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<title>Q1 2003 10Q DOC</title>
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<FONT SIZE="3"><B><P ALIGN="CENTER">UNITED STATES<br>
SECURITIES AND EXCHANGE COMMISSION<br>
Washington, D.C. 20549</B></font></p>

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

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

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

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


<FONT SIZE="3"><B><P ALIGN="CENTER">
</font><font face=Wingdings>x</font><font>&nbsp; QUARTERLY REPORT PURSUANT TO SECTION 13 OR
     15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</B></font></p>
<font size="4" color="FF0000"><B><p align="center">
               For the quarterly period ended March 31, 2003
</B></font></p>

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

<FONT SIZE="3"><B><P ALIGN="CENTER">
</font><font face=Wingdings>o</font><font>&nbsp; TRANSITION REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</P></font></B>
<FONT SIZE="3"><B><P ALIGN="CENTER">
 For the transition period from ________to _________
</P></font></B>
<FONT SIZE="3"><B><U><P ALIGN="CENTER">
                       Commission file number 000-30713
</U></B></font></p>
<P ALIGN="CENTER"><IMG SRC="logo.gif">
<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 37,120,689 shares of Common Stock, $0.001 par value per
share, outstanding as of April 30, 2003.

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


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

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

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

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


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

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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Consolidated balance sheets as of March 31, 2003 and<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           December 31, 2002

</font>
</TD>

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

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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Consolidated statements of operations for the three-month<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
             periods ended March 31, 2003 and March 31, 2002

</font>
</TD>

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


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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Consolidated statements of cash flows for the three-month<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           periods ended March 31, 2003 and March 31, 2002
</font>
</TD>

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

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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Notes to 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">13</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">36</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">36</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">37</A></CENTER>
</font>
</TD>
</TR>


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

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

<TD>
<font size="3">
<CENTER><A HREF="#item2">41</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">42</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">42</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">42</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">42</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">42</A></CENTER>
</font>
</TD>
</TR>
</TABLE>

<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<B><P ALIGN="CENTER">PART I -- FINANCIAL INFORMATION </P>
</B><P>Item 1. Financial Statements</P>


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

                                                           March 31,   December 31,
                                                             2003          2002
                                                         ------------  -----------
                                                         (Unaudited)   (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents............................ $     22,774  $    17,607
  Short-term investments...............................       22,235       33,232
  Accounts receivable, net.............................       20,895       16,887
  Inventory............................................        8,282        8,738
  Prepaid expenses.....................................        2,037        2,161
                                                         ------------  -----------
          Total current assets.........................       76,223       78,625
Property and equipment, net............................        9,823       10,388
Intangible and other assets............................        3,370        2,568
                                                         ------------  -----------
          Total assets.................................       89,416       91,581
                                                         ============  ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..................................... $     10,142  $     9,282
  Accrued compensation and employee benefits...........        2,225        4,666
  Warranty accrual.....................................        2,100        2,269
  Other accrued liabilities............................        3,485        3,497
  Deferred revenue.....................................        6,140        4,838
  Current portion of notes payable.....................        1,434        1,511
                                                         ------------  -----------
          Total current liabilities....................       25,526       26,063
Long-term notes payable................................        1,531        1,838
Commitments............................................           --           --
Stockholders' equity:
  Common stock, 200,000,000 shares authorized, $0.001
     par value, 37,101,480 and 36,715,026 shares
     issued and outstanding as of March 31, 2003
     and December 31, 2002, respectively...............           37           36
  Additional paid-in capital...........................      192,412      191,020
  Deferred compensation................................         (112)        (223)
  Accumulated deficit..................................     (131,084)    (128,791)
  Accumulated other comprehensive income ..............        1,106        1,638
                                                         ------------  -----------
          Total stockholders' equity...................       62,359       63,680
                                                         ------------  -----------
          Total liabilities and stockholders' equity... $     89,416  $    91,581
                                                         ============  ===========

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


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

                                        Three Months Ended
                                            March 31,
                                     ----------------------
                                        2003        2002
                                     ---------- -----------
Sales.............................. $   19,235  $   14,409
Cost of sales......................      8,738       7,507
                                     ----------  ----------
    Gross profit...................     10,497       6,902
                                     ----------  ----------
Operating costs and expenses:
  Selling, general and
   administrative..................     10,209       8,785
  Research and development.........      3,423       4,232
                                     ----------  ----------
    Total operating costs and
     expenses......................     13,632      13,017
                                     ----------  ----------
Loss from operations...............     (3,135)     (6,115)
Other income(expense), net ........        842         498
                                     ----------  ----------
Net loss........................... $   (2,293) $   (5,617)
                                     ==========  ==========
Basic and diluted net loss per
  common share..................... $    (0.06) $    (0.15)
                                     ==========  ==========
Shares used in computing net
  loss per common share............     36,862      36,308
                                     ==========  ==========

</pre>

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


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

                                                             For the Three Months
                                                                Ended March 31,
                                                         ------------------------
                                                            2003         2002
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net loss............................................... $    (2,293) $    (5,617)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation.........................................         882          622
  (Gain)loss on sales of fixed assets..................           1           69
  Amortization of deferred compensation................         154          216
  Amortization of intangible and other assets..........         198          195
Changes in operating assets and liabilities:
  Accounts receivable..................................      (4,008)      (2,244)
  Prepaid expenses.....................................         124          240
  Inventory............................................         456          (60)
  Accounts payable.....................................         860          884
  Accrued compensation and employee benefits...........      (2,441)         (31)
  Warranty accrual.....................................        (169)         (44)
  Other accrued liabilities............................      (1,012)         (43)
  Accrued royalty expense..............................          --       (1,000)
  Deferred revenue.....................................       1,302         (246)
                                                         -----------  -----------
Net cash used in operating activities..................      (5,946)      (7,059)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................        (318)      (4,024)
Disposition of property and equipment..................          --           43
Purchase of short-term investments.....................          --       (8,491)
Proceeds from sales of short-term investments..........       5,444       11,771
Proceeds from maturities of short-term investments.....       5,112        4,099
                                                         -----------  -----------
Net cash provided by investing activities..............      10,238        3,398
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       1,350        1,001
Repurchase of common stock.............................          --           (1)
Proceeds from notes payable............................          --          950
Repayment of notes payable.............................        (384)        (483)
                                                         -----------  -----------
Net cash provided by financing activities..............         966        1,467
                                                         -----------  -----------
Foreign currency translation adjustments...............         (91)          42
Net increase in cash and cash equivalents..............       5,167       (2,152)
Cash and cash equivalents, beginning of period.........      17,607       10,487
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $    22,774  $     8,335
                                                         ===========  ===========

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


<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="notes"></A>
<p align="center"><B>
                            INTUITIVE SURGICAL, INC.
<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS <BR>
(UNAUDITED) </P>
<P>NOTE 1. BASIS OF PRESENTATION</P>
</B><P ALIGN="JUSTIFY">The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion of management, all
normal, recurring adjustments considered necessary for a fair presentation have been included. The
consolidated balances at December 31, 2002 were derived from the audited financial statements
included in the Annual Report on Form 10-K/A for 2002. The financial statements should be read in
conjunction with the audited financial statements for the year ended December 31, 2002, included in
the Annual Report on Form 10-K/A of Intuitive Surgical, Inc, filed with the Securities and Exchange
Commission. The results for the interim period ended March 31, 2003 are not necessarily indicative
of the results to be expected for the full year ending December 31, 2003 or future operating
periods.</P>

<B><P>NOTE 2. CONCENTRATIONS OF RISK</P>
</B><P ALIGN="JUSTIFY">Financial instruments which subject the Company to potential risk
consist of its cash equivalents, short-term investments, accounts receivable, and foreign exchange
contracts. The counterparties to the agreements relating to the Company's investment securities and
foreign exchange contracts consist of various major corporations and financial institutions of high
credit standing. The Company believes the financial risks associated with these financial
instruments are minimal. For the three months ended March 31, 2003 and 2002, no customer accounted
for more than 10% of total sales. The Company extends reasonably short collection terms but does not
require collateral. The Company provides reserves for potential credit losses but has not
experienced significant losses to date. </P>
<P ALIGN="JUSTIFY">The Company's <I>da Vinci</I> Surgical System, related instruments and
accessories and service have accounted for all of the Company's sales for the three months ended
March 31, 2003 and 2002. Purchases of key parts and components used to manufacture the Company's
products are from limited supply sources. The inability of any of these suppliers to fulfill the
Company's supply requirements may negatively impact future operating results.</P>
<P ALIGN="JUSTIFY">The Company operates in one segment, the development and marketing of products
designed to provide the flexibility of open surgery while operating through ports. For the three
months ended March 31, 2003, U.S. and international sales accounted for 82% and 18%, respectively,
of total sales. For the three months ended March 31, 2002, U.S. and international sales accounted
for 87% and 13%, 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, 2003 and December 31, 2002.</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,
together with amortization of premiums and discounts on debt securities, are included in interest
income. The cost of securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in interest income.</P>

<B><P>NOTE 5. INVENTORY</P>
</B><P ALIGN="JUSTIFY">&#9;Inventory consists of the following (in thousands): </P>

<pre>

                                 March 31,    December 31,
                                   2003           2002
                               -------------  -----------
Raw materials................ $       3,808  $     3,420
Work-in-process..............         1,848          780
Finished goods...............         2,626        4,538
                               -------------  -----------
                              $       8,282  $     8,738
                               =============  ===========

</pre>

<B><P>NOTE 6. INTANGIBLE AND OTHER ASSETS</P>
</B><P ALIGN="JUSTIFY">Purchased intangible assets represent patents which are carried at cost
less accumulated amortization. Amortization is computed using the straight-line method over the
expected useful life of six years. At March 31, 2003 gross intangible assets totaled $5.7 million
and related accumulated amortization was $2.3 million. During the three months ended March 31, 2003,
the Company recorded $1.0 million in transaction costs related to the pending merger with Computer
Motion.</P>

<B><P>NOTE 7. COMPREHENSIVE LOSS</P>
</B><P ALIGN="JUSTIFY">&#9;The components of comprehensive loss consist of the following (in
thousands): </P>

<PRE>

                                         Three Months Ended
                                             March 31,
                                      --------------------
                                         2003       2002
                                      ---------  ---------
Net loss............................ $  (2,293) $  (5,617)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.....................       (91)        42
  Change in unrealized gain (loss)
    on available-for-sale securities      (441)      (501)
                                      ---------  ---------
Comprehensive loss.................. $  (2,825) $  (6,076)
                                      =========  =========


</PRE>

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

<PRE>

                                        March 31,  December 31,
                                          2003        2002
                                        ---------  -----------
Accumulated net unrealized gain on
  available-for-sales securities...... $   1,182  $     1,623
Foreign currency translation
  adjustments.........................       (76)          15
                                        ---------  -----------
Total accumulated other comprehensive
  income.............................. $   1,106  $     1,638
                                        =========  ===========

</PRE>

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

<PRE>

                                  Three Months Ended
                                      March 31,
                               ------------------------
                                  2003         2002
                               -----------  -----------
Numerator used for basic and
  diluted net loss per
  common share............... $    (2,293) $    (5,617)
Denominator used for basic
  and diluted net loss per
  common share:
  Weighted-average shares
    outstanding..............      36,876       36,342
  Less weighted-average
    shares subject to
    repurchase...............         (14)         (34)
                               -----------  -----------
  Weighted-average shares
    used in computing basic
    and diluted net loss per
    common share.............      36,862       36,308
                               ===========  ===========
Basic and diluted net loss
  per common share........... $     (0.06) $     (0.15)
                               ===========  ===========

</PRE>

<P>Common stock equivalents consisting of stock options and warrants (calculated using the treasury
stock method) have been excluded from the computation of diluted net loss per share, as their
inclusion would be anti-dilutive. </P>
<P>If the Company had earned a profit during the three months ended March 31, 2003 and 2002, the
Company would have added 6,309,602 and 4,960,355, respectively, common equivalent shares to the
basic weighted average shares outstanding to compute the diluted weighted average shares
outstanding.</P>

<B><P>NOTE 9. PRODUCT WARRANTY PROVISIONS</P>
</B><P ALIGN="JUSTIFY">The Company's standard policy is to warrant all shipped systems against
defects in design, materials and workmanship by replacing failed parts during the first year of
ownership. The Company's estimate of costs to service the warranty obligations is based on
historical experience and current product performance trends. These costs are included in cost of
goods sold at the time revenue is recognized. The warranty provision is reduced by material and
labor costs used for replacement activities over the warranty period. A review of the obligations is
performed regularly to determine the adequacy of the reserve. Based on the outcome of this review,
revisions to the estimated warranty liability are recorded as appropriate.</P>
<P>The following table reconciles the changes to the product warranty liability for the period
indicated (in thousands):</P>

<PRE>


                                    Balance at                         Balance at
                                     Beginning   Warranty   Warranties  End of
                                    of Quarter     Usage    Expensed    Quarter
                                    -----------  ---------  ---------  ---------
Three months ended March 31, 2003. $     2,269  $    (439) $     270  $   2,100


</PRE>

<P>The Company from time to time enters into agreements to indemnify its customers against liability
and damages arising from patent claims against the Company's product. The term of these agreements
vary, but generally, a maximum obligation is not explicitly stated within the agreements.
Historically, the Company has not been obligated to make any significant payments related to its
customer indeminification clauses and no liabilities have been recorded for this obligation on its
balance sheets as of March 31, 2003 and December 31, 2002.</P>
<B><P>NOTE 10. STOCK-BASED COMPENSATION</P>
</B><P>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, except the amortization of deferred compensation arising from
the Company's IPO in June 2000, has been recognized for stock option grants as all options granted
during the periods reported had an exercise price equal to the market value of the underlying common
stock on the date of grant. Had compensation expense for the stock option grants been determined on
the fair value at the grant dates consistent with the method of Statement of Financial Accounting
Standards Board (SFAS) No. 123, "Accounting for Stock-Based Compensation", the Company's net loss
and loss per share would have been adjusted to the pro forma amounts indicated below (amounts in
thousands, except per share amounts):</P>

<PRE>

                                              Three Months Ended
                                                    March 31,
                                            ----------------------
                                               2003        2002
                                            ----------  ----------
Net loss, as reported.................... $    (2,293) $   (5,617)
Add:  Total stock-based employee
  compensation expense included in
  reported net loss, net of related tax .         154         216
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method for
  all awards, net of related tax.........      (2,026)     (1,675)
                                            ----------  ----------
Pro forma net loss....................... $    (4,165) $   (7,076)
                                            ==========  ==========
Earnings per share:
  Basic and diluted - as reported........ $     (0.06) $    (0.15)
  Basic and diluted - pro forma.......... $     (0.11) $    (0.19)


</PRE>

<B><P>NOTE 11. REVENUE RECOGNITION</P>
</B><P ALIGN="JUSTIFY">The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred or service has been rendered, the price is fixed or
determinable and collectibility is reasonably assured. </P>
<P ALIGN="JUSTIFY">In certain cases, revenue from direct system sales is generated from multiple
element arrangements which require judgment in the areas of customer acceptance, training,
installation and collectibility. The Company accounts for multiple-element arrangements in
accordance with the provisions of SAB 101, "Revenue Recognition in Financial Statements." Revenue is
recognized as specific elements indicated in sales contracts are executed. If an element is
essential to the functionality of an arrangement, the entire arrangement's revenue is deferred until
that essential element is delivered. The fair value of each undelivered element that is not
essential to the functionality of the system is deferred until performance or delivery occurs. The
fair value of an undelivered element is based upon an estimate made by management. If an undelivered
element exists, the Company will determine the fair value of the undelivered element and subtract
the fair value of the undelivered element from the total consideration under the arrangement. The
residual amount is recognized as the value of the delivered element. Amounts billed in excess of
revenue recognized are recorded as deferred revenue on the balance sheet. Costs associated with
inconsequential or perfunctory elements in multiple-element arrangements are accrued at the time of
revenue recognition. The Company accounts for installation as a separate element of a multiple-
element arrangement. The Company therefore recognizes the fair value of installation services upon
the completion of installation.</P>
<P ALIGN="JUSTIFY">The Company's distributors do not have price protection rights. One of the
Company's distributors has return rights under limited circumstances. Such rights are accounted for
under the provisions of SFAS No. 48, "Revenue Recognition When Right of Return Exists." To date, the
Company has not had any system sales returns. </P>
<P ALIGN="JUSTIFY">Revenue from sales of instruments and accessories is recognized upon shipment.
Revenue related to future commitments under service contracts is deferred and recognized ratably
over the service period. All costs associated with the provision of service and maintenance,
including salaries, benefits, travel, spare parts and equipment, are recognized in cost of sales as
incurred. Amounts billed in excess of revenue recognized are included as deferred revenue in the
accompanying consolidated balance sheets.</P>
<P ALIGN="JUSTIFY">The Company's <I>da Vinci </I>Surgical System contains a software component. The
Company believes that the software element in the <I>da Vinci</I> Surgical System is an incidental
part of the system. The software element within the Company's product is not sold or marketed
separately to customers and the software does not operate independently of the surgical system.
Furthermore, the software development effort does not require a significant cost to the Company
relative to the overall development cost of the product. As such, the software the Company provides
is incidental to the surgical system as a whole and the software revenue guidance provided in SOP
97-2 is not applicable to the Company's revenues.</P>

<B><P>NOTE 12. MERGER AGREEMENT</P></B>
<P>&#9;On March 7, 2003, the Company entered into a merger agreement with Computer Motion. Upon
completion of the merger, each share of Computer Motion common stock will be converted into the
right to receive a fraction of a share of Intuitive Surgical common stock. The fraction of a share
of Intuitive Surgical common stock to be issued with respect to each share of Computer Motion common
stock will be determined by a formula described in the merger agreement. Based on the expected
capitalization of Intuitive Surgical and Computer Motion on an assumed closing date of June 30,
2003, the Company estimates that the exchange ratio will range from approximately 0.48 to 0.52
depending on the average Computer Motion common stock price during a defined period prior to
closing. Based on these assumptions, the Company estimates that it will issue approximately 15.2
million shares of common stock in the merger and will reserve approximately 5.2 million additional
shares of common stock for future issuance in connection with the assumption of Computer Motion's
outstanding options and warrants (including out-of-the-money options and warrants). Further, the
Company estimates that, upon completion of the merger, its current stockholders will own
approximately 71% of the then outstanding shares of its common stock and former Computer Motion
stockholders will own approximately 29% of the then outstanding shares of its common stock. These
estimates are subject to change depending on such factors as the number of fully-diluted shares the
Company and Computer Motion have outstanding at closing, Computer Motion's stock price, and whether
outstanding options and warrants of Computer Motion are exercised prior to closing. The merger is
subject to the approval of a majority of the stockholders of each company. In addition, the Company
has agreed to provide a bridge loan of up to $7.3 million to Computer Motion to provide working
capital for its operations through the closing date.</P>
<P ALIGN="JUSTIFY">&#9;Intuitive Surgical and Computer Motion can jointly agree to
terminate the merger agreement at any given time. Either company may also terminate the merger
agreement if the merger is not completed by August 31, 2003 and under other circumstances described
in the merger agreement. The merger agreement provides that under specified circumstances, Intuitive
Surgical or Computer Motion may be required to pay a termination fee and expenses of the other party
in an aggregate amount of up to $2.5 million.</P>
<P ALIGN="JUSTIFY">&#9;In connection with the proposed merger, Intuitive Surgical and Computer
Motion have obtained a stay through August 31, 2003 of all proceedings in the pending litigation
proceedings between the companies. As part of the stays, the courts have ceased all further activity
in the cases during the period of stay, including refraining from issuing any opinions or orders on
issues already submitted for decision. In addition, the California Court postponed the trial date to
a date no earlier than November 30, 2003. The stays may be terminated before, or extended beyond,
August 31, 2003 under specified circumstances. In the event the merger is completed, Intuitive
Surgical and Computer Motion will request dismissal with prejudice of the pending litigation.</P>
<B><P ALIGN="JUSTIFY">NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS</P>
</B><P ALIGN="JUSTIFY">In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are incurred rather than at
the date of a commitment to an exit or disposal plan. The provisions of SFAS 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The adoption of this
statement did not have an impact on the Company's results of operations or financial position in the
first quarter of 2003.</P>
<P ALIGN="JUSTIFY">&#9;In January 2003, the FASB issued Interpretation No. 46, or FIN 46,
"Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the entity's residual
returns or both. A variable interest entity is a corporation, partnership, trust, or any other legal
structures used for business purposes that either (a) does not have equity investors with voting
rights, or (b) has equity investors that do not provide sufficient financial resources for the
entity to support its activities. A variable interest entity often holds financial assets, including
loans or receivables, real estate or other property. A variable interest entity may be essentially
passive or it may engage in research and development or other activities on behalf of another
company. The consolidation requirements of FIN 46 apply immediately to variable interest entities
created after January 31, 2003. FIN 46 also requires consolidation of variable interest entities
entered into prior to January 31, 2003 in thefirst fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was established. The adoption of
FIN 46 has not had an impact on the Company's financial position or results of operations during the
three months ended March 31, 2003.</P>
<P ALIGN="JUSTIFY">&#9;In October 2002, the Emerging Issues Task Force reached consensus on issue
00-21, or EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The principles and
application guidance of EITF 00-21 should be used to determine (a) how the arrangement consideration
should be measured, (b) whether the arrangement should be divided into separate units of accounting,
and (c) how the arrangement consideration should be allocated among the separate units of
accounting. The guidance in this issue is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The Company is evaluating the possible impact of the adoption
of EITF 00-21 on its results of operations and financial position.</P>
<B><P ALIGN="JUSTIFY">NOTE 14. CONTINGENCIES</P>
</B><P ALIGN="JUSTIFY">On September 1, 2000 Brookhill-Wilk 1, LLC ("Wilk") filed a lawsuit
against Intuitive Surgical in the United States District Court for the Southern District of New York
(Case No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or offering for sale our <I>da
Vinci</I> Surgical System, the Company is infringing U.S. Patent Nos. 5,217,003 and 5,368,015 in
willful disregard of Wilk's patent rights. These patents concern methods and devices for "remote"
surgery. In March 2001, Wilk withdrew its assertion of the '015 patent against the Company. On
November 8, 2001, in response to a motion on one of Intuitive Surgical's noninfringement defenses,
the District Court granted summary judgment of noninfringement of the '003 patent in the Company's
favor and dismissed Wilk's complaint in its entirety without prejudice. Wilk appealed the summary
judgment ruling to the U.S. Court of Appeals for the Federal Circuit. </P>
<P ALIGN="JUSTIFY">On April 11, 2003, the Court of Appeals reversed the District Court's judgment
and remanded the case for further proceedings. This reversal is based on the Court of Appeals'
determination that the particular claim limitation at issue should be interpreted differently than
as construed by the District Court. Intuitive Surgical believes that the Court of Appeals' opinion
is not necessarily inconsistent with the noninfringement defense initially presented to the District
Court and has no bearing on Intuitive Surgical's other noninfringement defenses. Intuitive Surgical
has filed a petition for hearing to request clarification from the Court of Appeals on the claim
construction adopted. Upon remand, Intuitive Surgical intends to continue to vigorously defend its
rights and, if necessary, is prepared to continue to dispute the meaning of other portions of the
asserted claim language and to conduct discovery and file further motions on whether the patent is
infringed, valid and/or enforceable. Intuitive Surgical believes that it will prevail in the
litigation and that it has multiple meritorious defenses to Wilk's allegations. However, litigation
is unpredictable and Intuitive Surgical may not prevail. The case remains in its early stages of
discovery in the District Court.</P>
<P ALIGN="JUSTIFY">If the Company loses Wilk's suit against us, it will hurt its competitive
position, may be costly and may prevent the Company from selling its products. If the Company loses
the patent suit, it may need to obtain from Wilk a license to this technology to continue to market
its products that have been found to infringe Wilk's patents. This license could be expensive, which
could seriously harm the Company's business. If Wilk is successful in its suit against the Company
and is unwilling to grant a license, the Company may be required to stop selling its products that
are found to infringe Wilk's patents unless the Company can redesign them so they do not infringe
Wilk's patents, which it may be unable to do. In addition, the Company could be required to pay Wilk
damages, including treble damages, which could be substantial and harm its financial position. Due
to the inherent uncertainties of litigation, however, the Company cannot accurately predict the
ultimate outcome of the litigation against Wilk at this time and, therefore, cannot estimate the
range of possible loss.</P>
<P ALIGN="JUSTIFY">On February 21, 2001, Wilk filed suit against Computer Motion alleging that its
ZEUS original system infringed upon Wilk's U.S. Patent Nos. 5,217,003 and 5,368,015. Wilk's
complaint sought damages, attorneys' fees and increased damages alleging willful patent
infringement. On March 21, 2001, Computer Motion served its answer and counterclaim alleging non-
infringement of each patent-in-suit, patent invalidity and unenforceability. On November 8, 2001,
the United States District Court for the Southern District of New York in Wilk's pending litigation
against Intuitive Surgical issued an order interpreting the claims of Wilk's U.S. Patent No.
5,217,003 in a way that Computer Motion believed excluded current applications of its ZEUS surgical
system. In light of this decision, on November 13, 2001, the parties agreed to dismiss the case
without prejudice to refiling upon resolution of the appeal in Wilk's litigation against Intuitive
Surgical.</P>
<P ALIGN="JUSTIFY">On May 10, 2000, Computer Motion, Inc. filed a lawsuit in the United States
District Court for the Central District of California (Case No. CV00-4988 CBM) alleging that by
making, using, selling or offering for sale Intuitive Surgical's <I>da Vinci</I> Surgical System,
the Company is infringing United States Patent Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583,
5,878,193, 5,907,664 and 6,001,108, in willful disregard of Computer Motion's patent rights. On June
1, 2000, Computer Motion amended its lawsuit to allege that the Company also infringes U.S. Patent
Number 6,063,095. In late 2000, Computer Motion alleged infringement of a ninth patent, and added
U.S. Patent Number 6,102,850 to the litigation. Computer Motion subsequently alleged that the
Company infringed U.S. Patent No. 6,244,809, which it added to the litigation in May 2002. These ten
patents concern various methods and devices for conducting various aspects of robotic surgery. Of
those ten patents, three are no longer part of the suit. After Computer Motion lost all of its
rights to its 5,855,583 and 5,878,193 patents as a result of our successful Patent Office
interference proceedings, Computer Motion voluntarily dismissed those patents from suit. However,
Computer Motion has sought to challenge the interference proceedings by separate district court
appeal. In addition, in November 2002, the Court granted the Company's motion for summary judgment
of noninfringement of the 6,102,850 patent. In February 2003, the Court denied the Company's motion
for summary judgment of noninfringement of the 6,244,809 patent and granted Computer Motion's cross-
motion for partial summary judgment of literal infringement of one claim of that patent. Intuitive
Surgical subsequently requested that the Court reconsider that decision because of perceived flaws
in the Court's approach to the issue of infringement on summary judgment. Regardless of what happens
on reconsideration, the Company will continue to defend the '809 patent on invalidity, based on the
earlier robotic surgery work of SRI and others. The Company still has pending motions for summary
judgment of noninfringement on two more of Computer Motion's seven remaining patents-in-suit,
numbers 5,907,664 and 6,001,108. At the Court's request, the Company will not file further motions
for summary judgment until the remaining pending motions are decided. In late January 2003, after
close of fact discovery, Computer Motion asserted between 26 and 35 new claims of its seven
remaining patents-in-suit and new theories of infringement. The Company has moved to strike those
new assertions as inappropriate at this late stage. Trial had been calendared for April 29, 2003.
</P>
<P ALIGN="JUSTIFY">In connection with the Company's proposed merger with Computer Motion, the
Company and Computer Motion have obtained an immediate stay through August 31, 2003 of all
proceedings in the pending litigations between the companies. As part of the stays, the courts have
ceased all further activity in the cases during the period of stay, and will not issue any opinions
or orders on issues already submitted for decision. In addition, the California Court postponed the
trial date and was asked to reset the trial to a date no earlier than November 30, 2003. The stay
may be terminated before, or extended beyond, August 31, 2003 under specified circumstances. In the
event the merger is completed, the Company and Computer Motion will request dismissal with prejudice
of all pending litigations.</P>
<P ALIGN="JUSTIFY">If the merger is not completed by August 31, 2003, the stays may be lifted and
the California case may proceed to trial. If the stays are lifted and the Company ultimately loses
Computer Motion's suit, it will hurt the Company's competitive position, may be costly and may
prevent the Company from selling its products. In addition, the Company may need to obtain from
Computer Motion a license to this technology to continue to market its products that have been found
to infringe Computer Motion's patents. This license could be expensive, or could require the Company
to license to Computer Motion some of its technology, which would result in a partial loss of the
Company's competitive advantage in the marketplace, each of which could seriously harm its business.
If the stays are lifted and Computer Motion is successful in its suit and is unwilling to grant a
license, the Company will be required to stop selling its products that are found to infringe
Computer Motion's patents unless the Company can redesign them so they do not infringe Computer
Motion's patents, which it may be unable to do. In addition, the Company could be required to pay
Computer Motion damages, including treble damages, which could be substantial and harm its financial
position.</P>
<P ALIGN="JUSTIFY">The foregoing proceedings would be expensive to litigate, may be protracted and
the Company's confidential information may be compromised. Whether or not the Company is successful
in these lawsuits, these proceedings could consume substantial amounts of its financial and
managerial resources. At any time the other parties may file additional claims against the Company,
or the Company may file claims against them, which could increase the risk, expense and duration of
the litigations. For more information on the Company's litigation with Computer Motion, see "Part
II-Item 1: Legal Proceedings."</P>


<B><P><A NAME="mda"></A>ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS</P>
</B><P ALIGN="JUSTIFY">In this report, "Intuitive Surgical," "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,
2003 and Results of Operations for the three month periods ended March 31, 2003 and March 31, 2002
should be read in conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations included in our Annual Report on Form 10-K/A for the year ended December
31, 2002. </P>
<P ALIGN="JUSTIFY">Except for historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties, such as statements of our plans,
objectives, expectations, and intentions. The cautionary statements made in this report should be
read as applying to all related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed here. Factors that could cause or
contribute to these differences include those discussed in "Factors Affecting Operating Results"
below as well as those discussed elsewhere. </P>

<P ALIGN="JUSTIFY">Intuitive<FONT FACE="Symbol">&acirc;</FONT> , Intuitive Surgical<FONT
FACE="Symbol">&acirc;</FONT> , da Vinci<FONT FACE="Symbol">&acirc;</FONT> , EndoWrist<FONT
FACE="Symbol">&acirc;</FONT> , InSite<FONT FACE="Symbol">&acirc;</FONT> and Navigator&trade; are
trademarks of Intuitive Surgical, Inc. </P>

<B><I><P>OVERVIEW</P>
</B></I><P ALIGN="JUSTIFY">We design, manufacture, and market the <I>da Vinci</I> Surgical System,
an advanced surgical system that we believe represents a new generation of surgery-the third
generation. The <I>da Vinci</I> Surgical System consists of a surgeon's console, a patient-side
cart, a high performance vision system and proprietary "wristed" instruments. The <I>da Vinci</I>
Surgical System seamlessly translates the surgeon's natural hand movements on instrument controls at
a console into corresponding micro-movements of instruments positioned inside the patient through
small puncture incisions, or ports. We believe that the <I>da Vinci</I> Surgical System is the only
commercially available technology that can provide the surgeon with the intuitive control, range of
motion, fine tissue manipulation capability and 3-D visualization characteristic of open surgery,
while simultaneously allowing the surgeons to work through the small ports of minimally invasive
surgery, or MIS. By placing computer-enhanced technology between the surgeon and the patient, we
believe that the <I>da Vinci</I> Surgical System enables surgeons to perform better surgery in a
manner never before experienced. </P>
<P ALIGN="JUSTIFY">In 1999, we obtained permission from the European Union to affix the CE Mark to
the<I> da Vinci</I> Surgical System and <I>EndoWrist</I> instruments for general surgical and
cardiac surgical use. Based on this approval, we recognized revenue for the first time in the second
quarter of 1999 for the sale of our products. In July 2000, we received clearance from the U.S. Food
and Drug Administration, or FDA, to begin commercialization of our <I>da Vinci</I> Surgical System
in the United States for use in laparoscopic surgical procedures. In March 2001, we received
clearance from the FDA for use of our <I>da Vinci</I> Surgical System in non-cardiac thoracoscopic
surgical procedures. In May 2001, we received market clearance from the FDA to promote use of the<I>
da Vinci</I> Surgical System for performance of laparoscopic radical prostatectomy procedures. In
November 2002, we received clearance from the FDA for use of the <I>da Vinci</I> Surgical System in
thoracoscopically-assisted cardiotomy procedures. In January 2003, we began promoting atrial septal
defect closure surgery under the November 2002 cardiotomy clearance.</P>
<P ALIGN="JUSTIFY">To date, the majority of our revenues have come from the sales of the <I>da
Vinci</I> Surgical System, which are high revenue dollar items. A smaller percentage of revenues
have come from sales of <I>EndoWrist</I> instruments and accessories, which are lower revenue dollar
items. A small percentage of revenue comes from ongoing service of installed <I>da Vinci</I>
Surgical Systems. Although we expect the majority of our revenues to continue to come from the sale
of <I>da Vinci</I> Surgical Systems over the next few years, we believe that the percentage of
revenue from our <I>EndoWrist </I>instruments and service will continue to increase. Due to the high
dollar revenue per system sold, small variations in system unit sales may cause revenue to vary
significantly from quarter to quarter. During the useful life of each installed <I>da Vinci</I>
Surgical System, we expect to generate recurring revenue through sales of the <I>EndoWrist</I>
instruments and accessories and ongoing service. The percentage of revenue derived from recurring
instrument, accessory, and service revenue has grown from 19% for the quarter ended March 31, 2002
to 28% for the quarter ended March 31, 2003. Our service revenues have not exceeded 10% of total
revenue in any period to date.</P>

<B><I><P ALIGN="JUSTIFY">PROPOSED MERGER</P>
</B></I><P ALIGN="JUSTIFY">&#9;On March 7, 2003, the Company entered into an Agreement and Plan of
Merger with Computer Motion, Inc. Pursuant to the merger agreement, a wholly owned subsidiary of our
company will merge with Computer Motion, with Computer Motion surviving the merger and continuing as
a wholly owned subsidiary of our company.</P>
<P ALIGN="JUSTIFY">In connection with the proposed merger, we have entered into a Loan and Security
Agreement with Computer Motion pursuant to which we have agreed to provide a short-term secured
bridge loan facility of up to $7.3 million. Computer Motion may use the facility to pay off existing
indebtedness and to fund operations prior to completion of the merger. This facility terminates and
all outstanding amounts become due and payable 120 days following termination of the merger
agreement, subject to specified acceleration events. Interest on the facility will accrue at a rate
of 8% per annum and will be payable on the maturity date. As of March 31, 2003, no amounts were
outstanding under this short-term bridge loan facility.</P>
<P ALIGN="JUSTIFY">We expect that we and Computer Motion will hold our respective stockholders
meetings at which matters related to the merger will be submitted for approval in June 2003.</P>
<P ALIGN="JUSTIFY">Management anticipates that the combined companies will be able to achieve annual
pre-tax cost savings of approximately $18 million to be phased in beginning in the third quarter of
2003. The Company estimates that approximately $10.0 million of those savings will result from a
substantial reduction in headcount. Intuitive Surgical's ability to achieve these goals is subject
to economic conditions and unanticipated changes in business conditions, and therefore there can be
no assurance that these results will be achieved.</P>
<B><I><P>RESULTS OF OPERATIONS</P>
</B><P ALIGN="JUSTIFY">Sales</I>. Sales for the three months ended March 31, 2003 were $19.2
million, up 33% from $14.4 million for the three months ended March 31, 2002. The increase in first
quarter 2003 sales was driven by recurring revenue growth, consisting of instruments, accessories,
and service, and increased <I>da Vinci</I> Surgical System unit shipments. First quarter 2003
recurring revenue was $5.4 million, up $2.7 million, or 103%, compared to the first quarter of 2002.
Higher recurring revenue was driven by growth in the installed base of <I>da Vinci</I> Surgical
Systems and surgical procedures performed with the system. We shipped 14 <I>da Vinci</I> Surgical
Systems during the first quarter of 2003 compared to 13 in the first quarter of 2002. As of March
31, 2003, there were 163 cumulative <I>da Vinci</I> Surgical Systems shipped, compared to 102 as of
March 31, 2002. </P>
<I><P ALIGN="JUSTIFY">Gross Profit</I>. Gross profit for the three months ended March 31, 2003 was
$10.5 million, or 54.6% of sales, compared with $6.9 million, or 47.9% of sales for the three months
ended March 31, 2002. The year-over-year improvement in gross profit resulted primarily from a
higher <I>da Vinci</I> Surgical System average selling price and lower product warranty costs. </P>
<I><P ALIGN="JUSTIFY">Research and Development Expenses</I>. Research and development expenses for
the three months ended March 31, 2003 were $3.4 million, down 19% from $4.2 million for the three
months March 31, 2002. The year-over-year decrease resulted primarily from lower 2003 clinical trial
expenses of $300,000, reduced development project costs of $300,000, and lower deferred compensation
of $100,000. </P>
<P ALIGN="JUSTIFY">Research and development expenses include costs associated with the design,
development, testing and enhancement of our products. These enhancements represent significant
improvements to our products. Research and development expenses also include expenditures for
clinical trials and purchases of laboratory supplies. Research and development costs are expensed as
incurred. </P>
<I><P ALIGN="JUSTIFY">Selling, General and Administrative Expenses</I>. Selling, general and
administrative expenses for the three months ended March 31, 2003 were $10.2 million, up 16% from
$8.8 million for the three months ended March 31, 2002. The year-over-year increase was primarily
due to higher litigation costs of $1.0 million incurred during the first quarter of 2003 as we were
preparing for trial in California against Computer Motion prior to entering into the merger
agreement in March 2003. The remaining $400,000 of the increase resulted primarily from higher
selling and support costs to support increased revenue and a larger installed base of <I>da
Vinci</I> Surgical Systems. In the first quarter of 2003 selling, general and administrative
expenses were favorably impacted by an insurance recovery of $500,000 relating to the unauthorized
purchases made in the third quarter of 2002. Please see "Part II. Item I. Legal Proceedings - Other
Legal Matters."</P>
<P ALIGN="JUSTIFY">Selling, general and administrative expenses include costs for sales, marketing
and administrative personnel, tradeshow expenses, legal expenses, regulatory fees and general
corporate expenses. Selling, general and administrative expenses are expected to increase in the
future to support expanding business activities. </P>
<I><P ALIGN="JUSTIFY">Deferred Compensation</I>. We record deferred compensation as the difference
between the exercise price of options granted and the fair value of our common stock at the time of
grant for financial reporting purposes. Deferred compensation is amortized to research and
development expense and selling, general and administrative expense. Non-cash deferred compensation
expense included in research and development expenses was $73,000 and $140,000 for the three months
ended March 31, 2003 and 2002, respectively. Non-cash deferred compensation expense included in
selling, general and administrative expenses was $81,000 and $76,000 for the three months ended
March 31, 2003 and 2002, respectively. Deferred compensation recorded through March 31, 2003 was
$8.9 million with accumulated amortization of $8.8 million. We anticipate that the current balance
of deferred compensation will be completely amortized during the second quarter of 2003.</P>
<I><P ALIGN="JUSTIFY">Other Income (Expense)</I>. Other income (expense) for the three months ended
March 31, 2003 was $800,000, up $300,000 compared to $500,000 for the three months ended March 31,
2002. The increase resulted primarily from $500,000 of gains realized during the first quarter of
2003 on sales of investment securities offset by reduced interest earnings on lower investment
balances compared to March 31, 2002.</P>

<B><I><P>LIQUIDITY AND CAPITAL RESOURCES</P>
</B></I><P ALIGN="JUSTIFY">Our operations have been financed through the sales of our convertible
preferred stock, yielding net proceeds of approximately $127.3 million, our initial public offering
of 5,750,000 shares of our common stock, yielding approximately $46.8 million, and equipment
financing arrangements, yielding approximately $10.5 million. The equipment arrangements provide
financing at specific interest rates for periods of up to 48 months, by which time the principal is
repaid to the lessors. As collateral for the equipment financing, we have granted the lessors a
security interest in equipment specified under each arrangement. </P>
<P ALIGN="JUSTIFY">As of March 31, 2003, we had working capital of $50.7 million, compared to $52.6
million as of December 31, 2002. The decrease during the first three months of 2003 resulted
primarily from our net loss of $2.3 million.</P>
<P ALIGN="JUSTIFY">Net cash used in operating activities for the three months ended March 31, 2003
was $5.9 million, comprised primarily of our net loss of $2.3 million and working capital
requirements of $4.8 million, mostly due to increased accounts receivable of $4.0 million due to
higher first quarter 2003 sales, offset by non-cash expenses of $1.2 million resulting from
depreciation and amortization expense. Compared to the first quarter of 2002, cash used in operating
activities was lower by $1.1 million primarily due to a decrease in the first quarter loss of $3.3
million offset by a higher accounts receivable balance at March 31, 2003.</P>
<P ALIGN="JUSTIFY">Net cash provided by investing activities was $10.2 million for the three months
ended March 31, 2003, compared to $3.4 million for the three months ended March 31, 2002. In the
first quarter of 2002 we moved to our new facilities in Sunnyvale, California and made a significant
investment in leasehold improvements and furniture. In the first quarter of 2003 we spent $300,000
for the acquisition of fixed assets compared to $4.0 million spent in the first quarter of 2002 as
described above. Additionally, first quarter 2003 cash provided by investing activities was higher
compared to 2002 due to a higher conversion of investments into cash during the three months ended
March 31, 2003 primarily due to timing of the conversions required to support short-term
liquidity.</P>
<P ALIGN="JUSTIFY">Net cash provided by financing activities was $966,000 for the three months ended
March 31, 2003, compared to $1.5 million for the three months ended March 31, 2002. This decrease
resulted from lower proceeds of long-term borrowing of $1.0 million offset by an increase in
proceeds from the issuance of common stock of $350,000 in 2003.</P>
<P ALIGN="JUSTIFY">On March 7, 2003, we entered an Agreement and Plan of Merger with Computer
Motion, Inc. Under the terms of our merger agreement with Computer Motion, Computer Motion will
become a wholly owned subsidiary of our company. Computer Motion recorded net losses of $7.9 million
and $4.5 million for the three months ended March 31, 2003 and 2002, respectively, and had a cash
balance of $3.6 million as of March 31, 2003. In recent periods, Computer Motion has not generated
cash from operations. Both we and Computer Motion expect to incur additional operating losses into
2003, and both we and Computer Motion have substantial cash needs. Among other things, total fees
and costs of both companies associated with the merger are currently projected to be approximately
$4.0 million. We have agreed to fund up to $7.3 million of Computer Motion's working capital needs
through the effective time of the merger under a Loan and Security Agreement. Assuming completion of
the merger on or around June 30, 2003, we project that the total combined cash and cash equivalents
of the combined company will be less than $35.0 million.</P>
<P ALIGN="JUSTIFY">In addition to the effects of the merger, our capital requirements depend on
numerous factors, including market acceptance of our products, the resources we devote to developing
and supporting our products and other factors. We expect to devote substantial capital resources to
continue our research and development efforts, to expand our support and product development
activities and for other general corporate activities. We believe that our current cash and short-
term investment balances, together with revenue to be derived from the sale of our products, will be
sufficient to fund our operations at least through 2003. During or after this period, if cash
generated by operations is insufficient to satisfy our liquidity requirements, we may need to sell
additional equity or debt securities or obtain additional credit arrangements. Additional financing
may not be available on terms acceptable to us or at all. The sale of additional equity or
convertible debt securities may result in additional dilution to our stockholders.</P>

<P ALIGN="JUSTIFY">Contractual Obligations and Commercial Commitments</P>
<P ALIGN="JUSTIFY">&#9;The following table summarizes all significant contractual payment
obligations by payment due date:</P>

<P ALIGN="JUSTIFY">&#9;&#9;&#9;&#9;&#9;&#9;<B>Payments by Periods (Millions)</P></B>

<TABLE BORDER CELLSPACING=1 CELLPADDING=7 WIDTH=100%>
<TR><TD WIDTH="28%" VALIGN="TOP">
<P ALIGN="CENTER">Contractual Obligation</TD>
<TD WIDTH="12%" VALIGN="TOP">
<P ALIGN="CENTER">Total</TD>
<TD WIDTH="17%" VALIGN="TOP">
<P ALIGN="CENTER">Under 1 Year</TD>
<TD WIDTH="13%" VALIGN="TOP">
<P ALIGN="CENTER">1-3 Years</TD>
<TD WIDTH="13%" VALIGN="TOP">
<P ALIGN="CENTER">3-5 Years</TD>
<TD WIDTH="16%" VALIGN="TOP">
<P ALIGN="CENTER">Over 5 Years</TD>
</TR>
<TR><TD WIDTH="28%" VALIGN="TOP">
<P ALIGN="JUSTIFY">Long-term debt</TD>
<TD WIDTH="12%" VALIGN="TOP">
<P ALIGN="RIGHT">$ 3.0</TD>
<TD WIDTH="17%" VALIGN="TOP">
<P ALIGN="RIGHT">$ 1.5</TD>
<TD WIDTH="13%" VALIGN="TOP">
<P ALIGN="RIGHT">$ 1.5</TD>
<TD WIDTH="13%" VALIGN="TOP">
<P ALIGN="RIGHT">$ -</TD>
<TD WIDTH="16%" VALIGN="TOP">
<P ALIGN="RIGHT">$ -</TD>
</TR>
<TR><TD WIDTH="28%" VALIGN="TOP">
<P ALIGN="JUSTIFY">Building lease</TD>
<TD WIDTH="12%" VALIGN="TOP">
<P ALIGN="RIGHT">10.7</TD>
<TD WIDTH="17%" VALIGN="TOP">
<P ALIGN="RIGHT">2.2</TD>
<TD WIDTH="13%" VALIGN="TOP">
<P ALIGN="RIGHT">8.3</TD>
<TD WIDTH="13%" VALIGN="TOP">
<P ALIGN="RIGHT">.2 </TD>
<TD WIDTH="16%" VALIGN="TOP">
<P ALIGN="RIGHT">-</TD>
</TR>
<TR><TD WIDTH="28%" VALIGN="TOP">
<P ALIGN="CENTER">Total</TD>
<TD WIDTH="12%" VALIGN="TOP">
<P ALIGN="RIGHT">$ 13.7</TD>
<TD WIDTH="17%" VALIGN="TOP">
<P ALIGN="RIGHT">$ 3.7</TD>
<TD WIDTH="13%" VALIGN="TOP">
<P ALIGN="RIGHT">$ 9.8</TD>
<TD WIDTH="13%" VALIGN="TOP">
<P ALIGN="RIGHT">$ .2</TD>
<TD WIDTH="16%" VALIGN="TOP">
<P ALIGN="RIGHT">$ -</TD>
</TR>
</TABLE>

<B><I><P ALIGN="JUSTIFY">CRITICAL ACCOUNTING POLICIES</P>
</B></I><P>We believe the following represent our critical accounting policies:</P>
<P ALIGN="JUSTIFY">Revenue Recognition. In certain cases, revenue from direct system sales is
generated from multiple-element arrangements which require judgment in the areas of customer
acceptance, training, installation and collectibility. The Company accounts for multiple-element
arrangements in accordance with the provisions of SAB 101, "Revenue Recognition in Financial
Statements." Revenue is recognized as specific elements indicated in sales contracts are executed.
If an element is essential to the functionality of an arrangement, the entire arrangement's revenue
is deferred until that essential element is delivered. The fair value of each undelivered element
that is not essential to the functionality of the system is deferred until performance or delivery
occurs. The fair value of an undelivered element is based upon an estimate made by management. If an
undelivered element exists, the Company will determine the fair value of the undelivered element and
subtract the fair value of the undelivered element from the total consideration under the
arrangement. The residual amount is recognized as the value of the delivered element. Amounts billed
in excess of revenue recognized are recorded as deferred revenue on the balance sheet. Costs
associated with inconsequential or perfunctory elements in multiple-element arrangements are accrued
at the time revenue is recognized. The Company accounts for installation as a separate element of a
multiple-element arrangement. The Company therefore recognizes the fair value of the installation
services upon completion of installation.</P>
<P ALIGN="JUSTIFY">Revenue from sales of instruments and accessories is recognized upon shipment.
Revenue related to future commitments under service contracts is deferred and recognized ratably
over the service period. All costs associated with the provision of service and maintenance,
including salaries, benefits, travel, spare parts and equipment, are recognized in cost of sales as
incurred. Amounts billed in excess of revenue recognized are included as deferred revenue in the
accompanying consolidated balance sheets.</P>
<P ALIGN="JUSTIFY">Allowance for Doubtful Accounts. The allowance for doubtful accounts is based
upon management estimates. Factors underlying these estimates include analysis of days outstanding,
customer payment history and management judgment. The allowance is adjusted regularly to reflect
current data, activity, and associated risks.</P>
<P ALIGN="JUSTIFY">Inventory Reserves. We write our inventory down for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and the estimated
market value based upon assumptions about future demand and market conditions. If actual future
demand or market conditions are less favorable than those projected by management, additional
inventory write-downs may be required in the future.</P>
<P ALIGN="JUSTIFY">Intangible Assets. We have intangible assets on our balance sheet related to the
acquisition of patents. The valuation and classification of these assets and the assignment of
useful amortization lives involves judgments and the use of estimates. The evaluation of these
intangibles for impairment under established accounting guidelines is required on an ongoing basis.
Changes in business conditions could potentially require future adjustments to asset valuations.</P>
<P ALIGN="JUSTIFY">Warranties. We provide for the estimated costs of product warranties at the time
revenue is recognized. Our estimate of costs to service our warranty obligations is based upon
historical experience and expectation of future conditions. If warranty claim activity and the costs
associated with servicing those claims differ from our estimates, revisions to the estimated
warranty liability may be required.</P>
<P ALIGN="JUSTIFY">Contingencies. We are subject to proceedings, lawsuits and other claims related
to our products, patents and other matters. We are required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable losses. A
determination of the amount of reserves required, if any, for these contingencies is made after
careful analysis of each individual issue. The required reserves may change in the future due to new
developments in each matter or changes in approach such as a change in settlement strategy in
dealing with these matters.</P>
<B><I><P>FACTORS AFFECTING OPERATING RESULTS</P>
</B></I><B><P>OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES ANALYSTS' OR INVESTORS'
EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.</P>
</B><P ALIGN="JUSTIFY">Because of our limited operating history, we have limited insight into
trends that may emerge in our market and affect our business. The revenue and income potential of
our market are unproven, and we may be unable to generate significant revenues. In addition, our
costs may be higher than we, securities analysts or investors expect. If we fail to generate
sufficient revenues or our costs are higher than we expect, our results of operations will suffer,
which in turn could cause our stock price to decline. Further, future revenue from sales of our
products is difficult to forecast because the market for new surgical technologies is still
evolving. Our results of operations will depend upon numerous factors, including:</P>

<UL>
<LI>the progress and results of clinical trials; </LI>
<LI>actions relating to regulatory matters; </LI>
<LI>the completion of our pending merger with Computer Motion and the successful integration of the
two companies; </LI>
<LI>the extent to which our products gain market acceptance; </LI>
<LI>our timing and ability to develop our manufacturing and sales and marketing capabilities; </LI>
<LI>demand for our products; </LI>
<LI>the progress of surgical training in the use of our products; </LI>
<LI>our ability to develop, introduce and market new or enhanced versions of our products on a
timely basis; </LI>
<LI>product quality problems; </LI>
<LI>our ability to protect our proprietary rights and defend against third party challenges; </LI>
<LI>our ability to license additional intellectual property rights; </LI>
<LI>third-party payor reimbursement policies; </LI>
<LI>the effect of Severe Acute Respiratory Syndrome (SARS) on travel and on related business
operations. </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, 2003 and 2002, approximately 72% and
81%, respectively, of our revenues came from the sales of <I>da Vinci</I> Surgical Systems, which
are high revenue dollar items. During the three months ended March 31, 2003 and 2002, no customer
accounted for more than 10% of total sales. However, due to the high average selling price of the
<I>da Vinci</I> Surgical System, our failure to add new customers that make significant purchases of
our products could reduce our future revenues. The loss or delay of individual orders could have a
significant impact on revenues and operating results.</P>
<B><P>IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLE TO GENERATE THE
REVENUE NECESSARY TO SUPPORT OUR BUSINESS.</B> </P>
<P ALIGN="JUSTIFY">Our products represent a fundamentally new way of performing surgery. Achieving
physician, patient and third-party payor acceptance of <I>Intuitive</I> surgery as a preferred
method of performing surgery will be crucial to our success. If our products fail to achieve market
acceptance, hospitals will not purchase our products and we will not be able to generate the revenue
necessary to support our business. We believe that physicians' and third-party payors' acceptance of
the benefits of procedures performed using our products will be essential for acceptance of our
products by patients. Physicians will not recommend the use of our products unless we can
demonstrate that they produce results comparable or superior to existing surgical techniques. Even
if we can prove the effectiveness of our products through clinical trials, surgeons may elect not to
use our products for any number of other reasons. For example, cardiologists may continue to
recommend conventional open-heart surgery simply because such surgery is already widely accepted. In
addition, surgeons may be slow to adopt our products because of the perceived liability risks
arising from the use of new products and the uncertainty of reimbursement from third-party payors.
</P>
<P ALIGN="JUSTIFY">We expect that there will be a learning process involved for surgical teams to
become proficient in the use of our products. Broad use of our products will require training of
surgical teams. Market acceptance could be delayed by the time required to complete this training.
We may not be able to rapidly train surgical teams in numbers sufficient to generate adequate demand
for our products. We cannot be certain that our training programs will be cost effective or
sufficient to meet our customers' needs.</P>
<B><P>WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH BROOKHILL-WILK 1, LLC AND
COMPUTER MOTION THAT MAY HURT OUR COMPETITIVE POSITION, MAY BE COSTLY TO US AND MAY PREVENT US FROM
SELLING OUR PRODUCTS. WHILE THE MERGER AGREEMENT HAS RESULTED IN A STAY OF ALL PROCEEDINGS INVOLVING
COMPUTER MOTION, THESE PROCEEDINGS MAY CONTINUE IF THE MERGER IS NOT COMPLETED.</P>
</B><P ALIGN="JUSTIFY">On September 1, 2000 Brookhill-Wilk 1, LLC ("Wilk") filed a lawsuit
against Intuitive Surgical in the United States District Court for the Southern District of New York
(Case No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or offering for sale our <I>da
Vinci</I> Surgical System, we are infringing U.S. Patent Nos. 5,217,003 and 5,368,015 in willful
disregard of Wilk's patent rights. These patents concern methods and devices for "remote" surgery.
In March 2001, Wilk withdrew its assertion of the '015 patent against our company. On November 8,
2001, in response to a motion on one of Intuitive Surgical's noninfringement defenses, the District
Court granted summary judgment of noninfringement of the '003 patent in our favor and dismissed
Wilk's complaint in its entirety without prejudice. Wilk appealed the summary judgment ruling to the
U.S. Court of Appeals for the Federal Circuit. </P>
<P ALIGN="JUSTIFY">On April 11, 2003, the Court of Appeals reversed the District Court's judgment
and remanded the case for further proceedings. This reversal is based on the Court of Appeals'
determination that the particular claim limitation at issue should be interpreted differently than
as construed by the District Court. We believe that the Court of Appeals' opinion is not necessarily
inconsistent with the noninfringement defense initially presented to the District Court and has no
bearing on Intuitive Surgical's other noninfringement defenses. Intuitive Surgical has filed a
petition for rehearing to request clarification from the Court of Appeals on the claim construction
adopted. Upon remand, we intend to continue to vigorously defend our rights and, if necessary, are
prepared to continue to dispute the meaning of other portions of the asserted claim language and to
conduct discovery and file further motions on whether the patent is infringed, valid and/or
enforceable. We believe that we will prevail in the litigation and that we have multiple meritorious
defenses to Wilk's allegations. However, litigation is unpredictable and we may not prevail. The
case remains in its early stages of discovery in the District Court.</P>
<P ALIGN="JUSTIFY">If we lose Wilk's suit against us, it will hurt our competitive position, may be
costly to us and may prevent us from selling our products. If we lose the patent suit, we may need
to obtain from Wilk a license to this technology if we are to continue to market our products that
have been found to infringe Wilk's patents. This license could be expensive, which could seriously
harm our business. If Wilk is successful in its suit against us and is unwilling to grant us a
license, we may be required to stop selling our products that are found to infringe Wilk's patents
unless we can redesign them so they do not infringe Wilk's patents, which we may be unable to do. In
addition, we could be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position. Due to the inherent uncertainties of litigation,
however, the Company cannot accurately predict the ultimate outcome of the litigation against Wilk
at this time and, therefore, cannot estimate the range of possible loss.</P>
<P ALIGN="JUSTIFY">On February 21, 2001, Wilk filed suit against Computer Motion alleging that its
ZEUS original system infringed upon Wilk's U.S. Patent Nos. 5,217,003 and 5,368,015. Wilk's
complaint sought damages, attorneys' fees and increased damages alleging willful patent
infringement. On March 21, 2001, Computer Motion served its answer and counterclaim alleging non-
infringement of each patent-in-suit, patent invalidity and unenforceability. On November 8, 2001,
the United States District Court for the Southern District of New York in Wilk's pending litigation
against Intuitive Surgical issued an order interpreting the claims of Wilk's U.S. Patent No.
5,217,003 in a way that Computer Motion believed excluded current applications of its ZEUS surgical
system. In light of this decision, on November 13, 2001, the parties agreed to dismiss the case
without prejudice to refiling upon resolution appeal in Wilk's litigation against Intuitive
Surgical.</P>
<P ALIGN="JUSTIFY">On May 10, 2000, Computer Motion, Inc. filed a lawsuit in the United States
District Court for the Central District of California (Case No. CV00-4988 CBM) alleging that by
making, using, selling or offering for sale our <I>da Vinci</I> Surgical System, we are infringing
United States Patent Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583, 5,878,193, 5,907,664 and
6,001,108, in willful disregard of Computer Motion's patent rights. On June 1, 2000, Computer Motion
amended its lawsuit to allege that we also infringe U.S. Patent Number 6,063,095. In late 2000,
Computer Motion alleged our infringement of a ninth patent, and added U.S. Patent Number 6,102,850
to the litigation. Computer Motion subsequently alleged that we infringed U.S. Patent No. 6,244,809,
which it added to the litigation in May 2002. These ten patents concern various methods and devices
for conducting various aspects of robotic surgery. Of those ten patents, three are no longer part of
the suit. After Computer Motion lost all of its rights to its 5,855,583 and 5,878,193 patents as a
result of our successful Patent Office interference proceedings Computer Motion voluntarily
dismissed those patents from suit. However, Computer Motion has sought to challenge the interference
proceedings by separate district court appeal. In addition, in November 2002, the Court granted our
motion for summary judgment of noninfringement of the 6,102,850 patent. In February 2003, the Court
denied our motion for summary judgment of noninfringement of the 6,244,809 patent and granted
Computer Motion's cross-motion for partial summary judgment of literal infringement of one claim of
that patent. We subsequently requested that the Court reconsider that decision because of perceived
flaws in the Court's approach to the issue of infringement on summary judgment. Regardless of what
happens on reconsideration, we will continue to defend the '809 patent on invalidity, based on the
earlier robotic surgery work of SRI and others. We still have pending motions for summary judgment
of noninfringement on two more of Computer Motion's seven remaining patents-in-suit, numbers
5,907,664 and 6,001,108. At the Court's request, we will not file further motions for summary
judgment until the remaining pending motions are decided. In late January 2003, after close of fact
discovery, Computer Motion asserted between 26 and 35 new claims of its seven remaining patents-in-
suit and new theories of infringement. We have moved to strike those new assertions as inappropriate
at this late stage. Trial had been calendared for April 29, 2003. </P>
<P ALIGN="JUSTIFY">In connection with our proposed merger with Computer Motion, our company and
Computer Motion have obtained an immediate stay through August 31, 2003 of all proceedings in the
pending litigations between the companies. As part of the stays, the courts have ceased all further
activity in the cases during the period of stay, and will not issue any opinions or orders on issues
already submitted for decision. In addition, the California Court postponed the trial date and was
asked to reset the trial to a date no earlier than November 30, 2003. The stay may be terminated
before, or extended beyond, August 31, 2003 under specified circumstances. In the event the merger
is completed, our company and Computer Motion will request dismissal with prejudice of all pending
litigations.</P>
<P ALIGN="JUSTIFY">If the merger is not completed by August 31, 2003, the stays may be lifted and
the California case may proceed to trial. If the stays are lifted and we ultimately lose Computer
Motion's suit against us, it will hurt our competitive position, may be costly to us and may prevent
us from selling our products. In addition, we may need to obtain from Computer Motion a license to
this technology if we are to continue to market our products that have been found to infringe
Computer Motion's patents. This license could be expensive, or could require us to license to
Computer Motion some of our technology, which would result in a partial loss of our competitive
advantage in the marketplace, each of which could seriously harm our business. If the stay is lifted
and Computer Motion is successful in its suit against us and is unwilling to grant us a license, we
will be required to stop selling our products that are found to infringe Computer Motion's patents
unless we can redesign them so they do not infringe Computer Motion's patents, which may be unable
to do. In addition, we could be required to pay Computer Motion damages, including treble damages,
which could be substantial and harm our financial position.</P>
<P>The foregoing proceedings would be expensive to litigate, may be protracted and our confidential
information may be compromised. Whether or not we are successful in this lawsuit, these proceedings
could consume substantial amounts of our financial and managerial resources. At any time the other
parties may file additional claims against our company, or we may file claims against them, which
could increase the risk, expense and duration of the litigations. For more information on our
litigation with Computer Motion, see "Part II-Item 1: Legal Proceedings."</P>
<B><P>IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN OUR PRODUCTS FROM USE
BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET WILL BE HARMED.</B> </P>
<P ALIGN="JUSTIFY">Our commercial success will depend in part on obtaining patent and other
intellectual property protection for the technologies contained in our products, and on successfully
defending our patents and other intellectual property against third party challenges. </P>
<P ALIGN="JUSTIFY">We will incur substantial costs in obtaining patents and, if necessary, defending
our proprietary rights. The patent positions of medical device companies, including ours, can be
highly uncertain and involve complex and evolving legal and factual questions. We do not know
whether we will obtain the patent protection we seek, or that the protection we do obtain will be
found valid and enforceable if challenged. We also do not know whether we will be able to develop
additional patentable proprietary technologies. If we fail to obtain adequate protection of our
intellectual property, or if any protection we obtain is reduced or eliminated, others could use our
intellectual property without compensating us, resulting in harm to our business. We may also
determine that it is in our best interests to voluntarily challenge a third party's products or
patents in litigation or administrative proceedings, including patent interferences or
reexaminations. In addition, the laws of certain foreign countries do not protect intellectual
property rights to the same extent as do the laws of the United States.</P>
<B><P>OTHERS MAY ASSERT THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH
MAY CAUSE US TO ENGAGE IN COSTLY DISPUTES AND, IF WE ARE NOT SUCCESSFUL IN DEFENDING OURSELVES,
COULD ALSO CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.</B>
</P>
<P ALIGN="JUSTIFY">We are aware of both United States and foreign patents issued to third parties
that relate to computer-assisted surgery, remote surgery, and minimally invasive surgery. Some of
these patents on their face appear broad enough to cover one or more aspects of our present
technology, and may cover aspects of our future technology. We do not know whether any of these
patents, if challenged, would be held valid, enforceable and infringed. From time to time, we
receive, and likely will continue to receive, letters from third parties inviting us to license
their patents. We may be sued by, or become involved in an administrative proceeding with, one or
more of these third parties. We cannot assure you that a court or administrative body would agree
with any arguments or defenses we have concerning invalidity, unenforceability or noninfringement of
any third-party patent. In addition to the issued patents of which we are aware, other parties may
have filed, and in the future are likely to file, patent applications covering surgical products
that are similar or identical to ours. We cannot assure you that any patents issuing from
applications filed by a third party will not cover our products or will not have priority over our
patent applications. </P>
<P ALIGN="JUSTIFY">The medical device industry has been characterized by extensive litigation and
administrative proceedings regarding patents and other intellectual property rights, and companies
have employed such actions to gain a competitive advantage. If third parties assert infringement or
other intellectual property claims against us as Computer Motion and Brookhill-Wilk 1, LLC have
done, our technical and management personnel will experience a significant diversion of time and
effort and we will incur large expenses defending our company. If third parties in any patent action
are successful, our patent portfolio may be damaged, we may have to pay substantial damages,
including treble damages, and we may be required to stop selling our products or obtain a license
which, if available at all, may require us to pay substantial royalties. We cannot be certain that
we will have the financial resources or the substantive arguments to defend our patents from
infringement or claims of invalidity or unenforceability, or to defend against allegations of
infringement of third-party patents. In addition, any public announcements related to litigation or
administrative proceedings initiated by us, or initiated or threatened against us, could cause our
stock price to decline.</P>
<B><P>THE RIGHTS AND MEASURES WE RELY ON TO PROTECT THE INTELLECTUAL PROPERTY UNDERLYING OUR
PRODUCTS MAY NOT BE ADEQUATE TO PREVENT THIRD PARTIES FROM USING OUR TECHNOLOGY WHICH COULD HARM OUR
ABILITY TO COMPETE IN THE MARKET.</B> </P>
<P ALIGN="JUSTIFY">In addition to patents, we typically rely on a combination of trade secret,
copyright and trademark laws, nondisclosure agreements and other contractual provisions and
technical security measures to protect our intellectual property rights. Nevertheless, these
measures may not be adequate to safeguard the technology underlying our products. If they do not
protect our rights adequately, third parties could use our technology, and our ability to compete in
the market would be reduced. In addition, employees, consultants and others who participate in
developing our products may breach their agreements with us regarding our intellectual property, and
we may not have adequate remedies for the breach. We also may not be able to effectively protect our
intellectual property rights in some foreign countries. For a variety of reasons, we may decide not
to file for patent, copyright or trademark protection outside the United States. We also realize
that our trade secrets may become known through other means not currently foreseen by us.
Notwithstanding our efforts to protect our intellectual property, our competitors may independently
develop similar or alternative technologies or products that are equal or superior to our technology
and products without infringing any of our intellectual property rights, or may design around our
proprietary technologies. For further information on our intellectual property and the difficulties
in protecting it, see "Item 1: Business -- Intellectual Property," included in the Annual Report on
Form 10-K/A of Intuitive Surgical, Inc., filed with the SEC. </P>
<B><P>OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE ACCESS TO THESE
TECHNOLOGIES, OUR REVENUES COULD DECLINE.</B> </P>
<P ALIGN="JUSTIFY">We rely on technology that we license from others, including technology that is
integral to our products. We have entered into license agreements with SRI International, IBM
Corporation, MIT, Olympus Optical Co., Ltd., and Heartport, Inc.,now part of Johnson &amp; Johnson.
Any of these agreements may be terminated for breach. If any of these agreements is terminated, we
may be unable to reacquire the necessary license on satisfactory terms, or at all. The loss or
failure to maintain these licenses could prevent or delay further development or commercialization
of our products. See "Item 1: Business -- Intellectual Property," included in the Annual Report on
Form 10-K/A of Intuitive Surgical, Inc., filed with the SEC.</P>
<B><P>PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY CAUSE OUR STOCK PRICE TO DECLINE.</P>
</B><P ALIGN="JUSTIFY">During the course of our administrative proceedings and/or lawsuits,
there may be public announcements of the results of hearings, motions, and other interim proceedings
or developments in the litigation. If securities analysts or investors perceive these results to be
negative, it could have a substantial negative effect on the trading price of our stock.</P>
<B><P>OUR PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC REGULATORY PROCESS. IF WE DO
NOT OBTAIN AND MAINTAIN THE NECESSARY DOMESTIC REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET
AND SELL OUR PRODUCTS IN THE UNITED STATES.</B> </P>
<P ALIGN="JUSTIFY">Our products and operations are subject to extensive regulation in the United
States by the U.S. Food and Drug Administration, or FDA. The FDA regulates the research, testing,
manufacturing, safety, labeling, storage, recordkeeping, promotion, distribution and production of
medical devices in the United States to ensure that medical products distributed domestically are
safe and effective for their intended uses. In order for us to market certain products for use in
the United States, we generally must first obtain clearance from the FDA pursuant to Section 510(k)
of the Federal Food, Drug, and Cosmetic Act, or FFDCA. Clearance under Section 510(k) requires
demonstration that a new device is substantially equivalent to another legally marketed device. If
we modify our products after they receive FDA clearance, the FDA may require us to submit a separate
510(k) or premarket approval application, or PMA, for the modified product before we are permitted
to market the products in the U.S. In addition, if we develop products in the future that are not
considered to be substantially equivalent to a legally marketed device, we will be required to
obtain FDA approval by submitting a PMA. </P>
<P ALIGN="JUSTIFY">The FDA may not act favorably or quickly in its review of our 510(k) or PMA
submissions, or we may encounter significant difficulties and costs in our efforts to obtain FDA
clearance or approval, all of which could delay or preclude sale of new products in the United
States. Furthermore, the FDA may request additional data or require us to conduct further testing,
or compile more data, including clinical data and clinical studies, in support of a 510(k)
submission. The FDA may also, instead of accepting a 510(k) submission, require us to submit a PMA,
which is typically a much more complex application than a 510(k). To support a PMA, the FDA would
likely require that we conduct one or more clinical studies to demonstrate that the device is safe
and effective, rather than substantially equivalent to another legally marketed device. We may not
be able to meet the requirements to obtain 510(k) clearance or PMA approval, or the FDA may not
grant any necessary clearances or approvals. In addition, the FDA may place significant limitations
upon the intended use of our products as a condition to a 510(k) clearance or PMA approval. Product
applications can also be denied or withdrawn due to failure to comply with regulatory requirements
or the occurrence of unforeseen problems following clearance or approval. Any delays or failure to
obtain FDA clearance or approvals of new products we develop, any limitations imposed by the FDA on
new product use, or the costs of obtaining FDA clearance or approvals could have a material adverse
effect on our business, financial condition and results of operations. </P>
<P ALIGN="JUSTIFY">In order to conduct a clinical investigation involving human subjects for the
purpose of demonstrating the safety and effectiveness of a device, a company must, among other
things, apply for and obtain Institutional Review Board, or IRB approval of the proposed
investigation. In addition, if the clinical study involves a "significant risk" (as defined by the
FDA) to human health, the sponsor of the investigation must also submit and obtain FDA approval of
an investigational device exemption, or IDE application. We may not be able to obtain FDA and/or IRB
approval to undertake clinical trials in the U.S. for any new devices we intend to market in the
United States in the future. If we obtain such approvals, we may not be able to comply with the IDE
and other regulations governing clinical investigations or the data from any such trials may not
support clearance or approval of the investigational device. Failure to obtain such approvals or to
comply with such regulations could have a material adverse effect on our business, financial
condition and results of operations. For additional information concerning regulatory approvals of
our products, see "Item 1: Business -- Government Regulation," included in the Annual Report on Form
10-K/A of Intuitive Surgical, Inc., filed with the Securities and Exchange Commission or SEC.</P>
<B><P>OUR PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY PROCESSES AND APPROVAL
REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY INTERNATIONAL REGULATORY APPROVALS, WE
WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN FOREIGN COUNTRIES.</P>
</B><P ALIGN="JUSTIFY">To be able to market and sell our products in other countries, we must
obtain regulatory approvals and comply with the regulations of those countries. These regulations,
including the requirements for approvals, and the time required for regulatory review vary from
country to country. Obtaining and maintaining foreign regulatory approvals are expensive, and we
cannot be certain that we will receive regulatory approvals in any foreign country in which we plan
to market our products. If we fail to obtain regulatory approval in any foreign country in which we
plan to market our products, our ability to generate revenue will be harmed. </P>
<P ALIGN="JUSTIFY">The European Union requires that manufacturers of medical products obtain the
right to affix the CE mark to their products before selling them in member countries of the European
Union. The CE mark is an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. In order to obtain the right to affix
the CE mark to products, a manufacturer must obtain certification that its processes meet certain
European quality standards. In January 1999, we received permission to affix the CE mark to our
<I>da Vinci</I> Surgical System and <I>EndoWrist</I> instruments. </P>
<P ALIGN="JUSTIFY">If we modify existing products or develop new products in the future, including
new instruments, we may need to apply for permission to affix the CE mark to such products. In
addition, we will be subject to annual regulatory audits in order to maintain the CE mark
permissions we have already obtained. We cannot be certain that we will be able to obtain permission
to affix the CE mark for new or modified products or that we will continue to meet the quality and
safety standards required to maintain the permissions we have already received. If we are unable to
maintain permission to affix the CE mark to our products, we will no longer be able to sell our
products in member countries of the European Union. For additional information concerning regulatory
approvals of our products, see "Item 1: Business -- Government Regulation," included in the Annual
Report on Form 10-K/A of Intuitive Surgical, Inc., filed with the Securities and Exchange Commission
or SEC.</P>
<B><P>IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN REIMBURSEMENT FROM THIRD-PARTY PAYORS
FOR PROCEDURES USING OUR PRODUCTS, OR IF REIMBURSEMENT IS INSUFFICIENT TO COVER THE COSTS OF
PURCHASING OUR PRODUCTS, WE MAY BE UNABLE TO GENERATE SUFFICIENT SALES TO SUPPORT OUR
BUSINESS.</B> </P>
<P ALIGN="JUSTIFY">Domestic institutions will typically bill the services performed with our
products to various third-party payors, such as Medicare, Medicaid and other government programs and
private insurance plans. If hospitals do not obtain sufficient reimbursement from third-party payors
for procedures performed with our products, or if government and private payors' policies do not
permit reimbursement for surgical procedures performed using our products, we may not be able to
generate the revenues necessary to support our business. Our success in international markets also
depends upon the eligibility of our products for reimbursement through government-sponsored health
care payment systems and third-party payors. Reimbursement practices vary significantly by country.
Many international markets have government-managed healthcare systems that control reimbursement for
new products and procedures. Other foreign markets have both private insurance systems and
government-managed systems that control reimbursement for new products and procedures. Market
acceptance of our products may depend on the availability and level of reimbursement in any country
within a particular time. In addition, health care cost containment efforts similar to those we face
in the United States are prevalent in many of the other countries in which we intend to sell our
products and these efforts are expected to continue. For further information on third-party
reimbursement policies, see "Item 1: Business -- Third-Party Reimbursement," included in the Annual
Report on Form 10-K/A of Intuitive Surgical, Inc., filed with the SEC.</P>
<B><P ALIGN="JUSTIFY">BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS MAY CHOOSE TO
PURCHASE OUR COMPETITORS' PRODUCTS OR MAY NOT ACCEPT INTUITIVE SURGERY, WHICH WOULD RESULT IN
REDUCED REVENUE AND LOSS OF MARKET SHARE.</P>
</B><P ALIGN="JUSTIFY">Intuitive surgery is a new technology that must compete with established
minimally invasive surgery and open surgery. These procedures are widely accepted in the medical
community and in many cases have a long history of use. We also face competition from several
companies that are developing new approaches and products for the minimally invasive surgery market.
In addition, we presently face increasing competition from companies who are developing robotic and
computer-assisted surgical systems. Our revenues may be reduced or eliminated if our competitors
develop and market products that are more effective or less expensive than our products. If we are
unable to compete successfully, our revenues will suffer. We may not be able to maintain or improve
our competitive position against current or potential competitors, especially those with greater
resources. </P>
<P ALIGN="JUSTIFY">In many cases, the medical conditions that can be treated using our products can
also be treated by drugs or other medical devices and procedures. Many of these alternative
treatments are also widely accepted in the medical community and have a long history of use. In
addition, technological advances could make such treatments more effective or less expensive than
using our products, which could render our products obsolete or unmarketable. We cannot be certain
that physicians will use our products to replace or supplement established treatments or that our
products will be competitive with current or future technologies.</P>
<B><P>IF DEFECTS ARE DISCOVERED IN OUR PRODUCTS, WE MAY INCUR ADDITIONAL UNFORESEEN COSTS,
HOSPITALS MAY NOT PURCHASE OUR PRODUCTS AND OUR REPUTATION MAY SUFFER.</B> </P>
<P ALIGN="JUSTIFY">Our products incorporate mechanical parts and computer software, either of which
can contain errors or failures, especially when first introduced. In addition, new products or
enhancements may contain undetected errors or performance problems that, despite testing, are
discovered only after commercial shipment. Because our products are designed to be used to perform
complex surgical procedures, we expect that our customers will have an increased sensitivity to such
defects. We cannot assure you that our products will not experience errors or performance problems
in the future. If we experience flaws or performance problems, any of the following could occur:</P>

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

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

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

<P ALIGN="JUSTIFY">Manufacturing our products is a complex process. If demand for our products
exceeds our manufacturing capacity, we could develop a substantial backlog of customer orders. If we
are unable to establish and maintain larger-scale manufacturing capabilities, our ability to
generate revenues will be limited and our reputation in the marketplace would be damaged.</P>
<B><P>IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE OR EUROPEAN
MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR PART OF OUR MANUFACTURING
OPERATIONS, WHICH WOULD RESULT IN PRODUCT DELIVERY DELAYS AND LOST REVENUE.</B> </P>
<P ALIGN="JUSTIFY">Our manufacturing facilities are subject to periodic inspection by regulatory
authorities and our operations will continue to be regulated by the FDA for compliance with Good
Manufacturing Practice requirements contained in the FDA's Quality System Regulations, or QSR. We
are also required to comply with International Organization for Standardization, or ISO quality
system standards in order to produce products for sale in Europe. If we fail to continue to comply
with Good Manufacturing Practice requirements or ISO standards, we may be required to cease all or
part of our operations until we comply with these regulations. We are currently in compliance with
ISO standards. The FDA inspected our Mountain View and Sunnyvale facilities in March 2000 and
December 2002, respectively. The Good Manufacturing Practice issues raised by the FDA during the
inspections either were satisfactorily resolved with the FDA, or we believe can be resolved by us to
the FDA's satisfaction, although we cannot assure you that we will be able to do so. We continue to
be subject to FDA inspections at any time. Maintaining such compliance is difficult and costly. We
cannot be certain that our facilities will be found to comply with Good Manufacturing Practice
requirements or ISO standards in future inspections and audits by regulatory authorities. </P>
<P ALIGN="JUSTIFY">The state of California also requires that we maintain a license to manufacture
medical devices. Our facilities and manufacturing processes were inspected in February 1998. In
March 1998, we passed the inspection and received a device manufacturing license from the California
Department of Health Services. In March 2002, our facilities and manufacturing processes in our
Sunnyvale facility were re-inspected by the Food and Drug Branch, or FDB, and we were issued an
updated device manufacturing license for our Sunnyvale facility. We are subject to periodic
inspections by the California Department of Health Services and if we are unable to maintain this
license following any future inspections, we will be unable to manufacture or ship any products.</P>
<B><P>OUR RELIANCE ON SOLE AND SINGLE SOURCE SUPPLIERS COULD HARM OUR ABILITY TO MEET DEMAND
FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET.</B> </P>
<P ALIGN="JUSTIFY">Some of the components necessary for the assembly of our products are currently
provided to us by sole source suppliers or single source suppliers. We purchase components through
purchase orders rather than long-term supply agreements and generally do not maintain large volumes
of inventory. The disruption or termination of the supply of components could cause a significant
increase in the costs of these components, which could affect our profitability. A disruption or
termination in the supply of components could also result in our inability to meet demand for our
products, which could harm our ability to generate revenues, lead to customer dissatisfaction and
damage our reputation. Furthermore, if we are required to change the manufacturer of a key component
of our products, we may be required to verify that the new manufacturer maintains facilities and
procedures that comply with quality standards and with all applicable regulations and guidelines.
The delays associated with the verification of a new manufacturer could delay our ability to
manufacture our products in a timely manner or within budget.</P>
<B><P>THE USE OF OUR PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT COULD BE EXPENSIVE,
DIVERT MANAGEMENT'S ATTENTION AND HARM OUR BUSINESS.</B> </P>
<P ALIGN="JUSTIFY">Our business exposes us to significant risks of product liability claims. The
medical device industry has historically been litigious, and we face financial exposure to product
liability claims if the use of our products were to cause injury or death. There is also the
possibility that defects in the design or manufacture of our products might necessitate a product
recall. Although we maintain product liability insurance, the coverage limits of these policies may
not be adequate to cover future claims. Particularly as sales of our products increase, we may be
unable to maintain product liability insurance in the future at satisfactory rates or in adequate
amounts. A product liability claim, regardless of its merit or eventual outcome, could result in
significant legal defense costs. A product liability claim or any product recalls could also harm
our reputation or result in a decline in revenues.</P>
<B><P>IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL,
OUR ABILITY TO COMPETE WILL BE HARMED.</B> </P>
<P ALIGN="JUSTIFY">We are highly dependent on the principal members of our management and scientific
staff. Our product development plans depend in part on our ability to attract and retain engineers
with experience in mechanics, software and optics. Attracting and retaining qualified personnel will
be critical to our success, and competition for qualified personnel is intense. We may not be able
to attract and retain personnel on acceptable terms given the competition for such personnel among
technology and healthcare companies, and universities. The loss of any of these persons or our
inability to attract and retain qualified personnel could harm our business and our ability to
compete.</P>
<B><P>INTERNATIONAL SALES OF OUR PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES,
WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS. OUR GROWTH MAY BE LIMITED IF WE ARE
UNABLE TO SUCCESSFULLY MANAGE OUR INTERNATIONAL ACTIVITIES.</B> </P>
<P ALIGN="JUSTIFY">Our business currently depends in large part on our activities in Europe, and a
component of our growth strategy is to expand our presence into additional foreign markets. Sales to
markets outside of the United States accounted for approximately 18% of our sales for the three
months ended March 31, 2003 and 13% for the three months ended March 31, 2002.</P>
<P ALIGN="JUSTIFY">We are subject to a number of challenges that specifically relate to our
international business activities. These challenges include:</P>

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

<P ALIGN="JUSTIFY">Currently, a majority of our international sales are denominated in U.S. dollars.
As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make
our products less competitive in international markets. If we are unable to meet and overcome these
challenges, our international operations may not be successful, which would limit the growth of our
business.</P>
<B><P>RISK FACTORS ASSOCIATED WITH OUR PENDING MERGER WITH COMPUTER MOTION</P>
<P>THE ISSUANCE OF SHARES OF INTUITIVE SURGICAL COMMON STOCK TO COMPUTER MOTION STOCKHOLDERS IN THE
MERGER WILL SUBSTANTIALLY REDUCE THE PERCENTAGE INTERESTS OF INTUITIVE SURGICAL STOCKHOLDERS.</P>
</B><P ALIGN="JUSTIFY">Based on an estimated exchange ratio of approximately 0.52, we estimate that
we will issue approximately 15.2 million shares of our common stock in the merger and upon
completion of the merger, our current stockholders will own approximately 71% of the then
outstanding shares of our common stock and former Computer Motion stockholders will own
approximately 29% of the then outstanding shares of our common stock.</P>
<P ALIGN="JUSTIFY">In addition, based on the estimated exchange ratio of approximately 0.52, we
estimate that we will reserve approximately 5.2 million shares of Intuitive Surgical common stock
for future issuance in connection with Intuitive Surgical's assumption of Computer Motion's
outstanding options and warrants (including out-of-the-money options and warrants), subject to
proportional reduction in the event that the proposed reverse stock split is approved by our
stockholders and implemented by our board of directors. The outstanding warrants of Computer Motion
have a range of exercise prices. Holders of these warrants have the right to an adjustment in the
exercise price of their warrants, and in some cases in the number of shares issuable upon exercise,
if the warrant issuer sells shares in the future at prices below the exercise prices of the
warrants. These anti-dilution protections may continue to apply after the merger and thus could
result in additional dilution to stockholders of the combined company if we make future offerings of
capital stock.</P>
<P ALIGN="JUSTIFY">The issuance of shares of Intuitive Surgical common stock to former Computer
Motion stockholders in or after the merger will cause a significant reduction in the relative
percentage interests of current Intuitive Surgical stockholders in earnings, voting, liquidation
value and book and market value. The issuance of additional shares of Intuitive Surgical common
stock in future transactions could also reduce the percentage interests of former Computer Motion
stockholders and Intuitive Surgical stockholders in the combined company. This dilution could reduce
the market price of our common stock.</P>
<B><P>INTUITIVE SURGICAL AND COMPUTER MOTION EACH HAVE INCURRED SUBSTANTIAL LOSSES SINCE INCEPTION,
EXPECT TO INCUR FURTHER LOSSES, AND MAY NOT BE ABLE TO GENERATE OR RAISE SUFFICIENT CASH TO FUND
THEIR OPERATIONS, SEPARATE OR COMBINED.</P>
</B><P ALIGN="JUSTIFY">For the three months ended March 31, 2003, we incurred a net loss of $2.3
million, and Computer Motion incurred a net loss of $7.9 million. The extent of our future losses
and the timing of profitability are highly uncertain, and we may never achieve profitable
operations. If the time required to generate significant revenues and achieve profitability is
longer than anticipated, we may not be able to continue our operations. In recent periods, Computer
Motion has not generated cash from operations. Both companies expect to incur additional operating
losses into 2003, and both companies have substantial cash needs. Among other things, total fees and
costs of both companies associated with the merger are currently projected to be approximately $4.0
million. We have agreed to fund up to $7.3 million of Computer Motion's working capital needs
through the effective time of the merger under the Loan and Security Agreement. Assuming completion
of the merger on or around June 30, 2003, we project that the total cash and cash equivalents of the
combined company will be less than $35 million. We expect that the capital resources of the combined
company, together with revenue derived from product sales, will be sufficient to meet the combined
company's working capital needs at least through 2003. After that, we may need to raise additional
funds. We may not be able to obtain additional financing on favorable terms, or at all. If we are
unable to generate sufficient capital to fund our operations and cannot raise it on acceptable
terms, we may not be able to further develop, enhance or expand the market for our products and
service, and the combined company could fail.</P>
<B><P>THE COMBINED COMPANY MAY NOT REALIZE ALL OF THE ANITICPATED BENEFITS OF THE MERGER.</P>
</B><P ALIGN="JUSTIFY">The success of the merger will depend, in part, on the ability of the
combined company to realize the anticipated synergies, cost savings and growth opportunities from
integrating the business of Computer Motion with the business of Intuitive Surgical. Our success in
realizing these benefits and the timing of this realization depend upon the successful, rapid
integration of the operations of Computer Motion with those of Intuitive Surgical. This integration
will be a complex, costly and time-consuming process, and may not succeed as planned. The
difficulties of combining the operations of the companies include, among other things:</P>

<UL>
<P ALIGN="JUSTIFY"><LI>coordinating and consolidating ongoing and future research and development
efforts;</LI></P>
<P ALIGN="JUSTIFY"><LI>consolidating sales and marketing operations;</LI></P>
<P ALIGN="JUSTIFY"><LI>retaining existing customers and attracting new customers;</LI></P>
<P ALIGN="JUSTIFY"><LI>retaining strategic partners and attracting new strategic partners;</LI></P>
<P ALIGN="JUSTIFY"><LI>retaining key employees;</LI></P>
<P ALIGN="JUSTIFY"><LI>consolidating corporate and administrative infrastructures;</LI></P>
<P ALIGN="JUSTIFY"><LI>integrating and managing the technologies and products of the two
companies;</LI></P>
<P ALIGN="JUSTIFY"><LI>identifying and eliminating redundant and underperforming operations and
assets;</LI></P>
<P ALIGN="JUSTIFY"><LI>using capital assets efficiently to develop the business of the combined
company;</LI></P>
<P ALIGN="JUSTIFY"><LI>minimizing the diversion of management's attention from ongoing business
concerns; and</LI></P>
<P ALIGN="JUSTIFY"><LI>coordinating geographically separate organizations.</LI></P></UL>

<P ALIGN="JUSTIFY">In addition, Computer Motion's products differ in substantial ways from our
products, and the companies rely on different distributors and sales channels to sell their
products. Both Computer Motion and Intuitive Surgical are parties to existing distribution
agreements that cannot be terminated prior to the end of their terms.</P>
<P ALIGN="JUSTIFY">We do not know whether the combined company will succeed in addressing these
risks or any other problems encountered in connection with the merger, or whether the integration of
Computer Motion with Intuitive Surgical will result in the realization of the full benefits
anticipated by us from the merger.</P>
<B><P>FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT INTUITIVE SURGICAL AND ITS
STOCKHOLDERS.</P>
</B><P ALIGN="JUSTIFY">If the merger is not completed for any reason, Intuitive Surgical and
Computer Motion and their stockholders will be subject to a number of material risks, including:</P>

<UL>
<P ALIGN="JUSTIFY"><LI>the provision in the merger agreement that, under specified circumstances,
either Intuitive Surgical or Computer Motion could be required to pay the other a termination fee
and expenses of up to an aggregate of $2.5 million;</LI></P>
<P ALIGN="JUSTIFY"><LI>the litigations between the two companies may resume;</LI></P>
<P ALIGN="JUSTIFY"><LI>Computer Motion would be required to repay to Intuitive Surgical all amounts
loaned under the bridge loan facility within 120 days following termination of the merger
agreement;</LI></P>
<P ALIGN="JUSTIFY"><LI>Computer Motion likely would not have sufficient cash to repay amounts loaned
under the bridge loan, and Intuitive Surgical would be at risk that such bridge loan amounts would
not be repaid unless Computer Motion were able to obtain alternative financing;</LI></P>
<P ALIGN="JUSTIFY"><LI>the market price of Intuitive Surgical common stock and Computer Motion
common stock may decline to the extent that the current market price of such shares reflects a
market assumption that the merger will be completed;</LI></P>
<P ALIGN="JUSTIFY"><LI>costs related to the merger, such as legal and accounting fees, must be paid
even if the merger is not completed;</LI></P>
<P ALIGN="JUSTIFY"><LI>benefits that Intuitive Surgical and Computer Motion expect to realize from
the merger would not be realized; and</LI></P>
<P ALIGN="JUSTIFY"><LI>the diversion of management attention from the day-to-day businesses of the
companies and the unavoidable disruption to their employees and customers during the period before
completion of the merger may make it difficult for Intuitive Surgical and Computer Motion to regain
their financial and market positions if the merger does not occur.</LI></P></UL>

<B><P>SALES BY INTUITIVE SURGICAL STOCKHOLDERS OR FORMER COMPUTER MOTION STOCKHOLDERS COULD
CAUSE INTUITIVE SURGICAL'S COMMON STOCK PRICE TO DECLINE.</P>
</B><P ALIGN="JUSTIFY">The market price of our common stock could decline as a result of sales
of a large number of shares in the market. These sales may also make it more difficult for the
combined company to sell equity securities in the future at a time and at a price that we deem
appropriate to raise funds through future offerings of common stock. As of March 31, 2003, several
entities beneficially owned more than 5% of the outstanding shares of our common stock, including
Bear Stearns Asset Management, Allan G. Lozier, Investor Growth Capital, Ltd., and PaTMarK Company,
Inc. Assuming that the merger is completed, the former stockholders of Computer Motion will own
approximately 29% of the combined company. In addition, holders of warrants to purchase up to 4.4
million shares of Computer Motion common stock will receive Intuitive Surgical warrants in exchange
for their Computer Motion warrants in connection with the merger. Such warrant holders will have the
right to include their shares in resale registration statements that we will be obligated to file on
their behalf.</P>
<B><P>CUSTOMER, SUPPLIER, AND EMPLOYEE UNCERTAINTY RELATED TO THE MERGER COULD HARM THE COMBINED
COMPANY</P>
</B><P ALIGN="JUSTIFY">Intuitive Surgical and Computer Motion customers and suppliers may, in
response to the announcement or completion of the merger, delay purchasing or supply decisions or
otherwise alter existing relationships with Intuitive Surgical or Computer Motion. These decisions
or other adverse changes in the business relationships of Intuitive Surgical and Computer Motion
with their respective customers and suppliers could adversely affect the business of the combined
company. Similarly, current and prospective Computer Motion employees may experience uncertainty
about their future as employees of the combined company until strategies with regard to Computer
Motion are announced or executed. This may adversely affect Intuitive Surgical's or Computer
Motion's ability to attract and retain, and may affect the performance during the transition period
of, key management, sales, marketing and technical personnel.</P>
<B><P>THE CONVICTION OF ARTHUR ANDERSEN LLP ON OBSTRUCTION OF JUSTICE CHARGES MAY ADVERSELY AFFECT
ARTHUR ANDERSEN'S ABILITY TO SATISFY CLAIMS ARISING FROM THE PROVISION OF AUDITING SERVICES TO
COMPUTER MOTION AND MAY IMPEDE THE COMBINED COMPANY'S ACCESS TO CAPITAL MARKETS AFTER THE
MERGER.</P>
</B><P ALIGN="JUSTIFY">Arthur Andersen LLP audited Computer Motion's financial statements for the
years ended December 31, 2001 and December 31, 2000. On March 14, 2002, an indictment was unsealed
charging Arthur Andersen with federal obstruction of justice arising from the government's
investigation of Enron Corp. On June 15, 2002, Arthur Andersen was convicted of these charges. The
impact of this conviction on Arthur Andersen's financial condition may adversely affect the ability
of Arthur Andersen to satisfy any claims arising from its provision of auditing services to Computer
Motion.</P>
<P ALIGN="JUSTIFY">Should Intuitive Surgical seek to access the public capital markets after
completion of the merger, SEC rules will require Intuitive Surgical to include or incorporate by
reference in any prospectus three years of audited financial statements. The SEC's current rules
would require Intuitive Surgical to present audited financial statements for one or more fiscal
years audited by Arthur Andersen and use reasonable efforts to obtain its consent until the audited
financial statements for the fiscal year ending December 31, 2004 become available. If prior to that
time the SEC ceases accepting financial statements audited by Arthur Andersen, it is possible that
the available audited financial statements for the years ended December 31, 2001 and December 31,
2000 audited by Arthur Andersen might not satisfy the SEC's requirements. In that case, Intuitive
Surgical would be unable to access the public capital markets unless an independent accounting firm
were able to audit the financial statements originally audited by Arthur Andersen. Any delay or
inability to access the public capital markets caused by these circumstances could have a material
adverse effect on the combined company's business, profitability and growth prospects.</P>

<B><P><A NAME="market"></A>ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK</P>
</B><P ALIGN="JUSTIFY">We are not subject to any meaningful market risks related to currency,
commodity prices or similar matters. We are sensitive to short-term interest rate fluctuations to
the extent that such fluctuations impact the interest income we receive on the investment of the
remaining proceeds from our June 2000 initial public offering. </P>
<P ALIGN="JUSTIFY">The primary objective of our investment activities is to preserve principal while
at the same time maximizing the income we receive from our investments without significantly
increasing risk. Some of the securities that we invest in may have market risk. This means that a
change in prevailing interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing
rate and the prevailing interest rate later rises, the principal amount of our investment will
probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities. We classify our cash equivalents
and marketable securities as "fixed-rate" if the rate of return on such instruments remains fixed
over their term. These "fixed-rate" investments include commercial paper and government and non-
government debt securities. We classify our cash equivalents and marketable securities as "variable-
rate" if the rate of return on such investments varies based on the change in a predetermined index
or set of indices during their term. These "variable-rate" investments primarily include money
market accounts. The average time to maturity of all of our investments as of March 31, 2003 was
approximately 1.5 years. At March 31, 2003, approximately 33% of our investment portfolio was
composed of investments with original maturities of one year or less. </P>

<B><P ALIGN="JUSTIFY"><A NAME="control"></A>ITEM 4. CONTROLS AND PROCEDURES</P>
</B><P ALIGN="JUSTIFY">We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC'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 timely decisions regarding required
disclosure. In designing&nbsp;and evaluating the disclosure controls and procedures, management
recognized 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 necessarily
was required to apply its judgment in evaluating the cost-benefit relationship of&nbsp;possible
controls and procedures. </P>
<P ALIGN="JUSTIFY">Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective. There have
been no significant changes in our internal controls or in other factors that could significantly
affect the internal controls subsequent to the date we completed our evaluation. </P>

<B><P ALIGN="CENTER">PART II. - OTHER INFORMATION </P>
<P><A NAME="item1"></A>ITEM 1. LEGAL PROCEEDINGS</P>
</B><P>BROOKHILL-WILK 1, LLC</P>
<P ALIGN="JUSTIFY">On September 1, 2000 Brookhill-Wilk 1, LLC ("Wilk") filed a lawsuit against
Intuitive Surgical in the United States District Court for the Southern District of New York (Case
No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or offering for sale our <I>da
Vinci</I> Surgical System, we are infringing U.S. Patent Nos. 5,217,003 and 5,368,015 in willful
disregard of Wilk's patent rights. These patents concern methods and devices for "remote" surgery.
In March 2001, Wilk withdrew its assertion of infringement of the '015 patent against our company.
On November 8, 2001, in response to a motion on one of Intuitive Surgical's noninfringement
defenses, the District Court granted summary judgment of noninfringement of the '003 patent in our
favor and dismissed Wilk's complaint in its entirety without prejudice. Wilk appealed the summary
judgment ruling to the U.S. Court of Appeals for the Federal Circuit. </P>
<P ALIGN="JUSTIFY">On April 11, 2003, the Court of Appeals reversed the District Court's judgment
and remanded the case for further proceedings. This reversal is based on the Court of Appeals'
determination that the particular claim limitation at issue should be interpreted differently than
as construed by the District Court. Intuitive Surgical believes that the Court of Appeals' opinion
is not necessarily inconsistent with the noninfringement defense initially presented by Intuitive
Surgical to the District Court and has no bearing on Intuitive Surgical's other noninfringement
defenses. Intuitive Surgical has filed a petition for hearing to request clarification from the
Court of Appeals on the claim construction adopted. Upon remand, Intuitive Surgical intends to
continue to vigorously defend its rights and, if necessary, is prepared to continue to dispute the
meaning of other portions of the asserted claim language and to conduct discovery and file further
motions on whether the patent is infringed, valid and/or enforceable. Intuitive Surgical believes
that it will prevail in the litigation and that it has multiple meritorious defenses to Wilk's
allegations. However, litigation is unpredictable and Intuitive Surgical may not prevail. The case
remains in its early stages of discovery in the District Court. </P>
<P ALIGN="JUSTIFY">If we lose Wilk's suit against us, it will hurt our competitive position, may be
costly to us and may prevent us from selling our products. If we lose the patent suit, we may need
to obtain from Wilk a license to this technology if we are to continue to market our products that
have been found to infringe Wilk's patents. This license could be expensive, which could seriously
harm our business. If Wilk is successful in its suit against us and is unwilling to grant us a
license, we may be required to stop selling our products that are found to infringe Wilk's patents
unless we can redesign them so they do not infringe Wilk's patents, which we may be unable to do. In
addition, we could be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position. Due to the inherent uncertainties of litigation,
however, the Company cannot accurately predict the ultimate outcome of the litigation against Wilk
at this time and, therefore, cannot estimate the range of possible loss.</P>
<P ALIGN="JUSTIFY">On February 21, 2001, Wilk filed suit against Computer Motion alleging that its
ZEUS original system infringed upon Wilk's U.S. Patent Nos. 5,217,003 and 5,368,015. Wilk's
complaint sought damages, attorneys' fees and increased damages alleging willful patent
infringement. On March 21, 2001, Computer Motion served its answer and counterclaim alleging
 non-infringement of each patent-in-suit, patent invalidity and unenforceability. On November 8, 2001,
the United States District Court for the Southern District of New York in Wilk's pending litigation
against Intuitive Surgical issued an order interpreting the claims of Wilk's U.S. Patent No.
5,217,003 in a way that Computer Motion believed excluded current applications of its ZEUS surgical
system. In light of this decision, on November 13, 2001, the parties agreed to dismiss the case
without prejudice to refiling upon resolution in Wilk's litigation against Intuitive Surgical.</P>

<P>COMPUTER MOTION</P>

<P ALIGN="JUSTIFY">We are involved in intellectual property litigation with Computer Motion as
described below. While the recent announced merger agreement has resulted in a stay of all such
litigation and other administrative legal proceedings between Intuitive and Computer Motion, these
proceedings may continue if the merger is not completed for any reason. If the merger closes, then
all litigation and other disputes between Intuitive sand Computer Motion will be dismissed with
prejudice or similarly finally terminated.</P>
<P ALIGN="JUSTIFY">On May 10, 2000, Computer Motion, Inc. filed a lawsuit in United States
District Court for the Central District of California (Case No. CV00-4988 CBM) alleging that by
making, using, selling or offering for sale our <I>da Vinci</I> Surgical System, we are infringing
United States Patent Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583, 5,878,193, 5,907,664, and
6,001,108, in willful disregard of Computer Motion's patent rights. On June 1, 2000, Computer Motion
amended its lawsuit to allege that we also infringe U.S. Patent Number 6,063,095. In late 2000,
Computer Motion alleged our infringement of a ninth patent, and added U.S. Patent Number 6,102,850
to the litigation. Computer Motion subsequently added U.S. Patent No. 6,244,809 to the litigation,
alleging that we also infringe that tenth patent. These ten patents concern various methods and
devices for conducting various aspects of robotic surgery. Of those ten patents, three are no longer
part of the suit. After Computer Motion lost all of its rights to its 5,855,583 and 5,878,193
patents as a result of our successful Patent Office interference proceedings Computer Motion
voluntarily dismissed those patents from suit. However, Computer Motion has sought to challenge the
interference proceedings by separate district court appeal. In addition, in November 2002, the Court
granted our motion for summary judgment of noninfringement of the 6,102,850 patent. In February
2003, the Court denied our motion for summary judgment of noninfringement of the 6,244,809 patent
and granted Computer Motion's cross-motion for partial summary judgment of literal infringement of
one claim of that patent. We subsequently requested that the Court reconsider that decision because
of perceived flaws in the Court's approach to the issue of infringement on summary judgment.
Regardless of what happens on reconsideration, we will continue to defend the 809 patent on
invalidity, based on the earlier robotic surgery work of SRI and others. We still have pending
motions for summary judgment of noninfringement on two more of Computer Motion's seven remaining
patents-in-suit, numbers 5,907,664 and 6,001,108. At the Court's request, we will not file further
motions for summary judgment until the remaining pending motions are decided. In late January 2003,
after close of fact discovery, Computer Motion asserted between 26 and 35 new claims of its seven
remaining patents-in-suit and new theories of infringement. We have moved to strike those new
assertions as inappropriate at this late stage. Trial had been calendared for April 29, 2003. In
connection with our proposed merger with Computer Motion, our company and Computer Motion have
agreed to request an immediate stay through August 31, 2003 of all proceedings in the pending
litigations between the companies. As part of the stays, the courts have ceased all further activity
in the cases during the period of stay, and will not issue any opinions or orders on issues already
submitted for decision. In addition, the California Court postponed the trial date and was asked to
reset the trial to a date no earlier than November 30, 2003. The stay may be terminated before, or
extended beyond, August 31, 2003 under specified circumstances. In the event the merger is
completed, our company and Computer Motion will request dismissal with prejudice of all pending
litigations.</P>
<P ALIGN="JUSTIFY">The Computer Motion action seeks damages based upon the making, using, selling
and offering for sale of our products and processes, and seeks to enjoin our continued activities
relating to these products. In the event the stay is lifted, this action will subject us to
potential liability for damages, including treble damages, and could require us to cease making,
using or selling the affected products, or to obtain license in order to continue to manufacture,
use or sell the affected products. While we continue to believe we have multiple meritorious
defenses to each patent asserted in this action, in the event that the stay is lifted, we cannot
assure you that we ultimately will prevail on any issue in the litigation or that we will be able to
successfully defend Computer Motion action could harm our business, financial condition and
operating results. Due to the inherent uncertainties of litigation, we cannot accurately predict the
ultimate outcome of this matter at this time and, therefore, cannot estimate the range of possible
loss.</P>
<P ALIGN="JUSTIFY">On December 7 and 8, 2000, the PTO declared three interferences between a single
SRI patent application exclusively licensed to Intuitive and three of Computer Motion's patents,
Numbers 5,855,583, 5,878,193 and 5,907,664. An interference is a proceeding within the U.S. Patent
Office to resolve questions regarding the patentability of inventions and who first invented subject
matter claimed by two or more patents or patent applications. The Patent Office has now entered
final judgment in each interference proceeding. In the interference involving the 5,878,193 patent,
the PTO entered final judgment in Intuitive's favor. Subject to review by or appeal to a federal
court, which could reverse or modify any or all of the following, this judgment establishes that the
disputed invention of, generally speaking, image-based control of robotic surgical instruments is
prior art to all of Computer Motion's remaining patents, that Intuitive is entitled to patent that
invention for itself, and that Computer Motion is no longer entitled to any of the three claims of
the 5,878,193 patent. In the interference involving the 5,855,583 patent, the PTO again entered
final judgment in Intuitive's favor. Subject to review by or appeal to a federal court, which could
reverse or modify any or all of the following, this judgment establishes that the disputed invention
of, generally speaking, proportional movement of articulating robotic surgical instruments is prior
art to all of Computer Motion's remaining patents, that Intuitive is entitled to patent that
invention for itself, and that Computer Motion is no longer entitled to any of the 15 claims of the
5,855,583 patent. In the interference involving the 5,907,664 patent, the PTO entered final judgment
against us, deciding that our patent claim is unpatentable for noncompliance with the "written
description" requirement of Title 35 of the U.S. Code. The PTO declined to decide our motion
challenging the validity of certain claims of the '664 patent, leaving that issue in question. This
5,907,664 patent was the subject of our first motion for summary judgment of noninfringement
mentioned in the previous paragraph. In July 2002, Computer Motion filed suit against us in the U.S.
District Court for the Central District of California to challenge the PTO's two interference
judgments in our favor. That suit has also been stayed through August 31, 2003 as a result of the
merger agreement between Computer Motion and Intuitive.</P>
<P ALIGN="JUSTIFY">In September 2000, we filed a Notice of Opposition in the European Patent Office,
or EPO, challenging European Patent No. 0653,922, which issued to Computer Motion in 1999 and is
related to several of the patents now involved in the U.S. litigation and the interference
proceedings. An Opposition proceeding allows the EPO to determine whether the challenged patent
should be revoked in its entirety, should be amended, or should remain unaltered. In its Notice of
Opposition, Intuitive cited numerous prior art references not cited to the EPO during the '922
patent's original prosecution. An initial ruling in March 2002 indicated that the EPO was not then
inclined to alter the '922 patent in any way. However, during a hearing held in Germany on July 2,
2002, the EPO sanctioned Computer Motion for its "abuse" of the Opposition process. As a result of
Computer Motion's actions, the preliminary EPO decision is mooted, both sides will now provide
further written briefing and evidence on the substantive issues, and another hearing is anticipated
for sometime later in 2003. Intuitive and Computer Motion anticipate taking steps to seek a stay or
other similar relief from the EPO as a result of their recent merger agreement.</P>
<P ALIGN="JUSTIFY">On March 30, 2001, Intuitive and International Business Machines Corporation, or
IBM, jointly filed suit against Computer Motion, Inc. in the U.S. District Court for the District of
Delaware. The complaint alleged that by continuing to make, use, sell, and offer for sale its AESOP
and ZEUS voice-controlled products, Computer Motion willfully infringes U.S. Patent No. 6,201,984.
The complaint also impacted the HERMES product to the extent it interfaced with either the AESOP or
ZEUS. The '984 patent, which concerns various aspects of voice control of surgical instruments,
issued to IBM in early March 2001 and is exclusively licensed to us. The '984 patent predates by
several years Computer Motion's development of voice-controlled surgical robots. Trial was held in
August 2002. After evidence and argument was presented, the seven-member Delaware jury returned a
verdict in our favor, finding that Computer Motion had failed to prove any claim of the '984 patent
invalid and awarding us $4.4 million for damage caused by Computer Motion's sales of its infringing
AESOP and ZEUS products. In December 2002, the Court rejected Computer Motion's final "prosecution
laches" defense as inapplicable to the circumstances presented by our patent. Subject to the stay,
the suit is in the post-trial briefing phase. Computer Motion has filed three motions seeking to set
aside the jury's verdict, to reduce the damages awarded, and for a new trial on one or more issues.
We have filed our request for a permanent injunction against further infringing sales of Computer
Motion's AESOP and ZEUS products. In February 2003, the Court indicated that it would first address
Computer Motion's post-trial requests before deciding our request for a permanent injunction against
Computer Motion. All proceedings in this suit have also now been stayed through August 31, 2003 as a
result of the merger agreement between Computer Motion and Intuitive. &#9;</P>
<P ALIGN="JUSTIFY">OTHER LEGAL MATTERS</P>
<P ALIGN="JUSTIFY">&#9;In September 2002, we discovered that one of our employees had purchased
approximately $900,000 in administrative supplies without the authorization or knowledge of the
Company's management. This matter was investigated by law enforcement authorities and Company
advisors. We have since terminated this employee's employment and have taken actions intended to
ensure that no similar incidents can occur in the future, including implementing additional controls
relating to our cash disbursement process. In addition, we are seeking to recover our loss. We have
filed a claim with our insurance carrier, from which we received proceeds of $500,000, and have
filed suit against the sellers of the administrative supplies in December 2002. Our complaint
alleged that each of the defendants has (i) violated various sections of the Racketeer Influenced
and Corrupt Organization ("RICO") Act through their extortion, coercion, intimidation, fraud,
bribery and racketeering activity in connection with the unauthorized purchase of office supplies,
and (ii) committed unlawful business acts and practices in violation of Cal. Bus. &amp; Prof. Code
Section 17200 et seq. Our suit seeks to recover actual and treble damages, costs and attorney fees
for the damage caused by each of defendants through their illegal conduct. In January 2003, we
amended our complaint to allege that each defendant further unlawfully offered prizes and gifts in
violation of Cal. Bus. &amp; Prof. Code Section 17537 and unlawfully failed to advertise limitations
on the quantity of its sales in violation of Cal. Bus. &amp; Prof. Code Section 17500.5. The amended
complaint reiterates our claim to recover actual and treble damages, costs and attorney fees. This
suit is in its early stages and, as of March 31, 2003, none of the defendants have yet answered
either complaint.</P>
<P ALIGN="JUSTIFY">We are subject to legal proceedings and claims that arise in the normal course of
our business. We do not know whether we will prevail in these matters nor can we assure that any
remedy could be reached on commercially viable terms, if at all. Due to the inherent uncertainties
of litigation, we cannot accurately predict the ultimate outcome of these matters at this time and,
therefore, cannot estimate the range of possible loss.</P>

<B><P><A NAME="item2"></A>ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS</P>
</B><P>None.</P>
<B><P><A NAME="item3"></A>ITEM 3. DEFAULTS UPON SENIOR SECURITIES</P>
</B><P ALIGN="JUSTIFY">None. </P>
<B><P><A NAME="item4"></A>ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</P>
</B><P ALIGN="JUSTIFY">None.</P>
<B><P ALIGN="JUSTIFY"><A NAME="item5"></A>ITEM 5. OTHER INFORMATION</P>
</B><P ALIGN="JUSTIFY">None. </P>
<B><P><A NAME="item6"></A>ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K</P>
</B><P ALIGN="JUSTIFY">(a) Exhibits. </P>
<TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=574>
<TR><TD WIDTH="15%" VALIGN="BOTTOM">
<B><P ALIGN="CENTER">Exhibit Number</B></TD>
<TD WIDTH="85%" VALIGN="BOTTOM">
<B><P>Description</B></TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">99.1(1)</TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Certification by Chief Executive Officer pursuant to 18 U.S.C.   1350, as adopted by Section 906
of the Sarbanes-Oxley Act of 2002.</TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">99.2(1)</TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Certification by Chief Financial Officer pursuant to 18 U.S.C.  1350, as adopted by Section 906
of the Sarbanes-Oxley Act of 2002.<FONT FACE="Courier New"> </FONT></TD>
</TR>
</TABLE>

<P>__________

<FONT SIZE=2><P>(1) This exhibit is being furnished and shall not be deemed "filed" for
purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject
to the liabilities of that Section. This exhibit shall not be incorporated by reference into any
registration statement or other document pursuant to the Securities Act of 1933, as
amended.</P>


<P ALIGN="JUSTIFY">&nbsp;</P>
<P ALIGN="JUSTIFY">(b) Reports on Form 8-K. </P>
<P ALIGN="JUSTIFY">The Company filed a Current Report on Form 8-K on March 7, 2003 (File No. 000-
30713) announcing that it had entered into an Agreement and Plan of Merger on March 7, 2003 with
Computer Motion, Inc.</P>

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

<P><A NAME="sign"></A><B>SIGNATURE</P>
</B><P>&#9; Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
</P>

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

<P>Date: May 15, 2003 <BR>
</P>

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

<B><P ALIGN="CENTER"><A NAME="cert"></A>CERTIFICATIONS</P>
</B><P>I, Lonnie M. Smith, certify that:</P>
<OL>

<LI>I have reviewed this quarterly report on Form 10-Q of Intuitive Surgical, Inc.;</LI>
<LI>Based on my knowledge, this quarterly report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this quarterly report;</LI>
<LI>Based on my knowledge, the financial statements, and other financial information included in
this quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this quarterly
report;</LI>
<LI>The registrant's other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:</LI>

<OL TYPE="a">

<LI>designed such disclosure controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is being prepared;</LI>
<LI>evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and</LI>
<LI>presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;</LI></OL>


<LI>The registrant's other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):</LI>

<OL TYPE="a">

<LI>all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material weaknesses in internal controls;
and</LI>
<LI>any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and</LI></OL>


<LI>The registrant's other certifying officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and material
weaknesses.</LI></OL>

<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>

<P>/s/ Lonnie M. Smith<BR>
   &#9; Lonnie M. Smith<BR>
   Chief Executive Officer</P>
<P>&#9; &#9;&#9;&#9;&#9;&#9;&#9;&#9;&#9; May 15, 2003</P>

</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>

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

<P>I, Susan K. Barnes, certify that:</P>
<OL>

<LI>I have reviewed this quarterly report on Form 10-Q of Intuitive Surgical, Inc.;</LI>
<LI>Based on my knowledge, this quarterly report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this quarterly report;</LI>
<LI>Based on my knowledge, the financial statements, and other financial information included in
this quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this quarterly
report;</LI>
<LI>The registrant's other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:</LI>

<OL TYPE="a">

<LI>designed such disclosure controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is being prepared;</LI>
<LI>evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and</LI>
<LI>presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;</LI></OL>


<LI>The registrant's other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):</LI>

<OL TYPE="a">

<LI>all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material weaknesses in internal controls;
and</LI>
<LI>any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and</LI></OL>


<LI>The registrant's other certifying officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and material
weaknesses.</LI></OL>

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<P>/s/ Susan K. Barnes<BR>
   Susan K. Barnes<BR>
   Chief Financial Officer</P>
<P>&#9; &#9;&#9;&#9;&#9;&#9;&#9;&#9;&#9; May 15, 2003</P>

</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
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<br>
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<HR WIDTH="85%">
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<B><P ALIGN="CENTER">EXHIBIT INDEX </P></B>
<P ALIGN="CENTER"><CENTER><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=574>
<TR><TD WIDTH="15%" VALIGN="BOTTOM">
<B><P ALIGN="CENTER">Exhibit Number</B></TD>
<TD WIDTH="85%" VALIGN="BOTTOM">
<B><P>Description</B></TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">99.1 <FONT SIZE=2>(1)</FONT></TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Certification by Chief Executive Officer pursuant to 18 U.S.C.   1350, as adopted by Section 906
of the Sarbanes-Oxley Act of 2002.</TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">99.2 <FONT SIZE=2>(1)</FONT></TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Certification by Chief Financial Officer pursuant to 18 U.S.C.  1350, as adopted by Section 906
of the Sarbanes-Oxley Act of 2002.<FONT FACE="Courier New"> </FONT></TD>
</TR>
</TABLE>
</CENTER></P>

<P>__________

<FONT SIZE=2><P>(1) This exhibit is being furnished and shall not be deemed "filed" for
purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject
to the liabilities of that Section. This exhibit shall not be incorporated by reference into any
registration statement or other document pursuant to the Securities Act of 1933, as
amended.</P>

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{"company-data": {"conformed-name": "INTUITIVE SURGICAL INC", "cik": "0001035267", "assigned-sic": "3842", "irs-number": "770416458", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "000-30713", "film-number": "03704931"}, "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 2003 10Q DOC
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
     15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 000-30713
Intuitive Surgical, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
77-0416458
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
950 Kifer Road
Sunnyvale, California      94086
(Address of Principal Executive Offices including Zip Code)
(408) 523-2100
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days.    YES
x
NO
o
Indicate by check mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).    YES
x
NO
o
The Registrant had 37,120,689 shares of Common Stock, $0.001 par value per
share, outstanding as of April 30, 2003.
Intuitive Surgical, Inc.
TABLE OF CONTENTS
PART I.   FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited):
Consolidated balance sheets as of March 31, 2003 and
December 31, 2002
1
Consolidated statements of operations for the three-month
periods ended March 31, 2003 and March 31, 2002
2
Consolidated statements of cash flows for the three-month
periods ended March 31, 2003 and March 31, 2002
3
Notes to Consolidated Financial Statements
4
Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations
13
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
36
Item 4.   Controls and Procedures
36
PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings
37
Item 2.   Changes in Securities and Use of Proceeds
41
Item 3.  Defaults Upon Senior Securities
42
Item 4.  Submission of Matters to a Vote of Security Holders
42
Item 5.  Other Information
42
Item 6.   Exhibits and Reports on Form 8-K
42
Signatures
42
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31,   December 31,
                                                             2003          2002
                                                         ------------  -----------
                                                         (Unaudited)   (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents............................ $     22,774  $    17,607
  Short-term investments...............................       22,235       33,232
  Accounts receivable, net.............................       20,895       16,887
  Inventory............................................        8,282        8,738
  Prepaid expenses.....................................        2,037        2,161
                                                         ------------  -----------
          Total current assets.........................       76,223       78,625
Property and equipment, net............................        9,823       10,388
Intangible and other assets............................        3,370        2,568
                                                         ------------  -----------
          Total assets.................................       89,416       91,581
                                                         ============  ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..................................... $     10,142  $     9,282
  Accrued compensation and employee benefits...........        2,225        4,666
  Warranty accrual.....................................        2,100        2,269
  Other accrued liabilities............................        3,485        3,497
  Deferred revenue.....................................        6,140        4,838
  Current portion of notes payable.....................        1,434        1,511
                                                         ------------  -----------
          Total current liabilities....................       25,526       26,063
Long-term notes payable................................        1,531        1,838
Commitments............................................           --           --
Stockholders' equity:
  Common stock, 200,000,000 shares authorized, $0.001
     par value, 37,101,480 and 36,715,026 shares
     issued and outstanding as of March 31, 2003
     and December 31, 2002, respectively...............           37           36
  Additional paid-in capital...........................      192,412      191,020
  Deferred compensation................................         (112)        (223)
  Accumulated deficit..................................     (131,084)    (128,791)
  Accumulated other comprehensive income ..............        1,106        1,638
                                                         ------------  -----------
          Total stockholders' equity...................       62,359       63,680
                                                         ------------  -----------
          Total liabilities and stockholders' equity... $     89,416  $    91,581
                                                         ============  ===========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
                                            March 31,
                                     ----------------------
                                        2003        2002
                                     ---------- -----------
Sales.............................. $   19,235  $   14,409
Cost of sales......................      8,738       7,507
                                     ----------  ----------
    Gross profit...................     10,497       6,902
                                     ----------  ----------
Operating costs and expenses:
  Selling, general and
   administrative..................     10,209       8,785
  Research and development.........      3,423       4,232
                                     ----------  ----------
    Total operating costs and
     expenses......................     13,632      13,017
                                     ----------  ----------
Loss from operations...............     (3,135)     (6,115)
Other income(expense), net ........        842         498
                                     ----------  ----------
Net loss........................... $   (2,293) $   (5,617)
                                     ==========  ==========
Basic and diluted net loss per
  common share..................... $    (0.06) $    (0.15)
                                     ==========  ==========
Shares used in computing net
  loss per common share............     36,862      36,308
                                     ==========  ==========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
For the Three Months
                                                                Ended March 31,
                                                         ------------------------
                                                            2003         2002
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net loss............................................... $    (2,293) $    (5,617)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation.........................................         882          622
  (Gain)loss on sales of fixed assets..................           1           69
  Amortization of deferred compensation................         154          216
  Amortization of intangible and other assets..........         198          195
Changes in operating assets and liabilities:
  Accounts receivable..................................      (4,008)      (2,244)
  Prepaid expenses.....................................         124          240
  Inventory............................................         456          (60)
  Accounts payable.....................................         860          884
  Accrued compensation and employee benefits...........      (2,441)         (31)
  Warranty accrual.....................................        (169)         (44)
  Other accrued liabilities............................      (1,012)         (43)
  Accrued royalty expense..............................          --       (1,000)
  Deferred revenue.....................................       1,302         (246)
                                                         -----------  -----------
Net cash used in operating activities..................      (5,946)      (7,059)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................        (318)      (4,024)
Disposition of property and equipment..................          --           43
Purchase of short-term investments.....................          --       (8,491)
Proceeds from sales of short-term investments..........       5,444       11,771
Proceeds from maturities of short-term investments.....       5,112        4,099
                                                         -----------  -----------
Net cash provided by investing activities..............      10,238        3,398
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       1,350        1,001
Repurchase of common stock.............................          --           (1)
Proceeds from notes payable............................          --          950
Repayment of notes payable.............................        (384)        (483)
                                                         -----------  -----------
Net cash provided by financing activities..............         966        1,467
                                                         -----------  -----------
Foreign currency translation adjustments...............         (91)          42
Net increase in cash and cash equivalents..............       5,167       (2,152)
Cash and cash equivalents, beginning of period.........      17,607       10,487
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $    22,774  $     8,335
                                                         ===========  ===========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion of management, all
normal, recurring adjustments considered necessary for a fair presentation have been included. The
consolidated balances at December 31, 2002 were derived from the audited financial statements
included in the Annual Report on Form 10-K/A for 2002. The financial statements should be read in
conjunction with the audited financial statements for the year ended December 31, 2002, included in
the Annual Report on Form 10-K/A of Intuitive Surgical, Inc, filed with the Securities and Exchange
Commission. The results for the interim period ended March 31, 2003 are not necessarily indicative
of the results to be expected for the full year ending December 31, 2003 or future operating
periods.
NOTE 2. CONCENTRATIONS OF RISK
Financial instruments which subject the Company to potential risk
consist of its cash equivalents, short-term investments, accounts receivable, and foreign exchange
contracts. The counterparties to the agreements relating to the Company's investment securities and
foreign exchange contracts consist of various major corporations and financial institutions of high
credit standing. The Company believes the financial risks associated with these financial
instruments are minimal. For the three months ended March 31, 2003 and 2002, no customer accounted
for more than 10% of total sales. The Company extends reasonably short collection terms but does not
require collateral. The Company provides reserves for potential credit losses but has not
experienced significant losses to date.
The Company's
da Vinci
Surgical System, related instruments and
accessories and service have accounted for all of the Company's sales for the three months ended
March 31, 2003 and 2002. Purchases of key parts and components used to manufacture the Company's
products are from limited supply sources. The inability of any of these suppliers to fulfill the
Company's supply requirements may negatively impact future operating results.
The Company operates in one segment, the development and marketing of products
designed to provide the flexibility of open surgery while operating through ports. For the three
months ended March 31, 2003, U.S. and international sales accounted for 82% and 18%, respectively,
of total sales. For the three months ended March 31, 2002, U.S. and international sales accounted
for 87% and 13%, 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, 2003 and December 31, 2002.
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,
together with amortization of premiums and discounts on debt securities, are included in interest
income. The cost of securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in interest income.
NOTE 5. INVENTORY
Inventory consists of the following (in thousands):
March 31,    December 31,
                                   2003           2002
                               -------------  -----------
Raw materials................ $       3,808  $     3,420
Work-in-process..............         1,848          780
Finished goods...............         2,626        4,538
                               -------------  -----------
                              $       8,282  $     8,738
                               =============  ===========
NOTE 6. INTANGIBLE AND OTHER ASSETS
Purchased intangible assets represent patents which are carried at cost
less accumulated amortization. Amortization is computed using the straight-line method over the
expected useful life of six years. At March 31, 2003 gross intangible assets totaled $5.7 million
and related accumulated amortization was $2.3 million. During the three months ended March 31, 2003,
the Company recorded $1.0 million in transaction costs related to the pending merger with Computer
Motion.
NOTE 7. COMPREHENSIVE LOSS
The components of comprehensive loss consist of the following (in
thousands):
Three Months Ended
                                             March 31,
                                      --------------------
                                         2003       2002
                                      ---------  ---------
Net loss............................ $  (2,293) $  (5,617)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.....................       (91)        42
  Change in unrealized gain (loss)
    on available-for-sale securities      (441)      (501)
                                      ---------  ---------
Comprehensive loss.................. $  (2,825) $  (6,076)
                                      =========  =========
The components of accumulated other comprehensive loss were as follows (in
thousands):
March 31,  December 31,
                                          2003        2002
                                        ---------  -----------
Accumulated net unrealized gain on
  available-for-sales securities...... $   1,182  $     1,623
Foreign currency translation
  adjustments.........................       (76)          15
                                        ---------  -----------
Total accumulated other comprehensive
  income.............................. $   1,106  $     1,638
                                        =========  ===========
NOTE 8. NET LOSS PER SHARE
The following table presents the computation of basic and diluted
net loss per share (in thousands, except per share data):
Three Months Ended
                                      March 31,
                               ------------------------
                                  2003         2002
                               -----------  -----------
Numerator used for basic and
  diluted net loss per
  common share............... $    (2,293) $    (5,617)
Denominator used for basic
  and diluted net loss per
  common share:
  Weighted-average shares
    outstanding..............      36,876       36,342
  Less weighted-average
    shares subject to
    repurchase...............         (14)         (34)
                               -----------  -----------
  Weighted-average shares
    used in computing basic
    and diluted net loss per
    common share.............      36,862       36,308
                               ===========  ===========
Basic and diluted net loss
  per common share........... $     (0.06) $     (0.15)
                               ===========  ===========
Common stock equivalents consisting of stock options and warrants (calculated using the treasury
stock method) have been excluded from the computation of diluted net loss per share, as their
inclusion would be anti-dilutive.
If the Company had earned a profit during the three months ended March 31, 2003 and 2002, the
Company would have added 6,309,602 and 4,960,355, respectively, common equivalent shares to the
basic weighted average shares outstanding to compute the diluted weighted average shares
outstanding.
NOTE 9. PRODUCT WARRANTY PROVISIONS
The Company's standard policy is to warrant all shipped systems against
defects in design, materials and workmanship by replacing failed parts during the first year of
ownership. The Company's estimate of costs to service the warranty obligations is based on
historical experience and current product performance trends. These costs are included in cost of
goods sold at the time revenue is recognized. The warranty provision is reduced by material and
labor costs used for replacement activities over the warranty period. A review of the obligations is
performed regularly to determine the adequacy of the reserve. Based on the outcome of this review,
revisions to the estimated warranty liability are recorded as appropriate.
The following table reconciles the changes to the product warranty liability for the period
indicated (in thousands):
Balance at                         Balance at
                                     Beginning   Warranty   Warranties  End of
                                    of Quarter     Usage    Expensed    Quarter
                                    -----------  ---------  ---------  ---------
Three months ended March 31, 2003. $     2,269  $    (439) $     270  $   2,100
The Company from time to time enters into agreements to indemnify its customers against liability
and damages arising from patent claims against the Company's product. The term of these agreements
vary, but generally, a maximum obligation is not explicitly stated within the agreements.
Historically, the Company has not been obligated to make any significant payments related to its
customer indeminification clauses and no liabilities have been recorded for this obligation on its
balance sheets as of March 31, 2003 and December 31, 2002.
NOTE 10. 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, except the amortization of deferred compensation arising from
the Company's IPO in June 2000, has been recognized for stock option grants as all options granted
during the periods reported had an exercise price equal to the market value of the underlying common
stock on the date of grant. Had compensation expense for the stock option grants been determined on
the fair value at the grant dates consistent with the method of Statement of Financial Accounting
Standards Board (SFAS) No. 123, "Accounting for Stock-Based Compensation", the Company's net loss
and loss per share would have been adjusted to the pro forma amounts indicated below (amounts in
thousands, except per share amounts):
Three Months Ended
                                                    March 31,
                                            ----------------------
                                               2003        2002
                                            ----------  ----------
Net loss, as reported.................... $    (2,293) $   (5,617)
Add:  Total stock-based employee
  compensation expense included in
  reported net loss, net of related tax .         154         216
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method for
  all awards, net of related tax.........      (2,026)     (1,675)
                                            ----------  ----------
Pro forma net loss....................... $    (4,165) $   (7,076)
                                            ==========  ==========
Earnings per share:
  Basic and diluted - as reported........ $     (0.06) $    (0.15)
  Basic and diluted - pro forma.......... $     (0.11) $    (0.19)
NOTE 11. REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred or service has been rendered, the price is fixed or
determinable and collectibility is reasonably assured.
In certain cases, revenue from direct system sales is generated from multiple
element arrangements which require judgment in the areas of customer acceptance, training,
installation and collectibility. The Company accounts for multiple-element arrangements in
accordance with the provisions of SAB 101, "Revenue Recognition in Financial Statements." Revenue is
recognized as specific elements indicated in sales contracts are executed. If an element is
essential to the functionality of an arrangement, the entire arrangement's revenue is deferred until
that essential element is delivered. The fair value of each undelivered element that is not
essential to the functionality of the system is deferred until performance or delivery occurs. The
fair value of an undelivered element is based upon an estimate made by management. If an undelivered
element exists, the Company will determine the fair value of the undelivered element and subtract
the fair value of the undelivered element from the total consideration under the arrangement. The
residual amount is recognized as the value of the delivered element. Amounts billed in excess of
revenue recognized are recorded as deferred revenue on the balance sheet. Costs associated with
inconsequential or perfunctory elements in multiple-element arrangements are accrued at the time of
revenue recognition. The Company accounts for installation as a separate element of a multiple-
element arrangement. The Company therefore recognizes the fair value of installation services upon
the completion of installation.
The Company's distributors do not have price protection rights. One of the
Company's distributors has return rights under limited circumstances. Such rights are accounted for
under the provisions of SFAS No. 48, "Revenue Recognition When Right of Return Exists." To date, the
Company has not had any system sales returns.
Revenue from sales of instruments and accessories is recognized upon shipment.
Revenue related to future commitments under service contracts is deferred and recognized ratably
over the service period. All costs associated with the provision of service and maintenance,
including salaries, benefits, travel, spare parts and equipment, are recognized in cost of sales as
incurred. Amounts billed in excess of revenue recognized are included as deferred revenue in the
accompanying consolidated balance sheets.
The Company's
da Vinci
Surgical System contains a software component. The
Company believes that the software element in the
da Vinci
Surgical System is an incidental
part of the system. The software element within the Company's product is not sold or marketed
separately to customers and the software does not operate independently of the surgical system.
Furthermore, the software development effort does not require a significant cost to the Company
relative to the overall development cost of the product. As such, the software the Company provides
is incidental to the surgical system as a whole and the software revenue guidance provided in SOP
97-2 is not applicable to the Company's revenues.
NOTE 12. MERGER AGREEMENT
On March 7, 2003, the Company entered into a merger agreement with Computer Motion. Upon
completion of the merger, each share of Computer Motion common stock will be converted into the
right to receive a fraction of a share of Intuitive Surgical common stock. The fraction of a share
of Intuitive Surgical common stock to be issued with respect to each share of Computer Motion common
stock will be determined by a formula described in the merger agreement. Based on the expected
capitalization of Intuitive Surgical and Computer Motion on an assumed closing date of June 30,
2003, the Company estimates that the exchange ratio will range from approximately 0.48 to 0.52
depending on the average Computer Motion common stock price during a defined period prior to
closing. Based on these assumptions, the Company estimates that it will issue approximately 15.2
million shares of common stock in the merger and will reserve approximately 5.2 million additional
shares of common stock for future issuance in connection with the assumption of Computer Motion's
outstanding options and warrants (including out-of-the-money options and warrants). Further, the
Company estimates that, upon completion of the merger, its current stockholders will own
approximately 71% of the then outstanding shares of its common stock and former Computer Motion
stockholders will own approximately 29% of the then outstanding shares of its common stock. These
estimates are subject to change depending on such factors as the number of fully-diluted shares the
Company and Computer Motion have outstanding at closing, Computer Motion's stock price, and whether
outstanding options and warrants of Computer Motion are exercised prior to closing. The merger is
subject to the approval of a majority of the stockholders of each company. In addition, the Company
has agreed to provide a bridge loan of up to $7.3 million to Computer Motion to provide working
capital for its operations through the closing date.
Intuitive Surgical and Computer Motion can jointly agree to
terminate the merger agreement at any given time. Either company may also terminate the merger
agreement if the merger is not completed by August 31, 2003 and under other circumstances described
in the merger agreement. The merger agreement provides that under specified circumstances, Intuitive
Surgical or Computer Motion may be required to pay a termination fee and expenses of the other party
in an aggregate amount of up to $2.5 million.
In connection with the proposed merger, Intuitive Surgical and Computer
Motion have obtained a stay through August 31, 2003 of all proceedings in the pending litigation
proceedings between the companies. As part of the stays, the courts have ceased all further activity
in the cases during the period of stay, including refraining from issuing any opinions or orders on
issues already submitted for decision. In addition, the California Court postponed the trial date to
a date no earlier than November 30, 2003. The stays may be terminated before, or extended beyond,
August 31, 2003 under specified circumstances. In the event the merger is completed, Intuitive
Surgical and Computer Motion will request dismissal with prejudice of the pending litigation.
NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are incurred rather than at
the date of a commitment to an exit or disposal plan. The provisions of SFAS 146 are effective for
exit or disposal activities that are initiated after December 31, 2002. The adoption of this
statement did not have an impact on the Company's results of operations or financial position in the
first quarter of 2003.
In January 2003, the FASB issued Interpretation No. 46, or FIN 46,
"Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the entity's residual
returns or both. A variable interest entity is a corporation, partnership, trust, or any other legal
structures used for business purposes that either (a) does not have equity investors with voting
rights, or (b) has equity investors that do not provide sufficient financial resources for the
entity to support its activities. A variable interest entity often holds financial assets, including
loans or receivables, real estate or other property. A variable interest entity may be essentially
passive or it may engage in research and development or other activities on behalf of another
company. The consolidation requirements of FIN 46 apply immediately to variable interest entities
created after January 31, 2003. FIN 46 also requires consolidation of variable interest entities
entered into prior to January 31, 2003 in thefirst fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was established. The adoption of
FIN 46 has not had an impact on the Company's financial position or results of operations during the
three months ended March 31, 2003.
In October 2002, the Emerging Issues Task Force reached consensus on issue
00-21, or EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The principles and
application guidance of EITF 00-21 should be used to determine (a) how the arrangement consideration
should be measured, (b) whether the arrangement should be divided into separate units of accounting,
and (c) how the arrangement consideration should be allocated among the separate units of
accounting. The guidance in this issue is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The Company is evaluating the possible impact of the adoption
of EITF 00-21 on its results of operations and financial position.
NOTE 14. CONTINGENCIES
On September 1, 2000 Brookhill-Wilk 1, LLC ("Wilk") filed a lawsuit
against Intuitive Surgical in the United States District Court for the Southern District of New York
(Case No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or offering for sale our
da
Vinci
Surgical System, the Company is infringing U.S. Patent Nos. 5,217,003 and 5,368,015 in
willful disregard of Wilk's patent rights. These patents concern methods and devices for "remote"
surgery. In March 2001, Wilk withdrew its assertion of the '015 patent against the Company. On
November 8, 2001, in response to a motion on one of Intuitive Surgical's noninfringement defenses,
the District Court granted summary judgment of noninfringement of the '003 patent in the Company's
favor and dismissed Wilk's complaint in its entirety without prejudice. Wilk appealed the summary
judgment ruling to the U.S. Court of Appeals for the Federal Circuit.
On April 11, 2003, the Court of Appeals reversed the District Court's judgment
and remanded the case for further proceedings. This reversal is based on the Court of Appeals'
determination that the particular claim limitation at issue should be interpreted differently than
as construed by the District Court. Intuitive Surgical believes that the Court of Appeals' opinion
is not necessarily inconsistent with the noninfringement defense initially presented to the District
Court and has no bearing on Intuitive Surgical's other noninfringement defenses. Intuitive Surgical
has filed a petition for hearing to request clarification from the Court of Appeals on the claim
construction adopted. Upon remand, Intuitive Surgical intends to continue to vigorously defend its
rights and, if necessary, is prepared to continue to dispute the meaning of other portions of the
asserted claim language and to conduct discovery and file further motions on whether the patent is
infringed, valid and/or enforceable. Intuitive Surgical believes that it will prevail in the
litigation and that it has multiple meritorious defenses to Wilk's allegations. However, litigation
is unpredictable and Intuitive Surgical may not prevail. The case remains in its early stages of
discovery in the District Court.
If the Company loses Wilk's suit against us, it will hurt its competitive
position, may be costly and may prevent the Company from selling its products. If the Company loses
the patent suit, it may need to obtain from Wilk a license to this technology to continue to market
its products that have been found to infringe Wilk's patents. This license could be expensive, which
could seriously harm the Company's business. If Wilk is successful in its suit against the Company
and is unwilling to grant a license, the Company may be required to stop selling its products that
are found to infringe Wilk's patents unless the Company can redesign them so they do not infringe
Wilk's patents, which it may be unable to do. In addition, the Company could be required to pay Wilk
damages, including treble damages, which could be substantial and harm its financial position. Due
to the inherent uncertainties of litigation, however, the Company cannot accurately predict the
ultimate outcome of the litigation against Wilk at this time and, therefore, cannot estimate the
range of possible loss.
On February 21, 2001, Wilk filed suit against Computer Motion alleging that its
ZEUS original system infringed upon Wilk's U.S. Patent Nos. 5,217,003 and 5,368,015. Wilk's
complaint sought damages, attorneys' fees and increased damages alleging willful patent
infringement. On March 21, 2001, Computer Motion served its answer and counterclaim alleging non-
infringement of each patent-in-suit, patent invalidity and unenforceability. On November 8, 2001,
the United States District Court for the Southern District of New York in Wilk's pending litigation
against Intuitive Surgical issued an order interpreting the claims of Wilk's U.S. Patent No.
5,217,003 in a way that Computer Motion believed excluded current applications of its ZEUS surgical
system. In light of this decision, on November 13, 2001, the parties agreed to dismiss the case
without prejudice to refiling upon resolution of the appeal in Wilk's litigation against Intuitive
Surgical.
On May 10, 2000, Computer Motion, Inc. filed a lawsuit in the United States
District Court for the Central District of California (Case No. CV00-4988 CBM) alleging that by
making, using, selling or offering for sale Intuitive Surgical's
da Vinci
Surgical System,
the Company is infringing United States Patent Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583,
5,878,193, 5,907,664 and 6,001,108, in willful disregard of Computer Motion's patent rights. On June
1, 2000, Computer Motion amended its lawsuit to allege that the Company also infringes U.S. Patent
Number 6,063,095. In late 2000, Computer Motion alleged infringement of a ninth patent, and added
U.S. Patent Number 6,102,850 to the litigation. Computer Motion subsequently alleged that the
Company infringed U.S. Patent No. 6,244,809, which it added to the litigation in May 2002. These ten
patents concern various methods and devices for conducting various aspects of robotic surgery. Of
those ten patents, three are no longer part of the suit. After Computer Motion lost all of its
rights to its 5,855,583 and 5,878,193 patents as a result of our successful Patent Office
interference proceedings, Computer Motion voluntarily dismissed those patents from suit. However,
Computer Motion has sought to challenge the interference proceedings by separate district court
appeal. In addition, in November 2002, the Court granted the Company's motion for summary judgment
of noninfringement of the 6,102,850 patent. In February 2003, the Court denied the Company's motion
for summary judgment of noninfringement of the 6,244,809 patent and granted Computer Motion's cross-
motion for partial summary judgment of literal infringement of one claim of that patent. Intuitive
Surgical subsequently requested that the Court reconsider that decision because of perceived flaws
in the Court's approach to the issue of infringement on summary judgment. Regardless of what happens
on reconsideration, the Company will continue to defend the '809 patent on invalidity, based on the
earlier robotic surgery work of SRI and others. The Company still has pending motions for summary
judgment of noninfringement on two more of Computer Motion's seven remaining patents-in-suit,
numbers 5,907,664 and 6,001,108. At the Court's request, the Company will not file further motions
for summary judgment until the remaining pending motions are decided. In late January 2003, after
close of fact discovery, Computer Motion asserted between 26 and 35 new claims of its seven
remaining patents-in-suit and new theories of infringement. The Company has moved to strike those
new assertions as inappropriate at this late stage. Trial had been calendared for April 29, 2003.
In connection with the Company's proposed merger with Computer Motion, the
Company and Computer Motion have obtained an immediate stay through August 31, 2003 of all
proceedings in the pending litigations between the companies. As part of the stays, the courts have
ceased all further activity in the cases during the period of stay, and will not issue any opinions
or orders on issues already submitted for decision. In addition, the California Court postponed the
trial date and was asked to reset the trial to a date no earlier than November 30, 2003. The stay
may be terminated before, or extended beyond, August 31, 2003 under specified circumstances. In the
event the merger is completed, the Company and Computer Motion will request dismissal with prejudice
of all pending litigations.
If the merger is not completed by August 31, 2003, the stays may be lifted and
the California case may proceed to trial. If the stays are lifted and the Company ultimately loses
Computer Motion's suit, it will hurt the Company's competitive position, may be costly and may
prevent the Company from selling its products. In addition, the Company may need to obtain from
Computer Motion a license to this technology to continue to market its products that have been found
to infringe Computer Motion's patents. This license could be expensive, or could require the Company
to license to Computer Motion some of its technology, which would result in a partial loss of the
Company's competitive advantage in the marketplace, each of which could seriously harm its business.
If the stays are lifted and Computer Motion is successful in its suit and is unwilling to grant a
license, the Company will be required to stop selling its products that are found to infringe
Computer Motion's patents unless the Company can redesign them so they do not infringe Computer
Motion's patents, which it may be unable to do. In addition, the Company could be required to pay
Computer Motion damages, including treble damages, which could be substantial and harm its financial
position.
The foregoing proceedings would be expensive to litigate, may be protracted and
the Company's confidential information may be compromised. Whether or not the Company is successful
in these lawsuits, these proceedings could consume substantial amounts of its financial and
managerial resources. At any time the other parties may file additional claims against the Company,
or the Company may file claims against them, which could increase the risk, expense and duration of
the litigations. For more information on the Company's litigation with Computer Motion, see "Part
II-Item 1: Legal Proceedings."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In this report, "Intuitive Surgical," "we," "us," and "our" refer to
Intuitive Surgical, Inc.
This Management's Discussion and Analysis of Financial Condition as of March 31,
2003 and Results of Operations for the three month periods ended March 31, 2003 and March 31, 2002
should be read in conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations included in our Annual Report on Form 10-K/A for the year ended December
31, 2002.
Except for historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties, such as statements of our plans,
objectives, expectations, and intentions. The cautionary statements made in this report should be
read as applying to all related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed here. Factors that could cause or
contribute to these differences include those discussed in "Factors Affecting Operating Results"
below as well as those discussed elsewhere.
Intuitive
â
, Intuitive Surgical
â
, da Vinci
â
, EndoWrist
â
, InSite
â
and Navigator™ are
trademarks of Intuitive Surgical, Inc.
OVERVIEW
We design, manufacture, and market the
da Vinci
Surgical System,
an advanced surgical system that we believe represents a new generation of surgery-the third
generation. The
da Vinci
Surgical System consists of a surgeon's console, a patient-side
cart, a high performance vision system and proprietary "wristed" instruments. The
da Vinci
Surgical System seamlessly translates the surgeon's natural hand movements on instrument controls at
a console into corresponding micro-movements of instruments positioned inside the patient through
small puncture incisions, or ports. We believe that the
da Vinci
Surgical System is the only
commercially available technology that can provide the surgeon with the intuitive control, range of
motion, fine tissue manipulation capability and 3-D visualization characteristic of open surgery,
while simultaneously allowing the surgeons to work through the small ports of minimally invasive
surgery, or MIS. By placing computer-enhanced technology between the surgeon and the patient, we
believe that the
da Vinci
Surgical System enables surgeons to perform better surgery in a
manner never before experienced.
In 1999, we obtained permission from the European Union to affix the CE Mark to
the
da Vinci
Surgical System and
EndoWrist
instruments for general surgical and
cardiac surgical use. Based on this approval, we recognized revenue for the first time in the second
quarter of 1999 for the sale of our products. In July 2000, we received clearance from the U.S. Food
and Drug Administration, or FDA, to begin commercialization of our
da Vinci
Surgical System
in the United States for use in laparoscopic surgical procedures. In March 2001, we received
clearance from the FDA for use of our
da Vinci
Surgical System in non-cardiac thoracoscopic
surgical procedures. In May 2001, we received market clearance from the FDA to promote use of the
da Vinci
Surgical System for performance of laparoscopic radical prostatectomy procedures. In
November 2002, we received clearance from the FDA for use of the
da Vinci
Surgical System in
thoracoscopically-assisted cardiotomy procedures. In January 2003, we began promoting atrial septal
defect closure surgery under the November 2002 cardiotomy clearance.
To date, the majority of our revenues have come from the sales of the
da
Vinci
Surgical System, which are high revenue dollar items. A smaller percentage of revenues
have come from sales of
EndoWrist
instruments and accessories, which are lower revenue dollar
items. A small percentage of revenue comes from ongoing service of installed
da Vinci
Surgical Systems. Although we expect the majority of our revenues to continue to come from the sale
of
da Vinci
Surgical Systems over the next few years, we believe that the percentage of
revenue from our
EndoWrist
instruments and service will continue to increase. Due to the high
dollar revenue per system sold, small variations in system unit sales may cause revenue to vary
significantly from quarter to quarter. During the useful life of each installed
da Vinci
Surgical System, we expect to generate recurring revenue through sales of the
EndoWrist
instruments and accessories and ongoing service. The percentage of revenue derived from recurring
instrument, accessory, and service revenue has grown from 19% for the quarter ended March 31, 2002
to 28% for the quarter ended March 31, 2003. Our service revenues have not exceeded 10% of total
revenue in any period to date.
PROPOSED MERGER
On March 7, 2003, the Company entered into an Agreement and Plan of
Merger with Computer Motion, Inc. Pursuant to the merger agreement, a wholly owned subsidiary of our
company will merge with Computer Motion, with Computer Motion surviving the merger and continuing as
a wholly owned subsidiary of our company.
In connection with the proposed merger, we have entered into a Loan and Security
Agreement with Computer Motion pursuant to which we have agreed to provide a short-term secured
bridge loan facility of up to $7.3 million. Computer Motion may use the facility to pay off existing
indebtedness and to fund operations prior to completion of the merger. This facility terminates and
all outstanding amounts become due and payable 120 days following termination of the merger
agreement, subject to specified acceleration events. Interest on the facility will accrue at a rate
of 8% per annum and will be payable on the maturity date. As of March 31, 2003, no amounts were
outstanding under this short-term bridge loan facility.
We expect that we and Computer Motion will hold our respective stockholders
meetings at which matters related to the merger will be submitted for approval in June 2003.
Management anticipates that the combined companies will be able to achieve annual
pre-tax cost savings of approximately $18 million to be phased in beginning in the third quarter of
2003. The Company estimates that approximately $10.0 million of those savings will result from a
substantial reduction in headcount. Intuitive Surgical's ability to achieve these goals is subject
to economic conditions and unanticipated changes in business conditions, and therefore there can be
no assurance that these results will be achieved.
RESULTS OF OPERATIONS
Sales
. Sales for the three months ended March 31, 2003 were $19.2
million, up 33% from $14.4 million for the three months ended March 31, 2002. The increase in first
quarter 2003 sales was driven by recurring revenue growth, consisting of instruments, accessories,
and service, and increased
da Vinci
Surgical System unit shipments. First quarter 2003
recurring revenue was $5.4 million, up $2.7 million, or 103%, compared to the first quarter of 2002.
Higher recurring revenue was driven by growth in the installed base of
da Vinci
Surgical
Systems and surgical procedures performed with the system. We shipped 14
da Vinci
Surgical
Systems during the first quarter of 2003 compared to 13 in the first quarter of 2002. As of March
31, 2003, there were 163 cumulative
da Vinci
Surgical Systems shipped, compared to 102 as of
March 31, 2002.
Gross Profit
. Gross profit for the three months ended March 31, 2003 was
$10.5 million, or 54.6% of sales, compared with $6.9 million, or 47.9% of sales for the three months
ended March 31, 2002. The year-over-year improvement in gross profit resulted primarily from a
higher
da Vinci
Surgical System average selling price and lower product warranty costs.
Research and Development Expenses
. Research and development expenses for
the three months ended March 31, 2003 were $3.4 million, down 19% from $4.2 million for the three
months March 31, 2002. The year-over-year decrease resulted primarily from lower 2003 clinical trial
expenses of $300,000, reduced development project costs of $300,000, and lower deferred compensation
of $100,000.
Research and development expenses include costs associated with the design,
development, testing and enhancement of our products. These enhancements represent significant
improvements to our products. Research and development expenses also include expenditures for
clinical trials and purchases of laboratory supplies. Research and development costs are expensed as
incurred.
Selling, General and Administrative Expenses
. Selling, general and
administrative expenses for the three months ended March 31, 2003 were $10.2 million, up 16% from
$8.8 million for the three months ended March 31, 2002. The year-over-year increase was primarily
due to higher litigation costs of $1.0 million incurred during the first quarter of 2003 as we were
preparing for trial in California against Computer Motion prior to entering into the merger
agreement in March 2003. The remaining $400,000 of the increase resulted primarily from higher
selling and support costs to support increased revenue and a larger installed base of
da
Vinci
Surgical Systems. In the first quarter of 2003 selling, general and administrative
expenses were favorably impacted by an insurance recovery of $500,000 relating to the unauthorized
purchases made in the third quarter of 2002. Please see "Part II. Item I. Legal Proceedings - Other
Legal Matters."
Selling, general and administrative expenses include costs for sales, marketing
and administrative personnel, tradeshow expenses, legal expenses, regulatory fees and general
corporate expenses. Selling, general and administrative expenses are expected to increase in the
future to support expanding business activities.
Deferred Compensation
. We record deferred compensation as the difference
between the exercise price of options granted and the fair value of our common stock at the time of
grant for financial reporting purposes. Deferred compensation is amortized to research and
development expense and selling, general and administrative expense. Non-cash deferred compensation
expense included in research and development expenses was $73,000 and $140,000 for the three months
ended March 31, 2003 and 2002, respectively. Non-cash deferred compensation expense included in
selling, general and administrative expenses was $81,000 and $76,000 for the three months ended
March 31, 2003 and 2002, respectively. Deferred compensation recorded through March 31, 2003 was
$8.9 million with accumulated amortization of $8.8 million. We anticipate that the current balance
of deferred compensation will be completely amortized during the second quarter of 2003.
Other Income (Expense)
. Other income (expense) for the three months ended
March 31, 2003 was $800,000, up $300,000 compared to $500,000 for the three months ended March 31,
2002. The increase resulted primarily from $500,000 of gains realized during the first quarter of
2003 on sales of investment securities offset by reduced interest earnings on lower investment
balances compared to March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been financed through the sales of our convertible
preferred stock, yielding net proceeds of approximately $127.3 million, our initial public offering
of 5,750,000 shares of our common stock, yielding approximately $46.8 million, and equipment
financing arrangements, yielding approximately $10.5 million. The equipment arrangements provide
financing at specific interest rates for periods of up to 48 months, by which time the principal is
repaid to the lessors. As collateral for the equipment financing, we have granted the lessors a
security interest in equipment specified under each arrangement.
As of March 31, 2003, we had working capital of $50.7 million, compared to $52.6
million as of December 31, 2002. The decrease during the first three months of 2003 resulted
primarily from our net loss of $2.3 million.
Net cash used in operating activities for the three months ended March 31, 2003
was $5.9 million, comprised primarily of our net loss of $2.3 million and working capital
requirements of $4.8 million, mostly due to increased accounts receivable of $4.0 million due to
higher first quarter 2003 sales, offset by non-cash expenses of $1.2 million resulting from
depreciation and amortization expense. Compared to the first quarter of 2002, cash used in operating
activities was lower by $1.1 million primarily due to a decrease in the first quarter loss of $3.3
million offset by a higher accounts receivable balance at March 31, 2003.
Net cash provided by investing activities was $10.2 million for the three months
ended March 31, 2003, compared to $3.4 million for the three months ended March 31, 2002. In the
first quarter of 2002 we moved to our new facilities in Sunnyvale, California and made a significant
investment in leasehold improvements and furniture. In the first quarter of 2003 we spent $300,000
for the acquisition of fixed assets compared to $4.0 million spent in the first quarter of 2002 as
described above. Additionally, first quarter 2003 cash provided by investing activities was higher
compared to 2002 due to a higher conversion of investments into cash during the three months ended
March 31, 2003 primarily due to timing of the conversions required to support short-term
liquidity.
Net cash provided by financing activities was $966,000 for the three months ended
March 31, 2003, compared to $1.5 million for the three months ended March 31, 2002. This decrease
resulted from lower proceeds of long-term borrowing of $1.0 million offset by an increase in
proceeds from the issuance of common stock of $350,000 in 2003.
On March 7, 2003, we entered an Agreement and Plan of Merger with Computer
Motion, Inc. Under the terms of our merger agreement with Computer Motion, Computer Motion will
become a wholly owned subsidiary of our company. Computer Motion recorded net losses of $7.9 million
and $4.5 million for the three months ended March 31, 2003 and 2002, respectively, and had a cash
balance of $3.6 million as of March 31, 2003. In recent periods, Computer Motion has not generated
cash from operations. Both we and Computer Motion expect to incur additional operating losses into
2003, and both we and Computer Motion have substantial cash needs. Among other things, total fees
and costs of both companies associated with the merger are currently projected to be approximately
$4.0 million. We have agreed to fund up to $7.3 million of Computer Motion's working capital needs
through the effective time of the merger under a Loan and Security Agreement. Assuming completion of
the merger on or around June 30, 2003, we project that the total combined cash and cash equivalents
of the combined company will be less than $35.0 million.
In addition to the effects of the merger, our capital requirements depend on
numerous factors, including market acceptance of our products, the resources we devote to developing
and supporting our products and other factors. We expect to devote substantial capital resources to
continue our research and development efforts, to expand our support and product development
activities and for other general corporate activities. We believe that our current cash and short-
term investment balances, together with revenue to be derived from the sale of our products, will be
sufficient to fund our operations at least through 2003. During or after this period, if cash
generated by operations is insufficient to satisfy our liquidity requirements, we may need to sell
additional equity or debt securities or obtain additional credit arrangements. Additional financing
may not be available on terms acceptable to us or at all. The sale of additional equity or
convertible debt securities may result in additional dilution to our stockholders.
Contractual Obligations and Commercial Commitments
The following table summarizes all significant contractual payment
obligations by payment due date:
Payments by Periods (Millions)
Contractual Obligation
Total
Under 1 Year
1-3 Years
3-5 Years
Over 5 Years
Long-term debt
$ 3.0
$ 1.5
$ 1.5
$ -
$ -
Building lease
10.7
2.2
8.3
.2
-
Total
$ 13.7
$ 3.7
$ 9.8
$ .2
$ -
CRITICAL ACCOUNTING POLICIES
We believe the following represent our critical accounting policies:
Revenue Recognition. In certain cases, revenue from direct system sales is
generated from multiple-element arrangements which require judgment in the areas of customer
acceptance, training, installation and collectibility. The Company accounts for multiple-element
arrangements in accordance with the provisions of SAB 101, "Revenue Recognition in Financial
Statements." Revenue is recognized as specific elements indicated in sales contracts are executed.
If an element is essential to the functionality of an arrangement, the entire arrangement's revenue
is deferred until that essential element is delivered. The fair value of each undelivered element
that is not essential to the functionality of the system is deferred until performance or delivery
occurs. The fair value of an undelivered element is based upon an estimate made by management. If an
undelivered element exists, the Company will determine the fair value of the undelivered element and
subtract the fair value of the undelivered element from the total consideration under the
arrangement. The residual amount is recognized as the value of the delivered element. Amounts billed
in excess of revenue recognized are recorded as deferred revenue on the balance sheet. Costs
associated with inconsequential or perfunctory elements in multiple-element arrangements are accrued
at the time revenue is recognized. The Company accounts for installation as a separate element of a
multiple-element arrangement. The Company therefore recognizes the fair value of the installation
services upon completion of installation.
Revenue from sales of instruments and accessories is recognized upon shipment.
Revenue related to future commitments under service contracts is deferred and recognized ratably
over the service period. All costs associated with the provision of service and maintenance,
including salaries, benefits, travel, spare parts and equipment, are recognized in cost of sales as
incurred. Amounts billed in excess of revenue recognized are included as deferred revenue in the
accompanying consolidated balance sheets.
Allowance for Doubtful Accounts. The allowance for doubtful accounts is based
upon management estimates. Factors underlying these estimates include analysis of days outstanding,
customer payment history and management judgment. The allowance is adjusted regularly to reflect
current data, activity, and associated risks.
Inventory Reserves. We write our inventory down for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and the estimated
market value based upon assumptions about future demand and market conditions. If actual future
demand or market conditions are less favorable than those projected by management, additional
inventory write-downs may be required in the future.
Intangible Assets. We have intangible assets on our balance sheet related to the
acquisition of patents. The valuation and classification of these assets and the assignment of
useful amortization lives involves judgments and the use of estimates. The evaluation of these
intangibles for impairment under established accounting guidelines is required on an ongoing basis.
Changes in business conditions could potentially require future adjustments to asset valuations.
Warranties. We provide for the estimated costs of product warranties at the time
revenue is recognized. Our estimate of costs to service our warranty obligations is based upon
historical experience and expectation of future conditions. If warranty claim activity and the costs
associated with servicing those claims differ from our estimates, revisions to the estimated
warranty liability may be required.
Contingencies. We are subject to proceedings, lawsuits and other claims related
to our products, patents and other matters. We are required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable losses. A
determination of the amount of reserves required, if any, for these contingencies is made after
careful analysis of each individual issue. The required reserves may change in the future due to new
developments in each matter or changes in approach such as a change in settlement strategy in
dealing with these matters.
FACTORS AFFECTING OPERATING RESULTS
OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES ANALYSTS' OR INVESTORS'
EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Because of our limited operating history, we have limited insight into
trends that may emerge in our market and affect our business. The revenue and income potential of
our market are unproven, and we may be unable to generate significant revenues. In addition, our
costs may be higher than we, securities analysts or investors expect. If we fail to generate
sufficient revenues or our costs are higher than we expect, our results of operations will suffer,
which in turn could cause our stock price to decline. Further, future revenue from sales of our
products is difficult to forecast because the market for new surgical technologies is still
evolving. Our results of operations will depend upon numerous factors, including:
the progress and results of clinical trials;
actions relating to regulatory matters;
the completion of our pending merger with Computer Motion and the successful integration of the
two companies;
the extent to which our products gain market acceptance;
our timing and ability to develop our manufacturing and sales and marketing capabilities;
demand for our products;
the progress of surgical training in the use of our products;
our ability to develop, introduce and market new or enhanced versions of our products on a
timely basis;
product quality problems;
our ability to protect our proprietary rights and defend against third party challenges;
our ability to license additional intellectual property rights;
third-party payor reimbursement policies;
the effect of Severe Acute Respiratory Syndrome (SARS) on travel and on related business
operations.
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, 2003 and 2002, approximately 72% and
81%, respectively, of our revenues came from the sales of
da Vinci
Surgical Systems, which
are high revenue dollar items. During the three months ended March 31, 2003 and 2002, no customer
accounted for more than 10% of total sales. However, due to the high average selling price of the
da Vinci
Surgical System, our failure to add new customers that make significant purchases of
our products could reduce our future revenues. The loss or delay of individual orders could have a
significant impact on revenues and operating results.
IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLE TO GENERATE THE
REVENUE NECESSARY TO SUPPORT OUR BUSINESS.
Our products represent a fundamentally new way of performing surgery. Achieving
physician, patient and third-party payor acceptance of
Intuitive
surgery as a preferred
method of performing surgery will be crucial to our success. If our products fail to achieve market
acceptance, hospitals will not purchase our products and we will not be able to generate the revenue
necessary to support our business. We believe that physicians' and third-party payors' acceptance of
the benefits of procedures performed using our products will be essential for acceptance of our
products by patients. Physicians will not recommend the use of our products unless we can
demonstrate that they produce results comparable or superior to existing surgical techniques. Even
if we can prove the effectiveness of our products through clinical trials, surgeons may elect not to
use our products for any number of other reasons. For example, cardiologists may continue to
recommend conventional open-heart surgery simply because such surgery is already widely accepted. In
addition, surgeons may be slow to adopt our products because of the perceived liability risks
arising from the use of new products and the uncertainty of reimbursement from third-party payors.
We expect that there will be a learning process involved for surgical teams to
become proficient in the use of our products. Broad use of our products will require training of
surgical teams. Market acceptance could be delayed by the time required to complete this training.
We may not be able to rapidly train surgical teams in numbers sufficient to generate adequate demand
for our products. We cannot be certain that our training programs will be cost effective or
sufficient to meet our customers' needs.
WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH BROOKHILL-WILK 1, LLC AND
COMPUTER MOTION THAT MAY HURT OUR COMPETITIVE POSITION, MAY BE COSTLY TO US AND MAY PREVENT US FROM
SELLING OUR PRODUCTS. WHILE THE MERGER AGREEMENT HAS RESULTED IN A STAY OF ALL PROCEEDINGS INVOLVING
COMPUTER MOTION, THESE PROCEEDINGS MAY CONTINUE IF THE MERGER IS NOT COMPLETED.
On September 1, 2000 Brookhill-Wilk 1, LLC ("Wilk") filed a lawsuit
against Intuitive Surgical in the United States District Court for the Southern District of New York
(Case No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or offering for sale our
da
Vinci
Surgical System, we are infringing U.S. Patent Nos. 5,217,003 and 5,368,015 in willful
disregard of Wilk's patent rights. These patents concern methods and devices for "remote" surgery.
In March 2001, Wilk withdrew its assertion of the '015 patent against our company. On November 8,
2001, in response to a motion on one of Intuitive Surgical's noninfringement defenses, the District
Court granted summary judgment of noninfringement of the '003 patent in our favor and dismissed
Wilk's complaint in its entirety without prejudice. Wilk appealed the summary judgment ruling to the
U.S. Court of Appeals for the Federal Circuit.
On April 11, 2003, the Court of Appeals reversed the District Court's judgment
and remanded the case for further proceedings. This reversal is based on the Court of Appeals'
determination that the particular claim limitation at issue should be interpreted differently than
as construed by the District Court. We believe that the Court of Appeals' opinion is not necessarily
inconsistent with the noninfringement defense initially presented to the District Court and has no
bearing on Intuitive Surgical's other noninfringement defenses. Intuitive Surgical has filed a
petition for rehearing to request clarification from the Court of Appeals on the claim construction
adopted. Upon remand, we intend to continue to vigorously defend our rights and, if necessary, are
prepared to continue to dispute the meaning of other portions of the asserted claim language and to
conduct discovery and file further motions on whether the patent is infringed, valid and/or
enforceable. We believe that we will prevail in the litigation and that we have multiple meritorious
defenses to Wilk's allegations. However, litigation is unpredictable and we may not prevail. The
case remains in its early stages of discovery in the District Court.
If we lose Wilk's suit against us, it will hurt our competitive position, may be
costly to us and may prevent us from selling our products. If we lose the patent suit, we may need
to obtain from Wilk a license to this technology if we are to continue to market our products that
have been found to infringe Wilk's patents. This license could be expensive, which could seriously
harm our business. If Wilk is successful in its suit against us and is unwilling to grant us a
license, we may be required to stop selling our products that are found to infringe Wilk's patents
unless we can redesign them so they do not infringe Wilk's patents, which we may be unable to do. In
addition, we could be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position. Due to the inherent uncertainties of litigation,
however, the Company cannot accurately predict the ultimate outcome of the litigation against Wilk
at this time and, therefore, cannot estimate the range of possible loss.
On February 21, 2001, Wilk filed suit against Computer Motion alleging that its
ZEUS original system infringed upon Wilk's U.S. Patent Nos. 5,217,003 and 5,368,015. Wilk's
complaint sought damages, attorneys' fees and increased damages alleging willful patent
infringement. On March 21, 2001, Computer Motion served its answer and counterclaim alleging non-
infringement of each patent-in-suit, patent invalidity and unenforceability. On November 8, 2001,
the United States District Court for the Southern District of New York in Wilk's pending litigation
against Intuitive Surgical issued an order interpreting the claims of Wilk's U.S. Patent No.
5,217,003 in a way that Computer Motion believed excluded current applications of its ZEUS surgical
system. In light of this decision, on November 13, 2001, the parties agreed to dismiss the case
without prejudice to refiling upon resolution appeal in Wilk's litigation against Intuitive
Surgical.
On May 10, 2000, Computer Motion, Inc. filed a lawsuit in the United States
District Court for the Central District of California (Case No. CV00-4988 CBM) alleging that by
making, using, selling or offering for sale our
da Vinci
Surgical System, we are infringing
United States Patent Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583, 5,878,193, 5,907,664 and
6,001,108, in willful disregard of Computer Motion's patent rights. On June 1, 2000, Computer Motion
amended its lawsuit to allege that we also infringe U.S. Patent Number 6,063,095. In late 2000,
Computer Motion alleged our infringement of a ninth patent, and added U.S. Patent Number 6,102,850
to the litigation. Computer Motion subsequently alleged that we infringed U.S. Patent No. 6,244,809,
which it added to the litigation in May 2002. These ten patents concern various methods and devices
for conducting various aspects of robotic surgery. Of those ten patents, three are no longer part of
the suit. After Computer Motion lost all of its rights to its 5,855,583 and 5,878,193 patents as a
result of our successful Patent Office interference proceedings Computer Motion voluntarily
dismissed those patents from suit. However, Computer Motion has sought to challenge the interference
proceedings by separate district court appeal. In addition, in November 2002, the Court granted our
motion for summary judgment of noninfringement of the 6,102,850 patent. In February 2003, the Court
denied our motion for summary judgment of noninfringement of the 6,244,809 patent and granted
Computer Motion's cross-motion for partial summary judgment of literal infringement of one claim of
that patent. We subsequently requested that the Court reconsider that decision because of perceived
flaws in the Court's approach to the issue of infringement on summary judgment. Regardless of what
happens on reconsideration, we will continue to defend the '809 patent on invalidity, based on the
earlier robotic surgery work of SRI and others. We still have pending motions for summary judgment
of noninfringement on two more of Computer Motion's seven remaining patents-in-suit, numbers
5,907,664 and 6,001,108. At the Court's request, we will not file further motions for summary
judgment until the remaining pending motions are decided. In late January 2003, after close of fact
discovery, Computer Motion asserted between 26 and 35 new claims of its seven remaining patents-in-
suit and new theories of infringement. We have moved to strike those new assertions as inappropriate
at this late stage. Trial had been calendared for April 29, 2003.
In connection with our proposed merger with Computer Motion, our company and
Computer Motion have obtained an immediate stay through August 31, 2003 of all proceedings in the
pending litigations between the companies. As part of the stays, the courts have ceased all further
activity in the cases during the period of stay, and will not issue any opinions or orders on issues
already submitted for decision. In addition, the California Court postponed the trial date and was
asked to reset the trial to a date no earlier than November 30, 2003. The stay may be terminated
before, or extended beyond, August 31, 2003 under specified circumstances. In the event the merger
is completed, our company and Computer Motion will request dismissal with prejudice of all pending
litigations.
If the merger is not completed by August 31, 2003, the stays may be lifted and
the California case may proceed to trial. If the stays are lifted and we ultimately lose Computer
Motion's suit against us, it will hurt our competitive position, may be costly to us and may prevent
us from selling our products. In addition, we may need to obtain from Computer Motion a license to
this technology if we are to continue to market our products that have been found to infringe
Computer Motion's patents. This license could be expensive, or could require us to license to
Computer Motion some of our technology, which would result in a partial loss of our competitive
advantage in the marketplace, each of which could seriously harm our business. If the stay is lifted
and Computer Motion is successful in its suit against us and is unwilling to grant us a license, we
will be required to stop selling our products that are found to infringe Computer Motion's patents
unless we can redesign them so they do not infringe Computer Motion's patents, which may be unable
to do. In addition, we could be required to pay Computer Motion damages, including treble damages,
which could be substantial and harm our financial position.
The foregoing proceedings would be expensive to litigate, may be protracted and our confidential
information may be compromised. Whether or not we are successful in this lawsuit, these proceedings
could consume substantial amounts of our financial and managerial resources. At any time the other
parties may file additional claims against our company, or we may file claims against them, which
could increase the risk, expense and duration of the litigations. For more information on our
litigation with Computer Motion, see "Part II-Item 1: Legal Proceedings."
IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN OUR PRODUCTS FROM USE
BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET WILL BE HARMED.
Our commercial success will depend in part on obtaining patent and other
intellectual property protection for the technologies contained in our products, and on successfully
defending our patents and other intellectual property against third party challenges.
We will incur substantial costs in obtaining patents and, if necessary, defending
our proprietary rights. The patent positions of medical device companies, including ours, can be
highly uncertain and involve complex and evolving legal and factual questions. We do not know
whether we will obtain the patent protection we seek, or that the protection we do obtain will be
found valid and enforceable if challenged. We also do not know whether we will be able to develop
additional patentable proprietary technologies. If we fail to obtain adequate protection of our
intellectual property, or if any protection we obtain is reduced or eliminated, others could use our
intellectual property without compensating us, resulting in harm to our business. We may also
determine that it is in our best interests to voluntarily challenge a third party's products or
patents in litigation or administrative proceedings, including patent interferences or
reexaminations. In addition, the laws of certain foreign countries do not protect intellectual
property rights to the same extent as do the laws of the United States.
OTHERS MAY ASSERT THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH
MAY CAUSE US TO ENGAGE IN COSTLY DISPUTES AND, IF WE ARE NOT SUCCESSFUL IN DEFENDING OURSELVES,
COULD ALSO CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.
We are aware of both United States and foreign patents issued to third parties
that relate to computer-assisted surgery, remote surgery, and minimally invasive surgery. Some of
these patents on their face appear broad enough to cover one or more aspects of our present
technology, and may cover aspects of our future technology. We do not know whether any of these
patents, if challenged, would be held valid, enforceable and infringed. From time to time, we
receive, and likely will continue to receive, letters from third parties inviting us to license
their patents. We may be sued by, or become involved in an administrative proceeding with, one or
more of these third parties. We cannot assure you that a court or administrative body would agree
with any arguments or defenses we have concerning invalidity, unenforceability or noninfringement of
any third-party patent. In addition to the issued patents of which we are aware, other parties may
have filed, and in the future are likely to file, patent applications covering surgical products
that are similar or identical to ours. We cannot assure you that any patents issuing from
applications filed by a third party will not cover our products or will not have priority over our
patent applications.
The medical device industry has been characterized by extensive litigation and
administrative proceedings regarding patents and other intellectual property rights, and companies
have employed such actions to gain a competitive advantage. If third parties assert infringement or
other intellectual property claims against us as Computer Motion and Brookhill-Wilk 1, LLC have
done, our technical and management personnel will experience a significant diversion of time and
effort and we will incur large expenses defending our company. If third parties in any patent action
are successful, our patent portfolio may be damaged, we may have to pay substantial damages,
including treble damages, and we may be required to stop selling our products or obtain a license
which, if available at all, may require us to pay substantial royalties. We cannot be certain that
we will have the financial resources or the substantive arguments to defend our patents from
infringement or claims of invalidity or unenforceability, or to defend against allegations of
infringement of third-party patents. In addition, any public announcements related to litigation or
administrative proceedings initiated by us, or initiated or threatened against us, could cause our
stock price to decline.
THE RIGHTS AND MEASURES WE RELY ON TO PROTECT THE INTELLECTUAL PROPERTY UNDERLYING OUR
PRODUCTS MAY NOT BE ADEQUATE TO PREVENT THIRD PARTIES FROM USING OUR TECHNOLOGY WHICH COULD HARM OUR
ABILITY TO COMPETE IN THE MARKET.
In addition to patents, we typically rely on a combination of trade secret,
copyright and trademark laws, nondisclosure agreements and other contractual provisions and
technical security measures to protect our intellectual property rights. Nevertheless, these
measures may not be adequate to safeguard the technology underlying our products. If they do not
protect our rights adequately, third parties could use our technology, and our ability to compete in
the market would be reduced. In addition, employees, consultants and others who participate in
developing our products may breach their agreements with us regarding our intellectual property, and
we may not have adequate remedies for the breach. We also may not be able to effectively protect our
intellectual property rights in some foreign countries. For a variety of reasons, we may decide not
to file for patent, copyright or trademark protection outside the United States. We also realize
that our trade secrets may become known through other means not currently foreseen by us.
Notwithstanding our efforts to protect our intellectual property, our competitors may independently
develop similar or alternative technologies or products that are equal or superior to our technology
and products without infringing any of our intellectual property rights, or may design around our
proprietary technologies. For further information on our intellectual property and the difficulties
in protecting it, see "Item 1: Business -- Intellectual Property," included in the Annual Report on
Form 10-K/A of Intuitive Surgical, Inc., filed with the SEC.
OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE ACCESS TO THESE
TECHNOLOGIES, OUR REVENUES COULD DECLINE.
We rely on technology that we license from others, including technology that is
integral to our products. We have entered into license agreements with SRI International, IBM
Corporation, MIT, Olympus Optical Co., Ltd., and Heartport, Inc.,now part of Johnson & Johnson.
Any of these agreements may be terminated for breach. If any of these agreements is terminated, we
may be unable to reacquire the necessary license on satisfactory terms, or at all. The loss or
failure to maintain these licenses could prevent or delay further development or commercialization
of our products. See "Item 1: Business -- Intellectual Property," included in the Annual Report on
Form 10-K/A of Intuitive Surgical, Inc., filed with the SEC.
PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY CAUSE OUR STOCK PRICE TO DECLINE.
During the course of our administrative proceedings and/or lawsuits,
there may be public announcements of the results of hearings, motions, and other interim proceedings
or developments in the litigation. If securities analysts or investors perceive these results to be
negative, it could have a substantial negative effect on the trading price of our stock.
OUR PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC REGULATORY PROCESS. IF WE DO
NOT OBTAIN AND MAINTAIN THE NECESSARY DOMESTIC REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET
AND SELL OUR PRODUCTS IN THE UNITED STATES.
Our products and operations are subject to extensive regulation in the United
States by the U.S. Food and Drug Administration, or FDA. The FDA regulates the research, testing,
manufacturing, safety, labeling, storage, recordkeeping, promotion, distribution and production of
medical devices in the United States to ensure that medical products distributed domestically are
safe and effective for their intended uses. In order for us to market certain products for use in
the United States, we generally must first obtain clearance from the FDA pursuant to Section 510(k)
of the Federal Food, Drug, and Cosmetic Act, or FFDCA. Clearance under Section 510(k) requires
demonstration that a new device is substantially equivalent to another legally marketed device. If
we modify our products after they receive FDA clearance, the FDA may require us to submit a separate
510(k) or premarket approval application, or PMA, for the modified product before we are permitted
to market the products in the U.S. In addition, if we develop products in the future that are not
considered to be substantially equivalent to a legally marketed device, we will be required to
obtain FDA approval by submitting a PMA.
The FDA may not act favorably or quickly in its review of our 510(k) or PMA
submissions, or we may encounter significant difficulties and costs in our efforts to obtain FDA
clearance or approval, all of which could delay or preclude sale of new products in the United
States. Furthermore, the FDA may request additional data or require us to conduct further testing,
or compile more data, including clinical data and clinical studies, in support of a 510(k)
submission. The FDA may also, instead of accepting a 510(k) submission, require us to submit a PMA,
which is typically a much more complex application than a 510(k). To support a PMA, the FDA would
likely require that we conduct one or more clinical studies to demonstrate that the device is safe
and effective, rather than substantially equivalent to another legally marketed device. We may not
be able to meet the requirements to obtain 510(k) clearance or PMA approval, or the FDA may not
grant any necessary clearances or approvals. In addition, the FDA may place significant limitations
upon the intended use of our products as a condition to a 510(k) clearance or PMA approval. Product
applications can also be denied or withdrawn due to failure to comply with regulatory requirements
or the occurrence of unforeseen problems following clearance or approval. Any delays or failure to
obtain FDA clearance or approvals of new products we develop, any limitations imposed by the FDA on
new product use, or the costs of obtaining FDA clearance or approvals could have a material adverse
effect on our business, financial condition and results of operations.
In order to conduct a clinical investigation involving human subjects for the
purpose of demonstrating the safety and effectiveness of a device, a company must, among other
things, apply for and obtain Institutional Review Board, or IRB approval of the proposed
investigation. In addition, if the clinical study involves a "significant risk" (as defined by the
FDA) to human health, the sponsor of the investigation must also submit and obtain FDA approval of
an investigational device exemption, or IDE application. We may not be able to obtain FDA and/or IRB
approval to undertake clinical trials in the U.S. for any new devices we intend to market in the
United States in the future. If we obtain such approvals, we may not be able to comply with the IDE
and other regulations governing clinical investigations or the data from any such trials may not
support clearance or approval of the investigational device. Failure to obtain such approvals or to
comply with such regulations could have a material adverse effect on our business, financial
condition and results of operations. For additional information concerning regulatory approvals of
our products, see "Item 1: Business -- Government Regulation," included in the Annual Report on Form
10-K/A of Intuitive Surgical, Inc., filed with the Securities and Exchange Commission or SEC.
OUR PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY PROCESSES AND APPROVAL
REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY INTERNATIONAL REGULATORY APPROVALS, WE
WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN FOREIGN COUNTRIES.
To be able to market and sell our products in other countries, we must
obtain regulatory approvals and comply with the regulations of those countries. These regulations,
including the requirements for approvals, and the time required for regulatory review vary from
country to country. Obtaining and maintaining foreign regulatory approvals are expensive, and we
cannot be certain that we will receive regulatory approvals in any foreign country in which we plan
to market our products. If we fail to obtain regulatory approval in any foreign country in which we
plan to market our products, our ability to generate revenue will be harmed.
The European Union requires that manufacturers of medical products obtain the
right to affix the CE mark to their products before selling them in member countries of the European
Union. The CE mark is an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. In order to obtain the right to affix
the CE mark to products, a manufacturer must obtain certification that its processes meet certain
European quality standards. In January 1999, we received permission to affix the CE mark to our
da Vinci
Surgical System and
EndoWrist
instruments.
If we modify existing products or develop new products in the future, including
new instruments, we may need to apply for permission to affix the CE mark to such products. In
addition, we will be subject to annual regulatory audits in order to maintain the CE mark
permissions we have already obtained. We cannot be certain that we will be able to obtain permission
to affix the CE mark for new or modified products or that we will continue to meet the quality and
safety standards required to maintain the permissions we have already received. If we are unable to
maintain permission to affix the CE mark to our products, we will no longer be able to sell our
products in member countries of the European Union. For additional information concerning regulatory
approvals of our products, see "Item 1: Business -- Government Regulation," included in the Annual
Report on Form 10-K/A of Intuitive Surgical, Inc., filed with the Securities and Exchange Commission
or SEC.
IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN REIMBURSEMENT FROM THIRD-PARTY PAYORS
FOR PROCEDURES USING OUR PRODUCTS, OR IF REIMBURSEMENT IS INSUFFICIENT TO COVER THE COSTS OF
PURCHASING OUR PRODUCTS, WE MAY BE UNABLE TO GENERATE SUFFICIENT SALES TO SUPPORT OUR
BUSINESS.
Domestic institutions will typically bill the services performed with our
products to various third-party payors, such as Medicare, Medicaid and other government programs and
private insurance plans. If hospitals do not obtain sufficient reimbursement from third-party payors
for procedures performed with our products, or if government and private payors' policies do not
permit reimbursement for surgical procedures performed using our products, we may not be able to
generate the revenues necessary to support our business. Our success in international markets also
depends upon the eligibility of our products for reimbursement through government-sponsored health
care payment systems and third-party payors. Reimbursement practices vary significantly by country.
Many international markets have government-managed healthcare systems that control reimbursement for
new products and procedures. Other foreign markets have both private insurance systems and
government-managed systems that control reimbursement for new products and procedures. Market
acceptance of our products may depend on the availability and level of reimbursement in any country
within a particular time. In addition, health care cost containment efforts similar to those we face
in the United States are prevalent in many of the other countries in which we intend to sell our
products and these efforts are expected to continue. For further information on third-party
reimbursement policies, see "Item 1: Business -- Third-Party Reimbursement," included in the Annual
Report on Form 10-K/A of Intuitive Surgical, Inc., filed with the SEC.
BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS MAY CHOOSE TO
PURCHASE OUR COMPETITORS' PRODUCTS OR MAY NOT ACCEPT INTUITIVE SURGERY, WHICH WOULD RESULT IN
REDUCED REVENUE AND LOSS OF MARKET SHARE.
Intuitive surgery is a new technology that must compete with established
minimally invasive surgery and open surgery. These procedures are widely accepted in the medical
community and in many cases have a long history of use. We also face competition from several
companies that are developing new approaches and products for the minimally invasive surgery market.
In addition, we presently face increasing competition from companies who are developing robotic and
computer-assisted surgical systems. Our revenues may be reduced or eliminated if our competitors
develop and market products that are more effective or less expensive than our products. If we are
unable to compete successfully, our revenues will suffer. We may not be able to maintain or improve
our competitive position against current or potential competitors, especially those with greater
resources.
In many cases, the medical conditions that can be treated using our products can
also be treated by drugs or other medical devices and procedures. Many of these alternative
treatments are also widely accepted in the medical community and have a long history of use. In
addition, technological advances could make such treatments more effective or less expensive than
using our products, which could render our products obsolete or unmarketable. We cannot be certain
that physicians will use our products to replace or supplement established treatments or that our
products will be competitive with current or future technologies.
IF DEFECTS ARE DISCOVERED IN OUR PRODUCTS, WE MAY INCUR ADDITIONAL UNFORESEEN COSTS,
HOSPITALS MAY NOT PURCHASE OUR PRODUCTS AND OUR REPUTATION MAY SUFFER.
Our products incorporate mechanical parts and computer software, either of which
can contain errors or failures, especially when first introduced. In addition, new products or
enhancements may contain undetected errors or performance problems that, despite testing, are
discovered only after commercial shipment. Because our products are designed to be used to perform
complex surgical procedures, we expect that our customers will have an increased sensitivity to such
defects. We cannot assure you that our products will not experience errors or performance problems
in the future. If we experience flaws or performance problems, any of the following could occur:
delays in product shipments;
loss of revenue;
delay in market acceptance;
diversion of our resources;
damage to our reputation;
increased service or warranty costs; or
product liability claims.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND MAY ENCOUNTER MANUFACTURING
PROBLEMS OR DELAYS THAT COULD RESULT IN LOST REVENUE.
We have manufactured a limited number of our products for sales to customers. We
may be unable to establish or maintain reliable, high-volume manufacturing capacity. Even if this
capacity can be established and maintained, the cost of doing so may increase the cost of our
products and reduce our ability to compete. We may encounter difficulties in scaling up production
of our products, including:
problems involving production yields;
quality control and assurance;
component supply shortages;
shortages of qualified personnel; and
compliance with state, federal and foreign regulations.
Manufacturing our products is a complex process. If demand for our products
exceeds our manufacturing capacity, we could develop a substantial backlog of customer orders. If we
are unable to establish and maintain larger-scale manufacturing capabilities, our ability to
generate revenues will be limited and our reputation in the marketplace would be damaged.
IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE OR EUROPEAN
MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR PART OF OUR MANUFACTURING
OPERATIONS, WHICH WOULD RESULT IN PRODUCT DELIVERY DELAYS AND LOST REVENUE.
Our manufacturing facilities are subject to periodic inspection by regulatory
authorities and our operations will continue to be regulated by the FDA for compliance with Good
Manufacturing Practice requirements contained in the FDA's Quality System Regulations, or QSR. We
are also required to comply with International Organization for Standardization, or ISO quality
system standards in order to produce products for sale in Europe. If we fail to continue to comply
with Good Manufacturing Practice requirements or ISO standards, we may be required to cease all or
part of our operations until we comply with these regulations. We are currently in compliance with
ISO standards. The FDA inspected our Mountain View and Sunnyvale facilities in March 2000 and
December 2002, respectively. The Good Manufacturing Practice issues raised by the FDA during the
inspections either were satisfactorily resolved with the FDA, or we believe can be resolved by us to
the FDA's satisfaction, although we cannot assure you that we will be able to do so. We continue to
be subject to FDA inspections at any time. Maintaining such compliance is difficult and costly. We
cannot be certain that our facilities will be found to comply with Good Manufacturing Practice
requirements or ISO standards in future inspections and audits by regulatory authorities.
The state of California also requires that we maintain a license to manufacture
medical devices. Our facilities and manufacturing processes were inspected in February 1998. In
March 1998, we passed the inspection and received a device manufacturing license from the California
Department of Health Services. In March 2002, our facilities and manufacturing processes in our
Sunnyvale facility were re-inspected by the Food and Drug Branch, or FDB, and we were issued an
updated device manufacturing license for our Sunnyvale facility. We are subject to periodic
inspections by the California Department of Health Services and if we are unable to maintain this
license following any future inspections, we will be unable to manufacture or ship any products.
OUR RELIANCE ON SOLE AND SINGLE SOURCE SUPPLIERS COULD HARM OUR ABILITY TO MEET DEMAND
FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET.
Some of the components necessary for the assembly of our products are currently
provided to us by sole source suppliers or single source suppliers. We purchase components through
purchase orders rather than long-term supply agreements and generally do not maintain large volumes
of inventory. The disruption or termination of the supply of components could cause a significant
increase in the costs of these components, which could affect our profitability. A disruption or
termination in the supply of components could also result in our inability to meet demand for our
products, which could harm our ability to generate revenues, lead to customer dissatisfaction and
damage our reputation. Furthermore, if we are required to change the manufacturer of a key component
of our products, we may be required to verify that the new manufacturer maintains facilities and
procedures that comply with quality standards and with all applicable regulations and guidelines.
The delays associated with the verification of a new manufacturer could delay our ability to
manufacture our products in a timely manner or within budget.
THE USE OF OUR PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT COULD BE EXPENSIVE,
DIVERT MANAGEMENT'S ATTENTION AND HARM OUR BUSINESS.
Our business exposes us to significant risks of product liability claims. The
medical device industry has historically been litigious, and we face financial exposure to product
liability claims if the use of our products were to cause injury or death. There is also the
possibility that defects in the design or manufacture of our products might necessitate a product
recall. Although we maintain product liability insurance, the coverage limits of these policies may
not be adequate to cover future claims. Particularly as sales of our products increase, we may be
unable to maintain product liability insurance in the future at satisfactory rates or in adequate
amounts. A product liability claim, regardless of its merit or eventual outcome, could result in
significant legal defense costs. A product liability claim or any product recalls could also harm
our reputation or result in a decline in revenues.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL,
OUR ABILITY TO COMPETE WILL BE HARMED.
We are highly dependent on the principal members of our management and scientific
staff. Our product development plans depend in part on our ability to attract and retain engineers
with experience in mechanics, software and optics. Attracting and retaining qualified personnel will
be critical to our success, and competition for qualified personnel is intense. We may not be able
to attract and retain personnel on acceptable terms given the competition for such personnel among
technology and healthcare companies, and universities. The loss of any of these persons or our
inability to attract and retain qualified personnel could harm our business and our ability to
compete.
INTERNATIONAL SALES OF OUR PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUES,
WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS. OUR GROWTH MAY BE LIMITED IF WE ARE
UNABLE TO SUCCESSFULLY MANAGE OUR INTERNATIONAL ACTIVITIES.
Our business currently depends in large part on our activities in Europe, and a
component of our growth strategy is to expand our presence into additional foreign markets. Sales to
markets outside of the United States accounted for approximately 18% of our sales for the three
months ended March 31, 2003 and 13% for the three months ended March 31, 2002.
We are subject to a number of challenges that specifically relate to our
international business activities. These challenges include:
failure of local laws to provide the same degree of protection against infringement of our
intellectual property;
protectionist laws and business practices that favor local competitors, which could slow our
growth in international markets;
the risks associated with foreign currency exchange rate fluctuation;
the expense of establishing facilities and operations in new foreign markets; and
building an organization capable of supporting geographically dispersed operations.
Currently, a majority of our international sales are denominated in U.S. dollars.
As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make
our products less competitive in international markets. If we are unable to meet and overcome these
challenges, our international operations may not be successful, which would limit the growth of our
business.
RISK FACTORS ASSOCIATED WITH OUR PENDING MERGER WITH COMPUTER MOTION
THE ISSUANCE OF SHARES OF INTUITIVE SURGICAL COMMON STOCK TO COMPUTER MOTION STOCKHOLDERS IN THE
MERGER WILL SUBSTANTIALLY REDUCE THE PERCENTAGE INTERESTS OF INTUITIVE SURGICAL STOCKHOLDERS.
Based on an estimated exchange ratio of approximately 0.52, we estimate that
we will issue approximately 15.2 million shares of our common stock in the merger and upon
completion of the merger, our current stockholders will own approximately 71% of the then
outstanding shares of our common stock and former Computer Motion stockholders will own
approximately 29% of the then outstanding shares of our common stock.
In addition, based on the estimated exchange ratio of approximately 0.52, we
estimate that we will reserve approximately 5.2 million shares of Intuitive Surgical common stock
for future issuance in connection with Intuitive Surgical's assumption of Computer Motion's
outstanding options and warrants (including out-of-the-money options and warrants), subject to
proportional reduction in the event that the proposed reverse stock split is approved by our
stockholders and implemented by our board of directors. The outstanding warrants of Computer Motion
have a range of exercise prices. Holders of these warrants have the right to an adjustment in the
exercise price of their warrants, and in some cases in the number of shares issuable upon exercise,
if the warrant issuer sells shares in the future at prices below the exercise prices of the
warrants. These anti-dilution protections may continue to apply after the merger and thus could
result in additional dilution to stockholders of the combined company if we make future offerings of
capital stock.
The issuance of shares of Intuitive Surgical common stock to former Computer
Motion stockholders in or after the merger will cause a significant reduction in the relative
percentage interests of current Intuitive Surgical stockholders in earnings, voting, liquidation
value and book and market value. The issuance of additional shares of Intuitive Surgical common
stock in future transactions could also reduce the percentage interests of former Computer Motion
stockholders and Intuitive Surgical stockholders in the combined company. This dilution could reduce
the market price of our common stock.
INTUITIVE SURGICAL AND COMPUTER MOTION EACH HAVE INCURRED SUBSTANTIAL LOSSES SINCE INCEPTION,
EXPECT TO INCUR FURTHER LOSSES, AND MAY NOT BE ABLE TO GENERATE OR RAISE SUFFICIENT CASH TO FUND
THEIR OPERATIONS, SEPARATE OR COMBINED.
For the three months ended March 31, 2003, we incurred a net loss of $2.3
million, and Computer Motion incurred a net loss of $7.9 million. The extent of our future losses
and the timing of profitability are highly uncertain, and we may never achieve profitable
operations. If the time required to generate significant revenues and achieve profitability is
longer than anticipated, we may not be able to continue our operations. In recent periods, Computer
Motion has not generated cash from operations. Both companies expect to incur additional operating
losses into 2003, and both companies have substantial cash needs. Among other things, total fees and
costs of both companies associated with the merger are currently projected to be approximately $4.0
million. We have agreed to fund up to $7.3 million of Computer Motion's working capital needs
through the effective time of the merger under the Loan and Security Agreement. Assuming completion
of the merger on or around June 30, 2003, we project that the total cash and cash equivalents of the
combined company will be less than $35 million. We expect that the capital resources of the combined
company, together with revenue derived from product sales, will be sufficient to meet the combined
company's working capital needs at least through 2003. After that, we may need to raise additional
funds. We may not be able to obtain additional financing on favorable terms, or at all. If we are
unable to generate sufficient capital to fund our operations and cannot raise it on acceptable
terms, we may not be able to further develop, enhance or expand the market for our products and
service, and the combined company could fail.
THE COMBINED COMPANY MAY NOT REALIZE ALL OF THE ANITICPATED BENEFITS OF THE MERGER.
The success of the merger will depend, in part, on the ability of the
combined company to realize the anticipated synergies, cost savings and growth opportunities from
integrating the business of Computer Motion with the business of Intuitive Surgical. Our success in
realizing these benefits and the timing of this realization depend upon the successful, rapid
integration of the operations of Computer Motion with those of Intuitive Surgical. This integration
will be a complex, costly and time-consuming process, and may not succeed as planned. The
difficulties of combining the operations of the companies include, among other things:
coordinating and consolidating ongoing and future research and development
efforts;
consolidating sales and marketing operations;
retaining existing customers and attracting new customers;
retaining strategic partners and attracting new strategic partners;
retaining key employees;
consolidating corporate and administrative infrastructures;
integrating and managing the technologies and products of the two
companies;
identifying and eliminating redundant and underperforming operations and
assets;
using capital assets efficiently to develop the business of the combined
company;
minimizing the diversion of management's attention from ongoing business
concerns; and
coordinating geographically separate organizations.
In addition, Computer Motion's products differ in substantial ways from our
products, and the companies rely on different distributors and sales channels to sell their
products. Both Computer Motion and Intuitive Surgical are parties to existing distribution
agreements that cannot be terminated prior to the end of their terms.
We do not know whether the combined company will succeed in addressing these
risks or any other problems encountered in connection with the merger, or whether the integration of
Computer Motion with Intuitive Surgical will result in the realization of the full benefits
anticipated by us from the merger.
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT INTUITIVE SURGICAL AND ITS
STOCKHOLDERS.
If the merger is not completed for any reason, Intuitive Surgical and
Computer Motion and their stockholders will be subject to a number of material risks, including:
the provision in the merger agreement that, under specified circumstances,
either Intuitive Surgical or Computer Motion could be required to pay the other a termination fee
and expenses of up to an aggregate of $2.5 million;
the litigations between the two companies may resume;
Computer Motion would be required to repay to Intuitive Surgical all amounts
loaned under the bridge loan facility within 120 days following termination of the merger
agreement;
Computer Motion likely would not have sufficient cash to repay amounts loaned
under the bridge loan, and Intuitive Surgical would be at risk that such bridge loan amounts would
not be repaid unless Computer Motion were able to obtain alternative financing;
the market price of Intuitive Surgical common stock and Computer Motion
common stock may decline to the extent that the current market price of such shares reflects a
market assumption that the merger will be completed;
costs related to the merger, such as legal and accounting fees, must be paid
even if the merger is not completed;
benefits that Intuitive Surgical and Computer Motion expect to realize from
the merger would not be realized; and
the diversion of management attention from the day-to-day businesses of the
companies and the unavoidable disruption to their employees and customers during the period before
completion of the merger may make it difficult for Intuitive Surgical and Computer Motion to regain
their financial and market positions if the merger does not occur.
SALES BY INTUITIVE SURGICAL STOCKHOLDERS OR FORMER COMPUTER MOTION STOCKHOLDERS COULD
CAUSE INTUITIVE SURGICAL'S COMMON STOCK PRICE TO DECLINE.
The market price of our common stock could decline as a result of sales
of a large number of shares in the market. These sales may also make it more difficult for the
combined company to sell equity securities in the future at a time and at a price that we deem
appropriate to raise funds through future offerings of common stock. As of March 31, 2003, several
entities beneficially owned more than 5% of the outstanding shares of our common stock, including
Bear Stearns Asset Management, Allan G. Lozier, Investor Growth Capital, Ltd., and PaTMarK Company,
Inc. Assuming that the merger is completed, the former stockholders of Computer Motion will own
approximately 29% of the combined company. In addition, holders of warrants to purchase up to 4.4
million shares of Computer Motion common stock will receive Intuitive Surgical warrants in exchange
for their Computer Motion warrants in connection with the merger. Such warrant holders will have the
right to include their shares in resale registration statements that we will be obligated to file on
their behalf.
CUSTOMER, SUPPLIER, AND EMPLOYEE UNCERTAINTY RELATED TO THE MERGER COULD HARM THE COMBINED
COMPANY
Intuitive Surgical and Computer Motion customers and suppliers may, in
response to the announcement or completion of the merger, delay purchasing or supply decisions or
otherwise alter existing relationships with Intuitive Surgical or Computer Motion. These decisions
or other adverse changes in the business relationships of Intuitive Surgical and Computer Motion
with their respective customers and suppliers could adversely affect the business of the combined
company. Similarly, current and prospective Computer Motion employees may experience uncertainty
about their future as employees of the combined company until strategies with regard to Computer
Motion are announced or executed. This may adversely affect Intuitive Surgical's or Computer
Motion's ability to attract and retain, and may affect the performance during the transition period
of, key management, sales, marketing and technical personnel.
THE CONVICTION OF ARTHUR ANDERSEN LLP ON OBSTRUCTION OF JUSTICE CHARGES MAY ADVERSELY AFFECT
ARTHUR ANDERSEN'S ABILITY TO SATISFY CLAIMS ARISING FROM THE PROVISION OF AUDITING SERVICES TO
COMPUTER MOTION AND MAY IMPEDE THE COMBINED COMPANY'S ACCESS TO CAPITAL MARKETS AFTER THE
MERGER.
Arthur Andersen LLP audited Computer Motion's financial statements for the
years ended December 31, 2001 and December 31, 2000. On March 14, 2002, an indictment was unsealed
charging Arthur Andersen with federal obstruction of justice arising from the government's
investigation of Enron Corp. On June 15, 2002, Arthur Andersen was convicted of these charges. The
impact of this conviction on Arthur Andersen's financial condition may adversely affect the ability
of Arthur Andersen to satisfy any claims arising from its provision of auditing services to Computer
Motion.
Should Intuitive Surgical seek to access the public capital markets after
completion of the merger, SEC rules will require Intuitive Surgical to include or incorporate by
reference in any prospectus three years of audited financial statements. The SEC's current rules
would require Intuitive Surgical to present audited financial statements for one or more fiscal
years audited by Arthur Andersen and use reasonable efforts to obtain its consent until the audited
financial statements for the fiscal year ending December 31, 2004 become available. If prior to that
time the SEC ceases accepting financial statements audited by Arthur Andersen, it is possible that
the available audited financial statements for the years ended December 31, 2001 and December 31,
2000 audited by Arthur Andersen might not satisfy the SEC's requirements. In that case, Intuitive
Surgical would be unable to access the public capital markets unless an independent accounting firm
were able to audit the financial statements originally audited by Arthur Andersen. Any delay or
inability to access the public capital markets caused by these circumstances could have a material
adverse effect on the combined company's business, profitability and growth prospects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are not subject to any meaningful market risks related to currency,
commodity prices or similar matters. We are sensitive to short-term interest rate fluctuations to
the extent that such fluctuations impact the interest income we receive on the investment of the
remaining proceeds from our June 2000 initial public offering.
The primary objective of our investment activities is to preserve principal while
at the same time maximizing the income we receive from our investments without significantly
increasing risk. Some of the securities that we invest in may have market risk. This means that a
change in prevailing interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing
rate and the prevailing interest rate later rises, the principal amount of our investment will
probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities. We classify our cash equivalents
and marketable securities as "fixed-rate" if the rate of return on such instruments remains fixed
over their term. These "fixed-rate" investments include commercial paper and government and non-
government debt securities. We classify our cash equivalents and marketable securities as "variable-
rate" if the rate of return on such investments varies based on the change in a predetermined index
or set of indices during their term. These "variable-rate" investments primarily include money
market accounts. The average time to maturity of all of our investments as of March 31, 2003 was
approximately 1.5 years. At March 31, 2003, approximately 33% of our investment portfolio was
composed of investments with original maturities of one year or less.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC'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 timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures, management
recognized 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 necessarily
was required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective. There have
been no significant changes in our internal controls or in other factors that could significantly
affect the internal controls subsequent to the date we completed our evaluation.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BROOKHILL-WILK 1, LLC
On September 1, 2000 Brookhill-Wilk 1, LLC ("Wilk") filed a lawsuit against
Intuitive Surgical in the United States District Court for the Southern District of New York (Case
No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or offering for sale our
da
Vinci
Surgical System, we are infringing U.S. Patent Nos. 5,217,003 and 5,368,015 in willful
disregard of Wilk's patent rights. These patents concern methods and devices for "remote" surgery.
In March 2001, Wilk withdrew its assertion of infringement of the '015 patent against our company.
On November 8, 2001, in response to a motion on one of Intuitive Surgical's noninfringement
defenses, the District Court granted summary judgment of noninfringement of the '003 patent in our
favor and dismissed Wilk's complaint in its entirety without prejudice. Wilk appealed the summary
judgment ruling to the U.S. Court of Appeals for the Federal Circuit.
On April 11, 2003, the Court of Appeals reversed the District Court's judgment
and remanded the case for further proceedings. This reversal is based on the Court of Appeals'
determination that the particular claim limitation at issue should be interpreted differently than
as construed by the District Court. Intuitive Surgical believes that the Court of Appeals' opinion
is not necessarily inconsistent with the noninfringement defense initially presented by Intuitive
Surgical to the District Court and has no bearing on Intuitive Surgical's other noninfringement
defenses. Intuitive Surgical has filed a petition for hearing to request clarification from the
Court of Appeals on the claim construction adopted. Upon remand, Intuitive Surgical intends to
continue to vigorously defend its rights and, if necessary, is prepared to continue to dispute the
meaning of other portions of the asserted claim language and to conduct discovery and file further
motions on whether the patent is infringed, valid and/or enforceable. Intuitive Surgical believes
that it will prevail in the litigation and that it has multiple meritorious defenses to Wilk's
allegations. However, litigation is unpredictable and Intuitive Surgical may not prevail. The case
remains in its early stages of discovery in the District Court.
If we lose Wilk's suit against us, it will hurt our competitive position, may be
costly to us and may prevent us from selling our products. If we lose the patent suit, we may need
to obtain from Wilk a license to this technology if we are to continue to market our products that
have been found to infringe Wilk's patents. This license could be expensive, which could seriously
harm our business. If Wilk is successful in its suit against us and is unwilling to grant us a
license, we may be required to stop selling our products that are found to infringe Wilk's patents
unless we can redesign them so they do not infringe Wilk's patents, which we may be unable to do. In
addition, we could be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position. Due to the inherent uncertainties of litigation,
however, the Company cannot accurately predict the ultimate outcome of the litigation against Wilk
at this time and, therefore, cannot estimate the range of possible loss.
On February 21, 2001, Wilk filed suit against Computer Motion alleging that its
ZEUS original system infringed upon Wilk's U.S. Patent Nos. 5,217,003 and 5,368,015. Wilk's
complaint sought damages, attorneys' fees and increased damages alleging willful patent
infringement. On March 21, 2001, Computer Motion served its answer and counterclaim alleging
 non-infringement of each patent-in-suit, patent invalidity and unenforceability. On November 8, 2001,
the United States District Court for the Southern District of New York in Wilk's pending litigation
against Intuitive Surgical issued an order interpreting the claims of Wilk's U.S. Patent No.
5,217,003 in a way that Computer Motion believed excluded current applications of its ZEUS surgical
system. In light of this decision, on November 13, 2001, the parties agreed to dismiss the case
without prejudice to refiling upon resolution in Wilk's litigation against Intuitive Surgical.
COMPUTER MOTION
We are involved in intellectual property litigation with Computer Motion as
described below. While the recent announced merger agreement has resulted in a stay of all such
litigation and other administrative legal proceedings between Intuitive and Computer Motion, these
proceedings may continue if the merger is not completed for any reason. If the merger closes, then
all litigation and other disputes between Intuitive sand Computer Motion will be dismissed with
prejudice or similarly finally terminated.
On May 10, 2000, Computer Motion, Inc. filed a lawsuit in United States
District Court for the Central District of California (Case No. CV00-4988 CBM) alleging that by
making, using, selling or offering for sale our
da Vinci
Surgical System, we are infringing
United States Patent Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583, 5,878,193, 5,907,664, and
6,001,108, in willful disregard of Computer Motion's patent rights. On June 1, 2000, Computer Motion
amended its lawsuit to allege that we also infringe U.S. Patent Number 6,063,095. In late 2000,
Computer Motion alleged our infringement of a ninth patent, and added U.S. Patent Number 6,102,850
to the litigation. Computer Motion subsequently added U.S. Patent No. 6,244,809 to the litigation,
alleging that we also infringe that tenth patent. These ten patents concern various methods and
devices for conducting various aspects of robotic surgery. Of those ten patents, three are no longer
part of the suit. After Computer Motion lost all of its rights to its 5,855,583 and 5,878,193
patents as a result of our successful Patent Office interference proceedings Computer Motion
voluntarily dismissed those patents from suit. However, Computer Motion has sought to challenge the
interference proceedings by separate district court appeal. In addition, in November 2002, the Court
granted our motion for summary judgment of noninfringement of the 6,102,850 patent. In February
2003, the Court denied our motion for summary judgment of noninfringement of the 6,244,809 patent
and granted Computer Motion's cross-motion for partial summary judgment of literal infringement of
one claim of that patent. We subsequently requested that the Court reconsider that decision because
of perceived flaws in the Court's approach to the issue of infringement on summary judgment.
Regardless of what happens on reconsideration, we will continue to defend the 809 patent on
invalidity, based on the earlier robotic surgery work of SRI and others. We still have pending
motions for summary judgment of noninfringement on two more of Computer Motion's seven remaining
patents-in-suit, numbers 5,907,664 and 6,001,108. At the Court's request, we will not file further
motions for summary judgment until the remaining pending motions are decided. In late January 2003,
after close of fact discovery, Computer Motion asserted between 26 and 35 new claims of its seven
remaining patents-in-suit and new theories of infringement. We have moved to strike those new
assertions as inappropriate at this late stage. Trial had been calendared for April 29, 2003. In
connection with our proposed merger with Computer Motion, our company and Computer Motion have
agreed to request an immediate stay through August 31, 2003 of all proceedings in the pending
litigations between the companies. As part of the stays, the courts have ceased all further activity
in the cases during the period of stay, and will not issue any opinions or orders on issues already
submitted for decision. In addition, the California Court postponed the trial date and was asked to
reset the trial to a date no earlier than November 30, 2003. The stay may be terminated before, or
extended beyond, August 31, 2003 under specified circumstances. In the event the merger is
completed, our company and Computer Motion will request dismissal with prejudice of all pending
litigations.
The Computer Motion action seeks damages based upon the making, using, selling
and offering for sale of our products and processes, and seeks to enjoin our continued activities
relating to these products. In the event the stay is lifted, this action will subject us to
potential liability for damages, including treble damages, and could require us to cease making,
using or selling the affected products, or to obtain license in order to continue to manufacture,
use or sell the affected products. While we continue to believe we have multiple meritorious
defenses to each patent asserted in this action, in the event that the stay is lifted, we cannot
assure you that we ultimately will prevail on any issue in the litigation or that we will be able to
successfully defend Computer Motion action could harm our business, financial condition and
operating results. Due to the inherent uncertainties of litigation, we cannot accurately predict the
ultimate outcome of this matter at this time and, therefore, cannot estimate the range of possible
loss.
On December 7 and 8, 2000, the PTO declared three interferences between a single
SRI patent application exclusively licensed to Intuitive and three of Computer Motion's patents,
Numbers 5,855,583, 5,878,193 and 5,907,664. An interference is a proceeding within the U.S. Patent
Office to resolve questions regarding the patentability of inventions and who first invented subject
matter claimed by two or more patents or patent applications. The Patent Office has now entered
final judgment in each interference proceeding. In the interference involving the 5,878,193 patent,
the PTO entered final judgment in Intuitive's favor. Subject to review by or appeal to a federal
court, which could reverse or modify any or all of the following, this judgment establishes that the
disputed invention of, generally speaking, image-based control of robotic surgical instruments is
prior art to all of Computer Motion's remaining patents, that Intuitive is entitled to patent that
invention for itself, and that Computer Motion is no longer entitled to any of the three claims of
the 5,878,193 patent. In the interference involving the 5,855,583 patent, the PTO again entered
final judgment in Intuitive's favor. Subject to review by or appeal to a federal court, which could
reverse or modify any or all of the following, this judgment establishes that the disputed invention
of, generally speaking, proportional movement of articulating robotic surgical instruments is prior
art to all of Computer Motion's remaining patents, that Intuitive is entitled to patent that
invention for itself, and that Computer Motion is no longer entitled to any of the 15 claims of the
5,855,583 patent. In the interference involving the 5,907,664 patent, the PTO entered final judgment
against us, deciding that our patent claim is unpatentable for noncompliance with the "written
description" requirement of Title 35 of the U.S. Code. The PTO declined to decide our motion
challenging the validity of certain claims of the '664 patent, leaving that issue in question. This
5,907,664 patent was the subject of our first motion for summary judgment of noninfringement
mentioned in the previous paragraph. In July 2002, Computer Motion filed suit against us in the U.S.
District Court for the Central District of California to challenge the PTO's two interference
judgments in our favor. That suit has also been stayed through August 31, 2003 as a result of the
merger agreement between Computer Motion and Intuitive.
In September 2000, we filed a Notice of Opposition in the European Patent Office,
or EPO, challenging European Patent No. 0653,922, which issued to Computer Motion in 1999 and is
related to several of the patents now involved in the U.S. litigation and the interference
proceedings. An Opposition proceeding allows the EPO to determine whether the challenged patent
should be revoked in its entirety, should be amended, or should remain unaltered. In its Notice of
Opposition, Intuitive cited numerous prior art references not cited to the EPO during the '922
patent's original prosecution. An initial ruling in March 2002 indicated that the EPO was not then
inclined to alter the '922 patent in any way. However, during a hearing held in Germany on July 2,
2002, the EPO sanctioned Computer Motion for its "abuse" of the Opposition process. As a result of
Computer Motion's actions, the preliminary EPO decision is mooted, both sides will now provide
further written briefing and evidence on the substantive issues, and another hearing is anticipated
for sometime later in 2003. Intuitive and Computer Motion anticipate taking steps to seek a stay or
other similar relief from the EPO as a result of their recent merger agreement.
On March 30, 2001, Intuitive and International Business Machines Corporation, or
IBM, jointly filed suit against Computer Motion, Inc. in the U.S. District Court for the District of
Delaware. The complaint alleged that by continuing to make, use, sell, and offer for sale its AESOP
and ZEUS voice-controlled products, Computer Motion willfully infringes U.S. Patent No. 6,201,984.
The complaint also impacted the HERMES product to the extent it interfaced with either the AESOP or
ZEUS. The '984 patent, which concerns various aspects of voice control of surgical instruments,
issued to IBM in early March 2001 and is exclusively licensed to us. The '984 patent predates by
several years Computer Motion's development of voice-controlled surgical robots. Trial was held in
August 2002. After evidence and argument was presented, the seven-member Delaware jury returned a
verdict in our favor, finding that Computer Motion had failed to prove any claim of the '984 patent
invalid and awarding us $4.4 million for damage caused by Computer Motion's sales of its infringing
AESOP and ZEUS products. In December 2002, the Court rejected Computer Motion's final "prosecution
laches" defense as inapplicable to the circumstances presented by our patent. Subject to the stay,
the suit is in the post-trial briefing phase. Computer Motion has filed three motions seeking to set
aside the jury's verdict, to reduce the damages awarded, and for a new trial on one or more issues.
We have filed our request for a permanent injunction against further infringing sales of Computer
Motion's AESOP and ZEUS products. In February 2003, the Court indicated that it would first address
Computer Motion's post-trial requests before deciding our request for a permanent injunction against
Computer Motion. All proceedings in this suit have also now been stayed through August 31, 2003 as a
result of the merger agreement between Computer Motion and Intuitive.
OTHER LEGAL MATTERS
In September 2002, we discovered that one of our employees had purchased
approximately $900,000 in administrative supplies without the authorization or knowledge of the
Company's management. This matter was investigated by law enforcement authorities and Company
advisors. We have since terminated this employee's employment and have taken actions intended to
ensure that no similar incidents can occur in the future, including implementing additional controls
relating to our cash disbursement process. In addition, we are seeking to recover our loss. We have
filed a claim with our insurance carrier, from which we received proceeds of $500,000, and have
filed suit against the sellers of the administrative supplies in December 2002. Our complaint
alleged that each of the defendants has (i) violated various sections of the Racketeer Influenced
and Corrupt Organization ("RICO") Act through their extortion, coercion, intimidation, fraud,
bribery and racketeering activity in connection with the unauthorized purchase of office supplies,
and (ii) committed unlawful business acts and practices in violation of Cal. Bus. & Prof. Code
Section 17200 et seq. Our suit seeks to recover actual and treble damages, costs and attorney fees
for the damage caused by each of defendants through their illegal conduct. In January 2003, we
amended our complaint to allege that each defendant further unlawfully offered prizes and gifts in
violation of Cal. Bus. & Prof. Code Section 17537 and unlawfully failed to advertise limitations
on the quantity of its sales in violation of Cal. Bus. & Prof. Code Section 17500.5. The amended
complaint reiterates our claim to recover actual and treble damages, costs and attorney fees. This
suit is in its early stages and, as of March 31, 2003, none of the defendants have yet answered
either complaint.
We are subject to legal proceedings and claims that arise in the normal course of
our business. We do not know whether we will prevail in these matters nor can we assure that any
remedy could be reached on commercially viable terms, if at all. Due to the inherent uncertainties
of litigation, we cannot accurately predict the ultimate outcome of these matters at this time and,
therefore, cannot estimate the range of possible loss.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit Number
Description
99.1(1)
Certification by Chief Executive Officer pursuant to 18 U.S.C.   1350, as adopted by Section 906
of the Sarbanes-Oxley Act of 2002.
99.2(1)
Certification by Chief Financial Officer pursuant to 18 U.S.C.  1350, as adopted by Section 906
of the Sarbanes-Oxley Act of 2002.
__________
(1) This exhibit is being furnished and shall not be deemed "filed" for
purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject
to the liabilities of that Section. This exhibit shall not be incorporated by reference into any
registration statement or other document pursuant to the Securities Act of 1933, as
amended.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on March 7, 2003 (File No. 000-
30713) announcing that it had entered into an Agreement and Plan of Merger on March 7, 2003 with
Computer Motion, Inc.
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 15, 2003
CERTIFICATIONS
I, Lonnie M. Smith, certify that:
I have reviewed this quarterly report on Form 10-Q of Intuitive Surgical, Inc.;
Based on my knowledge, this quarterly report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this quarterly report;
Based on my knowledge, the financial statements, and other financial information included in
this quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this quarterly
report;
The registrant's other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
designed such disclosure controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
The registrant's other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material weaknesses in internal controls;
and
any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
The registrant's other certifying officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Lonnie M. Smith
Lonnie M. Smith
Chief Executive Officer
May 15, 2003
I, Susan K. Barnes, certify that:
I have reviewed this quarterly report on Form 10-Q of Intuitive Surgical, Inc.;
Based on my knowledge, this quarterly report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this quarterly report;
Based on my knowledge, the financial statements, and other financial information included in
this quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this quarterly
report;
The registrant's other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
designed such disclosure controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
The registrant's other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material weaknesses in internal controls;
and
any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
The registrant's other certifying officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Susan K. Barnes
Susan K. Barnes
Chief Financial Officer
May 15, 2003
EXHIBIT INDEX
Exhibit Number
Description
99.1
(1)
Certification by Chief Executive Officer pursuant to 18 U.S.C.   1350, as adopted by Section 906
of the Sarbanes-Oxley Act of 2002.
99.2
(1)
Certification by Chief Financial Officer pursuant to 18 U.S.C.  1350, as adopted by Section 906
of the Sarbanes-Oxley Act of 2002.
__________
(1) This exhibit is being furnished and shall not be deemed "filed" for
purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject
to the liabilities of that Section. This exhibit shall not be incorporated by reference into any
registration statement or other document pursuant to the Securities Act of 1933, as
amended.