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<title>Q3 2001 10Q DOC</title>
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<p align="center"><font size="3"><strong>UNITED STATES<br>
SECURITIES AND EXCHANGE COMMISSION<br>
Washington, D.C. 20549</strong></font></p>

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

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

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

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


<p align="center"><font size="3"><strong>
</font><font face=Wingdings>x</font><font>&nbsp; QUARTERLY REPORT PURSUANT TO SECTION 13 OR
     15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</strong></font></p>
<p align="center"><font size="4" color="FF0000"><strong>
               For the quarterly period ended September 30, 2001
</strong></font></p>

<p align="center"><font size="3"><strong> OR </strong></font></p>

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



<p align="center"><font size="3"><strong>
                            1340 West Middlefield Road<br>
                       <u>Mountain View, California  &nbsp;&nbsp;  94043-3061
</strong></font></u><br>


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

<p align="center"><font size="3"><strong><u>
                                    (650) 237-7000
</strong></font></u><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>


<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
     The Registrant had 36,200,277 shares of Common Stock, $0.001 par value per
share, outstanding as of October 31, 2001.

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


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

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

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

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


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

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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Consolidated balance sheets as of September 30, 2001 and<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           December 31, 2000

</font>
</TD>

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

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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Consolidated statements of operations for the three-month<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           and nine-month periods ended September 30, 2001 and 2000

</font>
</TD>

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


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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Consolidated statements of cash flows for the nine-month<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           periods ended September 30, 2001 and 2000
</font>
</TD>

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

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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Notes to Consolidated Financial Statements
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
</font>
</TD>

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

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

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

<TD>
<font size="3">
<CENTER><A HREF="#mda">8</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">25</A></CENTER>
</font>
</TD>
</TR>

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

  <TR vAlign=top>
<TD>
<font size="3"><strong>
        PART II.  OTHER INFORMATION
</font></strong>
</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">26</A></CENTER>
</font>
</TD>
</TR>


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

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

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

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

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

<TD>
<font size="3">
<CENTER><A HREF="#item3">29</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">29</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"><strong>
        Signatures
</font></strong>
</TD>

<TD>
<font size="3">
<CENTER><A HREF="#sign">31</A></CENTER>
</font>
</TD>
</TR>
</TABLE>

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

<p align="center"><strong>
PART I -- FINANCIAL INFORMATION
</strong></p>
<p>Item 1. Financial Statements


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

                                                          September 30,December 31,
                                                             2001          2000
                                                         ------------  -----------
                                                         (Unaudited)   (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents............................ $     24,619  $    22,657
  Short-term investments...............................       39,655       66,784
  Accounts receivable..................................       15,557        6,444
  Inventory, net.......................................        7,595        6,076
  Prepaid expenses.....................................        2,723        1,705
                                                         ------------  -----------
          Total current assets.........................       90,149      103,666
Property and equipment, net............................        6,761        4,669
Intangible and other assets............................        3,502        4,086
                                                         ------------  -----------
          Total assets.................................      100,412      112,421
                                                         ============  ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..................................... $      6,182  $     7,128
  Accrued compensation and employee benefits...........        2,379        2,609
  Warranty accrual.....................................        1,555        1,494
  Accrued royalty expense..............................           --        1,000
  Other accrued liabilities............................        1,590        2,028
  Deferred revenue.....................................        3,434        3,552
  Current portion of notes payable.....................        1,903        2,019
                                                         ------------  -----------
          Total current liabilities....................       17,043       19,830
Long-term notes payable................................          963        1,861
Stockholders' equity
  Preferred stock, 5,000,000 shares authorized, $0.001
     par value, issuable in series; no shares issued
     and outstanding as of September 30, 2001 and
     December 31, 2000.................................           --           --
  Common stock, 200,000,000 shares authorized, $0.001
     par value, 36,198,713 and 35,675,822 shares
     issued and outstanding as of September 30, 2001
     and December 31, 2000, respectively...............           36           36
  Additional paid-in capital...........................      188,877      186,713
  Deferred compensation................................       (1,145)      (2,483)
  Accumulated deficit..................................     (106,118)     (93,670)
  Accumulated other comprehensive income (loss)........          756          134
                                                         ------------  -----------
          Total stockholders' equity...................       82,406       90,730
                                                         ------------  -----------
          Total liabilities and stockholders' equity... $    100,412  $   112,421
                                                         ============  ===========

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







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

                                        Three Months Ended      Nine Months Ended
                                            September 30,           September 30,
                                     ----------------------  ----------------------
                                        2001        2000        2001        2000
                                     ---------- -----------  ---------- -----------
Sales.............................. $   10,861  $    7,859  $   35,660  $   15,918
Cost of sales......................      5,750       4,708      18,972      10,743
                                     ----------  ----------  ----------  ----------
    Gross profit...................      5,111       3,151      16,688       5,175
                                     ----------  ----------  ----------  ----------
Operating costs and expenses:
  Research and development.........      3,493       3,172      10,060       8,624
  Selling, general and                      --          --          --          --
   administrative..................      7,452       5,395      21,952      12,510
                                     ----------  ----------  ----------  ----------
    Total operating costs and
     expenses......................     10,945       8,567      32,012      21,134
                                     ----------  ----------  ----------  ----------
Loss from operations...............     (5,834)     (5,416)    (15,324)    (15,959)
Other income (expense).............      1,036       1,396       2,876       2,417
                                     ----------  ----------  ----------  ----------
Net loss........................... $   (4,798) $   (4,020) $  (12,448) $  (13,542)
                                     ==========  ==========  ==========  ==========
Basic and diluted net loss per
  common share..................... $    (0.13) $    (0.12) $    (0.35) $    (0.68)
                                     ==========  ==========  ==========  ==========
Shares used in computing net
  loss per common share............     36,056      34,665      35,704      20,016
                                     ==========  ==========  ==========  ==========

</pre>

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



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

                                                             For the Nine Months
                                                             Ended September 30,
                                                         ------------------------
                                                            2001         2000
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net loss............................................... $   (12,448) $   (13,542)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation.........................................       1,638        1,147
  (Gain) loss on sales of fixed assets.................         (11)          --
  Amortization of deferred compensation................       1,338        1,803
  Amortization of intangible and other assets..........         584          389
Changes in operating assets and liabilities:
  Accounts receivable..................................      (9,113)      (6,329)
  Prepaid expenses.....................................      (1,018)      (1,054)
  Inventory............................................      (1,519)      (2,395)
  Accounts payable.....................................        (946)       2,503
  Accrued compensation and employee benefits...........        (230)         665
  Warranty accrual.....................................          61          359
  Other accrued liabilities............................        (438)         183
  Accrued royalty expense..............................      (1,000)          --
  Deferred revenue.....................................        (118)       1,597
                                                         -----------  -----------
Net cash used in operating activities..................     (23,220)     (14,674)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................      (3,755)      (2,277)
Proceeds from sale of fixed assets.....................          36           --
Acquisition of patents.................................          --       (3,000)
Purchase of short-term investments.....................     (42,075)     (55,628)
Proceeds from sales of short-term investments..........      34,803        5,600
Proceeds from maturities of short-term investments.....      35,023       10,576
                                                         -----------  -----------
Net cash provided by (used in) investing activities....      24,032      (44,729)
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock..............          --       34,756
Proceeds from issuance of common stock.................       2,228       47,478
Repurchase of common stock.............................         (64)         (15)
Proceeds from notes payable............................         550          500
Repayment of notes payable.............................      (1,564)      (1,457)
                                                         -----------  -----------
Net cash provided by financing activities..............       1,150       81,262
                                                         -----------  -----------
Net increase (decrease) in cash and cash equivalents...       1,962       21,859
Cash and cash equivalents, beginning of period.........      22,657        4,106
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $    24,619  $    25,965
                                                         ===========  ===========

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

<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<A NAME="notes"></A>
<p align="center"><strong>
                            INTUITIVE SURGICAL, INC.
<br>
<br>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<br>
</strong>

<STRONG>
<P>NOTE 1. BASIS OF PRESENTATION</P>
</STRONG><P ALIGN="JUSTIFY">In this report, "Intuitive Surgical," "we," "us,"
and "our" refer to Intuitive Surgical, Inc. </P>
<P ALIGN="JUSTIFY">The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all normal, recurring adjustments considered necessary for a fair
presentation have been included. The financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2000, included in the Annual Report on Form 10-K of Intuitive Surgical, Inc,
filed with the Securities and Exchange Commission. The results for the interim
period ended September 30, 2001 are not necessarily indicative of the results to
be expected for the full year ending December 31, 2001 or future operating
periods. </P>
<STRONG><P>NOTE 2. CONCENTRATIONS OF RISK</P>
</STRONG><P ALIGN="JUSTIFY">For the nine months ended September 30, 2001, one
customer, A, accounted for 14% of total sales. For the nine months ended
September 30, 2000, one customer, A, accounted for 11% of total sales. The
Company extends reasonably short collection terms but does not require
collateral. The Company provides reserves for potential credit losses but has
not experienced significant losses to date. </P>
<P ALIGN="JUSTIFY">The Company's <I>da Vinci</I> Surgical System, related
instruments and accessories and service have accounted for all of the Company's
sales for the nine months ended September 30, 2001 and 2000. Purchases of key
parts and components used to manufacture our products are from limited supply
sources. The inability of any of these suppliers to fulfill our supply
requirements may negatively impact future operating results. </P>
<STRONG><H4>NOTE 3. CASH AND CASH EQUIVALENTS</H4>
</STRONG><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 September 30, 2001 and December 31, 2000. </P>
<STRONG><P>NOTE 4. SHORT-TERM INVESTMENTS</P>
</STRONG><P ALIGN="JUSTIFY">All short-term investments are classified as
available-for-sale and therefore carried at fair value. We view our available-
for-sale portfolio as available for use in our 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 value based upon quoted market prices of
the securities. Unrealized gains and losses on such securities, when material,
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>
<STRONG><P>NOTE 5. INVENTORY, NET</P>
</STRONG><P ALIGN="JUSTIFY">&#9;Inventory, net consists of the following (in
thousands): </P>

<pre>

                                September 30, December 31,
                                   2001           2000
                               -------------  -----------
Raw materials................ $       2,583  $     2,650
Work-in-process..............         1,590        1,130
Finished goods...............         3,422        2,296
                               -------------  -----------
                              $       7,595  $     6,076
                               =============  ===========

</pre>


<FONT SIZE=2><P>&nbsp;</P>
</FONT><STRONG><P>NOTE 6. INTANGIBLE AND OTHER ASSETS</P>
</STRONG><P ALIGN="JUSTIFY">Purchased intangible assets represent patents which
are carried at cost less accumulated amortization. Amortization is computed
using the straight-line method over the expected useful life of six years. At
September 30, 2001 gross intangible assets totaled $4.7 million and related
accumulated amortization was $1.2 million. </P>
<STRONG><P>NOTE 7. COMPREHENSIVE LOSS</P>
</STRONG><P ALIGN="JUSTIFY">&#9;The components of comprehensive loss consist of
the following (in thousands): </P>

<PRE>

                                         Three Months Ended    Nine Months Ended
                                             September 30,         September 30,
                                      --------------------  --------------------
                                         2001       2000       2001       2000
                                      ---------  ---------  ---------  ---------
Net loss............................ $  (4,798) $  (4,020) $ (12,448) $ (13,542)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.....................        --         14         --        (77)
  Change in unrealized gain on
    forward exchange contracts......        --         --        (67)        --
  Change in unrealized gain (loss)
    on available-for-sale securities       531        169        689        112
                                      ---------  ---------  ---------  ---------
Comprehensive loss.................. $  (4,267) $  (3,837) $ (11,826) $ (13,507)
                                      =========  =========  =========  =========

</PRE>


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

<PRE>

                                  Three Months Ended        Nine Months Ended
                                      September 30,            September 30,
                               ------------------------  ------------------------
                                  2001         2000         2001         2000
                               -----------  -----------  -----------  -----------
Numerator used for basic and
  diluted net loss per
  common share............... $    (4,798) $    (4,020) $   (12,449) $   (13,542)
Denominator used for basic
  and diluted net loss per
  common share:
  Weighted-average shares
    outstanding..............  36,169,191   35,549,811   35,918,873   21,018,784
  Less weighted-average
    shares subject to
    repurchase...............    (112,995)    (884,313)    (214,843)  (1,002,949)
                               -----------  -----------  -----------  -----------
  Weighted-average shares
    used in computing basic
    and diluted net loss per
    common share.............  36,056,196   34,665,498   35,704,030   20,015,835
                               ===========  ===========  ===========  ===========
Basic and diluted net loss
  per common share........... $     (0.13) $     (0.12) $     (0.35) $     (0.68)
                               ===========  ===========  ===========  ===========

</PRE>


<STRONG><P>NOTE 9. REVENUE RECOGNITION</P>
</STRONG><P ALIGN="JUSTIFY">We apply the provisions of SAB 101 when recognizing
revenue. SAB 101 states that revenue generally is realized or realizable and
earned when all of the following criteria are met: a) persuasive evidence of an
arrangement exists, b) delivery has occurred or services have been rendered, c)
the seller's price to the buyer is fixed or determinable, and d) collectibility
is reasonably assured. Accordingly, amounts billed in excess of revenue
recognized are included as deferred revenue in the accompanying consolidated
balance sheets. </P>
<P ALIGN="JUSTIFY">Revenue from system sales is recognized upon installation for
direct sales and upon shipment for sales to our distributors. If substantial
contractual obligations exist after system installation, revenue is recognized
after such obligations are fulfilled. Our distributors do not have price
protection rights. Our distributors have return rights under limited
circumstances.  Such rights are accounted for under the provisions of FAS 48. To
date, the Company has not had any returns of its systems.  Revenue from
instruments and accessories is recognized upon shipment. Service revenue is
billed in advance and recognized over the service period. Amounts are billed in
accordance with the terms of the underlying sales agreement. </P>
<P ALIGN="JUSTIFY">Our <I>da Vinci </I>Surgical System contains a software
component.  We believe that the software element of our <I>da Vinci</I> Surgical
System is an incidental part of the system.  The software element within our
product is not sold or marketed separately to customers and the software does
not operate independently of the surgical system.  Furthermore, the software
development effort does not require a significant cost to the Company relative
to the overall development cost of the product.  As such, the software we
provide is incidental to the surgical system as a whole and the software revenue
guidance provided in SOP 97-2 is not applicable to our revenues.</P>

<STRONG><P>NOTE 10. SOFTWARE DEVELOPMENT COSTS</P></STRONG>
<P>&#9;Software development costs are accounted for in accordance with FASB
Statement No. 86, &quot;Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed.&quot;  Prior to the achievement of
technological feasibility, software development costs are expensed as incurred
and are included in research and development expense.  Costs incurred between
feasibility and the general release of software enhancements are
insignificant.</P>

<STRONG><P>NOTE 11. OTHER FINANCIAL INSTRUMENTS</P>
</STRONG><P ALIGN="JUSTIFY">We did not hold any forward exchange contracts at
September 30, 2001. At December 31, 2000, we had forward foreign exchange
contracts of approximately 2 months duration, to exchange euro and Belgian
Francs for U.S. dollars in the total gross notional amount of $781,000. The net
effect on settlement of these contracts during the three months ended March 31,
2001 was not material to our financial position or our results of operations and
is included in other income (expense) in the accompanying consolidated
statements of operations. </P>

<STRONG><P>NOTE 12. STOCKHOLDERS' EQUITY</P></STRONG>
<P>&#9;On June 22, 2001, Heartport, Inc. exercised a warrant to purchase 200,000
shares of common stock of the Company at an exercise price of $3.00 per
share.</P>


<STRONG><P>NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS</P>
</STRONG><P ALIGN="JUSTIFY">In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). We
adopted SFAS 133 effective January 1, 2001. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The adoption of SFAS 133, as amended, has not had a significant impact on
our financial position or results of operations.</P>
<P ALIGN="JUSTIFY">In July 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141 &quot;Business Combinations&quot; and SFAS No. 142
&quot;Goodwill and Other Intangible Assets,&quot; effective for fiscal years
beginning after December 15, 2001.  SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, and that the use of the pooling-of-interest method is no longer
allowed.  Under SFAS No. 142 goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to an annual
impairment test in accordance with the new standards.  Other intangible assets
will continue to be amortized over their useful lives. The Company will adopt
SFAS No. 141 and SFAS No. 142 as of January 1, 2002.  The Company  does not
currently believe that the adoption of SFAS No. 141 and SFAS No. 142 will have a
significant impact on its financial position or results of operations.</P>




<A NAME="mda"></A>
<STRONG><P>ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS</P>
</STRONG><P ALIGN="JUSTIFY">This Management's Discussion and Analysis of
Financial Condition and Results of Operations as of September 30, 2001 and for
the three and nine-month periods ended September 30, 2001 and September 30, 2000
should be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Intuitive Surgical's
Annual Report on Form 10-K for the year ended December 31, 2000. </P>
<P ALIGN="JUSTIFY">Except for historical information, the discussion in this
report contains forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations, and intentions. The
cautionary statements made in this report should be read as applying to all
related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed here. Factors that
could cause or contribute to these differences include those discussed in
"Factors Affecting Operating Results" below as well as those discussed
elsewhere. </P>
<P ALIGN="JUSTIFY">Intuitive<FONT FACE="Symbol">&#226;</FONT>
, Intuitive Surgical<FONT FACE="Symbol">&#226;</FONT>
, da Vinci&trade;, EndoWrist&trade;, InSite&trade; and Navigator&trade; are
trademarks of Intuitive Surgical, Inc. </P>
<B><I><P>OVERVIEW</P>
</B></I><P ALIGN="JUSTIFY">We design, manufacture, and market the <I>da
Vinci</I> Surgical System, an advanced surgical system that we believe
represents a new generation of surgery. The <I>da Vinci</I> Surgical System
consists of a surgeon's console, a patient-side cart, a high performance vision
system and proprietary 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 while giving patients the benefits of MIS surgery, including decreased
trauma and postoperative pain, reduced surgical complications, shorter hospital
stays and lower total treatment costs. </P>
<P ALIGN="JUSTIFY">In 1999, we obtained permission from the European Union to
affix the CE Mark to the<I> da Vinci</I> Surgical System and <I>EndoWrist</I>
instruments for general surgical and cardiac surgical use. Based on this
approval, we recognized revenue for the first time in the second quarter of 1999
for the sale of our products. In July 2000, we received clearance from the U.S.
Food and Drug Administration, the FDA, to begin commercialization of our <I>da
Vinci</I> Surgical System in the United States for use in laparoscopic surgical
procedures. In March 2001, we received clearance from the FDA for use of our
<I>da Vinci</I> Surgical System in non-cardiac thoracoscopic surgical
procedures.  In May 2001, we received market clearance from the FDA to promote
use of the<I> da Vinci</I> Surgical System for performance of laparoscopic
radical prostatectomy procedures.</P>
<P ALIGN="JUSTIFY">To date, the majority of our revenues have come from the
sales of the <I>da Vinci</I> Surgical System, which are high revenue dollar
items. A smaller percentage of revenues have come from sales of <I>EndoWrist</I>
instruments and accessories, which are lower revenue dollar items. A small
percentage of revenue also comes from ongoing service of installed <I>da
Vinci</I> Surgical Systems. Although we expect the majority of our revenues to
continue to come from the sale of <I>da Vinci</I> Surgical Systems over the next
few years, the percentage of revenue from our <I>EndoWrist </I>instruments and
service should continue to increase. Due to the high dollar revenue per system
sold, small variations in system unit sales may cause revenue to vary
significantly from quarter to quarter. During the useful life of each installed
<I>da Vinci</I> Surgical System, we expect to generate recurring revenue through
sales of the <I>EndoWrist</I> instruments and accessories and ongoing service.
</P>
<B><I><P>RESULTS OF OPERATIONS</P>
</B></I><P ALIGN="JUSTIFY">Sales. Sales for the three months ended September 30,
2001 were $10.9 million, up 38% from the three months ended September 30, 2000.
The sales increase was primarily due to an increase in the number of <I>da
Vinci</I> Surgical Systems sold to 10 in the third quarter of 2001 from 8 in the
third quarter of 2000.  Sales for the nine months ended September 30, 2001 were
$35.7 million, up 124% from $15.9 million for the nine months ended September
30, 2000.  The sales increase was primarily due to an increase in the number of
year-to-date <I>da Vinci</I> Surgical Systems sold to 34 in 2001 from 17 in
2000. </P>
<P ALIGN="JUSTIFY">Gross Profit. Gross profit for the three months ended
September 30, 2001 was $5.1 million, or 47% of sales, compared with $3.2
million, or 40% of sales for the three months ended September 30, 2000. Gross
profit for the nine months ended September 30, 2001 was $16.7 million, or 47% of
sales, compared with $5.2 million, or 33% of sales for the nine months ended
September 30, 2000. The improvement in gross profit resulted from sales growth
and increased manufacturing efficiencies. </P>
<P ALIGN="JUSTIFY">Research and Development Expenses. Research and development
expenses for the three months ended September 30, 2001 were $3.5 million, up 10%
from $3.2 million for the  three months ended September 30, 2000.  Research and
development expenses for the nine months ended September 30, 2001 were $10.1
million, up 17% from $8.6 million for the  nine months ended September 30, 2000.
The year over year increases resulted primarily from headcount additions to
support product development and enhancements. </P>
<P ALIGN="JUSTIFY">Research and development expenses include costs associated
with the design, development, testing and enhancement of our products. These
enhancements represent significant improvements to our products. Research and
development expenses also include expenditures for clinical trials and purchases
of laboratory supplies. Research and development costs are expensed as incurred.
We expect to continue to make substantial investments in research and
development and anticipate that research and development expenses will continue
to increase in the future. </P>
<P ALIGN="JUSTIFY">Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the three months ended September 30,
2001 were $7.5 million, up 38% from $5.4 million  for the three months ended
September 30, 2000. Selling, general and administrative expenses for the nine
months ended September 30, 2001 were $22.0 million, up 75% from $12.5 million
for the nine months ended September 30, 2000.  The year over year increases
resulted from headcount additions in sales and marketing to support increased
revenue and the installed base of <I>da Vinci</I> Surgical Systems. </P>
<P ALIGN="JUSTIFY">Selling, general and administrative expenses include
personnel costs for sales, marketing and administrative personnel, tradeshow
expenses, legal expenses, regulatory fees and general corporate expenses.
Selling, general and administrative expenses are expected to increase in the
future to support expanding business activities. </P>
<P ALIGN="JUSTIFY">Deferred Compensation. We record deferred compensation as the
difference between the exercise price of options granted and the fair value of
our common stock at the time of grant for financial reporting purposes. Deferred
compensation is amortized to research and development expense and selling,
general and administrative expenses. Non-cash deferred compensation expense
included in research and development expenses was $0.2 million and $0.6 million
for the three months ended September 30, 2001 and 2000, respectively. Non-cash
deferred compensation expense included in research and development expense was
$0.8 million and $1.3 million for the nine months ended September 30, 2001 and
2000, respectively.  Non-cash deferred compensation expense included in selling,
general and administrative expenses was $0.1 million and $0.2 million for the
three months ended September 30, 2001 and 2000, respectively. Non-cash deferred
compensation expense included in selling, general and administrative expenses
was $0.5 million and $0.5 million for the nine months ended September 30, 2001
and 2000, respectively.  The remaining $1.1 million of deferred compensation
will be amortized over the remaining vesting periods of the options, generally
four years from the date of grant, using a graded vesting method. The amount of
deferred compensation expense to be recorded in future periods may decrease if
unvested options for which deferred compensation has been recorded are
subsequently canceled. </P>
<P ALIGN="JUSTIFY">Other Income (Expense). Other income (expense) for the three
months ended September 30, 2001 was $1.0 million, down $0.4 million compared to
$1.4 million  for the three months ended September 30, 2000. The decrease was
due primarily to lower 2001 interest income resulting from lower average cash
and short-term investment balances.  Other income (expense) for the nine months
ended September 30, 2001 was $2.9 million, up $0.5 million  for the nine months
ended September 30, 2000. The increase resulted from higher cash and short-term
investment balances, driven by the exercise of warrants to purchase preferred
stock in March 2000, yielding approximately $34.8 million in net proceeds, and
our initial public offering in June and July 2000, which raised net proceeds of
approximately $46.8 million. </P>
<B><I><P>LIQUIDITY AND CAPITAL RESOURCES</P>
</B></I><P ALIGN="JUSTIFY">Financing.  Prior to our initial public offering,
operations were financed primarily through sales of our preferred stock,
yielding net proceeds of approximately $127.3 million, and equipment financing
arrangements yielding approximately $8.0 million. The equipment arrangements
provide financing at specific interest rates for periods of up to 48 months, by
which time the principal is repaid to the lessors. As collateral for the
equipment financing, we have granted the lessors a security interest in
equipment specified under each arrangement. In June and July 2000, we completed
the initial public offering of 5,750,000 shares of our common stock and realized
net proceeds of approximately $46.8 million. </P>
<P ALIGN="JUSTIFY">As of September 30, 2001, we had working capital of $73.1
million, compared to $83.8 million as of December 31, 2000. The decrease in
working capital during the first nine months of 2001 resulted primarily from our
year-to-date net loss of $12.4 million. </P>
<P ALIGN="JUSTIFY">Cash and Short-Term Investments.  Our principal source of
liquidity comes from cash and short-term investments.  As of September 30, 2001,
we had cash, cash equivalents and short-term investments of $64.3 million,
comprised of $24.6 million cash and $39.7 million short-term investments.
Short-term investments consist of highly-liquid, interest-bearing notes and
commercial paper.  Cash and short-term investments as of December 31, 2000 was
$89.4 million.  The $25.1 million decrease during the first nine months of 2001
resulted primarily from our net loss of $12.4 million, increased accounts
receivable of $9.2 million, investments in fixed assets of $3.8 million and
payment of a $1.0 million royalty to IBM.</P>
<P ALIGN="JUSTIFY">Accounts Receivable.  Net accounts receivable was $15.6
million as of September 30, 2001, up $9.2 compared to $6.4 million at December
31, 2000.  The increase was due largely to an increase in average days
receivables outstanding from 54 days at December 31, 2000 to 129 days at
September 30, 2001.  The higher days sales outstanding at September 30, 2001
resulted from a high concentration of third quarter sales in the last month of
the quarter after the seasonally slower summer months. </P>
<P ALIGN="JUSTIFY">Inventory.  Net inventory was $7.6 million as of September
30, 2001, up $1.5 million compared to $6.1 million at December 31, 2000.  The
increase was due primarily to increased production efforts to meet greater sales
volume going forward.  </P>
<P ALIGN="JUSTIFY">Current Liabilities.  Total current liabilities were $17.0
million at September 30, 2001, down $2.8 million compared to $19.8 million at
December 31, 2000.  The decline in current liabilities resulted primarily from
lower accounts payable and other accrued liabilities ($1.3 million); accrued
royalties ($1.0 million) at December 31, 2000 paid in the first quarter of 2001;
and accrued compensation and employee benefits ($0.2 million) at December 31,
2000 paid in the first quarter of 2001.</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 support and product development activities and for other general
corporate activities. We believe that our current cash and short-term investment
balances, together with revenue to be derived from the sale of our products,
will be sufficient to fund our operations at least through 2002. During or after
this period, if cash generated by operations is insufficient to satisfy our
liquidity requirements, we may need to sell additional equity or debt securities
or obtain additional credit arrangements. Additional financing may not be
available on terms acceptable to us or at all. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders. </P>
<B><I><P>FACTORS AFFECTING OPERATING RESULTS</P>
</B></I><STRONG><P>OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES
ANALYSTS' OR INVESTORS' EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO
DECLINE.</P>
</STRONG><P ALIGN="JUSTIFY">Because of our limited operating history, we have
limited insight into trends that may emerge in our market and affect our
business. The revenue and income potential of our market are unproven, and we
may be unable to generate significant commercial 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, if any, will be
difficult to forecast because the market for new surgical technologies is still
evolving. Our results of operations will depend upon numerous factors,
including: </P>

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

<P ALIGN="JUSTIFY">Our operating results in any particular period will not be a
reliable indication of our future performance. It is likely that in some future
quarters, our operating results will be below the expectations of securities
analysts or investors. If this occurs, the price of our common stock, and the
value of your investment, will likely decline. </P>
<STRONG><P>WE HAVE A LARGE ACCUMULATED DEFICIT, WE EXPECT FUTURE LOSSES, AND WE
MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.</STRONG> </P>
<P ALIGN="JUSTIFY">We have incurred substantial losses since inception and we
expect to incur substantial additional operating losses for at least the next
two years, primarily as a result of expected increases in expenses for our
manufacturing and sales and marketing capabilities, research and development
activities, clinical trials and regulatory approval applications. The extent of
our future losses and the timing of profitability are highly uncertain, and we
may never achieve profitable operations. If the time required to generate
significant revenues and achieve profitability is longer than anticipated, we
may not be able to continue our operations. Our net loss for the three months
ended September 30, 2001 was $4.8 million compared to a net loss of $4.0 million
for the  three months ended September 30, 2000. As of September 30, 2001, we had
an accumulated deficit of $106.1 million. </P>
<STRONG><P>WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A NEGATIVE
IMPACT ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.</STRONG> </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. We do not plan to
maintain a significant inventory of assembled <I>da Vinci</I> Surgical Systems,
but rather plan to manufacture these systems after receiving customer orders.
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 could 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>
<STRONG><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 ORDER.</STRONG> </P>
<P ALIGN="JUSTIFY">A relatively small number of customers account for a
significant portion of our total revenues. For the nine months ended September
30, 2001, AB Medica SRL, our Italian distributor, accounted for 14% of total
sales.  For the nine months ended September 30, 2000, AB Medica SRL accounted
for 11% of total sales. </P>
<P ALIGN="JUSTIFY">We expect that revenues from a limited number of new
customers will account for a large percentage of total revenues in future
quarters. Our ability to attract new customers will depend on a variety of
factors, including the capability, safety, efficacy, ease of use, price, quality
and reliability of our products and effective sales, support, training and
service. The loss or delay of individual orders could have a significant impact
on revenues and operating results. Our failure to add new customers that make
significant purchases of our products would reduce our future revenues. </P>
<STRONG><P>IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLE
TO GENERATE THE REVENUE NECESSARY TO SUPPORT OUR BUSINESS.</STRONG> </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 so 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. Although we are in the process of developing training programs
for surgical teams, we cannot be certain that our training programs will be cost
effective or sufficient to meet our customers' needs. </P>
<STRONG><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.</STRONG> </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 ("FFDCA"). Clearance under Section 510(k) requires
demonstration that a new device is substantially equivalent to another legally
marketed device. If we modify our products after they receive FDA clearance, the
FDA may require us to submit a separate 510(k) or PMA for the modified product
before we are permitted to market the products in the U.S. In addition, if we
develop products in the future that are not considered to be substantially
equivalent to a legally marketed device, we will be required to obtain FDA
approval by submitting a premarket approval application ("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, require us to conduct further testing, or
compile more data, including clinical data, in support of a 510(k) submission.
The FDA may also, instead of accepting a 510(k) submission, require us to submit
a PMA, which is typically a much more complex application than a 510(k). To
support a PMA, the FDA would likely require that we conduct one or more clinical
studies to demonstrate that the device is safe and effective, rather than
substantially equivalent to another legally marketed device. We may not be able
to meet the requirements to obtain 510(k) clearance or PMA approval, or the FDA
may not grant any necessary clearances or approvals. In addition, the FDA may
place significant limitations upon the intended use of our products as a
condition to a 510(k) clearance or PMA approval. Product applications can also
be denied or withdrawn due to failure to comply with regulatory requirements or
the occurrence of unforeseen problems following 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 ("IRB") approval of the proposed investigation. In addition, if the
clinical study involves a "significant risk" (as defined by the FDA) to human
health, the sponsor of the investigation must also submit and obtain FDA
approval of an investigational device exemption ("IDE") application. We may not
be able to obtain FDA and/or IRB approval to undertake clinical trials in the
U.S. for any new devices we intend to market in the United States in the future.
If we obtain such approvals, we may not be able to comply with the IDE and other
regulations governing clinical investigations or the data from any such trials
may not support clearance or approval of the investigational device. Failure to
obtain such approvals or to comply with such regulations could have a material
adverse effect on our business, financial condition and results of operations.
For additional information concerning regulatory approvals of our products, see
"Item 1: Business -- Government Regulation," included in the Annual Report on
Form 10-K of Intuitive Surgical, Inc., filed with the Securities and Exchange
Commission or SEC. </P>
<STRONG><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>
</STRONG><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>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 for general surgical use. <STRONG>We received additional CE
approvals for use of our <I>da Vinci </I>Surgical System and <I>EndoWrist
</I>instruments in cardiac surgery in September 1999, February 2000, and August
2001.</P>
</STRONG><P>If we modify existing products or develop new products in the
future, including new instruments, we will 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>
<STRONG><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.</STRONG> </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.
In such circumstances, we may have to apply to the American Medical Association
for a unique Current Procedural Terminology code covering computer-enhanced
surgery. If an application for a unique code is required, reimbursement for any
use of our products may be unavailable until an appropriate code is granted. The
application process, from filing until adoption of a new code, can take two or
more years. </P>
<P ALIGN="JUSTIFY">Our success in international markets also depends upon the
eligibility of our products for reimbursement through government-sponsored
health care payment systems and third-party payors. Reimbursement practices vary
significantly by country. Many international markets have government-managed
healthcare systems that control reimbursement for new products and procedures.
Other foreign markets have both private insurance systems and government-managed
systems that control reimbursement for new products and procedures. Market
acceptance of our products may depend on the availability and level of
reimbursement in any country within a particular time. In addition, health care
cost containment efforts similar to those we face in the United States are
prevalent in many of the other countries in which we intend to sell our products
and these efforts are expected to continue. For further information on third-
party reimbursement policies, see "Item 1: Business -- Third-Party
Reimbursement," included in the Annual Report on Form 10-K of Intuitive
Surgical, Inc., filed with the SEC. </P>
<STRONG><P>WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH COMPUTER
MOTION AND BROOKHILL-WILK 1, LLC THAT MAY HURT OUR COMPETITIVE POSITION, MAY BE
COSTLY TO US AND MAY PREVENT US FROM SELLING OUR PRODUCTS.</P>
</STRONG><P ALIGN="JUSTIFY">On May 10, 2000, Computer Motion, Inc. filed a
lawsuit in United States District Court for the Central District of California
(Case No. CV00-4988 CBM) alleging that by making, using, selling or offering for
sale our <I>da Vinci</I> Surgical System, we are infringing United States Patent
Numbers 5,524,180, 5,878,193, 5,762,458, 6,001,108, 5,815,640, 5,907,664 and
5,855,583 in willful disregard of Computer Motion's patent rights. On June 1,
2000, Computer Motion amended its lawsuit to allege that we also infringe U.S.
Patent Number 6,063,095. On October 30, 2000, Computer Motion filed a motion
seeking to add U.S. Patent Number 6,102,850 to the litigation. These patents
concern methods and devices for conducting various aspects of robotic surgery.
On December 7 and 8, 2000, the U.S. Patent and Trademark Office ("PTO") declared
three interferences between a single SRI patent application exclusively licensed
to Intuitive and three of Computer Motion's patents, Numbers 5,878,193,
5,907,664 and 5,855,583. These interferences resulted from requests for
interference filed in May through July 1999.  In light of those declarations of
interference, the District Court on February 5, 2001 stayed -- put on hold --
all proceedings in the litigation for one year while the PTO conducts the
interference proceedings.  In March 2001, Computer Motion filed a Notice of
Appeal of the Stay Order with the United States Court of Appeals for the Federal
Circuit.  In April 2001, however, Computer Motion voluntarily dismissed its
appeal.  Then, in May 2001, Computer Motion filed a motion in the District Court
requesting that the Court lift the stay and not further delay the litigation.
The Court denied this motion on July 26, 2001 and left the stay in place. On
October 10, 2001 the PTO held a hearing concerning all three interferences.
Decisions regarding all of the motions argued at the interference hearing are
expected in late 2001. </P>
<P ALIGN="JUSTIFY">On March 30, 2001, Intuitive and International Business
Machines Corporation (&quot;IBM&quot;) jointly filed suit against Computer
Motion, Inc. in the U.S. District Court for the District of Delaware alleging
infringement of U.S. Patent No. 6,201,984.  The '984 patent which concerns
aspects of voice control of surgical instruments issued to IBM in early March
2001 and is exclusively licensed to us. In late June 2001, Computer Motion filed
a request to add its own U.S. Patent No. 6,244,809 to this Delaware litigation
alleging that we infringe the '809 patent by making, using, selling and offering
for sale our <I>da Vinci</I> Surgical System.  The '809 patent concerns aspects
of devices for performing robotic surgery.  On November 9, 2001, the Delaware
Court refused to permit Computer Motion to add its '809 patent into the Delaware
litigation. </P>
<P ALIGN="JUSTIFY">If the Central District of California litigation proceeds
after the PTO has resolved the interferences, and if we lose Computer Motion's
suit against us, it will hurt our competitive position, may be costly to us and
may prevent us from selling our products. In addition, if we lose either of the
patent suits, we will need to obtain from Computer Motion a license to this
technology if we are to continue to market our products that have been found to
infringe Computer Motion's patents. This license could be expensive, or could
require us to license to Computer Motion some of our technology which would
result in a partial loss of our competitive advantage in the marketplace, each
of which could seriously harm our business. We believe that we have multiple
meritorious defenses to all of Computer Motion's claims. However, litigation is
unpredictable and we may not prevail with any of these defenses. If Computer
Motion is successful in either of the patent suits and is unwilling to grant us
a license, we may be required to stop selling our products that are found to
infringe any of Computer Motion's patents unless we can redesign them so they do
not infringe Computer Motion's patents, which we may be unable to do. In
addition, if we lose either of the patent suits, we could be required to pay
Computer Motion damages, including treble damages, which could be substantial
and harm our financial position. </P>
<P ALIGN="JUSTIFY">On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk") filed a
lawsuit in the United States District Court for the Southern District of New
York (Case No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or
offering for sale our <I>da Vinci</I> Surgical System, we are infringing U.S.
Patent Nos. 5,217,003 and 5,368,015 in willful disregard of Wilk's patent
rights. These patents concern methods and devices for "remote" surgery. In March
2001, Wilk withdrew its assertion of infringement of the '015 patent against
Intuitive, leaving only the '003 patent at issue in the suit. On November 8,
2001, the District Court granted summary judgment of noninfringement of the '003
patent in our favor and dismissed Wilk's complaint.  This ruling terminates in
our favor all substantive liability issues in the litigation unless Wilk chooses
to appeal the summary judgment to the U.S. Court of Appeals for the Federal
Circuit. If the District Court's decision is appealed, we believe the summary
judgment of noninfringement will be  upheld by the appellate court.  However,
litigation is unpredictable and we may not prevail on appeal.  If we lose an
appeal and ultimately Wilk's suit against us, it will hurt our competitive
position, may be costly to us and may prevent us from selling our products. In
addition, if we lose the patent suit, we may need to obtain from Wilk a license
to this technology if we are to continue to market our products that have been
found to infringe Wilk's patents. This license could be expensive, which could
seriously harm our business. We continue to believe that we have multiple
meritorious defenses in this action. In addition, if Wilk is successful in its
suit against us and is unwilling to grant us a license, we may be required to
stop selling our products that are found to infringe Wilk's patents unless we
can redesign them so they do not infringe Wilk's patents, which we may be unable
to do. If we lose the patent suit, we could also be required to pay Wilk
damages, including treble damages, which could be substantial and harm our
financial position. </P>
<P ALIGN="JUSTIFY">These claims will be expensive to litigate, may be protracted
and our confidential information may be compromised. Whether or not we are
successful in these lawsuits, this litigation could consume substantial amounts
of our financial and managerial resources. At any time Computer Motion or Wilk
may file additional claims against Intuitive Surgical, or we may file claims
against Computer Motion or Wilk, which could increase the risk, expense and
duration of the litigations. Further, because of the substantial amount of
discovery often involved in connection with this type of litigation, there is a
risk that some of our confidential information could be compromised by
disclosure. For more information on our litigation with Computer Motion, see
"Part II-Item 1: Legal Proceedings."</P>
<STRONG><P>PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY HURT OUR STOCK
PRICE.</P>
</STRONG><P ALIGN="JUSTIFY">During the course of our administrative proceedings
and/or lawsuits with Computer Motion and Brookhill-Wilk 1, LLC, there may be
public announcements of the results of hearings, motions, and other interim
proceedings or developments. 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>
<STRONG><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.</STRONG> </P>
<P ALIGN="JUSTIFY">Our commercial success will depend in part on obtaining
patent and other intellectual property protection for the technologies contained
in our products, and on successfully defending our patents and other
intellectual property against third party challenges. </P>
<P ALIGN="JUSTIFY">We will incur substantial costs in obtaining patents and, if
necessary, defending our proprietary rights. The patent positions of medical
device companies, including ours, can be highly uncertain and involve complex
and evolving legal and factual questions. We cannot assure you that 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 cannot assure you that 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. Given the early priority dates
of some of our licensed patents, we believe one or more patent proceedings may
be in our best interests. 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>
<STRONG><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.</STRONG> </P>
<P ALIGN="JUSTIFY">We are aware of both United States and foreign patents issued
to third parties that relate to computer-assisted surgery and minimally invasive
surgery. Some of these patents on their face appear broad enough to cover one or
more aspects of our present technology, and may cover aspects of our future
technology. We do not know whether any of these patents, if challenged, would be
held valid, enforceable and infringed. From time to time, we receive, and likely
will continue to receive, letters from third parties inviting us to license
their patents. We may be sued by, or become involved in an administrative
proceeding because of one or more of these third parties, regardless of the
merits or likely outcome of such suit or proceeding. We cannot assure you that a
court or administrative body would agree with any arguments or defenses we have
concerning invalidity, unenforceability or noninfringement of any third-party
patent. In addition to the issued patents of which we are aware, other parties
may have filed, and in the future are likely to file, patent applications
covering surgical products that are similar or identical to ours. We cannot
assure you that any patents issuing from applications filed by a third party
will not cover our products or will not have priority over our patent
applications. </P>
<P ALIGN="JUSTIFY">The medical device industry has been characterized by
extensive litigation and administrative proceedings regarding patents and other
intellectual property rights, and companies have employed such actions to gain a
competitive advantage. If third parties assert infringement or other
intellectual property claims against us as Computer Motion and Brookhill-Wilk 1,
LLC have done, our technical and management personnel will experience a
significant diversion of time and effort and we will incur large expenses
defending ourselves. 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>
<STRONG><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.</STRONG> </P>
<P ALIGN="JUSTIFY">In addition to patents, we typically rely on a combination of
trade secret, copyright and trademark laws, nondisclosure agreements and other
contractual provisions and technical security measures to protect our
intellectual property rights. Nevertheless, these measures may not be adequate
to safeguard the technology underlying our products. If they do not protect our
rights adequately, third parties could use our technology, and our ability to
compete in the market would be reduced. In addition, employees, consultants and
others who participate in developing our products may breach their agreements
with us regarding our intellectual property, and we may not have adequate
remedies for the breach. We also may not be able to effectively protect our
intellectual property rights in some foreign countries. For a variety of
reasons, we may decide not to file for patent, copyright or trademark protection
outside the United States. We also realize that our trade secrets may become
known through other means not currently foreseen by us. Notwithstanding our
efforts to protect our intellectual property, our competitors may independently
develop similar or alternative technologies or products that are equal or
superior to our technology and products without infringing any of our
intellectual property rights, or may design around our proprietary technologies.
For further information on our intellectual property and the difficulties in
protecting it, see "Item 1: Business -- Intellectual Property," included in the
Annual Report on Form 10-K of Intuitive Surgical, Inc., filed with the SEC. </P>
<STRONG><P>OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE
ACCESS TO THESE TECHNOLOGIES, OUR REVENUES COULD DECLINE.</STRONG> </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, Heartport, Inc. (now
part of Johnson &amp; Johnson), and Olympus Optical Co., Ltd. of Japan. Any of
these agreements may be terminated for breach, including the failure to make
required payments under the IBM license and the failure to commercialize our
products under the SRI International license. If any of these agreements is
terminated, we may be unable to reacquire the necessary license on satisfactory
terms, or at all. The loss or failure to maintain these licenses could prevent
or delay further development or commercialization of our products. See "Item 1:
Business -- Intellectual Property," included in the Annual Report on Form 10-K
of Intuitive Surgical, Inc., filed with the SEC. </P>
<STRONG><P>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.</STRONG> </P>
<P ALIGN="JUSTIFY">Intuitive surgery is a new technology that must compete with
established minimally invasive surgery and open surgery. These procedures are
widely accepted in the medical community and in many cases have a long history
of use. We also face competition from several companies that are developing new
approaches and products for the minimally invasive surgery market. In addition,
we presently face increasing competition from companies who are developing
robotic and computer-assisted surgical systems. Our revenues may be reduced or
eliminated if our competitors develop and market products that are more
effective or less expensive than our products. If we are unable to compete
successfully, our revenues will suffer. We may not be able to maintain or
improve our competitive position against current or potential competitors,
especially those with greater resources. </P>
<P ALIGN="JUSTIFY">In many cases, the medical conditions that can be treated
using our products can also be treated by pharmaceuticals or other medical
devices and procedures. Many of these alternative treatments are also widely
accepted in the medical community and have a long history of use. In addition,
technological advances could make such treatments more effective or less
expensive than using our products, which could render our products obsolete or
unmarketable. We cannot be certain that physicians will use our products to
replace or supplement established treatments or that our products will be
competitive with current or future technologies. </P>
<STRONG><P>IF SOFTWARE DEFECTS ARE DISCOVERED IN OUR PRODUCTS, WE MAY INCUR
ADDITIONAL UNFORESEEN COSTS, HOSPITALS MAY NOT PURCHASE OUR PRODUCTS AND OUR
REPUTATION MAY SUFFER.</STRONG> </P>
<P ALIGN="JUSTIFY">Our products do incorporate computer software. Software 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 software
defects. We cannot assure you that our software will not experience errors or
performance problems in the future. If we experience software errors or
performance problems, any of the following could occur: </P>

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

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

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

<P ALIGN="JUSTIFY">Manufacturing our products is a complex process. If demand
for our products exceeds our manufacturing capacity, we could develop a
substantial backlog of customer orders. If we are unable to establish and
maintain larger-scale manufacturing capabilities, our ability to generate
revenues will be limited and our reputation in the marketplace would be
damaged.</P>
<STRONG><P>IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL,
STATE OR EUROPEAN MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY
CEASE ALL OR PART OF OUR MANUFACTURING OPERATIONS, WHICH WOULD RESULT IN PRODUCT
DELIVERY DELAYS AND LOST REVENUE.</STRONG> </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 (QSR). We are
also required to comply with the European Union (EU) ISO 9001 and Medical Device
Directive (MDD) standards in order to produce products bearing the CE Mark for
sale in Europe. If we fail to continue to comply with Good Manufacturing
Practice requirements or the aforementioned EU standards, we may be required to
cease all or part of our operations until we comply with these regulations.
Maintaining such compliance is difficult and costly. In March 2000, the FDA
inspected our Mountain View facility and the Good Manufacturing Practice issues
raised during the inspection were satisfactorily resolved with the FDA. We are
also audited on an annual basis to assure compliance with EU ISO 9001 and MDD
standards.  In June 2001, our facility in Mountain View was audited and the EU
standards issues raised during the inspection were satisfactorily resolved
allowing us to continue applying the CE Mark to our products.  We cannot be
certain that our facilities will be found to comply with Good Manufacturing
Practice requirements or the ISO 9001 standards in future audits by regulatory
authorities. </P>
<P ALIGN="JUSTIFY">The state of California also requires that we maintain a
license to manufacture medical devices. Our facilities and manufacturing
processes were inspected in February 1998. In March 1998, we passed the
inspection and received a device manufacturing license from the California
Department of Health Services. We will be 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>
<STRONG><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.</STRONG> </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>
<STRONG><P>THE USE OF OUR PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT
COULD BE EXPENSIVE, DIVERT MANAGEMENT'S ATTENTION AND HARM OUR
BUSINESS.</STRONG> </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 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>
<STRONG><P>OUR GROWTH WILL PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS
AND RESOURCES AND, IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET, SELL
AND DEVELOP OUR PRODUCTS MAY BE HARMED.</STRONG> </P>
<P ALIGN="JUSTIFY">In order to complete clinical trials, scale-up manufacturing,
expand marketing and distribution capabilities and develop future products, we
must expand our operations. We expect that future expansion will occur
particularly in the areas of sales and marketing, manufacturing and research and
development. This expansion will likely result in new and increased
responsibilities for management personnel and place significant strain upon our
management, operating and financial systems and resources. We plan to sell our
products primarily through direct sales, and we currently have a small sales
organization. Our products require a complex marketing and sales effort targeted
at several levels within a prospective customer's organization. We will need to
expand our sales team significantly over the next 12 months to achieve our sales
growth goals. We will face significant challenges and risks in building and
managing our sales team, including managing geographically dispersed sales
efforts and adequately training our sales people in the use and benefits of our
products. To accommodate our growth and compete effectively, we will be required
to improve our information systems, create additional procedures and controls
and expand, train, motivate and manage our work force. Our future success will
depend in part on the ability of current and future management personnel to
operate effectively, both independently and as a group. We cannot be certain
that our personnel, systems, procedures and controls will be adequate to support
our future operations. </P>
<STRONG><P>IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL, OUR ABILITY TO COMPETE WILL BE HARMED.</STRONG> </P>
<P ALIGN="JUSTIFY">We are highly dependent on the principal members of our
management and scientific staff.  In order to pursue our product development,
marketing and commercialization plans, we will need to hire additional qualified
personnel with expertise in research and development, clinical testing,
government regulation, manufacturing, sales and marketing, and finance. Our
product development plans depend in part on our ability to attract and retain
engineers with experience in mechanics, software and optics. Attracting and
retaining qualified personnel will be critical to our success, and competition
for qualified personnel is intense, particularly in Silicon Valley. 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>
<STRONG><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.</STRONG> </P>
<P ALIGN="JUSTIFY">Our business currently depends in large part on our
activities in Europe, and a component of our growth strategy is to expand our
presence into additional foreign markets. Sales to markets outside of the United
States accounted for approximately 22% of our sales for the three months ended
September 30, 2001, 35% for the three months ended September 30, 2000, 36% for
the nine months ended September 30, 2001 and 41% for the nine months ended
September 30, 2000. We will be subject to a number of challenges that
specifically relate to our international business activities. These challenges
include: </P>

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

<P ALIGN="JUSTIFY">Currently, a majority of our international sales are
denominated in U.S. dollars. As a result, an increase in the value of the U.S.
dollar relative to foreign currencies could make our products less competitive
in international markets. If we are unable to meet and overcome these
challenges, our international operations may not be successful, which would
limit the growth of our business. </P>
<STRONG><P>FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT
CAPITAL NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS COULD
REDUCE OUR ABILITY TO COMPETE, RESULT IN LOWER REVENUES AND MAY PREVENT US FROM
TAKING ADVANTAGE OF MARKET OPPORTUNITIES.</STRONG> </P>
<P ALIGN="JUSTIFY">We expect that our existing capital resources and the revenue
to be derived from the sale of our products will be sufficient to meet our
working capital and capital expenditure needs at least through 2002. After that,
we may need to raise additional funds and we cannot be certain that we will be
able to obtain additional financing on favorable terms, or at all. If we need
additional capital and cannot raise it on acceptable terms, we may not be able
to, among other things: </P>

<UL>
<LI>develop or enhance our products and services; </LI>
<LI>acquire technologies, products or businesses; </LI>
<LI>expand operations in the United States or internationally; </LI>
<LI>hire, train and retain employees; or </LI>
<LI>respond to competitive pressures or unanticipated capital requirements.
</LI></UL>

<P>Our failure to do any of these things could result in lower revenues and
could harm our business.</P>
<STRONG><P>SALES BY CURRENT STOCKHOLDERS COULD CAUSE OUR COMMON STOCK PRICE TO
DECLINE.</P>
</STRONG><P ALIGN="JUSTIFY">The market price of our common stock could decline
as a result of sales of a large number of shares in the market. These sales may
also make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate to raise funds through future
offerings of common stock. As of September 30, 2001, several entities
beneficially owned more than 5% of the outstanding shares of our common stock,
including Allan G. Lozier,  Investor Guernsey Ltd. and PaTMarK Company, Inc.
</P>
<P ALIGN="JUSTIFY">On May 8, 2001, June 21, 2001, and October 29, 2001, Mayfield
Fund distributed 1,734,176, 891,801, and 875,327shares of Intuitive common stock
to its Partners, respectively.



<A NAME="market"></A>
<STRONG><P>ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK</P>
</STRONG><P ALIGN="JUSTIFY">We are not subject to any meaningful market risks
related to currency, commodity prices or similar matters. We are sensitive to
short-term interest rate fluctuations to the extent that such fluctuations
impact the interest income we receive on the investment of the remaining
proceeds from our June 2000 initial public offering. </P>
<P ALIGN="JUSTIFY">The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities
that we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds and government and non-government debt securities. Due to the
short-term nature of these investments, we believe that we have no material
exposure to interest rate risk arising from our investments. Therefore, no
quantitative tabular disclosure is required. </P>


<STRONG><P ALIGN="CENTER">&nbsp;</P>
<P ALIGN="CENTER">PART II. OTHER INFORMATION </P>

<A NAME="item1"></A>
<P>ITEM 1. LEGAL PROCEEDINGS</P>
</STRONG><P ALIGN="JUSTIFY">On May 10, 2000, Computer Motion, Inc. filed a
lawsuit in United States District Court for the Central District of California
(Case No. CV00-4988 CBM) alleging that by making, using, selling or offering for
sale our <I>da Vinci</I> Surgical System, we are infringing United States Patent
Numbers 5,524,180, 5,878,193, 5,762,458, 6,001,108, 5,815,640, 5,907,664 and
5,855,583 in willful disregard of Computer Motion's patent rights. On June 1,
2000, Computer Motion amended its lawsuit to allege that we also infringe U.S.
Patent Number 6,063,095. On October 30, 2000, Computer Motion filed a motion
seeking to add U.S. Patent Number 6,102,850 to the litigation. Each of these
nine patents concerns methods and devices for conducting various aspects of
robotic surgery. Until February 2001, the litigation was proceeding in the early
stages of discovery, with no trial date set. In February 2001, in response to
Intuitive's request, the District Court stayed -- put on hold -- all proceedings
in the litigation because of the declaration by the U.S. Patent and Trademark
Office ("PTO") of three interferences between a single SRI patent application
exclusively licensed to us and three of Computer Motion's patents (see next
paragraph). A status report is due to the Court in one year, or earlier if the
interferences are resolved before then. In March 2001, Computer Motion filed a
Notice of Appeal of the Stay Order with the United States Court of Appeals for
the Federal Circuit.  In April 2001, however, Computer Motion voluntarily
dismissed its appeal.  Then, in May 2001, Computer Motion filed a motion with
the District Court requesting that the Court lift the stay and not further delay
the litigation.  The Court denied this motion on July 26, 2001 and left the stay
in place. The Computer Motion action seeks damages based upon the making, using,
selling and offering for sale of our products and processes, and seeks to enjoin
our continued activities relating to these products. This action subjects us to
potential liability for damages, including treble damages, and could require us
to cease making, using or selling the affected products, or to obtain a license
in order to continue to manufacture, use or sell the affected products. While we
continue to believe we have multiple meritorious defenses to this action, we
cannot assure you that we ultimately will prevail on any issue in the litigation
or that we will be able to successfully defend Computer Motion's charges, nor
can we provide assurance that any license required would be made available on
commercially acceptable terms, if at all. Failure to successfully defend against
the Computer Motion action could harm our business, financial condition and
operating results. Due to the inherent uncertainties of litigation, we cannot
accurately predict the ultimate outcome of this matter at this time and,
therefore, cannot estimate the range of possible loss. </P>
<P ALIGN="JUSTIFY">Beginning in May 1999 and as recently as March 2001, we
requested that the PTO declare interferences between some of our exclusively
licensed SRI patent applications and six of Computer Motion's U.S. patents. An
interference is a proceeding within the U.S. Patent Office to resolve questions
regarding the patentability of inventions and who first invented subject matter
claimed by two or more patents or patent applications. On December 7 and 8,
2000, the PTO formally declared three interference proceedings between a single
SRI patent application licensed to us and three of Computer Motion's patents:
Nos. 5,878,193, 5,907,664 and 5,855,583. Several of our requests for other
interferences are still pending. Because the SRI patent application licensed to
Intuitive was filed in January 1992 and Computer Motion's three patents were
filed no earlier than August 1992 and as late as February 1996, SRI/Intuitive
is the "Senior Party" in each interference. As "Junior Party," Computer Motion
will bear the burden of proving that it is entitled to keep its patents. In
papers filed with the PTO in March 2001, Computer Motion stated that
SRI/Intuitive filed for its patent application before Computer Motion thought of
its inventions.  We therefore anticipate that a second &quot;priority&quot;
phase of each interference to determine which party invented the technology
first will be unnecessary.  The written portion of the &quot;preliminary
motions&quot; phase of each interference has concluded.  We filed seventeen
motions in February and March 2001 to address possible contingencies and
outcomes dependent on how the interference proceedings might progress. A hearing
on our motions and on Computer Motion's five motions was held on October 10,
2001 before the PTO Board.  We expect the PTO Board to issue decisions regarding
all of the motions around the end of 2001.</P>

<P ALIGN="JUSTIFY">In September 2000, we filed a Notice of Opposition in the
European Patent Office ("EPO") challenging European Patent No. 653,922, which
was issued to Computer Motion in 1999 and is related to several of the patents
now involved in the U.S. litigation and the interference proceedings. An
Opposition proceeding allows the EPO to determine whether the challenged patent
should be revoked in its entirety, should be amended, or should remain
unaltered. In its Notice of Opposition, Intuitive cited numerous prior art
references not cited to the EPO during the '922 patent's original prosecution.
Computer Motion has responded to our Opposition and the matter is now before the
EPO for further proceedings.</P>
<P ALIGN="JUSTIFY">On March 30, 2001, Intuitive and International Business
Machines Corporation ("IBM") jointly filed suit against Computer Motion in the
U.S. District Court for the District of Delaware. The complaint alleges that by
continuing to make, use, sell, and offer for sale its AESOP and ZEUS voice-controlled
products, Computer Motion willfully infringes U.S. Patent No.
6,201,984. The '984 patent issued to IBM on March 13, 2001, and is exclusively
licensed to us under the terms of our 1997 License Agreement with IBM. The '984
patent concerns various aspects of controlling movement of surgical instruments
with voice commands and predates by several years Computer Motion's development
of voice-controlled surgical robots. Because Computer Motion's voice-controlled
HERMES product interfaces with the AESOP and ZEUS products, HERMES is also
implicated in the patent infringement complaint.  A trial date of June 2002 has
been set for this litigation.  In early June 2001, Computer Motion requested
that the District Court transfer this case from Delaware to the Central District
of California, where Computer Motion's lawsuit against Intuitive is pending.  In
addition, in late June 2001, Computer Motion filed a request to add its own U.S.
Patent No. 6,244,809 to the Delaware litigation, alleging we infringe the '809
patent by making, using, selling and offering for sale our <I>da Vinci</I>
Surgical System.  On November 9, 2001, the District Court denied both of
Computer Motion's requests, ruling that the litigation will remain in Delaware
and that Computer Motion will not be able to add its '809 patent into the suit.
Due to the inherent uncertainties of litigation, we cannot accurately predict
the ultimate outcome of this matter at this time.</P>

<P ALIGN="JUSTIFY">On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk") filed a
lawsuit in the United States District Court for the Southern District of New
York (Case No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or
offering for sale our da Vinci Surgical System, we are infringing U.S. Patent
Nos. 5,217,003 and 5,368,015 in willful disregard of Wilk's patent rights. These
patents concern methods and devices for "remote" surgery.  In March 2001, Wilk
withdrew its assertion of the '015 patent against Intuitive, leaving only the
'003 patent at issue in the suit. On November 8, 2001, the District Court
granted in Intuitive's favor summary judgment of noninfringement of the '003
patent and so dismissed Wilk's complaint.  This ruling terminates in Intuitive's
favor all liability issues in the litigation unless Wilk chooses to appeal the
summary judgment to the U.S. Court of Appeals for the Federal Circuit.  If Wilk
appeals, the litigation will continue at the appellate level.  If we lose Wilk's
suit against us, it will hurt our competitive position, may be costly to us and
may prevent us from selling our products. In addition, if we lose the patent
suit, we may need to obtain from Wilk a license to this technology if we are to
continue to market our products that have been found to infringe Wilk's patents.
This license could be expensive, which could seriously harm our business. We
continue to believe that we have multiple meritorious defenses in this action,
and further believe that Wilk has little chance of success if it chooses to
appeal the District Court's summary judgment of noninfringement to the U.S.
Court of Appeals for the Federal Circuit. However, litigation is unpredictable
and we may not prevail with any of our defenses or on appeal. If Wilk is
successful in its suit against us and is unwilling to grant us a license, we may
be required to stop selling our products that are found to infringe Wilk's
patents unless we can redesign them so they do not infringe Wilk's patents,
which we may be unable to do. In addition, if we lose the patent suit, we could
be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position.</P>

<A NAME="item2"></A>
<STRONG><P>ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS</P>
</STRONG><B><I><P>RECENT SALES OF UNREGISTERED SECURITIES</P>
</B></I><P ALIGN="JUSTIFY">Since January 1, 2001, we have sold and issued the
following unregistered securities: </P>
<BLOCKQUOTE ALIGN="JUSTIFY">(1) From January 1, 2001 through March 31, 2001, we
granted stock options to purchase 1,523,450 shares of our common stock, at
prices ranging from $5.38 to $8.44 per share, to employees pursuant to our 2000
Equity Incentive Plan. </BLOCKQUOTE>
<BLOCKQUOTE ALIGN="JUSTIFY">(2) From January 1, 2001 through March 31, 2001, we
granted stock options to purchase 40,000 shares of common stock, at $8.63 per
share, to directors pursuant to our 2000 Non-Employee Directors' Stock Option
Plan. </BLOCKQUOTE>
<BLOCKQUOTE ALIGN="JUSTIFY">(3) On January 31, 2001, we issued 102,629 shares at
an exercise price of $7.12 per share, to employees pursuant to our 2000 Employee
Stock Purchase Plan. </BLOCKQUOTE>
<BLOCKQUOTE ALIGN="JUSTIFY">(4) From April 1, 2001 through June 30, 2001, we
granted stock options to purchase 124,550 shares of our common stock, at prices
ranging from $3.35 to $11.17 per share,  to employees pursuant to our 2000
Equity Incentive Plan.</BLOCKQUOTE>
<BLOCKQUOTE ALIGN="JUSTIFY">(5) From April 1, 2001 through June 30, 2001, we
granted stock options to purchase 25,000 shares of common stock, at $6.29 per
share, to directors pursuant to our 2000 Non-Employee Directors' Stock Option
Plan. </BLOCKQUOTE>
<BLOCKQUOTE ALIGN="JUSTIFY">(6) From July 1, 2001 through September 30, 2001, we
granted stock options to purchase 306,300 shares of our common stock, at prices
ranging from $5.60 to $13.80 per share,  to employees pursuant to our 2000
Equity Incentive Plan.</BLOCKQUOTE>
<P ALIGN="JUSTIFY">The sales and issuance of securities described in paragraphs
(1), (2), (3), (4), (5), and (6) above were deemed to be exempt from
registration under the Securities Act by virtue of Rule 701 promulgated
thereunder in that they were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to a written contract relating to
compensation, as provided by Rule 701. </P>


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


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


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


<A NAME="item6"></A>
<STRONG><P>ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K</P>
</STRONG><P ALIGN="JUSTIFY">(a) Exhibits. </P>

<TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=575>
<TR><TD WIDTH="15%" VALIGN="BOTTOM">
<P ALIGN="CENTER"><B>Exhibit Number</B></TD>
<TD WIDTH="85%" VALIGN="BOTTOM">
<B><P>Description</B></TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">3.1(1) </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Amended and Restated Certificate of Incorporation of Intuitive Surgical.
</TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">3.2(2) </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Bylaws of Intuitive Surgical. </TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">4.1 </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Reference is made to Exhibits 3.1 and 3.2. </TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">4.2(3) </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Specimen Stock Certificate. </TD>
</TR>
</TABLE>

<P>_____________ </P>

<DIR>
<P ALIGN="JUSTIFY">(1) Previously filed as Exhibit 3.2 to our
Registration Statement on Form S-1, Registration No. 333-33016.
<P ALIGN="JUSTIFY">(2) Previously filed as Exhibit 3.3 to our
Registration Statement on Form S-1, Registration No. 333-33016.
<P ALIGN="JUSTIFY">(3) Previously filed as like-numbered Exhibit to our
Registration Statement on Form S-1, Registration No. 333-33016.
</DIR>

<P ALIGN="JUSTIFY">(b) Current Reports on Form 8-K.  We did not file a Current
Report on Form 8-K during the three month period ending September 30,
2001.</P>
<P ALIGN="JUSTIFY"></P>



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


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

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

<P>Date: November 14, 2001

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

<STRONG><P ALIGN="CENTER">EXHIBIT INDEX </P></STRONG>
<P ALIGN="CENTER"><CENTER><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=575>
<TR><TD WIDTH="15%" VALIGN="BOTTOM">
<P ALIGN="CENTER"><B>Exhibit Number</B></TD>
<TD WIDTH="85%" VALIGN="BOTTOM">
<B><P>Description</B></TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">3.1(1) </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Amended and Restated Certificate of Incorporation of Intuitive Surgical.
</TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">3.2(2) </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Bylaws of Intuitive Surgical. </TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">4.1 </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Reference is made to Exhibits 3.1 and 3.2. </TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">4.2(3) </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Specimen Stock Certificate. </TD>
</TR>
</TABLE>
</CENTER></P>

<P>_____________ </P>
<DIR>
<P ALIGN="JUSTIFY">(1) Previously filed as Exhibit 3.2 to our
Registration Statement on Form S-1, Registration No. 333-33016.
<P ALIGN="JUSTIFY">(2) Previously filed as Exhibit 3.3 to our
Registration Statement on Form S-1, Registration No. 333-33016.
<P ALIGN="JUSTIFY">(3) Previously filed as like-numbered Exhibit to our
Registration Statement on Form S-1, Registration No. 333-33016.
</DIR>

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

</BODY>
</HTML>
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Q3 2001 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 September 30, 2001
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)
1340 West Middlefield Road
Mountain View, California      94043-3061
(Address of Principal Executive Offices including Zip Code)
(650) 237-7000
(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
The Registrant had 36,200,277 shares of Common Stock, $0.001 par value per
share, outstanding as of October 31, 2001.
Intuitive Surgical, Inc.
TABLE OF CONTENTS
PART I.   FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited):
Consolidated balance sheets as of September 30, 2001 and
December 31, 2000
1
Consolidated statements of operations for the three-month
and nine-month periods ended September 30, 2001 and 2000
2
Consolidated statements of cash flows for the nine-month
periods ended September 30, 2001 and 2000
3
Notes to Consolidated Financial Statements
4
Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations
8
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
25
PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings
26
Item 2.   Changes in Securities and Use of Proceeds
28
Item 3.  Defaults Upon Senior Securities
29
Item 4.  Submission of Matters to a Vote of Security Holders
29
Item 5.  Other Information
29
Item 6.   Exhibits and Reports on Form 8-K
29
Signatures
31
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
INTUITIVE SURGICAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30,December 31,
                                                             2001          2000
                                                         ------------  -----------
                                                         (Unaudited)   (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents............................ $     24,619  $    22,657
  Short-term investments...............................       39,655       66,784
  Accounts receivable..................................       15,557        6,444
  Inventory, net.......................................        7,595        6,076
  Prepaid expenses.....................................        2,723        1,705
                                                         ------------  -----------
          Total current assets.........................       90,149      103,666
Property and equipment, net............................        6,761        4,669
Intangible and other assets............................        3,502        4,086
                                                         ------------  -----------
          Total assets.................................      100,412      112,421
                                                         ============  ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..................................... $      6,182  $     7,128
  Accrued compensation and employee benefits...........        2,379        2,609
  Warranty accrual.....................................        1,555        1,494
  Accrued royalty expense..............................           --        1,000
  Other accrued liabilities............................        1,590        2,028
  Deferred revenue.....................................        3,434        3,552
  Current portion of notes payable.....................        1,903        2,019
                                                         ------------  -----------
          Total current liabilities....................       17,043       19,830
Long-term notes payable................................          963        1,861
Stockholders' equity
  Preferred stock, 5,000,000 shares authorized, $0.001
     par value, issuable in series; no shares issued
     and outstanding as of September 30, 2001 and
     December 31, 2000.................................           --           --
  Common stock, 200,000,000 shares authorized, $0.001
     par value, 36,198,713 and 35,675,822 shares
     issued and outstanding as of September 30, 2001
     and December 31, 2000, respectively...............           36           36
  Additional paid-in capital...........................      188,877      186,713
  Deferred compensation................................       (1,145)      (2,483)
  Accumulated deficit..................................     (106,118)     (93,670)
  Accumulated other comprehensive income (loss)........          756          134
                                                         ------------  -----------
          Total stockholders' equity...................       82,406       90,730
                                                         ------------  -----------
          Total liabilities and stockholders' equity... $    100,412  $   112,421
                                                         ============  ===========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended      Nine Months Ended
                                            September 30,           September 30,
                                     ----------------------  ----------------------
                                        2001        2000        2001        2000
                                     ---------- -----------  ---------- -----------
Sales.............................. $   10,861  $    7,859  $   35,660  $   15,918
Cost of sales......................      5,750       4,708      18,972      10,743
                                     ----------  ----------  ----------  ----------
    Gross profit...................      5,111       3,151      16,688       5,175
                                     ----------  ----------  ----------  ----------
Operating costs and expenses:
  Research and development.........      3,493       3,172      10,060       8,624
  Selling, general and                      --          --          --          --
   administrative..................      7,452       5,395      21,952      12,510
                                     ----------  ----------  ----------  ----------
    Total operating costs and
     expenses......................     10,945       8,567      32,012      21,134
                                     ----------  ----------  ----------  ----------
Loss from operations...............     (5,834)     (5,416)    (15,324)    (15,959)
Other income (expense).............      1,036       1,396       2,876       2,417
                                     ----------  ----------  ----------  ----------
Net loss........................... $   (4,798) $   (4,020) $  (12,448) $  (13,542)
                                     ==========  ==========  ==========  ==========
Basic and diluted net loss per
  common share..................... $    (0.13) $    (0.12) $    (0.35) $    (0.68)
                                     ==========  ==========  ==========  ==========
Shares used in computing net
  loss per common share............     36,056      34,665      35,704      20,016
                                     ==========  ==========  ==========  ==========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
For the Nine Months
                                                             Ended September 30,
                                                         ------------------------
                                                            2001         2000
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net loss............................................... $   (12,448) $   (13,542)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation.........................................       1,638        1,147
  (Gain) loss on sales of fixed assets.................         (11)          --
  Amortization of deferred compensation................       1,338        1,803
  Amortization of intangible and other assets..........         584          389
Changes in operating assets and liabilities:
  Accounts receivable..................................      (9,113)      (6,329)
  Prepaid expenses.....................................      (1,018)      (1,054)
  Inventory............................................      (1,519)      (2,395)
  Accounts payable.....................................        (946)       2,503
  Accrued compensation and employee benefits...........        (230)         665
  Warranty accrual.....................................          61          359
  Other accrued liabilities............................        (438)         183
  Accrued royalty expense..............................      (1,000)          --
  Deferred revenue.....................................        (118)       1,597
                                                         -----------  -----------
Net cash used in operating activities..................     (23,220)     (14,674)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................      (3,755)      (2,277)
Proceeds from sale of fixed assets.....................          36           --
Acquisition of patents.................................          --       (3,000)
Purchase of short-term investments.....................     (42,075)     (55,628)
Proceeds from sales of short-term investments..........      34,803        5,600
Proceeds from maturities of short-term investments.....      35,023       10,576
                                                         -----------  -----------
Net cash provided by (used in) investing activities....      24,032      (44,729)
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock..............          --       34,756
Proceeds from issuance of common stock.................       2,228       47,478
Repurchase of common stock.............................         (64)         (15)
Proceeds from notes payable............................         550          500
Repayment of notes payable.............................      (1,564)      (1,457)
                                                         -----------  -----------
Net cash provided by financing activities..............       1,150       81,262
                                                         -----------  -----------
Net increase (decrease) in cash and cash equivalents...       1,962       21,859
Cash and cash equivalents, beginning of period.........      22,657        4,106
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $    24,619  $    25,965
                                                         ===========  ===========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
In this report, "Intuitive Surgical," "we," "us,"
and "our" refer to Intuitive Surgical, Inc.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all normal, recurring adjustments considered necessary for a fair
presentation have been included. The financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2000, included in the Annual Report on Form 10-K of Intuitive Surgical, Inc,
filed with the Securities and Exchange Commission. The results for the interim
period ended September 30, 2001 are not necessarily indicative of the results to
be expected for the full year ending December 31, 2001 or future operating
periods.
NOTE 2. CONCENTRATIONS OF RISK
For the nine months ended September 30, 2001, one
customer, A, accounted for 14% of total sales. For the nine months ended
September 30, 2000, one customer, A, accounted for 11% of total sales. The
Company extends reasonably short collection terms but does not require
collateral. The Company provides reserves for potential credit losses but has
not experienced significant losses to date.
The Company's
da Vinci
Surgical System, related
instruments and accessories and service have accounted for all of the Company's
sales for the nine months ended September 30, 2001 and 2000. Purchases of key
parts and components used to manufacture our products are from limited supply
sources. The inability of any of these suppliers to fulfill our supply
requirements may negatively impact future operating results.
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 September 30, 2001 and December 31, 2000.
NOTE 4. SHORT-TERM INVESTMENTS
All short-term investments are classified as
available-for-sale and therefore carried at fair value. We view our available-
for-sale portfolio as available for use in our 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 value based upon quoted market prices of
the securities. Unrealized gains and losses on such securities, when material,
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.
NOTE 5. INVENTORY, NET
Inventory, net consists of the following (in
thousands):
September 30, December 31,
                                   2001           2000
                               -------------  -----------
Raw materials................ $       2,583  $     2,650
Work-in-process..............         1,590        1,130
Finished goods...............         3,422        2,296
                               -------------  -----------
                              $       7,595  $     6,076
                               =============  ===========
NOTE 6. INTANGIBLE AND OTHER ASSETS
Purchased intangible assets represent patents which
are carried at cost less accumulated amortization. Amortization is computed
using the straight-line method over the expected useful life of six years. At
September 30, 2001 gross intangible assets totaled $4.7 million and related
accumulated amortization was $1.2 million.
NOTE 7. COMPREHENSIVE LOSS
The components of comprehensive loss consist of
the following (in thousands):
Three Months Ended    Nine Months Ended
                                             September 30,         September 30,
                                      --------------------  --------------------
                                         2001       2000       2001       2000
                                      ---------  ---------  ---------  ---------
Net loss............................ $  (4,798) $  (4,020) $ (12,448) $ (13,542)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.....................        --         14         --        (77)
  Change in unrealized gain on
    forward exchange contracts......        --         --        (67)        --
  Change in unrealized gain (loss)
    on available-for-sale securities       531        169        689        112
                                      ---------  ---------  ---------  ---------
Comprehensive loss.................. $  (4,267) $  (3,837) $ (11,826) $ (13,507)
                                      =========  =========  =========  =========
NOTE 8. NET LOSS PER SHARE
The following table presents the computation of
basic and diluted net loss per share (in thousands, except share and per share
data):
Three Months Ended        Nine Months Ended
                                      September 30,            September 30,
                               ------------------------  ------------------------
                                  2001         2000         2001         2000
                               -----------  -----------  -----------  -----------
Numerator used for basic and
  diluted net loss per
  common share............... $    (4,798) $    (4,020) $   (12,449) $   (13,542)
Denominator used for basic
  and diluted net loss per
  common share:
  Weighted-average shares
    outstanding..............  36,169,191   35,549,811   35,918,873   21,018,784
  Less weighted-average
    shares subject to
    repurchase...............    (112,995)    (884,313)    (214,843)  (1,002,949)
                               -----------  -----------  -----------  -----------
  Weighted-average shares
    used in computing basic
    and diluted net loss per
    common share.............  36,056,196   34,665,498   35,704,030   20,015,835
                               ===========  ===========  ===========  ===========
Basic and diluted net loss
  per common share........... $     (0.13) $     (0.12) $     (0.35) $     (0.68)
                               ===========  ===========  ===========  ===========
NOTE 9. REVENUE RECOGNITION
We apply the provisions of SAB 101 when recognizing
revenue. SAB 101 states that revenue generally is realized or realizable and
earned when all of the following criteria are met: a) persuasive evidence of an
arrangement exists, b) delivery has occurred or services have been rendered, c)
the seller's price to the buyer is fixed or determinable, and d) collectibility
is reasonably assured. Accordingly, amounts billed in excess of revenue
recognized are included as deferred revenue in the accompanying consolidated
balance sheets.
Revenue from system sales is recognized upon installation for
direct sales and upon shipment for sales to our distributors. If substantial
contractual obligations exist after system installation, revenue is recognized
after such obligations are fulfilled. Our distributors do not have price
protection rights. Our distributors have return rights under limited
circumstances.  Such rights are accounted for under the provisions of FAS 48. To
date, the Company has not had any returns of its systems.  Revenue from
instruments and accessories is recognized upon shipment. Service revenue is
billed in advance and recognized over the service period. Amounts are billed in
accordance with the terms of the underlying sales agreement.
Our
da Vinci
Surgical System contains a software
component.  We believe that the software element of our
da Vinci
Surgical
System is an incidental part of the system.  The software element within our
product is not sold or marketed separately to customers and the software does
not operate independently of the surgical system.  Furthermore, the software
development effort does not require a significant cost to the Company relative
to the overall development cost of the product.  As such, the software we
provide is incidental to the surgical system as a whole and the software revenue
guidance provided in SOP 97-2 is not applicable to our revenues.
NOTE 10. SOFTWARE DEVELOPMENT COSTS
Software development costs are accounted for in accordance with FASB
Statement No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed."  Prior to the achievement of
technological feasibility, software development costs are expensed as incurred
and are included in research and development expense.  Costs incurred between
feasibility and the general release of software enhancements are
insignificant.
NOTE 11. OTHER FINANCIAL INSTRUMENTS
We did not hold any forward exchange contracts at
September 30, 2001. At December 31, 2000, we had forward foreign exchange
contracts of approximately 2 months duration, to exchange euro and Belgian
Francs for U.S. dollars in the total gross notional amount of $781,000. The net
effect on settlement of these contracts during the three months ended March 31,
2001 was not material to our financial position or our results of operations and
is included in other income (expense) in the accompanying consolidated
statements of operations.
NOTE 12. STOCKHOLDERS' EQUITY
On June 22, 2001, Heartport, Inc. exercised a warrant to purchase 200,000
shares of common stock of the Company at an exercise price of $3.00 per
share.
NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). We
adopted SFAS 133 effective January 1, 2001. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The adoption of SFAS 133, as amended, has not had a significant impact on
our financial position or results of operations.
In July 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141 "Business Combinations" and SFAS No. 142
"Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001.  SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001, and that the use of the pooling-of-interest method is no longer
allowed.  Under SFAS No. 142 goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to an annual
impairment test in accordance with the new standards.  Other intangible assets
will continue to be amortized over their useful lives. The Company will adopt
SFAS No. 141 and SFAS No. 142 as of January 1, 2002.  The Company  does not
currently believe that the adoption of SFAS No. 141 and SFAS No. 142 will have a
significant impact on its financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of
Financial Condition and Results of Operations as of September 30, 2001 and for
the three and nine-month periods ended September 30, 2001 and September 30, 2000
should be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Intuitive Surgical's
Annual Report on Form 10-K for the year ended December 31, 2000.
Except for historical information, the discussion in this
report contains forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations, and intentions. The
cautionary statements made in this report should be read as applying to all
related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed here. Factors that
could cause or contribute to these differences include those discussed in
"Factors Affecting Operating Results" below as well as those discussed
elsewhere.
Intuitive
â
, Intuitive Surgical
â
, da Vinci™, EndoWrist™, InSite™ and Navigator™ are
trademarks of Intuitive Surgical, Inc.
OVERVIEW
We design, manufacture, and market the
da
Vinci
Surgical System, an advanced surgical system that we believe
represents a new generation of surgery. The
da Vinci
Surgical System
consists of a surgeon's console, a patient-side cart, a high performance vision
system and proprietary 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 while giving patients the benefits of MIS surgery, including decreased
trauma and postoperative pain, reduced surgical complications, shorter hospital
stays and lower total treatment costs.
In 1999, we obtained permission from the European Union to
affix the CE Mark to the
da Vinci
Surgical System and
EndoWrist
instruments for general surgical and cardiac surgical use. Based on this
approval, we recognized revenue for the first time in the second quarter of 1999
for the sale of our products. In July 2000, we received clearance from the U.S.
Food and Drug Administration, the FDA, to begin commercialization of our
da
Vinci
Surgical System in the United States for use in laparoscopic surgical
procedures. In March 2001, we received clearance from the FDA for use of our
da Vinci
Surgical System in non-cardiac thoracoscopic surgical
procedures.  In May 2001, we received market clearance from the FDA to promote
use of the
da Vinci
Surgical System for performance of laparoscopic
radical prostatectomy procedures.
To date, the majority of our revenues have come from the
sales of the
da Vinci
Surgical System, which are high revenue dollar
items. A smaller percentage of revenues have come from sales of
EndoWrist
instruments and accessories, which are lower revenue dollar items. A small
percentage of revenue also comes from ongoing service of installed
da
Vinci
Surgical Systems. Although we expect the majority of our revenues to
continue to come from the sale of
da Vinci
Surgical Systems over the next
few years, the percentage of revenue from our
EndoWrist
instruments and
service should continue to increase. Due to the high dollar revenue per system
sold, small variations in system unit sales may cause revenue to vary
significantly from quarter to quarter. During the useful life of each installed
da Vinci
Surgical System, we expect to generate recurring revenue through
sales of the
EndoWrist
instruments and accessories and ongoing service.
RESULTS OF OPERATIONS
Sales. Sales for the three months ended September 30,
2001 were $10.9 million, up 38% from the three months ended September 30, 2000.
The sales increase was primarily due to an increase in the number of
da
Vinci
Surgical Systems sold to 10 in the third quarter of 2001 from 8 in the
third quarter of 2000.  Sales for the nine months ended September 30, 2001 were
$35.7 million, up 124% from $15.9 million for the nine months ended September
30, 2000.  The sales increase was primarily due to an increase in the number of
year-to-date
da Vinci
Surgical Systems sold to 34 in 2001 from 17 in
2000.
Gross Profit. Gross profit for the three months ended
September 30, 2001 was $5.1 million, or 47% of sales, compared with $3.2
million, or 40% of sales for the three months ended September 30, 2000. Gross
profit for the nine months ended September 30, 2001 was $16.7 million, or 47% of
sales, compared with $5.2 million, or 33% of sales for the nine months ended
September 30, 2000. The improvement in gross profit resulted from sales growth
and increased manufacturing efficiencies.
Research and Development Expenses. Research and development
expenses for the three months ended September 30, 2001 were $3.5 million, up 10%
from $3.2 million for the  three months ended September 30, 2000.  Research and
development expenses for the nine months ended September 30, 2001 were $10.1
million, up 17% from $8.6 million for the  nine months ended September 30, 2000.
The year over year increases resulted primarily from headcount additions to
support product development and enhancements.
Research and development expenses include costs associated
with the design, development, testing and enhancement of our products. These
enhancements represent significant improvements to our products. Research and
development expenses also include expenditures for clinical trials and purchases
of laboratory supplies. Research and development costs are expensed as incurred.
We expect to continue to make substantial investments in research and
development and anticipate that research and development expenses will continue
to increase in the future.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the three months ended September 30,
2001 were $7.5 million, up 38% from $5.4 million  for the three months ended
September 30, 2000. Selling, general and administrative expenses for the nine
months ended September 30, 2001 were $22.0 million, up 75% from $12.5 million
for the nine months ended September 30, 2000.  The year over year increases
resulted from headcount additions in sales and marketing to support increased
revenue and the installed base of
da Vinci
Surgical Systems.
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 are expected to increase in the
future to support expanding business activities.
Deferred Compensation. We record deferred compensation as the
difference between the exercise price of options granted and the fair value of
our common stock at the time of grant for financial reporting purposes. Deferred
compensation is amortized to research and development expense and selling,
general and administrative expenses. Non-cash deferred compensation expense
included in research and development expenses was $0.2 million and $0.6 million
for the three months ended September 30, 2001 and 2000, respectively. Non-cash
deferred compensation expense included in research and development expense was
$0.8 million and $1.3 million for the nine months ended September 30, 2001 and
2000, respectively.  Non-cash deferred compensation expense included in selling,
general and administrative expenses was $0.1 million and $0.2 million for the
three months ended September 30, 2001 and 2000, respectively. Non-cash deferred
compensation expense included in selling, general and administrative expenses
was $0.5 million and $0.5 million for the nine months ended September 30, 2001
and 2000, respectively.  The remaining $1.1 million of deferred compensation
will be amortized over the remaining vesting periods of the options, generally
four years from the date of grant, using a graded vesting method. The amount of
deferred compensation expense to be recorded in future periods may decrease if
unvested options for which deferred compensation has been recorded are
subsequently canceled.
Other Income (Expense). Other income (expense) for the three
months ended September 30, 2001 was $1.0 million, down $0.4 million compared to
$1.4 million  for the three months ended September 30, 2000. The decrease was
due primarily to lower 2001 interest income resulting from lower average cash
and short-term investment balances.  Other income (expense) for the nine months
ended September 30, 2001 was $2.9 million, up $0.5 million  for the nine months
ended September 30, 2000. The increase resulted from higher cash and short-term
investment balances, driven by the exercise of warrants to purchase preferred
stock in March 2000, yielding approximately $34.8 million in net proceeds, and
our initial public offering in June and July 2000, which raised net proceeds of
approximately $46.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Financing.  Prior to our initial public offering,
operations were financed primarily through sales of our preferred stock,
yielding net proceeds of approximately $127.3 million, and equipment financing
arrangements yielding approximately $8.0 million. The equipment arrangements
provide financing at specific interest rates for periods of up to 48 months, by
which time the principal is repaid to the lessors. As collateral for the
equipment financing, we have granted the lessors a security interest in
equipment specified under each arrangement. In June and July 2000, we completed
the initial public offering of 5,750,000 shares of our common stock and realized
net proceeds of approximately $46.8 million.
As of September 30, 2001, we had working capital of $73.1
million, compared to $83.8 million as of December 31, 2000. The decrease in
working capital during the first nine months of 2001 resulted primarily from our
year-to-date net loss of $12.4 million.
Cash and Short-Term Investments.  Our principal source of
liquidity comes from cash and short-term investments.  As of September 30, 2001,
we had cash, cash equivalents and short-term investments of $64.3 million,
comprised of $24.6 million cash and $39.7 million short-term investments.
Short-term investments consist of highly-liquid, interest-bearing notes and
commercial paper.  Cash and short-term investments as of December 31, 2000 was
$89.4 million.  The $25.1 million decrease during the first nine months of 2001
resulted primarily from our net loss of $12.4 million, increased accounts
receivable of $9.2 million, investments in fixed assets of $3.8 million and
payment of a $1.0 million royalty to IBM.
Accounts Receivable.  Net accounts receivable was $15.6
million as of September 30, 2001, up $9.2 compared to $6.4 million at December
31, 2000.  The increase was due largely to an increase in average days
receivables outstanding from 54 days at December 31, 2000 to 129 days at
September 30, 2001.  The higher days sales outstanding at September 30, 2001
resulted from a high concentration of third quarter sales in the last month of
the quarter after the seasonally slower summer months.
Inventory.  Net inventory was $7.6 million as of September
30, 2001, up $1.5 million compared to $6.1 million at December 31, 2000.  The
increase was due primarily to increased production efforts to meet greater sales
volume going forward.
Current Liabilities.  Total current liabilities were $17.0
million at September 30, 2001, down $2.8 million compared to $19.8 million at
December 31, 2000.  The decline in current liabilities resulted primarily from
lower accounts payable and other accrued liabilities ($1.3 million); accrued
royalties ($1.0 million) at December 31, 2000 paid in the first quarter of 2001;
and accrued compensation and employee benefits ($0.2 million) at December 31,
2000 paid in the first quarter of 2001.
Our capital requirements depend on numerous factors,
including market acceptance of our products, the resources we devote to
developing and supporting our products and other factors. We expect to devote
substantial capital resources to continue our research and development efforts,
to expand our support and product development activities and for other general
corporate activities. We believe that our current cash and short-term investment
balances, together with revenue to be derived from the sale of our products,
will be sufficient to fund our operations at least through 2002. During or after
this period, if cash generated by operations is insufficient to satisfy our
liquidity requirements, we may need to sell additional equity or debt securities
or obtain additional credit arrangements. Additional financing may not be
available on terms acceptable to us or at all. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders.
FACTORS AFFECTING OPERATING RESULTS
OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES
ANALYSTS' OR INVESTORS' EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO
DECLINE.
Because of our limited operating history, we have
limited insight into trends that may emerge in our market and affect our
business. The revenue and income potential of our market are unproven, and we
may be unable to generate significant commercial 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, if any, will be
difficult to forecast because the market for new surgical technologies is still
evolving. Our results of operations will depend upon numerous factors,
including:
the progress and results of clinical trials;
actions relating to regulatory matters;
the extent to which our products gain market acceptance;
our timing and ability to develop our manufacturing and sales and marketing
capabilities;
demand for our products;
the progress of surgical training in the use of our products;
our ability to develop, introduce and market new or enhanced versions of our
products on a timely basis;
product quality problems;
our ability to protect our proprietary rights;
our ability to license additional intellectual property rights; and
third-party payor reimbursement policies.
Our operating results in any particular period will not be a
reliable indication of our future performance. It is likely that in some future
quarters, our operating results will be below the expectations of securities
analysts or investors. If this occurs, the price of our common stock, and the
value of your investment, will likely decline.
WE HAVE A LARGE ACCUMULATED DEFICIT, WE EXPECT FUTURE LOSSES, AND WE
MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred substantial losses since inception and we
expect to incur substantial additional operating losses for at least the next
two years, primarily as a result of expected increases in expenses for our
manufacturing and sales and marketing capabilities, research and development
activities, clinical trials and regulatory approval applications. The extent of
our future losses and the timing of profitability are highly uncertain, and we
may never achieve profitable operations. If the time required to generate
significant revenues and achieve profitability is longer than anticipated, we
may not be able to continue our operations. Our net loss for the three months
ended September 30, 2001 was $4.8 million compared to a net loss of $4.0 million
for the  three months ended September 30, 2000. As of September 30, 2001, we had
an accumulated deficit of $106.1 million.
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. We do not plan to
maintain a significant inventory of assembled
da Vinci
Surgical Systems,
but rather plan to manufacture these systems after receiving customer orders.
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 could 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 ORDER.
A relatively small number of customers account for a
significant portion of our total revenues. For the nine months ended September
30, 2001, AB Medica SRL, our Italian distributor, accounted for 14% of total
sales.  For the nine months ended September 30, 2000, AB Medica SRL accounted
for 11% of total sales.
We expect that revenues from a limited number of new
customers will account for a large percentage of total revenues in future
quarters. Our ability to attract new customers will depend on a variety of
factors, including the capability, safety, efficacy, ease of use, price, quality
and reliability of our products and effective sales, support, training and
service. The loss or delay of individual orders could have a significant impact
on revenues and operating results. Our failure to add new customers that make
significant purchases of our products would reduce our future revenues.
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 so 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. Although we are in the process of developing training programs
for surgical teams, 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 ("FFDCA"). Clearance under Section 510(k) requires
demonstration that a new device is substantially equivalent to another legally
marketed device. If we modify our products after they receive FDA clearance, the
FDA may require us to submit a separate 510(k) or PMA for the modified product
before we are permitted to market the products in the U.S. In addition, if we
develop products in the future that are not considered to be substantially
equivalent to a legally marketed device, we will be required to obtain FDA
approval by submitting a premarket approval application ("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, require us to conduct further testing, or
compile more data, including clinical data, in support of a 510(k) submission.
The FDA may also, instead of accepting a 510(k) submission, require us to submit
a PMA, which is typically a much more complex application than a 510(k). To
support a PMA, the FDA would likely require that we conduct one or more clinical
studies to demonstrate that the device is safe and effective, rather than
substantially equivalent to another legally marketed device. We may not be able
to meet the requirements to obtain 510(k) clearance or PMA approval, or the FDA
may not grant any necessary clearances or approvals. In addition, the FDA may
place significant limitations upon the intended use of our products as a
condition to a 510(k) clearance or PMA approval. Product applications can also
be denied or withdrawn due to failure to comply with regulatory requirements or
the occurrence of unforeseen problems following approval. Any delays or failure
to obtain FDA clearance or approvals of new products we develop, any limitations
imposed by the FDA on new product use or the costs of obtaining FDA clearance or
approvals could have a material adverse effect on our business, financial
condition and results of operations.
In order to conduct a clinical investigation involving human
subjects for the purpose of demonstrating the safety and effectiveness of a
device, a company must, among other things, apply for and obtain Institutional
Review Board ("IRB") approval of the proposed investigation. In addition, if the
clinical study involves a "significant risk" (as defined by the FDA) to human
health, the sponsor of the investigation must also submit and obtain FDA
approval of an investigational device exemption ("IDE") application. We may not
be able to obtain FDA and/or IRB approval to undertake clinical trials in the
U.S. for any new devices we intend to market in the United States in the future.
If we obtain such approvals, we may not be able to comply with the IDE and other
regulations governing clinical investigations or the data from any such trials
may not support clearance or approval of the investigational device. Failure to
obtain such approvals or to comply with such regulations could have a material
adverse effect on our business, financial condition and results of operations.
For additional information concerning regulatory approvals of our products, see
"Item 1: Business -- Government Regulation," included in the Annual Report on
Form 10-K of Intuitive Surgical, Inc., filed with the Securities and Exchange
Commission or SEC.
OUR PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY
PROCESSES AND APPROVAL REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE
NECESSARY INTERNATIONAL REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND
SELL OUR PRODUCTS IN FOREIGN COUNTRIES.
To be able to market and sell our products in other
countries, we must obtain regulatory approvals and comply with the regulations
of those countries. These regulations, including the requirements for approvals,
and the time required for regulatory review vary from country to country.
Obtaining and maintaining foreign regulatory approvals are expensive, and we
cannot be certain that we will receive regulatory approvals in any foreign
country in which we plan to market our products. If we fail to obtain regulatory
approval in any foreign country in which we plan to market our products, our
ability to generate revenue will be harmed.
The European Union requires that manufacturers of medical products obtain the
right to affix the CE mark to their products before selling them in member
countries of the European Union. The CE mark is an international symbol of
adherence to quality assurance standards and compliance with applicable European
medical device directives. In order to obtain the right to affix the CE mark to
products, a manufacturer must obtain certification that its processes meet
certain European quality standards. In January 1999, we received permission to
affix the CE mark to our
da Vinci
Surgical System and
EndoWrist
instruments for general surgical use.
We received additional CE
approvals for use of our
da Vinci
Surgical System and
EndoWrist
instruments in cardiac surgery in September 1999, February 2000, and August
2001.
If we modify existing products or develop new products in the
future, including new instruments, we will need to apply for permission to affix
the CE mark to such products. In addition, we will be subject to annual
regulatory audits in order to maintain the CE mark permissions we have already
obtained. We cannot be certain that we will be able to obtain permission to
affix the CE mark for new or modified products or that we will continue to meet
the quality and safety standards required to maintain the permissions we have
already received. If we are unable to maintain permission to affix the CE mark
to our products, we will no longer be able to sell our products in member
countries of the European Union.
IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN REIMBURSEMENT FROM
THIRD-PARTY PAYORS FOR PROCEDURES USING OUR PRODUCTS, OR IF REIMBURSEMENT IS
INSUFFICIENT TO COVER THE COSTS OF PURCHASING OUR PRODUCTS, WE MAY BE UNABLE TO
GENERATE SUFFICIENT SALES TO SUPPORT OUR BUSINESS.
Domestic institutions 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.
In such circumstances, we may have to apply to the American Medical Association
for a unique Current Procedural Terminology code covering computer-enhanced
surgery. If an application for a unique code is required, reimbursement for any
use of our products may be unavailable until an appropriate code is granted. The
application process, from filing until adoption of a new code, can take two or
more years.
Our success in international markets also depends upon the
eligibility of our products for reimbursement through government-sponsored
health care payment systems and third-party payors. Reimbursement practices vary
significantly by country. Many international markets have government-managed
healthcare systems that control reimbursement for new products and procedures.
Other foreign markets have both private insurance systems and government-managed
systems that control reimbursement for new products and procedures. Market
acceptance of our products may depend on the availability and level of
reimbursement in any country within a particular time. In addition, health care
cost containment efforts similar to those we face in the United States are
prevalent in many of the other countries in which we intend to sell our products
and these efforts are expected to continue. For further information on third-
party reimbursement policies, see "Item 1: Business -- Third-Party
Reimbursement," included in the Annual Report on Form 10-K of Intuitive
Surgical, Inc., filed with the SEC.
WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH COMPUTER
MOTION AND BROOKHILL-WILK 1, LLC THAT MAY HURT OUR COMPETITIVE POSITION, MAY BE
COSTLY TO US AND MAY PREVENT US FROM SELLING OUR PRODUCTS.
On May 10, 2000, Computer Motion, Inc. filed a
lawsuit in United States District Court for the Central District of California
(Case No. CV00-4988 CBM) alleging that by making, using, selling or offering for
sale our
da Vinci
Surgical System, we are infringing United States Patent
Numbers 5,524,180, 5,878,193, 5,762,458, 6,001,108, 5,815,640, 5,907,664 and
5,855,583 in willful disregard of Computer Motion's patent rights. On June 1,
2000, Computer Motion amended its lawsuit to allege that we also infringe U.S.
Patent Number 6,063,095. On October 30, 2000, Computer Motion filed a motion
seeking to add U.S. Patent Number 6,102,850 to the litigation. These patents
concern methods and devices for conducting various aspects of robotic surgery.
On December 7 and 8, 2000, the U.S. Patent and Trademark Office ("PTO") declared
three interferences between a single SRI patent application exclusively licensed
to Intuitive and three of Computer Motion's patents, Numbers 5,878,193,
5,907,664 and 5,855,583. These interferences resulted from requests for
interference filed in May through July 1999.  In light of those declarations of
interference, the District Court on February 5, 2001 stayed -- put on hold --
all proceedings in the litigation for one year while the PTO conducts the
interference proceedings.  In March 2001, Computer Motion filed a Notice of
Appeal of the Stay Order with the United States Court of Appeals for the Federal
Circuit.  In April 2001, however, Computer Motion voluntarily dismissed its
appeal.  Then, in May 2001, Computer Motion filed a motion in the District Court
requesting that the Court lift the stay and not further delay the litigation.
The Court denied this motion on July 26, 2001 and left the stay in place. On
October 10, 2001 the PTO held a hearing concerning all three interferences.
Decisions regarding all of the motions argued at the interference hearing are
expected in late 2001.
On March 30, 2001, Intuitive and International Business
Machines Corporation ("IBM") jointly filed suit against Computer
Motion, Inc. in the U.S. District Court for the District of Delaware alleging
infringement of U.S. Patent No. 6,201,984.  The '984 patent which concerns
aspects of voice control of surgical instruments issued to IBM in early March
2001 and is exclusively licensed to us. In late June 2001, Computer Motion filed
a request to add its own U.S. Patent No. 6,244,809 to this Delaware litigation
alleging that we infringe the '809 patent by making, using, selling and offering
for sale our
da Vinci
Surgical System.  The '809 patent concerns aspects
of devices for performing robotic surgery.  On November 9, 2001, the Delaware
Court refused to permit Computer Motion to add its '809 patent into the Delaware
litigation.
If the Central District of California litigation proceeds
after the PTO has resolved the interferences, and if we lose Computer Motion's
suit against us, it will hurt our competitive position, may be costly to us and
may prevent us from selling our products. In addition, if we lose either of the
patent suits, we will need to obtain from Computer Motion a license to this
technology if we are to continue to market our products that have been found to
infringe Computer Motion's patents. This license could be expensive, or could
require us to license to Computer Motion some of our technology which would
result in a partial loss of our competitive advantage in the marketplace, each
of which could seriously harm our business. We believe that we have multiple
meritorious defenses to all of Computer Motion's claims. However, litigation is
unpredictable and we may not prevail with any of these defenses. If Computer
Motion is successful in either of the patent suits and is unwilling to grant us
a license, we may be required to stop selling our products that are found to
infringe any of Computer Motion's patents unless we can redesign them so they do
not infringe Computer Motion's patents, which we may be unable to do. In
addition, if we lose either of the patent suits, we could be required to pay
Computer Motion damages, including treble damages, which could be substantial
and harm our financial position.
On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk") filed a
lawsuit in the United States District Court for the Southern District of New
York (Case No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or
offering for sale our
da Vinci
Surgical System, we are infringing U.S.
Patent Nos. 5,217,003 and 5,368,015 in willful disregard of Wilk's patent
rights. These patents concern methods and devices for "remote" surgery. In March
2001, Wilk withdrew its assertion of infringement of the '015 patent against
Intuitive, leaving only the '003 patent at issue in the suit. On November 8,
2001, the District Court granted summary judgment of noninfringement of the '003
patent in our favor and dismissed Wilk's complaint.  This ruling terminates in
our favor all substantive liability issues in the litigation unless Wilk chooses
to appeal the summary judgment to the U.S. Court of Appeals for the Federal
Circuit. If the District Court's decision is appealed, we believe the summary
judgment of noninfringement will be  upheld by the appellate court.  However,
litigation is unpredictable and we may not prevail on appeal.  If we lose an
appeal and ultimately Wilk's suit against us, it will hurt our competitive
position, may be costly to us and may prevent us from selling our products. In
addition, if we lose the patent suit, we may need to obtain from Wilk a license
to this technology if we are to continue to market our products that have been
found to infringe Wilk's patents. This license could be expensive, which could
seriously harm our business. We continue to believe that we have multiple
meritorious defenses in this action. In addition, if Wilk is successful in its
suit against us and is unwilling to grant us a license, we may be required to
stop selling our products that are found to infringe Wilk's patents unless we
can redesign them so they do not infringe Wilk's patents, which we may be unable
to do. If we lose the patent suit, we could also be required to pay Wilk
damages, including treble damages, which could be substantial and harm our
financial position.
These claims will be expensive to litigate, may be protracted
and our confidential information may be compromised. Whether or not we are
successful in these lawsuits, this litigation could consume substantial amounts
of our financial and managerial resources. At any time Computer Motion or Wilk
may file additional claims against Intuitive Surgical, or we may file claims
against Computer Motion or Wilk, which could increase the risk, expense and
duration of the litigations. Further, because of the substantial amount of
discovery often involved in connection with this type of litigation, there is a
risk that some of our confidential information could be compromised by
disclosure. For more information on our litigation with Computer Motion, see
"Part II-Item 1: Legal Proceedings."
PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY HURT OUR STOCK
PRICE.
During the course of our administrative proceedings
and/or lawsuits with Computer Motion and Brookhill-Wilk 1, LLC, there may be
public announcements of the results of hearings, motions, and other interim
proceedings or developments. 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.
IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN
OUR PRODUCTS FROM USE BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET
WILL BE HARMED.
Our commercial success will depend in part on obtaining
patent and other intellectual property protection for the technologies contained
in our products, and on successfully defending our patents and other
intellectual property against third party challenges.
We will incur substantial costs in obtaining patents and, if
necessary, defending our proprietary rights. The patent positions of medical
device companies, including ours, can be highly uncertain and involve complex
and evolving legal and factual questions. We cannot assure you that 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 cannot assure you that 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. Given the early priority dates
of some of our licensed patents, we believe one or more patent proceedings may
be in our best interests. In addition, the laws of certain foreign countries do
not protect intellectual property rights to the same extent as do the laws of
the United States.
OTHERS MAY ASSERT THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL
PROPERTY RIGHTS, WHICH MAY CAUSE US TO ENGAGE IN COSTLY DISPUTES AND, IF WE ARE
NOT SUCCESSFUL IN DEFENDING OURSELVES, COULD ALSO CAUSE US TO PAY SUBSTANTIAL
DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.
We are aware of both United States and foreign patents issued
to third parties that relate to computer-assisted surgery and minimally invasive
surgery. Some of these patents on their face appear broad enough to cover one or
more aspects of our present technology, and may cover aspects of our future
technology. We do not know whether any of these patents, if challenged, would be
held valid, enforceable and infringed. From time to time, we receive, and likely
will continue to receive, letters from third parties inviting us to license
their patents. We may be sued by, or become involved in an administrative
proceeding because of one or more of these third parties, regardless of the
merits or likely outcome of such suit or proceeding. We cannot assure you that a
court or administrative body would agree with any arguments or defenses we have
concerning invalidity, unenforceability or noninfringement of any third-party
patent. In addition to the issued patents of which we are aware, other parties
may have filed, and in the future are likely to file, patent applications
covering surgical products that are similar or identical to ours. We cannot
assure you that any patents issuing from applications filed by a third party
will not cover our products or will not have priority over our patent
applications.
The medical device industry has been characterized by
extensive litigation and administrative proceedings regarding patents and other
intellectual property rights, and companies have employed such actions to gain a
competitive advantage. If third parties assert infringement or other
intellectual property claims against us as Computer Motion and Brookhill-Wilk 1,
LLC have done, our technical and management personnel will experience a
significant diversion of time and effort and we will incur large expenses
defending ourselves. If third parties in any patent action are successful, our
patent portfolio may be damaged, we may have to pay substantial damages,
including treble damages, and we may be required to stop selling our products or
obtain a license which, if available at all, may require us to pay substantial
royalties. We cannot be certain that we will have the financial resources or the
substantive arguments to defend our patents from infringement or claims of
invalidity or unenforceability, or to defend against allegations of infringement
of third-party patents. In addition, any public announcements related to
litigation or administrative proceedings initiated by us, or initiated or
threatened against us, could cause our stock price to decline.
THE RIGHTS AND MEASURES WE RELY ON TO PROTECT THE INTELLECTUAL
PROPERTY UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE TO PREVENT THIRD PARTIES
FROM USING OUR TECHNOLOGY WHICH COULD HARM OUR ABILITY TO COMPETE IN THE
MARKET.
In addition to patents, we typically rely on a combination of
trade secret, copyright and trademark laws, nondisclosure agreements and other
contractual provisions and technical security measures to protect our
intellectual property rights. Nevertheless, these measures may not be adequate
to safeguard the technology underlying our products. If they do not protect our
rights adequately, third parties could use our technology, and our ability to
compete in the market would be reduced. In addition, employees, consultants and
others who participate in developing our products may breach their agreements
with us regarding our intellectual property, and we may not have adequate
remedies for the breach. We also may not be able to effectively protect our
intellectual property rights in some foreign countries. For a variety of
reasons, we may decide not to file for patent, copyright or trademark protection
outside the United States. We also realize that our trade secrets may become
known through other means not currently foreseen by us. Notwithstanding our
efforts to protect our intellectual property, our competitors may independently
develop similar or alternative technologies or products that are equal or
superior to our technology and products without infringing any of our
intellectual property rights, or may design around our proprietary technologies.
For further information on our intellectual property and the difficulties in
protecting it, see "Item 1: Business -- Intellectual Property," included in the
Annual Report on Form 10-K of Intuitive Surgical, Inc., filed with the SEC.
OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE
ACCESS TO THESE TECHNOLOGIES, OUR REVENUES COULD DECLINE.
We rely on technology that we license from others, including
technology that is integral to our products. We have entered into license
agreements with SRI International, IBM Corporation, MIT, Heartport, Inc. (now
part of Johnson & Johnson), and Olympus Optical Co., Ltd. of Japan. Any of
these agreements may be terminated for breach, including the failure to make
required payments under the IBM license and the failure to commercialize our
products under the SRI International license. If any of these agreements is
terminated, we may be unable to reacquire the necessary license on satisfactory
terms, or at all. The loss or failure to maintain these licenses could prevent
or delay further development or commercialization of our products. See "Item 1:
Business -- Intellectual Property," included in the Annual Report on Form 10-K
of Intuitive Surgical, Inc., filed with the SEC.
BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS MAY CHOOSE TO
PURCHASE OUR COMPETITORS' PRODUCTS OR MAY NOT ACCEPT INTUITIVE SURGERY, WHICH
WOULD RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE.
Intuitive surgery is a new technology that must compete with
established minimally invasive surgery and open surgery. These procedures are
widely accepted in the medical community and in many cases have a long history
of use. We also face competition from several companies that are developing new
approaches and products for the minimally invasive surgery market. In addition,
we presently face increasing competition from companies who are developing
robotic and computer-assisted surgical systems. Our revenues may be reduced or
eliminated if our competitors develop and market products that are more
effective or less expensive than our products. If we are unable to compete
successfully, our revenues will suffer. We may not be able to maintain or
improve our competitive position against current or potential competitors,
especially those with greater resources.
In many cases, the medical conditions that can be treated
using our products can also be treated by pharmaceuticals or other medical
devices and procedures. Many of these alternative treatments are also widely
accepted in the medical community and have a long history of use. In addition,
technological advances could make such treatments more effective or less
expensive than using our products, which could render our products obsolete or
unmarketable. We cannot be certain that physicians will use our products to
replace or supplement established treatments or that our products will be
competitive with current or future technologies.
IF SOFTWARE 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 do incorporate computer software. Software 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 software
defects. We cannot assure you that our software will not experience errors or
performance problems in the future. If we experience software errors or
performance problems, any of the following could occur:
delays in product shipments;
loss of revenue;
delay in market acceptance;
diversion of our resources;
damage to our reputation;
increased service or warranty costs; or
product liability claims.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND MAY
ENCOUNTER MANUFACTURING PROBLEMS OR DELAYS THAT COULD RESULT IN LOST
REVENUE.
We have manufactured a limited number of our products for
sales to customers. We may be unable to establish or maintain reliable, high-
volume manufacturing capacity. Even if this capacity can be established and
maintained, the cost of doing so may increase the cost of our products and
reduce our ability to compete. We may encounter difficulties in scaling up
production of our products, including:
problems involving production yields;
quality control and assurance;
component supply shortages;
shortages of qualified personnel; and
compliance with state, federal and foreign regulations.
Manufacturing our products is a complex process. If demand
for our products exceeds our manufacturing capacity, we could develop a
substantial backlog of customer orders. If we are unable to establish and
maintain larger-scale manufacturing capabilities, our ability to generate
revenues will be limited and our reputation in the marketplace would be
damaged.
IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL,
STATE OR EUROPEAN MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY
CEASE ALL OR PART OF OUR MANUFACTURING OPERATIONS, WHICH WOULD RESULT IN PRODUCT
DELIVERY DELAYS AND LOST REVENUE.
Our manufacturing facilities are subject to periodic
inspection by regulatory authorities and our operations will continue to be
regulated by the FDA for compliance with Good Manufacturing Practice
requirements contained in the FDA's Quality System Regulations (QSR). We are
also required to comply with the European Union (EU) ISO 9001 and Medical Device
Directive (MDD) standards in order to produce products bearing the CE Mark for
sale in Europe. If we fail to continue to comply with Good Manufacturing
Practice requirements or the aforementioned EU standards, we may be required to
cease all or part of our operations until we comply with these regulations.
Maintaining such compliance is difficult and costly. In March 2000, the FDA
inspected our Mountain View facility and the Good Manufacturing Practice issues
raised during the inspection were satisfactorily resolved with the FDA. We are
also audited on an annual basis to assure compliance with EU ISO 9001 and MDD
standards.  In June 2001, our facility in Mountain View was audited and the EU
standards issues raised during the inspection were satisfactorily resolved
allowing us to continue applying the CE Mark to our products.  We cannot be
certain that our facilities will be found to comply with Good Manufacturing
Practice requirements or the ISO 9001 standards in future audits by regulatory
authorities.
The state of California also requires that we maintain a
license to manufacture medical devices. Our facilities and manufacturing
processes were inspected in February 1998. In March 1998, we passed the
inspection and received a device manufacturing license from the California
Department of Health Services. We will be 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 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.
OUR GROWTH WILL PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS
AND RESOURCES AND, IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET, SELL
AND DEVELOP OUR PRODUCTS MAY BE HARMED.
In order to complete clinical trials, scale-up manufacturing,
expand marketing and distribution capabilities and develop future products, we
must expand our operations. We expect that future expansion will occur
particularly in the areas of sales and marketing, manufacturing and research and
development. This expansion will likely result in new and increased
responsibilities for management personnel and place significant strain upon our
management, operating and financial systems and resources. We plan to sell our
products primarily through direct sales, and we currently have a small sales
organization. Our products require a complex marketing and sales effort targeted
at several levels within a prospective customer's organization. We will need to
expand our sales team significantly over the next 12 months to achieve our sales
growth goals. We will face significant challenges and risks in building and
managing our sales team, including managing geographically dispersed sales
efforts and adequately training our sales people in the use and benefits of our
products. To accommodate our growth and compete effectively, we will be required
to improve our information systems, create additional procedures and controls
and expand, train, motivate and manage our work force. Our future success will
depend in part on the ability of current and future management personnel to
operate effectively, both independently and as a group. We cannot be certain
that our personnel, systems, procedures and controls will be adequate to support
our future operations.
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.  In order to pursue our product development,
marketing and commercialization plans, we will need to hire additional qualified
personnel with expertise in research and development, clinical testing,
government regulation, manufacturing, sales and marketing, and finance. Our
product development plans depend in part on our ability to attract and retain
engineers with experience in mechanics, software and optics. Attracting and
retaining qualified personnel will be critical to our success, and competition
for qualified personnel is intense, particularly in Silicon Valley. We may not
be able to attract and retain personnel on acceptable terms given the
competition for such personnel among technology and healthcare companies, and
universities. The loss of any of these persons or our inability to attract and
retain qualified personnel could harm our business and our ability to compete.
INTERNATIONAL SALES OF OUR PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION
OF OUR REVENUES, WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS.
OUR GROWTH MAY BE LIMITED IF WE ARE UNABLE TO SUCCESSFULLY MANAGE OUR
INTERNATIONAL ACTIVITIES.
Our business currently depends in large part on our
activities in Europe, and a component of our growth strategy is to expand our
presence into additional foreign markets. Sales to markets outside of the United
States accounted for approximately 22% of our sales for the three months ended
September 30, 2001, 35% for the three months ended September 30, 2000, 36% for
the nine months ended September 30, 2001 and 41% for the nine months ended
September 30, 2000. We will be subject to a number of challenges that
specifically relate to our international business activities. These challenges
include:
failure of local laws to provide the same degree of protection against
infringement of our intellectual property;
protectionist laws and business practices that favor local competitors,
which could slow our growth in international markets;
the risks associated with foreign currency exchange rate fluctuation;
the expense of establishing facilities and operations in new foreign
markets; and
building an organization capable of supporting geographically dispersed
operations.
Currently, a majority of our international sales are
denominated in U.S. dollars. As a result, an increase in the value of the U.S.
dollar relative to foreign currencies could make our products less competitive
in international markets. If we are unable to meet and overcome these
challenges, our international operations may not be successful, which would
limit the growth of our business.
FAILURE TO RAISE ADDITIONAL CAPITAL OR GENERATE THE SIGNIFICANT
CAPITAL NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS COULD
REDUCE OUR ABILITY TO COMPETE, RESULT IN LOWER REVENUES AND MAY PREVENT US FROM
TAKING ADVANTAGE OF MARKET OPPORTUNITIES.
We expect that our existing capital resources and the revenue
to be derived from the sale of our products will be sufficient to meet our
working capital and capital expenditure needs at least through 2002. After that,
we may need to raise additional funds and we cannot be certain that we will be
able to obtain additional financing on favorable terms, or at all. If we need
additional capital and cannot raise it on acceptable terms, we may not be able
to, among other things:
develop or enhance our products and services;
acquire technologies, products or businesses;
expand operations in the United States or internationally;
hire, train and retain employees; or
respond to competitive pressures or unanticipated capital requirements.
Our failure to do any of these things could result in lower revenues and
could harm our business.
SALES BY CURRENT STOCKHOLDERS COULD CAUSE OUR COMMON STOCK PRICE TO
DECLINE.
The market price of our common stock could decline
as a result of sales of a large number of shares in the market. These sales may
also make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate to raise funds through future
offerings of common stock. As of September 30, 2001, several entities
beneficially owned more than 5% of the outstanding shares of our common stock,
including Allan G. Lozier,  Investor Guernsey Ltd. and PaTMarK Company, Inc.
On May 8, 2001, June 21, 2001, and October 29, 2001, Mayfield
Fund distributed 1,734,176, 891,801, and 875,327shares of Intuitive common stock
to its Partners, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are not subject to any meaningful market risks
related to currency, commodity prices or similar matters. We are sensitive to
short-term interest rate fluctuations to the extent that such fluctuations
impact the interest income we receive on the investment of the remaining
proceeds from our June 2000 initial public offering.
The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities
that we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds and government and non-government debt securities. Due to the
short-term nature of these investments, we believe that we have no material
exposure to interest rate risk arising from our investments. Therefore, no
quantitative tabular disclosure is required.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 10, 2000, Computer Motion, Inc. filed a
lawsuit in United States District Court for the Central District of California
(Case No. CV00-4988 CBM) alleging that by making, using, selling or offering for
sale our
da Vinci
Surgical System, we are infringing United States Patent
Numbers 5,524,180, 5,878,193, 5,762,458, 6,001,108, 5,815,640, 5,907,664 and
5,855,583 in willful disregard of Computer Motion's patent rights. On June 1,
2000, Computer Motion amended its lawsuit to allege that we also infringe U.S.
Patent Number 6,063,095. On October 30, 2000, Computer Motion filed a motion
seeking to add U.S. Patent Number 6,102,850 to the litigation. Each of these
nine patents concerns methods and devices for conducting various aspects of
robotic surgery. Until February 2001, the litigation was proceeding in the early
stages of discovery, with no trial date set. In February 2001, in response to
Intuitive's request, the District Court stayed -- put on hold -- all proceedings
in the litigation because of the declaration by the U.S. Patent and Trademark
Office ("PTO") of three interferences between a single SRI patent application
exclusively licensed to us and three of Computer Motion's patents (see next
paragraph). A status report is due to the Court in one year, or earlier if the
interferences are resolved before then. In March 2001, Computer Motion filed a
Notice of Appeal of the Stay Order with the United States Court of Appeals for
the Federal Circuit.  In April 2001, however, Computer Motion voluntarily
dismissed its appeal.  Then, in May 2001, Computer Motion filed a motion with
the District Court requesting that the Court lift the stay and not further delay
the litigation.  The Court denied this motion on July 26, 2001 and left the stay
in place. The Computer Motion action seeks damages based upon the making, using,
selling and offering for sale of our products and processes, and seeks to enjoin
our continued activities relating to these products. This action subjects us to
potential liability for damages, including treble damages, and could require us
to cease making, using or selling the affected products, or to obtain a license
in order to continue to manufacture, use or sell the affected products. While we
continue to believe we have multiple meritorious defenses to this action, we
cannot assure you that we ultimately will prevail on any issue in the litigation
or that we will be able to successfully defend Computer Motion's charges, nor
can we provide assurance that any license required would be made available on
commercially acceptable terms, if at all. Failure to successfully defend against
the Computer Motion action could harm our business, financial condition and
operating results. Due to the inherent uncertainties of litigation, we cannot
accurately predict the ultimate outcome of this matter at this time and,
therefore, cannot estimate the range of possible loss.
Beginning in May 1999 and as recently as March 2001, we
requested that the PTO declare interferences between some of our exclusively
licensed SRI patent applications and six of Computer Motion's U.S. patents. An
interference is a proceeding within the U.S. Patent Office to resolve questions
regarding the patentability of inventions and who first invented subject matter
claimed by two or more patents or patent applications. On December 7 and 8,
2000, the PTO formally declared three interference proceedings between a single
SRI patent application licensed to us and three of Computer Motion's patents:
Nos. 5,878,193, 5,907,664 and 5,855,583. Several of our requests for other
interferences are still pending. Because the SRI patent application licensed to
Intuitive was filed in January 1992 and Computer Motion's three patents were
filed no earlier than August 1992 and as late as February 1996, SRI/Intuitive
is the "Senior Party" in each interference. As "Junior Party," Computer Motion
will bear the burden of proving that it is entitled to keep its patents. In
papers filed with the PTO in March 2001, Computer Motion stated that
SRI/Intuitive filed for its patent application before Computer Motion thought of
its inventions.  We therefore anticipate that a second "priority"
phase of each interference to determine which party invented the technology
first will be unnecessary.  The written portion of the "preliminary
motions" phase of each interference has concluded.  We filed seventeen
motions in February and March 2001 to address possible contingencies and
outcomes dependent on how the interference proceedings might progress. A hearing
on our motions and on Computer Motion's five motions was held on October 10,
2001 before the PTO Board.  We expect the PTO Board to issue decisions regarding
all of the motions around the end of 2001.
In September 2000, we filed a Notice of Opposition in the
European Patent Office ("EPO") challenging European Patent No. 653,922, which
was issued to Computer Motion in 1999 and is related to several of the patents
now involved in the U.S. litigation and the interference proceedings. An
Opposition proceeding allows the EPO to determine whether the challenged patent
should be revoked in its entirety, should be amended, or should remain
unaltered. In its Notice of Opposition, Intuitive cited numerous prior art
references not cited to the EPO during the '922 patent's original prosecution.
Computer Motion has responded to our Opposition and the matter is now before the
EPO for further proceedings.
On March 30, 2001, Intuitive and International Business
Machines Corporation ("IBM") jointly filed suit against Computer Motion in the
U.S. District Court for the District of Delaware. The complaint alleges that by
continuing to make, use, sell, and offer for sale its AESOP and ZEUS voice-controlled
products, Computer Motion willfully infringes U.S. Patent No.
6,201,984. The '984 patent issued to IBM on March 13, 2001, and is exclusively
licensed to us under the terms of our 1997 License Agreement with IBM. The '984
patent concerns various aspects of controlling movement of surgical instruments
with voice commands and predates by several years Computer Motion's development
of voice-controlled surgical robots. Because Computer Motion's voice-controlled
HERMES product interfaces with the AESOP and ZEUS products, HERMES is also
implicated in the patent infringement complaint.  A trial date of June 2002 has
been set for this litigation.  In early June 2001, Computer Motion requested
that the District Court transfer this case from Delaware to the Central District
of California, where Computer Motion's lawsuit against Intuitive is pending.  In
addition, in late June 2001, Computer Motion filed a request to add its own U.S.
Patent No. 6,244,809 to the Delaware litigation, alleging we infringe the '809
patent by making, using, selling and offering for sale our
da Vinci
Surgical System.  On November 9, 2001, the District Court denied both of
Computer Motion's requests, ruling that the litigation will remain in Delaware
and that Computer Motion will not be able to add its '809 patent into the suit.
Due to the inherent uncertainties of litigation, we cannot accurately predict
the ultimate outcome of this matter at this time.
On September 1, 2000, Brookhill-Wilk 1, LLC ("Wilk") filed a
lawsuit in the United States District Court for the Southern District of New
York (Case No. 00 Civ. 6599 (NRB)) alleging that by making, using, selling or
offering for sale our da Vinci Surgical System, we are infringing U.S. Patent
Nos. 5,217,003 and 5,368,015 in willful disregard of Wilk's patent rights. These
patents concern methods and devices for "remote" surgery.  In March 2001, Wilk
withdrew its assertion of the '015 patent against Intuitive, leaving only the
'003 patent at issue in the suit. On November 8, 2001, the District Court
granted in Intuitive's favor summary judgment of noninfringement of the '003
patent and so dismissed Wilk's complaint.  This ruling terminates in Intuitive's
favor all liability issues in the litigation unless Wilk chooses to appeal the
summary judgment to the U.S. Court of Appeals for the Federal Circuit.  If Wilk
appeals, the litigation will continue at the appellate level.  If we lose Wilk's
suit against us, it will hurt our competitive position, may be costly to us and
may prevent us from selling our products. In addition, if we lose the patent
suit, we may need to obtain from Wilk a license to this technology if we are to
continue to market our products that have been found to infringe Wilk's patents.
This license could be expensive, which could seriously harm our business. We
continue to believe that we have multiple meritorious defenses in this action,
and further believe that Wilk has little chance of success if it chooses to
appeal the District Court's summary judgment of noninfringement to the U.S.
Court of Appeals for the Federal Circuit. However, litigation is unpredictable
and we may not prevail with any of our defenses or on appeal. If Wilk is
successful in its suit against us and is unwilling to grant us a license, we may
be required to stop selling our products that are found to infringe Wilk's
patents unless we can redesign them so they do not infringe Wilk's patents,
which we may be unable to do. In addition, if we lose the patent suit, we could
be required to pay Wilk damages, including treble damages, which could be
substantial and harm our financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 2001, we have sold and issued the
following unregistered securities:
(1) From January 1, 2001 through March 31, 2001, we
granted stock options to purchase 1,523,450 shares of our common stock, at
prices ranging from $5.38 to $8.44 per share, to employees pursuant to our 2000
Equity Incentive Plan.
(2) From January 1, 2001 through March 31, 2001, we
granted stock options to purchase 40,000 shares of common stock, at $8.63 per
share, to directors pursuant to our 2000 Non-Employee Directors' Stock Option
Plan.
(3) On January 31, 2001, we issued 102,629 shares at
an exercise price of $7.12 per share, to employees pursuant to our 2000 Employee
Stock Purchase Plan.
(4) From April 1, 2001 through June 30, 2001, we
granted stock options to purchase 124,550 shares of our common stock, at prices
ranging from $3.35 to $11.17 per share,  to employees pursuant to our 2000
Equity Incentive Plan.
(5) From April 1, 2001 through June 30, 2001, we
granted stock options to purchase 25,000 shares of common stock, at $6.29 per
share, to directors pursuant to our 2000 Non-Employee Directors' Stock Option
Plan.
(6) From July 1, 2001 through September 30, 2001, we
granted stock options to purchase 306,300 shares of our common stock, at prices
ranging from $5.60 to $13.80 per share,  to employees pursuant to our 2000
Equity Incentive Plan.
The sales and issuance of securities described in paragraphs
(1), (2), (3), (4), (5), and (6) above were deemed to be exempt from
registration under the Securities Act by virtue of Rule 701 promulgated
thereunder in that they were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to a written contract relating to
compensation, as provided by Rule 701.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit Number
Description
3.1(1)
Amended and Restated Certificate of Incorporation of Intuitive Surgical.
3.2(2)
Bylaws of Intuitive Surgical.
4.1
Reference is made to Exhibits 3.1 and 3.2.
4.2(3)
Specimen Stock Certificate.
_____________
(1) Previously filed as Exhibit 3.2 to our
Registration Statement on Form S-1, Registration No. 333-33016.
(2) Previously filed as Exhibit 3.3 to our
Registration Statement on Form S-1, Registration No. 333-33016.
(3) Previously filed as like-numbered Exhibit to our
Registration Statement on Form S-1, Registration No. 333-33016.
(b) Current Reports on Form 8-K.  We did not file a Current
Report on Form 8-K during the three month period ending September 30,
2001.
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
Vice President, Finance, Chief Financial Officer and Assistant Secretary
Date: November 14, 2001
EXHIBIT INDEX
Exhibit Number
Description
3.1(1)
Amended and Restated Certificate of Incorporation of Intuitive Surgical.
3.2(2)
Bylaws of Intuitive Surgical.
4.1
Reference is made to Exhibits 3.1 and 3.2.
4.2(3)
Specimen Stock Certificate.
_____________
(1) Previously filed as Exhibit 3.2 to our
Registration Statement on Form S-1, Registration No. 333-33016.
(2) Previously filed as Exhibit 3.3 to our
Registration Statement on Form S-1, Registration No. 333-33016.
(3) Previously filed as like-numbered Exhibit to our
Registration Statement on Form S-1, Registration No. 333-33016.