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<title>Q1 2004 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 March 31, 2004
</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 33,502,943 shares of Common Stock, $0.001 par value per
share, outstanding as of March 31, 2004.

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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:
</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 March 31, 2004 and<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           December 31, 2003

</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;
             periods ended March 31, 2004 and March 31, 2003

</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 three-month<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           periods ended March 31, 2004 and March 31, 2003
</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, Use of Proceeds, and Issuer Purchases of Equity Securities
</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)
<br>
                                (UNAUDITED)
</B>
<PRE>

                                                              March 31,   December 31
                                                               2004          2003
                                                           ------------  -----------
                                                                         (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents.............................. $     13,346  $    11,335
  Short-term investments.................................      102,489      101,614
  Accounts receivables, net..............................       27,324       26,820
  Inventory..............................................        7,983        8,788
  Prepaids...............................................        3,338        3,203
  Restricted cash equivalents............................          213          188
                                                           ------------  -----------
          Total current assets...........................      154,693      151,948
Property and equipment, net..............................        9,384       10,288
Restricted cash equivalents..............................          348          642
Intangible assets, net...................................        7,622        8,089
Goodwill.................................................      143,332      143,106
Other assets.............................................          960          921
                                                           ------------  -----------
          Total assets...................................      316,339      314,994
                                                           ============  ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................... $      4,670  $     5,894
  Accrued compensation and employee benefits.............        3,651        5,267
  Warranty accrual.......................................          334          702
  Restructuring accrual..................................        1,160          971
  Other accrued liabilities..............................        6,413        8,432
  Deferred revenue.......................................       12,998       11,345
  Current portion of notes payable.......................          998        1,030
                                                           ------------  -----------
          Total current liabilities......................       30,224       33,641
Long-term notes payable..................................          435          695
Deferred revenue.........................................          991        1,148
Other accrued liabilities................................          534          553
Commitments and contingencies (Note12)...................           --           --
Stockholders' equity:
  Preferred stock, 2,500,000 shares authorized, $0.001
     par value, issuable in series; no shares issued
     and outstanding as of March 31, 2004  and
     and December 31, 2003, respectively...................         --           --
  Common stock, 100,000,000 shares authorized, $0.001
     par value, 33,516,579 and 33,051,631 shares
     issued and outstanding as of March 31, 2004
     and December 31, 2003, respectively.................           33           33
  Additional paid-in capital.............................      420,675      416,559
  Deferred compensation..................................          (84)         (99)
  Accumulated deficit....................................     (137,561)    (138,414)
  Accumulated other comprehensive income ................        1,092          878
                                                           ------------  -----------
          Total stockholders' equity.....................      284,155      278,957
                                                           ------------  -----------
          Total liabilities and stockholders' equity..... $    316,339  $   314,994
                                                           ============  ===========

</PRE>
<p align="center">
          See accompanying notes to 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>
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<br>
                                (UNAUDITED)
</B>
<PRE>

                                                  Three Months Ended
                                                     March 31,
                                               ----------------------
                                                  2004        2003
                                               ---------- -----------
Sales:
  Products................................... $   22,471  $   17,292
  Services...................................      4,588       1,943
                                               ----------  ----------
Total sales..................................     27,059      19,235
Cost of sales:
  Products...................................      8,813       7,772
  Services...................................      2,410       1,722
                                               ----------  ----------
Total cost of sales..........................     11,223       9,494
                                               ----------  ----------
    Gross profit.............................     15,836       9,741
                                               ----------  ----------
Operating costs and expenses:
  Selling, general, and administrative.......     10,243       9,453
  Research and development...................      5,310       3,423
                                               ----------  ----------
    Total operating costs and
     expenses................................     15,553      12,876
                                               ----------  ----------
Income (loss) from operations................        283      (3,135)
Other income, net ...........................        606         842
                                               ----------  ----------
Income (loss) before taxes...................        889      (2,293)

Income tax expense.............................       36          --
                                               ----------  ----------
Net income (loss).............................$      853  $   (2,293)
                                               ==========  ==========
Net earnings (loss) per share:
  Basic...................................... $     0.03  $    (0.12)
                                               ==========  ==========
  Diluted ................................... $     0.02  $    (0.12)
                                               ==========  ==========
Shares used in computing net earnings
 (loss) per share:
  Basic......................................     33,282      18,431
                                               ==========  ==========
  Diluted....................................     34,137      18,431
                                               ==========  ==========

</PRE>

<p align="center">
          See accompanying notes to 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>
                                 (IN THOUSANDS)
<br>
                                  (UNAUDITED)
</B>
<PRE>

                                                            For the Three Months
                                                               Ended March 31,
                                                         ------------------------
                                                            2004         2003
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net income (loss)...................................... $       853  $    (2,293)
Adjustments to reconcile net income (loss) to net cash
  used in operating activities:
  Depreciation.........................................       1,374          882
  Provision for doubtful accounts......................        (106)          85
  (Gain) loss on sales of fixed assets.................         (13)           1
  Amortization of deferred compensation and stock
    compensation.......................................          15          154
  Amortization/impairment of intangible assets.........         467          198
Changes in operating assets and liabilities:
  Accounts receivable..................................        (399)      (4,093)
  Prepaids.............................................        (469)         363
  Inventory............................................         805          456
  Other assets.........................................         (41)          --
  Accounts payable.....................................      (1,228)        (211)
  Accrued compensation and employee benefits...........      (1,647)      (2,381)
  Warranty accrual.....................................        (368)        (169)
  Restructuring accrual................................          38           --
  Other accrued liabilities............................      (1,692)        (240)
  Deferred revenue.....................................       1,496        1,302
                                                         -----------  -----------
Net cash used in operating activities..................        (915)      (5,946)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................        (537)        (318)
Disposition of property and equipment..................          27           --
Release of restricted cash equivalents.................         269           70
Purchase of short-term investments.....................     (28,778)      (4,900)
Proceeds from sales of short-term investments..........      21,403        7,844
Proceeds from maturities of short-term investments.....       6,744        5,112
                                                         -----------  -----------
Net cash (used in) provided by investing activities....        (872)       7,808
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       4,116        1,350
Repayment of notes payable.............................        (292)        (384)
                                                         -----------  -----------
Net cash provided by financing activities..............       3,824          966
                                                         -----------  -----------
Foreign currency translation adjustments...............         (26)         (91)
                                                         -----------  -----------
Net increase in cash and cash equivalents..............       2,011        2,737
Cash and cash equivalents, beginning of period.........      11,335        8,052
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $    13,346  $    10,789
                                                         ===========  ===========

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

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

<B><P ALIGN="CENTER"><A NAME="notes"></A>INTUITIVE SURGICAL, INC. <BR>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS <BR>
(UNAUDITED) </P>
</B><P>In this report, &quot;Intuitive Surgical, &quot; &quot;Intuitive,&quot;
and the &quot;Company&quot; refer to Intuitive Surgical, Inc.</P>
<B><P>NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</P>
<I><P>Basis of Presentation</P>
</B></I><P ALIGN="JUSTIFY">The accompanying unaudited condensed 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, 2003 were derived from the audited financial statements included
in  Intuitive Surgical, Inc.'s Annual Report on Form 10-K ("Annual Report") for
the year ended December 31, 2003. The financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2003 included in the Annual Report. The results for the interim period ended
March 31, 2004 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2004 or future operating periods.  The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries.  All significant intercompany accounts and transactions
have been eliminated in consolidation.  Certain reclassifications have been made
to prior year balances in order to conform to the current year presentation.
These reclassifications had no impact on previously reported net income or
stockholders' equity.</P>
<B><I><P ALIGN="JUSTIFY">Use of Estimates</P>
</B></I><P ALIGN="JUSTIFY">The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amount reported in
the consolidated financial statements and accompanying notes.  Actual results
could differ materially from these estimates.</P>
<B><I><P ALIGN="JUSTIFY">Revenue Recognition</P>
</B></I><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 that require judgment in the areas
of customer acceptance, collectibility, the separability of units of accounting,
and the fair value of individual elements.  Effective July 1, 2003, the Company
adopted the provisions of Emerging Issues Task Force, or EITF, Issue No. 00-21,
&quot;Revenue Arrangements with Multiple Deliverables&quot; on a prospective
basis.  The principles and guidance outlined in EITF 00-21 provide a framework
to (a) determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting, and (b) determine how the arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. The Company determined that its multiple-element
arrangements are generally comprised of the following elements that would
qualify as separate units of accounting: system sales, service, installation,
and training.  Each of these elements represent individual units of accounting
as the delivered item has value to a customer on a stand-alone basis, objective
and reliable evidence of fair value exists for undelivered items, and
arrangements generally do not contain a general right of return relative to the
delivered item.  The Company determines fair value based on the price of the
deliverable when it is sold separately or based on third-party evidence.  In
accordance with the guidance in EITF 00-21, the Company uses the residual method
to allocate the arrangement consideration when it does not have fair value of
the system sale.  Under the residual method, the amount of consideration
allocated to the delivered item equals the total arrangement consideration less
the aggregate fair value of the undelivered items.  Assuming all other criteria
for revenue recognition have been met, the Company recognizes revenue for system
sales when delivery and acceptance occurs, for installation and training when
the services are rendered, and for service ratably over the service period,
which is generally one year.</P>
<P ALIGN="JUSTIFY">The Company's distributors do not have price protection
rights. </P>
<P ALIGN="JUSTIFY">Revenue from sales of instruments and accessories is
recognized upon delivery. Revenue related to future commitments under separately
priced 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. </P>
<P ALIGN="JUSTIFY">Amounts billed in excess of revenue recognized are included
as deferred revenue in the condensed consolidated balance sheets.</P>
<P ALIGN="JUSTIFY">The Company's <I>da Vinci </I>Surgical System, <I>Hermes</I>
Control Center and <I>AESOP</I> Endoscope Positioner contain a software
component. The Company believes that this software element is an incidental part
of each system. The software element within the Company's products is not sold
or marketed separately to customers, and the software does not operate
independently of each system. Furthermore, the software development effort does
not represent 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 each system as a whole and the software revenue guidance provided
in SOP 97-2, "Software Revenue Recognition," is not applicable to the Company's
revenues.</P>
<B><I><P>Stock-Based Compensation</P>
</B></I><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 its acquisition of Computer Motion in June 2003.  As required under
Statement of Financial Accounting Standards Board ("SFAS"), No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," the Company has
provided the following pro forma net loss and pro forma net loss per share
disclosures for stock-based awards as if the fair value-based method defined in
SFAS 123, "Accounting for Stock-Based Compensation," had been applied (amounts
in thousands, except per share amounts):</P>

<PRE>

                                                 Three Months Ended
                                                      March 31,
                                                 ------------------
                                                   2004      2003
                                                 --------  --------
Net income (loss), as reported................. $    853  $ (2,293)
Add:  Total stock-based employee
  compensation expense included in reported net
  income (loss), net of $0 related tax effect..       15       154
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method for
  all awards, net of $0 related tax effect.....   (2,460)   (2,026)
                                                 --------  --------
Pro forma net loss............................. $ (1,592) $ (4,165)
                                                 ========  ========

Net earnings (loss) per share:
  Basic - as reported.......................... $   0.03  $  (0.12)
  Basic - pro forma............................ $  (0.05) $  (0.23)

  Diluted - as reported........................ $   0.02  $  (0.12)
  Diluted - pro forma.......................... $  (0.05) $  (0.23)

</PRE>

<P>The fair value for each stock option award granted was estimated at the date
of grant using the Black-Scholes option-pricing model, assuming no expected
dividends and the following weighted average assumptions:</P>

<PRE>

                                      Three Months Ended
                                           March 31,
                                     -------------------
                                        2004      2003
                                     --------  ---------
Stock Option Plans:
   Average risk free interest rate.     2.66 %     2.52 %
   Average expected life (years)...      4.0        4.0
   Volatility......................       73 %       80 %

Stock Purchase Plan:
   Average risk free interest rate.     1.30 %     1.71 %
   Average expected life (years)...      1.2        0.5
   Volatility......................       62 %       48 %

</PRE>

<B><I><P>Recent Accounting Pronouncements</P>
</B></I><P ALIGN="JUSTIFY">In December 2003, the FASB issued FIN Interpretation
No. 46R (revised December 2003), &quot;Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51,&quot; which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN No. 46R replaces FASB Interpretation FIN
No.&nbsp;46, which was issued in January 2003. As of the effective date of FIN
No. 46R, an enterprise must evaluate its involvement with all entities or legal
structures created before February 1, 2003, to determine whether consolidation
requirements of FIN No. 46R apply to those entities. There is no grandfathering
of existing entities. The adoption of FIN No. 46R did not have a significant
impact on the Company's consolidated financial position, results of operations
or cash flow. </P>

<P ALIGN="JUSTIFY">In December 2003, the SEC issued Staff Accounting Bulletin
(SAB) No. 104, &quot;Revenue Recognition.&quot; SAB No. 104 revises or rescinds
portions of the interpretative guidance included in Topic 13 of the codification
of staff accounting bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The adoption of SAB No. 104 did not have a significant
impact on the Company's consolidated financial position, results of operations
or cash flow.</P>

<B><P>NOTE 2. CONCENTRATIONS OF RISK</P>
</B><P ALIGN="JUSTIFY">Financial instruments that 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 three months ended March 31, 2004 and
2003, 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.</P>
<P ALIGN="JUSTIFY">The Company's <I>da Vinci</I> Surgical System, <I>Hermes</I>
Control Center, <I>AESOP</I> Endoscope Positioner and related instruments,
accessories and service accounted for all of the Company's product sales for the
three months ended March 31, 2004 and 2003. 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 for use in surgery.   The distribution of sales
by geographic location is as follows (in thousands): </P>

<PRE>

                                Three Months Ended
                                      March 31,
                               ---------------------
                                   2004       2003
                                ---------  ---------
Domestic...................... $  20,506  $  15,849
International.................     6,553      3,386
                                ---------  ---------
Total sales................... $  27,059  $  19,235
                                =========  =========

</PRE>

<P ALIGN="JUSTIFY">For the three months ended March 31, 2004, U.S. and
international sales accounted for 76% and 24%, respectively, of total sales. For
the three months ended March 31, 2003, U.S. and international sales accounted
for 82% and 18%, respectively, of total sales.</P>
<B><P>NOTE 3. 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 March 31, 2004 and December 31, 2003.</P>
<B><P>NOTE 4. 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 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>

<P ALIGN="JUSTIFY">The following table presents the fair value of available-for-sale
securities included in short-term investments as of the respective dates
(in thousands):</P>

<PRE>

                              March 31,      December 31,
                                2004             2003
                           ---------------  ---------------
U.S. corporate debt...... $        44,892  $        44,904
U.S. government debt.....          25,747           28,210
Municipal debt...........          19,400           11,950
Commercial paper.........          12,450           16,550
                           ---------------  ---------------
Total.................... $       102,489  $       101,614
                           ===============  ===============

</PRE>

<B><P ALIGN="JUSTIFY">NOTE 5. INVENTORY</P>
</B><P ALIGN="JUSTIFY">Inventory is stated at the lower of cost or market value.
Cost is computed using standard costs, which approximates actual cost on a
first-in, first-out basis.  Inventory consists of the following (in
thousands):</P>

<PRE>

                                  March 31,   December 31,
                                   2004          2003
                               ------------  ------------
Raw materials................ $      1,200  $      1,247
Work-in-process..............        2,314         1,797
Finished goods...............        4,469         5,744
                               ------------  ------------
                              $      7,983  $      8,788
                               ============  ============

</PRE>

<B>
<P>NOTE 6.  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 of Computer Motion
with a wholly owned subsidiary of Intuitive Surgical.  The Company accounted for
this transaction as a purchase of a business.</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..............................     1,774
Bridge loan facility..................................     5,302
                                                        ---------
Total purchase price.................................. $ 148,513
                                                        =========

</PRE>

<P>Future business results may differ from inherent estimates contained in the
allocation, including obligations related to exiting lease commitments, and
other underlying assumptions. The total purchase price has been allocated as
follows (in thousands):</P>

<PRE>

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..............................................   143,332
Net liabilities assumed...............................    (3,519)
                                                        ---------
Total purchase price.................................. $ 148,513
                                                        =========

</PRE>

<B>
<P>NOTE 7. GOODWILL AND INTANGIBLE ASSETS</P>
</B><I><P ALIGN="JUSTIFY">Goodwill and Intangible Assets</P>
</I><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 SFAS No. 142, &quot;Goodwill and Other Intangible Assets,&quot;
goodwill and intangible assets with indefinite useful lives can no longer be
amortized; rather, they will be tested for impairment at least annually of each
fiscal year (more frequently if certain indicators are present), which the
Company will do in the fourth quarter.  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 related to the
acquisition of Computer Motion, $143.3 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 totaling $0.5
million.   During the three months ended March 31, 2004, the Company increased
goodwill by $0.2 million due to the change in estimates on assumptions used to
calculate the losses on subleasing the vacated Computer Motion facilities.</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. </P>
<P ALIGN="JUSTIFY">Net intangible assets is comprised of the following (in
thousands):</P>

<PRE>

                                             March 31, 2004
                               -----------------------------------------------
                                            Accumulated
                                 Gross     Amortization  Impairment     Net
                               ---------   ------------  ----------  ---------
Developed technology........  $   3,500   $        250  $    3,250  $      --
Core technology.............      3,300            354          --      2,946
Customer relationships......      1,300            300          --      1,000
Patents.....................      7,310          3,787          --      3,523
Other intangible assets.....        500             56         291        153
                               ---------   ------------  ----------  ---------
Total intangible assets, net  $  15,910   $      4,747  $    3,541  $   7,622
                               =========   ============  ==========  =========

                                             December 31, 2003
                               -----------------------------------------------
                                            Accumulated
                                 Gross     Amortization  Impairment     Net
                               ---------   ------------  ----------  ---------
Developed technology........  $   3,500   $        250  $    3,250  $      --
Core technology.............      3,300            236          --      3,064
Customer relationships......      1,300            233          --      1,067
Patents.....................      7,310          3,511          --      3,799
Other intangible assets.....        500             50         291        159
                               ---------   ------------  ----------  ---------
Total intangible assets, net  $  15,910   $      4,280  $    3,541  $   8,089
                               =========   ============  ==========  =========

</PRE>

<P ALIGN="JUSTIFY">Amortization expense related to intangible assets was $0.5
million for the three months ended March 31, 2004 and $0.2 million for the three
months ended March 31, 2003.</P>
<P ALIGN="JUSTIFY">Estimated future amortization expense related to intangible
assets at March 31, 2004 is as follows (in thousands):</P>

<PRE>

        Fiscal Year
----------------------------
2004 (remaining 9 months)...  $    1,403
2005........................       1,870
2006........................       1,260
2007........................       1,074
2008........................         807
Thereafter..................       1,208
                                ---------
Total.......................  $    7,622
                                =========

</PRE>

<I><P ALIGN="JUSTIFY">Impairment of Goodwill</P>
</I><P ALIGN="JUSTIFY">The Company has elected to perform an annual analysis of
goodwill during the fourth quarter of each year.  Based on our 2003 impairment
analysis, no impairments were identified, and no indicators of impairment were
identified during the three months ended March 31, 2004.</P>
<I><P ALIGN="JUSTIFY">Impairment of Long-Lived Assets</P>
</I><P ALIGN="JUSTIFY">SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," requires recognition of impairment of long-lived assets
when circumstances indicate an impairment has occurred and in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets.  Accordingly, the Company evaluates asset
recoverability when an event occurs that may impair recoverability of the asset.
The Company determines the recoverability of the carrying amount of each asset
by reviewing the following factors: the undiscounted value of expected operating
cash flows, the estimated useful or contractual life of the asset and the
contract or product supporting the asset.  No impairment losses were incurred
during the three months ended March 31, 2004 and 2003.</P>
<B><P>NOTE 8. 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. Effective July 1, 2003, the Company adopted the
provisions of EITF No. 00-21 on a prospective basis. Under EITF No. 00-21, for
certain arrangements, a portion of the overall system price attributable to the
first year service is deferred and recognized as revenue over the service
period. As such, the Company recognizes warranty and related service costs as
incurred for these arrangements. The warranty provision resulting from
transactions prior to July 1, 2003 will be reduced in future periods for
material and labor costs incurred as related product is returned during the
warranty period or when the warranty period elapses. A review of warranty
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 ALIGN="JUSTIFY">The following table reconciles the changes to the product
warranty liability for the period indicated (in thousands)</P>

<PRE>

                                          Balance at                        Balance at
                                          Beginning   Warranty   Warranties  End of
                                          of Period     Usage     Issued     Period
                                         -----------  ---------  ---------  ---------
Three months ended March 31, 2004.....  $       702  $    (431) $      63  $     334

</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 products. 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 March 31,
2004 or December 31, 2003.</P>
<B><P ALIGN="JUSTIFY">NOTE 9. RESTRUCTURING CHARGES </P>
</B><P ALIGN="JUSTIFY">In connection with the acquisition of Computer Motion in
June 2003, the Company recorded an accrual for acquisition integration
liabilities, which includes the incremental costs to exit and consolidate
activities at Computer Motion locations, termination of certain Computer Motion
employees, and for other costs to integrate operating locations and other
activities of Computer Motion.  The accrual was recorded using the guidance
provided by EITF 95-3, &quot;Recognition of Liabilities in Connection with a
Purchase Business Combination,&quot; which requires that these acquisition
integration expenses, which are not associated with the generation of future
revenues and have no future economic benefit, be reflected as assumed
liabilities in the allocation of the purchase price to be net assets acquired.
During 2003, the Company recorded a $3.4 million accrual in accordance with EITF
95-3.  The accrual was comprised of $2.6 million for employee severance costs
and $0.8 million for estimated losses to be incurred to sublet vacated
facilities.  During the three months ended March 31, 2004, the Company increased
the accrual for the estimated losses to be incurred to sublet vacated facilities
by $0.2 million due to the change in estimates on assumptions used to calculate
the losses on subleasing the vacated facilities.  </P>
<P ALIGN="JUSTIFY">During the three months ended December 31, 2003, based on the
Company's cost structure and future development plans,</FONT><FONT SIZE=1>
</FONT><FONT SIZE=2>the Company planned to completely shut down the Goleta
research and development facility.  In accordance with SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities," the Company recorded
restructuring charges of $0.2 million, which is related to the costs of one-time
employee terminations.   SFAS No. 146 requires that a liability for costs
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred.  As employees are
generally required to render service beyond the minimum retention period or 60
days, the severance payments are recognized ratably over the service periods.
During the three months ended March 31, 2004, the Company completed the shutdown
of the Goleta research and development facilities and accrued $0.2 million of
employee severance costs and $0.5 million of lease commitments costs to exit the
leased facility.  The charges incurred in the three months ended March 31,2004
were recorded in research and development expenses on the income statement.  The
Company expects to fully utilize the accrual in the third quarter of 2007.</P>
<P ALIGN="JUSTIFY">The following table summarizes the restructuring activitiy
for the three months ended March 31, 2004 (in thousands):</P>

<PRE>

                                                    EITF No. 95-3          SFAS No. 146
                                             ----------------------  ---------------------
                                              Employee     Lease     Employee     Lease
                                             Severance   Commitments Severance  Commitments Total
                                             ----------  ----------  ---------  ---------  --------
Cost accrued............................... $    2,628  $      816  $     186  $      --  $  3,630
Cash payments, net of subleasing proceeds..     (2,310)       (303)        --         --    (2,613)
Currency impact............................        (23)        (23)        --         --       (46)
                                             ----------  ----------  ---------  ---------  --------
Balance at December 31, 2003...............        295         490        186         --       971
Cost accrued...............................         --         233        224        525       982
Cash payments, net of subleasing proceeds..       (199)       (176)      (388)       (36)     (799)
Currency impact............................         --           6                               6
                                             ----------  ----------  ---------  ---------  --------
Balance at March 31, 2004.................. $       96  $      553  $      22  $     489  $  1,160
                                             ==========  ==========  =========  =========  ========

</PRE>

<B><P>NOTE 10. COMPREHENSIVE INCOME (LOSS)</P>
</B><P ALIGN="JUSTIFY">Comprehensive income (loss) includes net loss and other
comprehensive income (loss), which primarily consists of unrealized gains and
losses on available-for-sale securities and cumulative translation adjustments.
Total accumulated other comprehensive income is displayed as a separate
component of stockholders' equity in the accompanying condensed consolidated
balance sheets.</FONT><FONT SIZE=1>  </FONT><FONT SIZE=2>The components of
comprehensive income (loss) consist of the following (in thousands):</P>

<PRE>

                                          Three Months Ended
                                               March 31,
                                        --------------------
                                           2004       2003
                                        ---------  ---------
Net income (loss)..................... $     853  $  (2,293)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.......................       (30)       (91)
  Change in unrealized gain (loss)
    on available-for-sale securities..       244       (441)
                                        ---------  ---------
Comprehensive income (loss)........... $   1,067  $  (2,825)
                                        =========  =========

</PRE>

<P ALIGN="JUSTIFY">The components of accumulated other comprehensive income were
as follows (in thousands):</P>

<PRE>

                                             March 31,  December 31,
                                              2004         2003
                                          ------------  -----------
Accumulated net unrealized gain on
  available-for-sales securities........ $      1,184  $       940
Foreign currency translation
  adjustments...........................          (92)         (62)

Total accumulated other comprehensive     ------------  -----------
  income................................ $      1,092  $       878
                                          ============  ===========

</PRE>

<B><P>NOTE 11. NET INCOME (LOSS) PER SHARE</P>
</B><P ALIGN="JUSTIFY">The following table presents the computation of basic and
diluted net earning (loss) per share (in thousands, except per share data).
Basic net earning (loss) per share is computed using the
weighted-average number of common shares outstanding.  Diluted net earning (loss)
per share is computed using the weighted-average number of common shares
outstanding and potential dilutive common shares from the assumed exercise of
options and warrants outstanding during the period, if any, using the treasury stock
method.</P>

<PRE>

                                        Three Months Ended
                                           March 31,
                                     -----------------------
                                        2004         2003
                                     -----------  ----------
Numerator used for basic and
  diluted net loss per common
  share............................ $       853  $   (2,293)
                                     ===========  ==========
Denominator used for basic and
  diluted net loss per common share:
  Weighted-average shares
    outstanding....................      33,282      18,438
  Less weighted-average
    shares subject to
    repurchase.....................          --          (7)
                                     -----------  ----------
  Weighted-average shares used in
    computing basic net loss per
    common share...................      33,282      18,431
                                     ===========  ==========

  Add common stock equivalents.....         855          --
  Weighted-average shares used
    in computing diluted common
    share..........................      34,137      18,431
                                     ===========  ==========

Net earnings (loss) per common share:
  Basic............................ $      0.03  $    (0.12)
                                     ===========  ==========
  Diluted.......................... $      0.02  $    (0.12)
                                     ===========  ==========

</PRE>

<P ALIGN="JUSTIFY">Potential weighted average common shares excluded from the
computation of diluted net earnings (loss) per share as their effect would be
antidilutive were 1,817,000 shares and 2,911,000 shares, respectively, for the
three months ended March 31, 2004 and March 31, 2003.</P>

<B><P ALIGN="JUSTIFY">NOTE 12. COMMITMENTS AND CONTINGENCIES </P>
</B><P ALIGN="JUSTIFY">OPERATING LEASES</P>
<P ALIGN="JUSTIFY">The Company entered into a lease arrangement for
approximately 83,000 square feet of office and manufacturing space in Sunnyvale,
California effective January 2002 (the "Sunnyvale Lease").  Under the Sunnyvale
Lease, the Company was required to lease an additional 22,000 square feet
starting in January 2004.  The Sunnyvale Lease was scheduled to expire on April
30, 2007.  The Sunnyvale Lease included a renewal option for one additional
five-year term.  On April 30, 2004, the Company purchased the property including
the 105,000 square foot building and canceled the Sunnyvale Lease.  In addition,
the Company leases approximately 2,000 square feet for research and development
in Milford, Connecticut and approximately 3,000 square feet for a sales office
in St. Germanin en Laye, France.  In connection with the acquisition of Computer
Motion, the Company assumed leases for approximately 47,000 square feet in
Goleta, California.  These leases have varying terms, the longest of which
extends to September 2007.  As of March 31, 2004, the Company sublet
approximately 90% of its office space in Goleta.</P>

<P ALIGN="JUSTIFY">Future minimum lease commitments, net of sublease income of
$1.8 million throughout the next 4 years, under the Company's operating lease as
of March 31, 2004 are as follows (in thousands):</P>

<PRE>

2004 (remaining 9 months)..... $   2,048
2005..........................     3,067
2006..........................     3,141
2007..........................     1,136
                                ---------
Total......................... $   9,392
                                =========

</PRE>

<P ALIGN="JUSTIFY">On April 30, 2004 the Company purchased the land and building
for its main office and manufacturing facility in Sunnyvale, California for
approximately $19.9 million in cash.  The transaction will reduce the Company's
future contractual obligation under building lease by approximately $8.4
million, which is included in the above table.</P>
<P ALIGN="JUSTIFY">Rent expense was approximately $0.8 million and $0.7 million
for the three months ended March 31, 2004 and March 31, 2003, respectively.</P>
<P ALIGN="JUSTIFY">CONTINGENCIES</P>
<P ALIGN="JUSTIFY">For a description of the Company's legal proceedings please
see the Section entitled &quot;Item 1 Legal Proceedings&quot; in Part II. Other
Information contained elsewhere in this report.</P>
<B><P ALIGN="JUSTIFY">NOTE 13. SUBSEQUENT EVENT</P>
</B><P ALIGN="JUSTIFY">On April 30, 2004 the Company purchased the land and
building for its main office and manufacturing facility in Sunnyvale, California
for approximately $19.9 million in cash.</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," "Intuitive," the
"Company, " "we," "us," and "our" refer to Intuitive Surgical, Inc.</P>
<P ALIGN="JUSTIFY">This management's discussion and analysis of financial
condition as of March 31, 2004 and results of operations for the three months
ended March 31, 2004 and March 31, 2003 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 for the year ended
December 31, 2003.  </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 &quot;wristed&quot; 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. The <I>da Vinci</I>
Surgical System is sold into multiple surgical specialties, principally urology,
cardiac and general surgery.</P>

<B><I><P>RESULTS OF OPERATIONS</P>
</I></B><P ALIGN="JUSTIFY">Product Sales  (in millions)</P>

<PRE>

                                     March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $    22.5  $    17.3  $     5.2        30 %

</PRE>

<P ALIGN="JUSTIFY">Product sales increased to $22.5 million for the quarter
ended March 31, 2004 from $17.3 million for the quarter ended March 31, 2003.
The 30% increase resulted primarily from $4.3 million higher first quarter 2004
instrument and accessory revenue and $0.9 million higher system revenue.
Instrument and accessory revenue increased to $7.9 million in the first quarter
of 2004 from $3.6 million in the first quarter of 2003, reflecting a larger base
of installed <I>da Vinci</I> Surgical Systems and improved system utilization
per site.  First quarter 2004 instruments and accessories revenue included
approximately $0.7 million from the <I>Aesop, Hermes, </I>and<I> Zeus
</I>product lines.  There was no <I>Aesop, Hermes, </I>or<I> Zeus</I> product
revenue in our first quarter 2003 results.&nbsp;Total system revenue increased
to $14.6 million for the quarter ended March 31, 2004, compared to $13.7 million
for the quarter ended March 31, 2003.  The systems revenue increase resulted
primarily from the shipment of 11 fourth arm upgrades to the <I>da Vinci</I>
Surgical System platform in the first quarter of 2004, compared to one in the
first quarter of 2003.  First quarter 2004 system revenue also included $0.6
million from the sales of seven <I>Aesop</I> systems.  The increases were
partially offset by a reduction in systems revenue related to the Company's
adoption of EITF 00-21 in July 2003, under which service revenue for the first
year is deferred for each <I>da Vinci</I> System sale.</P>

<P ALIGN="JUSTIFY">&nbsp;<I>Service Sales (in millions) </P></I>

<PRE>

                                     March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     4.6  $     1.9  $     2.7       136 %

</PRE>

<P ALIGN="JUSTIFY">Service sales, comprised of system service, installation and
customer training, increased to $4.6 million for the quarter ended March 31,
2004 from $1.9 million for the quarter ended March 31, 2003. The increase
resulted primarily from a larger installed base of <I>da Vinci</I> Surgical
Systems generating service revenue in 2004.  The installed base of <I>da
Vinci</I> Surgical Systems generating service revenue increased by 93 systems
from the first quarter of 2003 to the first quarter of 2004. The increase of 93
was comprised of 60 systems sold in 2002, which were coming out of the warranty
period onto service contracts, and 33 systems sold in the second half of 2003.
In accordance with EITF 00-21, which we adopted prospectively during the third
quarter of 2003, the first year service revenue has been deferred and will be
recognized ratably over the 12-month period following the system sale.  In
addition, the average service revenue per site increased in 2004 due to higher
rates charged for the sites with fourth arm upgrades.  Service related to the
<I>Aesop</I> and <I>Zeus </I>products contributed $0.1 million of service
revenue during the first quarter of 2004. There was no <I>Aesop</I> or <I>Zeus
</I>related service revenue included in our first quarter 2003
results.&nbsp;</P>
<P ALIGN="JUSTIFY"></P>
<I><P ALIGN="JUSTIFY">Product Sales Gross Profit (in millions)</P></I>

<PRE>

                                     March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $    13.6  $     9.5  $     4.1        43 %
Percentage of product sales........      60.8 %     55.1 %

</PRE>


<P ALIGN="JUSTIFY">Product sales gross profit for the quarter ended March 31,
2004 was $13.6 million, or 60.8% of product sales, compared to $9.5 million, or
55.1% of product sales, for the quarter ended March 31, 2003. Higher first
quarter 2004 gross product margin was driven by lower costs to manufacture the
<I>da Vinci</I> Surgical System, instruments and accessories.  Cost reductions
resulted from lower material costs obtained primarily through vendor
negotiations and lower labor and overhead resulting from leveraging fixed
manufacturing costs across a larger production base.</P>

<I><P ALIGN="JUSTIFY">Service Sales Gross Profit (in millions)</P></I>

<PRE>

                                     March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     2.2  $     0.2  $     2.0       886 %
Percentage of service sales........      47.5 %     11.4 %

</PRE>

<P ALIGN="JUSTIFY">Service sales gross profit for the quarter ended March 31,
2004 was $2.2 million, or 47.5% of service sales, compared to $0.2 million, or
11.4% of service sales, for the quarter ended March 31, 2003. The improved first
quarter 2004 gross service margin was driven by increased service revenue as
described above in combination with increased leverage of the mostly fixed
service and training organization expenses across a larger base of installed
systems.</P>

<I><P ALIGN="JUSTIFY">&nbsp;Selling, General and Administrative Expenses (in
millions)</P></I>

<PRE>

                                     March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $    10.2  $     9.5  $     0.8         8 %

</PRE>

<P ALIGN="JUSTIFY">&nbsp;Selling, general and administrative expenses include
personnel costs for sales, marketing and administrative personnel, tradeshow
expenses, legal expenses, regulatory fees and general corporate expenses.
Selling, general and administrative expenses for the quarter ended March 31,
2004 were $10.2 million, up 8% from $9.5 million for the quarter ended March 31,
2003. The year-over-year increase was due in large part to higher employee
compensation and travel costs, resulting primarily from additional headcount to
support increased sales volume.  This increase was offset by lower legal costs,
reflecting the elimination of Computer Motion litigation expenses after the
acquisition.</P>

<P ALIGN="JUSTIFY">We expect selling, general and administrative expenses to
increase in the future to support our expanding business. </P>

<I><P ALIGN="JUSTIFY">Research and Development Expenses (in millions)</P></I>

<PRE>

                                     March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     5.3  $     3.4  $     1.9        55 %

</PRE>

<P ALIGN="JUSTIFY">&nbsp;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 expenses for the
quarter ended March 31, 2004 were $5.3 million, up 55% from $3.4 million for the
quarter ended March 31, 2003. The increase was primarily due to additional
expenses incurred to support the development and sustaining engineering
activities related to the <I>Aesop, Hermes</I>, and <I>Zeus</I> products
acquired from Computer Motion.  In addition, as of March 31, 2004, in accordance
with our restructuring plan, we completely shut down the Goleta site.  As a
result, in the first quarter of 2004, we recorded  $0.7 million of restructuring
charges in research and development expenses to reflect the cost to completely
shut down the Goleta site.  Because Computer Motion was acquired on June 30,
2003, there were no Goleta site-based expenses included in the first quarter
2003 results.  </P>

<P ALIGN="JUSTIFY">Research and development costs are expensed as incurred. We
expect to continue to make substantial investments in research and development
and anticipate that research and development expenses will continue to increase
in the future. </P>

<P ALIGN="JUSTIFY">&nbsp;<I>Other Income, Net (in millions) </P></I>

<PRE>

                                     March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     0.6  $     0.8  $    (0.2)      (28)%

</PRE>

<P ALIGN="JUSTIFY">Other income decreased to $0.6 million for the quarter ended
March 31, 2004 from $0.8 million for the quarter ended March 31, 2003. The
decrease in other income, net is primarily due to a decrease in amounts realized
on the sale of investment securities in the quarter ended March 31, 2004, which
was partially offset by an increase in interest income earned during that
period, primarily related to proceeds from our follow-on common stock offering
which occurred during the fourth quarter of 2003.</P>
<B><I><P ALIGN="JUSTIFY">LIQUIDITY AND CAPITAL RESOURCES</P>
</B></I><P ALIGN="JUSTIFY">Our operations have been financed primarily through
the sale of our equity securities. Sales of convertible preferred stock have
yielded proceeds of approximately $127.3 million and public offerings of our
common stock have yielded proceeds of approximately $124.5 million. We have also
financed operations through employee stock purchase and option plans as well as
equipment financing arrangements. At March 31, 2004 we had total stockholders
equity of $284.2 million and outstanding equipment financing debt of $1.4
million. As of March 31, 2004, we had cash, cash equivalents and short-term
investments of $115.8 million, compared to $112.9 million at December 31, 2003.
Working capital at March 31, 2004 was $124.5 million, compared to $118.3 million
at December 31, 2003. The increase in cash and investments and in working
capital resulted primarily from $4.1 million of net proceeds realized from stock
option exercises and our employee stock purchase plan.  </P>

<P ALIGN="JUSTIFY">Net cash used in operating activities was $0.9 million for
the three months ended March 31, 2004, compared to $5.9 million for the three
months ended March 31, 2003. Lower cash used in operating activities was driven
by an increase of $3.1 million in first quarter 2004 net income, a decrease of
$1.6 million first quarter 2004 working capital consumed, and an increase of
$0.3 million first quarter 2004 non-cash expenses.  The $0.9 million of cash
used in operations during the first quarter of 2004 was primarily the result of
working capital consumed of $3.4 million, due in large part to net pay downs of
2003 year end accounts payable and other liabilities, offset by our net income
of $0.9 million and non-cash expenses of $1.6 million. Cash used in operating
activities during the first quarter of 2003 was comprised primarily of working
capital consumed of $5.0 million, due mostly to increased accounts receivable,
and our net loss of $2.3 million, offset by non-cash expenses of $1.3 million.
</P>

<P ALIGN="JUSTIFY">Net cash used in investing activities was $0.9 million for
the three months ended March 31, 2004, compared to net cash provided by
investing activities of $7.8 million for the three months ended March 31, 2003.
Net cash used in investing activities during the first quarter of 2004 resulted
mainly from the investments in fixed assets of $0.5 million.  The cash provided
by investing activities during the first quarter of 2003 related primarily to
the net conversion of short-term investments into cash to fund operations. </P>

<P ALIGN="JUSTIFY">Net cash provided by financing activities was $3.8 million
for the three months ended March 31, 2004, compared to $1.0 million for the
three months ended March 31, 2003.  Cash provided in the quarter ended March 31,
2004 resulted primarily from $4.1 million in net proceeds realized from stock
option exercises and our employee stock purchase plan, offset by repayments of
long-term debt of $0.3 million.  Cash provided in the three months ended March
31, 2003 resulted primarily from $1.4 million in net proceeds realized from
stock option exercises and our employee stock purchase plan, offset by
repayments of long-term debt $0.4 million. </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Our capital requirements depend on numerous factors,
including market acceptance of our products, the resources we devote to
developing and supporting our products, and other factors. We expect to devote
substantial capital resources to continue our research and development efforts,
to expand our customer support and product development activities and for other
general corporate activities. We believe that our current cash and cash
equivalents and short-term investment balances, together with revenue to be
derived from the sale of our products, will be sufficient to meet our liquidity
requirements for the foreseeable future.</FONT><FONT FACE="Arial Unicode MS">
</P>
</FONT><I><FONT SIZE=2><P ALIGN="JUSTIFY">Contractual Obligations and Commercial
Commitments</P>
</I><P ALIGN="JUSTIFY">The following table summarizes all significant
contractual payment obligations, net of sublease income of $1.8 million
throughout the next 4 years, by payment due date:</P>
<B><P ALIGN="JUSTIFY">Payments by Periods (in Millions)</P></B></FONT>
<TABLE BORDER CELLSPACING=1 CELLPADDING=7 WIDTH=467>
<TR><TD WIDTH="37%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Contractual Obligation</FONT></TD>
<TD WIDTH="20%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Total</FONT></TD>
<TD WIDTH="23%" VALIGN="MIDDLE">
<FONT SIZE=2><P ALIGN="CENTER">Less than 1 year</FONT></TD>
<TD WIDTH="19%" VALIGN="BOTTOM">
<FONT SIZE=2><P ALIGN="CENTER">1-3 years</FONT></TD>
</TR>
<TR><TD WIDTH="37%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Long-term debt</FONT></TD>
<TD WIDTH="20%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 1.4</FONT></TD>
<TD WIDTH="23%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 0.7</FONT></TD>
<TD WIDTH="19%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 0.7</FONT></TD>
</TR>
<TR><TD WIDTH="37%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Building lease</FONT></TD>
<TD WIDTH="20%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">9.4</FONT></TD>
<TD WIDTH="23%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">2.1</FONT></TD>
<TD WIDTH="19%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">7.3</FONT></TD>
</TR>
<TR><TD WIDTH="37%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Purchase commitments</FONT></TD>
<TD WIDTH="20%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">0.3</FONT></TD>
<TD WIDTH="23%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">0.3</FONT></TD>
<TD WIDTH="19%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">0.0</FONT></TD>
</TR>
<TR><TD WIDTH="37%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Total</FONT></TD>
<TD WIDTH="20%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 11.1</FONT></TD>
<TD WIDTH="23%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 3.1</FONT></TD>
<TD WIDTH="19%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 8.0</FONT></TD>
</TR>
</TABLE>

<FONT SIZE=2>
<P ALIGN="JUSTIFY">On April 30, 2004, we purchased the land and building for our
main office and manufacturing facility in Sunnyvale, California for
approximately $19.9 million in cash.  The transaction will reduce our future
contractual obligation under building lease by approximately $8.4 million, which
is included in the above table.</P>
<B><I><P ALIGN="JUSTIFY">CRITICAL ACCOUNTING POLICIES</P>
</B></I><P ALIGN="JUSTIFY">The discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
assets and liabilities. On an on-going basis, we evaluate our critical
accounting policies and estimates, including those related to revenue
recognition, bad debts, income taxes and intangible assets. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Our critical
accounting policies and estimates are discussed in our Annual Report on Form 10-K
for the year ended December 31, 2003.</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>our timing and ability to develop our manufacturing and sales and marketing
capabilities; </LI>
<LI>demand for our products; </LI>
<LI>the size and timing of specific sales and any collection delays related to
those sales;</LI>
<LI>product quality problems;</LI>
<LI>the extent to which our products gain market acceptance;</LI>
<LI>third-party payor reimbursement policies;</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>actions relating to regulatory matters;</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>the progress and results of clinical trials.</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 March
31, 2004 and 2003, approximately 52% and 72%, respectively, of our revenues came
from the sales of <I>da Vinci</I> Surgical Systems, which are high revenue
dollar items. During the three-month periods ended March 31, 2004 and 2003, 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>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 device
with 510(k) clearance or grandfather status. If we significantly 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 device with 510(k) clearance or grandfather status, 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 and
burdensome 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. 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.  Most of
our products to date have been considered significant risk devices requiring IDE
approval prior to investigational use. 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. </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 will
compete with established and emerging treatment options in both disease
management and reconstructive medical procedures.  These competitive treatment
options may take the form of traditional minimally invasive surgery, open
surgery, interventional approaches, or pharmacological regimens.  Some of these
procedures are widely accepted in the medical community and in many cases have a
long history of use.  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>
<P ALIGN="JUSTIFY">In addition, we may face competition from companies that
develop robotic and computer-assisted surgical systems in the future.  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>
<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. </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. In the past, we have voluntarily recalled certain
products as a result of performance problems.  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>product recalls;</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 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 COULD 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. 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.  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>
<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 electronics,
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>COMPLYING WITH FDA REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING
PROCESS, AND OUR FAILURE TO COMPLY FULLY COULD SUBJECT US TO SIGNIFICANT
ENFORCEMENT SANCTIONS.</P></B>

<FONT SIZE=2><P>Because our products, including the <I>da Vinci</I> Surgical
System, are commercially distributed, numerous postmarket regulatory
requirements apply, including the following: </P>

<UL>
<LI>QSR which requires manufacturers to follow elaborate design, testing,
control, documentation and other quality assurance procedures during the
manufacturing process;</LI>
<LI>labeling regulations;</LI>
<LI>the FDA's general prohibition against false or misleading statements in the
labeling or promotion of products for unapproved or &quot;off-label&quot;
uses;</LI>
<LI>the Reports of Corrections and Removals regulation, which requires that
manufacturers report to the FDA recalls and field corrective actions taken to
reduce a risk to health or to remedy a violation of the FFDCA that may pose a
risk to health; and</LI>
<LI>the Medical Device Reporting regulation, which requires that manufacturers
report to the FDA if their device may have caused or contributed to a death or
serious injury or malfunctioned in a way that would likely cause or contribute
to a death or serious injury if it were to recur.</LI></UL>

<P ALIGN="JUSTIFY">We are subject to inspection and marketing surveillance by
the FDA to determine our compliance with regulatory requirements. If the FDA
finds that we have failed to comply, it can institute a wide variety of
enforcement actions, ranging from a regulatory letter to a public warning letter
to more severe civil and criminal sanctions. Our failure to comply with
applicable requirements could lead to an enforcement action that may have an
adverse effect on our financial condition and results of operations. </P>
<P ALIGN="JUSTIFY">We have modified the labeling, advertising and user training
for the <I>da Vinci</I> Surgical System to call out specific procedures that we
believe are within the scope of our existing 510(k) clearances. We cannot assure
you that the FDA would agree that all such specific procedures are within the
scope of the existing general clearance or that we have compiled adequate
information to support the safety and efficacy of using the <I>da Vinci</I>
Surgical System for all such specific procedures. We also have modified the
hardware and software in the <I>da Vinci</I> Surgical System since clearance in
ways that we believe do not require new 510(k) clearance. We cannot be certain
that the FDA would agree with our determinations not to seek new 510(k)
clearance for any of these changes. Computer Motion also modified the hardware
and software in its products subsequent to 510(k) clearance without seeking new
clearance. We cannot be certain that the FDA would agree with the determinations
not to seek new 510(k) clearance for any of these changes. The FDA could impose
enforcement sanctions and/or require us to obtain 510(k) clearance for any
modification to our products or Computer Motion's products. We may be prohibited
from marketing the modified device until such 510(k) clearance is granted. </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. </P>
<B><P ALIGN="JUSTIFY">TERMINATION OF RELATIONSHIPS WITH FORMER DISTRIBUTORS OF
COMPUTER MOTION COULD RESULT IN LITIGATION.</P>
</B><P ALIGN="JUSTIFY">Our integration strategy related to our acquisition of
Computer Motion may involve the termination of Computer Motion's relationships
with a number of companies that served as Computer Motion's distributors prior
to the acquisition.  Several of these former distributors have informed us that
they believe that they are entitled to compensation in connection with such
termination.  We may be unable to resolve these claims without litigation.  Due
to the inherent uncertainties of litigation, we cannot accurately predict the
ultimate outcome of any such litigation at this time and, therefore, cannot
estimate the range of possible loss.  If we sue or are sued by any of Computer
Motion's former distributors, these proceedings may be expensive to litgate, may
be protracted, and Computer Motion's confidential information may be
compromised.  Whether or not we are successful in these lawsuits, these
proceedings could consume substantial amounts of our financial and managerial
resources.</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. 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 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">There may be 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 may be 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 be
certain 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 be certain 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, 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.
</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. </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 24% of our sales for the three months
ended March 31, 2004 and 18% for the three months ended March 31, 2003.  </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 United States dollars. As a result, an increase in the value of
the United States 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>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><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
public offerings. </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 March 31, 2004 was approximately 1.16
years.  At March 31, 2004 and December 31, 2003, approximately 49% and 37%,
respectively, of our investment portfolio was composed of investments with
original maturities of one year or less. </P>
<P ALIGN="JUSTIFY">The majority of our revenue, expense, and capital purchasing
activities are transacted in U.S. dollars. However, since a portion of our
operations consists of sales activities outside of the United States, we have
entered into transactions in other currencies, primarily the euro. On a limited
basis, we use forward foreign exchange contracts to reduce a portion of our
exposure to foreign currency risk from operational and balance sheet exposures
resulting from changes in foreign currency exchange rates. Such exposures result
from sales denominated in foreign currencies. These contracts are typically
short-term in nature (i.e., less than 6&nbsp;months).</P>
<P ALIGN="JUSTIFY">For the three months ended March 31, 2004 and 2003, sales
denominated in foreign currencies were 12% and 9%, respectively, of total sales.
We did not enter into forward foreign exchange contracts during the three months
ended March 31, 2004 and 2003.&nbsp;</P>
<P ALIGN="JUSTIFY">We have not designated any of our forward foreign exchange
contracts for hedge accounting under FAS 133. The forward contracts, which have
only nominal intrinsic value at the time of purchase, are denominated in the
same foreign currency in which the sales are denominated. The gains and losses
on these forward contracts as well as the offsetting losses and gains on the
hedged receivables are recognized depending on whether the derivative instrument
is designated and qualifies as part of a hedging relationship and, if so, the
nature of the hedging activity.</P>
<P ALIGN="JUSTIFY">During the three months ended March 31, 2004 and 2003, we did
not designate and qualify any forward contracts as part of a hedging
relationship. Accordingly, changes in the fair value of derivatives that do not
qualify for hedge treatment, as well as the ineffective portion of a particular
hedge, are recognized currently in earnings. All derivative instruments are
recorded as either current assets or accrued liabilities in the balance sheet at
fair value.</P>
<P ALIGN="JUSTIFY">We do not use derivative financial instruments for
speculative trading purposes, nor do we hold or issue leveraged derivative
financial instruments. We have not entered into any forward contracts since July
2002, and as of March 31, 2004 and December 31, 2003, we had no outstanding
derivative instruments.&nbsp;</P>
<P ALIGN="JUSTIFY">Foreign currency fluctuations resulted in $98,000 of foreign
exchange loss for the three months ended March 31, 2004 and $26,000 of foreign
exchange gain for the three months ended March 31, 2003. </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 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 period 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 ALIGN="JUSTIFY">In February 2004, a former customer of Computer Motion
filed a lawsuit against our company.  We received the complaint on April 23,
2004.  The customer alleges that it relied to its detriment on representations
made by Computer Motion in connection with Computer Motion's sale of products to
the customer, which representations the customer believes were not fulfilled.
The customer is seeking damages. We believe the allegation is baseless and will
vigorously defend this suit. </P>
<P ALIGN="JUSTIFY">In November 2003, an Israeli company, filed suit against our
company and Computer Motion in Israel alleging breach distribution contract and
seeking damages. We received the complaint on April 27, 2004. Following the
acquisition of Computer Motion, we withdrew Computer Motion's distributorship
offer to this Israeli company. We believe the allegation is baseless and will
vigorously defend the suit.</P>
<P ALIGN="JUSTIFY">In October 2003, a former Italian distributor for Computer
Motion, filed suit against our company and Computer Motion seeking damages. The
distributor alleges that we breached the distribution agreement the distributor
had with Computer Motion when, following our acquisition of Computer Motion, we
withdrew, from coverage under the distribution agreement, two of the products
covered by the agreement. We believe that under the terms of agreement, we are
entitled to withdraw the products from coverage with proper notice. We believe
we have provided proper notice to the distributor.  We also believe that the
distributor improperly and in violation of the agreement filed the suit in Rome
instead of in California as specifically provided for by the agreement. In
November 2003, we filed a counter suit against the distributor in California for
breach of contract, seeking unspecified damages and injunction against the
distributor's action in Rome. In March 2004, we obtained default entry against
the distributor in the California action.  We are defending the action in Rome
on both jurisdictional grounds and on the merits. The decision of the Rome court
is currently being awaited.</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 our management. This matter was investigated by
law enforcement authorities and our 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</FONT><FONT FACE="Helvetica" SIZE=4
COLOR="#0000ff"> </FONT><FONT SIZE=2>2002. Our complaint alleged that each of
the defendants has (i) violated various sections of the Racketeer</FONT><FONT
FACE="Helvetica" SIZE=4> </FONT><FONT SIZE=2>Influenced and Corrupt
Organization, or 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 November
2003, we filed a Second Amended 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, as well as
adding causes of action for rescission, conversion, intentional interference
with contract, negligent interference with contract, negligence, and money had
and received. The amended complaint reiterates our claim to recover actual and
treble damages, costs and attorney fees. Defendants have answered.  Substantial
discovery has been completed.  Trial is set for July 21, 2004.  </P>
<P ALIGN="JUSTIFY">The foregoing proceedings could be expensive to litigate, may
be protracted and our confidential information may be compromised. Whether or
not we are 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 us, or we may file claims
against them, which could increase the risk, expense and duration of the
litigations.</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, USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES</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> None.</P>
<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">On January 16, 2004, we filed a current report on Form 8-K
announcing the settlement of pending litigation.</P>
<P ALIGN="JUSTIFY">On February 12, 2004, we furnished a current report on Form
8-K announcing our fourth quarter and year ended December 31, 2003 financial
results.</P>
<P><BR>
</P>
<P><HR WIDTH="85%"></P>
<P ALIGN="CENTER"><BR>
<BR>
</P>
<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>

<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: May 7, 2004 </P>
<P><BR>
<BR>
</P>
<P>&nbsp;</P>
<P><BR>
<BR>
</P>
<P><HR WIDTH="85%"></P>
<P>&nbsp;</P>
<P><BR>
</P>
<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><A HREF="exh31.htm">Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.</A></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><A HREF="exh32.htm">Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002</A></FONT></TD>
</TR>
</TABLE>
</CENTER></P>

<FONT SIZE=2><P ALIGN="CENTER">&nbsp;</P>
<P>&nbsp;</P>
<P><BR>
<BR>
</P>
<P><HR WIDTH="85%"></P>
<P><BR>
<BR>
<BR>
</P></FONT>




</BODY>
</HTML>
{"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": "04789223"}, "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"}}
Q1 2004 10Q DOC
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
     15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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 33,502,943 shares of Common Stock, $0.001 par value per
share, outstanding as of March 31, 2004.
Intuitive Surgical, Inc.
TABLE OF CONTENTS
PART I.   FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Condensed consolidated balance sheets as of March 31, 2004 and
December 31, 2003
1
Condensed consolidated statements of operations for the three-month
periods ended March 31, 2004 and March 31, 2003
2
Condensed consolidated statements of cash flows for the three-month
periods ended March 31, 2004 and March 31, 2003
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, Use of Proceeds, and Issuer Purchases of Equity Securities
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)
(UNAUDITED)
March 31,   December 31
                                                               2004          2003
                                                           ------------  -----------
                                                                         (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents.............................. $     13,346  $    11,335
  Short-term investments.................................      102,489      101,614
  Accounts receivables, net..............................       27,324       26,820
  Inventory..............................................        7,983        8,788
  Prepaids...............................................        3,338        3,203
  Restricted cash equivalents............................          213          188
                                                           ------------  -----------
          Total current assets...........................      154,693      151,948
Property and equipment, net..............................        9,384       10,288
Restricted cash equivalents..............................          348          642
Intangible assets, net...................................        7,622        8,089
Goodwill.................................................      143,332      143,106
Other assets.............................................          960          921
                                                           ------------  -----------
          Total assets...................................      316,339      314,994
                                                           ============  ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................... $      4,670  $     5,894
  Accrued compensation and employee benefits.............        3,651        5,267
  Warranty accrual.......................................          334          702
  Restructuring accrual..................................        1,160          971
  Other accrued liabilities..............................        6,413        8,432
  Deferred revenue.......................................       12,998       11,345
  Current portion of notes payable.......................          998        1,030
                                                           ------------  -----------
          Total current liabilities......................       30,224       33,641
Long-term notes payable..................................          435          695
Deferred revenue.........................................          991        1,148
Other accrued liabilities................................          534          553
Commitments and contingencies (Note12)...................           --           --
Stockholders' equity:
  Preferred stock, 2,500,000 shares authorized, $0.001
     par value, issuable in series; no shares issued
     and outstanding as of March 31, 2004  and
     and December 31, 2003, respectively...................         --           --
  Common stock, 100,000,000 shares authorized, $0.001
     par value, 33,516,579 and 33,051,631 shares
     issued and outstanding as of March 31, 2004
     and December 31, 2003, respectively.................           33           33
  Additional paid-in capital.............................      420,675      416,559
  Deferred compensation..................................          (84)         (99)
  Accumulated deficit....................................     (137,561)    (138,414)
  Accumulated other comprehensive income ................        1,092          878
                                                           ------------  -----------
          Total stockholders' equity.....................      284,155      278,957
                                                           ------------  -----------
          Total liabilities and stockholders' equity..... $    316,339  $   314,994
                                                           ============  ===========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
                                                     March 31,
                                               ----------------------
                                                  2004        2003
                                               ---------- -----------
Sales:
  Products................................... $   22,471  $   17,292
  Services...................................      4,588       1,943
                                               ----------  ----------
Total sales..................................     27,059      19,235
Cost of sales:
  Products...................................      8,813       7,772
  Services...................................      2,410       1,722
                                               ----------  ----------
Total cost of sales..........................     11,223       9,494
                                               ----------  ----------
    Gross profit.............................     15,836       9,741
                                               ----------  ----------
Operating costs and expenses:
  Selling, general, and administrative.......     10,243       9,453
  Research and development...................      5,310       3,423
                                               ----------  ----------
    Total operating costs and
     expenses................................     15,553      12,876
                                               ----------  ----------
Income (loss) from operations................        283      (3,135)
Other income, net ...........................        606         842
                                               ----------  ----------
Income (loss) before taxes...................        889      (2,293)

Income tax expense.............................       36          --
                                               ----------  ----------
Net income (loss).............................$      853  $   (2,293)
                                               ==========  ==========
Net earnings (loss) per share:
  Basic...................................... $     0.03  $    (0.12)
                                               ==========  ==========
  Diluted ................................... $     0.02  $    (0.12)
                                               ==========  ==========
Shares used in computing net earnings
 (loss) per share:
  Basic......................................     33,282      18,431
                                               ==========  ==========
  Diluted....................................     34,137      18,431
                                               ==========  ==========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the Three Months
                                                               Ended March 31,
                                                         ------------------------
                                                            2004         2003
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net income (loss)...................................... $       853  $    (2,293)
Adjustments to reconcile net income (loss) to net cash
  used in operating activities:
  Depreciation.........................................       1,374          882
  Provision for doubtful accounts......................        (106)          85
  (Gain) loss on sales of fixed assets.................         (13)           1
  Amortization of deferred compensation and stock
    compensation.......................................          15          154
  Amortization/impairment of intangible assets.........         467          198
Changes in operating assets and liabilities:
  Accounts receivable..................................        (399)      (4,093)
  Prepaids.............................................        (469)         363
  Inventory............................................         805          456
  Other assets.........................................         (41)          --
  Accounts payable.....................................      (1,228)        (211)
  Accrued compensation and employee benefits...........      (1,647)      (2,381)
  Warranty accrual.....................................        (368)        (169)
  Restructuring accrual................................          38           --
  Other accrued liabilities............................      (1,692)        (240)
  Deferred revenue.....................................       1,496        1,302
                                                         -----------  -----------
Net cash used in operating activities..................        (915)      (5,946)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................        (537)        (318)
Disposition of property and equipment..................          27           --
Release of restricted cash equivalents.................         269           70
Purchase of short-term investments.....................     (28,778)      (4,900)
Proceeds from sales of short-term investments..........      21,403        7,844
Proceeds from maturities of short-term investments.....       6,744        5,112
                                                         -----------  -----------
Net cash (used in) provided by investing activities....        (872)       7,808
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       4,116        1,350
Repayment of notes payable.............................        (292)        (384)
                                                         -----------  -----------
Net cash provided by financing activities..............       3,824          966
                                                         -----------  -----------
Foreign currency translation adjustments...............         (26)         (91)
                                                         -----------  -----------
Net increase in cash and cash equivalents..............       2,011        2,737
Cash and cash equivalents, beginning of period.........      11,335        8,052
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $    13,346  $    10,789
                                                         ===========  ===========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In this report, "Intuitive Surgical, " "Intuitive,"
and the "Company" refer to Intuitive Surgical, Inc.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed 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, 2003 were derived from the audited financial statements included
in  Intuitive Surgical, Inc.'s Annual Report on Form 10-K ("Annual Report") for
the year ended December 31, 2003. The financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2003 included in the Annual Report. The results for the interim period ended
March 31, 2004 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2004 or future operating periods.  The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries.  All significant intercompany accounts and transactions
have been eliminated in consolidation.  Certain reclassifications have been made
to prior year balances in order to conform to the current year presentation.
These reclassifications had no impact on previously reported net income or
stockholders' equity.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amount reported in
the consolidated financial statements and accompanying notes.  Actual results
could differ materially from these estimates.
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 that require judgment in the areas
of customer acceptance, collectibility, the separability of units of accounting,
and the fair value of individual elements.  Effective July 1, 2003, the Company
adopted the provisions of Emerging Issues Task Force, or EITF, Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" on a prospective
basis.  The principles and guidance outlined in EITF 00-21 provide a framework
to (a) determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting, and (b) determine how the arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. The Company determined that its multiple-element
arrangements are generally comprised of the following elements that would
qualify as separate units of accounting: system sales, service, installation,
and training.  Each of these elements represent individual units of accounting
as the delivered item has value to a customer on a stand-alone basis, objective
and reliable evidence of fair value exists for undelivered items, and
arrangements generally do not contain a general right of return relative to the
delivered item.  The Company determines fair value based on the price of the
deliverable when it is sold separately or based on third-party evidence.  In
accordance with the guidance in EITF 00-21, the Company uses the residual method
to allocate the arrangement consideration when it does not have fair value of
the system sale.  Under the residual method, the amount of consideration
allocated to the delivered item equals the total arrangement consideration less
the aggregate fair value of the undelivered items.  Assuming all other criteria
for revenue recognition have been met, the Company recognizes revenue for system
sales when delivery and acceptance occurs, for installation and training when
the services are rendered, and for service ratably over the service period,
which is generally one year.
The Company's distributors do not have price protection
rights.
Revenue from sales of instruments and accessories is
recognized upon delivery. Revenue related to future commitments under separately
priced 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 condensed consolidated balance sheets.
The Company's
da Vinci
Surgical System,
Hermes
Control Center and
AESOP
Endoscope Positioner contain a software
component. The Company believes that this software element is an incidental part
of each system. The software element within the Company's products is not sold
or marketed separately to customers, and the software does not operate
independently of each system. Furthermore, the software development effort does
not represent 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 each system as a whole and the software revenue guidance provided
in SOP 97-2, "Software Revenue Recognition," is not applicable to the Company's
revenues.
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 its acquisition of Computer Motion in June 2003.  As required under
Statement of Financial Accounting Standards Board ("SFAS"), No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," the Company has
provided the following pro forma net loss and pro forma net loss per share
disclosures for stock-based awards as if the fair value-based method defined in
SFAS 123, "Accounting for Stock-Based Compensation," had been applied (amounts
in thousands, except per share amounts):
Three Months Ended
                                                      March 31,
                                                 ------------------
                                                   2004      2003
                                                 --------  --------
Net income (loss), as reported................. $    853  $ (2,293)
Add:  Total stock-based employee
  compensation expense included in reported net
  income (loss), net of $0 related tax effect..       15       154
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method for
  all awards, net of $0 related tax effect.....   (2,460)   (2,026)
                                                 --------  --------
Pro forma net loss............................. $ (1,592) $ (4,165)
                                                 ========  ========

Net earnings (loss) per share:
  Basic - as reported.......................... $   0.03  $  (0.12)
  Basic - pro forma............................ $  (0.05) $  (0.23)

  Diluted - as reported........................ $   0.02  $  (0.12)
  Diluted - pro forma.......................... $  (0.05) $  (0.23)
The fair value for each stock option award granted was estimated at the date
of grant using the Black-Scholes option-pricing model, assuming no expected
dividends and the following weighted average assumptions:
Three Months Ended
                                           March 31,
                                     -------------------
                                        2004      2003
                                     --------  ---------
Stock Option Plans:
   Average risk free interest rate.     2.66 %     2.52 %
   Average expected life (years)...      4.0        4.0
   Volatility......................       73 %       80 %

Stock Purchase Plan:
   Average risk free interest rate.     1.30 %     1.71 %
   Average expected life (years)...      1.2        0.5
   Volatility......................       62 %       48 %
Recent Accounting Pronouncements
In December 2003, the FASB issued FIN Interpretation
No. 46R (revised December 2003), "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51," which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN No. 46R replaces FASB Interpretation FIN
No. 46, which was issued in January 2003. As of the effective date of FIN
No. 46R, an enterprise must evaluate its involvement with all entities or legal
structures created before February 1, 2003, to determine whether consolidation
requirements of FIN No. 46R apply to those entities. There is no grandfathering
of existing entities. The adoption of FIN No. 46R did not have a significant
impact on the Company's consolidated financial position, results of operations
or cash flow.
In December 2003, the SEC issued Staff Accounting Bulletin
(SAB) No. 104, "Revenue Recognition." SAB No. 104 revises or rescinds
portions of the interpretative guidance included in Topic 13 of the codification
of staff accounting bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The adoption of SAB No. 104 did not have a significant
impact on the Company's consolidated financial position, results of operations
or cash flow.
NOTE 2. CONCENTRATIONS OF RISK
Financial instruments that 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 three months ended March 31, 2004 and
2003, 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.
The Company's
da Vinci
Surgical System,
Hermes
Control Center,
AESOP
Endoscope Positioner and related instruments,
accessories and service accounted for all of the Company's product sales for the
three months ended March 31, 2004 and 2003. 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 for use in surgery.   The distribution of sales
by geographic location is as follows (in thousands):
Three Months Ended
                                      March 31,
                               ---------------------
                                   2004       2003
                                ---------  ---------
Domestic...................... $  20,506  $  15,849
International.................     6,553      3,386
                                ---------  ---------
Total sales................... $  27,059  $  19,235
                                =========  =========
For the three months ended March 31, 2004, U.S. and
international sales accounted for 76% and 24%, respectively, of total sales. For
the three months ended March 31, 2003, U.S. and international sales accounted
for 82% and 18%, respectively, of total sales.
NOTE 3. CASH AND CASH EQUIVALENTS
Intuitive Surgical considers all highly liquid
investments with an original maturity from date of purchase of 90 days or less
to be cash equivalents for the purpose of balance sheet and statement of cash
flows presentation. The carrying value of cash and cash equivalents approximates
market value at March 31, 2004 and December 31, 2003.
NOTE 4. 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 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.
The following table presents the fair value of available-for-sale
securities included in short-term investments as of the respective dates
(in thousands):
March 31,      December 31,
                                2004             2003
                           ---------------  ---------------
U.S. corporate debt...... $        44,892  $        44,904
U.S. government debt.....          25,747           28,210
Municipal debt...........          19,400           11,950
Commercial paper.........          12,450           16,550
                           ---------------  ---------------
Total.................... $       102,489  $       101,614
                           ===============  ===============
NOTE 5. INVENTORY
Inventory is stated at the lower of cost or market value.
Cost is computed using standard costs, which approximates actual cost on a
first-in, first-out basis.  Inventory consists of the following (in
thousands):
March 31,   December 31,
                                   2004          2003
                               ------------  ------------
Raw materials................ $      1,200  $      1,247
Work-in-process..............        2,314         1,797
Finished goods...............        4,469         5,744
                               ------------  ------------
                              $      7,983  $      8,788
                               ============  ============
NOTE 6.  ACQUISITION OF COMPUTER MOTION, INC.
On June 30, 2003, the Company acquired all of the
outstanding shares of Computer Motion, Inc. through a merger of Computer Motion
with a wholly owned subsidiary of Intuitive Surgical.  The Company accounted for
this transaction as a purchase of a business.
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..............................     1,774
Bridge loan facility..................................     5,302
                                                        ---------
Total purchase price.................................. $ 148,513
                                                        =========
Future business results may differ from inherent estimates contained in the
allocation, including obligations related to exiting lease commitments, and
other underlying assumptions. The total purchase price has been allocated as
follows (in thousands):
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..............................................   143,332
Net liabilities assumed...............................    (3,519)
                                                        ---------
Total purchase price.................................. $ 148,513
                                                        =========
NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Goodwill and 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 SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill and intangible assets with indefinite useful lives can no longer be
amortized; rather, they will be tested for impairment at least annually of each
fiscal year (more frequently if certain indicators are present), which the
Company will do in the fourth quarter.  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 related to the
acquisition of Computer Motion, $143.3 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 totaling $0.5
million.   During the three months ended March 31, 2004, the Company increased
goodwill by $0.2 million due to the change in estimates on assumptions used to
calculate the losses on subleasing the vacated Computer Motion facilities.
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.
Net intangible assets is comprised of the following (in
thousands):
March 31, 2004
                               -----------------------------------------------
                                            Accumulated
                                 Gross     Amortization  Impairment     Net
                               ---------   ------------  ----------  ---------
Developed technology........  $   3,500   $        250  $    3,250  $      --
Core technology.............      3,300            354          --      2,946
Customer relationships......      1,300            300          --      1,000
Patents.....................      7,310          3,787          --      3,523
Other intangible assets.....        500             56         291        153
                               ---------   ------------  ----------  ---------
Total intangible assets, net  $  15,910   $      4,747  $    3,541  $   7,622
                               =========   ============  ==========  =========

                                             December 31, 2003
                               -----------------------------------------------
                                            Accumulated
                                 Gross     Amortization  Impairment     Net
                               ---------   ------------  ----------  ---------
Developed technology........  $   3,500   $        250  $    3,250  $      --
Core technology.............      3,300            236          --      3,064
Customer relationships......      1,300            233          --      1,067
Patents.....................      7,310          3,511          --      3,799
Other intangible assets.....        500             50         291        159
                               ---------   ------------  ----------  ---------
Total intangible assets, net  $  15,910   $      4,280  $    3,541  $   8,089
                               =========   ============  ==========  =========
Amortization expense related to intangible assets was $0.5
million for the three months ended March 31, 2004 and $0.2 million for the three
months ended March 31, 2003.
Estimated future amortization expense related to intangible
assets at March 31, 2004 is as follows (in thousands):
Fiscal Year
----------------------------
2004 (remaining 9 months)...  $    1,403
2005........................       1,870
2006........................       1,260
2007........................       1,074
2008........................         807
Thereafter..................       1,208
                                ---------
Total.......................  $    7,622
                                =========
Impairment of Goodwill
The Company has elected to perform an annual analysis of
goodwill during the fourth quarter of each year.  Based on our 2003 impairment
analysis, no impairments were identified, and no indicators of impairment were
identified during the three months ended March 31, 2004.
Impairment of Long-Lived Assets
SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," requires recognition of impairment of long-lived assets
when circumstances indicate an impairment has occurred and in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets.  Accordingly, the Company evaluates asset
recoverability when an event occurs that may impair recoverability of the asset.
The Company determines the recoverability of the carrying amount of each asset
by reviewing the following factors: the undiscounted value of expected operating
cash flows, the estimated useful or contractual life of the asset and the
contract or product supporting the asset.  No impairment losses were incurred
during the three months ended March 31, 2004 and 2003.
NOTE 8. 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. Effective July 1, 2003, the Company adopted the
provisions of EITF No. 00-21 on a prospective basis. Under EITF No. 00-21, for
certain arrangements, a portion of the overall system price attributable to the
first year service is deferred and recognized as revenue over the service
period. As such, the Company recognizes warranty and related service costs as
incurred for these arrangements. The warranty provision resulting from
transactions prior to July 1, 2003 will be reduced in future periods for
material and labor costs incurred as related product is returned during the
warranty period or when the warranty period elapses. A review of warranty
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                        Balance at
                                          Beginning   Warranty   Warranties  End of
                                          of Period     Usage     Issued     Period
                                         -----------  ---------  ---------  ---------
Three months ended March 31, 2004.....  $       702  $    (431) $      63  $     334
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 products. 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 March 31,
2004 or December 31, 2003.
NOTE 9. RESTRUCTURING CHARGES
In connection with the acquisition of Computer Motion in
June 2003, the Company recorded an accrual for acquisition integration
liabilities, which includes the incremental costs to exit and consolidate
activities at Computer Motion locations, termination of certain Computer Motion
employees, and for other costs to integrate operating locations and other
activities of Computer Motion.  The accrual was recorded using the guidance
provided by EITF 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination," which requires that these acquisition
integration expenses, which are not associated with the generation of future
revenues and have no future economic benefit, be reflected as assumed
liabilities in the allocation of the purchase price to be net assets acquired.
During 2003, the Company recorded a $3.4 million accrual in accordance with EITF
95-3.  The accrual was comprised of $2.6 million for employee severance costs
and $0.8 million for estimated losses to be incurred to sublet vacated
facilities.  During the three months ended March 31, 2004, the Company increased
the accrual for the estimated losses to be incurred to sublet vacated facilities
by $0.2 million due to the change in estimates on assumptions used to calculate
the losses on subleasing the vacated facilities.
During the three months ended December 31, 2003, based on the
Company's cost structure and future development plans,
the Company planned to completely shut down the Goleta
research and development facility.  In accordance with SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities," the Company recorded
restructuring charges of $0.2 million, which is related to the costs of one-time
employee terminations.   SFAS No. 146 requires that a liability for costs
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred.  As employees are
generally required to render service beyond the minimum retention period or 60
days, the severance payments are recognized ratably over the service periods.
During the three months ended March 31, 2004, the Company completed the shutdown
of the Goleta research and development facilities and accrued $0.2 million of
employee severance costs and $0.5 million of lease commitments costs to exit the
leased facility.  The charges incurred in the three months ended March 31,2004
were recorded in research and development expenses on the income statement.  The
Company expects to fully utilize the accrual in the third quarter of 2007.
The following table summarizes the restructuring activitiy
for the three months ended March 31, 2004 (in thousands):
EITF No. 95-3          SFAS No. 146
                                             ----------------------  ---------------------
                                              Employee     Lease     Employee     Lease
                                             Severance   Commitments Severance  Commitments Total
                                             ----------  ----------  ---------  ---------  --------
Cost accrued............................... $    2,628  $      816  $     186  $      --  $  3,630
Cash payments, net of subleasing proceeds..     (2,310)       (303)        --         --    (2,613)
Currency impact............................        (23)        (23)        --         --       (46)
                                             ----------  ----------  ---------  ---------  --------
Balance at December 31, 2003...............        295         490        186         --       971
Cost accrued...............................         --         233        224        525       982
Cash payments, net of subleasing proceeds..       (199)       (176)      (388)       (36)     (799)
Currency impact............................         --           6                               6
                                             ----------  ----------  ---------  ---------  --------
Balance at March 31, 2004.................. $       96  $      553  $      22  $     489  $  1,160
                                             ==========  ==========  =========  =========  ========
NOTE 10. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net loss and other
comprehensive income (loss), which primarily consists of unrealized gains and
losses on available-for-sale securities and cumulative translation adjustments.
Total accumulated other comprehensive income is displayed as a separate
component of stockholders' equity in the accompanying condensed consolidated
balance sheets.
The components of
comprehensive income (loss) consist of the following (in thousands):
Three Months Ended
                                               March 31,
                                        --------------------
                                           2004       2003
                                        ---------  ---------
Net income (loss)..................... $     853  $  (2,293)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.......................       (30)       (91)
  Change in unrealized gain (loss)
    on available-for-sale securities..       244       (441)
                                        ---------  ---------
Comprehensive income (loss)........... $   1,067  $  (2,825)
                                        =========  =========
The components of accumulated other comprehensive income were
as follows (in thousands):
March 31,  December 31,
                                              2004         2003
                                          ------------  -----------
Accumulated net unrealized gain on
  available-for-sales securities........ $      1,184  $       940
Foreign currency translation
  adjustments...........................          (92)         (62)

Total accumulated other comprehensive     ------------  -----------
  income................................ $      1,092  $       878
                                          ============  ===========
NOTE 11. NET INCOME (LOSS) PER SHARE
The following table presents the computation of basic and
diluted net earning (loss) per share (in thousands, except per share data).
Basic net earning (loss) per share is computed using the
weighted-average number of common shares outstanding.  Diluted net earning (loss)
per share is computed using the weighted-average number of common shares
outstanding and potential dilutive common shares from the assumed exercise of
options and warrants outstanding during the period, if any, using the treasury stock
method.
Three Months Ended
                                           March 31,
                                     -----------------------
                                        2004         2003
                                     -----------  ----------
Numerator used for basic and
  diluted net loss per common
  share............................ $       853  $   (2,293)
                                     ===========  ==========
Denominator used for basic and
  diluted net loss per common share:
  Weighted-average shares
    outstanding....................      33,282      18,438
  Less weighted-average
    shares subject to
    repurchase.....................          --          (7)
                                     -----------  ----------
  Weighted-average shares used in
    computing basic net loss per
    common share...................      33,282      18,431
                                     ===========  ==========

  Add common stock equivalents.....         855          --
  Weighted-average shares used
    in computing diluted common
    share..........................      34,137      18,431
                                     ===========  ==========

Net earnings (loss) per common share:
  Basic............................ $      0.03  $    (0.12)
                                     ===========  ==========
  Diluted.......................... $      0.02  $    (0.12)
                                     ===========  ==========
Potential weighted average common shares excluded from the
computation of diluted net earnings (loss) per share as their effect would be
antidilutive were 1,817,000 shares and 2,911,000 shares, respectively, for the
three months ended March 31, 2004 and March 31, 2003.
NOTE 12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company entered into a lease arrangement for
approximately 83,000 square feet of office and manufacturing space in Sunnyvale,
California effective January 2002 (the "Sunnyvale Lease").  Under the Sunnyvale
Lease, the Company was required to lease an additional 22,000 square feet
starting in January 2004.  The Sunnyvale Lease was scheduled to expire on April
30, 2007.  The Sunnyvale Lease included a renewal option for one additional
five-year term.  On April 30, 2004, the Company purchased the property including
the 105,000 square foot building and canceled the Sunnyvale Lease.  In addition,
the Company leases approximately 2,000 square feet for research and development
in Milford, Connecticut and approximately 3,000 square feet for a sales office
in St. Germanin en Laye, France.  In connection with the acquisition of Computer
Motion, the Company assumed leases for approximately 47,000 square feet in
Goleta, California.  These leases have varying terms, the longest of which
extends to September 2007.  As of March 31, 2004, the Company sublet
approximately 90% of its office space in Goleta.
Future minimum lease commitments, net of sublease income of
$1.8 million throughout the next 4 years, under the Company's operating lease as
of March 31, 2004 are as follows (in thousands):
2004 (remaining 9 months)..... $   2,048
2005..........................     3,067
2006..........................     3,141
2007..........................     1,136
                                ---------
Total......................... $   9,392
                                =========
On April 30, 2004 the Company purchased the land and building
for its main office and manufacturing facility in Sunnyvale, California for
approximately $19.9 million in cash.  The transaction will reduce the Company's
future contractual obligation under building lease by approximately $8.4
million, which is included in the above table.
Rent expense was approximately $0.8 million and $0.7 million
for the three months ended March 31, 2004 and March 31, 2003, respectively.
CONTINGENCIES
For a description of the Company's legal proceedings please
see the Section entitled "Item 1 Legal Proceedings" in Part II. Other
Information contained elsewhere in this report.
NOTE 13. SUBSEQUENT EVENT
On April 30, 2004 the Company purchased the land and
building for its main office and manufacturing facility in Sunnyvale, California
for approximately $19.9 million in cash.
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 March 31, 2004 and results of operations for the three months
ended March 31, 2004 and March 31, 2003 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 for the year ended
December 31, 2003.
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. The
da Vinci
Surgical System is sold into multiple surgical specialties, principally urology,
cardiac and general surgery.
RESULTS OF OPERATIONS
Product Sales  (in millions)
March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $    22.5  $    17.3  $     5.2        30 %
Product sales increased to $22.5 million for the quarter
ended March 31, 2004 from $17.3 million for the quarter ended March 31, 2003.
The 30% increase resulted primarily from $4.3 million higher first quarter 2004
instrument and accessory revenue and $0.9 million higher system revenue.
Instrument and accessory revenue increased to $7.9 million in the first quarter
of 2004 from $3.6 million in the first quarter of 2003, reflecting a larger base
of installed
da Vinci
Surgical Systems and improved system utilization
per site.  First quarter 2004 instruments and accessories revenue included
approximately $0.7 million from the
Aesop, Hermes,
and
Zeus
product lines.  There was no
Aesop, Hermes,
or
Zeus
product
revenue in our first quarter 2003 results. Total system revenue increased
to $14.6 million for the quarter ended March 31, 2004, compared to $13.7 million
for the quarter ended March 31, 2003.  The systems revenue increase resulted
primarily from the shipment of 11 fourth arm upgrades to the
da Vinci
Surgical System platform in the first quarter of 2004, compared to one in the
first quarter of 2003.  First quarter 2004 system revenue also included $0.6
million from the sales of seven
Aesop
systems.  The increases were
partially offset by a reduction in systems revenue related to the Company's
adoption of EITF 00-21 in July 2003, under which service revenue for the first
year is deferred for each
da Vinci
System sale.
Service Sales (in millions)
March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     4.6  $     1.9  $     2.7       136 %
Service sales, comprised of system service, installation and
customer training, increased to $4.6 million for the quarter ended March 31,
2004 from $1.9 million for the quarter ended March 31, 2003. The increase
resulted primarily from a larger installed base of
da Vinci
Surgical
Systems generating service revenue in 2004.  The installed base of
da
Vinci
Surgical Systems generating service revenue increased by 93 systems
from the first quarter of 2003 to the first quarter of 2004. The increase of 93
was comprised of 60 systems sold in 2002, which were coming out of the warranty
period onto service contracts, and 33 systems sold in the second half of 2003.
In accordance with EITF 00-21, which we adopted prospectively during the third
quarter of 2003, the first year service revenue has been deferred and will be
recognized ratably over the 12-month period following the system sale.  In
addition, the average service revenue per site increased in 2004 due to higher
rates charged for the sites with fourth arm upgrades.  Service related to the
Aesop
and
Zeus
products contributed $0.1 million of service
revenue during the first quarter of 2004. There was no
Aesop
or
Zeus
related service revenue included in our first quarter 2003
results.
Product Sales Gross Profit (in millions)
March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $    13.6  $     9.5  $     4.1        43 %
Percentage of product sales........      60.8 %     55.1 %
Product sales gross profit for the quarter ended March 31,
2004 was $13.6 million, or 60.8% of product sales, compared to $9.5 million, or
55.1% of product sales, for the quarter ended March 31, 2003. Higher first
quarter 2004 gross product margin was driven by lower costs to manufacture the
da Vinci
Surgical System, instruments and accessories.  Cost reductions
resulted from lower material costs obtained primarily through vendor
negotiations and lower labor and overhead resulting from leveraging fixed
manufacturing costs across a larger production base.
Service Sales Gross Profit (in millions)
March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     2.2  $     0.2  $     2.0       886 %
Percentage of service sales........      47.5 %     11.4 %
Service sales gross profit for the quarter ended March 31,
2004 was $2.2 million, or 47.5% of service sales, compared to $0.2 million, or
11.4% of service sales, for the quarter ended March 31, 2003. The improved first
quarter 2004 gross service margin was driven by increased service revenue as
described above in combination with increased leverage of the mostly fixed
service and training organization expenses across a larger base of installed
systems.
Selling, General and Administrative Expenses (in
millions)
March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $    10.2  $     9.5  $     0.8         8 %
Selling, general and administrative expenses include
personnel costs for sales, marketing and administrative personnel, tradeshow
expenses, legal expenses, regulatory fees and general corporate expenses.
Selling, general and administrative expenses for the quarter ended March 31,
2004 were $10.2 million, up 8% from $9.5 million for the quarter ended March 31,
2003. The year-over-year increase was due in large part to higher employee
compensation and travel costs, resulting primarily from additional headcount to
support increased sales volume.  This increase was offset by lower legal costs,
reflecting the elimination of Computer Motion litigation expenses after the
acquisition.
We expect selling, general and administrative expenses to
increase in the future to support our expanding business.
Research and Development Expenses (in millions)
March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     5.3  $     3.4  $     1.9        55 %
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 expenses for the
quarter ended March 31, 2004 were $5.3 million, up 55% from $3.4 million for the
quarter ended March 31, 2003. The increase was primarily due to additional
expenses incurred to support the development and sustaining engineering
activities related to the
Aesop, Hermes
, and
Zeus
products
acquired from Computer Motion.  In addition, as of March 31, 2004, in accordance
with our restructuring plan, we completely shut down the Goleta site.  As a
result, in the first quarter of 2004, we recorded  $0.7 million of restructuring
charges in research and development expenses to reflect the cost to completely
shut down the Goleta site.  Because Computer Motion was acquired on June 30,
2003, there were no Goleta site-based expenses included in the first quarter
2003 results.
Research and development costs are expensed as incurred. We
expect to continue to make substantial investments in research and development
and anticipate that research and development expenses will continue to increase
in the future.
Other Income, Net (in millions)
March 31,  March 31,                %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     0.6  $     0.8  $    (0.2)      (28)%
Other income decreased to $0.6 million for the quarter ended
March 31, 2004 from $0.8 million for the quarter ended March 31, 2003. The
decrease in other income, net is primarily due to a decrease in amounts realized
on the sale of investment securities in the quarter ended March 31, 2004, which
was partially offset by an increase in interest income earned during that
period, primarily related to proceeds from our follow-on common stock offering
which occurred during the fourth quarter of 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been financed primarily through
the sale of our equity securities. Sales of convertible preferred stock have
yielded proceeds of approximately $127.3 million and public offerings of our
common stock have yielded proceeds of approximately $124.5 million. We have also
financed operations through employee stock purchase and option plans as well as
equipment financing arrangements. At March 31, 2004 we had total stockholders
equity of $284.2 million and outstanding equipment financing debt of $1.4
million. As of March 31, 2004, we had cash, cash equivalents and short-term
investments of $115.8 million, compared to $112.9 million at December 31, 2003.
Working capital at March 31, 2004 was $124.5 million, compared to $118.3 million
at December 31, 2003. The increase in cash and investments and in working
capital resulted primarily from $4.1 million of net proceeds realized from stock
option exercises and our employee stock purchase plan.
Net cash used in operating activities was $0.9 million for
the three months ended March 31, 2004, compared to $5.9 million for the three
months ended March 31, 2003. Lower cash used in operating activities was driven
by an increase of $3.1 million in first quarter 2004 net income, a decrease of
$1.6 million first quarter 2004 working capital consumed, and an increase of
$0.3 million first quarter 2004 non-cash expenses.  The $0.9 million of cash
used in operations during the first quarter of 2004 was primarily the result of
working capital consumed of $3.4 million, due in large part to net pay downs of
2003 year end accounts payable and other liabilities, offset by our net income
of $0.9 million and non-cash expenses of $1.6 million. Cash used in operating
activities during the first quarter of 2003 was comprised primarily of working
capital consumed of $5.0 million, due mostly to increased accounts receivable,
and our net loss of $2.3 million, offset by non-cash expenses of $1.3 million.
Net cash used in investing activities was $0.9 million for
the three months ended March 31, 2004, compared to net cash provided by
investing activities of $7.8 million for the three months ended March 31, 2003.
Net cash used in investing activities during the first quarter of 2004 resulted
mainly from the investments in fixed assets of $0.5 million.  The cash provided
by investing activities during the first quarter of 2003 related primarily to
the net conversion of short-term investments into cash to fund operations.
Net cash provided by financing activities was $3.8 million
for the three months ended March 31, 2004, compared to $1.0 million for the
three months ended March 31, 2003.  Cash provided in the quarter ended March 31,
2004 resulted primarily from $4.1 million in net proceeds realized from stock
option exercises and our employee stock purchase plan, offset by repayments of
long-term debt of $0.3 million.  Cash provided in the three months ended March
31, 2003 resulted primarily from $1.4 million in net proceeds realized from
stock option exercises and our employee stock purchase plan, offset by
repayments of long-term debt $0.4 million.
Our capital requirements depend on numerous factors,
including market acceptance of our products, the resources we devote to
developing and supporting our products, and other factors. We expect to devote
substantial capital resources to continue our research and development efforts,
to expand our customer support and product development activities and for other
general corporate activities. We believe that our current cash and cash
equivalents and short-term investment balances, together with revenue to be
derived from the sale of our products, will be sufficient to meet our liquidity
requirements for the foreseeable future.
Contractual Obligations and Commercial
Commitments
The following table summarizes all significant
contractual payment obligations, net of sublease income of $1.8 million
throughout the next 4 years, by payment due date:
Payments by Periods (in Millions)
Contractual Obligation
Total
Less than 1 year
1-3 years
Long-term debt
$ 1.4
$ 0.7
$ 0.7
Building lease
9.4
2.1
7.3
Purchase commitments
0.3
0.3
0.0
Total
$ 11.1
$ 3.1
$ 8.0
On April 30, 2004, we purchased the land and building for our
main office and manufacturing facility in Sunnyvale, California for
approximately $19.9 million in cash.  The transaction will reduce our future
contractual obligation under building lease by approximately $8.4 million, which
is included in the above table.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
assets and liabilities. On an on-going basis, we evaluate our critical
accounting policies and estimates, including those related to revenue
recognition, bad debts, income taxes and intangible assets. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Our critical
accounting policies and estimates are discussed in our Annual Report on Form 10-K
for the year ended December 31, 2003.
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:
our timing and ability to develop our manufacturing and sales and marketing
capabilities;
demand for our products;
the size and timing of specific sales and any collection delays related to
those sales;
product quality problems;
the extent to which our products gain market acceptance;
third-party payor reimbursement policies;
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;
actions relating to regulatory matters;
our ability to protect our proprietary rights and defend against third party
challenges;
our ability to license additional intellectual property rights; and
the progress and results of clinical trials.
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 March
31, 2004 and 2003, approximately 52% and 72%, respectively, of our revenues came
from the sales of
da Vinci
Surgical Systems, which are high revenue
dollar items. During the three-month periods ended March 31, 2004 and 2003, 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.
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 device
with 510(k) clearance or grandfather status. If we significantly 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 device with 510(k) clearance or grandfather status, 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 and
burdensome 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. 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.  Most of
our products to date have been considered significant risk devices requiring IDE
approval prior to investigational use. 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.
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 will
compete with established and emerging treatment options in both disease
management and reconstructive medical procedures.  These competitive treatment
options may take the form of traditional minimally invasive surgery, open
surgery, interventional approaches, or pharmacological regimens.  Some of these
procedures are widely accepted in the medical community and in many cases have a
long history of use.  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.
In addition, we may face competition from companies that
develop robotic and computer-assisted surgical systems in the future.  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.
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.
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. In the past, we have voluntarily recalled certain
products as a result of performance problems.  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;
product recalls;
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 COULD 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. 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.  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.
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 electronics,
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.
COMPLYING WITH FDA REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING
PROCESS, AND OUR FAILURE TO COMPLY FULLY COULD SUBJECT US TO SIGNIFICANT
ENFORCEMENT SANCTIONS.
Because our products, including the
da Vinci
Surgical
System, are commercially distributed, numerous postmarket regulatory
requirements apply, including the following:
QSR which requires manufacturers to follow elaborate design, testing,
control, documentation and other quality assurance procedures during the
manufacturing process;
labeling regulations;
the FDA's general prohibition against false or misleading statements in the
labeling or promotion of products for unapproved or "off-label"
uses;
the Reports of Corrections and Removals regulation, which requires that
manufacturers report to the FDA recalls and field corrective actions taken to
reduce a risk to health or to remedy a violation of the FFDCA that may pose a
risk to health; and
the Medical Device Reporting regulation, which requires that manufacturers
report to the FDA if their device may have caused or contributed to a death or
serious injury or malfunctioned in a way that would likely cause or contribute
to a death or serious injury if it were to recur.
We are subject to inspection and marketing surveillance by
the FDA to determine our compliance with regulatory requirements. If the FDA
finds that we have failed to comply, it can institute a wide variety of
enforcement actions, ranging from a regulatory letter to a public warning letter
to more severe civil and criminal sanctions. Our failure to comply with
applicable requirements could lead to an enforcement action that may have an
adverse effect on our financial condition and results of operations.
We have modified the labeling, advertising and user training
for the
da Vinci
Surgical System to call out specific procedures that we
believe are within the scope of our existing 510(k) clearances. We cannot assure
you that the FDA would agree that all such specific procedures are within the
scope of the existing general clearance or that we have compiled adequate
information to support the safety and efficacy of using the
da Vinci
Surgical System for all such specific procedures. We also have modified the
hardware and software in the
da Vinci
Surgical System since clearance in
ways that we believe do not require new 510(k) clearance. We cannot be certain
that the FDA would agree with our determinations not to seek new 510(k)
clearance for any of these changes. Computer Motion also modified the hardware
and software in its products subsequent to 510(k) clearance without seeking new
clearance. We cannot be certain that the FDA would agree with the determinations
not to seek new 510(k) clearance for any of these changes. The FDA could impose
enforcement sanctions and/or require us to obtain 510(k) clearance for any
modification to our products or Computer Motion's products. We may be prohibited
from marketing the modified device until such 510(k) clearance is granted.
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.
TERMINATION OF RELATIONSHIPS WITH FORMER DISTRIBUTORS OF
COMPUTER MOTION COULD RESULT IN LITIGATION.
Our integration strategy related to our acquisition of
Computer Motion may involve the termination of Computer Motion's relationships
with a number of companies that served as Computer Motion's distributors prior
to the acquisition.  Several of these former distributors have informed us that
they believe that they are entitled to compensation in connection with such
termination.  We may be unable to resolve these claims without litigation.  Due
to the inherent uncertainties of litigation, we cannot accurately predict the
ultimate outcome of any such litigation at this time and, therefore, cannot
estimate the range of possible loss.  If we sue or are sued by any of Computer
Motion's former distributors, these proceedings may be expensive to litgate, may
be protracted, and Computer Motion's confidential information may be
compromised.  Whether or not we are successful in these lawsuits, these
proceedings could consume substantial amounts of our financial and managerial
resources.
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 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.
There may be 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 may be 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 be
certain 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 be certain 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, 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.
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.
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 24% of our sales for the three months
ended March 31, 2004 and 18% for the three months ended March 31, 2003.
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 United States dollars. As a result, an increase in the value of
the United States 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.
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.
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
public offerings.
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 March 31, 2004 was approximately 1.16
years.  At March 31, 2004 and December 31, 2003, approximately 49% and 37%,
respectively, of our investment portfolio was composed of investments with
original maturities of one year or less.
The majority of our revenue, expense, and capital purchasing
activities are transacted in U.S. dollars. However, since a portion of our
operations consists of sales activities outside of the United States, we have
entered into transactions in other currencies, primarily the euro. On a limited
basis, we use forward foreign exchange contracts to reduce a portion of our
exposure to foreign currency risk from operational and balance sheet exposures
resulting from changes in foreign currency exchange rates. Such exposures result
from sales denominated in foreign currencies. These contracts are typically
short-term in nature (i.e., less than 6 months).
For the three months ended March 31, 2004 and 2003, sales
denominated in foreign currencies were 12% and 9%, respectively, of total sales.
We did not enter into forward foreign exchange contracts during the three months
ended March 31, 2004 and 2003.
We have not designated any of our forward foreign exchange
contracts for hedge accounting under FAS 133. The forward contracts, which have
only nominal intrinsic value at the time of purchase, are denominated in the
same foreign currency in which the sales are denominated. The gains and losses
on these forward contracts as well as the offsetting losses and gains on the
hedged receivables are recognized depending on whether the derivative instrument
is designated and qualifies as part of a hedging relationship and, if so, the
nature of the hedging activity.
During the three months ended March 31, 2004 and 2003, we did
not designate and qualify any forward contracts as part of a hedging
relationship. Accordingly, changes in the fair value of derivatives that do not
qualify for hedge treatment, as well as the ineffective portion of a particular
hedge, are recognized currently in earnings. All derivative instruments are
recorded as either current assets or accrued liabilities in the balance sheet at
fair value.
We do not use derivative financial instruments for
speculative trading purposes, nor do we hold or issue leveraged derivative
financial instruments. We have not entered into any forward contracts since July
2002, and as of March 31, 2004 and December 31, 2003, we had no outstanding
derivative instruments.
Foreign currency fluctuations resulted in $98,000 of foreign
exchange loss for the three months ended March 31, 2004 and $26,000 of foreign
exchange gain for the three months ended March 31, 2003.
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 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 period 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
In February 2004, a former customer of Computer Motion
filed a lawsuit against our company.  We received the complaint on April 23,
2004.  The customer alleges that it relied to its detriment on representations
made by Computer Motion in connection with Computer Motion's sale of products to
the customer, which representations the customer believes were not fulfilled.
The customer is seeking damages. We believe the allegation is baseless and will
vigorously defend this suit.
In November 2003, an Israeli company, filed suit against our
company and Computer Motion in Israel alleging breach distribution contract and
seeking damages. We received the complaint on April 27, 2004. Following the
acquisition of Computer Motion, we withdrew Computer Motion's distributorship
offer to this Israeli company. We believe the allegation is baseless and will
vigorously defend the suit.
In October 2003, a former Italian distributor for Computer
Motion, filed suit against our company and Computer Motion seeking damages. The
distributor alleges that we breached the distribution agreement the distributor
had with Computer Motion when, following our acquisition of Computer Motion, we
withdrew, from coverage under the distribution agreement, two of the products
covered by the agreement. We believe that under the terms of agreement, we are
entitled to withdraw the products from coverage with proper notice. We believe
we have provided proper notice to the distributor.  We also believe that the
distributor improperly and in violation of the agreement filed the suit in Rome
instead of in California as specifically provided for by the agreement. In
November 2003, we filed a counter suit against the distributor in California for
breach of contract, seeking unspecified damages and injunction against the
distributor's action in Rome. In March 2004, we obtained default entry against
the distributor in the California action.  We are defending the action in Rome
on both jurisdictional grounds and on the merits. The decision of the Rome court
is currently being awaited.
In September 2002, we discovered that one of our employees
had purchased approximately $900,000 in administrative supplies without the
authorization or knowledge of our management. This matter was investigated by
law enforcement authorities and our 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, or 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 November
2003, we filed a Second Amended 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, as well as
adding causes of action for rescission, conversion, intentional interference
with contract, negligent interference with contract, negligence, and money had
and received. The amended complaint reiterates our claim to recover actual and
treble damages, costs and attorney fees. Defendants have answered.  Substantial
discovery has been completed.  Trial is set for July 21, 2004.
The foregoing proceedings could be expensive to litigate, may
be protracted and our confidential information may be compromised. Whether or
not we are 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 us, or we may file claims
against them, which could increase the risk, expense and duration of the
litigations.
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, USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM
8-K
(a) Exhibits.
Exhibit Number
Description
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.
On January 16, 2004, we filed a current report on Form 8-K
announcing the settlement of pending litigation.
On February 12, 2004, we furnished a current report on Form
8-K announcing our fourth quarter and year ended December 31, 2003 financial
results.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUITIVE SURGICAL, INC.
(Registrant)
By:
/s/ SUSAN K. BARNES
Susan K. Barnes
Senior Vice President, Chief Financial Officer and Assistant
Secretary
Date: May 7, 2004
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