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<title>Q2 2004 10Q DOC</title>
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<FONT SIZE="3"><B><P ALIGN="CENTER">UNITED STATES<BR>
SECURITIES AND EXCHANGE COMMISSION<BR>
Washington, D.C. 20549</B></font></p>

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

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

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

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


<FONT SIZE="3"><B><P ALIGN="CENTER">
</font><font face=Wingdings>x</font><font>&nbsp; QUARTERLY REPORT PURSUANT TO SECTION 13 OR
     15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</B></font></p>
<font size="4" color="FF0000"><B><p align="center">
               For the quarterly period ended June 30, 2004
</B></font></p>

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

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

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



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


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

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

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



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


<font size="3">
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Indicate by check mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). &nbsp;&nbsp; YES
</font><font face=Wingdings>x</font><font>&nbsp; NO
</font><font face=Wingdings>o</font><font>&nbsp; </p>


<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
     The Registrant had 33,662,797 shares of Common Stock, $0.001 par value per
share, outstanding as of July 31, 2004.

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


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

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

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

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


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

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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Condensed consolidated balance sheets as of June 30, 2004 and<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           December 31, 2003

</font>
</TD>

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

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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Condensed consolidated statements of operations for the three-month<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
             and six-month periods ended June 30, 2004 and June 30, 2003

</font>
</TD>

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


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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Condensed consolidated statements of cash flows for the six-month<BR>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           periods ended June 30, 2004 and June 30, 2003
</font>
</TD>

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

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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Notes to condensed consolidated financial statements
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
</font>
</TD>

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

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

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

<TD>
<font size="3">
<CENTER><A HREF="#mda">11</A></CENTER>
</font>
</TD>
</TR>

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

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

</font>
</TD>

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

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

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

</font>
</TD>

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

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

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

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


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

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

<TD>
<font size="3">
<CENTER><A HREF="#item1">27</A></CENTER>
</font>
</TD>
</TR>


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

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

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

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

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

<TD>
<font size="3">
<CENTER><A HREF="#item3">28</A></CENTER>
</font>
</TD>
</TR>


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

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

<TD>
<font size="3">
<CENTER><A HREF="#item4">28</A></CENTER>
</font>
</TD>
</TR>


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

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

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

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

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

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


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

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

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

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

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

<P>Item 1. Financial Statements (Unaudited)


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

                                                              June 30,    December 31,
                                                               2004          2003
                                                           ------------  ------------
                                                                         (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents.............................. $      8,230  $     11,335
  Short-term investments.................................       98,184       101,614
  Accounts receivables, net..............................       24,705        26,820
  Inventory..............................................        7,162         8,788
  Prepaids and other current assets......................        3,462         3,203
  Restricted cash equivalents............................          204           188
                                                           ------------  ------------
          Total current assets...........................      141,947       151,948
Property and equipment, net..............................       29,012        10,288
Restricted cash equivalents..............................          319           642
Intangible assets, net...................................        7,155         8,089
Goodwill.................................................      143,332       143,106
Other assets.............................................          695           921
                                                           ------------  ------------
          Total assets...................................      322,460       314,994
                                                           ============  ============
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................... $      4,311  $      5,894
  Accrued compensation and employee benefits.............        5,186         5,267
  Restructuring accrual..................................          902           971
  Other accrued liabilities..............................        7,392         9,134
  Deferred revenue.......................................       13,385        11,345
  Current portion of notes payable.......................          904         1,030
                                                           ------------  ------------
          Total current liabilities......................       32,080        33,641
Long-term notes payable..................................          230           695
Deferred revenue.........................................        1,166         1,148
Other accrued liabilities................................           57           553
                                                           ------------  ------------
          Total non-current liabilities..................        1,453         2,396
Commitments and contingencies (Note 11)..................           --            --
Stockholders' equity:
  Preferred stock, 2,500,000 shares authorized, $0.001
     par value, issuable in series; no shares issued
     and outstanding as of June 30, 2004  and
     and December 31, 2003, respectively.................           --            --
  Common stock, 100,000,000 shares authorized, $0.001
     par value, 33,644,149 and 33,051,631 shares
     issued and outstanding as of June 30, 2004
     and December 31, 2003, respectively.................           34            33
  Additional paid-in capital.............................      421,911       416,559
  Deferred compensation..................................           --           (99)
  Accumulated deficit....................................     (132,731)     (138,414)
  Accumulated other comprehensive income (loss)..........         (287)          878
                                                           ------------  ------------
          Total stockholders' equity.....................      288,927       278,957
                                                           ------------  ------------
          Total liabilities and stockholders' equity..... $    322,460  $    314,994
                                                           ============  ============

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


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

                                                  Three Months Ended       Six Months Ended
                                                      June 30,                June 30,
                                               ----------------------  ----------------------
                                                  2004        2003        2004        2003
                                               ---------- -----------  ---------- -----------
Sales:
  Products................................... $   25,850  $   19,151  $   48,321  $   36,443
  Services...................................      5,207       2,302       9,795       4,245
                                               ----------  ----------  ----------  ----------
Total sales..................................     31,057      21,453      58,116      40,688
Cost of sales:
  Products...................................      9,260       6,906      18,073      14,678
  Services...................................      2,169       1,859       4,579       3,581
                                               ----------  ----------  ----------  ----------
Total cost of sales..........................     11,429       8,765      22,652      18,259
                                               ----------  ----------  ----------  ----------
    Gross profit.............................     19,628      12,688      35,464      22,429
                                               ----------  ----------  ----------  ----------
Operating costs and expenses:
  Selling, general, and administrative.......     11,535       8,531      21,778      17,984
  Research and development...................      3,626       3,627       8,936       7,050
                                               ----------  ----------  ----------  ----------
    Total operating costs and
     expenses................................     15,161      12,158      30,714      25,034
                                               ----------  ----------  ----------  ----------
Income (loss) from operations................      4,467         530       4,750      (2,605)
Other income, net ...........................        626         347       1,232       1,189
                                               ----------  ----------  ----------  ----------
Income (loss) before taxes...................      5,093         877       5,982      (1,416)

Income tax expense...........................        263          --         299          --
                                               ----------  ----------  ----------  ----------
Net income (loss)............................ $    4,830  $      877  $    5,683  $   (1,416)
                                               ==========  ==========  ==========  ==========
Net income (loss) per share:
  Basic...................................... $     0.14  $     0.05  $     0.17  $    (0.08)
                                               ==========  ==========  ==========  ==========
  Diluted ................................... $     0.14  $     0.05  $     0.17  $    (0.08)
                                               ==========  ==========  ==========  ==========
Shares used in computing net income
 (loss) per share:
  Basic......................................     33,559      18,580      33,421      18,506
                                               ==========  ==========  ==========  ==========
  Diluted....................................     34,210      18,973      34,170      18,506
                                               ==========  ==========  ==========  ==========


</PRE>

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


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

                                                            For the Six Months
                                                               Ended June 30,
                                                         ------------------------
                                                            2004         2003
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net income (loss)...................................... $     5,683  $    (1,416)
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
  Depreciation.........................................       2,606        1,777
  Provision for doubtful accounts......................        (320)         613
  (Gain) loss on disposition of property and equipment.          (3)           5
  Amortization of deferred compensation and stock
   compensation........................................          99          296
  Amortization of intangible assets....................         934          495
Changes in operating assets and liabilities:
  Accounts receivable..................................       2,434       (1,106)
  Prepaids and other current assets....................        (591)         623
  Inventory............................................       1,626         (191)
  Other assets.........................................         226         (827)
  Accounts payable.....................................      (1,584)        (733)
  Accrued compensation and employee benefits...........        (108)      (1,256)
  Restructuring accrual................................        (215)          --
  Other accrued liabilities............................      (1,894)      (2,239)
  Deferred revenue.....................................       2,058          944
                                                         -----------  -----------
Net cash provided by (used in) operating activities....      10,951       (3,015)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................     (21,409)      (1,030)
Disposition of property and equipment..................          26            1
Acquisition of business, net of cash acquired..........          --       (4,088)
Release of restricted cash equivalents.................         307           70
Purchase of short-term investments.....................     (41,782)      (7,834)
Proceeds from sales of short-term investments..........      37,212        7,844
Proceeds from maturities of short-term investments.....       6,892        5,097
                                                         -----------  -----------
Net cash (used in) provided by investing activities....     (18,754)          60
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       5,353        1,629
Repurchase of common stock.............................          --           (6)
Repayment of notes payable.............................        (591)        (870)
                                                         -----------  -----------
Net cash provided by financing activities..............       4,762          753
                                                         -----------  -----------
Foreign currency translation adjustments...............         (64)        (155)
                                                         -----------  -----------
Net decrease in cash and cash equivalents..............      (3,105)      (2,357)
Cash and cash equivalents, beginning of period.........      11,335        8,052
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $     8,230  $     5,695
                                                         ===========  ===========

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

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

<P>In this report, &quot;Intuitive Surgical, &quot; &quot;Intuitive,&quot;
and the &quot;Company&quot; refer to Intuitive Surgical, Inc.</P>
<B><P>NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</P>
<I><P>Basis of Presentation</P>
</B></I><P ALIGN="JUSTIFY">The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all normal, recurring adjustments considered
necessary for a fair presentation have been included. The consolidated balances
at December 31, 2003 were derived from the audited financial statements included
in  Intuitive Surgical, Inc.'s Annual Report on Form 10-K ("Annual Report") for
the year ended December 31, 2003. The financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2003 included in the Annual Report. The results for the interim period ended
June 30, 2004 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2004 or future operating periods.  The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries.  All significant intercompany accounts and transactions
have been eliminated in consolidation.  Certain reclassifications have been made
to prior year balances in order to conform to the current year presentation.
These reclassifications had no impact on previously reported net income or
stockholders' equity.</P>

<B><I><P ALIGN="JUSTIFY">Use of Estimates</P>
</B></I><P ALIGN="JUSTIFY">The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amount reported in
the consolidated financial statements and accompanying notes.  Actual results
could differ materially from these estimates.</P>
<B><I><P ALIGN="JUSTIFY">Revenue Recognition</P>
</B></I><P ALIGN="JUSTIFY">The Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred or service has been
rendered, the price is fixed or determinable and collectibility is reasonably
assured. </P>
<P ALIGN="JUSTIFY">In certain cases, revenue from direct system sales is
generated from multiple-element arrangements that require judgment in the areas
of customer acceptance, collectibility, the separability of units of accounting,
and the fair value of individual elements.  Effective July 1, 2003, the Company
adopted the provisions of Emerging Issues Task Force (&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 represent individual units
of accounting as the delivered item has value to a customer on a stand-alone
basis, objective and reliable evidence of fair value exists for undelivered
items, and arrangements generally do not contain a general right of return
relative to the delivered item.  The Company determines fair value based on the
price of the deliverable when it is sold separately or based on third-party
evidence.  In accordance with the guidance in EITF 00-21, the Company uses the
residual method to allocate the arrangement consideration when it does not have
fair value of the system sale.  Under the residual method, the amount of
consideration allocated to the delivered item equals the total arrangement
consideration less the aggregate fair value of the undelivered items.  Assuming
all other criteria for revenue recognition have been met, the Company recognizes
revenue for system sales when delivery and acceptance occurs, for installation
and training when the services are rendered, and for service ratably over the
service period, which is generally one year.</P>
<P ALIGN="JUSTIFY">The Company's distributors do not have price protection or
return rights. </P>
<P ALIGN="JUSTIFY">Revenue from sales of instruments and accessories is
recognized upon delivery. Revenue related to future commitments under separately
priced service contracts is deferred and recognized ratably over the service
period. All costs associated with the provision of service and maintenance,
including salaries, benefits, travel, spare parts and equipment, are recognized
in cost of sales as incurred. </P>
<P ALIGN="JUSTIFY">Amounts billed in excess of revenue recognized are included
as deferred revenue in the condensed consolidated balance sheets.</P>
<P ALIGN="JUSTIFY">The Company's <I>da Vinci </I>Surgical System, <I>Hermes</I>
Control Center and <I>AESOP</I> Endoscope Positioner contain a software
component. The Company believes that this software element is an incidental part
of each system. The software element within the Company's products is not sold
or marketed separately to customers, and the software does not operate
independently of each system. Furthermore, the software development effort does
not represent a significant cost to the Company relative to the overall
development cost of the product. As such, the software the Company provides is
incidental to each system as a whole and the software revenue guidance provided
in Statement of Position (&quot;SOP&quot;) 97-2, "Software Revenue Recognition,"
is not applicable to the Company's revenues.</P>
<B><I><P>Stock-Based Compensation   </P>
</B></I><P ALIGN="JUSTIFY">The Company applies Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recorded for stock option grants issued with an
exercise price equal to the market value of the underlying stock on the date
granted.  The Company has recorded stock-based compensation, primarily related
to deferred compensation arising from the Company's initial public offering in
2000 and its acquisition of Computer Motion in June 2003.  As required under
Statement of Financial Accounting Standards Board ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," the Company has
provided the following pro forma net income (loss) and pro forma net income
(loss) per share disclosures for stock-based awards as if the fair value-based
method defined in SFAS 123, "Accounting for Stock-Based Compensation," had been
applied (amounts in thousands, except per share amounts):</P>

<PRE>

                                                     Three Months Ended  Six Months Ended
                                                          June 30,            June 30,
                                                     ------------------  -------------------
                                                       2004      2003      2004       2003
                                                     --------  --------  ---------  --------
Net income (loss), as reported..................... $  4,830  $    877  $   5,683  $ (1,416)
Add:  Total stock-based employee
  compensation expense included in reported
  net income (loss), net of $0 related tax effect..       84       141         99       296
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method for
  all awards, net of $0 related tax effect.........   (2,657)   (1,958)    (5,117)   (3,984)
                                                     --------  --------  ---------  --------
Pro forma net income (loss)........................ $  2,257  $   (940) $     665  $ (5,104)
                                                     ========  ========  =========  ========

Net income (loss) per share:
  Basic - as reported.............................. $   0.14  $   0.05  $    0.17  $  (0.08)
  Basic - pro forma................................ $   0.07  $  (0.05) $    0.02  $  (0.28)

  Diluted - as reported............................ $   0.14  $   0.05  $    0.17  $  (0.08)
  Diluted - pro forma.............................. $   0.07  $  (0.05) $    0.02  $  (0.28)

</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,
                                     -------------------   ------------------
                                        2004      2003        2004      2003
                                     --------  ---------   --------  --------
Stock Option Plans:
   Average risk free interest rate.     3.36 %     2.48 %     3.03 %    2.50 %
   Average expected life (years)...      4.0        4.0        4.0       4.0
   Volatility......................       68 %       80 %       70 %      80 %

Stock Purchase Plan:
   Average risk free interest rate.     1.30 %     1.46 %     1.30 %    1.61 %
   Average expected life (years)...      1.1        0.5        1.2       0.5
   Volatility......................       62 %       48 %       62 %      48 %

</PRE>



<B><I><P>Recent Accounting Pronouncements</P>
</B></I><P ALIGN="JUSTIFY">In December 2003, the FASB issued FIN Interpretation
No. 46R (revised December 2003), &quot;Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51,&quot; which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN No. 46R replaces FASB Interpretation FIN
No.&nbsp;46, which was issued in January 2003. As of the effective date of FIN
No. 46R, an enterprise must evaluate its involvement with all entities or legal
structures created before February 1, 2003, to determine whether consolidation
requirements of FIN No. 46R apply to those entities. There is no grandfathering
of existing entities. The adoption of FIN No. 46R did not have a significant
impact on the Company's consolidated financial position, results of operations
or cash flow. </P>
<P ALIGN="JUSTIFY">In December 2003, the SEC issued Staff Accounting Bulletin
("SAB") No. 104, &quot;Revenue Recognition.&quot; SAB No. 104 revises and
rescinds portions of the interpretative guidance included in Topic 13 of the
codification of staff accounting bulletins in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB No. 104 did not have a
significant impact on the Company's consolidated financial position, results of
operations or cash flow.</P>
<B><P>NOTE 2. CONCENTRATIONS OF RISK</P>
</B><P ALIGN="JUSTIFY">Financial instruments that subject the Company to
potential risk consist of its cash equivalents, short-term investments, accounts
receivable, and foreign exchange contracts. The counterparties to the agreements
relating to the Company's investment securities and foreign exchange contracts
consist of various major corporations and financial institutions of high credit
standing. The Company believes the financial risks associated with these
financial instruments are minimal. For the three months and six months ended
June 30, 2004 and 2003, no customer accounted for more than 10% of total sales.
The Company extends reasonably short collection terms but does not require
collateral. The Company provides reserves for potential credit losses.</P>
<P ALIGN="JUSTIFY">The Company's <I>da Vinci</I> Surgical System, <I>Hermes</I>
Control Center, <I>AESOP</I> Endoscope Positioner and related instruments and
accessories accounted for all of the Company's product sales for the three
months and six months ended June 30, 2004 and 2003. Purchases of key parts and
components used to manufacture the Company's products are from limited supply
sources. The inability of any of these suppliers to fulfill the Company's supply
requirements may negatively impact future operating results.</P>
<P ALIGN="JUSTIFY">The Company operates in one segment, the development and
marketing of products designed for use in surgery.   The distribution of sales
by geographic location is as follows (in thousands): </P>

<PRE>

                                   Three Months Ended     Six Months Ended
                                       June 30,              June 30,
                               --------------------- ---------------------
                                   2004       2003       2004       2003
                                ---------  ---------  ---------  ---------
Domestic...................... $  24,674  $  14,948  $  45,180  $  30,797
International.................     6,383      6,505     12,936      9,891
                                ---------  ---------  ---------  ---------
Total sales................... $  31,057  $  21,453  $  58,116  $  40,688
                                =========  =========  =========  =========

</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, 2004 and December 31, 2003.  Approximately $4.3 million
and $4.8 million of money market instruments were included in cash and cash
equivalents at June 30, 2004 and December 31, 2003, 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, 2004   December 31, 2004
                           ---------------  -----------------
U.S. corporate debt...... $        49,829  $          44,904
U.S. government debt.....          27,305             28,210
Municipal debt...........          13,700             11,950
Commercial paper.........           7,350             16,550
                           ---------------  -----------------
Total.................... $        98,184  $         101,614
                           ===============  =================

</PRE>



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

<PRE>

                                  June 30,    December 31,
                                   2004          2003
                               ------------  ------------
Raw materials................ $      2,018  $      1,247
Work-in-process..............        1,849         1,797
Finished goods...............        3,295         5,744
                               ------------  ------------
Total........................ $      7,162  $      8,788
                               ============  ============

</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.  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 once each fiscal
year (more frequently if certain indicators are present), which the Company will
do in the fourth quarter.  Intangible assets with finite useful lives will
continue to be amortized over their respective useful lives.   In the event
management determines that goodwill has been impaired, the Company will incur an
accounting charge for the impairment during the fiscal quarter in which the
determination is made.  Of the total purchase price related to the acquisition
of Computer Motion, $143.3 million was allocated to goodwill and $8.6 million
was allocated to amortizable intangible assets, comprised of developed
technology of $3.5 million, core technology of $3.3 million, customer
relationships of $1.3 million, and other intangible assets totaling $0.5
million</P>
<P ALIGN="JUSTIFY">Other purchased intangible assets represent patents, which
are carried at cost less accumulated amortization. Amortization is computed
using the straight-line method over the expected useful life of six or seven
years.</P>
<P ALIGN="JUSTIFY"> </P>
<P ALIGN="JUSTIFY">Net intangible assets is comprised of the following (in
thousands):</P>

<PRE>

                                                  June 30, 2004
                                    -----------------------------------------------
                                                 Accumulated
                                      Gross     Amortization  Impairment     Net
                                    ---------   ------------  ----------  ---------
Developed technology.............  $   3,500   $        250  $    3,250  $      --
Core technology..................      3,300            471          --      2,829
Customer relationships...........      1,300            367          --        933
Patents..........................      7,310          4,064          --      3,246
Other intangible assets..........        500             62         291        147
                                    ---------   ------------  ----------  ---------
Total intangible assets, net.....  $  15,910   $      5,214  $    3,541  $   7,155
                                    =========   ============  ==========  =========

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



</PRE>

<P ALIGN="JUSTIFY">Amortization expense related to intangible assets was $0.5
million and $0.2 for the three months ended June 30, 2004 and 2003,
respectively.  Amortization expense related to intangible assets was $0.9
million and $0.5 million for the six months ended June 30, 2004 and 2003,
respectively.</P>
<P ALIGN="JUSTIFY">Estimated future amortization expense related to intangible
assets at June 30, 2004 is as follows (in thousands):</P>

<PRE>

        Fiscal Year
----------------------------
2004 (remaining 6 months)...  $      934
2005........................       1,868
2006........................       1,275
2007........................       1,077
2008........................         811
Thereafter..................       1,190
                                ---------
Total.......................  $    7,155
                                =========

</PRE>


<I><P ALIGN="JUSTIFY">Impairment of Goodwill</P>
</I><P ALIGN="JUSTIFY">The Company has elected to perform an annual analysis of
goodwill during the fourth quarter of each year.  Based on our 2003 impairment
analysis, no impairments were identified, and no indicators of impairment were
identified during the six months ended June 30, 2004.</P>
<I><P ALIGN="JUSTIFY">Impairment of Long-Lived Assets</P>
</I><P ALIGN="JUSTIFY">SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," requires recognition of impairment of long-lived assets
when circumstances indicate an impairment has occurred and in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets.  Accordingly, the Company evaluates asset
recoverability when an event occurs that may impair recoverability of the asset.
The Company determines the recoverability of the carrying amount of each asset
by reviewing the following factors: the undiscounted value of expected operating
cash flows, the estimated useful or contractual life of the asset and the
contract or product supporting the asset.  No impairment losses were incurred
during the  six months ended June 30, 2004 and 2003.</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. Effective July 1, 2003, the Company adopted the
provisions of EITF No. 00-21 on a prospective basis. Under EITF No. 00-21, for
certain arrangements, a portion of the overall system price attributable to the
first year service is deferred and recognized as revenue over the service
period. As such, the Company recognizes warranty and related service costs as
incurred for these arrangements. The warranty provision resulting from
transactions prior to July 1, 2003 will be reduced in future periods for
material and labor costs incurred as related product is returned during the
warranty period or when the warranty period elapses. A review of warranty
obligations is performed regularly to determine the adequacy of the reserve.
Based on the outcome of this review, revisions to the estimated warranty
liability are recorded as appropriate.</P>
<P ALIGN="JUSTIFY">The following table reconciles the changes to the product
warranty liability for the period indicated (in thousands):</P>

<PRE>

                                      Balance at             Warranty Accrued/   Balance at
                                      Beginning   Warranty       Change in        End of
                                      of Period     Usage         Estimate        Period
                                     -----------  ---------  ------------------  ---------
Six months ended June 30, 2004....  $       702  $    (678) $              128  $     152

</PRE>



<P>The Company from time to time enters into agreements to indemnify its
customers against liability and damages arising from patent claims against the
Company's products. The term of these agreements vary, but generally, a maximum
obligation is not explicitly stated within the agreements. Historically, the
Company has not been obligated to make any significant payments related to its
customer indemnification clauses and no liabilities have been recorded for this
obligation on its balance sheets as of June 30, 2004 or December 31, 2003.</P>
<B><P ALIGN="JUSTIFY">NOTE 8. RESTRUCTURING CHARGES </P>
</B><P ALIGN="JUSTIFY">In connection with the acquisition of Computer Motion in
June 2003, the Company recorded an accrual for acquisition integration
liabilities, which includes the incremental costs to exit and consolidate
activities at Computer Motion locations, termination of certain Computer Motion
employees, and for other costs to integrate operating locations and other
activities of Computer Motion.  The accrual was recorded using the guidance
provided by EITF 95-3, &quot;Recognition of Liabilities in Connection with a
Purchase Business Combination,&quot; which requires that these acquisition
integration expenses, which are not associated with the generation of future
revenues and have no future economic benefit, be reflected as assumed
liabilities in the allocation of the purchase price to the net assets
acquired.  During 2003, the Company recorded a $3.4 million accrual in
accordance with EITF 95-3.  The accrual was comprised of $2.6 million for
employee severance costs and $0.8 million for estimated losses to be incurred to
sublet vacated facilities.  During the six months ended June 30, 2004, the
Company increased the accrual for the estimated losses to be incurred to sublet
vacated facilities by $0.2 million due to the change in estimates on assumptions
used to calculate the losses on subleasing the vacated facilities.  </P>
<P ALIGN="JUSTIFY">During the three months ended December 31, 2003, based on the
Company's cost structure and future development plans,</FONT><FONT SIZE=1>
</FONT><FONT SIZE=2>the Company planned to completely shut down the Goleta
research and development facility.  In accordance with SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities," the Company recorded
restructuring charges of $0.2 million, which is related to the costs of one-time
employee terminations.   SFAS No. 146 requires that a liability for costs
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred.  As employees are
generally required to render service beyond the minimum retention period or 60
days, the severance payments are recognized ratably over the service periods.
During the six months ended June 30, 2004, the Company completed the shutdown of
the Goleta research and development facilities and accrued $0.2 million of
employee severance costs and $0.5 million of lease commitment costs to exit the
leased facility.  The charges incurred in the six months ended June 30,2004 were
recorded in research and development expenses on the income statement.  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 activitiy
for the six months ended June 30, 2004 (in thousands):</P>

<PRE>

                                                    EITF No. 95-3          SFAS No. 146
                                             ----------------------  ---------------------
                                              Employee     Lease     Employee     Lease
                                             Severance   Commitments Severance  Commitments Total
                                             ----------  ----------  ---------  ---------  --------
Cost accrued............................... $    2,628  $      816  $     186  $      --  $  3,630
Cash payments, net of subleasing proceeds..     (2,310)       (303)        --         --    (2,613)
Currency impact............................        (23)        (23)        --         --       (46)
                                             ----------  ----------  ---------  ---------  --------
Balance at December 31, 2003...............        295         490        186         --       971
Cost accrued...............................         --         233        224        525       982
Cash payments, net of subleasing proceeds..       (281)       (221)      (410)      (145)   (1,057)
Currency impact............................         --           6                               6
                                             ----------  ----------  ---------  ---------  --------
Balance at June 30, 2004................... $       14  $      508  $      --  $     380  $    902
                                             ==========  ==========  =========  =========  ========

</PRE>


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

<PRE>

                                          Three Months Ended    Six Months Ended
                                               June 30,              June 30,
                                        --------------------  --------------------
                                           2004       2003       2004       2003
                                        ---------  ---------  ---------  ---------
Net income (loss)..................... $   4,830  $     877  $   5,683  $  (1,416)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.......................       (27)       (64)       (57)      (155)
  Change in unrealized gain (loss)
    on available-for-sale securities..    (1,351)       (15)    (1,107)      (456)
                                        ---------  ---------  ---------  ---------
Comprehensive income (loss)........... $   3,452  $     798  $   4,519  $  (2,027)
                                        =========  =========  =========  =========

</PRE>



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

<PRE>

                                               June 30,   December 31,
                                                2004         2003
                                            ------------  -----------
Accumulated net unrealized gain (loss) on
  available-for-sales securities.......... $       (168) $       940
Foreign currency translation
  adjustments.............................         (119)         (62)

Total accumulated other comprehensive       ------------  -----------
  income (loss)........................... $       (287) $       878
                                            ============  ===========

</PRE>



<B><P>NOTE 10. NET INCOME (LOSS) PER SHARE</P>
</B><P ALIGN="JUSTIFY">The following table presents the computation of basic and
diluted net income (loss) per share (in thousands, except per share data).
Basic net income (loss) per share is computed using the weighted-average number
of common shares outstanding.  Diluted net income (loss) per share is computed
using the weighted-average number of common shares outstanding and potential
dilutive common shares from the assumed exercise of options and warrants
outstanding during the period, if any, using the treasury method.</P>

<PRE>

                                            Three Months Ended        Six Months Ended
                                                June 30,                 June 30,
                                         -----------------------  -------------------------
                                            2004         2003        2004         2003
                                         -----------  ----------  -----------  ------------
Numerator used for basic and
  diluted net income (loss) per
  common share......................... $     4,830  $      877  $     5,683  $     (1,416)
                                         ===========  ==========  ===========  ============
Denominator used for basic and
  diluted net income (loss) per common
  share:
  Weighted-average shares
    outstanding........................      33,559      18,585       33,421        18,512
  Less weighted-average
    shares subject to
    repurchase.........................          --          (5)          --            (6)
                                         -----------  ----------  -----------  ------------
  Weighted-average shares used in
    computing basic net income (loss)
    per common share...................      33,559      18,580       33,421        18,506
                                         ===========  ==========  ===========  ============

  Add common stock equivalents.........         651         393          749            --
  Weighted-average shares used
    in computing diluted net income
    (loss) per common share............      34,210      18,973       34,170        18,506
                                         ===========  ==========  ===========  ============

Net income (loss) per common share:
  Basic................................ $      0.14  $     0.05  $      0.17  $      (0.08)
                                         ===========  ==========  ===========  ============
  Diluted.............................. $      0.14  $     0.05  $      0.17  $      (0.08)
                                         ===========  ==========  ===========  ============



</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 2,143,000 shares and 3,521,000, shares, respectively, for the
three months ended June 30, 2004 and June 30, 2003, and 1,868,000 shares for the
six months ended June 30, 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.  For the six months ended June 30, 2003, the Company did not
include options outstanding to purchase 3,216,000 shares of common stock in the
diluted net loss per share since their effect was antidilutive due to the reported
loss.</P>
<B><P ALIGN="JUSTIFY">NOTE 11. COMMITMENTS AND CONTINGENCIES </P>
</B><P ALIGN="JUSTIFY">OPERATING LEASES</P>
<P ALIGN="JUSTIFY">The Company entered into a lease arrangement of office and
manufacturing space in Sunnyvale, California effective January 2002 (the
"Sunnyvale Lease").  Under the Sunnyvale Lease, the Company was required to
lease additional space in the same building starting in January 2004.  The
Sunnyvale Lease was scheduled to expire on April 30, 2007. On April 30, 2004,
the Company purchased the property for approximately $20.0 million and canceled
the Sunnyvale Lease.  In addition, the Company leases an office space for
research and development in Milford, Connecticut and a 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, 2004, the
Company sublet approximately 90% of its office space in Goleta.  </P>
<P ALIGN="JUSTIFY">Future minimum lease commitments, net of sublease income of
$1.6 million throughout the next 4 years, under the Company's operating leases
as of June 30, 2004 are as follows (in thousands):</P>

<PRE>

2004 (remaining 6 months)..... $     174
2005..........................       306
2006..........................       297
2007..........................       160
                                ---------
Total......................... $     937
                                =========

</PRE>


<P ALIGN="JUSTIFY">Rent expense was approximately $0.1 million and $0.7 million
for the three months ended June 30, 2004 and 2003, respectively.  Rent expense
was approximately $0.9 million and $1.5 million for the six months ended June
30, 2004 and 2003, respectively.</P>
<P ALIGN="JUSTIFY">CONTINGENCIES</P>
<P ALIGN="JUSTIFY">For a description of the Company's legal proceedings, please
see the Section entitled &quot;Item 1. Legal Proceedings&quot; in Part II. Other
Information" contained in 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, "Intuitive Surgical," "Intuitive," the
"Company, " "we," "us," and "our" refer to Intuitive Surgical, Inc.</P>
<P ALIGN="JUSTIFY">This management's discussion and analysis of financial
condition as of June 30, 2004 and results of operations for the three months and
six months ended June 30, 2004 and June 30, 2003 should be read in conjunction
with the management's discussion and analysis of financial condition and results
of operations included in our Annual Report on Form 10-K for the year ended
December 31, 2003.  </P>
<P ALIGN="JUSTIFY">Except for historical information, the discussion in this
report contains forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations, and intentions. The
cautionary statements made in this report should be read as applying to all
related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed here. Factors that
could cause or contribute to these differences include those discussed in
"Factors Affecting Operating Results" below as well as those discussed
elsewhere.</P>
<P ALIGN="JUSTIFY">Intuitive 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 and general surgery.</P>

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

<PRE>

                                     June 30,   June 30,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $    25.9  $    19.2  $     6.7        35 %
Six months ended................... $    48.3  $    36.4  $    11.9        33 %

</PRE>


<P ALIGN="JUSTIFY">Product sales increased to $25.9 million for the three months
ended June 30, 2004 from $19.2 million for the three months ended June 30, 2003.
This 35% increase in product sales resulted primarily from higher <I>da Vinci</I>
Surgical System unit sales, higher fourth arm unit sales, and higher recurring
instrument and accessory revenue.  </P>

<P ALIGN="JUSTIFY">Total second quarter 2004 system revenue was $18.1 million
compared to $15.0 million during the second quarter of 2003.  We shipped 19
<I>da Vinci</I> Surgical Systems during the quarter: 13 in North America, 2 in
Europe, and 4 in the rest of the world.  The 19 total units shipped represented
a 5 unit increase compared to 14 units shipped during the second quarter of
2003.  As of June 30, 2004 we have shipped a total of 243 <I>da Vinci</I>
Surgical Systems: 171 in North America, 51 in Europe, and 21 in the rest of the
world.  We shipped 15 <I>da Vinci</I> Surgical System fourth arms during the
second quarter of 2004, up from 9 during the second quarter of 2003.  We shipped
2 Aesop systems during the second quarter of 2004, compared to none during the
second quarter of 2003.  </P>

<P ALIGN="JUSTIFY">During the first quarter of 2004, we transitioned from the
use of a distributor to a direct sales organization in Japan.  As part of this
transition, we bought back 5 <I>da Vinci</I> Surgical Systems that were being
used for demonstration and training purposes in Japan.  During the second
quarter of 2004, we refurbished and sold 3 of these systems, at a discount from
our normal prices, to other distributors located outside the United States.
These systems are included in the 19 <I>da Vinci</I> system sales we recorded in
the second quarter of 2004. We have retained the other 2 systems for internal use.
</P>

<P ALIGN="JUSTIFY">Second quarter 2004 instrument and accessory revenue
increased to $7.8 million from $4.1 million for the second quarter of 2003,
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 ALIGN="JUSTIFY">Product sales increased to $48.3 million for the six months
ended June 30, 2004 from $36.4 million for the six months ended June 30, 2003.
This 33% increase in product sales 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 first half of 2004 system revenue was $32.6 million
compared to $28.7 million during the first half of 2003.  We shipped 33 <I>da
Vinci</I> Surgical Systems during the first six months of 2004, compared to 28
units shipped during the first six months of 2003.  We shipped 9 Aesop systems
during the first half of 2004, compared to none during the first half of
2003.</P>

<P ALIGN="JUSTIFY">Instrument and accessory revenue for the six months ended
June 30, 2004 increased to $15.7 millon from $7.8 million for the six months
ended June 30, 2003, reflecting a growing number of surgical procedures
preformed 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 ALIGN="JUSTIFY">&nbsp;<I>Service Sales (dollars in millions) </P></I>

<PRE>

                                     June 30,   June 30,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     5.2  $     2.3  $     2.9       126 %
Six months ended................... $     9.8  $     4.2  $     5.6       133 %

</PRE>

<P ALIGN="JUSTIFY">Service sales, comprised of system service, installation and
customer training, increased to $5.2 million for the three months ended June 30,
2004 from $2.3 million for the three months ended June 30, 2003. The increase
was primarily due to a larger base of <I>da Vinci</I> Surgical Systems
generating service revenue.  The base of systems generating service revenue grew
to 210 entering the second quarter of 2004 compared to 102 entering the second
quarter 2003. The increase of 108 was comprised of 61 systems sold between the
second quarter of 2002 and the first quarter of 2003 coming out of the warranty
period onto service contracts and 47 systems sold between the third quarter of
2003 and the first quarter of 2004, with first year service deferred according
to EITF 00-21, adopted prospectively effective July 1, 2003.  In addition, the
average service revenue per active system under a service contract increased in
2004 due to higher rates charges for fourth arm systems.  </P>

<P ALIGN="JUSTIFY">Service sales increased to $9.8 million for the first half of
2004 from $4.2 million for the first half of 2003. The increase was primarily
due to a larger base of <I>da Vinci</I> Surgical Systems generating service
revenue.</P>

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

<PRE>

                                     June 30,   June 30,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $    16.6  $    12.2  $     4.4        35 %
Percentage of product sales........      64.2 %     63.9 %

Six months ended................... $    30.2  $    21.8  $     8.4        39 %
Percentage of product sales........      62.6 %     59.7 %

</PRE>


<P ALIGN="JUSTIFY">Product sales gross profit for the three months ended June
30, 2004 was $16.6 million, or 64.2% of product sales, compared to $12.2
million, or 63.9% of product sales for the three months ended June 30, 2003. Our
increased second quarter 2004 gross profit percentage was driven by several
factors.  As described earlier, we sold 3 refurbished <I>da Vinci</I> systems
that we repurchased last quarter from our former Japanese distributor.  Although
these systems were sold at a discount, they also had a lower cost basis.
Without these sales, second quarter 2004 product gross profit would have been
about 0.8 percentage points lower.  These factors offset the negative
gross product margin impact resulting from the deferral of first
year service beginning prospectively on July 1, 2003 in accordance
with EITF 00-21.  Under previous accounting treatment, the second
quarter 2004 gross margin would have been 0.9 percentage points higher.</P>

<P ALIGN="JUSTIFY">Product sales gross profit for the six months ended June 30,
2004 was $30.2 million, or 62.6% of product sales, compared to $21.8 million, or
59.7% of product sales for the six months ended June 30, 2003.  The increase was
driven by the sale of the 3 refurbished Japanese distribution units, lower
product material costs, improved product reliability, continued leverage of our
manufacturing organization across a larger production base, and lower overhead
costs derived from our building purchase, partially offset by the negative
margin impact of EITF 00-21 implementation.</P>

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

<PRE>

                                     June 30,   June 30,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     3.0  $     0.4  $     2.6       650 %
Percentage of service sales........      58.3 %     19.2 %

Six months ended................... $     5.2  $     0.7  $     4.5       643 %
Percentage of product sales........      53.3 %     15.6 %

</PRE>





<P ALIGN="JUSTIFY">Service sales gross profit for the three months ended June
30, 2004 was $3.0 million, or 58.3% of service sales, compared to $0.4 million,
or 19.2% of service sales for the three months ended June 30, 2003. Service
sales gross profit for the six months ended June 30, 2004 was $5.2 million, or
53.3% of service sales, compared to $0.7 million, or 15.6% of sales, for the six
months ended June 30, 2003. Higher 2004 gross service margin was driven by
increased service revenue as described above in combination with increased
leverage of the mostly fixed service and training organization expenses across a
larger base of installed systems.</P>

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

<PRE>

                                     June 30,   June 30,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $    11.5  $     8.5  $     3.0        35 %
Six months ended................... $    21.8  $    18.0  $     3.8        21 %

</PRE>


<P ALIGN="JUSTIFY">&nbsp;Selling, general and administrative expenses include
personnel costs for sales, marketing and administrative personnel, tradeshow
expenses, legal expenses, regulatory fees and general corporate expenses.
Selling, general and administrative expenses for the three months ended June 30,
2004 were $11.5 million, up 35% from $8.5 million for the three months ended
June 30, 2003.  Selling, general and administrative expenses for the six months
ended June 30, 2004 were $21.8 million, up 21% from $18.0 million for the six
months ended June 30, 2003. The year over year increases were primarily due to
higher incentive compensation and other variable costs associated with achieving
higher revenues, incremental patent costs associated with maintaining the
Computer Motion patent portfolio, and additional accounting personnel,
consulting, and auditing resources added to support the Sarbanes Oxley Act of
2002 compliance.  However, we experienced favorability in our bad debt expense
for the three and six months ended June 30, 2004, primarily due to an improved
accounts receivable aging based on increased collection efforts.</P>

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

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


<PRE>

                                     June 30,   June 30,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     3.6  $     3.6  $      --        -- %
Six months ended................... $     8.9  $     7.1  $     1.8        25 %

</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. Research and development expenses for the three months
ended June 30, 2004 were $3.6 million, equal to the three months ended June 30,
2003. Research and development expenses for the six months ended June 30, 2004
were $8.9 million, up 25% compared to $7.1 million for the six months ended June
30, 2003. The increase during the first half of 2004 was primarily due to expenses
incurred in the first quarter of 2004, related to the former Computer Motion
Goleta, California site.  During the first quarter of 2004, the Goleta site
incurred $1.0 million of general operating expenses, comprised of salaries,
materials, depreciation, and other expenses.  In addition, in accordance with
our restructuring plan, we completely shut down the Goleta site on March 31,
2004 and terminated all remaining Goleta-based employees, resulting in a $0.8
million restructuring expense recorded in the first quarter of 2004. As a result,
the $1.0 million of operating expenses and $0.8 million of restructuring costs
will not recur going forward.  Since Computer Motion was acquired on June 30,
2003, there were no Goleta site-based expenses included in the second quarter of
2003 results.  After having closed the former Computer Motion Goleta site at the
end of the first quarter of this year, our second quarter of 2004 research and
development expenses returned to a level consistent with the second quarter of
2003, the last quarter prior to our acquisition of Computer Motion.</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 increase in the
future.</P>

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


<PRE>

                                     June 30,   June 30,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     0.9  $     0.3  $     0.6       200 %
Six months ended................... $     1.5  $     1.2  $     0.3        25 %

</PRE>

<P ALIGN="JUSTIFY">Other income, comprised mostly of
interest income, increased to $0.6 million for the three months ended June 30,
2004 from $0.3 million for the  three months ended June 30, 2003. The increase
resulted primarily from higher interest income earned on a larger cash balance
position during the second quarter of 2004 resulting from the proceeds of the
fourth quarter of 2003 public offering of our common stock.    </P>

<P ALIGN="JUSTIFY">Other income for the six months ended June 30, 2004 was $1.2
million, equivalent to the total for the six months ended June 30, 2003.  First
quarter 2003 other income included $0.5 million of gains realized on sales of
securities.  Excluding these first quarter 2003 capital gains, the first half of
2004 increase resulted primarily from higher interest income earned on a larger
cash balance position during the
period resulting from the proceeds of the fourth quarter of
2003 public offering of our common stock. </P>

<P ALIGN="JUSTIFY">Income tax expense represents estimated income tax based on
our profitability for the three and six months ended June 30, 2004.</P>
</FONT><FONT SIZE=3>
</FONT><B><I><FONT SIZE=2><P ALIGN="JUSTIFY">LIQUIDITY AND CAPITAL RESOURCES</P>
</B></I><P ALIGN="JUSTIFY">Our operations have been financed primarily through
the sale of our equity securities. Sales of convertible preferred stock have
yielded proceeds of approximately $127.3 million and public offerings of our
common stock have yielded proceeds of approximately $124.5 million. We have also
financed operations through employee stock purchase and option plans as well as
equipment financing arrangements. At June 30, 2004 we had total stockholders
equity of $288.9 million and outstanding equipment financing debt of $1.1
million. As of June 30, 2004, we had cash, cash equivalents and short-term
investments of $106.4 million, compared to $112.9 million at December 31, 2003.
Working capital as of June 30, 2004 was $109.9 million, compared to $118.3
million as of December 31, 2003. The decrease in cash, cash equivalents and
short-term investments and in working capital resulted primarily from the
purchase of our Sunnyvale, California facility during the second quarter of 2004
for approximately $20.0 million in cash and the purchase of other property and
equipment for approximately $1.4 million in cash, partially offset by our 2004
year-to-date net income of $5.7 million, non-cash operating expenses of $3.3
million, and net proceeds of $5.4 million realized from stock option exercises
and our employee stock purchase plan.  </P>

<P ALIGN="JUSTIFY">Net cash provided by operating activities was $11.0 million
for the six months ended June 30, 2004, compared to $3.0 million of cash used in
operating activities for the six months ended June 30, 2003.  The $11.0 million
of cash provided by operations during the first half of 2004 resulted from net
income of $5.7 million, non-cash expenses of $3.3 million and net working
capital generated of $2.0 million.  The $3.0 million of cash used in operating
activities during the first half of 2003 was comprised primarily of working
capital consumed of $4.8 million and our net loss of $1.4 million, partially
offset by non-cash expenses of $3.2 million.</P>

<P ALIGN="JUSTIFY">Net cash used in investing activities was $18.8 million for
the six months ended June 30, 2004, compared to net cash provided by investing
activities of $0.1 million for the six months ended June 30, 2003.  Net cash
used in investing activities during the first half of 2004 resulted mainly from
investments in fixed assets of $21.4 million, comprised mostly of our purchase
of our Sunnyvale, California facility ($20.0 million) during the second quarter
of 2004, offset by the net conversion of short-term investments into cash of
$2.3 million.  The cash provided by investing activities during the first half
of 2003 related primarily to the net conversion of short-term investments into
cash of $5.1 million, partially offset by cash used to acquire Computer Motion
of $4.1 million and fixed asset purchases of $1.0 million. </P>

<P ALIGN="JUSTIFY">Net cash provided by financing activities was $4.8 million
for the six months ended June 30, 2004, compared to $0.8 million for the six
months ended June 30, 2003. Cash provided by financing activities in the first
half of 2004 resulted primarily from net proceeds realized from stock option
exercises and our employee stock purchase plan of $5.4 million, partially offset
by repayments of long-term debt of $0.6 million. Cash provided by financing
activities in the first half of 2003 resulted primarily from net proceeds
realized from stock option exercises and our employee stock purchase plan of
$1.6 million, partially offset by repayments of long-term debt of $0.9 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 $1.6 million
throughout the next 4 years, by payment due date:</P>

<B><P ALIGN="JUSTIFY">Payments by Periods (in millions)</P></B>

<TABLE BORDER CELLSPACING=1 CELLPADDING=7 WIDTH=467>
<TR><TD WIDTH="37%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Contractual Obligation</FONT></TD>
<TD WIDTH="20%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Total</FONT></TD>
<TD WIDTH="23%" VALIGN="MIDDLE">
<FONT SIZE=2><P ALIGN="CENTER">Less than 1 year</FONT></TD>
<TD WIDTH="19%" VALIGN="BOTTOM">
<FONT SIZE=2><P ALIGN="CENTER">1-3 years</FONT></TD>
</TR>
<TR><TD WIDTH="37%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Long-term debt</FONT></TD>
<TD WIDTH="20%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 1.1</FONT></TD>
<TD WIDTH="23%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 0.9</FONT></TD>
<TD WIDTH="19%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 0.2</FONT></TD>
</TR>
<TR><TD WIDTH="37%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Building lease</FONT></TD>
<TD WIDTH="20%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">0.9</FONT></TD>
<TD WIDTH="23%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">0.2</FONT></TD>
<TD WIDTH="19%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">0.7</FONT></TD>
</TR>
<TR><TD WIDTH="37%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Purchase commitments</FONT></TD>
<TD WIDTH="20%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">0.3</FONT></TD>
<TD WIDTH="23%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">0.3</FONT></TD>
<TD WIDTH="19%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">0.0</FONT></TD>
</TR>
<TR><TD WIDTH="37%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">Total</FONT></TD>
<TD WIDTH="20%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 2.3</FONT></TD>
<TD WIDTH="23%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 1.4</FONT></TD>
<TD WIDTH="19%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="RIGHT">$ 0.9</FONT></TD>
</TR>
</TABLE>

<FONT SIZE=2>
<B><I><P ALIGN="JUSTIFY">CRITICAL ACCOUNTING POLICIES</P>
</B></I><P ALIGN="JUSTIFY">The discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
assets and liabilities. On an on-going basis, we evaluate our critical
accounting policies and estimates, including those related to revenue
recognition, bad debts, income taxes and intangible assets. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Our critical
accounting policies and estimates are discussed in our Annual Report on Form
10-K for the year ended December 31, 2003.</P>
<B><I><P>FACTORS AFFECTING OPERATING RESULTS</P>
</I><P>OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES ANALYSTS' OR
INVESTORS' EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.</P>
</B><P ALIGN="JUSTIFY">Because of our limited operating history, we have limited
insight into trends that may emerge in our market and affect our business. The
revenue and income potential of our market are uncertain, and we may be unable
to generate significant revenues. In addition, our costs may be higher than we,
securities analysts or investors expect. If we fail to generate sufficient
revenues or our costs are higher than we expect, our results of operations will
suffer, which in turn could cause our stock price to decline. Further, future
revenue from sales of our products is difficult to forecast because the market
for new surgical technologies is still evolving. Our results of operations will
depend upon numerous factors, including:</P>

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

<P ALIGN="JUSTIFY">Our operating results in any particular period will not be a
reliable indication of our future performance. It is likely that in some future
quarters, our operating results will be below the expectations of securities
analysts or investors. If this occurs, the price of our common stock, and the
value of your investment, will likely decline.</P>
<B><P>WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A NEGATIVE
IMPACT ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.</B> </P>
<P ALIGN="JUSTIFY">Our <I>da Vinci</I> Surgical System has a lengthy sales and
purchase order cycle because it is a major capital item and generally requires
the approval of senior management at purchasing institutions. These factors may
contribute to substantial fluctuations in our quarterly operating results,
particularly during the periods in which our sales volume is low. Because of
these fluctuations, it is likely that in some future quarters our operating
results will fall below the expectations of securities analysts or investors. If
that happens, the market price of our stock would likely decrease. These
fluctuations also mean that you will not be able to rely upon our operating
results in any particular period as an indication of future performance.</P>
<B><P>BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE AND ARE LIKELY TO CONTINUE TO
ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES COULD DECLINE
DUE TO THE LOSS OR DELAY OF A SINGLE CUSTOMER. </P>
</B><P ALIGN="JUSTIFY">A relatively small number of customers account for a
significant portion of our total revenues. During the three months ended June
30, 2004 and 2003, approximately 58% and 70%, respectively, of our revenues came
from the sales of <I>da Vinci</I> Surgical Systems, which are high revenue
dollar items. During the six months ended June 30, 2004 and 2003, approximately
55% and 71%, respectively, of our revenues came from the sales of <I>da
Vinci</I> Surgical Systems, which are high revenue dollar items. During the
three-month and six months periods ended June 30, 2004 and 2003, no customer
accounted for more than 10% of total sales. However, due to the high average
selling price of the <I>da Vinci</I> Surgical System, our failure to add new
customers that make significant purchases of our products could reduce our
future revenues. The loss or delay of individual orders could have a significant
impact on revenues and operating results.</P>
<B><P>IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLE TO
GENERATE THE REVENUE NECESSARY TO SUPPORT OUR BUSINESS.</B> </P>
<P ALIGN="JUSTIFY">Our products represent a fundamentally new way of performing
surgery. Achieving physician, patient and third-party payor acceptance of
<I>Intuitive</I> surgery as a preferred method of performing surgery will be
crucial to our success. If our products fail to achieve market acceptance,
hospitals will not purchase our products and we will not be able to generate the
revenue necessary to support our business. We believe that physicians' and
third-party payors' acceptance of the benefits of procedures performed using our
products will be essential for acceptance of our products by patients.
Physicians will not recommend the use of our products unless we can demonstrate
that they produce results comparable or superior to existing surgical
techniques. Even if we can prove the effectiveness of our products through
clinical trials, surgeons may elect not to use our products for any number of
other reasons. For example, cardiologists may continue to recommend conventional
open-heart surgery simply because such surgery is already widely accepted. In
addition, surgeons may be slow to adopt our products because of the perceived
liability risks arising from the use of new products and the uncertainty of
reimbursement from third-party payors. </P>
<P ALIGN="JUSTIFY">We expect that there will be a learning process involved for
surgical teams to become proficient in the use of our products. Broad use of our
products will require training of surgical teams. Market acceptance could be
delayed by the time required to complete this training. We may not be able to
rapidly train surgical teams in numbers sufficient to generate adequate demand
for our products. We cannot be certain that our training programs will be cost
effective or sufficient to meet our customers' needs.</P>
<B><P>OUR PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC REGULATORY
PROCESS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY DOMESTIC REGULATORY
APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN THE UNITED
STATES.</B> </P>
<P ALIGN="JUSTIFY">Our products and operations are subject to extensive
regulation in the United States by the U.S. Food and Drug Administration, or
FDA. The FDA regulates the research, testing, manufacturing, safety, labeling,
storage, recordkeeping, promotion, distribution and production of medical
devices in the United States to ensure that medical products distributed
domestically are safe and effective for their intended uses. In order for us to
market certain products for use in the United States, we generally must first
obtain clearance from the FDA pursuant to Section 510(k) of the Federal Food,
Drug, and Cosmetic Act, or FFDCA. Clearance under Section 510(k) requires
demonstration that a new device is substantially equivalent to another device
with 510(k) clearance or grandfather status. If we significantly modify our
products after they receive FDA clearance, the FDA may require us to submit a
separate 510(k) or premarket approval application, or PMA, for the modified
product before we are permitted to market the products in the U.S. In addition,
if we develop products in the future that are not considered to be substantially
equivalent to a device with 510(k) clearance or grandfather status, we will be
required to obtain FDA approval by submitting a PMA. </P>
<P ALIGN="JUSTIFY">The FDA may not act favorably or quickly in its review of our
510(k) or PMA submissions, or we may encounter significant difficulties and
costs in our efforts to obtain FDA clearance or approval, all of which could
delay or preclude sale of new products in the United States. Furthermore, the
FDA may request additional data or require us to conduct further testing, or
compile more data, including clinical data and clinical studies, in support of a
510(k) submission. The FDA may also, instead of accepting a 510(k) submission,
require us to submit a PMA, which is typically a much more complex and
burdensome application than a 510(k). To support a PMA, the FDA would likely
require that we conduct one or more clinical studies to demonstrate that the
device is safe and effective. We may not be able to meet the requirements to
obtain 510(k) clearance or PMA approval, or the FDA may not grant any necessary
clearances or approvals. In addition, the FDA may place significant limitations
upon the intended use of our products as a condition to a 510(k) clearance or
PMA approval. Product applications can also be denied or withdrawn due to
failure to comply with regulatory requirements or the occurrence of unforeseen
problems following clearance or approval. Any delays or failure to obtain FDA
clearance or approvals of new products we develop, any limitations imposed by
the FDA on new product use, or the costs of obtaining FDA clearance or approvals
could have a material adverse effect on our business, financial condition and
results of operations. </P>
<P ALIGN="JUSTIFY">In order to conduct a clinical investigation involving human
subjects for the purpose of demonstrating the safety and effectiveness of a
device, a company must, among other things, apply for and obtain Institutional
Review Board, or IRB approval of the proposed investigation. In addition, if the
clinical study involves a "significant risk" (as defined by the FDA) to human
health, the sponsor of the investigation must also submit and obtain FDA
approval of an investigational device exemption, or IDE, application.  Most of
our products to date have been considered significant risk devices requiring IDE
approval prior to investigational use. We may not be able to obtain FDA and/or
IRB approval to undertake clinical trials in the U.S. for any new devices we
intend to market in the United States in the future. If we obtain such
approvals, we may not be able to comply with the IDE and other regulations
governing clinical investigations or the data from any such trials may not
support clearance or approval of the investigational device. Failure to obtain
such approvals or to comply with such regulations could have a material adverse
effect on our business, financial condition and results of operations. </P>
<B><P ALIGN="JUSTIFY">BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS MAY
CHOOSE TO PURCHASE OUR COMPETITORS' PRODUCTS OR MAY NOT ACCEPT INTUITIVE
SURGERY, WHICH WOULD RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE.</P>
</B><I><P ALIGN="JUSTIFY">Intuitive</I> surgery is a new technology that will
compete with established and emerging treatment options in both disease
management and reconstructive medical procedures.  These competitive treatment
options may take the form of traditional minimally invasive surgery, open
surgery, interventional approaches, or pharmacological regimens.  Some of these
procedures are widely accepted in the medical community and in many cases have a
long history of use.  Technological advances could make such treatments more
effective or less expensive than using our products, which could render our
products obsolete or unmarketable.  We cannot be certain that physicians will
use our products to replace or supplement established treatments or that our
products will be competitive with current or future technologies. </P>
<P ALIGN="JUSTIFY">In addition, we may face competition from companies that
develop robotic and computer-assisted surgical systems in the future.  Our
revenues may be reduced or eliminated if our competitors develop and market
products that are more effective or less expensive than our products.  If we are
unable to compete successfully, our revenues will suffer.  We may not be able to
maintain or improve our competitive position against current or potential
competitors, especially those with greater resources.</P>
<B><P>IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN REIMBURSEMENT FROM
THIRD-PARTY PAYORS FOR PROCEDURES USING OUR PRODUCTS, OR IF REIMBURSEMENT IS
INSUFFICIENT TO COVER THE COSTS OF PURCHASING OUR PRODUCTS, WE MAY BE UNABLE TO
GENERATE SUFFICIENT SALES TO SUPPORT OUR BUSINESS.</B> </P>
<P ALIGN="JUSTIFY">Domestic institutions will typically bill the services
performed with our products to various third-party payors, such as Medicare,
Medicaid and other government programs and private insurance plans. If hospitals
do not obtain sufficient reimbursement from third-party payors for procedures
performed with our products, or if government and private payors' policies do
not permit reimbursement for surgical procedures performed using our products,
we may not be able to generate the revenues necessary to support our business.
Our success in international markets also depends upon the eligibility of our
products for reimbursement through government-sponsored health care payment
systems and third-party payors. Reimbursement practices vary significantly by
country. Many international markets have government-managed healthcare systems
that control reimbursement for new products and procedures. Other foreign
markets have both private insurance systems and government-managed systems that
control reimbursement for new products and procedures. Market acceptance of our
products may depend on the availability and level of reimbursement in any
country within a particular time. In addition, health care cost containment
efforts similar to those we face in the United States are prevalent in many of
the other countries in which we intend to sell our products and these efforts
are expected to continue. </P>
<B><P>IF DEFECTS ARE DISCOVERED IN OUR PRODUCTS, WE MAY INCUR ADDITIONAL
UNFORESEEN COSTS, HOSPITALS MAY NOT PURCHASE OUR PRODUCTS AND OUR REPUTATION MAY
SUFFER.</B> </P>
<P ALIGN="JUSTIFY">Our products incorporate mechanical parts and computer
software, either of which can contain errors or failures, especially when first
introduced. In addition, new products or enhancements may contain undetected
errors or performance problems that, despite testing, are discovered only after
commercial shipment. Because our products are designed to be used to perform
complex surgical procedures, we expect that our customers will have an increased
sensitivity to such defects. In the past, we have voluntarily recalled certain
products as a result of performance problems.  We cannot assure you that our
products will not experience errors or performance problems in the future. If we
experience flaws or performance problems, any of the following could occur:</P>

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

<B><P>WE 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 would be damaged.</P>
<B><P>IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE OR
EUROPEAN MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR
PART OF OUR MANUFACTURING OPERATIONS, WHICH COULD RESULT IN PRODUCT DELIVERY
DELAYS AND LOST REVENUE.</B> </P>
<P ALIGN="JUSTIFY">Our manufacturing facilities are subject to periodic
inspection by regulatory authorities and our operations will continue to be
regulated by the FDA for compliance with Good Manufacturing Practice
requirements contained in the FDA's Quality System Regulations, or QSR. We are
also required to comply with International Organization for Standardization, or
ISO, quality system standards in order to produce products for sale in Europe.
If we fail to continue to comply with Good Manufacturing Practice requirements
or ISO standards, we may be required to cease all or part of our operations
until we comply with these regulations. We are currently in compliance with ISO
standards. We continue to be subject to FDA inspections at any time. Maintaining
such compliance is difficult and costly. We cannot be certain that our
facilities will be found to comply with Good Manufacturing Practice requirements
or ISO standards in future inspections and audits by regulatory authorities.
</P>
<P ALIGN="JUSTIFY">The state of California also requires that we maintain a
license to manufacture medical devices.  We are subject to periodic inspections
by the California Department of Health Services and, if we are unable to
maintain this license following any future inspections, we will be unable to
manufacture or ship any products.</P>
<B><P>OUR RELIANCE ON SOLE AND SINGLE SOURCE SUPPLIERS COULD HARM OUR ABILITY TO
MEET DEMAND FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET.</B> </P>
<P ALIGN="JUSTIFY">Some of the components necessary for the assembly of our
products are currently provided to us by sole source suppliers or single source
suppliers. We purchase components through purchase orders rather than long-term
supply agreements and generally do not maintain large volumes of inventory. The
disruption or termination of the supply of components could cause a significant
increase in the costs of these components, which could affect our profitability.
A disruption or termination in the supply of components could also result in our
inability to meet demand for our products, which could harm our ability to
generate revenues, lead to customer dissatisfaction and damage our reputation.
Furthermore, if we are required to change the manufacturer of a key component of
our products, we may be required to verify that the new manufacturer maintains
facilities and procedures that comply with quality standards and with all
applicable regulations and guidelines. The delays associated with the
verification of a new manufacturer could delay our ability to manufacture our
products in a timely manner or within budget.</P>
<B><P>THE USE OF OUR PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT
COULD BE EXPENSIVE, DIVERT MANAGEMENT'S ATTENTION AND HARM OUR BUSINESS.</B>
</P>
<P ALIGN="JUSTIFY">Our business exposes us to significant risks of product
liability claims. The medical device industry has historically been litigious,
and we face financial exposure to product liability claims if the use of our
products were to cause injury or death. There is also the possibility that
defects in the design or manufacture of our products might necessitate a product
recall. Although we maintain product liability insurance, the coverage limits of
these policies may not be adequate to cover future claims. Particularly as sales
of our products increase, we may be unable to maintain product liability
insurance in the future at satisfactory rates or in adequate amounts. A product
liability claim, regardless of its merit or eventual outcome, could result in
significant legal defense costs. A product liability claim or any product
recalls could also harm our reputation or result in a decline in revenues.</P>
<B><P>IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL, OUR ABILITY TO COMPETE WILL BE HARMED.</B> </P>
<P ALIGN="JUSTIFY">We are highly dependent on the principal members of our
management and scientific staff. Our product development plans depend, in part,
on our ability to attract and retain engineers with experience in electronics,
mechanics, software and optics. Attracting and retaining qualified personnel
will be critical to our success, and competition for qualified personnel is
intense. We may not be able to attract and retain personnel on acceptable terms
given the competition for such personnel among technology and healthcare
companies, and universities. The loss of any of these persons or our inability
to attract and retain qualified personnel could harm our business and our
ability to compete.</P>
</FONT><H5>COMPLYING WITH FDA REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING
PROCESS, AND OUR FAILURE TO COMPLY FULLY COULD SUBJECT US TO SIGNIFICANT
ENFORCEMENT SANCTIONS.</H5>
<FONT SIZE=2><P>Because our products, including the <I>da Vinci</I> Surgical
System, are commercially distributed, numerous postmarket regulatory
requirements apply, including the following: </P>

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

<P ALIGN="JUSTIFY">We are subject to inspection and marketing surveillance by
the FDA to determine our compliance with regulatory requirements. If the FDA
finds that we have failed to comply, it can institute a wide variety of
enforcement actions, ranging from a regulatory letter to a public warning letter
to more severe civil and criminal sanctions. Our failure to comply with
applicable requirements could lead to an enforcement action that may have an
adverse effect on our financial condition and results of operations. </P>
<P ALIGN="JUSTIFY">We have modified the labeling, advertising and user training
for the <I>da Vinci</I> Surgical System to call out specific procedures that we
believe are within the scope of our existing 510(k) clearances. We cannot assure
you that the FDA would agree that all such specific procedures are within the
scope of the existing general clearance or that we have compiled adequate
information to support the safety and efficacy of using the <I>da Vinci</I>
Surgical System for all such specific procedures. We also have modified the
hardware and software in the <I>da Vinci</I> Surgical System since clearance in
ways that we believe do not require new 510(k) clearance. We cannot be certain
that the FDA would agree with our determinations not to seek new 510(k)
clearance for any of these changes. Computer Motion also modified the hardware
and software in its products subsequent to 510(k) clearance without seeking new
clearance. We cannot be certain that the FDA would agree with the determinations
not to seek new 510(k) clearance for any of these changes. The FDA could impose
enforcement sanctions and/or require us to obtain 510(k) clearance for any
modification to our products or Computer Motion's products. We may be prohibited
from marketing the modified device until such 510(k) clearance is granted. </P>
<B><P>OUR PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY PROCESSES AND
APPROVAL REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY
INTERNATIONAL REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR
PRODUCTS IN FOREIGN COUNTRIES.</P>
</B><P ALIGN="JUSTIFY">To be able to market and sell our products in other
countries, we must obtain regulatory approvals and comply with the regulations
of those countries. These regulations, including the requirements for approvals
and the time required for regulatory review, vary from country to country.
Obtaining and maintaining foreign regulatory approvals are expensive, and we
cannot be certain that we will receive regulatory approvals in any foreign
country in which we plan to market our products. If we fail to obtain regulatory
approval in any foreign country in which we plan to market our products, our
ability to generate revenue will be harmed. </P>
<P ALIGN="JUSTIFY">The European Union requires that manufacturers of medical
products obtain the right to affix the CE mark to their products before selling
them in member countries of the European Union. The CE mark is an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. In order to obtain the right to
affix the CE mark to products, a manufacturer must obtain certification that its
processes meet certain European quality standards. In January 1999, we received
permission to affix the CE mark to our <I>da Vinci</I> Surgical System and
<I>EndoWrist</I> instruments. </P>
<P ALIGN="JUSTIFY">If we modify existing products or develop new products in the
future, including new instruments, we may need to apply for permission to affix
the CE mark to such products. In addition, we will be subject to annual
regulatory audits in order to maintain the CE mark permissions we have already
obtained. We cannot be certain that we will be able to obtain permission to
affix the CE mark for new or modified products or that we will continue to meet
the quality and safety standards required to maintain the permissions we have
already received. If we are unable to maintain permission to affix the CE mark
to our products, we will no longer be able to sell our products in member
countries of the European Union. </P>
<B><P ALIGN="JUSTIFY">TERMINATION OF RELATIONSHIPS WITH FORMER DISTRIBUTORS OF
COMPUTER MOTION COULD RESULT IN LITIGATION.</P>
</B><P ALIGN="JUSTIFY">Our integration strategy related to our acquisition of
Computer Motion may involve the termination of Computer Motion's relationships
with a number of companies that served as Computer Motion's distributors prior
to the acquisition.  Several of these former distributors have informed us that
they believe that they are entitled to compensation in connection with such
termination.  We may be unable to resolve these claims without litigation.  Due
to the inherent uncertainties of litigation, we cannot accurately predict the
ultimate outcome of any such litigation at this time and, therefore, cannot
estimate the range of possible loss.  If we sue or are sued by any of Computer
Motion's former distributors, these proceedings may be expensive to litigate,
may be protracted, and Computer Motion's confidential information may be
compromised.  Whether or not we are successful in these lawsuits, these
proceedings could consume substantial amounts of our financial and managerial
resources.</P>
<B><P>IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN OUR
PRODUCTS FROM USE BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET WILL BE
HARMED.</B> </P>
<P ALIGN="JUSTIFY">Our commercial success will depend in part on obtaining
patent and other intellectual property protection for the technologies contained
in our products, and on successfully defending our patents and other
intellectual property against third party challenges. We will incur substantial
costs in obtaining patents and, if necessary, defending our proprietary rights.
The patent positions of medical device companies, including ours, can be highly
uncertain and involve complex legal and factual questions. We do not know
whether we will obtain the patent protection we seek, or that the protection we
do obtain will be found valid and enforceable if challenged. We also do not know
whether we will be able to develop additional patentable proprietary
technologies. If we fail to obtain adequate protection of our intellectual
property, or if any protection we obtain is reduced or eliminated, others could
use our intellectual property without compensating us, resulting in harm to our
business. We may also determine that it is in our best interests to voluntarily
challenge a third party's products or patents in litigation or administrative
proceedings, including patent interferences or reexaminations. In addition, the
laws of certain foreign countries do not protect intellectual property rights to
the same extent as do the laws of the United States.</P>
<B><P>OTHERS MAY ASSERT THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY
RIGHTS, WHICH MAY CAUSE US TO ENGAGE IN COSTLY DISPUTES AND, IF WE ARE NOT
SUCCESSFUL IN DEFENDING OURSELVES, COULD ALSO CAUSE US TO PAY SUBSTANTIAL
DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.</B> </P>
<P ALIGN="JUSTIFY">There may be United States and foreign patents issued to
third parties that relate to computer-assisted surgery, remote surgery, and
minimally invasive surgery. Some of these patents may be broad enough to cover
one or more aspects of our present technology, and may cover aspects of our
future technology. We do not know whether any of these patents, if challenged,
would be held valid, enforceable and infringed. From time to time, we receive,
and likely will continue to receive, letters from third parties inviting us to
license their patents. We may be sued by, or become involved in an
administrative proceeding with, one or more of these third parties. We cannot be
certain that a court or administrative body would agree with any arguments or
defenses we have concerning invalidity, unenforceability or noninfringement of
any third-party patent. In addition to the issued patents of which we are aware,
other parties may have filed, and in the future are likely to file, patent
applications covering surgical products that are similar or identical to ours.
We cannot be certain that any patents issuing from applications filed by a third
party will not cover our products or will not have priority over our patent
applications. </P>
<P ALIGN="JUSTIFY">The medical device industry has been characterized by
extensive litigation and administrative proceedings regarding patents and other
intellectual property rights, and companies have employed such actions to gain a
competitive advantage. If third parties assert infringement or other
intellectual property claims against us, our technical and management personnel
will experience a significant diversion of time and effort and we will incur
large expenses defending our company. If third parties in any patent action are
successful, our patent portfolio may be damaged, we may have to pay substantial
damages, including treble damages, and we may be required to stop selling our
products or obtain a license which, if available at all, may require us to pay
substantial royalties. We cannot be certain that we will have the financial
resources or the substantive arguments to defend our patents from infringement
or claims of invalidity or unenforceability, or to defend against allegations of
infringement of third-party patents. In addition, any public announcements
related to litigation or administrative proceedings initiated by us, or
initiated or threatened against us, could cause our stock price to decline.</P>
<B><P>THE RIGHTS AND MEASURES WE RELY ON TO PROTECT THE INTELLECTUAL PROPERTY
UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE TO PREVENT THIRD PARTIES FROM USING
OUR TECHNOLOGY, WHICH COULD HARM OUR ABILITY TO COMPETE IN THE MARKET.</B> </P>
<P ALIGN="JUSTIFY">In addition to patents, we typically rely on a combination of
trade secret, copyright and trademark laws, nondisclosure agreements and other
contractual provisions and technical security measures to protect our
intellectual property rights. Nevertheless, these measures may not be adequate
to safeguard the technology underlying our products. If they do not protect our
rights adequately, third parties could use our technology, and our ability to
compete in the market would be reduced. In addition, employees, consultants and
others who participate in developing our products may breach their agreements
with us regarding our intellectual property, and we may not have adequate
remedies for the breach. We also may not be able to effectively protect our
intellectual property rights in some foreign countries. For a variety of
reasons, we may decide not to file for patent, copyright or trademark protection
outside the United States. We also realize that our trade secrets may become
known through other means not currently foreseen by us. Notwithstanding our
efforts to protect our intellectual property, our competitors may independently
develop similar or alternative technologies or products that are equal or
superior to our technology and products without infringing any of our
intellectual property rights, or may design around our proprietary technologies.
</P>
<B><P>OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE ACCESS TO
THESE TECHNOLOGIES, OUR REVENUES COULD DECLINE.</B> </P>
<P ALIGN="JUSTIFY">We rely on technology that we license from others, including
technology that is integral to our products. We have entered into license
agreements with SRI International, IBM Corporation, MIT, Olympus Optical Co.,
Ltd., and Heartport, Inc., now part of Johnson &amp; Johnson. Any of these
agreements may be terminated for breach. If any of these agreements is
terminated, we may be unable to reacquire the necessary license on satisfactory
terms, or at all. The loss or failure to maintain these licenses could prevent
or delay further development or commercialization of our products. </P>
<B><P>INTERNATIONAL SALES OF OUR PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION OF
OUR REVENUES, WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS.
OUR GROWTH MAY BE LIMITED IF WE ARE UNABLE TO SUCCESSFULLY MANAGE OUR
INTERNATIONAL ACTIVITIES.</B> </P>
<P ALIGN="JUSTIFY">Our business currently depends in large part on our
activities in Europe and other foreign markets. Sales to markets outside of the
United States accounted for approximately 21% of our sales for the three months
ended June 30, 2004 and 30% for the three months ended June 30, 2003.  Sales to
markets outside of the United States accounted for approximately 22% of our
sales for the six months ended June 30, 2004 and 24% for the six months ended
June 30, 2003.</P>
<P ALIGN="JUSTIFY">We are subject to a number of challenges that specifically
relate to our international business activities. These challenges include:</P>

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

<P ALIGN="JUSTIFY">Currently, a majority of our international sales are
denominated in United States dollars. As a result, an increase in the value of
the United States dollar relative to foreign currencies could make our products
less competitive in international markets. If we are unable to meet and overcome
these challenges, our international operations may not be successful, which
would limit the growth of our business.</P>
<B><P>PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.</P>
</B><P ALIGN="JUSTIFY">During the course of our administrative proceedings
and/or lawsuits, there may be public announcements of the results of hearings,
motions, and other interim proceedings or developments in the litigation. If
securities analysts or investors perceive these results to be negative, it could
have a substantial negative effect on the trading price of our stock.</P>
<B><P>INVESTOR CONFIDENCE AND SHARE VALUE MAY BE ADVERSELY IMPACTED IF WE OR OUR
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ARE UNABLE TO PROVIDE AN UNQUALIFIED
ATTESTATION OF THE ADEQUACY OF OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING AS
OF DECEMBER 31, 2004, AS REQUIRED BY SECTION 404 OF THE SARBANES-OXLEY ACT OF
2002.</P>
</B><P ALIGN="JUSTIFY">The Securities and Exchange Commission, as directed by
Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public
companies to include a report of management on the company's internal controls
over financial reporting in its annual reports on Form 10-K that contain an
assessment by management of the effectiveness of the company's internal controls over
financial reporting. In addition, the company's independent registered public accounting
firm must attest to and report on management's assessment of the effectiveness of the
company's internal controls over financial reporting. This requirement will
first apply to our Annual Report on Form 10-K for the fiscal year ending
December 31, 2004. Although we intend to diligently and vigorously review our
internal controls over financial reporting in order to ensure compliance with
the Section 404 requirements, if we or our independent registered public accounting firm
are not satisfied with our internal controls over financial reporting or the level at
which these controls are documented, designed, operated, reviewed or tested, or if our
independent registered public accounting firm interprets the requirements, rules or
regulations differently from us, then we or they may decline to attest to management's
assessment or may issue a report that is qualified. This could result in an adverse
reaction in the financial marketplace due to a loss of investor confidence in the
reliability of our financial statements, which ultimately could negatively impact the
market price of our shares.</P>
<B><P><A NAME="market"></A>ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK</P>
</B><P ALIGN="JUSTIFY">We are not subject to any meaningful market risks related
to currency, commodity prices or similar matters. We are sensitive to short-term
interest rate fluctuations to the extent that such fluctuations impact the
interest income we receive on the investment of the remaining proceeds from our
public offerings. </P>
<P ALIGN="JUSTIFY">The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities
that we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities. We classify our cash
equivalents and marketable securities as "fixed-rate" if the rate of return on
such instruments remains fixed over their term. These "fixed-rate" investments
include commercial paper and government and non-government debt securities. We
classify our cash equivalents and marketable securities as "variable- rate" if
the rate of return on such investments varies based on the change in a
predetermined index or set of indices during their term. These "variable-rate"
investments primarily include money market accounts. The average time to
maturity of all of our investments as of June 30, 2004 was approximately 1.20
years.  At June 30, 2004 and December 31, 2003, approximately 47% and 37%,
respectively, of our investment portfolio was composed of investments with
original maturities of one year or less. </P>
<P ALIGN="JUSTIFY">The majority of our revenue, expense, and capital purchasing
activities are transacted in U.S. dollars. However, since a portion of our
operations consists of sales activities outside of the United States, we have
entered into transactions in other currencies, primarily the euro. On a limited
basis, we have used forward foreign exchange contracts to reduce a portion of
our exposure to foreign currency risk from operational and balance sheet
exposures resulting from changes in foreign currency exchange rates. Such
exposures result from sales denominated in foreign currencies. These contracts
were typically short-term in nature (i.e., less than 6&nbsp;months).</P>
<P ALIGN="JUSTIFY">For the three months ended June 30, 2004 and 2003, sales
denominated in foreign currencies were 7% and 15%, respectively, of total sales.
For the six months ended June 30, 2004 and 2003, sales denominated in foreign
currencies were 9% and 12%, respectively, of total sales. We did not enter into
forward foreign exchange contracts during the three months and six months ended
June 30, 2004 and 2003.&nbsp; </P>
<P ALIGN="JUSTIFY">We do not use derivative financial instruments for
speculative trading purposes, nor do we hold or issue leveraged derivative
financial instruments. We have not entered into any forward contracts since July
2002, and as of June 30, 2004 and December 31, 2003, we had no outstanding
derivative instruments.&nbsp;</P>
<P ALIGN="JUSTIFY">Foreign currency fluctuations resulted in $10,000 of foreign
exchange gain for the three months ended June 30, 2004 and $92,000 of foreign
exchange gain for the three months ended June 30, 2003. Foreign currency
fluctuations resulted in $88,000 of foreign exchange loss for the six months
ended June 30, 2004 and $118,000 of foreign exchange gain for the six months
ended June 30, 2003.</P>
<B><P ALIGN="JUSTIFY"><A NAME="control"></A>ITEM 4. CONTROLS AND PROCEDURES</P>
</B><P ALIGN="JUSTIFY">We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our 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>
<P ALIGN="JUSTIFY">There has been no change in our internal controls over
financial reporting during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.</P>
<B><P ALIGN="CENTER">PART II. OTHER INFORMATION </P>
<P><A NAME="item1"></A>ITEM 1. LEGAL PROCEEDINGS</P>
</B><P ALIGN="JUSTIFY">In February 2004, a former customer of Computer Motion
filed a lawsuit against our company.  We received the complaint on April 23,
2004.  The customer alleges that it relied to its detriment on representations
made by Computer Motion in connection with Computer Motion's sale of products to
the customer, which representations the customer believes were not fulfilled.
The customer is seeking damages. We believe the allegation is baseless and will
vigorously defend this suit. To date, we have filed a motion to dismiss the
fraud-based complaints and an answer defending the breach of contract claim.
The litigation is in the early stages of discovery.  </P>
<P ALIGN="JUSTIFY">In November 2003, an Israeli company filed suit against our
company and Computer Motion in Israel alleging breach of a distribution contract
and seeking damages. We received the complaint on April 27, 2004. Following the
acquisition of Computer Motion, we withdrew Computer Motion's distributorship
offer to this Israeli company. We believe the allegation is baseless and will
vigorously defend the suit.</P>
<P ALIGN="JUSTIFY">In October 2003, SIC System, S.R.L. (&quot;SIC System&quot;)
a former Italian distributor for Computer Motion, filed suit against our company
and Computer Motion seeking damages in the Civil Court of Rome, Italy (the
&quot;Italian Action&quot;).  In the Italian Action, 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 Italian Action on both jurisdictional grounds and on the merits.
To date, the Court in the Italian Action has ruled that SIC System's service
process in filing its complaint is defective and has ordered SIC System to re-
file its complaint on or about October 6, 2004.  The court in the Italian Action
has not ruled on jurisdiction or other pending issues pertaining to the
applicable law or appropriate forum.</P>
<P ALIGN="JUSTIFY">In November 2003, Intuitive Surgical filed a lawsuit in
the United States District Court for the Central District of California
captioned <I>Intuitive Surgical, Inc., et. al v. SIC System Srl</I>, Case Number
CV-03-08220 for declaratory relief, breach of contract and preliminary and
permanent injunction (the &quot;Federal Action&quot;).  The Federal Action seeks
a judicial declaration of the rights and obligations of the parties under the
distribution agreement, specifically that we effectively deleted the products
from the distribution agreement, and a preliminary and permanent injunction
prohibiting SIC System from proceeding with the Italian Action.  The complaint
in the Federal Action was served on SIC System on November 28, 2003. SIC Systems
has not answered the complaint and the Clerk of Court entered Default in the
Federal Action on March 31, 2004. We filed a motion for entry of default
judgment on June 22, 2004, which has been taken under submission by the Court as
of July 31, 2004.</P>
<P ALIGN="JUSTIFY">In September 2002, we discovered that one of our employees
had purchased approximately $900,000 in administrative supplies without the
authorization or knowledge of our management. This matter was investigated by
law enforcement authorities and our advisors. We have since terminated this
employee's employment and have taken actions intended to ensure that no similar
incidents can occur in the future, including implementing additional controls
relating to our cash disbursement process. In addition, we are seeking to
recover our loss. We have filed a claim with our insurance carrier, from which
we received proceeds of $500,000, and filed suit against the sellers of the
administrative supplies in December</FONT><FONT FACE="Helvetica" SIZE=4
COLOR="#0000ff"> </FONT><FONT SIZE=2>2002. Our complaint alleged that each of
the defendants has (i) violated various sections of the Racketeer</FONT><FONT
FACE="Helvetica" SIZE=4> </FONT><FONT SIZE=2>Influenced and Corrupt
Organization, or RICO, Act through their extortion, coercion, intimidation,
fraud, bribery and racketeering activity in connection with the unauthorized
purchase of office supplies and (ii) committed unlawful business acts and
practices in violation of Cal. Bus. &amp; Prof. Code Section 17200 et seq. Our
suit seeks to recover actual and treble damages, costs and attorney fees for the
damage caused by each of defendants through their illegal conduct. In November
2003, we filed a Second Amended Complaint to allege that each defendant further
unlawfully offered prizes and gifts in violation of Cal. Bus. &amp; Prof. Code
Section 17537 and unlawfully failed to advertise limitations on the quantity of
its sales in violation of Cal. Bus. &amp; Prof. Code Section 17500.5, as well as
adding causes of action for rescission, conversion, intentional interference
with contract, negligent interference with contract, negligence, and money had
and received. The amended complaint reiterates our claim to recover actual and
treble damages, costs and attorney fees. A settlement was reached in July 2004
in which the other parties in the lawsuit agreed to pay us $250,000 over a
maximum of three years.</P>
<P ALIGN="JUSTIFY">The foregoing proceedings could be expensive to litigate, may
be protracted and our confidential information may be compromised. Whether or
not we are successful in these lawsuits, these proceedings could consume
substantial amounts of its financial and managerial resources. At any time, the
other parties may file additional claims against us, or we may file claims
against them, which could increase the risk, expense and duration of the
litigations.</P>
<P ALIGN="JUSTIFY">We are subject to legal proceedings and claims that arise in
the normal course of our business. We do not know whether we will prevail in
these matters nor can we assure that any remedy could be reached on commercially
viable terms, if at all. Due to the inherent uncertainties of litigation, we
cannot accurately predict the ultimate outcome of these matters at this time
and, therefore, cannot estimate the range of possible loss.</P>
<B><P><A NAME="item2"></A>ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES</P>
</B><P>None.</P>
<B><P><A NAME="item3"></A>ITEM 3. DEFAULTS UPON SENIOR SECURITIES</P>
</B><P ALIGN="JUSTIFY">None. </P>

<B><P><A NAME="item4"></A>ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</P></B>


<P ALIGN="JUSTIFY"> 1. &nbsp; At the Annual Meeting of Stockholders held on May 21,
2004, the stockholders of Intuitive Surgical, Inc. elected Alan J. Levy, Ph.D.
and Eric H. Halvorson to the Board of Directors of the Company to terms expiring
at the Annual Meeting of Stockholders in the year 2007.  The following table
sets forth the votes for each director:</P>

<P><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">Alan J. Levy, Ph.D</FONT></TD>
<TD WIDTH="36%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">27,740,083 </FONT></TD>
<TD WIDTH="29%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER"> 1,179,898</FONT></TD>
</TR>
<TR><TD WIDTH="35%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="JUSTIFY">Eric H. Halvorson</FONT></TD>
<TD WIDTH="36%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER"> 28,391,104</FONT></TD>
<TD WIDTH="29%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER"> 528,877</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, William C. Meyers, and Lonnie M. Smith.</P>

<A NAME="item5"></A>
<B><P ALIGN="JUSTIFY">ITEM 5. OTHER INFORMATION</P>
</B><P ALIGN="JUSTIFY">None. </P>
<P ALIGN="JUSTIFY"> <A NAME="item6"></A><B>ITEM 6. EXHIBITS AND REPORTS ON FORM
8-K</P>
</B><P ALIGN="JUSTIFY">(a) Exhibits. </P></FONT>
<TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=600>
<TR><TD WIDTH="14%" VALIGN="BOTTOM">
<B><FONT SIZE=2><P ALIGN="CENTER">Exhibit Number</B></FONT></TD>
<TD WIDTH="86%" VALIGN="BOTTOM">
<B><FONT SIZE=2><P>Description</B></FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">31</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P>Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.</FONT></TD>
</TR>
<TR><TD WIDTH="14%" VALIGN="TOP">
<FONT SIZE=2><P ALIGN="CENTER">32</FONT></TD>
<TD WIDTH="86%" VALIGN="TOP">
<FONT SIZE=2><P>Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002</FONT></TD>
</TR>
</TABLE>

<FONT SIZE=2><P>__________ </P>
<P ALIGN="JUSTIFY">&nbsp;(b) Reports on Form 8-K. </P>
<P ALIGN="JUSTIFY">On April 29, 2004, we furnished a current report on Form 8-K
announcing our first quarter financial results.</P>
<P ALIGN="JUSTIFY">On April 30, 2004, we filed a current report on Form 8-K
announcing the purchase of the real property located on 950 Kifer Road,
Sunnyvale, California from RNM Technology Drive, L.P.</P>
<P><BR>
</P>
<P><HR WIDTH="85%"></P>
<P ALIGN="CENTER"><BR>
<BR>
</P>
<B><P ALIGN="CENTER"><A NAME="sign"></A>SIGNATURE</P>
</B><P>Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. </P>

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

<FONT SIZE=2><P>Date: August 6, 2004 </P>
<P><BR>
<BR>
</P>

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

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

<FONT SIZE=2><P ALIGN="CENTER">&nbsp;</P>

<P><BR>
<BR>
</P>
<P><HR WIDTH="85%"></P>
<P><BR>
<BR>
<BR>
</P></FONT>




</BODY>
</HTML>
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Q2 2004 10Q DOC
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
     15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 000-30713
Intuitive Surgical, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
77-0416458
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
950 Kifer Road
Sunnyvale, California      94086
(Address of Principal Executive Offices including Zip Code)
(408) 523-2100
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days.    YES
x
NO
o
Indicate by check mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).    YES
x
NO
o
The Registrant had 33,662,797 shares of Common Stock, $0.001 par value per
share, outstanding as of July 31, 2004.
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, 2004 and
December 31, 2003
1
Condensed consolidated statements of operations for the three-month
and six-month periods ended June 30, 2004 and June 30, 2003
2
Condensed consolidated statements of cash flows for the six-month
periods ended June 30, 2004 and June 30, 2003
3
Notes to condensed consolidated financial statements
4
Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations
11
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
26
Item 4.   Controls and Procedures
26
PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings
27
Item 2.   Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
28
Item 3.  Defaults Upon Senior Securities
28
Item 4.  Submission of Matters to a Vote of Security Holders
28
Item 5.  Other Information
29
Item 6.   Exhibits and Reports on Form 8-K
29
Signatures
29
PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
June 30,    December 31,
                                                               2004          2003
                                                           ------------  ------------
                                                                         (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents.............................. $      8,230  $     11,335
  Short-term investments.................................       98,184       101,614
  Accounts receivables, net..............................       24,705        26,820
  Inventory..............................................        7,162         8,788
  Prepaids and other current assets......................        3,462         3,203
  Restricted cash equivalents............................          204           188
                                                           ------------  ------------
          Total current assets...........................      141,947       151,948
Property and equipment, net..............................       29,012        10,288
Restricted cash equivalents..............................          319           642
Intangible assets, net...................................        7,155         8,089
Goodwill.................................................      143,332       143,106
Other assets.............................................          695           921
                                                           ------------  ------------
          Total assets...................................      322,460       314,994
                                                           ============  ============
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................... $      4,311  $      5,894
  Accrued compensation and employee benefits.............        5,186         5,267
  Restructuring accrual..................................          902           971
  Other accrued liabilities..............................        7,392         9,134
  Deferred revenue.......................................       13,385        11,345
  Current portion of notes payable.......................          904         1,030
                                                           ------------  ------------
          Total current liabilities......................       32,080        33,641
Long-term notes payable..................................          230           695
Deferred revenue.........................................        1,166         1,148
Other accrued liabilities................................           57           553
                                                           ------------  ------------
          Total non-current liabilities..................        1,453         2,396
Commitments and contingencies (Note 11)..................           --            --
Stockholders' equity:
  Preferred stock, 2,500,000 shares authorized, $0.001
     par value, issuable in series; no shares issued
     and outstanding as of June 30, 2004  and
     and December 31, 2003, respectively.................           --            --
  Common stock, 100,000,000 shares authorized, $0.001
     par value, 33,644,149 and 33,051,631 shares
     issued and outstanding as of June 30, 2004
     and December 31, 2003, respectively.................           34            33
  Additional paid-in capital.............................      421,911       416,559
  Deferred compensation..................................           --           (99)
  Accumulated deficit....................................     (132,731)     (138,414)
  Accumulated other comprehensive income (loss)..........         (287)          878
                                                           ------------  ------------
          Total stockholders' equity.....................      288,927       278,957
                                                           ------------  ------------
          Total liabilities and stockholders' equity..... $    322,460  $    314,994
                                                           ============  ============
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended       Six Months Ended
                                                      June 30,                June 30,
                                               ----------------------  ----------------------
                                                  2004        2003        2004        2003
                                               ---------- -----------  ---------- -----------
Sales:
  Products................................... $   25,850  $   19,151  $   48,321  $   36,443
  Services...................................      5,207       2,302       9,795       4,245
                                               ----------  ----------  ----------  ----------
Total sales..................................     31,057      21,453      58,116      40,688
Cost of sales:
  Products...................................      9,260       6,906      18,073      14,678
  Services...................................      2,169       1,859       4,579       3,581
                                               ----------  ----------  ----------  ----------
Total cost of sales..........................     11,429       8,765      22,652      18,259
                                               ----------  ----------  ----------  ----------
    Gross profit.............................     19,628      12,688      35,464      22,429
                                               ----------  ----------  ----------  ----------
Operating costs and expenses:
  Selling, general, and administrative.......     11,535       8,531      21,778      17,984
  Research and development...................      3,626       3,627       8,936       7,050
                                               ----------  ----------  ----------  ----------
    Total operating costs and
     expenses................................     15,161      12,158      30,714      25,034
                                               ----------  ----------  ----------  ----------
Income (loss) from operations................      4,467         530       4,750      (2,605)
Other income, net ...........................        626         347       1,232       1,189
                                               ----------  ----------  ----------  ----------
Income (loss) before taxes...................      5,093         877       5,982      (1,416)

Income tax expense...........................        263          --         299          --
                                               ----------  ----------  ----------  ----------
Net income (loss)............................ $    4,830  $      877  $    5,683  $   (1,416)
                                               ==========  ==========  ==========  ==========
Net income (loss) per share:
  Basic...................................... $     0.14  $     0.05  $     0.17  $    (0.08)
                                               ==========  ==========  ==========  ==========
  Diluted ................................... $     0.14  $     0.05  $     0.17  $    (0.08)
                                               ==========  ==========  ==========  ==========
Shares used in computing net income
 (loss) per share:
  Basic......................................     33,559      18,580      33,421      18,506
                                               ==========  ==========  ==========  ==========
  Diluted....................................     34,210      18,973      34,170      18,506
                                               ==========  ==========  ==========  ==========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
For the Six Months
                                                               Ended June 30,
                                                         ------------------------
                                                            2004         2003
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net income (loss)...................................... $     5,683  $    (1,416)
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
  Depreciation.........................................       2,606        1,777
  Provision for doubtful accounts......................        (320)         613
  (Gain) loss on disposition of property and equipment.          (3)           5
  Amortization of deferred compensation and stock
   compensation........................................          99          296
  Amortization of intangible assets....................         934          495
Changes in operating assets and liabilities:
  Accounts receivable..................................       2,434       (1,106)
  Prepaids and other current assets....................        (591)         623
  Inventory............................................       1,626         (191)
  Other assets.........................................         226         (827)
  Accounts payable.....................................      (1,584)        (733)
  Accrued compensation and employee benefits...........        (108)      (1,256)
  Restructuring accrual................................        (215)          --
  Other accrued liabilities............................      (1,894)      (2,239)
  Deferred revenue.....................................       2,058          944
                                                         -----------  -----------
Net cash provided by (used in) operating activities....      10,951       (3,015)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................     (21,409)      (1,030)
Disposition of property and equipment..................          26            1
Acquisition of business, net of cash acquired..........          --       (4,088)
Release of restricted cash equivalents.................         307           70
Purchase of short-term investments.....................     (41,782)      (7,834)
Proceeds from sales of short-term investments..........      37,212        7,844
Proceeds from maturities of short-term investments.....       6,892        5,097
                                                         -----------  -----------
Net cash (used in) provided by investing activities....     (18,754)          60
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       5,353        1,629
Repurchase of common stock.............................          --           (6)
Repayment of notes payable.............................        (591)        (870)
                                                         -----------  -----------
Net cash provided by financing activities..............       4,762          753
                                                         -----------  -----------
Foreign currency translation adjustments...............         (64)        (155)
                                                         -----------  -----------
Net decrease in cash and cash equivalents..............      (3,105)      (2,357)
Cash and cash equivalents, beginning of period.........      11,335        8,052
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $     8,230  $     5,695
                                                         ===========  ===========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In this report, "Intuitive Surgical, " "Intuitive,"
and the "Company" refer to Intuitive Surgical, Inc.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all normal, recurring adjustments considered
necessary for a fair presentation have been included. The consolidated balances
at December 31, 2003 were derived from the audited financial statements included
in  Intuitive Surgical, Inc.'s Annual Report on Form 10-K ("Annual Report") for
the year ended December 31, 2003. The financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2003 included in the Annual Report. The results for the interim period ended
June 30, 2004 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2004 or future operating periods.  The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries.  All significant intercompany accounts and transactions
have been eliminated in consolidation.  Certain reclassifications have been made
to prior year balances in order to conform to the current year presentation.
These reclassifications had no impact on previously reported net income or
stockholders' equity.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amount reported in
the consolidated financial statements and accompanying notes.  Actual results
could differ materially from these estimates.
Revenue Recognition
The Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred or service has been
rendered, the price is fixed or determinable and collectibility is reasonably
assured.
In certain cases, revenue from direct system sales is
generated from multiple-element arrangements that require judgment in the areas
of customer acceptance, collectibility, the separability of units of accounting,
and the fair value of individual elements.  Effective July 1, 2003, the Company
adopted the provisions of Emerging Issues Task Force ("EITF") Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables," on a
prospective basis.  The principles and guidance outlined in EITF 00-21 provide a
framework to (a) determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting, and (b) determine how
the arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. The Company determined that its
multiple-element arrangements are generally comprised of the following elements
that would qualify as separate units of accounting: system sales, service,
installation, and training.  Each of these elements represent individual units
of accounting as the delivered item has value to a customer on a stand-alone
basis, objective and reliable evidence of fair value exists for undelivered
items, and arrangements generally do not contain a general right of return
relative to the delivered item.  The Company determines fair value based on the
price of the deliverable when it is sold separately or based on third-party
evidence.  In accordance with the guidance in EITF 00-21, the Company uses the
residual method to allocate the arrangement consideration when it does not have
fair value of the system sale.  Under the residual method, the amount of
consideration allocated to the delivered item equals the total arrangement
consideration less the aggregate fair value of the undelivered items.  Assuming
all other criteria for revenue recognition have been met, the Company recognizes
revenue for system sales when delivery and acceptance occurs, for installation
and training when the services are rendered, and for service ratably over the
service period, which is generally one year.
The Company's distributors do not have price protection or
return rights.
Revenue from sales of instruments and accessories is
recognized upon delivery. Revenue related to future commitments under separately
priced service contracts is deferred and recognized ratably over the service
period. All costs associated with the provision of service and maintenance,
including salaries, benefits, travel, spare parts and equipment, are recognized
in cost of sales as incurred.
Amounts billed in excess of revenue recognized are included
as deferred revenue in the condensed consolidated balance sheets.
The Company's
da Vinci
Surgical System,
Hermes
Control Center and
AESOP
Endoscope Positioner contain a software
component. The Company believes that this software element is an incidental part
of each system. The software element within the Company's products is not sold
or marketed separately to customers, and the software does not operate
independently of each system. Furthermore, the software development effort does
not represent a significant cost to the Company relative to the overall
development cost of the product. As such, the software the Company provides is
incidental to each system as a whole and the software revenue guidance provided
in 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 in June 2003.  As required under
Statement of Financial Accounting Standards Board ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," the Company has
provided the following pro forma net income (loss) and pro forma net income
(loss) per share disclosures for stock-based awards as if the fair value-based
method defined in SFAS 123, "Accounting for Stock-Based Compensation," had been
applied (amounts in thousands, except per share amounts):
Three Months Ended  Six Months Ended
                                                          June 30,            June 30,
                                                     ------------------  -------------------
                                                       2004      2003      2004       2003
                                                     --------  --------  ---------  --------
Net income (loss), as reported..................... $  4,830  $    877  $   5,683  $ (1,416)
Add:  Total stock-based employee
  compensation expense included in reported
  net income (loss), net of $0 related tax effect..       84       141         99       296
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method for
  all awards, net of $0 related tax effect.........   (2,657)   (1,958)    (5,117)   (3,984)
                                                     --------  --------  ---------  --------
Pro forma net income (loss)........................ $  2,257  $   (940) $     665  $ (5,104)
                                                     ========  ========  =========  ========

Net income (loss) per share:
  Basic - as reported.............................. $   0.14  $   0.05  $    0.17  $  (0.08)
  Basic - pro forma................................ $   0.07  $  (0.05) $    0.02  $  (0.28)

  Diluted - as reported............................ $   0.14  $   0.05  $    0.17  $  (0.08)
  Diluted - pro forma.............................. $   0.07  $  (0.05) $    0.02  $  (0.28)
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,
                                     -------------------   ------------------
                                        2004      2003        2004      2003
                                     --------  ---------   --------  --------
Stock Option Plans:
   Average risk free interest rate.     3.36 %     2.48 %     3.03 %    2.50 %
   Average expected life (years)...      4.0        4.0        4.0       4.0
   Volatility......................       68 %       80 %       70 %      80 %

Stock Purchase Plan:
   Average risk free interest rate.     1.30 %     1.46 %     1.30 %    1.61 %
   Average expected life (years)...      1.1        0.5        1.2       0.5
   Volatility......................       62 %       48 %       62 %      48 %
Recent Accounting Pronouncements
In December 2003, the FASB issued FIN Interpretation
No. 46R (revised December 2003), "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51," which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN No. 46R replaces FASB Interpretation FIN
No. 46, which was issued in January 2003. As of the effective date of FIN
No. 46R, an enterprise must evaluate its involvement with all entities or legal
structures created before February 1, 2003, to determine whether consolidation
requirements of FIN No. 46R apply to those entities. There is no grandfathering
of existing entities. The adoption of FIN No. 46R did not have a significant
impact on the Company's consolidated financial position, results of operations
or cash flow.
In December 2003, the SEC issued Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition." SAB No. 104 revises and
rescinds portions of the interpretative guidance included in Topic 13 of the
codification of staff accounting bulletins in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB No. 104 did not have a
significant impact on the Company's consolidated financial position, results of
operations or cash flow.
NOTE 2. CONCENTRATIONS OF RISK
Financial instruments that subject the Company to
potential risk consist of its cash equivalents, short-term investments, accounts
receivable, and foreign exchange contracts. The counterparties to the agreements
relating to the Company's investment securities and foreign exchange contracts
consist of various major corporations and financial institutions of high credit
standing. The Company believes the financial risks associated with these
financial instruments are minimal. For the three months and six months ended
June 30, 2004 and 2003, no customer accounted for more than 10% of total sales.
The Company extends reasonably short collection terms but does not require
collateral. The Company provides reserves for potential credit losses.
The Company's
da Vinci
Surgical System,
Hermes
Control Center,
AESOP
Endoscope Positioner and related instruments and
accessories accounted for all of the Company's product sales for the three
months and six months ended June 30, 2004 and 2003. Purchases of key parts and
components used to manufacture the Company's products are from limited supply
sources. The inability of any of these suppliers to fulfill the Company's supply
requirements may negatively impact future operating results.
The Company operates in one segment, the development and
marketing of products designed for use in surgery.   The distribution of sales
by geographic location is as follows (in thousands):
Three Months Ended     Six Months Ended
                                       June 30,              June 30,
                               --------------------- ---------------------
                                   2004       2003       2004       2003
                                ---------  ---------  ---------  ---------
Domestic...................... $  24,674  $  14,948  $  45,180  $  30,797
International.................     6,383      6,505     12,936      9,891
                                ---------  ---------  ---------  ---------
Total sales................... $  31,057  $  21,453  $  58,116  $  40,688
                                =========  =========  =========  =========
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, 2004 and December 31, 2003.  Approximately $4.3 million
and $4.8 million of money market instruments were included in cash and cash
equivalents at June 30, 2004 and December 31, 2003, 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, 2004   December 31, 2004
                           ---------------  -----------------
U.S. corporate debt...... $        49,829  $          44,904
U.S. government debt.....          27,305             28,210
Municipal debt...........          13,700             11,950
Commercial paper.........           7,350             16,550
                           ---------------  -----------------
Total.................... $        98,184  $         101,614
                           ===============  =================
NOTE 5. INVENTORY
Inventory is stated at the lower of cost or market value.
Cost is computed using standard costs, which approximates actual cost on a
first-in, first-out basis.  Inventory consists of the following (in
thousands):
June 30,    December 31,
                                   2004          2003
                               ------------  ------------
Raw materials................ $      2,018  $      1,247
Work-in-process..............        1,849         1,797
Finished goods...............        3,295         5,744
                               ------------  ------------
Total........................ $      7,162  $      8,788
                               ============  ============
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.  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 once each fiscal
year (more frequently if certain indicators are present), which the Company will
do in the fourth quarter.  Intangible assets with finite useful lives will
continue to be amortized over their respective useful lives.   In the event
management determines that goodwill has been impaired, the Company will incur an
accounting charge for the impairment during the fiscal quarter in which the
determination is made.  Of the total purchase price related to the acquisition
of Computer Motion, $143.3 million was allocated to goodwill and $8.6 million
was allocated to amortizable intangible assets, comprised of developed
technology of $3.5 million, core technology of $3.3 million, customer
relationships of $1.3 million, and other intangible assets totaling $0.5
million
Other purchased intangible assets represent patents, which
are carried at cost less accumulated amortization. Amortization is computed
using the straight-line method over the expected useful life of six or seven
years.
Net intangible assets is comprised of the following (in
thousands):
June 30, 2004
                                    -----------------------------------------------
                                                 Accumulated
                                      Gross     Amortization  Impairment     Net
                                    ---------   ------------  ----------  ---------
Developed technology.............  $   3,500   $        250  $    3,250  $      --
Core technology..................      3,300            471          --      2,829
Customer relationships...........      1,300            367          --        933
Patents..........................      7,310          4,064          --      3,246
Other intangible assets..........        500             62         291        147
                                    ---------   ------------  ----------  ---------
Total intangible assets, net.....  $  15,910   $      5,214  $    3,541  $   7,155
                                    =========   ============  ==========  =========

                                                  December 31, 2003
                                    -----------------------------------------------
                                                 Accumulated
                                      Gross     Amortization  Impairment     Net
                                    ---------   ------------  ----------  ---------
Developed technology.............  $   3,500   $        250  $    3,250  $      --
Core technology..................      3,300            236          --      3,064
Customer relationships...........      1,300            233          --      1,067
Patents..........................      7,310          3,511          --      3,799
Other intangible assets..........        500             50         291        159
                                    ---------   ------------  ----------  ---------
Total intangible assets, net.....  $  15,910   $      4,280  $    3,541  $   8,089
                                    =========   ============  ==========  =========
Amortization expense related to intangible assets was $0.5
million and $0.2 for the three months ended June 30, 2004 and 2003,
respectively.  Amortization expense related to intangible assets was $0.9
million and $0.5 million for the six months ended June 30, 2004 and 2003,
respectively.
Estimated future amortization expense related to intangible
assets at June 30, 2004 is as follows (in thousands):
Fiscal Year
----------------------------
2004 (remaining 6 months)...  $      934
2005........................       1,868
2006........................       1,275
2007........................       1,077
2008........................         811
Thereafter..................       1,190
                                ---------
Total.......................  $    7,155
                                =========
Impairment of Goodwill
The Company has elected to perform an annual analysis of
goodwill during the fourth quarter of each year.  Based on our 2003 impairment
analysis, no impairments were identified, and no indicators of impairment were
identified during the six months ended June 30, 2004.
Impairment of Long-Lived Assets
SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," requires recognition of impairment of long-lived assets
when circumstances indicate an impairment has occurred and in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets.  Accordingly, the Company evaluates asset
recoverability when an event occurs that may impair recoverability of the asset.
The Company determines the recoverability of the carrying amount of each asset
by reviewing the following factors: the undiscounted value of expected operating
cash flows, the estimated useful or contractual life of the asset and the
contract or product supporting the asset.  No impairment losses were incurred
during the  six months ended June 30, 2004 and 2003.
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. Effective July 1, 2003, the Company adopted the
provisions of EITF No. 00-21 on a prospective basis. Under EITF No. 00-21, for
certain arrangements, a portion of the overall system price attributable to the
first year service is deferred and recognized as revenue over the service
period. As such, the Company recognizes warranty and related service costs as
incurred for these arrangements. The warranty provision resulting from
transactions prior to July 1, 2003 will be reduced in future periods for
material and labor costs incurred as related product is returned during the
warranty period or when the warranty period elapses. A review of warranty
obligations is performed regularly to determine the adequacy of the reserve.
Based on the outcome of this review, revisions to the estimated warranty
liability are recorded as appropriate.
The following table reconciles the changes to the product
warranty liability for the period indicated (in thousands):
Balance at             Warranty Accrued/   Balance at
                                      Beginning   Warranty       Change in        End of
                                      of Period     Usage         Estimate        Period
                                     -----------  ---------  ------------------  ---------
Six months ended June 30, 2004....  $       702  $    (678) $              128  $     152
The Company from time to time enters into agreements to indemnify its
customers against liability and damages arising from patent claims against the
Company's products. The term of these agreements vary, but generally, a maximum
obligation is not explicitly stated within the agreements. Historically, the
Company has not been obligated to make any significant payments related to its
customer indemnification clauses and no liabilities have been recorded for this
obligation on its balance sheets as of June 30, 2004 or December 31, 2003.
NOTE 8. RESTRUCTURING CHARGES
In connection with the acquisition of Computer Motion in
June 2003, the Company recorded an accrual for acquisition integration
liabilities, which includes the incremental costs to exit and consolidate
activities at Computer Motion locations, termination of certain Computer Motion
employees, and for other costs to integrate operating locations and other
activities of Computer Motion.  The accrual was recorded using the guidance
provided by EITF 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination," which requires that these acquisition
integration expenses, which are not associated with the generation of future
revenues and have no future economic benefit, be reflected as assumed
liabilities in the allocation of the purchase price to the net assets
acquired.  During 2003, the Company recorded a $3.4 million accrual in
accordance with EITF 95-3.  The accrual was comprised of $2.6 million for
employee severance costs and $0.8 million for estimated losses to be incurred to
sublet vacated facilities.  During the six months ended June 30, 2004, the
Company increased the accrual for the estimated losses to be incurred to sublet
vacated facilities by $0.2 million due to the change in estimates on assumptions
used to calculate the losses on subleasing the vacated facilities.
During the three months ended December 31, 2003, based on the
Company's cost structure and future development plans,
the Company planned to completely shut down the Goleta
research and development facility.  In accordance with SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities," the Company recorded
restructuring charges of $0.2 million, which is related to the costs of one-time
employee terminations.   SFAS No. 146 requires that a liability for costs
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred.  As employees are
generally required to render service beyond the minimum retention period or 60
days, the severance payments are recognized ratably over the service periods.
During the six months ended June 30, 2004, the Company completed the shutdown of
the Goleta research and development facilities and accrued $0.2 million of
employee severance costs and $0.5 million of lease commitment costs to exit the
leased facility.  The charges incurred in the six months ended June 30,2004 were
recorded in research and development expenses on the income statement.  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 activitiy
for the six months ended June 30, 2004 (in thousands):
EITF No. 95-3          SFAS No. 146
                                             ----------------------  ---------------------
                                              Employee     Lease     Employee     Lease
                                             Severance   Commitments Severance  Commitments Total
                                             ----------  ----------  ---------  ---------  --------
Cost accrued............................... $    2,628  $      816  $     186  $      --  $  3,630
Cash payments, net of subleasing proceeds..     (2,310)       (303)        --         --    (2,613)
Currency impact............................        (23)        (23)        --         --       (46)
                                             ----------  ----------  ---------  ---------  --------
Balance at December 31, 2003...............        295         490        186         --       971
Cost accrued...............................         --         233        224        525       982
Cash payments, net of subleasing proceeds..       (281)       (221)      (410)      (145)   (1,057)
Currency impact............................         --           6                               6
                                             ----------  ----------  ---------  ---------  --------
Balance at June 30, 2004................... $       14  $      508  $      --  $     380  $    902
                                             ==========  ==========  =========  =========  ========
NOTE 9. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) and
other comprehensive income (loss), which primarily consists of unrealized gains and
losses on available-for-sale securities and cumulative translation adjustments.
Total accumulated other comprehensive income is displayed as a separate
component of stockholders' equity in the accompanying condensed consolidated
balance sheets.  The components of comprehensive income (loss) consist of the
following (in thousands):
Three Months Ended    Six Months Ended
                                               June 30,              June 30,
                                        --------------------  --------------------
                                           2004       2003       2004       2003
                                        ---------  ---------  ---------  ---------
Net income (loss)..................... $   4,830  $     877  $   5,683  $  (1,416)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.......................       (27)       (64)       (57)      (155)
  Change in unrealized gain (loss)
    on available-for-sale securities..    (1,351)       (15)    (1,107)      (456)
                                        ---------  ---------  ---------  ---------
Comprehensive income (loss)........... $   3,452  $     798  $   4,519  $  (2,027)
                                        =========  =========  =========  =========
The components of accumulated other comprehensive income were
as follows (in thousands):
June 30,   December 31,
                                                2004         2003
                                            ------------  -----------
Accumulated net unrealized gain (loss) on
  available-for-sales securities.......... $       (168) $       940
Foreign currency translation
  adjustments.............................         (119)         (62)

Total accumulated other comprehensive       ------------  -----------
  income (loss)........................... $       (287) $       878
                                            ============  ===========
NOTE 10. NET INCOME (LOSS) PER SHARE
The following table presents the computation of basic and
diluted net income (loss) per share (in thousands, except per share data).
Basic net income (loss) per share is computed using the weighted-average number
of common shares outstanding.  Diluted net income (loss) per share is computed
using the weighted-average number of common shares outstanding and potential
dilutive common shares from the assumed exercise of options and warrants
outstanding during the period, if any, using the treasury method.
Three Months Ended        Six Months Ended
                                                June 30,                 June 30,
                                         -----------------------  -------------------------
                                            2004         2003        2004         2003
                                         -----------  ----------  -----------  ------------
Numerator used for basic and
  diluted net income (loss) per
  common share......................... $     4,830  $      877  $     5,683  $     (1,416)
                                         ===========  ==========  ===========  ============
Denominator used for basic and
  diluted net income (loss) per common
  share:
  Weighted-average shares
    outstanding........................      33,559      18,585       33,421        18,512
  Less weighted-average
    shares subject to
    repurchase.........................          --          (5)          --            (6)
                                         -----------  ----------  -----------  ------------
  Weighted-average shares used in
    computing basic net income (loss)
    per common share...................      33,559      18,580       33,421        18,506
                                         ===========  ==========  ===========  ============

  Add common stock equivalents.........         651         393          749            --
  Weighted-average shares used
    in computing diluted net income
    (loss) per common share............      34,210      18,973       34,170        18,506
                                         ===========  ==========  ===========  ============

Net income (loss) per common share:
  Basic................................ $      0.14  $     0.05  $      0.17  $      (0.08)
                                         ===========  ==========  ===========  ============
  Diluted.............................. $      0.14  $     0.05  $      0.17  $      (0.08)
                                         ===========  ==========  ===========  ============
Potential weighted average common shares excluded from the
computation of diluted net income per share as their effect would be
antidilutive were 2,143,000 shares and 3,521,000, shares, respectively, for the
three months ended June 30, 2004 and June 30, 2003, and 1,868,000 shares for the
six months ended June 30, 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.  For the six months ended June 30, 2003, the Company did not
include options outstanding to purchase 3,216,000 shares of common stock in the
diluted net loss per share since their effect was antidilutive due to the reported
loss.
NOTE 11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company entered into a lease arrangement of office and
manufacturing space in Sunnyvale, California effective January 2002 (the
"Sunnyvale Lease").  Under the Sunnyvale Lease, the Company was required to
lease additional space in the same building starting in January 2004.  The
Sunnyvale Lease was scheduled to expire on April 30, 2007. On April 30, 2004,
the Company purchased the property for approximately $20.0 million and canceled
the Sunnyvale Lease.  In addition, the Company leases an office space for
research and development in Milford, Connecticut and a 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, 2004, the
Company sublet approximately 90% of its office space in Goleta.
Future minimum lease commitments, net of sublease income of
$1.6 million throughout the next 4 years, under the Company's operating leases
as of June 30, 2004 are as follows (in thousands):
2004 (remaining 6 months)..... $     174
2005..........................       306
2006..........................       297
2007..........................       160
                                ---------
Total......................... $     937
                                =========
Rent expense was approximately $0.1 million and $0.7 million
for the three months ended June 30, 2004 and 2003, respectively.  Rent expense
was approximately $0.9 million and $1.5 million for the six months ended June
30, 2004 and 2003, respectively.
CONTINGENCIES
For a description of the Company's legal proceedings, please
see the Section entitled "Item 1. Legal Proceedings" in Part II. Other
Information" contained in 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, 2004 and results of operations for the three months and
six months ended June 30, 2004 and June 30, 2003 should be read in conjunction
with the management's discussion and analysis of financial condition and results
of operations included in our Annual Report on Form 10-K for the year ended
December 31, 2003.
Except for historical information, the discussion in this
report contains forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations, and intentions. The
cautionary statements made in this report should be read as applying to all
related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed here. Factors that
could cause or contribute to these differences include those discussed in
"Factors Affecting Operating Results" below as well as those discussed
elsewhere.
Intuitive 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 and general surgery.
RESULTS OF OPERATIONS
Product Sales  (dollars in millions)
June 30,   June 30,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $    25.9  $    19.2  $     6.7        35 %
Six months ended................... $    48.3  $    36.4  $    11.9        33 %
Product sales increased to $25.9 million for the three months
ended June 30, 2004 from $19.2 million for the three months ended June 30, 2003.
This 35% increase in product sales resulted primarily from higher
da Vinci
Surgical System unit sales, higher fourth arm unit sales, and higher recurring
instrument and accessory revenue.
Total second quarter 2004 system revenue was $18.1 million
compared to $15.0 million during the second quarter of 2003.  We shipped 19
da Vinci
Surgical Systems during the quarter: 13 in North America, 2 in
Europe, and 4 in the rest of the world.  The 19 total units shipped represented
a 5 unit increase compared to 14 units shipped during the second quarter of
2003.  As of June 30, 2004 we have shipped a total of 243
da Vinci
Surgical Systems: 171 in North America, 51 in Europe, and 21 in the rest of the
world.  We shipped 15
da Vinci
Surgical System fourth arms during the
second quarter of 2004, up from 9 during the second quarter of 2003.  We shipped
2 Aesop systems during the second quarter of 2004, compared to none during the
second quarter of 2003.
During the first quarter of 2004, we transitioned from the
use of a distributor to a direct sales organization in Japan.  As part of this
transition, we bought back 5
da Vinci
Surgical Systems that were being
used for demonstration and training purposes in Japan.  During the second
quarter of 2004, we refurbished and sold 3 of these systems, at a discount from
our normal prices, to other distributors located outside the United States.
These systems are included in the 19
da Vinci
system sales we recorded in
the second quarter of 2004. We have retained the other 2 systems for internal use.
Second quarter 2004 instrument and accessory revenue
increased to $7.8 million from $4.1 million for the second quarter of 2003,
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.
Product sales increased to $48.3 million for the six months
ended June 30, 2004 from $36.4 million for the six months ended June 30, 2003.
This 33% increase in product sales resulted primarily from higher recurring
instrument and accessory revenue, higher
da Vinci
Surgical System unit
sales, and higher fourth arm unit sales.
Total first half of 2004 system revenue was $32.6 million
compared to $28.7 million during the first half of 2003.  We shipped 33
da
Vinci
Surgical Systems during the first six months of 2004, compared to 28
units shipped during the first six months of 2003.  We shipped 9 Aesop systems
during the first half of 2004, compared to none during the first half of
2003.
Instrument and accessory revenue for the six months ended
June 30, 2004 increased to $15.7 millon from $7.8 million for the six months
ended June 30, 2003, reflecting a growing number of surgical procedures
preformed 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,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     5.2  $     2.3  $     2.9       126 %
Six months ended................... $     9.8  $     4.2  $     5.6       133 %
Service sales, comprised of system service, installation and
customer training, increased to $5.2 million for the three months ended June 30,
2004 from $2.3 million for the three months ended June 30, 2003. The increase
was primarily due to a larger base of
da Vinci
Surgical Systems
generating service revenue.  The base of systems generating service revenue grew
to 210 entering the second quarter of 2004 compared to 102 entering the second
quarter 2003. The increase of 108 was comprised of 61 systems sold between the
second quarter of 2002 and the first quarter of 2003 coming out of the warranty
period onto service contracts and 47 systems sold between the third quarter of
2003 and the first quarter of 2004, with first year service deferred according
to EITF 00-21, adopted prospectively effective July 1, 2003.  In addition, the
average service revenue per active system under a service contract increased in
2004 due to higher rates charges for fourth arm systems.
Service sales increased to $9.8 million for the first half of
2004 from $4.2 million for the first half of 2003. The increase was primarily
due to a larger base of
da Vinci
Surgical Systems generating service
revenue.
Product Sales Gross Profit (dollars in millions)
June 30,   June 30,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $    16.6  $    12.2  $     4.4        35 %
Percentage of product sales........      64.2 %     63.9 %

Six months ended................... $    30.2  $    21.8  $     8.4        39 %
Percentage of product sales........      62.6 %     59.7 %
Product sales gross profit for the three months ended June
30, 2004 was $16.6 million, or 64.2% of product sales, compared to $12.2
million, or 63.9% of product sales for the three months ended June 30, 2003. Our
increased second quarter 2004 gross profit percentage was driven by several
factors.  As described earlier, we sold 3 refurbished
da Vinci
systems
that we repurchased last quarter from our former Japanese distributor.  Although
these systems were sold at a discount, they also had a lower cost basis.
Without these sales, second quarter 2004 product gross profit would have been
about 0.8 percentage points lower.  These factors offset the negative
gross product margin impact resulting from the deferral of first
year service beginning prospectively on July 1, 2003 in accordance
with EITF 00-21.  Under previous accounting treatment, the second
quarter 2004 gross margin would have been 0.9 percentage points higher.
Product sales gross profit for the six months ended June 30,
2004 was $30.2 million, or 62.6% of product sales, compared to $21.8 million, or
59.7% of product sales for the six months ended June 30, 2003.  The increase was
driven by the sale of the 3 refurbished Japanese distribution units, lower
product material costs, improved product reliability, continued leverage of our
manufacturing organization across a larger production base, and lower overhead
costs derived from our building purchase, partially offset by the negative
margin impact of EITF 00-21 implementation.
Service Sales Gross Profit (dollars in millions)
June 30,   June 30,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     3.0  $     0.4  $     2.6       650 %
Percentage of service sales........      58.3 %     19.2 %

Six months ended................... $     5.2  $     0.7  $     4.5       643 %
Percentage of product sales........      53.3 %     15.6 %
Service sales gross profit for the three months ended June
30, 2004 was $3.0 million, or 58.3% of service sales, compared to $0.4 million,
or 19.2% of service sales for the three months ended June 30, 2003. Service
sales gross profit for the six months ended June 30, 2004 was $5.2 million, or
53.3% of service sales, compared to $0.7 million, or 15.6% of sales, for the six
months ended June 30, 2003. Higher 2004 gross service margin was driven by
increased service revenue as described above in combination with increased
leverage of the mostly fixed service and training organization expenses across a
larger base of installed systems.
Selling, General and Administrative Expenses
(dollars in millions)
June 30,   June 30,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $    11.5  $     8.5  $     3.0        35 %
Six months ended................... $    21.8  $    18.0  $     3.8        21 %
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 three months ended June 30,
2004 were $11.5 million, up 35% from $8.5 million for the three months ended
June 30, 2003.  Selling, general and administrative expenses for the six months
ended June 30, 2004 were $21.8 million, up 21% from $18.0 million for the six
months ended June 30, 2003. The year over year increases were primarily due to
higher incentive compensation and other variable costs associated with achieving
higher revenues, incremental patent costs associated with maintaining the
Computer Motion patent portfolio, and additional accounting personnel,
consulting, and auditing resources added to support the Sarbanes Oxley Act of
2002 compliance.  However, we experienced favorability in our bad debt expense
for the three and six months ended June 30, 2004, primarily due to an improved
accounts receivable aging based on increased collection efforts.
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,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     3.6  $     3.6  $      --        -- %
Six months ended................... $     8.9  $     7.1  $     1.8        25 %
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 three months
ended June 30, 2004 were $3.6 million, equal to the three months ended June 30,
2003. Research and development expenses for the six months ended June 30, 2004
were $8.9 million, up 25% compared to $7.1 million for the six months ended June
30, 2003. The increase during the first half of 2004 was primarily due to expenses
incurred in the first quarter of 2004, related to the former Computer Motion
Goleta, California site.  During the first quarter of 2004, the Goleta site
incurred $1.0 million of general operating expenses, comprised of salaries,
materials, depreciation, and other expenses.  In addition, in accordance with
our restructuring plan, we completely shut down the Goleta site on March 31,
2004 and terminated all remaining Goleta-based employees, resulting in a $0.8
million restructuring expense recorded in the first quarter of 2004. As a result,
the $1.0 million of operating expenses and $0.8 million of restructuring costs
will not recur going forward.  Since Computer Motion was acquired on June 30,
2003, there were no Goleta site-based expenses included in the second quarter of
2003 results.  After having closed the former Computer Motion Goleta site at the
end of the first quarter of this year, our second quarter of 2004 research and
development expenses returned to a level consistent with the second quarter of
2003, the last quarter prior to our acquisition of Computer Motion.
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 increase in the
future.
Other Income, Net, and Income Tax Expense (dollars in millions)
June 30,   June 30,                 %
                                       2004       2003      Change    Change
                                     ---------  ---------  --------- ---------
Three months ended................. $     0.9  $     0.3  $     0.6       200 %
Six months ended................... $     1.5  $     1.2  $     0.3        25 %
Other income, comprised mostly of
interest income, increased to $0.6 million for the three months ended June 30,
2004 from $0.3 million for the  three months ended June 30, 2003. The increase
resulted primarily from higher interest income earned on a larger cash balance
position during the second quarter of 2004 resulting from the proceeds of the
fourth quarter of 2003 public offering of our common stock.
Other income for the six months ended June 30, 2004 was $1.2
million, equivalent to the total for the six months ended June 30, 2003.  First
quarter 2003 other income included $0.5 million of gains realized on sales of
securities.  Excluding these first quarter 2003 capital gains, the first half of
2004 increase resulted primarily from higher interest income earned on a larger
cash balance position during the
period resulting from the proceeds of the fourth quarter of
2003 public offering of our common stock.
Income tax expense represents estimated income tax based on
our profitability for the three and six months ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been financed primarily through
the sale of our equity securities. Sales of convertible preferred stock have
yielded proceeds of approximately $127.3 million and public offerings of our
common stock have yielded proceeds of approximately $124.5 million. We have also
financed operations through employee stock purchase and option plans as well as
equipment financing arrangements. At June 30, 2004 we had total stockholders
equity of $288.9 million and outstanding equipment financing debt of $1.1
million. As of June 30, 2004, we had cash, cash equivalents and short-term
investments of $106.4 million, compared to $112.9 million at December 31, 2003.
Working capital as of June 30, 2004 was $109.9 million, compared to $118.3
million as of December 31, 2003. The decrease in cash, cash equivalents and
short-term investments and in working capital resulted primarily from the
purchase of our Sunnyvale, California facility during the second quarter of 2004
for approximately $20.0 million in cash and the purchase of other property and
equipment for approximately $1.4 million in cash, partially offset by our 2004
year-to-date net income of $5.7 million, non-cash operating expenses of $3.3
million, and net proceeds of $5.4 million realized from stock option exercises
and our employee stock purchase plan.
Net cash provided by operating activities was $11.0 million
for the six months ended June 30, 2004, compared to $3.0 million of cash used in
operating activities for the six months ended June 30, 2003.  The $11.0 million
of cash provided by operations during the first half of 2004 resulted from net
income of $5.7 million, non-cash expenses of $3.3 million and net working
capital generated of $2.0 million.  The $3.0 million of cash used in operating
activities during the first half of 2003 was comprised primarily of working
capital consumed of $4.8 million and our net loss of $1.4 million, partially
offset by non-cash expenses of $3.2 million.
Net cash used in investing activities was $18.8 million for
the six months ended June 30, 2004, compared to net cash provided by investing
activities of $0.1 million for the six months ended June 30, 2003.  Net cash
used in investing activities during the first half of 2004 resulted mainly from
investments in fixed assets of $21.4 million, comprised mostly of our purchase
of our Sunnyvale, California facility ($20.0 million) during the second quarter
of 2004, offset by the net conversion of short-term investments into cash of
$2.3 million.  The cash provided by investing activities during the first half
of 2003 related primarily to the net conversion of short-term investments into
cash of $5.1 million, partially offset by cash used to acquire Computer Motion
of $4.1 million and fixed asset purchases of $1.0 million.
Net cash provided by financing activities was $4.8 million
for the six months ended June 30, 2004, compared to $0.8 million for the six
months ended June 30, 2003. Cash provided by financing activities in the first
half of 2004 resulted primarily from net proceeds realized from stock option
exercises and our employee stock purchase plan of $5.4 million, partially offset
by repayments of long-term debt of $0.6 million. Cash provided by financing
activities in the first half of 2003 resulted primarily from net proceeds
realized from stock option exercises and our employee stock purchase plan of
$1.6 million, partially offset by repayments of long-term debt of $0.9 million.
Our capital requirements depend on numerous factors,
including market acceptance of our products, the resources we devote to
developing and supporting our products, and other factors. We expect to devote
substantial capital resources to continue our research and development efforts,
to expand our customer support and product development activities and for other
general corporate activities. We believe that our current cash and cash
equivalents and short-term investment balances, together with revenue to be
derived from the sale of our products, will be sufficient to meet our liquidity
requirements for the foreseeable future.
Contractual Obligations and Commercial Commitments
The following table summarizes all significant
contractual payment obligations, net of sublease income of $1.6 million
throughout the next 4 years, by payment due date:
Payments by Periods (in millions)
Contractual Obligation
Total
Less than 1 year
1-3 years
Long-term debt
$ 1.1
$ 0.9
$ 0.2
Building lease
0.9
0.2
0.7
Purchase commitments
0.3
0.3
0.0
Total
$ 2.3
$ 1.4
$ 0.9
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
assets and liabilities. On an on-going basis, we evaluate our critical
accounting policies and estimates, including those related to revenue
recognition, bad debts, income taxes and intangible assets. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Our critical
accounting policies and estimates are discussed in our Annual Report on Form
10-K for the year ended December 31, 2003.
FACTORS AFFECTING OPERATING RESULTS
OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES ANALYSTS' OR
INVESTORS' EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Because of our limited operating history, we have limited
insight into trends that may emerge in our market and affect our business. The
revenue and income potential of our market are uncertain, and we may be unable
to generate significant revenues. In addition, our costs may be higher than we,
securities analysts or investors expect. If we fail to generate sufficient
revenues or our costs are higher than we expect, our results of operations will
suffer, which in turn could cause our stock price to decline. Further, future
revenue from sales of our products is difficult to forecast because the market
for new surgical technologies is still evolving. Our results of operations will
depend upon numerous factors, including:
our timing and ability to develop our manufacturing and sales and marketing
capabilities;
demand for our products;
the size and timing of specific sales and any collection delays related to
those sales;
product quality problems;
the extent to which our products gain market acceptance;
third-party payor reimbursement policies;
the progress of surgical training in the use of our products;
our ability to develop, introduce and market new or enhanced versions of our
products on a timely basis;
actions relating to regulatory matters;
our ability to protect our proprietary rights and defend against third party
challenges;
our ability to license additional intellectual property rights; and
the progress and results of clinical trials.
Our operating results in any particular period will not be a
reliable indication of our future performance. It is likely that in some future
quarters, our operating results will be below the expectations of securities
analysts or investors. If this occurs, the price of our common stock, and the
value of your investment, will likely decline.
WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A NEGATIVE
IMPACT ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.
Our
da Vinci
Surgical System has a lengthy sales and
purchase order cycle because it is a major capital item and generally requires
the approval of senior management at purchasing institutions. These factors may
contribute to substantial fluctuations in our quarterly operating results,
particularly during the periods in which our sales volume is low. Because of
these fluctuations, it is likely that in some future quarters our operating
results will fall below the expectations of securities analysts or investors. If
that happens, the market price of our stock would likely decrease. These
fluctuations also mean that you will not be able to rely upon our operating
results in any particular period as an indication of future performance.
BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE AND ARE LIKELY TO CONTINUE TO
ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES COULD DECLINE
DUE TO THE LOSS OR DELAY OF A SINGLE CUSTOMER.
A relatively small number of customers account for a
significant portion of our total revenues. During the three months ended June
30, 2004 and 2003, approximately 58% and 70%, respectively, of our revenues came
from the sales of
da Vinci
Surgical Systems, which are high revenue
dollar items. During the six months ended June 30, 2004 and 2003, approximately
55% and 71%, respectively, of our revenues came from the sales of
da
Vinci
Surgical Systems, which are high revenue dollar items. During the
three-month and six months periods ended June 30, 2004 and 2003, no customer
accounted for more than 10% of total sales. However, due to the high average
selling price of the
da Vinci
Surgical System, our failure to add new
customers that make significant purchases of our products could reduce our
future revenues. The loss or delay of individual orders could have a significant
impact on revenues and operating results.
IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLE TO
GENERATE THE REVENUE NECESSARY TO SUPPORT OUR BUSINESS.
Our products represent a fundamentally new way of performing
surgery. Achieving physician, patient and third-party payor acceptance of
Intuitive
surgery as a preferred method of performing surgery will be
crucial to our success. If our products fail to achieve market acceptance,
hospitals will not purchase our products and we will not be able to generate the
revenue necessary to support our business. We believe that physicians' and
third-party payors' acceptance of the benefits of procedures performed using our
products will be essential for acceptance of our products by patients.
Physicians will not recommend the use of our products unless we can demonstrate
that they produce results comparable or superior to existing surgical
techniques. Even if we can prove the effectiveness of our products through
clinical trials, surgeons may elect not to use our products for any number of
other reasons. For example, cardiologists may continue to recommend conventional
open-heart surgery simply because such surgery is already widely accepted. In
addition, surgeons may be slow to adopt our products because of the perceived
liability risks arising from the use of new products and the uncertainty of
reimbursement from third-party payors.
We expect that there will be a learning process involved for
surgical teams to become proficient in the use of our products. Broad use of our
products will require training of surgical teams. Market acceptance could be
delayed by the time required to complete this training. We may not be able to
rapidly train surgical teams in numbers sufficient to generate adequate demand
for our products. We cannot be certain that our training programs will be cost
effective or sufficient to meet our customers' needs.
OUR PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC REGULATORY
PROCESS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY DOMESTIC REGULATORY
APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN THE UNITED
STATES.
Our products and operations are subject to extensive
regulation in the United States by the U.S. Food and Drug Administration, or
FDA. The FDA regulates the research, testing, manufacturing, safety, labeling,
storage, recordkeeping, promotion, distribution and production of medical
devices in the United States to ensure that medical products distributed
domestically are safe and effective for their intended uses. In order for us to
market certain products for use in the United States, we generally must first
obtain clearance from the FDA pursuant to Section 510(k) of the Federal Food,
Drug, and Cosmetic Act, or FFDCA. Clearance under Section 510(k) requires
demonstration that a new device is substantially equivalent to another device
with 510(k) clearance or grandfather status. If we significantly modify our
products after they receive FDA clearance, the FDA may require us to submit a
separate 510(k) or premarket approval application, or PMA, for the modified
product before we are permitted to market the products in the U.S. In addition,
if we develop products in the future that are not considered to be substantially
equivalent to a device with 510(k) clearance or grandfather status, we will be
required to obtain FDA approval by submitting a PMA.
The FDA may not act favorably or quickly in its review of our
510(k) or PMA submissions, or we may encounter significant difficulties and
costs in our efforts to obtain FDA clearance or approval, all of which could
delay or preclude sale of new products in the United States. Furthermore, the
FDA may request additional data or require us to conduct further testing, or
compile more data, including clinical data and clinical studies, in support of a
510(k) submission. The FDA may also, instead of accepting a 510(k) submission,
require us to submit a PMA, which is typically a much more complex and
burdensome application than a 510(k). To support a PMA, the FDA would likely
require that we conduct one or more clinical studies to demonstrate that the
device is safe and effective. We may not be able to meet the requirements to
obtain 510(k) clearance or PMA approval, or the FDA may not grant any necessary
clearances or approvals. In addition, the FDA may place significant limitations
upon the intended use of our products as a condition to a 510(k) clearance or
PMA approval. Product applications can also be denied or withdrawn due to
failure to comply with regulatory requirements or the occurrence of unforeseen
problems following clearance or approval. Any delays or failure to obtain FDA
clearance or approvals of new products we develop, any limitations imposed by
the FDA on new product use, or the costs of obtaining FDA clearance or approvals
could have a material adverse effect on our business, financial condition and
results of operations.
In order to conduct a clinical investigation involving human
subjects for the purpose of demonstrating the safety and effectiveness of a
device, a company must, among other things, apply for and obtain Institutional
Review Board, or IRB approval of the proposed investigation. In addition, if the
clinical study involves a "significant risk" (as defined by the FDA) to human
health, the sponsor of the investigation must also submit and obtain FDA
approval of an investigational device exemption, or IDE, application.  Most of
our products to date have been considered significant risk devices requiring IDE
approval prior to investigational use. We may not be able to obtain FDA and/or
IRB approval to undertake clinical trials in the U.S. for any new devices we
intend to market in the United States in the future. If we obtain such
approvals, we may not be able to comply with the IDE and other regulations
governing clinical investigations or the data from any such trials may not
support clearance or approval of the investigational device. Failure to obtain
such approvals or to comply with such regulations could have a material adverse
effect on our business, financial condition and results of operations.
BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS MAY
CHOOSE TO PURCHASE OUR COMPETITORS' PRODUCTS OR MAY NOT ACCEPT INTUITIVE
SURGERY, WHICH WOULD RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE.
Intuitive
surgery is a new technology that will
compete with established and emerging treatment options in both disease
management and reconstructive medical procedures.  These competitive treatment
options may take the form of traditional minimally invasive surgery, open
surgery, interventional approaches, or pharmacological regimens.  Some of these
procedures are widely accepted in the medical community and in many cases have a
long history of use.  Technological advances could make such treatments more
effective or less expensive than using our products, which could render our
products obsolete or unmarketable.  We cannot be certain that physicians will
use our products to replace or supplement established treatments or that our
products will be competitive with current or future technologies.
In addition, we may face competition from companies that
develop robotic and computer-assisted surgical systems in the future.  Our
revenues may be reduced or eliminated if our competitors develop and market
products that are more effective or less expensive than our products.  If we are
unable to compete successfully, our revenues will suffer.  We may not be able to
maintain or improve our competitive position against current or potential
competitors, especially those with greater resources.
IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN REIMBURSEMENT FROM
THIRD-PARTY PAYORS FOR PROCEDURES USING OUR PRODUCTS, OR IF REIMBURSEMENT IS
INSUFFICIENT TO COVER THE COSTS OF PURCHASING OUR PRODUCTS, WE MAY BE UNABLE TO
GENERATE SUFFICIENT SALES TO SUPPORT OUR BUSINESS.
Domestic institutions will typically bill the services
performed with our products to various third-party payors, such as Medicare,
Medicaid and other government programs and private insurance plans. If hospitals
do not obtain sufficient reimbursement from third-party payors for procedures
performed with our products, or if government and private payors' policies do
not permit reimbursement for surgical procedures performed using our products,
we may not be able to generate the revenues necessary to support our business.
Our success in international markets also depends upon the eligibility of our
products for reimbursement through government-sponsored health care payment
systems and third-party payors. Reimbursement practices vary significantly by
country. Many international markets have government-managed healthcare systems
that control reimbursement for new products and procedures. Other foreign
markets have both private insurance systems and government-managed systems that
control reimbursement for new products and procedures. Market acceptance of our
products may depend on the availability and level of reimbursement in any
country within a particular time. In addition, health care cost containment
efforts similar to those we face in the United States are prevalent in many of
the other countries in which we intend to sell our products and these efforts
are expected to continue.
IF DEFECTS ARE DISCOVERED IN OUR PRODUCTS, WE MAY INCUR ADDITIONAL
UNFORESEEN COSTS, HOSPITALS MAY NOT PURCHASE OUR PRODUCTS AND OUR REPUTATION MAY
SUFFER.
Our products incorporate mechanical parts and computer
software, either of which can contain errors or failures, especially when first
introduced. In addition, new products or enhancements may contain undetected
errors or performance problems that, despite testing, are discovered only after
commercial shipment. Because our products are designed to be used to perform
complex surgical procedures, we expect that our customers will have an increased
sensitivity to such defects. In the past, we have voluntarily recalled certain
products as a result of performance problems.  We cannot assure you that our
products will not experience errors or performance problems in the future. If we
experience flaws or performance problems, any of the following could occur:
delays in product shipments;
loss of revenue;
delay in market acceptance;
diversion of our resources;
damage to our reputation;
product recalls;
increased service or warranty costs; or
product liability claims.
WE 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 would be damaged.
IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL, STATE OR
EUROPEAN MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY CEASE ALL OR
PART OF OUR MANUFACTURING OPERATIONS, WHICH COULD RESULT IN PRODUCT DELIVERY
DELAYS AND LOST REVENUE.
Our manufacturing facilities are subject to periodic
inspection by regulatory authorities and our operations will continue to be
regulated by the FDA for compliance with Good Manufacturing Practice
requirements contained in the FDA's Quality System Regulations, or QSR. We are
also required to comply with International Organization for Standardization, or
ISO, quality system standards in order to produce products for sale in Europe.
If we fail to continue to comply with Good Manufacturing Practice requirements
or ISO standards, we may be required to cease all or part of our operations
until we comply with these regulations. We are currently in compliance with ISO
standards. We continue to be subject to FDA inspections at any time. Maintaining
such compliance is difficult and costly. We cannot be certain that our
facilities will be found to comply with Good Manufacturing Practice requirements
or ISO standards in future inspections and audits by regulatory authorities.
The state of California also requires that we maintain a
license to manufacture medical devices.  We are subject to periodic inspections
by the California Department of Health Services and, if we are unable to
maintain this license following any future inspections, we will be unable to
manufacture or ship any products.
OUR RELIANCE ON SOLE AND SINGLE SOURCE SUPPLIERS COULD HARM OUR ABILITY TO
MEET DEMAND FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET.
Some of the components necessary for the assembly of our
products are currently provided to us by sole source suppliers or single source
suppliers. We purchase components through purchase orders rather than long-term
supply agreements and generally do not maintain large volumes of inventory. The
disruption or termination of the supply of components could cause a significant
increase in the costs of these components, which could affect our profitability.
A disruption or termination in the supply of components could also result in our
inability to meet demand for our products, which could harm our ability to
generate revenues, lead to customer dissatisfaction and damage our reputation.
Furthermore, if we are required to change the manufacturer of a key component of
our products, we may be required to verify that the new manufacturer maintains
facilities and procedures that comply with quality standards and with all
applicable regulations and guidelines. The delays associated with the
verification of a new manufacturer could delay our ability to manufacture our
products in a timely manner or within budget.
THE USE OF OUR PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT
COULD BE EXPENSIVE, DIVERT MANAGEMENT'S ATTENTION AND HARM OUR BUSINESS.
Our business exposes us to significant risks of product
liability claims. The medical device industry has historically been litigious,
and we face financial exposure to product liability claims if the use of our
products were to cause injury or death. There is also the possibility that
defects in the design or manufacture of our products might necessitate a product
recall. Although we maintain product liability insurance, the coverage limits of
these policies may not be adequate to cover future claims. Particularly as sales
of our products increase, we may be unable to maintain product liability
insurance in the future at satisfactory rates or in adequate amounts. A product
liability claim, regardless of its merit or eventual outcome, could result in
significant legal defense costs. A product liability claim or any product
recalls could also harm our reputation or result in a decline in revenues.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL, OUR ABILITY TO COMPETE WILL BE HARMED.
We are highly dependent on the principal members of our
management and scientific staff. Our product development plans depend, in part,
on our ability to attract and retain engineers with experience in electronics,
mechanics, software and optics. Attracting and retaining qualified personnel
will be critical to our success, and competition for qualified personnel is
intense. We may not be able to attract and retain personnel on acceptable terms
given the competition for such personnel among technology and healthcare
companies, and universities. The loss of any of these persons or our inability
to attract and retain qualified personnel could harm our business and our
ability to compete.
COMPLYING WITH FDA REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING
PROCESS, AND OUR FAILURE TO COMPLY FULLY COULD SUBJECT US TO SIGNIFICANT
ENFORCEMENT SANCTIONS.
Because our products, including the
da Vinci
Surgical
System, are commercially distributed, numerous postmarket regulatory
requirements apply, including the following:
QSR which requires manufacturers to follow elaborate design, testing,
control, documentation and other quality assurance procedures during the
manufacturing process;
labeling regulations;
the FDA's general prohibition against false or misleading statements in the
labeling or promotion of products for unapproved or "off-label"
uses;
the Reports of Corrections and Removals regulation, which requires that
manufacturers report to the FDA recalls and field corrective actions taken to
reduce a risk to health or to remedy a violation of the FFDCA that may pose a
risk to health; and
the Medical Device Reporting regulation, which requires that manufacturers
report to the FDA if their device may have caused or contributed to a death or
serious injury or malfunctioned in a way that would likely cause or contribute
to a death or serious injury if it were to recur.
We are subject to inspection and marketing surveillance by
the FDA to determine our compliance with regulatory requirements. If the FDA
finds that we have failed to comply, it can institute a wide variety of
enforcement actions, ranging from a regulatory letter to a public warning letter
to more severe civil and criminal sanctions. Our failure to comply with
applicable requirements could lead to an enforcement action that may have an
adverse effect on our financial condition and results of operations.
We have modified the labeling, advertising and user training
for the
da Vinci
Surgical System to call out specific procedures that we
believe are within the scope of our existing 510(k) clearances. We cannot assure
you that the FDA would agree that all such specific procedures are within the
scope of the existing general clearance or that we have compiled adequate
information to support the safety and efficacy of using the
da Vinci
Surgical System for all such specific procedures. We also have modified the
hardware and software in the
da Vinci
Surgical System since clearance in
ways that we believe do not require new 510(k) clearance. We cannot be certain
that the FDA would agree with our determinations not to seek new 510(k)
clearance for any of these changes. Computer Motion also modified the hardware
and software in its products subsequent to 510(k) clearance without seeking new
clearance. We cannot be certain that the FDA would agree with the determinations
not to seek new 510(k) clearance for any of these changes. The FDA could impose
enforcement sanctions and/or require us to obtain 510(k) clearance for any
modification to our products or Computer Motion's products. We may be prohibited
from marketing the modified device until such 510(k) clearance is granted.
OUR PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY PROCESSES AND
APPROVAL REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY
INTERNATIONAL REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR
PRODUCTS IN FOREIGN COUNTRIES.
To be able to market and sell our products in other
countries, we must obtain regulatory approvals and comply with the regulations
of those countries. These regulations, including the requirements for approvals
and the time required for regulatory review, vary from country to country.
Obtaining and maintaining foreign regulatory approvals are expensive, and we
cannot be certain that we will receive regulatory approvals in any foreign
country in which we plan to market our products. If we fail to obtain regulatory
approval in any foreign country in which we plan to market our products, our
ability to generate revenue will be harmed.
The European Union requires that manufacturers of medical
products obtain the right to affix the CE mark to their products before selling
them in member countries of the European Union. The CE mark is an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. In order to obtain the right to
affix the CE mark to products, a manufacturer must obtain certification that its
processes meet certain European quality standards. In January 1999, we received
permission to affix the CE mark to our
da Vinci
Surgical System and
EndoWrist
instruments.
If we modify existing products or develop new products in the
future, including new instruments, we may need to apply for permission to affix
the CE mark to such products. In addition, we will be subject to annual
regulatory audits in order to maintain the CE mark permissions we have already
obtained. We cannot be certain that we will be able to obtain permission to
affix the CE mark for new or modified products or that we will continue to meet
the quality and safety standards required to maintain the permissions we have
already received. If we are unable to maintain permission to affix the CE mark
to our products, we will no longer be able to sell our products in member
countries of the European Union.
TERMINATION OF RELATIONSHIPS WITH FORMER DISTRIBUTORS OF
COMPUTER MOTION COULD RESULT IN LITIGATION.
Our integration strategy related to our acquisition of
Computer Motion may involve the termination of Computer Motion's relationships
with a number of companies that served as Computer Motion's distributors prior
to the acquisition.  Several of these former distributors have informed us that
they believe that they are entitled to compensation in connection with such
termination.  We may be unable to resolve these claims without litigation.  Due
to the inherent uncertainties of litigation, we cannot accurately predict the
ultimate outcome of any such litigation at this time and, therefore, cannot
estimate the range of possible loss.  If we sue or are sued by any of Computer
Motion's former distributors, these proceedings may be expensive to litigate,
may be protracted, and Computer Motion's confidential information may be
compromised.  Whether or not we are successful in these lawsuits, these
proceedings could consume substantial amounts of our financial and managerial
resources.
IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN OUR
PRODUCTS FROM USE BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET WILL BE
HARMED.
Our commercial success will depend in part on obtaining
patent and other intellectual property protection for the technologies contained
in our products, and on successfully defending our patents and other
intellectual property against third party challenges. We will incur substantial
costs in obtaining patents and, if necessary, defending our proprietary rights.
The patent positions of medical device companies, including ours, can be highly
uncertain and involve complex legal and factual questions. We do not know
whether we will obtain the patent protection we seek, or that the protection we
do obtain will be found valid and enforceable if challenged. We also do not know
whether we will be able to develop additional patentable proprietary
technologies. If we fail to obtain adequate protection of our intellectual
property, or if any protection we obtain is reduced or eliminated, others could
use our intellectual property without compensating us, resulting in harm to our
business. We may also determine that it is in our best interests to voluntarily
challenge a third party's products or patents in litigation or administrative
proceedings, including patent interferences or reexaminations. In addition, the
laws of certain foreign countries do not protect intellectual property rights to
the same extent as do the laws of the United States.
OTHERS MAY ASSERT THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY
RIGHTS, WHICH MAY CAUSE US TO ENGAGE IN COSTLY DISPUTES AND, IF WE ARE NOT
SUCCESSFUL IN DEFENDING OURSELVES, COULD ALSO CAUSE US TO PAY SUBSTANTIAL
DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.
There may be United States and foreign patents issued to
third parties that relate to computer-assisted surgery, remote surgery, and
minimally invasive surgery. Some of these patents may be broad enough to cover
one or more aspects of our present technology, and may cover aspects of our
future technology. We do not know whether any of these patents, if challenged,
would be held valid, enforceable and infringed. From time to time, we receive,
and likely will continue to receive, letters from third parties inviting us to
license their patents. We may be sued by, or become involved in an
administrative proceeding with, one or more of these third parties. We cannot be
certain that a court or administrative body would agree with any arguments or
defenses we have concerning invalidity, unenforceability or noninfringement of
any third-party patent. In addition to the issued patents of which we are aware,
other parties may have filed, and in the future are likely to file, patent
applications covering surgical products that are similar or identical to ours.
We cannot be certain that any patents issuing from applications filed by a third
party will not cover our products or will not have priority over our patent
applications.
The medical device industry has been characterized by
extensive litigation and administrative proceedings regarding patents and other
intellectual property rights, and companies have employed such actions to gain a
competitive advantage. If third parties assert infringement or other
intellectual property claims against us, our technical and management personnel
will experience a significant diversion of time and effort and we will incur
large expenses defending our company. If third parties in any patent action are
successful, our patent portfolio may be damaged, we may have to pay substantial
damages, including treble damages, and we may be required to stop selling our
products or obtain a license which, if available at all, may require us to pay
substantial royalties. We cannot be certain that we will have the financial
resources or the substantive arguments to defend our patents from infringement
or claims of invalidity or unenforceability, or to defend against allegations of
infringement of third-party patents. In addition, any public announcements
related to litigation or administrative proceedings initiated by us, or
initiated or threatened against us, could cause our stock price to decline.
THE RIGHTS AND MEASURES WE RELY ON TO PROTECT THE INTELLECTUAL PROPERTY
UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE TO PREVENT THIRD PARTIES FROM USING
OUR TECHNOLOGY, WHICH COULD HARM OUR ABILITY TO COMPETE IN THE MARKET.
In addition to patents, we typically rely on a combination of
trade secret, copyright and trademark laws, nondisclosure agreements and other
contractual provisions and technical security measures to protect our
intellectual property rights. Nevertheless, these measures may not be adequate
to safeguard the technology underlying our products. If they do not protect our
rights adequately, third parties could use our technology, and our ability to
compete in the market would be reduced. In addition, employees, consultants and
others who participate in developing our products may breach their agreements
with us regarding our intellectual property, and we may not have adequate
remedies for the breach. We also may not be able to effectively protect our
intellectual property rights in some foreign countries. For a variety of
reasons, we may decide not to file for patent, copyright or trademark protection
outside the United States. We also realize that our trade secrets may become
known through other means not currently foreseen by us. Notwithstanding our
efforts to protect our intellectual property, our competitors may independently
develop similar or alternative technologies or products that are equal or
superior to our technology and products without infringing any of our
intellectual property rights, or may design around our proprietary technologies.
OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE ACCESS TO
THESE TECHNOLOGIES, OUR REVENUES COULD DECLINE.
We rely on technology that we license from others, including
technology that is integral to our products. We have entered into license
agreements with SRI International, IBM Corporation, MIT, Olympus Optical Co.,
Ltd., and Heartport, Inc., now part of Johnson & Johnson. Any of these
agreements may be terminated for breach. If any of these agreements is
terminated, we may be unable to reacquire the necessary license on satisfactory
terms, or at all. The loss or failure to maintain these licenses could prevent
or delay further development or commercialization of our products.
INTERNATIONAL SALES OF OUR PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION OF
OUR REVENUES, WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS.
OUR GROWTH MAY BE LIMITED IF WE ARE UNABLE TO SUCCESSFULLY MANAGE OUR
INTERNATIONAL ACTIVITIES.
Our business currently depends in large part on our
activities in Europe and other foreign markets. Sales to markets outside of the
United States accounted for approximately 21% of our sales for the three months
ended June 30, 2004 and 30% for the three months ended June 30, 2003.  Sales to
markets outside of the United States accounted for approximately 22% of our
sales for the six months ended June 30, 2004 and 24% for the six months ended
June 30, 2003.
We are subject to a number of challenges that specifically
relate to our international business activities. These challenges include:
failure of local laws to provide the same degree of protection against
infringement of our intellectual property;
protectionist laws and business practices that favor local competitors,
which could slow our growth in international markets;
the risks associated with foreign currency exchange rate fluctuation;
the expense of establishing facilities and operations in new foreign
markets; and
building an organization capable of supporting geographically dispersed
operations.
Currently, a majority of our international sales are
denominated in United States dollars. As a result, an increase in the value of
the United States dollar relative to foreign currencies could make our products
less competitive in international markets. If we are unable to meet and overcome
these challenges, our international operations may not be successful, which
would limit the growth of our business.
PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
During the course of our administrative proceedings
and/or lawsuits, there may be public announcements of the results of hearings,
motions, and other interim proceedings or developments in the litigation. If
securities analysts or investors perceive these results to be negative, it could
have a substantial negative effect on the trading price of our stock.
INVESTOR CONFIDENCE AND SHARE VALUE MAY BE ADVERSELY IMPACTED IF WE OR OUR
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ARE UNABLE TO PROVIDE AN UNQUALIFIED
ATTESTATION OF THE ADEQUACY OF OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING AS
OF DECEMBER 31, 2004, AS REQUIRED BY SECTION 404 OF THE SARBANES-OXLEY ACT OF
2002.
The Securities and Exchange Commission, as directed by
Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public
companies to include a report of management on the company's internal controls
over financial reporting in its annual reports on Form 10-K that contain an
assessment by management of the effectiveness of the company's internal controls over
financial reporting. In addition, the company's independent registered public accounting
firm must attest to and report on management's assessment of the effectiveness of the
company's internal controls over financial reporting. This requirement will
first apply to our Annual Report on Form 10-K for the fiscal year ending
December 31, 2004. Although we intend to diligently and vigorously review our
internal controls over financial reporting in order to ensure compliance with
the Section 404 requirements, if we or our independent registered public accounting firm
are not satisfied with our internal controls over financial reporting or the level at
which these controls are documented, designed, operated, reviewed or tested, or if our
independent registered public accounting firm interprets the requirements, rules or
regulations differently from us, then we or they may decline to attest to management's
assessment or may issue a report that is qualified. This could result in an adverse
reaction in the financial marketplace due to a loss of investor confidence in the
reliability of our financial statements, which ultimately could negatively impact the
market price of our shares.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are not subject to any meaningful market risks related
to currency, commodity prices or similar matters. We are sensitive to short-term
interest rate fluctuations to the extent that such fluctuations impact the
interest income we receive on the investment of the remaining proceeds from our
public offerings.
The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities
that we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities. We classify our cash
equivalents and marketable securities as "fixed-rate" if the rate of return on
such instruments remains fixed over their term. These "fixed-rate" investments
include commercial paper and government and non-government debt securities. We
classify our cash equivalents and marketable securities as "variable- rate" if
the rate of return on such investments varies based on the change in a
predetermined index or set of indices during their term. These "variable-rate"
investments primarily include money market accounts. The average time to
maturity of all of our investments as of June 30, 2004 was approximately 1.20
years.  At June 30, 2004 and December 31, 2003, approximately 47% and 37%,
respectively, of our investment portfolio was composed of investments with
original maturities of one year or less.
The majority of our revenue, expense, and capital purchasing
activities are transacted in U.S. dollars. However, since a portion of our
operations consists of sales activities outside of the United States, we have
entered into transactions in other currencies, primarily the euro. On a limited
basis, we have used forward foreign exchange contracts to reduce a portion of
our exposure to foreign currency risk from operational and balance sheet
exposures resulting from changes in foreign currency exchange rates. Such
exposures result from sales denominated in foreign currencies. These contracts
were typically short-term in nature (i.e., less than 6 months).
For the three months ended June 30, 2004 and 2003, sales
denominated in foreign currencies were 7% and 15%, respectively, of total sales.
For the six months ended June 30, 2004 and 2003, sales denominated in foreign
currencies were 9% and 12%, respectively, of total sales. We did not enter into
forward foreign exchange contracts during the three months and six months ended
June 30, 2004 and 2003.
We do not use derivative financial instruments for
speculative trading purposes, nor do we hold or issue leveraged derivative
financial instruments. We have not entered into any forward contracts since July
2002, and as of June 30, 2004 and December 31, 2003, we had no outstanding
derivative instruments.
Foreign currency fluctuations resulted in $10,000 of foreign
exchange gain for the three months ended June 30, 2004 and $92,000 of foreign
exchange gain for the three months ended June 30, 2003. Foreign currency
fluctuations resulted in $88,000 of foreign exchange loss for the six months
ended June 30, 2004 and $118,000 of foreign exchange gain for the six months
ended June 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our 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.
There has been no change in our internal controls over
financial reporting during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 2004, a former customer of Computer Motion
filed a lawsuit against our company.  We received the complaint on April 23,
2004.  The customer alleges that it relied to its detriment on representations
made by Computer Motion in connection with Computer Motion's sale of products to
the customer, which representations the customer believes were not fulfilled.
The customer is seeking damages. We believe the allegation is baseless and will
vigorously defend this suit. To date, we have filed a motion to dismiss the
fraud-based complaints and an answer defending the breach of contract claim.
The litigation is in the early stages of discovery.
In November 2003, an Israeli company filed suit against our
company and Computer Motion in Israel alleging breach of a distribution contract
and seeking damages. We received the complaint on April 27, 2004. Following the
acquisition of Computer Motion, we withdrew Computer Motion's distributorship
offer to this Israeli company. We believe the allegation is baseless and will
vigorously defend the suit.
In October 2003, SIC System, S.R.L. ("SIC System")
a former Italian distributor for Computer Motion, filed suit against our company
and Computer Motion seeking damages in the Civil Court of Rome, Italy (the
"Italian Action").  In the Italian Action, 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 Italian Action on both jurisdictional grounds and on the merits.
To date, the Court in the Italian Action has ruled that SIC System's service
process in filing its complaint is defective and has ordered SIC System to re-
file its complaint on or about October 6, 2004.  The court in the Italian Action
has not ruled on jurisdiction or other pending issues pertaining to the
applicable law or appropriate forum.
In November 2003, Intuitive Surgical filed a lawsuit in
the United States District Court for the Central District of California
captioned
Intuitive Surgical, Inc., et. al v. SIC System Srl
, Case Number
CV-03-08220 for declaratory relief, breach of contract and preliminary and
permanent injunction (the "Federal Action").  The Federal Action seeks
a judicial declaration of the rights and obligations of the parties under the
distribution agreement, specifically that we effectively deleted the products
from the distribution agreement, and a preliminary and permanent injunction
prohibiting SIC System from proceeding with the Italian Action.  The complaint
in the Federal Action was served on SIC System on November 28, 2003. SIC Systems
has not answered the complaint and the Clerk of Court entered Default in the
Federal Action on March 31, 2004. We filed a motion for entry of default
judgment on June 22, 2004, which has been taken under submission by the Court as
of July 31, 2004.
In September 2002, we discovered that one of our employees
had purchased approximately $900,000 in administrative supplies without the
authorization or knowledge of our management. This matter was investigated by
law enforcement authorities and our advisors. We have since terminated this
employee's employment and have taken actions intended to ensure that no similar
incidents can occur in the future, including implementing additional controls
relating to our cash disbursement process. In addition, we are seeking to
recover our loss. We have filed a claim with our insurance carrier, from which
we received proceeds of $500,000, and filed suit against the sellers of the
administrative supplies in December
2002. Our complaint alleged that each of
the defendants has (i) violated various sections of the Racketeer
Influenced and Corrupt
Organization, or RICO, Act through their extortion, coercion, intimidation,
fraud, bribery and racketeering activity in connection with the unauthorized
purchase of office supplies and (ii) committed unlawful business acts and
practices in violation of Cal. Bus. & Prof. Code Section 17200 et seq. Our
suit seeks to recover actual and treble damages, costs and attorney fees for the
damage caused by each of defendants through their illegal conduct. In November
2003, we filed a Second Amended Complaint to allege that each defendant further
unlawfully offered prizes and gifts in violation of Cal. Bus. & Prof. Code
Section 17537 and unlawfully failed to advertise limitations on the quantity of
its sales in violation of Cal. Bus. & Prof. Code Section 17500.5, as well as
adding causes of action for rescission, conversion, intentional interference
with contract, negligent interference with contract, negligence, and money had
and received. The amended complaint reiterates our claim to recover actual and
treble damages, costs and attorney fees. A settlement was reached in July 2004
in which the other parties in the lawsuit agreed to pay us $250,000 over a
maximum of three years.
The foregoing proceedings could be expensive to litigate, may
be protracted and our confidential information may be compromised. Whether or
not we are successful in these lawsuits, these proceedings could consume
substantial amounts of its financial and managerial resources. At any time, the
other parties may file additional claims against us, or we may file claims
against them, which could increase the risk, expense and duration of the
litigations.
We are subject to legal proceedings and claims that arise in
the normal course of our business. We do not know whether we will prevail in
these matters nor can we assure that any remedy could be reached on commercially
viable terms, if at all. Due to the inherent uncertainties of litigation, we
cannot accurately predict the ultimate outcome of these matters at this time
and, therefore, cannot estimate the range of possible loss.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1.   At the Annual Meeting of Stockholders held on May 21,
2004, the stockholders of Intuitive Surgical, Inc. elected Alan J. Levy, Ph.D.
and Eric H. Halvorson to the Board of Directors of the Company to terms expiring
at the Annual Meeting of Stockholders in the year 2007.  The following table
sets forth the votes for each director:
Votes For
Withheld
Alan J. Levy, Ph.D
27,740,083
1,179,898
Eric H. Halvorson
28,391,104
528,877
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, William C. Meyers, and Lonnie M. Smith.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM
8-K
(a) Exhibits.
Exhibit Number
Description
31
Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32
Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
__________
(b) Reports on Form 8-K.
On April 29, 2004, we furnished a current report on Form 8-K
announcing our first quarter financial results.
On April 30, 2004, we filed a current report on Form 8-K
announcing the purchase of the real property located on 950 Kifer Road,
Sunnyvale, California from RNM Technology Drive, L.P.
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 6, 2004
EXHIBIT INDEX
Exhibit Number
Description
31
Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32
Certifications of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002