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<TITLE>Q2 2005 10Q DOC</TITLE>
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<FONT SIZE="3"><B><P ALIGN="CENTER">UNITED STATES<BR>
SECURITIES AND EXCHANGE COMMISSION<BR>
Washington, D.C. 20549</B></font></P>

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

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

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

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


<FONT SIZE="3"><B><P ALIGN="CENTER">
</font><font face=Wingdings>x</font><font>&nbsp; QUARTERLY REPORT PURSUANT TO SECTION 13 OR
     15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</B></font></P>
<font size="4" color="FF0000"><B><p align="center">
               For the quarterly period ended June 30, 2005
</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 34,925,694 shares of Common Stock, $0.001 par value per
share, outstanding as of August 1, 2005.

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<B><P ALIGN="CENTER">
                                Intuitive Surgical, Inc.<BR>
                                TABLE OF CONTENTS
</B></P>


<P><TABLE BORDER=0 CELLSPACING=1 CELLPADDING=2 WIDTH=85%>
  <TR vAlign=bottom>
<TD WIDTH="90%">
<font size="2"><B>
    PART I.   FINANCIAL INFORMATION
</font></B>
</TD>

<TD WIDTH="10%">
<font size="2"><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="2">
         Item 1. Financial Statements (Unaudited):
</font>
</TD>


<TD>
<font size="2">
<CENTER>&nbsp;</CENTER>
</font>
</TD>
</TR>

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

  <TR vAlign=toP>
<TD>
<font size="2">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Condensed consolidated balance sheets as of June 30, 2005 and<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           December 31, 2004

</font>
</TD>

<TD>
<font size="2">
<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="2">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Condensed consolidated statements of operations for the three-month and six-month<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
             periods ended June 30, 2005 and June 30, 2004

</font>
</TD>

<TD>
<font size="2">
<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="2">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Condensed consolidated statements of cash flows for the six-month<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
             periods ended June 30, 2005 and June 30, 2004
</font>
</TD>

<TD>
<font size="2">
<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="2">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Notes to condensed consolidated financial statements
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
</font>
</TD>

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

<TD>
<font size="2">
<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="2">
Item 3.   Quantitative and Qualitative Disclosures About Market Risk

</font>
</TD>

<TD>
<font size="2">
<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="2">
Item 4.   Controls and Procedures

</font>
</TD>

<TD>
<font size="2">
<CENTER><A HREF="#control">36</A></CENTER>
</font>
</TD>
</TR>

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

  <TR vAlign=toP>
<TD>
<font size="2"><B>
        PART II.  OTHER INFORMATION
</font></B>
</TD>

<TD>
<font size="2">
<CENTER>&nbsp;</CENTER>
</font>
</TD>
</TR>


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

  <TR vAlign=toP>
<TD>
<font size="2">
            Item 1.  Legal Proceedings
</font>
</TD>

<TD>
<font size="2">
<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="2">
        Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
</font>
</TD>

<TD>
<font size="2">
<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="2">
Item 3.  Defaults Upon Senior Securities
</font>
</TD>

<TD>
<font size="2">
<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="2">
Item 4.  Submission of Matters to a Vote of Security Holders
</font>
</TD>

<TD>
<font size="2">
<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="2">
Item 5.  Other Information
</font>
</TD>

<TD>
<font size="2">
<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="2">
        Item 6.   Exhibits
</font>
</TD>

<TD>
<font size="2">
<CENTER><A HREF="#item6">42</A></CENTER>
</font>
</TD>
</TR>
</TABLE>

<font FACE="Times New Roman" SIZE="2">

<B><P>PART I.  FINANCIAL INFORMATION </P></B>

<P>Item 1. Financial Statements </P>


<BR>
<BR>
<BR>
<HR WIDTH="85%">
<BR>
<BR>
<BR>
<P style="PAGE-BREAK-BEFORE: always" align=left>
<A NAME="bs"></A>
<B><P ALIGN="CENTER">
                            INTUITIVE SURGICAL, INC.
<BR>
                        CONDENSED CONSOLIDATED BALANCE SHEETS
<BR>
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<BR>
                                (UNAUDITED)
</B>

<PRE>

                                                              June 30,    December 31,
                                                               2005          2004
                                                           ------------  ------------
                                                                         (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents.............................. $      7,972  $      5,771
  Investments............................................      150,570       126,267
  Accounts receivable, net...............................       39,646        35,443
  Inventory..............................................        8,836         5,966
  Prepaids...............................................        4,652         3,032
  Restricted cash........................................          319           205
                                                           ------------  ------------
          Total current assets...........................      211,995       176,684
Property, plant and equipment, net.......................       29,291        27,065
Restricted cash..........................................           --           319
Intangible assets, net...................................        5,288         6,221
Goodwill.................................................      142,407       143,332
Other assets.............................................          541           608
                                                           ------------  ------------
          Total assets...................................      389,522       354,229
                                                           ============  ============
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................... $      5,382  $      4,485
  Accrued compensation and employee benefits.............        9,030        10,321
  Deferred revenue.......................................       18,396        15,372
  Restructuring accrual..................................          397           541
  Other accrued liabilities..............................        7,457         7,057
  Current portion of notes payable.......................          171           609
                                                           ------------  ------------
          Total current liabilities......................       40,833        38,385
Deferred revenue.........................................          337           505
Other accrued liabilities................................          342           407
                                                           ------------  ------------
          Total non-current liabilities..................          679           912
Commitments and contingencies............................           --            --
Stockholders' equity:
  Common stock, 100,000,000 shares authorized, $0.001
     par value, 34,870,405 and 34,234,795 shares
     issued and outstanding as of June 30, 2005
     and December 31, 2004, respectively.................           35            34
  Additional paid-in capital.............................      440,064       430,362
  Accumulated deficit....................................      (91,235)     (114,936)
  Treasury stock, at cost, no shares and 4,461 shares at
     June 30, 2005 and December 31, 2004, respectively...           --          (136)
  Accumulated other comprehensive loss...................         (854)         (392)
                                                           ------------  ------------
          Total stockholders' equity.....................      348,010       314,932
                                                           ------------  ------------
          Total liabilities and stockholders' equity..... $    389,522  $    354,229
                                                           ============  ============

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


<BR>
<BR>
<BR>
<HR WIDTH="85%">
<BR>
<BR>
<BR>
<P style="PAGE-BREAK-BEFORE: always" align=left>
<A NAME="ops"></A>
<B><P ALIGN="CENTER">
                            INTUITIVE SURGICAL, INC.
<BR>
                    CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<BR>
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<BR>
                                  (UNAUDITED)
</B>

<PRE>

                                                  Three Months Ended       Six Months Ended
                                                      June 30,                June 30,
                                               ----------------------  ----------------------
                                                  2005        2004        2005        2004
                                               ---------- -----------  ---------- -----------
Sales:
  Products................................... $   44,651  $   25,850  $   78,834  $   48,321
  Services...................................      8,105       5,207      15,536       9,795
                                               ----------  ----------  ----------  ----------
    Total sales..............................     52,756      31,057      94,370      58,116
Cost of sales:
  Products...................................     13,649       9,260      24,804      18,073
  Services...................................      3,480       2,169       6,676       4,579
                                               ----------  ----------  ----------  ----------
    Total cost of sales......................     17,129      11,429      31,480      22,652
                                               ----------  ----------  ----------  ----------
    Gross profit.............................     35,627      19,628      62,890      35,464
                                               ----------  ----------  ----------  ----------
Operating costs and expenses:
  Selling, general, and administrative.......     15,934      11,535      30,138      21,778
  Research and development...................      4,355       3,626       8,500       8,936
                                               ----------  ----------  ----------  ----------
    Total operating costs and
     expenses................................     20,289      15,161      38,638      30,714
                                               ----------  ----------  ----------  ----------
Income from operations.......................     15,338       4,467      24,252       4,750
Other income, net ...........................        954         626       1,677       1,232
                                               ----------  ----------  ----------  ----------
Income before taxes..........................     16,292       5,093      25,929       5,982

Income tax expense...........................      1,508         263       2,041         299
                                               ----------  ----------  ----------  ----------
Net income................................... $   14,784  $    4,830  $   23,888  $    5,683
                                               ==========  ==========  ==========  ==========
Net income per share:
  Basic...................................... $     0.42  $     0.14  $     0.69  $     0.17
                                               ==========  ==========  ==========  ==========
  Diluted ................................... $     0.40  $     0.14  $     0.64  $     0.17
                                               ==========  ==========  ==========  ==========
Shares used in computing net income
  per share:
  Basic......................................     34,790      33,559      34,655      33,421
                                               ==========  ==========  ==========  ==========
  Diluted....................................     37,244      34,210      37,133      34,170
                                               ==========  ==========  ==========  ==========


</PRE>

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



<BR>
<BR>
<BR>
<HR WIDTH="85%">
<BR>
<BR>
<BR>
<P style="PAGE-BREAK-BEFORE: always" align=left>
<A NAME="flows"></A>
<B><P ALIGN="CENTER">
                            INTUITIVE SURGICAL, INC.
<BR>
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<BR>
                                 (IN THOUSANDS)
<BR>
                                  (UNAUDITED)
</B>
<PRE>

                                                            For the Six Months
                                                              Ended June 30,
                                                         ------------------------
                                                            2005         2004
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net income............................................. $    23,888  $     5,683
Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation.........................................       2,363        2,606
  Benefit for doubtful accounts........................         (78)        (320)
  Gain on sales of property and equipment..............          --           (3)
  Amortization of deferred compensation and stock
   compensation........................................          --           99
  Amortization of intangible assets....................         934          934
  Acquisition related tax benefits.....................         925           --
  Income tax benefits from employee stock option plans.         529           --
Changes in operating assets and liabilities:
  Accounts receivable..................................      (4,126)       2,434
  Prepaids.............................................      (1,637)        (591)
  Inventory............................................      (2,871)       1,626
  Other assets.........................................          62          226
  Accounts payable.....................................         930       (1,584)
  Accrued compensation and employee benefits...........      (1,226)        (108)
  Restructuring accrual................................        (144)        (215)
  Other accrued liabilities............................         361       (1,894)
  Deferred revenue.....................................       2,856        2,058
                                                         -----------  -----------
Net cash provided by operating activities..............      22,766       10,951
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................      (4,604)     (21,409)
Disposition of property and equipment..................          --           26
Release of restricted cash.............................         204          307
Purchase of investments................................     (85,704)     (41,782)
Proceeds from sales and maturities of
 investments...........................................      60,890       44,104
                                                         -----------  -----------
Net cash used in investing activities..................     (29,214)     (18,754)
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       9,195        5,353
Repurchase of common stock.............................         (72)          --
Repayment of notes payable.............................        (438)        (591)
                                                         -----------  -----------
Net cash provided by financing activities..............       8,685        4,762
                                                         -----------  -----------
Effect of exchange rate changes on cash and cash
 equivalents...........................................         (36)         (64)
                                                         -----------  -----------
Net increase (decrease) in cash and cash equivalents...       2,201       (3,105)
Cash and cash equivalents, beginning of period.........       5,771       11,335
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $     7,972  $     8,230
                                                         ===========  ===========

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

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

<FONT SIZE=2><B><P ALIGN="CENTER"><A NAME="notes"></A>INTUITIVE SURGICAL, INC. <BR>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS <BR>
(UNAUDITED) </P>
</B><P>In this report, &quot;Intuitive Surgical,&quot; &quot;Intuitive,&quot; and the &quot;Company&quot; refer to
Intuitive Surgical, Inc.</P>
<B><P>NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</P>
<I><P>Basis of Presentation</P>
</B></I><P ALIGN="JUSTIFY">The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
notes required by accounting principles generally accepted in the United States for complete financial statements. In the
opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been
included. The consolidated balances at December 31, 2004 were derived from the audited financial statements included
in  Intuitive Surgical, Inc.'s Annual Report on Form 10-K (&quot;Annual Report&quot;) for the year ended December 31,
2004. The financial statements included in this report should be read in conjunction with the audited financial statements
for the year ended December 31, 2004 included in the Annual Report. The results for the interim period ended June 30,
2005 are not necessarily indicative of the results to be expected for the full year ending December 31, 2005 or future
operating periods.  The condensed consolidated financial statements include the accounts of the Company and its
subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.   </P>
<B><I><P ALIGN="JUSTIFY">Use of Estimates</P>
</B></I><P ALIGN="JUSTIFY">The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ
materially from these estimates.</P>
<B><I><P ALIGN="JUSTIFY">Revenue Recognition</P>
</B></I><P ALIGN="JUSTIFY">The Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or service has been rendered, the price is fixed or determinable and collectibility is reasonably
assured. </P>
<P ALIGN="JUSTIFY">In certain cases, revenue from direct system sales is earned pursuant to multiple-element
arrangements that require judgment in the areas of customer acceptance, collectibility, the separability of units of
accounting, and the fair value of individual elements.  Effective July 1, 2003, the Company adopted the provisions of
Emerging Issues Task Force (&quot;EITF&quot;) Issue No. 00-21, &quot;Revenue Arrangements with Multiple
Deliverables,&quot; on a prospective basis.  The principles and guidance outlined in EITF 00-21 provide a framework to
(a) determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and (b)
determine how the arrangement consideration should be measured and allocated to the separate units of accounting in
the arrangement. The Company determined that its multiple-element arrangements are generally comprised of the
following elements that would qualify as separate units of accounting: system sales, service, installation, and training.
Each of these elements represents individual units of accounting as the delivered item has value to a customer on a
stand-alone basis, objective and reliable evidence of fair value exists for undelivered items, and arrangements generally
do not contain a general right of return relative to the delivered item.  The Company determines fair value based on the
price of the deliverable when it is sold separately or based on third-party evidence.  In accordance with the guidance in
EITF 00-21, the Company uses the residual method to allocate the arrangement consideration when it does not have fair
value of the system sale.  Under the residual method, the amount of consideration allocated to the delivered item equals
the total arrangement consideration less the aggregate fair value of the undelivered items.  Assuming all other criteria for
revenue recognition have been met, the Company recognizes revenue for system sales when delivery and acceptance
occurs, for installation and training when the services are rendered, and for service ratably over the service period,
which is generally one year.</P>
<P ALIGN="JUSTIFY">The Company's distributors do not have price protection rights.  The Company records an
allowance for sales returns based on historical returns. </P>
<P ALIGN="JUSTIFY">Revenue from sales of instruments and accessories is recognized upon delivery.  Revenue
related to future commitments under separately priced service contracts is deferred and recognized ratably over the
service period. All costs associated with the provision of service and maintenance, including salaries, benefits, travel,
spare parts and equipment, are recognized in cost of sales as incurred.  Amounts billed in excess of revenue recognized
are included as deferred revenue in the condensed consolidated balance sheets.</P>
<P ALIGN="JUSTIFY">The Company's <I>da Vinci </I>Surgical System, <I>Hermes</I> Control Center and
<I>AESOP</I> Endoscope Positioner contain a software component. The Company believes that this software element
is an incidental part of each system. The software element within the Company's products is not sold or marketed
separately to customers, and the software does not operate independently of each system. Furthermore, the software
development effort does not represent a significant cost to the Company relative to the overall development cost of the
product. As such, the software the Company provides is incidental to each system as a whole, and the software revenue
guidance provided in Statement of Position (&quot;SOP&quot;) 97-2, &quot;Software Revenue Recognition,&quot; is not
applicable to the Company's revenues.</P>

<B><I><P>Stock-Based Compensation  </P>
</B></I><P ALIGN="JUSTIFY">The Company applies Accounting Principles Board (&quot;APB&quot;) Opinion No. 25,
&quot;Accounting for Stock Issued to Employees,&quot; and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recorded for stock option grants issued with an exercise price
equal to the market value of the underlying stock on the date granted.  The Company has recorded stock-based
compensation, primarily related to deferred compensation arising from the Company's initial public offering in 2000 and
its acquisition of Computer Motion, Inc. (&quot;Computer Motion&quot;) in June 2003.  As required under Statement of
Financial Accounting Standards (&quot;SFAS&quot;) No. 148, &quot;Accounting for Stock-Based Compensation -
Transition and Disclosure,&quot; the Company has provided the following pro forma net income and pro forma net
income per share disclosure for stock-based awards as if the fair value-based method defined in SFAS 123,
&quot;Accounting for Stock-Based Compensation,&quot; had been applied, amortizing expense ratably over the service
period (amounts in thousands, except per share amounts):</P>

<PRE>

                                                     Three Months Ended   Six Months Ended
                                                          June 30,            June 30,
                                                     ------------------  -------------------
                                                       2005      2004      2005       2004
                                                     --------  --------  ---------  --------
Net income, as reported............................ $ 14,784  $  4,830  $  23,888  $  5,683
Add:  Total stock-based employee
  compensation expense included in reported
  net income, net of $0 related tax effect.........       --        84         --        99
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method for
  all awards, net of $0 related tax effect.........   (3,123)   (2,657)    (6,129)   (5,117)
                                                     --------  --------  ---------  --------
Pro forma net income............................... $ 11,661  $  2,257  $  17,759  $    665
                                                     ========  ========  =========  ========

Net income per share:
  Basic - as reported.............................. $   0.42  $   0.14  $    0.69  $   0.17
  Basic - pro forma................................ $   0.34  $   0.07  $    0.51  $   0.02

  Diluted - as reported............................ $   0.40  $   0.14  $    0.64  $   0.17
  Diluted - pro forma.............................. $   0.31  $   0.07  $    0.48  $   0.02


</PRE>

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

<PRE>

                                      Three Months Ended    Six Months Ended
                                          June 30,              June 30,
                                     -------------------   ------------------
                                        2005      2004        2005      2004
                                     --------  ---------   --------  --------
Stock Option Plans:
   Average risk free interest rate.     3.85 %     3.36 %     3.75 %    3.03 %
   Average expected life (years)...      4.0        4.0        4.0       4.0
   Volatility......................       58 %       68 %       58 %      70 %

Stock Purchase Plan:
   Average risk free interest rate.     1.89 %     1.30 %     1.93 %    1.30 %
   Average expected life (years)...      1.4        1.1        1.4       1.2
   Volatility......................       49 %       62 %       49 %      62 %


</PRE>

<B><I><P>Income Tax</P>
</B></I><P>The Company makes certain estimates and judgments in determining income tax expense for financial
statement purposes.  These estimates and judgments occur in the calculation of certain tax assets and liabilities, which
arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.</P>
<B><I><P>Recent Accounting Pronouncements</P>
</B></I><P ALIGN="JUSTIFY">In December 2004, the Financial Accounting Standards Board (&quot;FASB&quot;)
issued SFAS No. 123R, &quot;Share Based Payment&quot; (&quot;SFAS 123R&quot;), which replaces SFAS 123 and
supersedes APB Opinion No. 25, &quot;Accounting for Stock Issued to Employees.&quot; In March 2005, the SEC
issued Staff Accounting Bulletin (&quot;SAB&quot;) No. 107, providing supplemental implementation guidance for SFAS
123R.  In April 2005, the SEC issued &quot;Amendment to Rule 04-01(a) of Regulation S-X Regarding the Compliance
Date for SFAS No. 123R, &quot;Share Based Payment,&quot; (the &quot;Amendment to Rule 4-01(a)&quot;), changing
the effective date for most public companies to adopt SFAS 123R to the first interim reporting period of a company's
fiscal year that begins on or after June 15, 2005.  Under the Amendment to Rule 4-01(a), the Company is now required
to adopt SFAS 123R in the first quarter of fiscal year 2006.</P>

<P ALIGN="JUSTIFY">SFAS 123R permits public companies to choose between the following two adoption
methods:</P>

<OL>

<P ALIGN="JUSTIFY"><LI>A &quot;modified prospective&quot; method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the
effective date of SFAS 123R that remain unvested on the effective date; or</LI></P>
<P ALIGN="JUSTIFY"><LI>A &quot;modified retrospective&quot; method which includes the requirements of the
modified prospective method described above, but also permits entities to restate based on the amounts previously
recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior
interim periods of the year of adoption.</LI></P>
</OL>

<P ALIGN="JUSTIFY">The Company currently measures compensation costs related to share-based payment under
APB 25, as allowed by SFAS 123, and provides disclosure in notes to the financial statements as required by SFAS 123.
The Company expects the adoption of SFAS 123R and SAB 107 will have a material adverse impact on the net income
and net income per share.  The Company is currently evaluating the extent of such impact and has not yet determined
which transition method the Company will use in adopting SFAS 123R.</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, and accounts receivable. The counterparties to the agreements relating to the
Company's investment securities 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
and six months ended June 30, 2005 and 2004, no customer accounted for more than 10% of total sales or accounts
receivable. The Company 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, <I>Hermes</I> Control Center, <I>AESOP</I>
Endoscope Positioner and related instruments and accessories accounted for all of the Company's product sales for the
three and six months ended June 30, 2005 and 2004. Purchases of key parts and components used to manufacture the
Company's products are from limited supply sources. The inability of any of these suppliers to fulfill the Company's
supply requirements may negatively impact future operating results.</P>

<P ALIGN="JUSTIFY">The Company operates in one segment: the development and marketing of products designed
for use in surgery.   The distribution of sales by geographic location is as follows (in thousands): </P>

<PRE>

                                 Three Months Ended     Six Months Ended
                                       June 30,              June 30,
                               --------------------- ---------------------
                                   2005       2004       2005       2004
                                ---------  ---------  ---------  ---------
Domestic...................... $  44,152  $  24,674  $  81,009  $  45,180
International.................     8,604      6,383     13,361     12,936
                                ---------  ---------  ---------  ---------
  Total sales................. $  52,756  $  31,057  $  94,370  $  58,116
                                =========  =========  =========  =========

</PRE>

<B><P ALIGN="JUSTIFY">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 June 30, 2005 and
December 31, 2004. Approximately $5.6 million and $1.7 million of money market instruments were included in cash and
cash equivalents at June 30, 2005 and December 31, 2004, respectively.</P>

<B><P>NOTE 4. SHORT-TERM INVESTMENTS</P>
</B><P ALIGN="JUSTIFY">All short-term investments are classified as available-for-sale, and, therefore, are carried at
fair market value. The Company views its available-for-sale portfolio as available for use in its current operations.
Accordingly, all investments are classified as short-term, even though the stated maturity date may be one year or more
beyond the current balance sheet date. Available-for-sale securities are stated at fair market value based upon quoted
market prices of the securities. Unrealized gains and losses on such securities are reported as a separate component of
stockholders' equity. Realized gains and losses on available-for-sale securities are included in interest income. The cost
of securities sold is based on the specific identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.</P>

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

<PRE>

                             June 30, 2005    December 31, 2004
                           -----------------  -----------------
U.S. corporate debt...... $          73,794  $          54,430
U.S. government debt.....            44,576             33,188
Municipal debt...........            32,200             38,649
                           -----------------  -----------------
  Total.................. $         150,570  $         126,267
                           =================  =================

</PRE>

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

<PRE>

                                  June 30,    December 31,
                                   2005          2004
                               ------------  ------------
Raw materials................ $      3,085  $      2,404
Work-in-process..............        1,901         1,183
Finished goods...............        3,850         2,379
                               ------------  ------------
  Total...................... $      8,836  $      5,966
                               ============  ============

</PRE>

<B><P>NOTE 6. GOODWILL AND INTANGIBLE ASSETS</P>
</B><I><P ALIGN="JUSTIFY">Goodwill and Intangible Assets</P>
</I><P ALIGN="JUSTIFY">Goodwill represents the excess of the purchase price over the fair value of the underlying net
tangible and intangible assets.  Goodwill is not deductible for tax purposes.  In accordance with SFAS No. 142,
&quot;Goodwill and Other Intangible Assets,&quot; goodwill and intangible assets with indefinite useful lives can no
longer be amortized; rather, they will be tested for impairment at least annually (more frequently if certain indicators are
present).  Intangible assets with finite useful lives will continue to be amortized over their respective useful lives.  In the
event management determines that goodwill has been impaired, the Company will record an accounting charge for the
impairment during the fiscal quarter in which the determination is made. Of the total purchase price related to the
Company's acquisition of Computer Motion on June 30, 2003, $143.3 million was allocated to goodwill and $8.6 million
was allocated to amortizable intangible assets, comprised of developed technology of $3.5 million, core technology of
$3.3 million, customer relationships of $1.3 million, and other intangible assets totaling $0.5 million.</P>

<P ALIGN="JUSTIFY">The Company has adjusted the goodwill amount related to the projected use of Computer
Motion, Inc.'s net operating losses from the acquisition in June 2003.  A full valuation allowance was recorded at the
acquisition date.  </P>

<P ALIGN="JUSTIFY">The following table represents the changes in goodwill for the period (in thousands):</P>

<PRE>

Balance at December 31, 2004...... $  143,332
Acquisition related tax benefits..       (925)
                                     ---------
Balance at June 30, 2005.......... $  142,407
                                     =========

</PRE>

<P ALIGN="JUSTIFY">Other purchased intangible assets represent patents, which are carried at cost less accumulated
amortization. Amortization is computed using the straight-line method over the expected useful life of generally six or
seven years.</P>

<P ALIGN="JUSTIFY"> Net intangible assets is comprised of the following (in thousands):</P>

<PRE>

                                                      June 30, 2005
                                    -----------------------------------------------
                                                 Accumulated
                                      Gross     Amortization  Impairment     Net
                                    ---------   ------------  ----------  ---------
Developed technology.............  $   3,500   $        250  $    3,250  $      --
Core technology..................      3,300            943          --      2,357
Customer relationships...........      1,300            633          --        667
Patents..........................      7,310          5,168          --      2,142
Other intangible assets..........        500             87         291        122
                                    ---------   ------------  ----------  ---------
  Total intangible assets, net...  $  15,910   $      7,081  $    3,541  $   5,288
                                    =========   ============  ==========  =========

                                                   December 31, 2004
                                    -----------------------------------------------
                                                 Accumulated
                                      Gross     Amortization  Impairment     Net
                                    ---------   ------------  ----------  ---------
Developed technology.............  $   3,500   $        250  $    3,250  $      --
Core technology..................      3,300            707          --      2,593
Customer relationships...........      1,300            501          --        799
Patents..........................      7,310          4,616          --      2,694
Other intangible assets..........        500             74         291        135
                                    ---------   ------------  ----------  ---------
  Total intangible assets, net...  $  15,910   $      6,148  $    3,541  $   6,221
                                    =========   ============  ==========  =========

</PRE>

<P ALIGN="JUSTIFY"> Amortization expense related to intangible assets was $0.5 million for each of the three months
ended June 30, 2005 and 2004. Amortization expense related to intangible assets was $0.9 million for each of the six
months ended June 30, 2005 and 2004.</P>

<P ALIGN="JUSTIFY">Estimated future amortization expense related to intangible assets at June 30, 2005 is as follows
(in thousands):</P>

<PRE>

        Fiscal Year
----------------------------
2005 (remaining 6 months)...  $      934
2006........................       1,275
2007........................       1,078
2008........................         811
2009........................         811
Thereafter..................         379
                                ---------
  Total.....................  $    5,288
                                =========

</PRE>

<I><P ALIGN="JUSTIFY">Impairment of Goodwill</P>
</I><P ALIGN="JUSTIFY">The Company has elected to perform an annual analysis of goodwill during the fourth quarter
of each year.  Based on the Company's 2004 impairment analysis, no impairments were identified, and no indicators of
impairment were identified during the six months ended June 30, 2005.</P>
<I><P ALIGN="JUSTIFY">Impairment of Long-Lived Assets</P>
</I><P ALIGN="JUSTIFY">SFAS No. 144, &quot;Accounting for the Impairment or Disposal of Long-Lived
Assets,&quot; requires recognition of impairment of long-lived assets when circumstances indicate an impairment has
occurred and in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to
such assets.  Accordingly, the Company evaluates asset recoverability when an event occurs that may impair
recoverability of the asset.  The Company determines the recoverability of the carrying amount of each asset by
reviewing the following factors: the undiscounted value of expected operating cash flows; the estimated useful or
contractual life of the asset; and the contract or product supporting the asset.  No impairment losses were incurred
during the six months ended June 30, 2005 and 2004.</P>

<B><P>NOTE 7. 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. A review of
warranty obligations is performed regularly to determine the adequacy of the reserve. Based on the outcome of this
review, revisions to the estimated warranty liability are recorded as appropriate.</P>

<P ALIGN="JUSTIFY">The following table reconciles the changes to the product warranty liability, which is included in
other accrued liabilities on the accompanying condensed consolidated balance sheets, for the period indicated (in
thousands):</P>

<PRE>

                                         Balance at                            Balance at
                                         Beginning   Warranty     Warranty      End of
                                         of Period     Usage      Expensed      Period
                                        -----------  ---------  -------------  ---------
Six months ended June 30, 2005.......  $       136  $     (37) $          19  $     118

</PRE>

<P ALIGN="JUSTIFY"> The Company from time to time enters into agreements to indemnify its customers against
liability and damages arising from patent claims against the Company's products. The term of these agreements varies,
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 indemnification clauses and no liabilities have
been recorded for this obligation on the Company's balance sheets as of June 30, 2005 or December 31, 2004.</P>

<B><P ALIGN="JUSTIFY">NOTE 8. RESTRUCTURING CHARGES </P>
</B><P ALIGN="JUSTIFY">Upon the consummation of the acquisition of Computer Motion, Intuitive's management
approved plans to restructure the operations of the combined entity.  The restructuring plan eliminated redundant
activities and infrastructure. The Company now has a single sales and marketing organization and has consolidated all
manufacturing and administrative functions in Sunnyvale, California.  Based upon the restructuring plan, the Company
recorded a $3.4 million accrual in accordance with EITF 95-3, &quot;Recognition of Liabilities in Connection with a
Purchase Business Combination.&quot; In accordance with EITF No. 95-3, the restructuring accrual has been recorded
as a component of the purchase price. The accrual was comprised of $2.6 million for employee severance costs, which
was substantially paid out by the end of 2004, and $0.8 million to exit existing lease commitments.  The Company has
estimated vacancy periods of between one month and three years between exiting various sites and realizing subleasing
proceeds.  The Company increased the accrual for the estimated losses to be incurred to sublet vacated facilities by
$0.2 million in 2004 due to the change in assumptions used to calculate the losses on subleasing the vacated facilities.
This amount was recorded as an adjustment to goodwill.</P>
<P ALIGN="JUSTIFY">Subsequent to the Computer Motion acquisition, based on the Company's cost structure and
future development plans,</FONT><FONT SIZE=1> </FONT><FONT SIZE=2>the Company determined to completely
shut down the Goleta research and development facility.  This plan called for exiting the last Goleta rented facility and
terminating all of the Goleta-based employees.  In accordance with SFAS No. 146, &quot;Accounting for Costs
Associated with Exit or Disposal Activities,&quot; the Company recorded $0.4 million of one-time employee termination
costs, which were paid out by the end of 2004.  In 2004, the Company completed the shutdown of the Goleta research
and development facilities and accrued $0.5 million of lease commitment costs to exit the leased facility.  The Company
later decreased its restructuring liability by $0.2 million due to the changes in estimates of subleasing proceeds.  The
charges incurred were recorded in research and development expenses on the condensed consolidated statement of
operations.  The Company expects to fully utilize the accrual by the third quarter of 2007, when existing lease
commitments expire.</P>

<P ALIGN="JUSTIFY">The following table summarizes the restructuring activity for the periods indicated (in
thousands):</P>

<PRE>


                                                    EITF No. 95-3          SFAS No. 146
                                             ----------------------  ---------------------
                                              Employee     Lease     Employee     Lease
                                             Severance   Commitments Severance  Commitments Total
                                             ----------  ----------  ---------  ---------  --------
Cost accrued............................... $    2,629  $      816  $     410  $     525  $  4,380
Cash payments, net of subleasing proceeds..     (2,781)       (593)      (410)      (207)   (3,991)
Currency impact............................        (23)        (23)        --         --       (46)
Adjustments................................        175         200         --       (177)      198
                                             ----------  ----------  ---------  ---------  --------
  Balance at December 31, 2004.............         --         400         --        141       541
Cash payments, net of subleasing proceeds..         --         (96)        --        (48)     (144)
                                             ----------  ----------  ---------  ---------  --------
  Balance at June 30, 2005................. $       --  $      304  $      --  $      93  $    397
                                             ==========  ==========  =========  =========  ========

</PRE>

<B><P>NOTE 9. COMPREHENSIVE INCOME </P>
</B><P>Comprehensive income includes net income and other comprehensive income (loss), which primarily consists
of unrealized gains and losses on available-for-sale securities and cumulative translation adjustments. Total
accumulated other comprehensive loss is displayed as a separate component of stockholders' equity in the
accompanying condensed consolidated balance sheets.  The components of comprehensive income consist of the
following (in thousands):</P>

<PRE>

                                          Three Months Ended     Six Months Ended
                                               June 30,              June 30,
                                        --------------------  --------------------
                                           2005       2004       2005       2004
                                        ---------  ---------  ---------  ---------
Net income, as reported............... $  14,784  $   4,830  $  23,888  $   5,683
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.......................        14        (27)        50        (57)
  Change in unrealized gain (loss)
    on available-for-sale securities..       321     (1,351)      (512)    (1,107)
                                        ---------  ---------  ---------  ---------
Comprehensive income.................. $  15,119  $   3,452  $  23,426  $   4,519
                                        =========  =========  =========  =========

</PRE>

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

<PRE>

                                              June 30,    December 31,
                                                2005         2004
                                            ------------  -----------
Accumulated net unrealized loss on
  available-for-sales securities.......... $       (938) $      (427)
Foreign currency translation
  adjustments.............................           84           35

Total accumulated other comprehensive       ------------  -----------
  loss.................................... $       (854) $      (392)
                                            ============  ===========

</PRE>

<B><P>NOTE 10. NET INCOME PER SHARE</P>
</B><P ALIGN="JUSTIFY">Basic net income per share is computed by dividing the net income for the period by the
weighted-average number of common shares outstanding during the period.  Diluted net income per share is computed
by dividing the net income for the period by the weighted-average number of common shares outstanding and potential
number of common shares outstanding during the period less the weighted-average number of common shares subject
to repurchase if their effect is dilutive.</P>

<P ALIGN="JUSTIFY">The following table presents the computation of basic and diluted net income per share (in
thousands, except per share data).  </P>

<PRE>

                                            Three Months Ended        Six Months Ended
                                                June 30,                 June 30,
                                         -----------------------  -------------------------
                                            2005         2004        2005         2004
                                         -----------  ----------  -----------  ------------
Net income............................. $    14,784  $    4,830  $    23,888  $      5,683
Basic:
  Weighted-average shares outstanding..      34,790      33,559       34,655        33,421
                                         ===========  ==========  ===========  ============
  Basic net income per common share.... $      0.42  $     0.14  $      0.69  $       0.17
                                         ===========  ==========  ===========  ============
Diluted:
  Weighted-average shares outstanding
    used in basic calculation..........      34,790      33,559       34,655        33,421
  Add common stock equivalents.........       2,454         651        2,478           749
                                         -----------  ----------  -----------  ------------
  Weighted-average shares used in
    computing diluted net income
    per common share...................      37,244      34,210       37,133        34,170
                                         ===========  ==========  ===========  ============
  Diluted net income per common share.. $      0.40  $     0.14  $      0.64  $       0.17
                                         ===========  ==========  ===========  ============

</PRE>

<P ALIGN="JUSTIFY">Potential weighted-average common shares excluded from the computation of diluted net
income per share as their effect would be antidilutive were 837,000 shares and 2,143,000 shares, respectively, for the
three months ended June 30, 2005 and 2004, and 657,000 shares and 1,868,000 shares, respectively, for the six
months ended June 30, 2005 and 2004.  The exercise price of these options exceeded the average market price during
the three-month and six-month periods mentioned above.  These shares could, however, potentially dilute basic income
per share in the future.</P>

<B><P ALIGN="JUSTIFY">NOTE 11. INCOME TAX</P></B>

<P ALIGN="JUSTIFY">
Tax expense for interim periods is computed on the basis of a projected
effective tax rate for the full year.  The Company's effective tax rates
for the three and six month periods ended June 30, 2005 were
approximately 9% and 8%, respectively, compared to 5% for both periods
in 2004. The tax rate in the second quarter of fiscal 2005 brings the
Company's year-to-date tax rate to the anticipated full year rate of 8%.
 The fiscal 2005 tax rates include the anticipated current tax
liability, the anticipated benefits from utilizing tax deductions
related to stock option plans, and the anticipated tax benefit that will
be derived from the utilization of the loss carryovers obtained as a
result of the Computer Motion acquisition in 2003.  When any portion of
the Computer Motion's loss carryovers are utilized based on tax return
ordering rules (older year losses utilized first), tax expense is
recorded and goodwill related to the Computer Motion acquisition is
reduced.  The fiscal 2005 effective tax rates are higher than those of
fiscal 2004 because of the utilization of some Computer Motion loss
carryovers.

<P ALIGN="JUSTIFY">
The effective tax rate for fiscal 2005 continues to reflect a full
valuation allowance against the Company's deferred tax assets.  The
Company evaluates the realizability of the deferred tax assets every
quarter.  Should the Company determine that it is more likely than not
that the future taxable income will be sufficient to utilize some or all
of the deferred tax assets, the Company will release some or all of the
valuation allowance.  The release of this valuation allowance would
result in a combination of tax provision benefit (reduced expense or
negative expense) and a decrease in the goodwill recorded as a result of
the Computer Motion acquisition.


<B><P ALIGN="JUSTIFY">NOTE 12. COMMITMENTS AND CONTINGENCIES </P>
</B><I><P ALIGN="JUSTIFY">Operating Leases</P>
</I><P ALIGN="JUSTIFY">The Company leases office space for research and development in Milford, Connecticut and
sales office space in St. Germain en Laye, France.  In connection with the acquisition of Computer Motion, the Company
assumed leases in Goleta, California.  These leases have varying terms, the longest of which extends to September
2007.  As of June 30, 2005, the Company sublet approximately 92% of its office space in Goleta.  </P>

<P ALIGN="JUSTIFY">Future minimum lease commitments, net of sublease income of $941,000 during the next three
years, under the Company's operating leases as of June 30, 2005 are as follows (in thousands):</P>

<PRE>

2005 (remaining 6 months)..... $     340
2006..........................       622
2007..........................       337
2008..........................        62
2009..........................        35
                                ---------
  Total....................... $   1,396
                                =========

</PRE>

<P ALIGN="JUSTIFY">Rent expense was approximately $40,000 and $0.1 million for the three months ended June 30,
2005 and 2004, respectively.  Rent expense was approximately $84,000 and $0.9 million for the six months ended June
30, 2005 and 2004, respectively.</P>

<I><P ALIGN="JUSTIFY">Contingencies</P>
</I><P>The discussion of the Company's legal proceedings is incorporated by reference from Part II: Other Information -
Item 1. Legal Proceedings of this report.</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, &quot;Intuitive Surgical,&quot; &quot;Intuitive,&quot; the
&quot;Company,&quot; &quot;we,&quot; &quot;us,&quot; and &quot;our&quot; refer to Intuitive Surgical, Inc.</P>
<P ALIGN="JUSTIFY">This management's discussion and analysis of financial condition as of June 30, 2005 and
results of operations for the three months and six months ended June 30, 2005 and June 30, 2004 should be read in
conjunction with the management's discussion and analysis of financial condition and results of operations included in
the Annual Report.  </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 &quot;Factors Affecting Operating
Results&quot; below as well as those discussed elsewhere.</P>
<P ALIGN="JUSTIFY">Intuitive Surgical&reg;, <I>da Vinci</I>&reg;, InSite&reg;, EndoWrist&reg;, <I>Zeus</I>&reg;,
<I>Hermes</I>&reg;, and <I>Aesop</I>&reg; are registered trademarks of Intuitive Surgical, Inc.</P>
<B><I><P>OVERVIEW&nbsp;</P>
</B></I><P ALIGN="JUSTIFY">We design, manufacture and market the <I>da Vinci</I> Surgical System, an advanced
surgical system that we believe represents a new generation of surgery-the third generation. The <I>da Vinci</I>
Surgical System consists of a surgeon's console, a patient-side cart, a high performance vision system and proprietary
&quot;wristed&quot; instruments. The <I>da Vinci</I> Surgical System seamlessly translates the surgeon's natural hand
movements on instrument controls at a console into corresponding micro-movements of instruments positioned inside
the patient through small puncture incisions, or ports. We believe that the <I>da Vinci</I> Surgical System is the only
commercially available technology that can provide the surgeon with the intuitive control, range of motion, fine tissue
manipulation capability and 3-D visualization characteristic of open surgery, while simultaneously allowing the surgeons
to work through the small ports of minimally invasive surgery, or MIS. By placing computer-enhanced technology
between the surgeon and the patient, we believe that the <I>da Vinci</I> Surgical System enables surgeons to perform
better surgery in a manner never before experienced. The <I>da Vinci</I> Surgical System is sold for use in multiple
surgical specialties, principally urology, cardiac, general, and gynecologic surgery.</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 our revenues have come from sales of EndoWrist
instruments and accessories, which are lower revenue dollar items. In addition, a portion of our revenue comes from the
ongoing service of installed <I>da Vinci</I> Surgical Systems. 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 revenue through sales of the EndoWrist
instrument and accessories and ongoing service. As our business has matured, revenue generated from the sale of
instruments, accessories, service and training increased from $15.7 million, or 22% of sales, in 2002 to $29.9 million, or
33% of sales, in 2003 to $60 million, or 43% of sales, in 2004.  We have seen a continuation of this trend in 2005 as
revenue generated from the sale of instruments, accessories, service and training for the first half of the year grew to
$44.6 million, or 47% of sales, from $25.5 million, or 44% of sales, during the first half of 2004.  We expect that revenue
generated from the sale of instruments, accessories, service and training will continue to grow and become a larger part
of overall revenue in the future.</P>

<B><I><P>RESULTS OF OPERATIONS</P>
</B><P>Product Sales (dollars in millions) </P>
</I>

<PRE>

                                       June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $        44.7  $        25.9  $    18.8        73 %
Six months ended................... $        78.8  $        48.3  $    30.5        63 %

</PRE>

<P ALIGN="JUSTIFY">Product sales for the quarter ended June 30, 2005 were $44.7 million, compared to $25.9 million
during the quarter ended June 30, 2004.  The increase resulted from higher system, instrument, and accessory sales.
</P>

<P ALIGN="JUSTIFY">System sales increased to $28.4 million in the quarter ended June 30, 2005 from $18.1 million in
the quarter ended June 30, 2004, reflecting growth in system unit sales of  the <I>da Vinci</I> Surgical Systems and the
<I>da Vinci</I> fourth arms.  There were 26 <I>da Vinci</I> Surgical Systems sold during the quarter ended June 30,
2005, compared to 19 during the quarter ended June 30, 2004. There were 27 fourth arms sold during the quarter ended
June 30, 2005, compared to 15 during the quarter ended June 30, 2004. </P>

<P ALIGN="JUSTIFY">Instrument and accessory revenue for the quarter ended June 30, 2005 was $16.2 million,
compared to $7.8 million for the quarter ended June 30, 2004.  The increase was driven by a larger number of installed
systems during the quarter ended June 30, 2005 and higher utilization per system.  Increased use of the <I>da Vinci</I>
Surgical System for radical prostatectomies contributed substantially to higher second quarter 2005 instrument and
accessory sales</FONT><FONT SIZE=2>.</P>

</FONT><FONT SIZE=2><P ALIGN="JUSTIFY">Product sales increased to $78.8 million for the six months ended
June 30, 2005 from $48.3 million for the six months ended June 30, 2004. The 63% increase resulted primarily from
higher recurring instrument and accessory revenue, higher <I>da Vinci</I> Surgical System unit sales, and higher fourth
arm unit sales.</P>

<P ALIGN="JUSTIFY">Total system revenue in the first half of 2005 was $49.7 million, compared to $32.6 million during
the first half of 2004.  We shipped 45 <I>da Vinci</I> Surgical Systems during the first six months of 2005, compared to
33 units shipped during the first six months of 2004.  We shipped 46 <I>da Vinci</I> fourth arms during the first six
months of 2005, compared to 26 units shipped during the first six months of 2004.  We also shipped 13 <I>Aesop</I>
systems during the first half of 2005, compared to 9 during the first half of 2004.</FONT><FONT SIZE=2>  </P>

</FONT><FONT SIZE=2><P ALIGN="JUSTIFY">Instrument and accessory revenue for the six months ended June 30,
2005 increased to $29.1 million from $15.7 million for the six months ended June 30, 2004, reflecting a growing number
of surgical procedures performed by our customers.  This growth was driven by a larger base of installed <I>da Vinci</I>
Surgical Systems and improved system utilization per site.</P>

<P>&nbsp;<I>Service Sales (dollars in millions) </P></I>

<PRE>

                                       June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $         8.1  $         5.2  $     2.9        56 %
Six months ended................... $        15.5  $         9.8  $     5.7        59 %

</PRE>

<P ALIGN="JUSTIFY">Service sales, comprised of system service, installation and customer training, increased to $8.1
million for the quarter ended June 30, 2005 from $5.2 million for the quarter ended June 30, 2004. The increase resulted
primarily from a larger base of the <I>da Vinci</I> Surgical Systems generating service revenue in 2005.  The base of
the <I>da Vinci</I> Surgical Systems generating service revenue grew to approximately 298 entering the second quarter
of 2005, compared to approximately 203 entering the second quarter of 2004. The increase of 95 was comprised of 14
systems sold in the second quarter of 2003 coming out of the warranty period onto service contracts and 81 systems
sold between April 1, 2004 and March 31, 2005, with the first year service deferred according to EITF 00-21.  In addition,
the average service revenue per site was higher during the second quarter of 2005 compared to the second quarter of
2004 due to a higher percentage of four-arm systems in the installed base.  Four-arm systems carry higher service
revenue contracts.  </P>

<P ALIGN="JUSTIFY">Service sales increased to $15.5 million for the first half of 2005 from $9.8 million for the first half
of 2004. The increase was primarily due to a larger base of the <I>da Vinci</I> Surgical Systems generating service
revenue.  </P>

<I><P>Product Sales Gross Profit (dollars in millions)</P></I>

<PRE>

                                       June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $        31.0  $        16.6  $    14.4        87 %
Percentage of product sales........          69.4 %         64.2 %

Six months ended................... $        54.0  $        30.2  $    23.8        79 %
Percentage of product sales........          68.5 %         62.6 %

</PRE>

<P ALIGN="JUSTIFY">Product gross profit for the quarter ended June 30, 2005 was $31.0 million, or 69.4% of sales,
compared to $16.6 million, or 64.2% of sales, during the quarter ended June 30, 2004.  Product gross profit for the six
months ended June 30, 2005 was $54.0 million, or 68.5% of sales, compared to $30.2 million, or 62.6% of sales during
the six months ended June 30, 2004.  The higher gross profit for the quarter and six months ended June 30, 2005 was
driven by higher product revenue, as described above.  The higher product gross profit percentage was driven by
leveraging manufacturing overhead costs across higher product revenue.</P>

<I><P>Service Sales Gross Profit (dollars in millions)</P></I>

<PRE>

                                       June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $         4.6  $         3.0  $     1.6        52 %
Percentage of service sales........          57.1 %         58.3 %

Six months ended................... $         8.9  $         5.2  $     3.6        70 %
Percentage of service sales........          57.0 %         53.3 %

</PRE>

<P ALIGN="JUSTIFY">Service sales gross profit for the quarter ended June 30, 2005 was $4.6 million, or 57.1% of
sales, compared to $3.0 million, or 58.3% of sales, for the quarter ended June 30, 2004.  The higher gross profit for the
quarter ended June 30, 2005 was driven by higher service revenue, as described above.  The slightly lower second
quarter 2005 gross service profit percentage was driven by higher service parts inventory consumption and repair
costs.</P>

<P ALIGN="JUSTIFY">Service sales gross profit for the six months ended June 30, 2005 was $8.9 million, or 57.0% of
sales, compared to $5.2 million, or 53.3% of sales, for the six months ended June 30, 2004.  The higher gross profit for
the quarter ended June 30, 2005 was driven by higher service revenue, as described above.  The higher first half of
2005 gross service profit percentage was driven by leveraging the service and training organization expenses across a
larger base of installed systems.  </P>

<P>&nbsp;<I>Selling, General and Administrative Expenses (dollars in millions)</P></I>

<PRE>

                                       June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $        15.9  $        11.5  $     4.4        38 %
Six months ended................... $        30.1  $        21.8  $     8.4        38 %

</PRE>

<P ALIGN="JUSTIFY">Selling, general and administrative expenses include personnel costs for sales, marketing and
administrative personnel, tradeshow expenses, legal expenses, regulatory fees and general corporate expenses.  </P>

<P ALIGN="JUSTIFY"><A NAME="OLE_LINK1">Selling, general and administrative expenses for the quarter ended
June 30, 2005 were $15.9 million, up 38% from $11.5 million for the quarter ended June 30, 2004.  </A>Selling, general,
and administrative expenses for the six months ended June 30, 2005 were $30.1 million, up 38% from $21.8 million for
the six months ended June 30, 2004.  The year-over-year increases were primarily due to sales organization headcount
growth to support higher sales and higher variable compensation associated with achieving higher revenues and
profitability.  We have also grown our marketing organization and our administrative infrastructure.</P>

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

<I><P>Research and Development Expenses (dollars in millions)</P></I>

<PRE>

                                       June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $         4.4  $         3.6  $     0.7        20 %
Six months ended................... $         8.5  $         8.9  $    (0.4)       (5)%

</PRE>

<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.
</P>

<P ALIGN="JUSTIFY">Research and development expenses for the quarter ended June 30, 2005 were $4.4 million,
compared to $3.6 million for the quarter ended June 30, 2004.  The increase was primarily due to increased headcount
and higher second quarter 2005 prototyping and other project-related expenses.</P>

<P ALIGN="JUSTIFY">Research and development expenses for the six months ended June 30, 2005 were $8.5 million,
compared to $8.9 million for the six months ended June 30, 2004.  The decrease was primarily due to the elimination of
expenses incurred during the first quarter of 2004 that were related to the former Computer Motion Goleta, California
site.  During the first quarter of 2004, the Goleta site incurred $1.0 million in general operating expenses, comprised of
salaries, materials, depreciation, and other expenses.  In addition, we recorded a $0.8 million restructuring charge during
the quarter ended March 31, 2004 to completely shut down the Goleta site and terminate all remaining Goleta-based
employees.  Excluding the impact of the Goleta expenses, higher research and development expenses for the quarter
ended June 30, 2005 was primarily due to higher prototyping and other project-related expenses.</P>

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

<I><P>Other Income, Net (dollars in millions) </P></I>

<PRE>

                                       June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $         1.0  $         0.6  $     0.3        51 %
Six months ended................... $         1.7  $         1.2  $     0.4        36 %

</PRE>

<P ALIGN="JUSTIFY">Other income for the quarter ended June 30, 2005 was $1.0 million, up 51% from $0.6 million for
the quarter ended June 30, 2004.  Other income for the quarter ended June 30, 2005 was comprised of $1.2 million of
interest income, partially offset by foreign exchange losses resulting from euro-based transactions.  Other income
increased by $0.3 million compared to the second quarter of 2004 primarily due to higher interest earned of $0.6 million,
resulting from higher 2005 cash and investment balances and higher 2005 interest rates, partially offset by higher
foreign exchange losses.   </P>

<P ALIGN="JUSTIFY">Other income for the six months ended June 30, 2005 was $1.7 million, up 36% from $1.2 million
for the six months ended June 30, 2004.  Other income for the six months ended June 30, 2005 was comprised of $2.2
million of interest income, partially offset by foreign exchange losses of $0.5 million resulting from euro-based
transactions.  Other income increased by $0.5 million compared to the first half of 2004 primarily due to higher interest
earned of $0.9 million, resulting from higher interest earned on higher 2005 cash and investment balances and higher
2005 interest rates, partially offset by higher 2005 foreign exchange losses.</FONT><FONT SIZE=2>   </P>

<I><P>Income Tax Expense (dollars in millions)</P></I>

<PRE>

                                       June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $         1.5  $         0.3  $     1.2       473 %
Six months ended................... $         2.0  $         0.3  $     1.7       583 %

</PRE>

<P ALIGN="JUSTIFY">We make certain estimates and judgments in determining income tax expense for financial
statement purposes.  These estimates and judgments occur in the calculation of certain tax assets and liabilities, which
arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.</P>

<P ALIGN="JUSTIFY">Income tax expense for the quarter ended June 30, 2005 was $1.5 million, or 9.3% of pre-tax
income, compared to a 5.2% provision taken during the second quarter of 2004.   Income tax expense for the six months
ended June 30, 2005 was $2.0 million, or 7.9% of pre-tax income, compared to a 5.0% provision taken during the first
half of 2004.  The increase in the Company's tax rate during the three and six months ended June 30, 2005 is primarily
due to the projected utilization of net operating losses acquired in the acquisition of Computer Motion, Inc.</P>


<P ALIGN="JUSTIFY">
The tax rate in the second quarter of fiscal 2005 brings our year-to-date tax rate to the anticipated full year
rate of 8%.  The fiscal 2005 tax rates include the anticipated current tax liability, the anticipated benefits
from utilizing tax deductions related to stock option plans, and the anticipated tax benefit that will be
derived from the utilization of the loss carryovers obtained as a result of the Computer Motion acquisition
in 2003.

<P ALIGN="JUSTIFY">
The effective tax rate for fiscal 2005 continues to reflect a full valuation allowance against our deferred tax
assets. We evaluate the realizability of the deferred tax assets every quarter.  Should we determine that it is
more likely than not that the future taxable income will be sufficient to utilize some or all of the deferred
tax assets, we will release some or all of the valuation allowance.  The release of this valuation allowance
would result in a combination of tax provision benefit (reduced expense or negative expense) and a
decrease in the goodwill recorded as a result of the Computer Motion acquisition.

<B><I><P>LIQUIDITY AND CAPITAL RESOURCES</P>
</B></I>
<P ALIGN="JUSTIFY">Our operations have been financed through the sale of our equity securities and cash generated
from operations. Sales of convertible preferred stock have yielded proceeds of approximately $127.3 million and public
offerings of our common stock have yielded proceeds of approximately $124.5 million. We have also financed
operations through employee stock purchase and option plans as well as equipment financing arrangements. As of June
30, 2005, we had total stockholders equity of $348.0 million and outstanding equipment financing debt of $0.2 million.
As of June 30, 2005, we had cash, cash equivalents and short-term investments of $158.5 million, compared to $132.0
million as of December 31, 2004.  Working capital as of June 30, 2005 was $171.2 million, compared to $138.3 million
as of December 31, 2004. The increase in cash and investments and in working capital resulted primarily from our $23.9
million of net income and $9.2 million of net proceeds realized from stock option and warrant exercises and our
employee stock purchase plan for the six months ended June 30, 2005.   </P>

<P ALIGN="JUSTIFY">Net cash provided by operating activities was $22.8 million for the six months ended June 30,
2005, compared to $11.0 million for the six months ended June 30, 2004.    Cash provided by operating activities during
the six months ended June 30, 2005 was comprised of net income of $23.9 million and non-cash expenses of $4.7
million, partially offset by consumed working capital of $5.8 million.  The $11.0 million of cash provided by operations
during the six months ended June 30, 2004 was primarily the result of net income of $5.7 million, non-cash expenses of
$3.3 million and net working capital generated of $2.0 million. </P>

<P ALIGN="JUSTIFY">Net cash used in investing activities was $29.2 million for the six months ended June 30, 2005,
compared to $18.8 million for the six months ended June 30, 2004.  Net cash used in investing activities during the six
months ended June 30, 2005 resulted mainly from the investment of cash provided by operations into marketable
securities of $85.7 million, and was partially offset by the proceeds from sales and maturities of marketable securities of
$60.9 million.  Net cash used in investing activities during the six months ended June 30, 2004 resulted mainly from
investments in property and equipment of $21.4 million.  </P>

<P ALIGN="JUSTIFY">Net cash provided by financing activities was $8.7 million for six months ended June 30, 2005,
compared to $4.8 million for the six months ended June 30, 2004. Net cash provided by financing activities during the six
months ended June 30, 2005 resulted mainly from $9.2 million net proceeds realized from stock option and warrant
exercises, partially offset by repayments of short-term debt of $0.4 million.  Net cash provided by financing activities
during the six months ended June 30, 2004 resulted mainly from $5.4 million net proceeds realized from stock option
and warrant exercises, partially offset by repayments of long-term debt of $0.6 million.  </P>

<P ALIGN="JUSTIFY">Our capital requirements depend on numerous factors, including market acceptance of our
products, the resources we devote to developing and supporting our products, and other factors. We expect to devote
substantial capital resources to continue our research and development efforts, to expand our customer support and
product development activities and for other general corporate activities. We believe that our current cash and cash
equivalents and short-term investment balances, together with revenue to be derived from the sale of our products, will
be sufficient to meet our liquidity requirements for the foreseeable future.     </P>
<I><P ALIGN="JUSTIFY">Contractual Obligations and Commercial Commitments</P>
</I><P ALIGN="JUSTIFY">The following table summarizes all significant contractual payment obligations, net of
sublease income of $941,000 during the next three years, by payment due date:</P>
<B><P ALIGN="JUSTIFY">Payments by Periods (in millions)</P></B>

<P ALIGN="CENTER">
<TABLE BORDER=0 CELLSPACING=1 CELLPADDING=7 WIDTH=80%>
<TR><TD WIDTH="23%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Contractual Obligation
<HR NOSHADE SIZE=2>
</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Total
<HR NOSHADE SIZE=2>
</FONT></TD>
<TD WIDTH="17%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Less than 1 year
<HR NOSHADE SIZE=2>
</FONT></TD>
<TD WIDTH="11%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">1-3 years
<HR NOSHADE SIZE=2>
</FONT></TD>
<TD WIDTH="12%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">3-5 years
<HR NOSHADE SIZE=2>
</FONT></TD>
<TD WIDTH="22%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">More than 5 years
<HR NOSHADE SIZE=2>
</FONT></TD>
</TR>

<TR><TD WIDTH="23%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Operating leases</FONT></TD>
<TD WIDTH="15%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$1.4</FONT></TD>
<TD WIDTH="17%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$0.7</FONT></TD>
<TD WIDTH="11%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$0.7</FONT></TD>
<TD WIDTH="12%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$0.0</FONT></TD>
<TD WIDTH="18%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$0.0</FONT></TD>
</TR>
</TABLE></P>

<P ALIGN="JUSTIFY">
Purchase obligations for inventory and other goods and services have not been included in the table above as these
obligations have remaining terms generally less than one year. </P>

<B><I><FONT SIZE=2><P ALIGN="JUSTIFY">CRITICAL ACCOUNTING POLICIES</P>
</B></I><P ALIGN="JUSTIFY">The discussion and analysis of our financial condition and results of operations are
based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and
estimates, including those related to revenue recognition, bad debts, income taxes and intangible assets. We base our
estimates on historical experience and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report.</P>

<B><I><P>FACTORS AFFECTING OPERATING RESULTS</P>
</I><P>OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES ANALYSTS' OR INVESTORS'
EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.</P>
</B><P ALIGN="JUSTIFY">Due to the nascent nature of our industry, 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 subject to change,
and we may be unable to continue to generate significant revenues. In addition, our costs may be higher than we
anticipated. If we fail to generate sufficient revenues or our costs are higher than we expect, our results of operations will
suffer.  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 extent to which our products gain market acceptance;</LI>
<LI>actions relating to regulatory matters;</LI>
<LI>our timing and ability to develop our manufacturing and sales and marketing capabilities; </LI>
<LI>demand for our products; </LI>
<LI>the size and timing of specific sales and any collection delays related to those sales;</LI>
<LI>product quality problems;</LI>
<LI>the 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>third-party payor reimbursement policies;</LI>
<LI>our ability to protect our proprietary rights and defend against third party challenges; </LI>
<LI>our ability to license additional intellectual property rights; and</LI>
<LI>the progress and results of clinical trials.</LI></UL>

<P ALIGN="JUSTIFY">Our operating results in any particular period will not be a reliable indication of our future
performance. It is likely that in some future quarters, our operating results will be below the expectations of securities
analysts or investors. If this occurs, the price of our common stock, and the value of your investment, will likely
decline.</P>
<B><P>WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A NEGATIVE IMPACT ON
OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.</B> </P>
<P ALIGN="JUSTIFY">Our <I>da Vinci</I> Surgical System has a lengthy sales and purchase order cycle because it is
a major capital item and generally requires the approval of senior management at purchasing institutions. These factors
may contribute to substantial fluctuations in our quarterly operating results, particularly during the periods in which our
sales volume is low. Because of these fluctuations, it is likely that in some future quarters our operating results will fall
below the expectations of securities analysts or investors. If that happens, the market price of our stock would likely
decrease. These fluctuations also mean that you will not be able to rely upon our operating results in any particular
period as an indication of future performance.</P>
<B><P>BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE AND ARE LIKELY TO CONTINUE TO ACCOUNT
FOR A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES COULD DECLINE DUE TO THE LOSS OR
DELAY OF A SINGLE CUSTOMER. </P>
</B><P ALIGN="JUSTIFY">A relatively small number of customers account for a significant portion of our total
revenues. During the three months ended June 30, 2005 and 2004, approximately 52% and 58%, respectively, of our
revenues came from the sales of the <I>da Vinci</I> Surgical Systems, which are high revenue dollar items. During the
six months ended June 30, 2005 and 2004, approximately 51% and 55%, respectively, of our revenues came from the
sales of the <I>da Vinci</I> Surgical Systems. During the three months and six months ended June 30, 2005 and 2004,
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">The <I>da Vinci</I> Surgical Systems and our other 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 ALIGN="JUSTIFY">BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS MAY CHOOSE
TO PURCHASE OUR COMPETITORS' PRODUCTS OR MAY NOT ACCEPT INTUITIVE SURGERY, WHICH WOULD
RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE.</P>
</B><I><P ALIGN="JUSTIFY">Intuitive</I> surgery is a new technology that will compete with established and
emerging treatment options in both disease management and reconstructive medical procedures.  These competitive
treatment options may take the form of traditional minimally invasive surgery, open surgery, interventional approaches,
or pharmacological regimens.  Some of these procedures are widely accepted in the medical community and in many
cases have a long history of use.  Technological advances could make such treatments more effective or less expensive
than using our products, which could render our products obsolete or unmarketable.  We cannot be certain that
physicians will use our products to replace or supplement established treatments or that our products will be competitive
with current or future technologies. </P>
<P ALIGN="JUSTIFY">In addition, we may face competition from companies that develop robotic and computer-assisted
surgical systems in the future.  Our revenues may be reduced or eliminated if our competitors develop and
market products that are more effective or less expensive than our products.  If we are unable to compete successfully,
our revenues will suffer.  We may not be able to maintain or improve our competitive position against current or potential
competitors, especially those with greater resources.</P>
<B><P>INTERNATIONAL SALES OF OUR PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR
REVENUES, WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS. OUR GROWTH MAY
BE LIMITED IF WE ARE UNABLE TO SUCCESSFULLY MANAGE OUR INTERNATIONAL ACTIVITIES.</B> </P>
<P ALIGN="JUSTIFY">Our business currently depends in large part on our activities in Europe and other foreign
markets. Sales to markets outside of the United States accounted for approximately 16% of sales for the three months
ended June 30, 2005 and 21% of sales for the three months ended June 30, 2004. Sales to markets outside of the
United States accounted for approximately 14% of sales for the six months ended June 30, 2005 and 22% of sales for
the six months ended June 30, 2004.</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>Currently, a majority of our international sales are denominated in United States dollars. As a result, an increase in
the value of the United States dollar relative to foreign currencies could make our products less competitive in
international markets. If we are unable to meet and overcome these challenges, our international operations may not be
successful, which would limit the growth of our business.</P>
<B><P ALIGN="JUSTIFY">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, electrical components and computer software, any of
which can contain errors or failures, especially when first introduced. In addition, new products or enhancements may
contain undetected errors or performance problems that, despite testing, are discovered only after commercial shipment.
Because our products are designed to be used to perform complex surgical procedures, we expect that our customers
will have an increased sensitivity to such defects. In the past, we have voluntarily recalled certain products as a result of
performance problems.  We cannot assure you that our products will not experience errors or performance problems in
the future. If we experience flaws or performance problems, any of the following could occur:</P>

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

<B><P>WE 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 maintain reliable, high-volume manufacturing capacity. Even if this capacity can be 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 maintain
larger-scale manufacturing capabilities, our ability to generate revenues will be limited and our reputation in the marketplace
could be damaged.</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>IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN OUR PRODUCTS
FROM USE BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET WILL BE HARMED.</B> </P>
<P ALIGN="JUSTIFY">Our commercial success will depend in part on obtaining patent and other intellectual property
protection for the technologies contained in our products, and on successfully defending our patents and other
intellectual property against third party challenges. We will incur substantial costs in obtaining patents and, if necessary,
defending our proprietary rights. The patent positions of medical device companies, including ours, can be highly
uncertain and involve complex legal and factual questions. We do not know whether we will obtain the patent protection
we seek, or that the protection we do obtain will be found valid and enforceable if challenged. We also do not know
whether we will be able to develop additional patentable proprietary technologies. If we fail to obtain adequate protection
of our intellectual property, or if any protection we obtain is reduced or eliminated, others could use our intellectual
property without compensating us, resulting in harm to our business. We may also determine that it is in our best
interests to voluntarily challenge a third party's products or patents in litigation or administrative proceedings, including
patent interferences or reexaminations. In addition, the laws of certain foreign countries do not protect intellectual
property rights to the same extent as do the laws of the United States.</P>
<B><P>OTHERS MAY ASSERT THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS,
WHICH MAY CAUSE US TO ENGAGE IN COSTLY DISPUTES AND, IF WE ARE NOT SUCCESSFUL IN DEFENDING
OURSELVES, COULD ALSO CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING
OUR PRODUCTS.</B> </P>
<P ALIGN="JUSTIFY">There may be United States and foreign patents issued to third parties that relate to
computer-assisted surgery, remote surgery, and minimally invasive surgery. Some of these patents may be broad enough to cover
one or more aspects of our present technology, and may cover aspects of our future technology. We do not know
whether any of these patents, if challenged, would be held valid, enforceable and infringed. From time to time, we
receive, and likely will continue to receive, letters from third parties inviting us to license their patents. We may be sued
by, or become involved in an administrative proceeding with, one or more of these third parties. We cannot be certain
that a court or administrative body would agree with any arguments or defenses we have concerning invalidity,
unenforceability or noninfringement of any third-party patent. In addition to the issued patents of which we are aware,
other parties may have filed, and in the future are likely to file, patent applications covering surgical products that are
similar or identical to ours. We cannot be certain that any patents issuing from applications filed by a third party will not
cover our products or will not have priority over our patent applications. </P>
<P ALIGN="JUSTIFY">The medical device industry has been characterized by extensive litigation and administrative
proceedings regarding patents and other intellectual property rights, and companies have employed such actions to gain
a competitive advantage. If third parties assert infringement or other intellectual property claims against us, our technical
and management personnel will experience a significant diversion of time and effort and we will incur large expenses
defending our company. If third parties in any patent action are successful, our patent portfolio may be damaged, we
may have to pay substantial damages, including treble damages, and we may be required to stop selling our products or
obtain a license which, if available at all, may require us to pay substantial royalties. We cannot be certain that we will
have the financial resources or the substantive arguments to defend our patents from infringement or claims of invalidity
or unenforceability, or to defend against allegations of infringement of third-party patents. In addition, any public
announcements related to litigation or administrative proceedings initiated by us, or initiated or threatened against us,
could cause our stock price to decline.</P>
<B><P>THE RIGHTS AND MEASURES WE RELY ON TO PROTECT THE INTELLECTUAL PROPERTY
UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE TO PREVENT THIRD PARTIES FROM USING OUR
TECHNOLOGY, WHICH COULD HARM OUR ABILITY TO COMPETE IN THE MARKET.</B> </P>
<P ALIGN="JUSTIFY">In addition to patents, we typically rely on a combination of trade secret, copyright and trademark
laws, nondisclosure agreements and other contractual provisions and technical security measures to protect our
intellectual property rights. Nevertheless, these measures may not be adequate to safeguard the technology underlying
our products. If they do not protect our rights adequately, third parties could use our technology, and our ability to
compete in the market would be reduced. In addition, employees, consultants and others who participate in developing
our products may breach their agreements with us regarding our intellectual property, and we may not have adequate
remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign
countries. For a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside the
United States. We also realize that our trade secrets may become known through other means not currently foreseen by
us. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or
alternative technologies or products that are equal or superior to our technology and products without infringing any of
our intellectual property rights, or may design around our proprietary technologies.</P>
<B><P>OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE ACCESS TO THESE
TECHNOLOGIES, OUR REVENUES COULD DECLINE.</B> </P>
<P ALIGN="JUSTIFY">We rely on technology that we license from others, including technology that is integral to our
products. We have entered into license agreements with Heartport, Inc., now part of Johnson &amp; Johnson, IBM
Corporation, MIT, Olympus Optical Co., Ltd., SRI International, and Brookhill-Wilk, LLC. Any of these agreements may
be terminated for breach. If any of these agreements is terminated, we may be unable to reacquire the necessary
license on satisfactory terms, or at all. The loss or failure to maintain these licenses could prevent or delay further
development or commercialization of our products. </P>
<B><P>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 ALIGN="JUSTIFY">TERMINATION OF RELATIONSHIPS WITH FORMER DISTRIBUTORS OF COMPUTER
MOTION COULD RESULT IN LITIGATION.</P>
</B><P ALIGN="JUSTIFY">As part of our integration strategy related to our acquisition of Computer Motion, we
terminated Computer Motion's relationships with a number of companies that served as Computer Motion's distributors
prior to the acquisition.  As a result, two former distributors (one in Italy and the other in Israel) have filed breach of
contract suits against us.  Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate
outcome of any such litigation at this time and, therefore, cannot estimate the range of possible loss.  These
proceedings could be expensive to litigate, may be protracted and our confidential information may be compromised.
Whether or not we are successful in these lawsuits, these proceedings could consume substantial amounts of our
financial and managerial resources.  See Part II: Other Information - Item 1: Legal Proceedings.</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 (&quot;FDA&quot;). 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 (&quot;FFDCA&quot;). Clearance under Section 510(k)
requires demonstration that a new device is substantially equivalent to another device with 510(k) clearance or
grandfather status. If we significantly modify our products after they receive FDA clearance, the FDA may require us to
submit a separate 510(k) or premarket approval application (&quot;PMA&quot;), for the modified product before we are
permitted to market the products in the U.S. In addition, if we develop products in the future that are not considered to be
substantially equivalent to a device with 510(k) clearance or grandfather status, we will be required to obtain FDA
approval by submitting a PMA. </P>
<P ALIGN="JUSTIFY">The FDA may not act favorably or quickly in its review of our 510(k) or PMA submissions, or we
may encounter significant difficulties and costs in our efforts to obtain FDA clearance or approval, all of which could
delay or preclude sale of new products in the United States. Furthermore, the FDA may request additional data or
require us to conduct further testing, or compile more data, including clinical data and clinical studies, in support of a
510(k) submission. The FDA may also, instead of accepting a 510(k) submission, require us to submit a PMA, which is
typically a much more complex and burdensome application than a 510(k). To support a PMA, the FDA would likely
require that we conduct one or more clinical studies to demonstrate that the device is safe and effective. We may not be
able to meet the requirements to obtain 510(k) clearance or PMA approval, or the FDA may not grant any necessary
clearances or approvals. In addition, the FDA may place significant limitations upon the intended use of our products as
a condition to a 510(k) clearance or PMA approval. Product applications can also be denied or withdrawn due to failure
to comply with regulatory requirements or the occurrence of unforeseen problems following clearance or approval. Any
delays or failure to obtain FDA clearance or approvals of new products we develop, any limitations imposed by the FDA
on new product use, or the costs of obtaining FDA clearance or approvals could have a material adverse effect on our
business, financial condition and results of operations. </P>
<P ALIGN="JUSTIFY">In order to conduct a clinical investigation involving human subjects for the purpose of
demonstrating the safety and effectiveness of a device, a company must, among other things, apply for and obtain
Institutional Review Board (&quot;IRB&quot;) approval of the proposed investigation. In addition, if the clinical study
involves a &quot;significant risk&quot; (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 (&quot;IDE&quot;) application.  Most of our
products to date have been considered significant risk devices requiring IDE approval prior to investigational use. We
may not be able to obtain FDA and/or IRB approval to undertake clinical trials in the U.S. for any new devices we intend
to market in the United States in the future. If we obtain such approvals, we may not be able to comply with the IDE and
other regulations governing clinical investigations or the data from any such trials may not support clearance or approval
of the investigational device. Failure to obtain such approvals or to comply with such regulations could have a material
adverse effect on our business, financial condition and results of operations.</P>
<B><P>COMPLYING WITH FDA REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING PROCESS, AND OUR
FAILURE TO COMPLY FULLY COULD SUBJECT US TO SIGNIFICANT ENFORCEMENT SANCTIONS</B>.</P>
<P>Because our products, including the <I>da Vinci</I> Surgical System, are commercially distributed, numerous post
market regulatory requirements apply, including the following: </P>

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

<P ALIGN="JUSTIFY">We are subject to inspection and marketing surveillance by the FDA to determine our
compliance with regulatory requirements. If the FDA finds that we have failed to comply, it can institute a wide variety of
enforcement actions, ranging from a regulatory letter to a public warning letter to more severe civil and criminal
sanctions. Our failure to comply with applicable requirements could lead to an enforcement action that may have an
adverse effect on our financial condition and results of operations. </P>
<P ALIGN="JUSTIFY">We have modified the labeling, advertising and user training for the <I>da Vinci</I> Surgical
System to call out specific procedures that we believe are within the scope of our existing 510(k) clearances. We cannot
assure you that the FDA would agree that all such specific procedures are within the scope of the existing clearances or
that we have compiled adequate information to support the safety and efficacy of using the <I>da Vinci</I> Surgical
System for all such specific procedures. We also have modified the hardware and software in the <I>da Vinci</I>
Surgical System since clearance in ways that we believe do not require new 510(k) clearance. We cannot be certain that
the FDA would agree with our determinations not to seek new 510(k) clearance for any of these changes. Computer
Motion also modified the hardware and software in its products subsequent to 510(k) clearance without seeking new
clearance. We cannot be certain that the FDA would agree with the determinations not to seek new 510(k) clearance for
any of these changes. The FDA could impose enforcement sanctions and/or require us to obtain 510(k) clearance for
any modification to our products or Computer Motion's products. We may be prohibited from marketing the modified
device until such 510(k) clearance is granted.</P>
<P ALIGN="JUSTIFY">In December 2002, the FDA inspected our Sunnyvale manufacturing facility and issued a Form
FDA 483 setting forth three observed compliance deficiencies relating to the QSR and two observed deficiencies relating
to the Reports of Corrections and Removals regulation.  In January 2003, we wrote to the FDA indicating our response
to each observation with proposed corrective actions.  That same month, the FDA informed us that the adequacy of our
promised corrections and actions would be verified during the next inspection of our facility.  To date, the FDA has not
returned for another inspection and we continue to evaluate and upgrade our QSR compliance.  We cannot assure you
that, upon reinspection, the FDA will find that our promised corrective actions are appropriate or that they have been
adequately implemented.  We also cannot assure you that the FDA will not find other deficiencies in our compliance with
the QSR and other postmarket regulations.</P>
<P ALIGN="JUSTIFY">In June 2003, we acquired Computer Motion and have integrated its FDA compliance quality
system into our own.  As a result of the integration and review, we identified deficiencies in Computer Motion's complaint
handling, MDR reporting and Corrections and Removals reporting in several years preceding our acquisition of
Computer Motion that required submission of retroactive reports to the FDA.  We reported 52 MDRs, although we
believe many of the complaints likely would not have been reportable if more information had been available.  To our
knowledge, none of the reported events resulted in a death or serious injury, prolonged hospitalization, or medical
intervention to prevent death or serious injury.  Computer Motion did respond to complaint trends, and it addressed the
trends through corrective actions.  Accordingly, the incident of many of the types of events in the reports had been
mitigated by June 2003.  Our review also suggested that significant complaint trends identified by Computer Motion over
the period of four years were addressed by corrective actions, which have proven to be effective over time.  Computer
Motion's product modifications were completed without 510(k) clearance, and we believe that no new 510(k) clearances
are required.  We cannot assure you that the FDA would agree with our determinations not to seek new 510(k)
clearance of any of these changes.</P>
<P ALIGN="JUSTIFY">We cannot assure you that the FDA will not seek to impose enforcement sanctions on us for
Computer Motion's violations preceding our acquisition of Computer Motion, that the FDA will agree that since the
acquisition we have corrected all regulatory problems, or that our review of Computer Motion's complaint handling will
not lead us to initiate recalls or field actions to remedy problems with Computer Motion products already in the field.</P>
<B><P>OUR PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY PROCESSES AND
APPROVAL REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY INTERNATIONAL
REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN FOREIGN
COUNTRIES.</P>
</B><P ALIGN="JUSTIFY">To be able to market and sell our products in other countries, we must obtain regulatory
approvals and comply with the regulations of those countries. These regulations, including the requirements for
approvals and the time required for regulatory review, vary from country to country. Obtaining and maintaining foreign
regulatory approvals are expensive, and we cannot be certain that we will receive regulatory approvals in any foreign
country in which we plan to market our products. If we fail to obtain regulatory approval in any foreign country in which
we plan to market our products, our ability to generate revenue will be harmed. </P>
<P ALIGN="JUSTIFY">The European Union requires that manufacturers of medical products obtain the right to affix the
CE mark to their products before selling them in member countries of the European Union. The CE mark is an
international symbol of adherence to quality assurance standards and compliance with applicable European medical
device directives. In order to obtain the right to affix the CE mark to products, a manufacturer must obtain certification
that its processes meet certain European quality standards. In January 1999, we received permission to affix the CE
mark to our <I>da Vinci</I> Surgical System and <I>EndoWrist</I> instruments. </P>
<P ALIGN="JUSTIFY">If we modify existing products or develop new products in the future, including new instruments,
we may need to apply for permission to affix the CE mark to such products. In addition, we will be subject to annual
regulatory audits in order to maintain the CE mark permissions we have already obtained. We cannot be certain that we
will be able to obtain permission to affix the CE mark for new or modified products or that we will continue to meet the
quality and safety standards required to maintain the permissions we have already received. If we are unable to maintain
permission to affix the CE mark to our products, we will no longer be able to sell our products in member countries of the
European Union. </P>
<B><P>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 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 sell our products and these efforts are expected
to continue.</P>
<B><P>IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE OR EUROPEAN
MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR PART OF OUR
MANUFACTURING OPERATIONS, WHICH COULD RESULT IN PRODUCT DELIVERY DELAYS AND LOST
REVENUE.</B> </P>
<P ALIGN="JUSTIFY">Our manufacturing facilities are subject to periodic inspection by regulatory authorities and our
operations will continue to be regulated by the FDA for compliance with Good Manufacturing Practice requirements
contained in the FDA's Quality System Regulations, or QSR. We are also required to comply with International
Organization for Standardization, or ISO, quality system standards in order to produce products for sale in Europe. If we
fail to continue to comply with Good Manufacturing Practice requirements or ISO standards, we may be required to
cease all or part of our operations until we comply with these regulations.   We continue to be subject to FDA and other
regulatory 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 FDA inspected the Goleta facilities of Computer Motion in 1998 and noted deficiencies in
Computer Motion's systems for reviewing and reporting product-related complaints and defect information.  We have
determined that these deficiencies may not have been addressed.  While the Goleta manufacturing facility has been
closed and production of certain products has been transferred to our Sunnyvale facility, these issues raised by the FDA
must nonetheless be resolved.  The complaint records prior to acquisition of Computer Motion were reviewed and
appropriate Medical Device Reports were filed with the FDA.  Complaints received subsequent to our acquisition of
Computer Motion are handled in accordance with Intuitive Surgical quality system requirements, which we believe is in
accordance with FDA requirements, although we cannot assure you that FDA will agree, nor can we assess what
regulatory impact, if any, this may have on our company.</P>
<P ALIGN="JUSTIFY">As required, we are licensed by the State of California to manufacture medical devices.  We are
subject to periodic inspections by the California Department of Health Services and, if we are unable to maintain this
license following any future inspections, we will be unable to manufacture or ship products.</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 technical staff. Our
product development plans depend, in part, on our ability to attract and retain engineers with experience in electronics,
mechanics, software and optics. Attracting and retaining qualified personnel will be critical to our success, and
competition for qualified personnel is intense. We may not be able to attract and retain personnel on acceptable terms
given the competition for such personnel among technology and healthcare companies, and universities. The loss of any
of these persons or our inability to attract and retain qualified personnel could harm our business and our ability to
compete.</P>

<B><P><A NAME="market"></A>ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</P>

</B><P ALIGN="JUSTIFY">We are not subject to any meaningful market risks related to currency, commodity prices or
similar matters. We are sensitive to short-term interest rate fluctuations to the extent that such fluctuations impact the
interest income we receive on the investment of the remaining proceeds from our public offerings and cash generated
from operations. </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 fair value of our investment will probably decline. To
minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a
variety of securities. We classify our cash equivalents and marketable securities as &quot;fixed-rate&quot; if the rate of
return on such instruments remains fixed over their term. These &quot;fixed-rate&quot; investments include commercial
paper and government and non-government debt securities. We classify our cash equivalents and marketable securities
as &quot;variable-rate&quot; if the rate of return on such investments varies based on the change in a predetermined
index or set of indices during their term. These &quot;variable-rate&quot; investments primarily include auction-rate
securities with rates that re-set generally every 30 days. The weighted average maturity of all of our fixed-rate and
variable-rate investments as of June 30, 2005 was approximately 1 year.  At June 30, 2005 and December 31, 2004,
approximately 37% and 47%, respectively, of our fixed-rate and variable-rate investment portfolio was composed of
investments with maturities of one year or less.  </P>
<P ALIGN="JUSTIFY">The majority of our revenue, expense, and capital purchasing activities are transacted in U.S.
dollars. However, since a portion of our operations consists of sales activities outside of the United States, we have
entered into transactions in other currencies, primarily the euro.</P>
<P ALIGN="JUSTIFY">For the three months ended June 30, 2005 and 2004, sales denominated in foreign currencies
were 9% and 7%, respectively, of total sales. For the six months ended June 30, 2005 and 2004, sales denominated in
foreign currencies were 7% and 9%, respectively, of total sales.  </P>
<P ALIGN="JUSTIFY">Foreign currency fluctuations resulted in approximately $264,000 of foreign exchange loss and
$10,000 of foreign exchange gain for the three months ended June 30, 2005 and 2004, respectively. Foreign currency
fluctuations resulted in approximately $545,000 and $88,000 of foreign exchange loss for the six months ended June 30,
2005 and 2004, respectively. </P>
<B><P ALIGN="JUSTIFY"><A NAME="control"></A>ITEM 4. CONTROLS AND PROCEDURES</P>
<P ALIGN="JUSTIFY">Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures</P>
</B><P ALIGN="JUSTIFY">We maintain disclosure controls and procedures, as such term is defined in SEC Rule
13a-15(e) that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934
reports is recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.  </P>
<P ALIGN="JUSTIFY">As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered
by this report.&nbsp; Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective at the reasonable assurance level. </P>
<B><P ALIGN="JUSTIFY">Changes in Internal Control Over Financial Reporting</P>
</B><P ALIGN="JUSTIFY">There has been no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over
financial reporting.</P>
<B><P ALIGN="CENTER">PART II. OTHER INFORMATION </P>
<P><A NAME="item1"></A>ITEM 1. LEGAL PROCEEDINGS</P>
</B><P ALIGN="JUSTIFY">In February 2004, the University of Miami, a former customer of Computer Motion, filed a
lawsuit against our company in the U.S. District Court, Southern District of Florida.  We received the complaint in April
2004.  The customer alleges that it relied to its detriment on representations made by Computer Motion in connection
with Computer Motion's sale of products to the customer, which representations the customer believes were not fulfilled.
The customer is seeking damages.  We filed a motion to dismiss the fraud-based complaints and an answer defending
the breach of contract claim.  After discovery was completed, we filed a motion for summary judgment to dismiss the
entire case.  In January 2005, the Court granted our motion for summary judgment and dismissed the case against us in
its entirety.  In February 2005, the customer filed an appeal, and the parties are awaiting a decision from the Court of
Appeals of the Eleventh Circuit.</P>
<P ALIGN="JUSTIFY">In November 2003, Tzamal Jacobson, Ltd., an Israeli company, filed suit against our company
and Computer Motion in the District Court in Tel-Aviv - Jaffa, Israel, Civil File 2293/03, alleging breach of a distribution
contract and seeking damages. We received the complaint in April 2004. Following the acquisition of Computer Motion,
we withdrew Computer Motion's distributorship offer to this Israeli company. We intend to vigorously defend the suit, and
have filed a motion to have the case dismissed on jurisdictional grounds.  The court has not yet ruled on the motion.
Tzamal's request for access to a Company witness for discovery has been granted by the court.  Discovery will begin
shortly.</P>
<P ALIGN="JUSTIFY">In October 2003, SIC System, S.R.L., a former Italian distributor for Computer Motion, filed suit
against our company and Computer Motion seeking damages in the Civil Court of Rome, Italy.  In the complaint, SIC
System alleges that we breached the distribution agreement between SIC System and Computer Motion when, following
our acquisition of Computer Motion, we deleted two products previously covered under the distribution agreement.   The
distribution agreement provides, among other things, that (1) it shall be governed and construed under the laws of the
State of California and (2) in the event of any dispute or controversy arising under the distribution agreement or the
transactions contemplated thereunder, the parties mutually consent to the exclusive jurisdiction of a court of competent
jurisdiction within Santa Barbara County, California.  We are defending the lawsuit on both jurisdictional grounds and on
the merits. The Italian court has ruled that SIC System's service of process in filing its complaint was defective and has
ordered SIC System to re-file its complaint on or about October 6, 2004, which service our company did not receive.
The parties continue to dispute the service of process issue.  The Italian court has not ruled on jurisdiction or other
pending issues pertaining to the applicable law or appropriate forum but has confirmed that the jurisdiction question will
be decided first before any other.  The parties' briefs are due between late-October and mid-November 2005 with the
Italian court's decision expected by year's end.</P>
<P ALIGN="JUSTIFY">In November 2003, we filed a lawsuit against SIC System, S.R.L. in the United States District
Court for the Central District of California for declaratory relief, breach of contract and preliminary and permanent
injunction.  In particular, we sought a judicial declaration of the rights and obligations of the parties under a distribution
agreement, specifically that our company effectively deleted the products from the distribution agreement, and a
preliminary and permanent injunction prohibiting SIC System from proceeding with the Italian action described above.
The complaint was served on SIC System in November 2003, and the Court entered default against SIC Systems in
March 2004.  In August 2004, the Court entered a judgment in favor of our company in the amount of $195,155 for
breach of contract.  The Court also awarded judgment in favor of our company as to its claim for declaratory relief.  The
Court awarded judgment in favor of SIC Systems as to our company's claim for preliminary and permanent injunction.
We intend to enforce this judgment against SIC System in the Italian portion of the lawsuit.</P>
<P ALIGN="JUSTIFY">The foregoing proceedings could be expensive to litigate, may be protracted and our confidential
information may be compromised. Whether or not we are successful in these lawsuits, these proceedings could
consume substantial amounts of our financial and managerial resources. At any time, the other parties may file
additional claims against us, or we may file claims against them, which could increase the risk, expense and duration of
the litigations.</P>
<P ALIGN="JUSTIFY">We are subject to legal proceedings and claims, including those discussed above, 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. In accordance with Statement of Financial Accounting
Standards, or SFAS, No. 5, &quot;Accounting for Contingencies,&quot; we record a liability when it is both probable that
a liability has been incurred and the amount of the loss can be reasonably estimated.  These provisions are reviewed at
least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other
information and events pertaining to a particular case.</P>

<B><P><A NAME="item2"></A>ITEM 2. UNREGISTERED SALES OF EQUITY 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>
<OL>

<P ALIGN="JUSTIFY"><LI>At the Annual Meeting of Stockholders held on May 20, 2005, the stockholders of
Intuitive Surgical, Inc. elected Robert W. Duggan and William J. Mercer to the Board of Directors of the Company to
terms expiring at the Annual Meeting of Stockholders in the year 2008.  The following table sets forth the votes for each
director:</LI></P></OL>

<P ALIGN="LEFT"><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=450>
<TR><TD WIDTH="35%" VALIGN="TOP">&nbsp;</TD>
<TD WIDTH="36%" VALIGN="TOP">
<U><FONT SIZE=2><P ALIGN="CENTER">Votes For</U></FONT></TD>
<TD WIDTH="29%" VALIGN="TOP">
<U><FONT SIZE=2><P ALIGN="CENTER">Withheld</U></FONT></TD>
</TR>
<TR><TD WIDTH="35%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Robert W. Duggan</FONT></TD>
<TD WIDTH="36%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">31,863,970</FONT></TD>
<TD WIDTH="29%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">260,722 </FONT></TD>
</TR>
<TR><TD WIDTH="35%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">William J. Mercer</FONT></TD>
<TD WIDTH="36%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">31,693,821 </FONT></TD>
<TD WIDTH="29%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">430,871</FONT></TD>
</TR>
</TABLE>
</P>

<FONT SIZE=2>
<P ALIGN="JUSTIFY">After the meeting, our Board of Directors consisted of Robert W. Duggan, D. Keith Grossman,
Eric H. Halvorson, Richard J. Kramer, Alan J. Levy, William J. Mercer, and Lonnie M. Smith.</P>
<B><P ALIGN="JUSTIFY"><A NAME="item5"></A>ITEM 5. OTHER INFORMATION</P>
</B><P ALIGN="JUSTIFY">None. </P>

<P ALIGN="JUSTIFY"> <A NAME="item6"></A><B>ITEM 6. EXHIBITS </P></B>

<P><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=85%>
<TR><TD WIDTH="14%" VALIGN="BOTTOM">
<B><FONT SIZE=2><P ALIGN="CENTER">Exhibit Number</B></FONT></TD>
<TD WIDTH="86%" VALIGN="BOTTOM">
<B><FONT SIZE=2><P>Description</B></FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">31.1</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P>Certification of the Company's Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002</FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">31.2</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P>Certification of the Company's Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002</FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">32.1</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P>Certification of the Company's Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002</FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">32.2</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P>Certification of the Company's Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002</FONT></TD>
</TR>
</TABLE></P>

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

<FONT SIZE=2><P>Date: August 8, 2005 </P>

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

<B><P ALIGN="CENTER">EXHIBIT INDEX </P></B>


<P ALIGN="CENTER"><CENTER><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=85%>
<TR><TD WIDTH="14%" VALIGN="BOTTOM">
<B><FONT SIZE=2><P ALIGN="CENTER">Exhibit Number</B></FONT></TD>
<TD WIDTH="86%" VALIGN="BOTTOM">
<B><FONT SIZE=2><P>Description</B></FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">31.1</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P><A HREF="exh31-1.htm">Certification of the Company's Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002</A></FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">31.2</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P><A HREF="exh31-2.htm">Certification of the Company's Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002</A></FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">32.1</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P><A HREF="exh32-1.htm">Certification of the Company's Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002</A></FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">32.2</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P><A HREF="exh32-2.htm">Certification of the Company's Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002</A></FONT></TD>
</TR>
</TABLE>
</CENTER></P>


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

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Q2 2005 10Q DOC
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
     15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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 34,925,694 shares of Common Stock, $0.001 par value per
share, outstanding as of August 1, 2005.
Intuitive Surgical, Inc.
TABLE OF CONTENTS
PART I.   FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets as of June 30, 2005 and
December 31, 2004
1
Condensed consolidated statements of operations for the three-month and six-month
periods ended June 30, 2005 and June 30, 2004
2
Condensed consolidated statements of cash flows for the six-month
periods ended June 30, 2005 and June 30, 2004
3
Notes to condensed 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.   Unregistered Sales of Equity 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
42
PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements
INTUITIVE SURGICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
June 30,    December 31,
                                                               2005          2004
                                                           ------------  ------------
                                                                         (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents.............................. $      7,972  $      5,771
  Investments............................................      150,570       126,267
  Accounts receivable, net...............................       39,646        35,443
  Inventory..............................................        8,836         5,966
  Prepaids...............................................        4,652         3,032
  Restricted cash........................................          319           205
                                                           ------------  ------------
          Total current assets...........................      211,995       176,684
Property, plant and equipment, net.......................       29,291        27,065
Restricted cash..........................................           --           319
Intangible assets, net...................................        5,288         6,221
Goodwill.................................................      142,407       143,332
Other assets.............................................          541           608
                                                           ------------  ------------
          Total assets...................................      389,522       354,229
                                                           ============  ============
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................... $      5,382  $      4,485
  Accrued compensation and employee benefits.............        9,030        10,321
  Deferred revenue.......................................       18,396        15,372
  Restructuring accrual..................................          397           541
  Other accrued liabilities..............................        7,457         7,057
  Current portion of notes payable.......................          171           609
                                                           ------------  ------------
          Total current liabilities......................       40,833        38,385
Deferred revenue.........................................          337           505
Other accrued liabilities................................          342           407
                                                           ------------  ------------
          Total non-current liabilities..................          679           912
Commitments and contingencies............................           --            --
Stockholders' equity:
  Common stock, 100,000,000 shares authorized, $0.001
     par value, 34,870,405 and 34,234,795 shares
     issued and outstanding as of June 30, 2005
     and December 31, 2004, respectively.................           35            34
  Additional paid-in capital.............................      440,064       430,362
  Accumulated deficit....................................      (91,235)     (114,936)
  Treasury stock, at cost, no shares and 4,461 shares at
     June 30, 2005 and December 31, 2004, respectively...           --          (136)
  Accumulated other comprehensive loss...................         (854)         (392)
                                                           ------------  ------------
          Total stockholders' equity.....................      348,010       314,932
                                                           ------------  ------------
          Total liabilities and stockholders' equity..... $    389,522  $    354,229
                                                           ============  ============
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended       Six Months Ended
                                                      June 30,                June 30,
                                               ----------------------  ----------------------
                                                  2005        2004        2005        2004
                                               ---------- -----------  ---------- -----------
Sales:
  Products................................... $   44,651  $   25,850  $   78,834  $   48,321
  Services...................................      8,105       5,207      15,536       9,795
                                               ----------  ----------  ----------  ----------
    Total sales..............................     52,756      31,057      94,370      58,116
Cost of sales:
  Products...................................     13,649       9,260      24,804      18,073
  Services...................................      3,480       2,169       6,676       4,579
                                               ----------  ----------  ----------  ----------
    Total cost of sales......................     17,129      11,429      31,480      22,652
                                               ----------  ----------  ----------  ----------
    Gross profit.............................     35,627      19,628      62,890      35,464
                                               ----------  ----------  ----------  ----------
Operating costs and expenses:
  Selling, general, and administrative.......     15,934      11,535      30,138      21,778
  Research and development...................      4,355       3,626       8,500       8,936
                                               ----------  ----------  ----------  ----------
    Total operating costs and
     expenses................................     20,289      15,161      38,638      30,714
                                               ----------  ----------  ----------  ----------
Income from operations.......................     15,338       4,467      24,252       4,750
Other income, net ...........................        954         626       1,677       1,232
                                               ----------  ----------  ----------  ----------
Income before taxes..........................     16,292       5,093      25,929       5,982

Income tax expense...........................      1,508         263       2,041         299
                                               ----------  ----------  ----------  ----------
Net income................................... $   14,784  $    4,830  $   23,888  $    5,683
                                               ==========  ==========  ==========  ==========
Net income per share:
  Basic...................................... $     0.42  $     0.14  $     0.69  $     0.17
                                               ==========  ==========  ==========  ==========
  Diluted ................................... $     0.40  $     0.14  $     0.64  $     0.17
                                               ==========  ==========  ==========  ==========
Shares used in computing net income
  per share:
  Basic......................................     34,790      33,559      34,655      33,421
                                               ==========  ==========  ==========  ==========
  Diluted....................................     37,244      34,210      37,133      34,170
                                               ==========  ==========  ==========  ==========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the Six Months
                                                              Ended June 30,
                                                         ------------------------
                                                            2005         2004
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net income............................................. $    23,888  $     5,683
Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation.........................................       2,363        2,606
  Benefit for doubtful accounts........................         (78)        (320)
  Gain on sales of property and equipment..............          --           (3)
  Amortization of deferred compensation and stock
   compensation........................................          --           99
  Amortization of intangible assets....................         934          934
  Acquisition related tax benefits.....................         925           --
  Income tax benefits from employee stock option plans.         529           --
Changes in operating assets and liabilities:
  Accounts receivable..................................      (4,126)       2,434
  Prepaids.............................................      (1,637)        (591)
  Inventory............................................      (2,871)       1,626
  Other assets.........................................          62          226
  Accounts payable.....................................         930       (1,584)
  Accrued compensation and employee benefits...........      (1,226)        (108)
  Restructuring accrual................................        (144)        (215)
  Other accrued liabilities............................         361       (1,894)
  Deferred revenue.....................................       2,856        2,058
                                                         -----------  -----------
Net cash provided by operating activities..............      22,766       10,951
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................      (4,604)     (21,409)
Disposition of property and equipment..................          --           26
Release of restricted cash.............................         204          307
Purchase of investments................................     (85,704)     (41,782)
Proceeds from sales and maturities of
 investments...........................................      60,890       44,104
                                                         -----------  -----------
Net cash used in investing activities..................     (29,214)     (18,754)
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       9,195        5,353
Repurchase of common stock.............................         (72)          --
Repayment of notes payable.............................        (438)        (591)
                                                         -----------  -----------
Net cash provided by financing activities..............       8,685        4,762
                                                         -----------  -----------
Effect of exchange rate changes on cash and cash
 equivalents...........................................         (36)         (64)
                                                         -----------  -----------
Net increase (decrease) in cash and cash equivalents...       2,201       (3,105)
Cash and cash equivalents, beginning of period.........       5,771       11,335
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $     7,972  $     8,230
                                                         ===========  ===========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In this report, "Intuitive Surgical," "Intuitive," and the "Company" refer to
Intuitive Surgical, Inc.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
notes required by accounting principles generally accepted in the United States for complete financial statements. In the
opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been
included. The consolidated balances at December 31, 2004 were derived from the audited financial statements included
in  Intuitive Surgical, Inc.'s Annual Report on Form 10-K ("Annual Report") for the year ended December 31,
2004. The financial statements included in this report should be read in conjunction with the audited financial statements
for the year ended December 31, 2004 included in the Annual Report. The results for the interim period ended June 30,
2005 are not necessarily indicative of the results to be expected for the full year ending December 31, 2005 or future
operating periods.  The condensed consolidated financial statements include the accounts of the Company and its
subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ
materially from these estimates.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or service has been rendered, the price is fixed or determinable and collectibility is reasonably
assured.
In certain cases, revenue from direct system sales is earned pursuant to multiple-element
arrangements that require judgment in the areas of customer acceptance, collectibility, the separability of units of
accounting, and the fair value of individual elements.  Effective July 1, 2003, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables," on a prospective basis.  The principles and guidance outlined in EITF 00-21 provide a framework to
(a) determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and (b)
determine how the arrangement consideration should be measured and allocated to the separate units of accounting in
the arrangement. The Company determined that its multiple-element arrangements are generally comprised of the
following elements that would qualify as separate units of accounting: system sales, service, installation, and training.
Each of these elements represents individual units of accounting as the delivered item has value to a customer on a
stand-alone basis, objective and reliable evidence of fair value exists for undelivered items, and arrangements generally
do not contain a general right of return relative to the delivered item.  The Company determines fair value based on the
price of the deliverable when it is sold separately or based on third-party evidence.  In accordance with the guidance in
EITF 00-21, the Company uses the residual method to allocate the arrangement consideration when it does not have fair
value of the system sale.  Under the residual method, the amount of consideration allocated to the delivered item equals
the total arrangement consideration less the aggregate fair value of the undelivered items.  Assuming all other criteria for
revenue recognition have been met, the Company recognizes revenue for system sales when delivery and acceptance
occurs, for installation and training when the services are rendered, and for service ratably over the service period,
which is generally one year.
The Company's distributors do not have price protection rights.  The Company records an
allowance for sales returns based on historical returns.
Revenue from sales of instruments and accessories is recognized upon delivery.  Revenue
related to future commitments under separately priced service contracts is deferred and recognized ratably over the
service period. All costs associated with the provision of service and maintenance, including salaries, benefits, travel,
spare parts and equipment, are recognized in cost of sales as incurred.  Amounts billed in excess of revenue recognized
are included as deferred revenue in the condensed consolidated balance sheets.
The Company's
da Vinci
Surgical System,
Hermes
Control Center and
AESOP
Endoscope Positioner contain a software component. The Company believes that this software element
is an incidental part of each system. The software element within the Company's products is not sold or marketed
separately to customers, and the software does not operate independently of each system. Furthermore, the software
development effort does not represent a significant cost to the Company relative to the overall development cost of the
product. As such, the software the Company provides is incidental to each system as a whole, and the software revenue
guidance provided in Statement of Position ("SOP") 97-2, "Software Revenue Recognition," is not
applicable to the Company's revenues.
Stock-Based Compensation
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recorded for stock option grants issued with an exercise price
equal to the market value of the underlying stock on the date granted.  The Company has recorded stock-based
compensation, primarily related to deferred compensation arising from the Company's initial public offering in 2000 and
its acquisition of Computer Motion, Inc. ("Computer Motion") in June 2003.  As required under Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," the Company has provided the following pro forma net income and pro forma net
income per share disclosure for stock-based awards as if the fair value-based method defined in SFAS 123,
"Accounting for Stock-Based Compensation," had been applied, amortizing expense ratably over the service
period (amounts in thousands, except per share amounts):
Three Months Ended   Six Months Ended
                                                          June 30,            June 30,
                                                     ------------------  -------------------
                                                       2005      2004      2005       2004
                                                     --------  --------  ---------  --------
Net income, as reported............................ $ 14,784  $  4,830  $  23,888  $  5,683
Add:  Total stock-based employee
  compensation expense included in reported
  net income, net of $0 related tax effect.........       --        84         --        99
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method for
  all awards, net of $0 related tax effect.........   (3,123)   (2,657)    (6,129)   (5,117)
                                                     --------  --------  ---------  --------
Pro forma net income............................... $ 11,661  $  2,257  $  17,759  $    665
                                                     ========  ========  =========  ========

Net income per share:
  Basic - as reported.............................. $   0.42  $   0.14  $    0.69  $   0.17
  Basic - pro forma................................ $   0.34  $   0.07  $    0.51  $   0.02

  Diluted - as reported............................ $   0.40  $   0.14  $    0.64  $   0.17
  Diluted - pro forma.............................. $   0.31  $   0.07  $    0.48  $   0.02
The fair value for each stock option award granted was estimated at the date of grant using the Black-Scholes
option-pricing model, assuming no expected dividends and the following weighted average assumptions:
Three Months Ended    Six Months Ended
                                          June 30,              June 30,
                                     -------------------   ------------------
                                        2005      2004        2005      2004
                                     --------  ---------   --------  --------
Stock Option Plans:
   Average risk free interest rate.     3.85 %     3.36 %     3.75 %    3.03 %
   Average expected life (years)...      4.0        4.0        4.0       4.0
   Volatility......................       58 %       68 %       58 %      70 %

Stock Purchase Plan:
   Average risk free interest rate.     1.89 %     1.30 %     1.93 %    1.30 %
   Average expected life (years)...      1.4        1.1        1.4       1.2
   Volatility......................       49 %       62 %       49 %      62 %
Income Tax
The Company makes certain estimates and judgments in determining income tax expense for financial
statement purposes.  These estimates and judgments occur in the calculation of certain tax assets and liabilities, which
arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123R, "Share Based Payment" ("SFAS 123R"), which replaces SFAS 123 and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." In March 2005, the SEC
issued Staff Accounting Bulletin ("SAB") No. 107, providing supplemental implementation guidance for SFAS
123R.  In April 2005, the SEC issued "Amendment to Rule 04-01(a) of Regulation S-X Regarding the Compliance
Date for SFAS No. 123R, "Share Based Payment," (the "Amendment to Rule 4-01(a)"), changing
the effective date for most public companies to adopt SFAS 123R to the first interim reporting period of a company's
fiscal year that begins on or after June 15, 2005.  Under the Amendment to Rule 4-01(a), the Company is now required
to adopt SFAS 123R in the first quarter of fiscal year 2006.
SFAS 123R permits public companies to choose between the following two adoption
methods:
A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the
effective date of SFAS 123R that remain unvested on the effective date; or
A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to restate based on the amounts previously
recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior
interim periods of the year of adoption.
The Company currently measures compensation costs related to share-based payment under
APB 25, as allowed by SFAS 123, and provides disclosure in notes to the financial statements as required by SFAS 123.
The Company expects the adoption of SFAS 123R and SAB 107 will have a material adverse impact on the net income
and net income per share.  The Company is currently evaluating the extent of such impact and has not yet determined
which transition method the Company will use in adopting SFAS 123R.
NOTE 2. CONCENTRATIONS OF RISK
Financial instruments which subject the Company to potential risk consist of its cash
equivalents, short-term investments, and accounts receivable. The counterparties to the agreements relating to the
Company's investment securities 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
and six months ended June 30, 2005 and 2004, no customer accounted for more than 10% of total sales or accounts
receivable. The Company 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,
Hermes
Control Center,
AESOP
Endoscope Positioner and related instruments and accessories accounted for all of the Company's product sales for the
three and six months ended June 30, 2005 and 2004. Purchases of key parts and components used to manufacture the
Company's products are from limited supply sources. The inability of any of these suppliers to fulfill the Company's
supply requirements may negatively impact future operating results.
The Company operates in one segment: the development and marketing of products designed
for use in surgery.   The distribution of sales by geographic location is as follows (in thousands):
Three Months Ended     Six Months Ended
                                       June 30,              June 30,
                               --------------------- ---------------------
                                   2005       2004       2005       2004
                                ---------  ---------  ---------  ---------
Domestic...................... $  44,152  $  24,674  $  81,009  $  45,180
International.................     8,604      6,383     13,361     12,936
                                ---------  ---------  ---------  ---------
  Total sales................. $  52,756  $  31,057  $  94,370  $  58,116
                                =========  =========  =========  =========
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 June 30, 2005 and
December 31, 2004. Approximately $5.6 million and $1.7 million of money market instruments were included in cash and
cash equivalents at June 30, 2005 and December 31, 2004, respectively.
NOTE 4. SHORT-TERM INVESTMENTS
All short-term investments are classified as available-for-sale, and, therefore, are carried at
fair market value. The Company views its available-for-sale portfolio as available for use in its current operations.
Accordingly, all investments are classified as short-term, even though the stated maturity date may be one year or more
beyond the current balance sheet date. Available-for-sale securities are stated at fair market value based upon quoted
market prices of the securities. Unrealized gains and losses on such securities are reported as a separate component of
stockholders' equity. Realized gains and losses on available-for-sale securities are included in interest income. The cost
of securities sold is based on the specific identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
The following table presents the fair value of available-for-sale securities included in short-term
investments as of the respective dates (in thousands):
June 30, 2005    December 31, 2004
                           -----------------  -----------------
U.S. corporate debt...... $          73,794  $          54,430
U.S. government debt.....            44,576             33,188
Municipal debt...........            32,200             38,649
                           -----------------  -----------------
  Total.................. $         150,570  $         126,267
                           =================  =================
NOTE 5. INVENTORY
Inventory is stated at the lower of cost or market value. Cost is computed using standard
costs, which approximates actual cost on a first-in, first-out basis.  Inventory consists of the following (in thousands):
June 30,    December 31,
                                   2005          2004
                               ------------  ------------
Raw materials................ $      3,085  $      2,404
Work-in-process..............        1,901         1,183
Finished goods...............        3,850         2,379
                               ------------  ------------
  Total...................... $      8,836  $      5,966
                               ============  ============
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the underlying net
tangible and intangible assets.  Goodwill is not deductible for tax purposes.  In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets," goodwill and intangible assets with indefinite useful lives can no
longer be amortized; rather, they will be tested for impairment at least annually (more frequently if certain indicators are
present).  Intangible assets with finite useful lives will continue to be amortized over their respective useful lives.  In the
event management determines that goodwill has been impaired, the Company will record an accounting charge for the
impairment during the fiscal quarter in which the determination is made. Of the total purchase price related to the
Company's acquisition of Computer Motion on June 30, 2003, $143.3 million was allocated to goodwill and $8.6 million
was allocated to amortizable intangible assets, comprised of developed technology of $3.5 million, core technology of
$3.3 million, customer relationships of $1.3 million, and other intangible assets totaling $0.5 million.
The Company has adjusted the goodwill amount related to the projected use of Computer
Motion, Inc.'s net operating losses from the acquisition in June 2003.  A full valuation allowance was recorded at the
acquisition date.
The following table represents the changes in goodwill for the period (in thousands):
Balance at December 31, 2004...... $  143,332
Acquisition related tax benefits..       (925)
                                     ---------
Balance at June 30, 2005.......... $  142,407
                                     =========
Other purchased intangible assets represent patents, which are carried at cost less accumulated
amortization. Amortization is computed using the straight-line method over the expected useful life of generally six or
seven years.
Net intangible assets is comprised of the following (in thousands):
June 30, 2005
                                    -----------------------------------------------
                                                 Accumulated
                                      Gross     Amortization  Impairment     Net
                                    ---------   ------------  ----------  ---------
Developed technology.............  $   3,500   $        250  $    3,250  $      --
Core technology..................      3,300            943          --      2,357
Customer relationships...........      1,300            633          --        667
Patents..........................      7,310          5,168          --      2,142
Other intangible assets..........        500             87         291        122
                                    ---------   ------------  ----------  ---------
  Total intangible assets, net...  $  15,910   $      7,081  $    3,541  $   5,288
                                    =========   ============  ==========  =========

                                                   December 31, 2004
                                    -----------------------------------------------
                                                 Accumulated
                                      Gross     Amortization  Impairment     Net
                                    ---------   ------------  ----------  ---------
Developed technology.............  $   3,500   $        250  $    3,250  $      --
Core technology..................      3,300            707          --      2,593
Customer relationships...........      1,300            501          --        799
Patents..........................      7,310          4,616          --      2,694
Other intangible assets..........        500             74         291        135
                                    ---------   ------------  ----------  ---------
  Total intangible assets, net...  $  15,910   $      6,148  $    3,541  $   6,221
                                    =========   ============  ==========  =========
Amortization expense related to intangible assets was $0.5 million for each of the three months
ended June 30, 2005 and 2004. Amortization expense related to intangible assets was $0.9 million for each of the six
months ended June 30, 2005 and 2004.
Estimated future amortization expense related to intangible assets at June 30, 2005 is as follows
(in thousands):
Fiscal Year
----------------------------
2005 (remaining 6 months)...  $      934
2006........................       1,275
2007........................       1,078
2008........................         811
2009........................         811
Thereafter..................         379
                                ---------
  Total.....................  $    5,288
                                =========
Impairment of Goodwill
The Company has elected to perform an annual analysis of goodwill during the fourth quarter
of each year.  Based on the Company's 2004 impairment analysis, no impairments were identified, and no indicators of
impairment were identified during the six months ended June 30, 2005.
Impairment of Long-Lived Assets
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," requires recognition of impairment of long-lived assets when circumstances indicate an impairment has
occurred and in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to
such assets.  Accordingly, the Company evaluates asset recoverability when an event occurs that may impair
recoverability of the asset.  The Company determines the recoverability of the carrying amount of each asset by
reviewing the following factors: the undiscounted value of expected operating cash flows; the estimated useful or
contractual life of the asset; and the contract or product supporting the asset.  No impairment losses were incurred
during the six months ended June 30, 2005 and 2004.
NOTE 7. 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. A review of
warranty obligations is performed regularly to determine the adequacy of the reserve. Based on the outcome of this
review, revisions to the estimated warranty liability are recorded as appropriate.
The following table reconciles the changes to the product warranty liability, which is included in
other accrued liabilities on the accompanying condensed consolidated balance sheets, for the period indicated (in
thousands):
Balance at                            Balance at
                                         Beginning   Warranty     Warranty      End of
                                         of Period     Usage      Expensed      Period
                                        -----------  ---------  -------------  ---------
Six months ended June 30, 2005.......  $       136  $     (37) $          19  $     118
The Company from time to time enters into agreements to indemnify its customers against
liability and damages arising from patent claims against the Company's products. The term of these agreements varies,
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 indemnification clauses and no liabilities have
been recorded for this obligation on the Company's balance sheets as of June 30, 2005 or December 31, 2004.
NOTE 8. RESTRUCTURING CHARGES
Upon the consummation of the acquisition of Computer Motion, Intuitive's management
approved plans to restructure the operations of the combined entity.  The restructuring plan eliminated redundant
activities and infrastructure. The Company now has a single sales and marketing organization and has consolidated all
manufacturing and administrative functions in Sunnyvale, California.  Based upon the restructuring plan, the Company
recorded a $3.4 million accrual in accordance with EITF 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination." In accordance with EITF No. 95-3, the restructuring accrual has been recorded
as a component of the purchase price. The accrual was comprised of $2.6 million for employee severance costs, which
was substantially paid out by the end of 2004, and $0.8 million to exit existing lease commitments.  The Company has
estimated vacancy periods of between one month and three years between exiting various sites and realizing subleasing
proceeds.  The Company increased the accrual for the estimated losses to be incurred to sublet vacated facilities by
$0.2 million in 2004 due to the change in assumptions used to calculate the losses on subleasing the vacated facilities.
This amount was recorded as an adjustment to goodwill.
Subsequent to the Computer Motion acquisition, based on the Company's cost structure and
future development plans,
the Company determined to completely
shut down the Goleta research and development facility.  This plan called for exiting the last Goleta rented facility and
terminating all of the Goleta-based employees.  In accordance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," the Company recorded $0.4 million of one-time employee termination
costs, which were paid out by the end of 2004.  In 2004, the Company completed the shutdown of the Goleta research
and development facilities and accrued $0.5 million of lease commitment costs to exit the leased facility.  The Company
later decreased its restructuring liability by $0.2 million due to the changes in estimates of subleasing proceeds.  The
charges incurred were recorded in research and development expenses on the condensed consolidated statement of
operations.  The Company expects to fully utilize the accrual by the third quarter of 2007, when existing lease
commitments expire.
The following table summarizes the restructuring activity for the periods indicated (in
thousands):
EITF No. 95-3          SFAS No. 146
                                             ----------------------  ---------------------
                                              Employee     Lease     Employee     Lease
                                             Severance   Commitments Severance  Commitments Total
                                             ----------  ----------  ---------  ---------  --------
Cost accrued............................... $    2,629  $      816  $     410  $     525  $  4,380
Cash payments, net of subleasing proceeds..     (2,781)       (593)      (410)      (207)   (3,991)
Currency impact............................        (23)        (23)        --         --       (46)
Adjustments................................        175         200         --       (177)      198
                                             ----------  ----------  ---------  ---------  --------
  Balance at December 31, 2004.............         --         400         --        141       541
Cash payments, net of subleasing proceeds..         --         (96)        --        (48)     (144)
                                             ----------  ----------  ---------  ---------  --------
  Balance at June 30, 2005................. $       --  $      304  $      --  $      93  $    397
                                             ==========  ==========  =========  =========  ========
NOTE 9. COMPREHENSIVE INCOME
Comprehensive income includes net income and other comprehensive income (loss), which primarily consists
of unrealized gains and losses on available-for-sale securities and cumulative translation adjustments. Total
accumulated other comprehensive loss is displayed as a separate component of stockholders' equity in the
accompanying condensed consolidated balance sheets.  The components of comprehensive income consist of the
following (in thousands):
Three Months Ended     Six Months Ended
                                               June 30,              June 30,
                                        --------------------  --------------------
                                           2005       2004       2005       2004
                                        ---------  ---------  ---------  ---------
Net income, as reported............... $  14,784  $   4,830  $  23,888  $   5,683
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.......................        14        (27)        50        (57)
  Change in unrealized gain (loss)
    on available-for-sale securities..       321     (1,351)      (512)    (1,107)
                                        ---------  ---------  ---------  ---------
Comprehensive income.................. $  15,119  $   3,452  $  23,426  $   4,519
                                        =========  =========  =========  =========
The components of accumulated other comprehensive loss were as follows (in thousands):
June 30,    December 31,
                                                2005         2004
                                            ------------  -----------
Accumulated net unrealized loss on
  available-for-sales securities.......... $       (938) $      (427)
Foreign currency translation
  adjustments.............................           84           35

Total accumulated other comprehensive       ------------  -----------
  loss.................................... $       (854) $      (392)
                                            ============  ===========
NOTE 10. NET INCOME PER SHARE
Basic net income per share is computed by dividing the net income for the period by the
weighted-average number of common shares outstanding during the period.  Diluted net income per share is computed
by dividing the net income for the period by the weighted-average number of common shares outstanding and potential
number of common shares outstanding during the period less the weighted-average number of common shares subject
to repurchase if their effect is dilutive.
The following table presents the computation of basic and diluted net income per share (in
thousands, except per share data).
Three Months Ended        Six Months Ended
                                                June 30,                 June 30,
                                         -----------------------  -------------------------
                                            2005         2004        2005         2004
                                         -----------  ----------  -----------  ------------
Net income............................. $    14,784  $    4,830  $    23,888  $      5,683
Basic:
  Weighted-average shares outstanding..      34,790      33,559       34,655        33,421
                                         ===========  ==========  ===========  ============
  Basic net income per common share.... $      0.42  $     0.14  $      0.69  $       0.17
                                         ===========  ==========  ===========  ============
Diluted:
  Weighted-average shares outstanding
    used in basic calculation..........      34,790      33,559       34,655        33,421
  Add common stock equivalents.........       2,454         651        2,478           749
                                         -----------  ----------  -----------  ------------
  Weighted-average shares used in
    computing diluted net income
    per common share...................      37,244      34,210       37,133        34,170
                                         ===========  ==========  ===========  ============
  Diluted net income per common share.. $      0.40  $     0.14  $      0.64  $       0.17
                                         ===========  ==========  ===========  ============
Potential weighted-average common shares excluded from the computation of diluted net
income per share as their effect would be antidilutive were 837,000 shares and 2,143,000 shares, respectively, for the
three months ended June 30, 2005 and 2004, and 657,000 shares and 1,868,000 shares, respectively, for the six
months ended June 30, 2005 and 2004.  The exercise price of these options exceeded the average market price during
the three-month and six-month periods mentioned above.  These shares could, however, potentially dilute basic income
per share in the future.
NOTE 11. INCOME TAX
Tax expense for interim periods is computed on the basis of a projected
effective tax rate for the full year.  The Company's effective tax rates
for the three and six month periods ended June 30, 2005 were
approximately 9% and 8%, respectively, compared to 5% for both periods
in 2004. The tax rate in the second quarter of fiscal 2005 brings the
Company's year-to-date tax rate to the anticipated full year rate of 8%.
 The fiscal 2005 tax rates include the anticipated current tax
liability, the anticipated benefits from utilizing tax deductions
related to stock option plans, and the anticipated tax benefit that will
be derived from the utilization of the loss carryovers obtained as a
result of the Computer Motion acquisition in 2003.  When any portion of
the Computer Motion's loss carryovers are utilized based on tax return
ordering rules (older year losses utilized first), tax expense is
recorded and goodwill related to the Computer Motion acquisition is
reduced.  The fiscal 2005 effective tax rates are higher than those of
fiscal 2004 because of the utilization of some Computer Motion loss
carryovers.
The effective tax rate for fiscal 2005 continues to reflect a full
valuation allowance against the Company's deferred tax assets.  The
Company evaluates the realizability of the deferred tax assets every
quarter.  Should the Company determine that it is more likely than not
that the future taxable income will be sufficient to utilize some or all
of the deferred tax assets, the Company will release some or all of the
valuation allowance.  The release of this valuation allowance would
result in a combination of tax provision benefit (reduced expense or
negative expense) and a decrease in the goodwill recorded as a result of
the Computer Motion acquisition.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space for research and development in Milford, Connecticut and
sales office space in St. Germain en Laye, France.  In connection with the acquisition of Computer Motion, the Company
assumed leases in Goleta, California.  These leases have varying terms, the longest of which extends to September
2007.  As of June 30, 2005, the Company sublet approximately 92% of its office space in Goleta.
Future minimum lease commitments, net of sublease income of $941,000 during the next three
years, under the Company's operating leases as of June 30, 2005 are as follows (in thousands):
2005 (remaining 6 months)..... $     340
2006..........................       622
2007..........................       337
2008..........................        62
2009..........................        35
                                ---------
  Total....................... $   1,396
                                =========
Rent expense was approximately $40,000 and $0.1 million for the three months ended June 30,
2005 and 2004, respectively.  Rent expense was approximately $84,000 and $0.9 million for the six months ended June
30, 2005 and 2004, respectively.
Contingencies
The discussion of the Company's legal proceedings is incorporated by reference from Part II: Other Information -
Item 1. Legal Proceedings of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this report, "Intuitive Surgical," "Intuitive," the
"Company," "we," "us," and "our" refer to Intuitive Surgical, Inc.
This management's discussion and analysis of financial condition as of June 30, 2005 and
results of operations for the three months and six months ended June 30, 2005 and June 30, 2004 should be read in
conjunction with the management's discussion and analysis of financial condition and results of operations included in
the Annual Report.
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 Surgical®,
da Vinci
®, InSite®, EndoWrist®,
Zeus
®,
Hermes
®, and
Aesop
® are registered trademarks of Intuitive Surgical, Inc.
OVERVIEW
We design, manufacture and market the
da Vinci
Surgical System, an advanced
surgical system that we believe represents a new generation of surgery-the third generation. The
da Vinci
Surgical System consists of a surgeon's console, a patient-side cart, a high performance vision system and proprietary
"wristed" instruments. The
da Vinci
Surgical System seamlessly translates the surgeon's natural hand
movements on instrument controls at a console into corresponding micro-movements of instruments positioned inside
the patient through small puncture incisions, or ports. We believe that the
da Vinci
Surgical System is the only
commercially available technology that can provide the surgeon with the intuitive control, range of motion, fine tissue
manipulation capability and 3-D visualization characteristic of open surgery, while simultaneously allowing the surgeons
to work through the small ports of minimally invasive surgery, or MIS. By placing computer-enhanced technology
between the surgeon and the patient, we believe that the
da Vinci
Surgical System enables surgeons to perform
better surgery in a manner never before experienced. The
da Vinci
Surgical System is sold for use in multiple
surgical specialties, principally urology, cardiac, general, and gynecologic surgery.
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 our revenues have come from sales of EndoWrist
instruments and accessories, which are lower revenue dollar items. In addition, a portion of our revenue comes from the
ongoing service of installed
da Vinci
Surgical Systems. 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 revenue through sales of the EndoWrist
instrument and accessories and ongoing service. As our business has matured, revenue generated from the sale of
instruments, accessories, service and training increased from $15.7 million, or 22% of sales, in 2002 to $29.9 million, or
33% of sales, in 2003 to $60 million, or 43% of sales, in 2004.  We have seen a continuation of this trend in 2005 as
revenue generated from the sale of instruments, accessories, service and training for the first half of the year grew to
$44.6 million, or 47% of sales, from $25.5 million, or 44% of sales, during the first half of 2004.  We expect that revenue
generated from the sale of instruments, accessories, service and training will continue to grow and become a larger part
of overall revenue in the future.
RESULTS OF OPERATIONS
Product Sales (dollars in millions)
June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $        44.7  $        25.9  $    18.8        73 %
Six months ended................... $        78.8  $        48.3  $    30.5        63 %
Product sales for the quarter ended June 30, 2005 were $44.7 million, compared to $25.9 million
during the quarter ended June 30, 2004.  The increase resulted from higher system, instrument, and accessory sales.
System sales increased to $28.4 million in the quarter ended June 30, 2005 from $18.1 million in
the quarter ended June 30, 2004, reflecting growth in system unit sales of  the
da Vinci
Surgical Systems and the
da Vinci
fourth arms.  There were 26
da Vinci
Surgical Systems sold during the quarter ended June 30,
2005, compared to 19 during the quarter ended June 30, 2004. There were 27 fourth arms sold during the quarter ended
June 30, 2005, compared to 15 during the quarter ended June 30, 2004.
Instrument and accessory revenue for the quarter ended June 30, 2005 was $16.2 million,
compared to $7.8 million for the quarter ended June 30, 2004.  The increase was driven by a larger number of installed
systems during the quarter ended June 30, 2005 and higher utilization per system.  Increased use of the
da Vinci
Surgical System for radical prostatectomies contributed substantially to higher second quarter 2005 instrument and
accessory sales
.
Product sales increased to $78.8 million for the six months ended
June 30, 2005 from $48.3 million for the six months ended June 30, 2004. The 63% increase resulted primarily from
higher recurring instrument and accessory revenue, higher
da Vinci
Surgical System unit sales, and higher fourth
arm unit sales.
Total system revenue in the first half of 2005 was $49.7 million, compared to $32.6 million during
the first half of 2004.  We shipped 45
da Vinci
Surgical Systems during the first six months of 2005, compared to
33 units shipped during the first six months of 2004.  We shipped 46
da Vinci
fourth arms during the first six
months of 2005, compared to 26 units shipped during the first six months of 2004.  We also shipped 13
Aesop
systems during the first half of 2005, compared to 9 during the first half of 2004.
Instrument and accessory revenue for the six months ended June 30,
2005 increased to $29.1 million from $15.7 million for the six months ended June 30, 2004, reflecting a growing number
of surgical procedures performed by our customers.  This growth was driven by a larger base of installed
da Vinci
Surgical Systems and improved system utilization per site.
Service Sales (dollars in millions)
June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $         8.1  $         5.2  $     2.9        56 %
Six months ended................... $        15.5  $         9.8  $     5.7        59 %
Service sales, comprised of system service, installation and customer training, increased to $8.1
million for the quarter ended June 30, 2005 from $5.2 million for the quarter ended June 30, 2004. The increase resulted
primarily from a larger base of the
da Vinci
Surgical Systems generating service revenue in 2005.  The base of
the
da Vinci
Surgical Systems generating service revenue grew to approximately 298 entering the second quarter
of 2005, compared to approximately 203 entering the second quarter of 2004. The increase of 95 was comprised of 14
systems sold in the second quarter of 2003 coming out of the warranty period onto service contracts and 81 systems
sold between April 1, 2004 and March 31, 2005, with the first year service deferred according to EITF 00-21.  In addition,
the average service revenue per site was higher during the second quarter of 2005 compared to the second quarter of
2004 due to a higher percentage of four-arm systems in the installed base.  Four-arm systems carry higher service
revenue contracts.
Service sales increased to $15.5 million for the first half of 2005 from $9.8 million for the first half
of 2004. The increase was primarily due to a larger base of the
da Vinci
Surgical Systems generating service
revenue.
Product Sales Gross Profit (dollars in millions)
June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $        31.0  $        16.6  $    14.4        87 %
Percentage of product sales........          69.4 %         64.2 %

Six months ended................... $        54.0  $        30.2  $    23.8        79 %
Percentage of product sales........          68.5 %         62.6 %
Product gross profit for the quarter ended June 30, 2005 was $31.0 million, or 69.4% of sales,
compared to $16.6 million, or 64.2% of sales, during the quarter ended June 30, 2004.  Product gross profit for the six
months ended June 30, 2005 was $54.0 million, or 68.5% of sales, compared to $30.2 million, or 62.6% of sales during
the six months ended June 30, 2004.  The higher gross profit for the quarter and six months ended June 30, 2005 was
driven by higher product revenue, as described above.  The higher product gross profit percentage was driven by
leveraging manufacturing overhead costs across higher product revenue.
Service Sales Gross Profit (dollars in millions)
June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $         4.6  $         3.0  $     1.6        52 %
Percentage of service sales........          57.1 %         58.3 %

Six months ended................... $         8.9  $         5.2  $     3.6        70 %
Percentage of service sales........          57.0 %         53.3 %
Service sales gross profit for the quarter ended June 30, 2005 was $4.6 million, or 57.1% of
sales, compared to $3.0 million, or 58.3% of sales, for the quarter ended June 30, 2004.  The higher gross profit for the
quarter ended June 30, 2005 was driven by higher service revenue, as described above.  The slightly lower second
quarter 2005 gross service profit percentage was driven by higher service parts inventory consumption and repair
costs.
Service sales gross profit for the six months ended June 30, 2005 was $8.9 million, or 57.0% of
sales, compared to $5.2 million, or 53.3% of sales, for the six months ended June 30, 2004.  The higher gross profit for
the quarter ended June 30, 2005 was driven by higher service revenue, as described above.  The higher first half of
2005 gross service profit percentage was driven by leveraging the service and training organization expenses across a
larger base of installed systems.
Selling, General and Administrative Expenses (dollars in millions)
June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $        15.9  $        11.5  $     4.4        38 %
Six months ended................... $        30.1  $        21.8  $     8.4        38 %
Selling, general and administrative expenses include personnel costs for sales, marketing and
administrative personnel, tradeshow expenses, legal expenses, regulatory fees and general corporate expenses.
Selling, general and administrative expenses for the quarter ended
June 30, 2005 were $15.9 million, up 38% from $11.5 million for the quarter ended June 30, 2004.
Selling, general,
and administrative expenses for the six months ended June 30, 2005 were $30.1 million, up 38% from $21.8 million for
the six months ended June 30, 2004.  The year-over-year increases were primarily due to sales organization headcount
growth to support higher sales and higher variable compensation associated with achieving higher revenues and
profitability.  We have also grown our marketing organization and our administrative infrastructure.
We expect selling, general and administrative expenses to increase in the future to support our
expanding business.
Research and Development Expenses (dollars in millions)
June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $         4.4  $         3.6  $     0.7        20 %
Six months ended................... $         8.5  $         8.9  $    (0.4)       (5)%
Research and development expenses include costs associated with the design, development,
testing and enhancement of our products. These enhancements represent significant improvements to our products.
Research and development expenses also include expenditures for clinical trials and purchases of laboratory supplies.
Research and development expenses for the quarter ended June 30, 2005 were $4.4 million,
compared to $3.6 million for the quarter ended June 30, 2004.  The increase was primarily due to increased headcount
and higher second quarter 2005 prototyping and other project-related expenses.
Research and development expenses for the six months ended June 30, 2005 were $8.5 million,
compared to $8.9 million for the six months ended June 30, 2004.  The decrease was primarily due to the elimination of
expenses incurred during the first quarter of 2004 that were related to the former Computer Motion Goleta, California
site.  During the first quarter of 2004, the Goleta site incurred $1.0 million in general operating expenses, comprised of
salaries, materials, depreciation, and other expenses.  In addition, we recorded a $0.8 million restructuring charge during
the quarter ended March 31, 2004 to completely shut down the Goleta site and terminate all remaining Goleta-based
employees.  Excluding the impact of the Goleta expenses, higher research and development expenses for the quarter
ended June 30, 2005 was primarily due to higher prototyping and other project-related expenses.
Research and development costs are expensed as incurred. We
expect to continue to make substantial investments in research and development and anticipate that research and
development expenses will continue to increase in the future.
Other Income, Net (dollars in millions)
June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $         1.0  $         0.6  $     0.3        51 %
Six months ended................... $         1.7  $         1.2  $     0.4        36 %
Other income for the quarter ended June 30, 2005 was $1.0 million, up 51% from $0.6 million for
the quarter ended June 30, 2004.  Other income for the quarter ended June 30, 2005 was comprised of $1.2 million of
interest income, partially offset by foreign exchange losses resulting from euro-based transactions.  Other income
increased by $0.3 million compared to the second quarter of 2004 primarily due to higher interest earned of $0.6 million,
resulting from higher 2005 cash and investment balances and higher 2005 interest rates, partially offset by higher
foreign exchange losses.
Other income for the six months ended June 30, 2005 was $1.7 million, up 36% from $1.2 million
for the six months ended June 30, 2004.  Other income for the six months ended June 30, 2005 was comprised of $2.2
million of interest income, partially offset by foreign exchange losses of $0.5 million resulting from euro-based
transactions.  Other income increased by $0.5 million compared to the first half of 2004 primarily due to higher interest
earned of $0.9 million, resulting from higher interest earned on higher 2005 cash and investment balances and higher
2005 interest rates, partially offset by higher 2005 foreign exchange losses.
Income Tax Expense (dollars in millions)
June 30,       June 30,                   %
                                         2005           2004        Change    Change
                                     -------------  -------------  --------- ---------
Three months ended................. $         1.5  $         0.3  $     1.2       473 %
Six months ended................... $         2.0  $         0.3  $     1.7       583 %
We make certain estimates and judgments in determining income tax expense for financial
statement purposes.  These estimates and judgments occur in the calculation of certain tax assets and liabilities, which
arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.
Income tax expense for the quarter ended June 30, 2005 was $1.5 million, or 9.3% of pre-tax
income, compared to a 5.2% provision taken during the second quarter of 2004.   Income tax expense for the six months
ended June 30, 2005 was $2.0 million, or 7.9% of pre-tax income, compared to a 5.0% provision taken during the first
half of 2004.  The increase in the Company's tax rate during the three and six months ended June 30, 2005 is primarily
due to the projected utilization of net operating losses acquired in the acquisition of Computer Motion, Inc.
The tax rate in the second quarter of fiscal 2005 brings our year-to-date tax rate to the anticipated full year
rate of 8%.  The fiscal 2005 tax rates include the anticipated current tax liability, the anticipated benefits
from utilizing tax deductions related to stock option plans, and the anticipated tax benefit that will be
derived from the utilization of the loss carryovers obtained as a result of the Computer Motion acquisition
in 2003.
The effective tax rate for fiscal 2005 continues to reflect a full valuation allowance against our deferred tax
assets. We evaluate the realizability of the deferred tax assets every quarter.  Should we determine that it is
more likely than not that the future taxable income will be sufficient to utilize some or all of the deferred
tax assets, we will release some or all of the valuation allowance.  The release of this valuation allowance
would result in a combination of tax provision benefit (reduced expense or negative expense) and a
decrease in the goodwill recorded as a result of the Computer Motion acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been financed through the sale of our equity securities and cash generated
from operations. Sales of convertible preferred stock have yielded proceeds of approximately $127.3 million and public
offerings of our common stock have yielded proceeds of approximately $124.5 million. We have also financed
operations through employee stock purchase and option plans as well as equipment financing arrangements. As of June
30, 2005, we had total stockholders equity of $348.0 million and outstanding equipment financing debt of $0.2 million.
As of June 30, 2005, we had cash, cash equivalents and short-term investments of $158.5 million, compared to $132.0
million as of December 31, 2004.  Working capital as of June 30, 2005 was $171.2 million, compared to $138.3 million
as of December 31, 2004. The increase in cash and investments and in working capital resulted primarily from our $23.9
million of net income and $9.2 million of net proceeds realized from stock option and warrant exercises and our
employee stock purchase plan for the six months ended June 30, 2005.
Net cash provided by operating activities was $22.8 million for the six months ended June 30,
2005, compared to $11.0 million for the six months ended June 30, 2004.    Cash provided by operating activities during
the six months ended June 30, 2005 was comprised of net income of $23.9 million and non-cash expenses of $4.7
million, partially offset by consumed working capital of $5.8 million.  The $11.0 million of cash provided by operations
during the six months ended June 30, 2004 was primarily the result of net income of $5.7 million, non-cash expenses of
$3.3 million and net working capital generated of $2.0 million.
Net cash used in investing activities was $29.2 million for the six months ended June 30, 2005,
compared to $18.8 million for the six months ended June 30, 2004.  Net cash used in investing activities during the six
months ended June 30, 2005 resulted mainly from the investment of cash provided by operations into marketable
securities of $85.7 million, and was partially offset by the proceeds from sales and maturities of marketable securities of
$60.9 million.  Net cash used in investing activities during the six months ended June 30, 2004 resulted mainly from
investments in property and equipment of $21.4 million.
Net cash provided by financing activities was $8.7 million for six months ended June 30, 2005,
compared to $4.8 million for the six months ended June 30, 2004. Net cash provided by financing activities during the six
months ended June 30, 2005 resulted mainly from $9.2 million net proceeds realized from stock option and warrant
exercises, partially offset by repayments of short-term debt of $0.4 million.  Net cash provided by financing activities
during the six months ended June 30, 2004 resulted mainly from $5.4 million net proceeds realized from stock option
and warrant exercises, partially offset by repayments of long-term debt of $0.6 million.
Our capital requirements depend on numerous factors, including market acceptance of our
products, the resources we devote to developing and supporting our products, and other factors. We expect to devote
substantial capital resources to continue our research and development efforts, to expand our customer support and
product development activities and for other general corporate activities. We believe that our current cash and cash
equivalents and short-term investment balances, together with revenue to be derived from the sale of our products, will
be sufficient to meet our liquidity requirements for the foreseeable future.
Contractual Obligations and Commercial Commitments
The following table summarizes all significant contractual payment obligations, net of
sublease income of $941,000 during the next three years, by payment due date:
Payments by Periods (in millions)
Contractual Obligation
Total
Less than 1 year
1-3 years
3-5 years
More than 5 years
Operating leases
$1.4
$0.7
$0.7
$0.0
$0.0
Purchase obligations for inventory and other goods and services have not been included in the table above as these
obligations have remaining terms generally less than one year.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are
based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and
estimates, including those related to revenue recognition, bad debts, income taxes and intangible assets. We base our
estimates on historical experience and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report.
FACTORS AFFECTING OPERATING RESULTS
OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES ANALYSTS' OR INVESTORS'
EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Due to the nascent nature of our industry, 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 subject to change,
and we may be unable to continue to generate significant revenues. In addition, our costs may be higher than we
anticipated. If we fail to generate sufficient revenues or our costs are higher than we expect, our results of operations will
suffer.  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 extent to which our products gain market acceptance;
actions relating to regulatory matters;
our timing and ability to develop our manufacturing and sales and marketing capabilities;
demand for our products;
the size and timing of specific sales and any collection delays related to those sales;
product quality problems;
the 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;
third-party payor reimbursement policies;
our ability to protect our proprietary rights and defend against third party challenges;
our ability to license additional intellectual property rights; and
the progress and results of clinical trials.
Our operating results in any particular period will not be a reliable indication of our future
performance. It is likely that in some future quarters, our operating results will be below the expectations of securities
analysts or investors. If this occurs, the price of our common stock, and the value of your investment, will likely
decline.
WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A NEGATIVE IMPACT ON
OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.
Our
da Vinci
Surgical System has a lengthy sales and purchase order cycle because it is
a major capital item and generally requires the approval of senior management at purchasing institutions. These factors
may contribute to substantial fluctuations in our quarterly operating results, particularly during the periods in which our
sales volume is low. Because of these fluctuations, it is likely that in some future quarters our operating results will fall
below the expectations of securities analysts or investors. If that happens, the market price of our stock would likely
decrease. These fluctuations also mean that you will not be able to rely upon our operating results in any particular
period as an indication of future performance.
BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE AND ARE LIKELY TO CONTINUE TO ACCOUNT
FOR A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES COULD DECLINE DUE TO THE LOSS OR
DELAY OF A SINGLE CUSTOMER.
A relatively small number of customers account for a significant portion of our total
revenues. During the three months ended June 30, 2005 and 2004, approximately 52% and 58%, respectively, of our
revenues came from the sales of the
da Vinci
Surgical Systems, which are high revenue dollar items. During the
six months ended June 30, 2005 and 2004, approximately 51% and 55%, respectively, of our revenues came from the
sales of the
da Vinci
Surgical Systems. During the three months and six months ended June 30, 2005 and 2004,
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.
The
da Vinci
Surgical Systems and our other 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.
BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS MAY CHOOSE
TO PURCHASE OUR COMPETITORS' PRODUCTS OR MAY NOT ACCEPT INTUITIVE SURGERY, WHICH WOULD
RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE.
Intuitive
surgery is a new technology that will compete with established and
emerging treatment options in both disease management and reconstructive medical procedures.  These competitive
treatment options may take the form of traditional minimally invasive surgery, open surgery, interventional approaches,
or pharmacological regimens.  Some of these procedures are widely accepted in the medical community and in many
cases have a long history of use.  Technological advances could make such treatments more effective or less expensive
than using our products, which could render our products obsolete or unmarketable.  We cannot be certain that
physicians will use our products to replace or supplement established treatments or that our products will be competitive
with current or future technologies.
In addition, we may face competition from companies that develop robotic and computer-assisted
surgical systems in the future.  Our revenues may be reduced or eliminated if our competitors develop and
market products that are more effective or less expensive than our products.  If we are unable to compete successfully,
our revenues will suffer.  We may not be able to maintain or improve our competitive position against current or potential
competitors, especially those with greater resources.
INTERNATIONAL SALES OF OUR PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR
REVENUES, WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS. OUR GROWTH MAY
BE LIMITED IF WE ARE UNABLE TO SUCCESSFULLY MANAGE OUR INTERNATIONAL ACTIVITIES.
Our business currently depends in large part on our activities in Europe and other foreign
markets. Sales to markets outside of the United States accounted for approximately 16% of sales for the three months
ended June 30, 2005 and 21% of sales for the three months ended June 30, 2004. Sales to markets outside of the
United States accounted for approximately 14% of sales for the six months ended June 30, 2005 and 22% of sales for
the six months ended June 30, 2004.
We are subject to a number of challenges that specifically relate to our international business
activities. These challenges include:
failure of local laws to provide the same degree of protection against infringement of our intellectual property;
protectionist laws and business practices that favor local competitors, which could slow our growth in international
markets;
the risks associated with foreign currency exchange rate fluctuation;
the expense of establishing facilities and operations in new foreign markets; and
building an organization capable of supporting geographically dispersed operations.
Currently, a majority of our international sales are denominated in United States dollars. As a result, an increase in
the value of the United States dollar relative to foreign currencies could make our products less competitive in
international markets. If we are unable to meet and overcome these challenges, our international operations may not be
successful, which would limit the growth of our business.
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, electrical components and computer software, any of
which can contain errors or failures, especially when first introduced. In addition, new products or enhancements may
contain undetected errors or performance problems that, despite testing, are discovered only after commercial shipment.
Because our products are designed to be used to perform complex surgical procedures, we expect that our customers
will have an increased sensitivity to such defects. In the past, we have voluntarily recalled certain products as a result of
performance problems.  We cannot assure you that our products will not experience errors or performance problems in
the future. If we experience flaws or performance problems, any of the following could occur:
delays in product shipments;
loss of revenue;
delay in market acceptance;
diversion of our resources;
damage to our reputation;
product recalls;
increased service or warranty costs; or
product liability claims.
WE 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 maintain reliable, high-volume manufacturing capacity. Even if this capacity can be 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 maintain
larger-scale manufacturing capabilities, our ability to generate revenues will be limited and our reputation in the marketplace
could be damaged.
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.
IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN OUR PRODUCTS
FROM USE BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET WILL BE HARMED.
Our commercial success will depend in part on obtaining patent and other intellectual property
protection for the technologies contained in our products, and on successfully defending our patents and other
intellectual property against third party challenges. We will incur substantial costs in obtaining patents and, if necessary,
defending our proprietary rights. The patent positions of medical device companies, including ours, can be highly
uncertain and involve complex legal and factual questions. We do not know whether we will obtain the patent protection
we seek, or that the protection we do obtain will be found valid and enforceable if challenged. We also do not know
whether we will be able to develop additional patentable proprietary technologies. If we fail to obtain adequate protection
of our intellectual property, or if any protection we obtain is reduced or eliminated, others could use our intellectual
property without compensating us, resulting in harm to our business. We may also determine that it is in our best
interests to voluntarily challenge a third party's products or patents in litigation or administrative proceedings, including
patent interferences or reexaminations. In addition, the laws of certain foreign countries do not protect intellectual
property rights to the same extent as do the laws of the United States.
OTHERS MAY ASSERT THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS,
WHICH MAY CAUSE US TO ENGAGE IN COSTLY DISPUTES AND, IF WE ARE NOT SUCCESSFUL IN DEFENDING
OURSELVES, COULD ALSO CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING
OUR PRODUCTS.
There may be United States and foreign patents issued to third parties that relate to
computer-assisted surgery, remote surgery, and minimally invasive surgery. Some of these patents may be broad enough to cover
one or more aspects of our present technology, and may cover aspects of our future technology. We do not know
whether any of these patents, if challenged, would be held valid, enforceable and infringed. From time to time, we
receive, and likely will continue to receive, letters from third parties inviting us to license their patents. We may be sued
by, or become involved in an administrative proceeding with, one or more of these third parties. We cannot be certain
that a court or administrative body would agree with any arguments or defenses we have concerning invalidity,
unenforceability or noninfringement of any third-party patent. In addition to the issued patents of which we are aware,
other parties may have filed, and in the future are likely to file, patent applications covering surgical products that are
similar or identical to ours. We cannot be certain that any patents issuing from applications filed by a third party will not
cover our products or will not have priority over our patent applications.
The medical device industry has been characterized by extensive litigation and administrative
proceedings regarding patents and other intellectual property rights, and companies have employed such actions to gain
a competitive advantage. If third parties assert infringement or other intellectual property claims against us, our technical
and management personnel will experience a significant diversion of time and effort and we will incur large expenses
defending our company. If third parties in any patent action are successful, our patent portfolio may be damaged, we
may have to pay substantial damages, including treble damages, and we may be required to stop selling our products or
obtain a license which, if available at all, may require us to pay substantial royalties. We cannot be certain that we will
have the financial resources or the substantive arguments to defend our patents from infringement or claims of invalidity
or unenforceability, or to defend against allegations of infringement of third-party patents. In addition, any public
announcements related to litigation or administrative proceedings initiated by us, or initiated or threatened against us,
could cause our stock price to decline.
THE RIGHTS AND MEASURES WE RELY ON TO PROTECT THE INTELLECTUAL PROPERTY
UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE TO PREVENT THIRD PARTIES FROM USING OUR
TECHNOLOGY, WHICH COULD HARM OUR ABILITY TO COMPETE IN THE MARKET.
In addition to patents, we typically rely on a combination of trade secret, copyright and trademark
laws, nondisclosure agreements and other contractual provisions and technical security measures to protect our
intellectual property rights. Nevertheless, these measures may not be adequate to safeguard the technology underlying
our products. If they do not protect our rights adequately, third parties could use our technology, and our ability to
compete in the market would be reduced. In addition, employees, consultants and others who participate in developing
our products may breach their agreements with us regarding our intellectual property, and we may not have adequate
remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign
countries. For a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside the
United States. We also realize that our trade secrets may become known through other means not currently foreseen by
us. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or
alternative technologies or products that are equal or superior to our technology and products without infringing any of
our intellectual property rights, or may design around our proprietary technologies.
OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE ACCESS TO THESE
TECHNOLOGIES, OUR REVENUES COULD DECLINE.
We rely on technology that we license from others, including technology that is integral to our
products. We have entered into license agreements with Heartport, Inc., now part of Johnson & Johnson, IBM
Corporation, MIT, Olympus Optical Co., Ltd., SRI International, and Brookhill-Wilk, LLC. 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.
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.
TERMINATION OF RELATIONSHIPS WITH FORMER DISTRIBUTORS OF COMPUTER
MOTION COULD RESULT IN LITIGATION.
As part of our integration strategy related to our acquisition of Computer Motion, we
terminated Computer Motion's relationships with a number of companies that served as Computer Motion's distributors
prior to the acquisition.  As a result, two former distributors (one in Italy and the other in Israel) have filed breach of
contract suits against us.  Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate
outcome of any such litigation at this time and, therefore, cannot estimate the range of possible loss.  These
proceedings could be expensive to litigate, may be protracted and our confidential information may be compromised.
Whether or not we are successful in these lawsuits, these proceedings could consume substantial amounts of our
financial and managerial resources.  See Part II: Other Information - Item 1: Legal Proceedings.
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 ("FDA"). The FDA regulates the research, testing, manufacturing, safety,
labeling, storage, recordkeeping, promotion, distribution and production of medical devices in the United States to
ensure that medical products distributed domestically are safe and effective for their intended uses. In order for us to
market certain products for use in the United States, we generally must first obtain clearance from the FDA pursuant to
Section 510(k) of the Federal Food, Drug, and Cosmetic Act ("FFDCA"). Clearance under Section 510(k)
requires demonstration that a new device is substantially equivalent to another device with 510(k) clearance or
grandfather status. If we significantly modify our products after they receive FDA clearance, the FDA may require us to
submit a separate 510(k) or premarket approval application ("PMA"), for the modified product before we are
permitted to market the products in the U.S. In addition, if we develop products in the future that are not considered to be
substantially equivalent to a device with 510(k) clearance or grandfather status, we will be required to obtain FDA
approval by submitting a PMA.
The FDA may not act favorably or quickly in its review of our 510(k) or PMA submissions, or we
may encounter significant difficulties and costs in our efforts to obtain FDA clearance or approval, all of which could
delay or preclude sale of new products in the United States. Furthermore, the FDA may request additional data or
require us to conduct further testing, or compile more data, including clinical data and clinical studies, in support of a
510(k) submission. The FDA may also, instead of accepting a 510(k) submission, require us to submit a PMA, which is
typically a much more complex and burdensome application than a 510(k). To support a PMA, the FDA would likely
require that we conduct one or more clinical studies to demonstrate that the device is safe and effective. We may not be
able to meet the requirements to obtain 510(k) clearance or PMA approval, or the FDA may not grant any necessary
clearances or approvals. In addition, the FDA may place significant limitations upon the intended use of our products as
a condition to a 510(k) clearance or PMA approval. Product applications can also be denied or withdrawn due to failure
to comply with regulatory requirements or the occurrence of unforeseen problems following clearance or approval. Any
delays or failure to obtain FDA clearance or approvals of new products we develop, any limitations imposed by the FDA
on new product use, or the costs of obtaining FDA clearance or approvals could have a material adverse effect on our
business, financial condition and results of operations.
In order to conduct a clinical investigation involving human subjects for the purpose of
demonstrating the safety and effectiveness of a device, a company must, among other things, apply for and obtain
Institutional Review Board ("IRB") approval of the proposed investigation. In addition, if the clinical study
involves a "significant risk" (as defined by the FDA) to human health, the sponsor of the investigation must
also submit and obtain FDA approval of an investigational device exemption ("IDE") application.  Most of our
products to date have been considered significant risk devices requiring IDE approval prior to investigational use. We
may not be able to obtain FDA and/or IRB approval to undertake clinical trials in the U.S. for any new devices we intend
to market in the United States in the future. If we obtain such approvals, we may not be able to comply with the IDE and
other regulations governing clinical investigations or the data from any such trials may not support clearance or approval
of the investigational device. Failure to obtain such approvals or to comply with such regulations could have a material
adverse effect on our business, financial condition and results of operations.
COMPLYING WITH FDA REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING PROCESS, AND OUR
FAILURE TO COMPLY FULLY COULD SUBJECT US TO SIGNIFICANT ENFORCEMENT SANCTIONS
.
Because our products, including the
da Vinci
Surgical System, are commercially distributed, numerous post
market regulatory requirements apply, including the following:
Quality System Regulation, or QSR, which requires manufacturers to follow elaborate design, testing, control,
documentation and other quality assurance procedures during the manufacturing process;
labeling regulations;
the FDA's general prohibition against false or misleading statements in the labeling or promotion of products for
unapproved or "off-label" uses;
the Reports of Corrections and Removals regulation, which requires that manufacturers
report to the FDA recalls and field corrective actions taken to reduce a risk to health or to remedy a violation of the
FFDCA that may pose a risk to health; and
the Medical Device Reporting regulation, which requires that manufacturers report to the
FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would
likely cause or contribute to a death or serious injury if it were to recur.
We are subject to inspection and marketing surveillance by the FDA to determine our
compliance with regulatory requirements. If the FDA finds that we have failed to comply, it can institute a wide variety of
enforcement actions, ranging from a regulatory letter to a public warning letter to more severe civil and criminal
sanctions. Our failure to comply with applicable requirements could lead to an enforcement action that may have an
adverse effect on our financial condition and results of operations.
We have modified the labeling, advertising and user training for the
da Vinci
Surgical
System to call out specific procedures that we believe are within the scope of our existing 510(k) clearances. We cannot
assure you that the FDA would agree that all such specific procedures are within the scope of the existing clearances or
that we have compiled adequate information to support the safety and efficacy of using the
da Vinci
Surgical
System for all such specific procedures. We also have modified the hardware and software in the
da Vinci
Surgical System since clearance in ways that we believe do not require new 510(k) clearance. We cannot be certain that
the FDA would agree with our determinations not to seek new 510(k) clearance for any of these changes. Computer
Motion also modified the hardware and software in its products subsequent to 510(k) clearance without seeking new
clearance. We cannot be certain that the FDA would agree with the determinations not to seek new 510(k) clearance for
any of these changes. The FDA could impose enforcement sanctions and/or require us to obtain 510(k) clearance for
any modification to our products or Computer Motion's products. We may be prohibited from marketing the modified
device until such 510(k) clearance is granted.
In December 2002, the FDA inspected our Sunnyvale manufacturing facility and issued a Form
FDA 483 setting forth three observed compliance deficiencies relating to the QSR and two observed deficiencies relating
to the Reports of Corrections and Removals regulation.  In January 2003, we wrote to the FDA indicating our response
to each observation with proposed corrective actions.  That same month, the FDA informed us that the adequacy of our
promised corrections and actions would be verified during the next inspection of our facility.  To date, the FDA has not
returned for another inspection and we continue to evaluate and upgrade our QSR compliance.  We cannot assure you
that, upon reinspection, the FDA will find that our promised corrective actions are appropriate or that they have been
adequately implemented.  We also cannot assure you that the FDA will not find other deficiencies in our compliance with
the QSR and other postmarket regulations.
In June 2003, we acquired Computer Motion and have integrated its FDA compliance quality
system into our own.  As a result of the integration and review, we identified deficiencies in Computer Motion's complaint
handling, MDR reporting and Corrections and Removals reporting in several years preceding our acquisition of
Computer Motion that required submission of retroactive reports to the FDA.  We reported 52 MDRs, although we
believe many of the complaints likely would not have been reportable if more information had been available.  To our
knowledge, none of the reported events resulted in a death or serious injury, prolonged hospitalization, or medical
intervention to prevent death or serious injury.  Computer Motion did respond to complaint trends, and it addressed the
trends through corrective actions.  Accordingly, the incident of many of the types of events in the reports had been
mitigated by June 2003.  Our review also suggested that significant complaint trends identified by Computer Motion over
the period of four years were addressed by corrective actions, which have proven to be effective over time.  Computer
Motion's product modifications were completed without 510(k) clearance, and we believe that no new 510(k) clearances
are required.  We cannot assure you that the FDA would agree with our determinations not to seek new 510(k)
clearance of any of these changes.
We cannot assure you that the FDA will not seek to impose enforcement sanctions on us for
Computer Motion's violations preceding our acquisition of Computer Motion, that the FDA will agree that since the
acquisition we have corrected all regulatory problems, or that our review of Computer Motion's complaint handling will
not lead us to initiate recalls or field actions to remedy problems with Computer Motion products already in the field.
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.
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 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 sell our products and these efforts are expected
to continue.
IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE OR EUROPEAN
MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR PART OF OUR
MANUFACTURING OPERATIONS, WHICH COULD RESULT IN PRODUCT DELIVERY DELAYS AND LOST
REVENUE.
Our manufacturing facilities are subject to periodic inspection by regulatory authorities and our
operations will continue to be regulated by the FDA for compliance with Good Manufacturing Practice requirements
contained in the FDA's Quality System Regulations, or QSR. We are also required to comply with International
Organization for Standardization, or ISO, quality system standards in order to produce products for sale in Europe. If we
fail to continue to comply with Good Manufacturing Practice requirements or ISO standards, we may be required to
cease all or part of our operations until we comply with these regulations.   We continue to be subject to FDA and other
regulatory 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 FDA inspected the Goleta facilities of Computer Motion in 1998 and noted deficiencies in
Computer Motion's systems for reviewing and reporting product-related complaints and defect information.  We have
determined that these deficiencies may not have been addressed.  While the Goleta manufacturing facility has been
closed and production of certain products has been transferred to our Sunnyvale facility, these issues raised by the FDA
must nonetheless be resolved.  The complaint records prior to acquisition of Computer Motion were reviewed and
appropriate Medical Device Reports were filed with the FDA.  Complaints received subsequent to our acquisition of
Computer Motion are handled in accordance with Intuitive Surgical quality system requirements, which we believe is in
accordance with FDA requirements, although we cannot assure you that FDA will agree, nor can we assess what
regulatory impact, if any, this may have on our company.
As required, we are licensed by the State of California to manufacture medical devices.  We are
subject to periodic inspections by the California Department of Health Services and, if we are unable to maintain this
license following any future inspections, we will be unable to manufacture or ship products.
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 technical staff. Our
product development plans depend, in part, on our ability to attract and retain engineers with experience in electronics,
mechanics, software and optics. Attracting and retaining qualified personnel will be critical to our success, and
competition for qualified personnel is intense. We may not be able to attract and retain personnel on acceptable terms
given the competition for such personnel among technology and healthcare companies, and universities. The loss of any
of these persons or our inability to attract and retain qualified personnel could harm our business and our ability to
compete.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not subject to any meaningful market risks related to currency, commodity prices or
similar matters. We are sensitive to short-term interest rate fluctuations to the extent that such fluctuations impact the
interest income we receive on the investment of the remaining proceeds from our public offerings and cash generated
from operations.
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 fair value 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 auction-rate
securities with rates that re-set generally every 30 days. The weighted average maturity of all of our fixed-rate and
variable-rate investments as of June 30, 2005 was approximately 1 year.  At June 30, 2005 and December 31, 2004,
approximately 37% and 47%, respectively, of our fixed-rate and variable-rate investment portfolio was composed of
investments with maturities of one year or less.
The majority of our revenue, expense, and capital purchasing activities are transacted in U.S.
dollars. However, since a portion of our operations consists of sales activities outside of the United States, we have
entered into transactions in other currencies, primarily the euro.
For the three months ended June 30, 2005 and 2004, sales denominated in foreign currencies
were 9% and 7%, respectively, of total sales. For the six months ended June 30, 2005 and 2004, sales denominated in
foreign currencies were 7% and 9%, respectively, of total sales.
Foreign currency fluctuations resulted in approximately $264,000 of foreign exchange loss and
$10,000 of foreign exchange gain for the three months ended June 30, 2005 and 2004, respectively. Foreign currency
fluctuations resulted in approximately $545,000 and $88,000 of foreign exchange loss for the six months ended June 30,
2005 and 2004, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in SEC Rule
13a-15(e) that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934
reports is recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered
by this report.  Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 2004, the University of Miami, a former customer of Computer Motion, filed a
lawsuit against our company in the U.S. District Court, Southern District of Florida.  We received the complaint in April
2004.  The customer alleges that it relied to its detriment on representations made by Computer Motion in connection
with Computer Motion's sale of products to the customer, which representations the customer believes were not fulfilled.
The customer is seeking damages.  We filed a motion to dismiss the fraud-based complaints and an answer defending
the breach of contract claim.  After discovery was completed, we filed a motion for summary judgment to dismiss the
entire case.  In January 2005, the Court granted our motion for summary judgment and dismissed the case against us in
its entirety.  In February 2005, the customer filed an appeal, and the parties are awaiting a decision from the Court of
Appeals of the Eleventh Circuit.
In November 2003, Tzamal Jacobson, Ltd., an Israeli company, filed suit against our company
and Computer Motion in the District Court in Tel-Aviv - Jaffa, Israel, Civil File 2293/03, alleging breach of a distribution
contract and seeking damages. We received the complaint in April 2004. Following the acquisition of Computer Motion,
we withdrew Computer Motion's distributorship offer to this Israeli company. We intend to vigorously defend the suit, and
have filed a motion to have the case dismissed on jurisdictional grounds.  The court has not yet ruled on the motion.
Tzamal's request for access to a Company witness for discovery has been granted by the court.  Discovery will begin
shortly.
In October 2003, SIC System, S.R.L., a former Italian distributor for Computer Motion, filed suit
against our company and Computer Motion seeking damages in the Civil Court of Rome, Italy.  In the complaint, SIC
System alleges that we breached the distribution agreement between SIC System and Computer Motion when, following
our acquisition of Computer Motion, we deleted two products previously covered under the distribution agreement.   The
distribution agreement provides, among other things, that (1) it shall be governed and construed under the laws of the
State of California and (2) in the event of any dispute or controversy arising under the distribution agreement or the
transactions contemplated thereunder, the parties mutually consent to the exclusive jurisdiction of a court of competent
jurisdiction within Santa Barbara County, California.  We are defending the lawsuit on both jurisdictional grounds and on
the merits. The Italian court has ruled that SIC System's service of process in filing its complaint was defective and has
ordered SIC System to re-file its complaint on or about October 6, 2004, which service our company did not receive.
The parties continue to dispute the service of process issue.  The Italian court has not ruled on jurisdiction or other
pending issues pertaining to the applicable law or appropriate forum but has confirmed that the jurisdiction question will
be decided first before any other.  The parties' briefs are due between late-October and mid-November 2005 with the
Italian court's decision expected by year's end.
In November 2003, we filed a lawsuit against SIC System, S.R.L. in the United States District
Court for the Central District of California for declaratory relief, breach of contract and preliminary and permanent
injunction.  In particular, we sought a judicial declaration of the rights and obligations of the parties under a distribution
agreement, specifically that our company effectively deleted the products from the distribution agreement, and a
preliminary and permanent injunction prohibiting SIC System from proceeding with the Italian action described above.
The complaint was served on SIC System in November 2003, and the Court entered default against SIC Systems in
March 2004.  In August 2004, the Court entered a judgment in favor of our company in the amount of $195,155 for
breach of contract.  The Court also awarded judgment in favor of our company as to its claim for declaratory relief.  The
Court awarded judgment in favor of SIC Systems as to our company's claim for preliminary and permanent injunction.
We intend to enforce this judgment against SIC System in the Italian portion of the lawsuit.
The foregoing proceedings could be expensive to litigate, may be protracted and our confidential
information may be compromised. Whether or not we are successful in these lawsuits, these proceedings could
consume substantial amounts of our financial and managerial resources. At any time, the other parties may file
additional claims against us, or we may file claims against them, which could increase the risk, expense and duration of
the litigations.
We are subject to legal proceedings and claims, including those discussed above, 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. In accordance with Statement of Financial Accounting
Standards, or SFAS, No. 5, "Accounting for Contingencies," we record a liability when it is both probable that
a liability has been incurred and the amount of the loss can be reasonably estimated.  These provisions are reviewed at
least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other
information and events pertaining to a particular case.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 20, 2005, the stockholders of
Intuitive Surgical, Inc. elected Robert W. Duggan and William J. Mercer to the Board of Directors of the Company to
terms expiring at the Annual Meeting of Stockholders in the year 2008.  The following table sets forth the votes for each
director:
Votes For
Withheld
Robert W. Duggan
31,863,970
260,722
William J. Mercer
31,693,821
430,871
After the meeting, our Board of Directors consisted of Robert W. Duggan, D. Keith Grossman,
Eric H. Halvorson, Richard J. Kramer, Alan J. Levy, William J. Mercer, and Lonnie M. Smith.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit Number
Description
31.1
Certification of the Company's Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2
Certification of the Company's Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1
Certification of the Company's Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2
Certification of the Company's Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
INTUITIVE SURGICAL, INC.
(Registrant)
By:
/s/ SUSAN K. BARNES
Susan K. Barnes
Senior Vice President, Chief Financial Officer and Assistant Secretary
Date: August 8, 2005
EXHIBIT INDEX
Exhibit Number
Description
31.1
Certification of the Company's Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2
Certification of the Company's Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1
Certification of the Company's Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2
Certification of the Company's Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002