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<title>Q3 2002 10Q DOC</title>
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<FONT SIZE="3"><B><P ALIGN="CENTER">UNITED STATES<br>
SECURITIES AND EXCHANGE COMMISSION<br>
Washington, D.C. 20549</B></font></p>

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

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

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

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


<FONT SIZE="3"><B><P ALIGN="CENTER">
</font><font face=Wingdings>x</font><font>&nbsp; QUARTERLY REPORT PURSUANT TO SECTION 13 OR
     15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</B></font></p>
<font size="4" color="FF0000"><B><p align="center">
               For the quarterly period ended September 30, 2002
</B></font></p>

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

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

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



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


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

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

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



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


<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
     The Registrant had 36,599,409 shares of Common Stock, $0.001 par value per
share, outstanding as of September 30, 2002.

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


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

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

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

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


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

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

  <TR vAlign=top>
<TD>
<font size="3">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
         Consolidated balance sheets as of September 30, 2002 and<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
           December 31, 2001

</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, 2002 and September 30, 2001

</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, 2002 and September 30, 2001
</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">
Item 4.   Controls and Procedures

</font>
</TD>

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

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

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

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


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

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

<TD>
<font size="3">
<CENTER><A HREF="#item1">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"><B>
        Signatures
</font></B>
</TD>

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



<FONT SIZE=2><P><HR ALIGN="LEFT" WIDTH="85%"><BR>
<BR>
</P>
</FONT><B><P ALIGN="CENTER">PART I -- FINANCIAL INFORMATION </P>
</B><P><HR WIDTH="85%">Item 1. Financial Statements <BR>
<BR>

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

                                                          September 30,December 31,
                                                             2002          2001
                                                         ------------  -----------
                                                         (Unaudited)   (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents............................ $     18,340  $    10,487
  Short-term investments...............................       30,165       56,174
  Accounts receivable..................................       19,044       13,248
  Inventory, net.......................................        9,871        6,182
  Prepaid expenses.....................................        2,022        3,128
                                                         ------------  -----------
          Total current assets.........................       79,442       89,219
Property and equipment, net............................       10,689        7,834
Intangible and other assets............................        2,724        3,308
                                                         ------------  -----------
          Total assets.................................       92,855      100,361
                                                         ============  ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..................................... $      9,099  $     8,300
  Accrued compensation and employee benefits...........        4,057        2,537
  Warranty accrual.....................................        2,479        1,831
  Accrued royalty expense..............................           --        1,000
  Other accrued liabilities............................        3,658        2,128
  Deferred revenue.....................................        4,515        3,870
  Current portion of notes payable.....................        1,386        1,631
                                                         ------------  -----------
          Total current liabilities....................       25,194       21,297
Long-term notes payable................................        1,792          771
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, 2002 and
     December 31, 2001.................................           --           --
  Common stock, 200,000,000 shares authorized, $0.001
     par value, 36,594,466 and 36,223,640 shares
     issued and outstanding as of September 30, 2002
     and December 31, 2001, respectively...............           36           36
  Additional paid-in capital...........................      190,909      188,962
  Deferred compensation................................         (343)        (886)
  Accumulated deficit..................................     (126,191)    (110,370)
  Accumulated other comprehensive income ..............        1,458          551
                                                         ------------  -----------
          Total stockholders' equity...................       65,869       78,293
                                                         ------------  -----------
          Total liabilities and stockholders' equity... $     92,855  $   100,361
                                                         ============  ===========

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


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

                                        Three Months Ended      Nine Months Ended
                                          September 30,           September 30,
                                     ----------------------  ----------------------
                                        2002        2001        2002        2001
                                     ---------- -----------  ---------- -----------
Sales.............................. $   17,081  $   10,861  $   50,877  $   35,660
Cost of sales......................      8,340       5,750      25,072      18,972
                                     ----------  ----------  ----------  ----------
    Gross profit...................      8,741       5,111      25,805      16,688
                                     ----------  ----------  ----------  ----------
Operating costs and expenses:
  Research and development.........      3,890       3,493      12,767      10,060
  Selling, general and
   administrative..................     11,693       7,452      30,262      21,952
                                     ----------  ----------  ----------  ----------
    Total operating costs and
     expenses......................     15,583      10,945      43,029      32,012
                                     ----------  ----------  ----------  ----------
Loss from operations...............     (6,842)     (5,834)    (17,224)    (15,324)
Other income(expense), net ........        378       1,036       1,403       2,876
                                     ----------  ----------  ----------  ----------
Net loss........................... $   (6,464) $   (4,798) $  (15,821) $  (12,448)
                                     ==========  ==========  ==========  ==========
Basic and diluted net loss per
  common share..................... $    (0.18) $    (0.13) $    (0.43) $    (0.35)
                                     ==========  ==========  ==========  ==========
Shares used in computing net
  loss per common share............     36,499      36,056      36,397      35,704
                                     ==========  ==========  ==========  ==========

</pre>

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


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

                                                             For the Nine Months
                                                             Ended September 30,
                                                         ------------------------
                                                            2002         2001
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net loss............................................... $   (15,821) $   (12,448)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation.........................................       2,247        1,638
  (Gain)loss on sales of fixed assets..................          64          (11)
  Amortization of deferred compensation................         543        1,338
  Amortization of intangible and other assets..........         584          584
Changes in operating assets and liabilities:
  Accounts receivable..................................      (5,796)      (9,113)
  Prepaid expenses.....................................       1,106       (1,018)
  Inventory............................................      (3,689)      (1,519)
  Accounts payable.....................................         799         (946)
  Accrued compensation and employee benefits...........       1,520         (230)
  Warranty accrual.....................................         648           61
  Other accrued liabilities............................       1,530         (438)
  Accrued royalty expense..............................      (1,000)      (1,000)
  Deferred revenue.....................................         645         (118)
                                                         -----------  -----------
Net cash used in operating activities..................     (16,620)     (23,220)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................      (5,228)      (3,755)
Disposition of property and equipment..................          62           36
Purchase of short-term investments.....................     (11,527)     (42,075)
Proceeds from sales of short-term investments..........      21,216       34,803
Proceeds from maturities of short-term investments.....      17,167       35,023
                                                         -----------  -----------
Net cash provided by investing activities..............      21,690       24,032
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       1,948        2,228
Repurchase of common stock.............................          (1)         (64)
Proceeds from notes payable............................       2,338          550
Repayment of notes payable.............................      (1,562)      (1,564)
                                                         -----------  -----------
Net cash provided by financing activities..............       2,723        1,150
                                                         -----------  -----------
Foreign currency translation adjustments...............          60           --
Net increase in cash and cash equivalents..............       7,853        1,962
Cash and cash equivalents, beginning of period.........      10,487       22,657
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $    18,340  $    24,619
                                                         ===========  ===========

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

</P>
<P ALIGN="CENTER"><BR>
<A NAME="notes"></A> <BR>
</P>
<B><P ALIGN="CENTER">INTUITIVE SURGICAL, INC. <BR>
<BR>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS <BR>
(UNAUDITED) </P>
<P>NOTE 1. BASIS OF PRESENTATION</P>
</B><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 consolidated balances at December 31, 2001
were derived from the audited financial statements included in our Annual Report
on Form 10-K for 2001.  The financial statements should be read in conjunction
with the audited financial statements for the year ended December 31, 2001,
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, 2002 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2002 or future operating
periods.</P>
<B><P>NOTE 2. CONCENTRATIONS OF RISK</P>
</B><P ALIGN="JUSTIFY">For the nine months ended September 30, 2002, no
customer accounted for over 10% of total sales. For the nine months ended
September 30, 2001, one customer, A, accounted for 14% of total sales. The
Company extends reasonably short collection terms but does not require
collateral. The Company provides reserves for potential credit losses but has
not experienced significant losses to date. </P>
<P ALIGN="JUSTIFY">The Company's <I>da Vinci</I> Surgical System, related
instruments and accessories and service have accounted for all of the Company's
sales for the three months and nine months ended September 30, 2002 and 2001.
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>
<B><H4>NOTE 3. CASH AND CASH EQUIVALENTS</H4>
</B><P ALIGN="JUSTIFY">Intuitive Surgical considers all highly liquid
investments with an original maturity from date of purchase of 90 days or less
to be cash equivalents for the purpose of balance sheet and statement of cash
flows presentation. The carrying value of cash and cash equivalents approximates
market value at September 30, 2002 and December 31, 2001.</P>
<B><P>NOTE 4. SHORT-TERM INVESTMENTS</P>
</B><P ALIGN="JUSTIFY">All short-term investments are classified as
available-for-sale and therefore 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>
<B><P>NOTE 5. INVENTORY, NET</P>
</B><P ALIGN="JUSTIFY">&#9;Inventory, net consists of the following (in
thousands): </P>

<pre>

                                September 30, December 31,
                                   2002           2001
                               -------------  -----------
Raw materials................ $       3,335  $     3,577
Work-in-process..............         1,372        1,330
Finished goods...............         5,165        1,275
                               -------------  -----------
                              $       9,871  $     6,182
                               =============  ===========

</pre>

<B><P>NOTE 6. INTANGIBLE AND OTHER ASSETS</P>
</B><P ALIGN="JUSTIFY">Purchased intangible assets represent patents which
are carried at cost less accumulated amortization. Amortization is computed
using the straight-line method over the expected useful life of six years. At
September 30, 2002 gross intangible assets totaled $4.7 million and related
accumulated amortization was $2.0 million.</P>

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

<PRE>

                                         Three Months Ended    Nine Months Ended
                                           September 30,         September 30,
                                      --------------------  --------------------
                                         2002       2001       2002       2001
                                      ---------  ---------  ---------  ---------
Net loss............................ $  (6,464) $  (4,798) $ (15,821) $ (12,448)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.....................       109         --         60         --
  Change in unrealized gain on
    forward exchange contracts......        --         --         --        (67)
  Change in unrealized gain (loss)
    on available-for-sale securities       689        531        847        689
                                      ---------  ---------  ---------  ---------
Comprehensive loss.................. $  (5,666) $  (4,267) $ (14,914) $ (11,826)
                                      =========  =========  =========  =========

</PRE>

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

<PRE>

                                  Three Months Ended        Nine Months Ended
                                    September 30,             September 30,
                               ------------------------  ------------------------
                                  2002         2001         2002         2001
                               -----------  -----------  -----------  -----------
Numerator used for basic and
  diluted net loss per
  common share............... $    (6,464) $    (4,798) $   (15,821) $   (12,448)
Denominator used for basic
  and diluted net loss per
  common share:
  Weighted-average shares
    outstanding..............  36,519,383   36,169,191   36,425,085   35,918,873
  Less weighted-average
    shares subject to
    repurchase...............     (20,621)    (112,995)     (28,543)    (214,843)
                               -----------  -----------  -----------  -----------
  Weighted-average shares
    used in computing basic
    and diluted net loss per
    common share.............  36,498,762   36,056,196   36,396,542   35,704,030
                               ===========  ===========  ===========  ===========
Basic and diluted net loss
  per common share........... $     (0.18) $     (0.13) $     (0.43) $     (0.35)
                               ===========  ===========  ===========  ===========

</PRE>


<B><P>NOTE 9. REVENUE RECOGNITION</P>
</B><P ALIGN="JUSTIFY">We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred or service has been rendered, the
price is fixed or determinable and collectibility is reasonably assured.  </P>
<P ALIGN="JUSTIFY">Revenue from system sales is generally 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.  In certain instances,
contract terms may provide for customer acceptance and transfer of title to
occur prior to installation for direct sales.  In those instances, we account
for the sale as a multiple element arrangement and defer revenue recognition on
the fair value of any undelivered elements, including installation.  The fair
value of the undelivered elements are then recognized when the outstanding
obligations are fulfilled.</P>
<P ALIGN="JUSTIFY">Our distributors do not have price protection rights. One of
our distributors has return rights under limited circumstances. Such rights are
accounted for under the provisions of SFAS No. 48. To date, we have not had any
returns of our systems.</P>
<P ALIGN="JUSTIFY">Revenue from sales of instruments and accessories is
recognized upon shipment. Revenue related to future commitments under service
contracts is deferred and recognized ratably over the service period.  Amounts
billed in excess of revenue recognized are included as deferred revenue in the
accompanying consolidated balance sheets.</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>

<B><P>NOTE 10. SOFTWARE DEVELOPMENT COSTS</P></B>
<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>

<B><P ALIGN="JUSTIFY">NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS </P>
</B><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 adopted SFAS
No. 141 and SFAS No. 142 as of January 1, 2002.  The adoption of SFAS No. 141
and SFAS No. 142 has not had a significant impact on our financial position or
results of operations.</P>
<P ALIGN="JUSTIFY">In August 2001, the FASB issued SFAS No. 144 &quot;Accounting
for the Impairment or Disposal of Long-Lived Assets&quot;, effective for fiscal
years beginning after December 15, 2001.  SFAS No. 144 addresses financial
accounting and reporting for impairment or disposal of long-lived assets and
supersedes SFAS 121.  The Company adopted SFAS No. 144 as of January 1, 2002.
The adoption of SFAS No. 144 has not had a significant impact on our financial
position or results of operations.</P>


<P><A NAME="mda"></A></P>
<B><P>ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS</P>
</B><P ALIGN="JUSTIFY">This Management's Discussion and Analysis of
Financial Condition as of September 30, 2002 and Results of Operations for the
three month and nine month periods ended September 30, 2002 and September 30,
2001 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, 2001. </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. In addition,
a portion of our revenue comes from ongoing service of installed <I>da Vinci</I>
Surgical Systems. Although we expect the majority of our revenues to continue to
come from the sale of <I>da Vinci</I> Surgical Systems over the next few years,
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,
2002 were $17.1 million, up 57% from $10.9 million for the three months ended
September 30, 2001.  Sales growth was driven by higher da Vinci&trade; Surgical
System placements and increased recurring revenue.  We shipped 14 da
Vinci&trade; Surgical Systems during the third quarter of 2002 compared to 10 in
the third quarter of 2001.  Third quarter 2002 recurring revenue, consisting of
instruments, accessories, and service was $3.9 million, up 135% from $1.7
million for the same period last year.  </P>
<P ALIGN="JUSTIFY">Sales for the nine months ended September 30, 2002 were $50.9
million, up 43% from $35.7 million for the nine months ended September 30, 2001.
Sales growth was again driven by higher da Vinci&trade; Surgical System
placements and increased recurring revenue.  We shipped 43 da Vinci&trade;
Surgical Systems during the first nine months of 2002 compared to 34 in the
first nine months of 2001.  Recurring revenue for the first nine months of 2002
was $10.4 million, up 122% from $4.7 million for the same period last year.</P>
<P ALIGN="JUSTIFY"> As of September 30, 2002 there were 132 cumulative da
Vinci&trade; Surgical Systems shipped, compared to 74 as of September 30, 2001.
</P>
<P ALIGN="JUSTIFY">Gross Profit. Gross profit for the three months ended
September 30, 2002 was $8.7 million, or 51% of sales, compared with $5.1
million, or 47% of sales for the three months ended September 30, 2001. Gross
profit was $25.8 million, or 51% of sales for the first nine months of 2002,
compared to $16.7 million, or 47% of sales for the first nine months of 2001.
The year-over-year improvement in gross profit resulted primarily from sales
growth, a higher da Vinci&trade; Surgical System average selling price and
increased manufacturing efficiencies. </P>
<P ALIGN="JUSTIFY">Research and Development Expenses. Research and development
expenses for the three months ended September 30, 2002 were $3.9 million, up 11%
from $3.5 million for the three months ended September 30, 2001.  Research and
development expenses for the nine months ended September 30, 2002 were $12.8
million, up 27% from $10.1 million for the nine months ended September 30, 2001.
The year-over-year increase resulted primarily from headcount additions and
increased spending on prototype materials 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,
2002 were $11.7 million, up 57% from $7.5 million  for the three months ended
September 30, 2001.  Selling, general and administrative  expenses were $30.3
million for the first nine months of 2002, up 38% compared to $22.0 million
during the first nine months of 2001.  The year-over-year increase resulted in
large part from headcount additions in the sales and customer support functions
to support increased revenue and a larger installed base of <I>da Vinci</I>
Surgical Systems and higher litigation costs. Selling, general and
administrative expenses for the three months ended September 30, 2002
significantly impacted by litigation costs incurred in our Delaware trial
against Computer Motion and charges taken for unauthorized purchases of
administrative supplies, unusable by the company and expensed during the
quarter.  Intuitive is actively pursuing a refund for these purchases and has
taken appropriate measures to ensure no recurrence in the future.  </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 $0.1 million and $0.2
million for the three months ended September 30, 2002 and 2001, respectively.
Non-cash deferred compensation expense included in selling, general and
administrative expenses was $0.1 million and $0.1 million for the three months
ended September 30, 2002 and 2001, respectively.  Non-cash deferred compensation
expense included in research and development expenses was $0.4 million and $0.8
million for the nine months ended September 30, 2002 and 2001, respectively.
Non-cash deferred compensation expense included in selling, general and
administrative expenses was $0.2 million and $0.5 million for the nine months
ended September 30, 2002 and 2001, respectively.  The remaining $0.3 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, 2002 was $0.4 million, down $0.6 million compared to
$1.0 million for the three months ended September 30, 2001.  For the nine months
ended September 30, 2002 other income (expense) was $1.4 million, down $1.5
million compared to $2.9 million for the nine months ended September 30, 2001.
The decrease was due primarily to lower interest income earned in 2002 resulting
mostly from lower average cash and short-term investment balances and lower
interest rates than in the same periods of 2001. </P>
<B><I><P>LIQUIDITY AND CAPITAL RESOURCES</P>
</B></I><P ALIGN="JUSTIFY">Our operations have been financed through the sales
of our convertible preferred stock, yielding net proceeds of approximately
$127.3 million, our initial public offering of 5,750,000 shares of our common
stock, yielding approximately $46.8 million, and equipment financing
arrangements, yielding approximately $10.3 million. The equipment arrangements
provide financing at specific interest rates for periods of up to 48 months, by
which time the principal is repaid to the lessors.  As collateral for the
equipment financing, we have granted the lessors a security interest in
equipment specified under each arrangement. </P>
<P ALIGN="JUSTIFY">As of September 30, 2002, we had working capital of $54.2
million, compared to $67.9 million as of December 31, 2001.  The decrease over
the first nine months of 2002 resulted primarily from our net loss of $15.8
million and investments in fixed assets of $5.2 million, offset by proceeds from
issuance of stock of $1.9 million, net increase in long-term borrowings of $0.8
million, unrealized gains on investments of $0.9 million, and non-cash expenses
of $3.5 million.</P>
<P ALIGN="JUSTIFY">Net cash used in operating activities for the nine months
ended September 30, 2002 was $16.6 million, comprised primarily of our net loss
of $15.8 million and working capital requirements of $4.3 million, offset by
non-cash expenses of $3.5 million. Cash used in operations during the first nine
months of 2001 was $23.2 million, comprised primarily of our net loss of $12.4
million and working capital requirements of $14.3 million, offset by non-cash
expenses of $3.5 million.</P>
<P ALIGN="JUSTIFY">Net cash provided by investing activities was $21.7 million
for the nine months ended September 30, 2002, compared to $24.0 million for the
nine months ended September 30, 2001.  The decrease between periods was
primarily due to the additional acquisition of property and equipment in
2002.</P>
<P ALIGN="JUSTIFY">Net cash provided by financing activities was $2.7 million
for the nine months ended September 30, 2002, compared to $1.2 million for the
nine months ended September 30, 2001.  The difference was primarily due to
additional proceeds from long-term borrowings in 2002.</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 2003. During or after
this period, if cash generated by operations is insufficient to satisfy our
liquidity requirements, we may need to sell additional equity or debt securities
or obtain additional credit arrangements. Additional financing may not be
available on terms acceptable to us or at all. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders.</P>

<B><I><P ALIGN="JUSTIFY">CRITICAL ACCOUNTING POLICIES</P>
</B></I><P>The Company believes the following represent its critical accounting
policies:</P>
<P ALIGN="JUSTIFY">Revenue Recognition.  In certain cases, revenue from direct
system sales is generated from multiple element  arrangements which require
judgement in the areas of delivery, customer acceptance, installation and
collectibility.  Revenue is recognized as specific elements indicated in sales
contracts are executed. If an element is essential to the functionality of the
system, revenue is deferred until that essential element is delivered. The fair
value of each undelivered element that is not essential to the functionality of
the system is deferred until performance occurs. The fair value of an
undelivered element is based upon an estimate made by management. Amounts billed
in excess of revenue recognized is recorded as deferred revenue on the balance
sheet.</P>
<P ALIGN="JUSTIFY">Warranties.  We provide for the estimated costs of product
warranties at the time revenue is recognized.  The Company's estimate of costs
to service its warranty obligations is based upon historical experience and
expectation of future conditions.  Should warranty claim activity and the costs
associated with servicing those claims differ from the Company's estimates,
revisions to the estimated warranty liability may be required.</P>
<P ALIGN="JUSTIFY">Allowance for Doubtful Accounts.  The allowance for doubtful
accounts is based upon management estimates.  Factors underlying these estimates
include analysis of days outstanding, customer payment history and management
judgement.  The allowance is adjusted regularly to reflect current data and
activity.</P>
<P ALIGN="JUSTIFY">Inventory Reserves. We write our inventory down for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are
less favorable than those projected by management, additional inventory write-
downs may be required.</P>
<P ALIGN="JUSTIFY">Intangible Assets.  We have intangible assets on our balance
sheet related to the acquisition of patents.  The valuation and classification
of these assets and the assignment of useful amortization lives involves
judgments and the use of estimates. The testing of these intangibles for
impairment under established accounting guidelines would be required if
indicators of impairment exist. Changes in business conditions could potentially
require future adjustments to asset valuations.</P>
<P ALIGN="JUSTIFY">Contingencies. We are subject to proceedings, lawsuits and
other claims related to our products, patents and other matters. We are required
to assess the likelihood of any adverse judgments or outcomes to these matters
as well as potential ranges of probable losses. A determination of the amount of
reserves required, if any, for these contingencies is made after careful
analysis of each individual issue. The required reserves may change in the
future due to new developments in each matter or changes in approach such as a
change in settlement strategy in dealing with these matters.</P>
<B><I><P>FACTORS AFFECTING OPERATING RESULTS</P>
</B></I><B><P>OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES
ANALYSTS' OR INVESTORS' EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO
DECLINE.</P>
</B><P ALIGN="JUSTIFY">Because of our limited operating history, we have
limited insight into trends that may emerge in our market and affect our
business. The revenue and income potential of our market are largely unproven.
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 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>our ability to protect our intellectual proprietary rights;</LI>
<LI>the progress and results of clinical trials; </LI>
<LI>actions relating to regulatory matters;</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 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>
<B><P>WE HAVE A LARGE ACCUMULATED DEFICIT, WE EXPECT FUTURE LOSSES, AND WE
MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.</B> </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
year, 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, 2002 was
$6.5 million compared to a net loss of $4.8 million for the third quarter last
year. Our year-to-date loss for the nine months ended September 30, 2002 was
$15.8 million, compared to $12.4 million for the first nine months of 2001.  As
of September 30, 2002, we had an accumulated deficit of $126.2 million.</P>
<B><P>WE EXPERIENCE LONG AND VARIABLE SALES CYCLES, WHICH COULD HAVE A
NEGATIVE IMPACT ON OUR RESULTS OF OPERATIONS FOR ANY GIVEN QUARTER.</B>
</P>
<P ALIGN="JUSTIFY">Our <I>da Vinci</I> Surgical System has a lengthy sales and
purchase order cycle because it is a major capital item and generally requires
the approval of senior management at purchasing institutions. As a result, we
may experience 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>
<B><P>BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE AND ARE LIKELY TO CONTINUE
TO ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES COULD DECLINE
DUE TO THE LOSS OR DELAY OF A SINGLE CUSTOMER ORDER.</B> </P>
<P ALIGN="JUSTIFY">A relatively small number of customers account for a
significant portion of our total revenues. While no customer accounted for over
10% of total sales for the three or nine months ended September 30, 2002, AB
Medica SRL, our Italian distributor, accounted for 14% of total sales for the
nine months ended September 30, 2001. </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>
<B><P>IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE WILL NOT BE ABLE
TO GENERATE THE REVENUE NECESSARY TO SUPPORT OUR BUSINESS.</B> </P>
<P ALIGN="JUSTIFY">Our products represent a fundamentally new way of performing
surgery. Achieving physician, patient and third-party payor acceptance of
<I>Intuitive</I> surgery as a preferred method of performing surgery will be
crucial to our success. If our products fail to achieve market acceptance,
hospitals will not purchase our products and we will not be able to generate the
revenue necessary to support our business. We believe that physicians' and
third-party payors' acceptance of the benefits of procedures performed using our
products will be essential for acceptance of our products by patients.
Physicians will not recommend the use of our products unless we can demonstrate
that they produce results comparable or superior to existing surgical
techniques. Even if we can prove the effectiveness of our products through
clinical trials, surgeons may elect not to use our products for any number of
other reasons. For example, cardiologists may continue to recommend conventional
open-heart surgery simply because such surgery is already 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>
<B><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>
</B><P ALIGN="JUSTIFY">On May 10, 2000, Computer Motion, Inc. filed a
lawsuit in United States District Court for the Central District of California
(Case No. CV00-4988 CBM) alleging that by making, using, selling or offering for
sale our <I>da Vinci</I> Surgical System, we are infringing United States Patent
Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583, 5,878,193, 5,907,664 and
6,001,108 in willful disregard of Computer Motion's patent rights.  On June 1,
2000, Computer Motion amended its lawsuit to allege that we also infringe U.S.
Patent Number 6,063,095. In late 2000, Computer Motion alleged our infringement
of a ninth patent, and so added U.S. Patent Number 6,102,850 to the litigation.
Computer Motion has since also accused us of infringing U.S. Patent No.
6,244,809, which it added to the litigation in May 2002.  These ten patents
concern various methods and devices for conducting various aspects of robotic
surgery.  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 us and three of Computer Motion's patents, Numbers
5,855,583, 5,878,193, and 5,907,664, two of which Computer Motion has already
now lost as a result of final judgments in Intuitive's favor.  In light of those
declarations of interference, the District Court on February 2001 stayed -- put
on hold -- all proceedings in the litigation while the PTO conducted the
interference proceedings. On March 30, 2002, the PTO rendered decisions in each
of the interferences.  As a result of the PTO's decisions, the District Court
lifted the stay on May 1, 2002 and set trial to begin in late April 2003. The
parties have now begun to file their motions for summary judgment.  As of
September 30, 2002, Intuitive had four motions for summary judgment of
noninfringement on file to address four of Computer Motion's eight remaining
patents-in-suit, numbers 5,907,664, 6,001,108, 6,102,850, and 6,244,809; as of
that same date, Computer Motion had not filed any, although it has filed cross-
motions on three of these same four patents.  Decisions on these motions are
expected to begin to issue sometime before year-end.  At the Court's request, we
will not file further motions for summary judgment until our first four motions
are decided.</P>
<P ALIGN="JUSTIFY">If we ultimately lose Computer Motion's suit against us, it
will hurt our competitive position, may be costly to us and may prevent us from
selling our products. In addition, if we lose the patent suit, 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.  If Computer Motion is successful in its suit against us and is
unwilling to grant us a license, we will be required to stop selling our
products that are found to infringe Computer Motion's patents unless we can
redesign them so they do not infringe Computer Motion's patents, which we may be
unable to do. In addition, if we lose the patent suit, 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 the '015 patent against Intuitive. On
November 8, 2001, the District Court granted summary judgment of noninfringement
of the '003 patent in our favor and dismissed Wilk's complaint in its entirety
without prejudice.  Wilk appealed the summary judgment ruling to the U.S. Court
of Appeals for the Federal Circuit.  A decision on the merits of the appeal is
expected sometime in the next year.  If we lose on appeal and ultimately also
lose Wilk's suit against us, it will hurt our competitive position, may be
costly to us and may prevent us from selling our products.  If we lose the
patent suit, we may need to obtain from Wilk a license to this technology if we
are to continue to market our products that have been found to infringe Wilk's
patents.  This license could be expensive, which could seriously harm our
business.  If Wilk is successful in its suit against us and is unwilling to
grant us a license, we may be required to stop selling our products that are
found to infringe Wilk's patents unless we can redesign them so they do not
infringe Wilk's patents, which we may be unable to do.  In addition, 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>
<P>The foregoing proceedings, will be expensive to litigate, may be protracted
and our confidential information may be compromised. Whether or not we are
successful in this lawsuit, these proceedings could consume substantial amounts
of our financial and managerial resources. At any time 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>
<B><P>IF WE ARE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY CONTAINED IN
OUR PRODUCTS FROM USE BY THIRD PARTIES, OUR ABILITY TO COMPETE IN THE MARKET
WILL BE HARMED.</B> </P>
<P ALIGN="JUSTIFY">Our commercial success will depend in part on obtaining
patent and other intellectual property protection for the technologies contained
in our products, and on successfully defending our patents and other
intellectual property against third party challenges. </P>
<P ALIGN="JUSTIFY">We will incur substantial costs in obtaining patents and, if
necessary, defending our proprietary rights. The patent positions of medical
device companies, including ours, can be highly uncertain and involve complex
and evolving legal and factual questions. We 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>
<B><P>OTHERS MAY ASSERT THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL
PROPERTY RIGHTS, WHICH MAY CAUSE US TO ENGAGE IN COSTLY DISPUTES AND, IF WE ARE
NOT SUCCESSFUL IN DEFENDING OURSELVES, COULD ALSO CAUSE US TO PAY SUBSTANTIAL
DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.</B> </P>
<P ALIGN="JUSTIFY">We are aware of both United States and foreign patents issued
to third parties that relate to computer-assisted surgery 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>
<B><P>THE RIGHTS AND MEASURES WE RELY ON TO PROTECT THE INTELLECTUAL
PROPERTY UNDERLYING OUR PRODUCTS MAY NOT BE ADEQUATE TO PREVENT THIRD PARTIES
FROM USING OUR TECHNOLOGY WHICH COULD HARM OUR ABILITY TO COMPETE IN THE
MARKET.</B> </P>
<P ALIGN="JUSTIFY">In addition to patents, we typically rely on a combination of
trade secret, copyright and trademark laws, nondisclosure agreements and other
contractual provisions and technical security measures to protect our
intellectual property rights. Nevertheless, these measures may not be adequate
to safeguard the technology underlying our products. If they do not protect our
rights adequately, third parties could use our technology, and our ability to
compete in the market would be reduced. In addition, employees, consultants and
others who participate in developing our products may breach their agreements
with us regarding our intellectual property, and we may not have adequate
remedies for the breach. We also may not be able to effectively protect our
intellectual property rights in some foreign countries. For a variety of
reasons, we may decide not to file for patent, copyright or trademark protection
outside the United States. We also realize that our trade secrets may become
known through other means not currently foreseen by us. Notwithstanding our
efforts to protect our intellectual property, our competitors may independently
develop similar or alternative technologies or products that are equal or
superior to our technology and products without infringing any of our
intellectual property rights, or may design around our proprietary technologies.
For further information on our intellectual property and the difficulties in
protecting it, see "Item 1: Business -- Intellectual Property," included in the
Annual Report on Form 10-K of Intuitive Surgical, Inc., filed with the SEC. </P>
<B><P>OUR PRODUCTS RELY ON LICENSES FROM THIRD PARTIES, AND IF WE LOSE
ACCESS TO THESE TECHNOLOGIES, OUR REVENUES COULD DECLINE.</B> </P>
<P ALIGN="JUSTIFY">We rely on technology that we license from others, including
technology that is integral to our products. We have entered into license
agreements with SRI International, IBM Corporation, MIT, Olympus Optical Co.,
Ltd., and Heartport, Inc. (now part of Johnson &amp; Johnson). Any of these
agreements may be terminated for breach.  If any of these agreements is
terminated, we may be unable to reacquire the necessary license on satisfactory
terms, or at all. The loss or failure to maintain these licenses could prevent
or delay further development or commercialization of our products. See "Item 1:
Business -- Intellectual Property," included in the Annual Report on Form 10-K
of Intuitive Surgical, Inc., filed with the SEC.</P>
<B><P>PUBLIC ANNOUNCEMENTS OF LITIGATION EVENTS MAY HURT OUR STOCK
PRICE.</P>
</B><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>
<B><P>OUR PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN DOMESTIC
REGULATORY PROCESS. IF WE DO NOT OBTAIN AND MAINTAIN THE NECESSARY DOMESTIC
REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND SELL OUR PRODUCTS IN THE
UNITED STATES.</B> </P>
<P ALIGN="JUSTIFY">Our products and operations are subject to extensive
regulation in the United States by the U.S. Food and Drug Administration, or
FDA. The FDA regulates the research, testing, manufacturing, safety, labeling,
storage, recordkeeping, promotion, distribution and production of medical
devices in the United States to ensure that medical products distributed
domestically are safe and effective for their intended uses. In order for us to
market certain products for use in the United States, we generally must first
obtain clearance from the FDA, pursuant to Section 510(k) of the Federal Food,
Drug, and Cosmetic Act ("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>
<B><P>OUR PRODUCTS ARE SUBJECT TO VARIOUS INTERNATIONAL REGULATORY
PROCESSES AND APPROVAL REQUIREMENTS. IF WE DO NOT OBTAIN AND MAINTAIN THE
NECESSARY INTERNATIONAL REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET AND
SELL OUR PRODUCTS IN FOREIGN COUNTRIES.</P>
</B><P ALIGN="JUSTIFY">To be able to market and sell our products in other
countries, we must obtain regulatory approvals and comply with the regulations
of those countries. These regulations, including the requirements for approvals,
and the time required for regulatory review vary from country to country.
Obtaining and maintaining foreign regulatory approvals are expensive, and we
cannot be certain that we will receive regulatory approvals in any foreign
country in which we plan to market our products. If we fail to obtain regulatory
approval in any foreign country in which we plan to market our products, our
ability to generate revenue will be harmed. </P>
<P ALIGN="JUSTIFY">The European Union requires that manufacturers of medical
products obtain the right to affix the CE mark to their products before selling
them in member countries of the European Union. The CE mark is an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. In order to obtain the right to
affix the CE mark to products, a manufacturer must obtain certification that its
processes meet certain European quality standards. In January 1999, we received
permission to affix the CE mark to our <I>da Vinci</I> Surgical System and
<I>EndoWrist</I> instruments for general surgical use. 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>

<P ALIGN="JUSTIFY">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>
<P ALIGN="JUSTIFY">Our products and operations are subject to extensive
regulation in Japan by the Ministry of Health, Labour, and Welfare, or MHLW.
Like the FDA in the United States, the MHLW regulates the research, testing,
manufacturing, safety, labeling, storage, promotion, distribution and production
of medical devices in Japan.  In order for us to market either directly in Japan
or indirectly through a partner, we must first obtain an approval from MHLW,
pursuant to Japanese law, demonstrating that all regulatory needs have been
satisfied.  This approval, or Shonin, is typically received following submission
of an application by the manufacturer or partner to the MHLW requesting
permission to commercialize the device for a specific intended use.  Only after
successful review of the application by the MHLW can we initiate commercial
distribution of our device in Japan.  If we modify our products after they
receive the initial approval from the MHLW, we may be required to submit a
separate application to the MHLW for the modified product before we are
permitted to market the product in Japan.</P>
<P ALIGN="JUSTIFY">The MHLW may not act favorably or quickly in its review of
any of our applications, or we may encounter significant difficulties and costs
in our efforts to obtain MHLW approval, all of which could delay or preclude
sale of new products in Japan.  Furthermore, the MHLW may request additional
data, require us to conduct further testing, or compile more data, including
clinical data, in support of an application.  Even if we receive an approval,
the MHLW may place significant limitations upon the intended use of our products
as a condition of 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 MHLW approval of new products we develop, any limitations imposed by the
MHLW on new product use or the costs of obtaining approval in Japan 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 in Japan
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 MHLW) to human health, the sponsor of the investigation must
also submit and obtain MHLW approval of the investigational protocol/test plan.
We may not be able to obtain MHLW and/or IRB approval to undertake clinical
trials in Japan for any new devices we intend to market in Japan in the future.
If we obtain such approvals, we may not be able to comply with the
investigational protocol and other regulations governing clinical investigations
or the data from any such trials may not support 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>
<B><P>IF INSTITUTIONS OR SURGEONS ARE UNABLE TO OBTAIN REIMBURSEMENT FROM
THIRD-PARTY PAYORS FOR PROCEDURES USING OUR PRODUCTS, OR IF REIMBURSEMENT IS
INSUFFICIENT TO COVER THE COSTS OF PURCHASING OUR PRODUCTS, WE MAY BE UNABLE TO
GENERATE SUFFICIENT SALES TO SUPPORT OUR BUSINESS.</B> </P>
<P ALIGN="JUSTIFY">Domestic institutions will typically bill the services
performed with our products to various third-party payors, such as Medicare,
Medicaid and other government programs and private insurance plans. If hospitals
do not obtain sufficient reimbursement from third-party payors for procedures
performed with our products, or if government and private payors' policies do
not permit reimbursement for surgical procedures performed using our products,
we may not be able to generate the revenues necessary to support our business.
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>
<B><P ALIGN="JUSTIFY">BECAUSE OUR MARKETS ARE HIGHLY COMPETITIVE, CUSTOMERS
MAY CHOOSE TO PURCHASE OUR COMPETITORS' PRODUCTS OR MAY NOT ACCEPT INTUITIVE
SURGERY, WHICH WOULD RESULT IN REDUCED REVENUE AND LOSS OF MARKET SHARE.</P>
</B><P ALIGN="JUSTIFY">Intuitive surgery is a new technology that must
compete with established minimally invasive surgery and open surgery. These
procedures are widely accepted in the medical community and in many cases have a
long history of use. We also face competition from several companies that are
developing new approaches and products for the minimally invasive surgery
market. In addition, we presently face increasing competition from companies who
are developing robotic and computer-assisted surgical systems. Our revenues may
be reduced or eliminated if our competitors develop and market products that are
more effective or less expensive than our products. If we are unable to compete
successfully, our revenues will suffer. We may not be able to maintain or
improve our competitive position against current or potential competitors,
especially those with greater resources. </P>
<P ALIGN="JUSTIFY">In many cases, the medical conditions that can be treated
using our products can also be treated by 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>
<B><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.</B> </P>
<P ALIGN="JUSTIFY">Our products 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>

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

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

<P ALIGN="JUSTIFY">Manufacturing our products is a complex process. If demand
for our products exceeds our manufacturing capacity, we could develop a
substantial backlog of customer orders. If we are unable to establish and
maintain larger-scale manufacturing capabilities, our ability to generate
revenues will be limited and our reputation in the marketplace would be
damaged.</P>
<B><P>IF OUR MANUFACTURING FACILITIES DO NOT CONTINUE TO MEET FEDERAL,
STATE OR EUROPEAN MANUFACTURING STANDARDS, WE MAY BE REQUIRED TO TEMPORARILY
CEASE ALL OR PART OF OUR MANUFACTURING OPERATIONS, WHICH WOULD RESULT IN PRODUCT
DELIVERY DELAYS AND LOST REVENUE.</B> </P>
<P ALIGN="JUSTIFY">Our manufacturing facilities are subject to periodic
inspection by regulatory authorities and our operations will continue to be
regulated by the FDA for compliance with Good Manufacturing Practice
requirements contained in the FDA's Quality System Regulations (QSR). We are
also required to comply with the ISO 9000 series standards in order to produce
products for sale in Europe. If we fail to continue to comply with Good
Manufacturing Practice requirements or ISO 9000 series standards, we may be
required to cease all or part of our operations until we comply with these
regulations.  We are currently in compliance with ISO 9000 series standards. 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. Maintaining such compliance is difficult and costly. We
cannot be certain that our facilities will be found to comply with Good
Manufacturing Practice requirements or 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. In March 2002, our facilities and manufacturing
processes in our Sunnyvale facility were re-inspected by the Food and Drug
Branch (FDB).  We passed this audit and are awaiting issuance of our device
manufacturing license renewal.  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>
<B><P>OUR RELIANCE ON SOLE AND SINGLE SOURCE SUPPLIERS COULD HARM OUR
ABILITY TO MEET DEMAND FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN
BUDGET.</B> </P>
<P ALIGN="JUSTIFY">Some of the components necessary for the assembly of our
products are currently provided to us by sole source suppliers or single source
suppliers. We purchase components through purchase orders rather than long-term
supply agreements and generally do not maintain large volumes of inventory. The
disruption or termination of the supply of components could cause a significant
increase in the costs of these components, which could affect our profitability.
A disruption or termination in the supply of components could also result in our
inability to meet demand for our products, which could harm our ability to
generate revenues, lead to customer dissatisfaction and damage our reputation.
Furthermore, if we are required to change the manufacturer of a key component of
our products, we may be required to verify that the new manufacturer maintains
facilities and procedures that comply with quality standards and with all
applicable regulations and guidelines. The delays associated with the
verification of a new manufacturer could delay our ability to manufacture our
products in a timely manner or within budget.</P>
<B><P>THE USE OF OUR PRODUCTS COULD RESULT IN PRODUCT LIABILITY CLAIMS THAT
COULD BE EXPENSIVE, DIVERT MANAGEMENT'S ATTENTION AND HARM OUR
BUSINESS.</B> </P>
<P ALIGN="JUSTIFY">Our business exposes us to significant risks of product
liability claims. The medical device industry has historically been litigious,
and we face financial exposure to product liability claims if the use of our
products were to cause injury or death. There is also the possibility that
defects in the design or manufacture of our products might necessitate a product
recall. Although we maintain product liability insurance, the coverage limits of
these policies may not be adequate to cover future claims. Particularly as sales
of our products increase, we may be unable to maintain product liability
insurance in the future at satisfactory rates or adequate amounts. A product
liability claim, regardless of its merit or eventual outcome, could result in
significant legal defense costs. A product liability claim or any product
recalls could also harm our reputation or result in a decline in revenues.</P>
<B><P>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.</B> </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, field service,
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>
<B><P>IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL, OUR ABILITY TO COMPETE WILL BE HARMED.</B> </P>
<P ALIGN="JUSTIFY">We are highly dependent on the principal members of our
management and scientific staff.  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>
<B><P>INTERNATIONAL SALES OF OUR PRODUCTS ACCOUNT FOR A SIGNIFICANT PORTION
OF OUR REVENUES, WHICH EXPOSES US TO RISKS INHERENT IN INTERNATIONAL OPERATIONS.
OUR GROWTH MAY BE LIMITED IF WE ARE UNABLE TO SUCCESSFULLY MANAGE OUR
INTERNATIONAL ACTIVITIES.</B> </P>
<P ALIGN="JUSTIFY">Our business currently depends in large part on our
activities in Europe, and a component of our growth strategy is to expand our
presence into additional foreign markets. Sales to markets outside of the United
States accounted for approximately 10% of our sales for the three months ended
September 30, 2002 and 22% for the three months ended September 30, 2001.  On a
year-to-date basis, sales to markets outside of the United States accounted for
approximately 15% of our sales for the nine months ended September 30, 2002 and
36% for the nine months ended September 30, 2001.</P>
<P ALIGN="JUSTIFY">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>

<B><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.</B> </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 2003. 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>
<B><P>SALES BY CURRENT STOCKHOLDERS COULD CAUSE OUR COMMON STOCK PRICE TO
DECLINE.</P>
</B><P ALIGN="JUSTIFY">The market price of our common
stock could decline as a result of sales of a large number of shares in the
market. These sales may also make it more difficult for 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, 2002,
several entities beneficially owned more than 5% of the outstanding shares of
our common stock, including Bear Stearns Asset Management, Allan G. Lozier,
Investor Growth Capital, Ltd., Merrill Lynch &amp; Co., and PaTMarK Company,
Inc.</P>

<P><A NAME="market"></A></P>
<B><P>ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK</P>
</B><P ALIGN="JUSTIFY">We are not subject to any meaningful market risks
related to currency, commodity prices or similar matters. We are sensitive to
short-term interest rate fluctuations to the extent that such fluctuations
impact the interest income we receive on the investment of the remaining
proceeds from our June 2000 initial public offering. </P>
<P ALIGN="JUSTIFY">The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities
that we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities. We classify our cash
equivalents and marketable securities as &quot;fixed-rate&quot; if the rate of
return on such instruments remains fixed over their term. These &quot;fixed-rate&quot;
investments include commercial paper and government and non-government debt
securities. We classify our cash equivalents and marketable
securities as &quot;variable-rate&quot; if the rate of return on such
investments varies based on the change in a predetermined index or set of
indices during their term.  These &quot;variable-rate&quot; investments
primarily include money market accounts. The average time to maturity of all of
our investments as of September 2002 was approximately 1.53 years.  At September
30, 2002, approximately 32% of our investment portfolio was composed of
investments with original maturities of one year or less.  </P>

<P><A NAME="controls"></A></P>
<B><P ALIGN="JUSTIFY">ITEM 4.  CONTROLS AND PROCEDURES</P>
</B><P ALIGN="JUSTIFY">We maintain disclosure controls and procedures that
are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.  In designing&nbsp;and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship
of&nbsp;possible controls and procedures.  </P>
<P ALIGN="JUSTIFY">Within 90 days prior to the date of this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures.   Based on the foregoing, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective.</P>
<P ALIGN="JUSTIFY">Other than implementation of additional internal controls
related to our cash disbursement process, there have been no significant changes
in our internal controls or in other factors that could significantly affect the
internal controls subsequent to the date we completed our evaluation.  </P>



<B><P ALIGN="CENTER">PART II. - OTHER INFORMATION</P>

<P><A NAME="item1"></A></P>
<P>ITEM 1. LEGAL PROCEEDINGS</P>
</B><P ALIGN="JUSTIFY">On May 10, 2000, Computer Motion, Inc. filed a
lawsuit in United States District Court for the Central District of California
(Case No. CV00-4988 CBM) alleging that by making, using, selling or offering for
sale our <I>da Vinci</I> Surgical System, we are infringing United States Patent
Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583, 5,878,193, 5,907,664, and
6,001,108, in willful disregard of Computer Motion's patent rights.  On June 1,
2000, Computer Motion amended its lawsuit to allege that we also infringe U.S.
Patent Number 6,063,095.  In late 2000, Computer Motion alleged our infringement
of a ninth patent, and so added U.S. Patent Number 6,102,850 to the litigation.
Computer Motion has since also added U.S. Patent No. 6,244,809 to the
litigation, alleging that we also infringe that tenth patent. Each of these ten
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 "interference" proceedings between a single
SRI patent application exclusively licensed to us and three of Computer Motion's
patents (see next paragraph).  Now that the PTO has acted in each of the
interferences, the stay has lifted and trial has been set for late April 2003.
As is explained in the next paragraph, subject to appeal, Computer Motion has
already lost all of its rights to two of its asserted patents, numbers 5,878,193
and 5,855,583, due to the interference judgments entered against it.  In
addition, we have now filed four motions for summary judgment of
noninfringement, addressing four more of Computer Motion's patents-in-suit,
numbers 6,001,108, 5,907,664, 6,102,850 and 6,244,809, on the latter three of
which Computer Motion has cross-moved.  Decisions on one or more of these
motions may begin to issue sometime before year-end.  Intuitive intends to file
motions for summary judgment addressing the other four of Computer Motion's
eight remaining patents by early 2003, once the Court has decided our first four
motions. 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 each patent
asserted in 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">On December 7 and 8, 2000, the PTO declared three
interferences between a single SRI patent application exclusively licensed to
Intuitive and three of Computer Motion's patents, Numbers 5,855,583, 5,878,193
and 5,907,664.  An interference is a proceeding within the U.S. Patent Office to
resolve questions regarding the patentability of inventions and who first
invented subject matter claimed by two or more patents or patent applications.
The Patent Office has now entered final judgment in each interference
proceeding.    In the interference involving the 5,878,193 patent, the PTO
entered final judgment in Intuitive's favor.  Subject to review by or appeal to
a federal court, which could reverse or modify any or all of the following, this
judgment establishes that the disputed invention of, generally speaking, image-based
control of robotic surgical instruments is prior art to all of Computer
Motion's remaining patents, that Intuitive is entitled to patent that invention
for itself, and that Computer Motion is no longer entitled to any of the three
claims of the 5,878,193 patent.  In the interference involving the 5,855,583
patent, the PTO again entered final judgment in Intuitive's favor. Subject to
review by or appeal to a federal court, which could reverse or modify any or all
of the following, this judgment establishes that the disputed invention of,
generally speaking, proportional movement of articulating robotic surgical
instruments is prior art to all of Computer Motion's remaining patents, that
Intuitive is entitled to patent that invention for itself, and that Computer
Motion is no longer entitled to any of the fifteen claims of the 5,855,583
patent. In the interference involving the 5,907,664 patent, the PTO entered
final judgment against us, deciding that our patent claim is unpatentable for
noncompliance with the &quot;written description&quot; requirement of Title 35
of the U.S. Code. The PTO declined to decide our motion challenging the validity
of certain claims of the '664 patent, leaving that issue in question. This
5,907,664 patent was the subject of our first motion for summary judgment of
noninfringement mentioned in the previous paragraph.  In July 2002, Computer
Motion filed suit against us in the U.S. District Court for the Central District
of California to challenge the PTO's two interference judgments in our favor.
That suit is pending.</P>
<P ALIGN="JUSTIFY">In September 2000, we filed a Notice of Opposition in the
European Patent Office ("EPO") challenging European Patent No. 0653,922, which
issued to Computer Motion in 1999 and is related to several of the patents now
involved in the U.S. litigation and the interference proceedings. An Opposition
proceeding allows the EPO to determine whether the challenged patent should be
revoked in its entirety, should be amended, or should remain unaltered. In its
Notice of Opposition, Intuitive cited numerous prior art references not cited to
the EPO during the '922 patent's original prosecution. An initial ruling in
March 2002 indicated that the EPO was not then inclined to alter the '922 patent
in any way.  However, during a hearing held in Germany on July 2, 2002, the EPO
sanctioned Computer Motion for its &quot;abuse&quot; of the Opposition process.
As a result of Computer Motion's actions, the preliminary EPO decision is
mooted, both sides will now provide further written briefing and evidence on the
substantive issues, and another hearing is anticipated for sometime in 2003.</P>
<P ALIGN="JUSTIFY">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. The complaint alleged that
by continuing to make, use, sell, and offer for sale its AESOP and ZEUS voice-controlled
products, Computer Motion willfully infringes U.S. Patent No.
6,201,984. The '984 patent, which concerns various aspects of voice control of
surgical instruments, issued to IBM in early March 2001 and is exclusively
licensed to us.  The '984 patent predates by several years Computer Motion's
development of voice-controlled surgical robots. Trial was held in August 2002.
After evidence and argument was presented, the seven-member Delaware jury
returned a verdict in our favor, finding that Computer Motion had failed to
prove any claim of the '984 patent invalid and awarding us $4.4 million for
damage caused by Computer Motion's sales of its infringing AESOP and ZEUS
products.  The suit is now in the post-trial briefing phase.  Computer Motion's
&quot;prosecution laches&quot; defense has now been fully briefed and we await a
decision from the Court as to whether prosecution laches applies to the
circumstances of our case. </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 in its entirety.
Wilk appealed the summary judgment ruling to the U.S. Court of Appeals for the
Federal Circuit.  A decision on the substantive issue on appeal is expected
sometime in the next year.  We believe the appellate court will uphold the
summary judgment of noninfringement.  If we lose the appeal, the case will
return for further proceedings in the District Court.  We remain confident that
we will prevail in Wilk's suit against us and that we have multiple meritorious
defenses to Wilk's assertion of its '003 patent. However, litigation is
unpredictable and we may not prevail with any of our defenses or on appeal. If
we ultimately lose Wilk's suit against us, however, 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. 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>
<P>The Company is subject to legal proceedings and claims that arise in the
normal course of its business. We cannot assure that we will prevail in these
matters nor can we assure that any remedy could be reached on commercially
viable terms, if at all. Due to the inherent uncertainties of litigation, the
Company cannot accurately predict the ultimate outcome of these matters at this
time and, therefore, cannot estimate the range of possible loss.</P>


<P><A NAME="item2"></A></P>
<B><P>ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS</P>
</B><P>None.</P>

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

<P><A NAME="item4"></A></P>
<B><P>ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</P>
</B><P ALIGN="JUSTIFY">None.</P>

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

<P><A NAME="item6"></A></P>
<B><P>ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K</P>
</B><P ALIGN="JUSTIFY">(a) Exhibits. </P>
<TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=575>
<TR><TD WIDTH="15%" VALIGN="BOTTOM">
<B><P ALIGN="CENTER">Exhibit Number</B></TD>
<TD WIDTH="85%" VALIGN="BOTTOM">
<B><P>Description</B></TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">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>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">99.1</TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Certification by Chief Executive Officer pursuant to 18 U.S.C.   1350, as
adopted by Section 906 of the Sarbanes-Oxley Act of 2002.</TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">99.2 </TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Certification by Chief Financial Officer pursuant to 18 U.S.C.  1350, as
adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
</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,
2002.</P>

<br>
<br>
<br>
<HR WIDTH="85%">
<br>
<br>
<br>
<P><A NAME="sign"></A></P>
<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>Senior Vice President, Chief Financial Officer and Assistant Secretary
</I></TD>
</TR>
</TABLE>

<P>Date: November 8, 2002 </P>

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

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

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

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


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

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


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

<P>&nbsp;</P>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>

<U><P>/s/ Lonnie M. Smith<BR></U>
   Lonnie M. Smith<BR>
   Chief Executive Officer</P>
<P>November 8, 2002</P>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>


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

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

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

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

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

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


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

<P>&nbsp;</P>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>


<U><P>/s/ Susan K. Barnes<BR></U>
   Susan K. Barnes<BR>
   Chief Financial Officer</P>
<P>November 8, 2002</P>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>

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

<B><P ALIGN="CENTER">EXHIBIT INDEX </P></B>
<P ALIGN="CENTER"><CENTER><TABLE CELLSPACING=0 BORDER=0 CELLPADDING=7 WIDTH=575>
<TR><TD WIDTH="15%" VALIGN="BOTTOM">
<B><P ALIGN="CENTER">Exhibit Number</B></TD>
<TD WIDTH="85%" VALIGN="BOTTOM">
<B><P>Description</B></TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">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>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">99.1</TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Certification by Chief Executive Officer pursuant to 18 U.S.C.   1350, as
adopted by Section 906 of the Sarbanes-Oxley Act of 2002.</TD>
</TR>
<TR><TD WIDTH="15%" VALIGN="TOP">
<P ALIGN="CENTER">99.2</TD>
<TD WIDTH="85%" VALIGN="TOP">
<P>Certification by Chief Financial Officer pursuant to 18 U.S.C.  1350, as
adopted by Section 906 of the Sarbanes-Oxley Act of 2002.<FONT FACE="Courier
New"> </FONT></TD>
</TR>
</TABLE>
</CENTER></P>

<P>_____________ </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>


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Q3 2002 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, 2002
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 000-30713
Intuitive Surgical, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
77-0416458
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
950 Kifer Road
Sunnyvale, California      94086
(Address of Principal Executive Offices including Zip Code)
(408) 523-2100
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days.    YES
x
NO
o
The Registrant had 36,599,409 shares of Common Stock, $0.001 par value per
share, outstanding as of September 30, 2002.
Intuitive Surgical, Inc.
TABLE OF CONTENTS
PART I.   FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited):
Consolidated balance sheets as of September 30, 2002 and
December 31, 2001
1
Consolidated statements of operations for the three-month
and nine-month periods ended September 30, 2002 and September 30, 2001
2
Consolidated statements of cash flows for the nine-month
periods ended September 30, 2002 and September 30, 2001
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
Item 4.   Controls and Procedures
26
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,
                                                             2002          2001
                                                         ------------  -----------
                                                         (Unaudited)   (See Note 1)
                        ASSETS
Current assets:
  Cash and cash equivalents............................ $     18,340  $    10,487
  Short-term investments...............................       30,165       56,174
  Accounts receivable..................................       19,044       13,248
  Inventory, net.......................................        9,871        6,182
  Prepaid expenses.....................................        2,022        3,128
                                                         ------------  -----------
          Total current assets.........................       79,442       89,219
Property and equipment, net............................       10,689        7,834
Intangible and other assets............................        2,724        3,308
                                                         ------------  -----------
          Total assets.................................       92,855      100,361
                                                         ============  ===========
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..................................... $      9,099  $     8,300
  Accrued compensation and employee benefits...........        4,057        2,537
  Warranty accrual.....................................        2,479        1,831
  Accrued royalty expense..............................           --        1,000
  Other accrued liabilities............................        3,658        2,128
  Deferred revenue.....................................        4,515        3,870
  Current portion of notes payable.....................        1,386        1,631
                                                         ------------  -----------
          Total current liabilities....................       25,194       21,297
Long-term notes payable................................        1,792          771
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, 2002 and
     December 31, 2001.................................           --           --
  Common stock, 200,000,000 shares authorized, $0.001
     par value, 36,594,466 and 36,223,640 shares
     issued and outstanding as of September 30, 2002
     and December 31, 2001, respectively...............           36           36
  Additional paid-in capital...........................      190,909      188,962
  Deferred compensation................................         (343)        (886)
  Accumulated deficit..................................     (126,191)    (110,370)
  Accumulated other comprehensive income ..............        1,458          551
                                                         ------------  -----------
          Total stockholders' equity...................       65,869       78,293
                                                         ------------  -----------
          Total liabilities and stockholders' equity... $     92,855  $   100,361
                                                         ============  ===========
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,
                                     ----------------------  ----------------------
                                        2002        2001        2002        2001
                                     ---------- -----------  ---------- -----------
Sales.............................. $   17,081  $   10,861  $   50,877  $   35,660
Cost of sales......................      8,340       5,750      25,072      18,972
                                     ----------  ----------  ----------  ----------
    Gross profit...................      8,741       5,111      25,805      16,688
                                     ----------  ----------  ----------  ----------
Operating costs and expenses:
  Research and development.........      3,890       3,493      12,767      10,060
  Selling, general and
   administrative..................     11,693       7,452      30,262      21,952
                                     ----------  ----------  ----------  ----------
    Total operating costs and
     expenses......................     15,583      10,945      43,029      32,012
                                     ----------  ----------  ----------  ----------
Loss from operations...............     (6,842)     (5,834)    (17,224)    (15,324)
Other income(expense), net ........        378       1,036       1,403       2,876
                                     ----------  ----------  ----------  ----------
Net loss........................... $   (6,464) $   (4,798) $  (15,821) $  (12,448)
                                     ==========  ==========  ==========  ==========
Basic and diluted net loss per
  common share..................... $    (0.18) $    (0.13) $    (0.43) $    (0.35)
                                     ==========  ==========  ==========  ==========
Shares used in computing net
  loss per common share............     36,499      36,056      36,397      35,704
                                     ==========  ==========  ==========  ==========
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,
                                                         ------------------------
                                                            2002         2001
                                                         -----------  -----------
OPERATING ACTIVITIES:
Net loss............................................... $   (15,821) $   (12,448)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation.........................................       2,247        1,638
  (Gain)loss on sales of fixed assets..................          64          (11)
  Amortization of deferred compensation................         543        1,338
  Amortization of intangible and other assets..........         584          584
Changes in operating assets and liabilities:
  Accounts receivable..................................      (5,796)      (9,113)
  Prepaid expenses.....................................       1,106       (1,018)
  Inventory............................................      (3,689)      (1,519)
  Accounts payable.....................................         799         (946)
  Accrued compensation and employee benefits...........       1,520         (230)
  Warranty accrual.....................................         648           61
  Other accrued liabilities............................       1,530         (438)
  Accrued royalty expense..............................      (1,000)      (1,000)
  Deferred revenue.....................................         645         (118)
                                                         -----------  -----------
Net cash used in operating activities..................     (16,620)     (23,220)
                                                         -----------  -----------
INVESTING ACTIVITIES:
Acquisition of property and equipment..................      (5,228)      (3,755)
Disposition of property and equipment..................          62           36
Purchase of short-term investments.....................     (11,527)     (42,075)
Proceeds from sales of short-term investments..........      21,216       34,803
Proceeds from maturities of short-term investments.....      17,167       35,023
                                                         -----------  -----------
Net cash provided by investing activities..............      21,690       24,032
                                                         -----------  -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................       1,948        2,228
Repurchase of common stock.............................          (1)         (64)
Proceeds from notes payable............................       2,338          550
Repayment of notes payable.............................      (1,562)      (1,564)
                                                         -----------  -----------
Net cash provided by financing activities..............       2,723        1,150
                                                         -----------  -----------
Foreign currency translation adjustments...............          60           --
Net increase in cash and cash equivalents..............       7,853        1,962
Cash and cash equivalents, beginning of period.........      10,487       22,657
                                                         -----------  -----------
Cash and cash equivalents, end of period............... $    18,340  $    24,619
                                                         ===========  ===========
See accompanying notes to consolidated financial statements.
INTUITIVE SURGICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 consolidated balances at December 31, 2001
were derived from the audited financial statements included in our Annual Report
on Form 10-K for 2001.  The financial statements should be read in conjunction
with the audited financial statements for the year ended December 31, 2001,
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, 2002 are not necessarily indicative of the results to be
expected for the full year ending December 31, 2002 or future operating
periods.
NOTE 2. CONCENTRATIONS OF RISK
For the nine months ended September 30, 2002, no
customer accounted for over 10% of total sales. For the nine months ended
September 30, 2001, one customer, A, accounted for 14% of total sales. The
Company extends reasonably short collection terms but does not require
collateral. The Company provides reserves for potential credit losses but has
not experienced significant losses to date.
The Company's
da Vinci
Surgical System, related
instruments and accessories and service have accounted for all of the Company's
sales for the three months and nine months ended September 30, 2002 and 2001.
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, 2002 and December 31, 2001.
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,
                                   2002           2001
                               -------------  -----------
Raw materials................ $       3,335  $     3,577
Work-in-process..............         1,372        1,330
Finished goods...............         5,165        1,275
                               -------------  -----------
                              $       9,871  $     6,182
                               =============  ===========
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, 2002 gross intangible assets totaled $4.7 million and related
accumulated amortization was $2.0 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,
                                      --------------------  --------------------
                                         2002       2001       2002       2001
                                      ---------  ---------  ---------  ---------
Net loss............................ $  (6,464) $  (4,798) $ (15,821) $ (12,448)
Other comprehensive income (loss):
  Foreign currency translation
    adjustments.....................       109         --         60         --
  Change in unrealized gain on
    forward exchange contracts......        --         --         --        (67)
  Change in unrealized gain (loss)
    on available-for-sale securities       689        531        847        689
                                      ---------  ---------  ---------  ---------
Comprehensive loss.................. $  (5,666) $  (4,267) $ (14,914) $ (11,826)
                                      =========  =========  =========  =========
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,
                               ------------------------  ------------------------
                                  2002         2001         2002         2001
                               -----------  -----------  -----------  -----------
Numerator used for basic and
  diluted net loss per
  common share............... $    (6,464) $    (4,798) $   (15,821) $   (12,448)
Denominator used for basic
  and diluted net loss per
  common share:
  Weighted-average shares
    outstanding..............  36,519,383   36,169,191   36,425,085   35,918,873
  Less weighted-average
    shares subject to
    repurchase...............     (20,621)    (112,995)     (28,543)    (214,843)
                               -----------  -----------  -----------  -----------
  Weighted-average shares
    used in computing basic
    and diluted net loss per
    common share.............  36,498,762   36,056,196   36,396,542   35,704,030
                               ===========  ===========  ===========  ===========
Basic and diluted net loss
  per common share........... $     (0.18) $     (0.13) $     (0.43) $     (0.35)
                               ===========  ===========  ===========  ===========
NOTE 9. REVENUE RECOGNITION
We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred or service has been rendered, the
price is fixed or determinable and collectibility is reasonably assured.
Revenue from system sales is generally 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.  In certain instances,
contract terms may provide for customer acceptance and transfer of title to
occur prior to installation for direct sales.  In those instances, we account
for the sale as a multiple element arrangement and defer revenue recognition on
the fair value of any undelivered elements, including installation.  The fair
value of the undelivered elements are then recognized when the outstanding
obligations are fulfilled.
Our distributors do not have price protection rights. One of
our distributors has return rights under limited circumstances. Such rights are
accounted for under the provisions of SFAS No. 48. To date, we have not had any
returns of our systems.
Revenue from sales of instruments and accessories is
recognized upon shipment. Revenue related to future commitments under service
contracts is deferred and recognized ratably over the service period.  Amounts
billed in excess of revenue recognized are included as deferred revenue in the
accompanying consolidated balance sheets.
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. RECENT ACCOUNTING PRONOUNCEMENTS
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 adopted SFAS
No. 141 and SFAS No. 142 as of January 1, 2002.  The adoption of SFAS No. 141
and SFAS No. 142 has not had a significant impact on our financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets", effective for fiscal
years beginning after December 15, 2001.  SFAS No. 144 addresses financial
accounting and reporting for impairment or disposal of long-lived assets and
supersedes SFAS 121.  The Company adopted SFAS No. 144 as of January 1, 2002.
The adoption of SFAS No. 144 has not had a significant impact on our 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 as of September 30, 2002 and Results of Operations for the
three month and nine month periods ended September 30, 2002 and September 30,
2001 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, 2001.
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. In addition,
a portion of our revenue comes from ongoing service of installed
da Vinci
Surgical Systems. Although we expect the majority of our revenues to continue to
come from the sale of
da Vinci
Surgical Systems over the next few years,
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,
2002 were $17.1 million, up 57% from $10.9 million for the three months ended
September 30, 2001.  Sales growth was driven by higher da Vinci™ Surgical
System placements and increased recurring revenue.  We shipped 14 da
Vinci™ Surgical Systems during the third quarter of 2002 compared to 10 in
the third quarter of 2001.  Third quarter 2002 recurring revenue, consisting of
instruments, accessories, and service was $3.9 million, up 135% from $1.7
million for the same period last year.
Sales for the nine months ended September 30, 2002 were $50.9
million, up 43% from $35.7 million for the nine months ended September 30, 2001.
Sales growth was again driven by higher da Vinci™ Surgical System
placements and increased recurring revenue.  We shipped 43 da Vinci™
Surgical Systems during the first nine months of 2002 compared to 34 in the
first nine months of 2001.  Recurring revenue for the first nine months of 2002
was $10.4 million, up 122% from $4.7 million for the same period last year.
As of September 30, 2002 there were 132 cumulative da
Vinci™ Surgical Systems shipped, compared to 74 as of September 30, 2001.
Gross Profit. Gross profit for the three months ended
September 30, 2002 was $8.7 million, or 51% of sales, compared with $5.1
million, or 47% of sales for the three months ended September 30, 2001. Gross
profit was $25.8 million, or 51% of sales for the first nine months of 2002,
compared to $16.7 million, or 47% of sales for the first nine months of 2001.
The year-over-year improvement in gross profit resulted primarily from sales
growth, a higher da Vinci™ Surgical System average selling price and
increased manufacturing efficiencies.
Research and Development Expenses. Research and development
expenses for the three months ended September 30, 2002 were $3.9 million, up 11%
from $3.5 million for the three months ended September 30, 2001.  Research and
development expenses for the nine months ended September 30, 2002 were $12.8
million, up 27% from $10.1 million for the nine months ended September 30, 2001.
The year-over-year increase resulted primarily from headcount additions and
increased spending on prototype materials 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,
2002 were $11.7 million, up 57% from $7.5 million  for the three months ended
September 30, 2001.  Selling, general and administrative  expenses were $30.3
million for the first nine months of 2002, up 38% compared to $22.0 million
during the first nine months of 2001.  The year-over-year increase resulted in
large part from headcount additions in the sales and customer support functions
to support increased revenue and a larger installed base of
da Vinci
Surgical Systems and higher litigation costs. Selling, general and
administrative expenses for the three months ended September 30, 2002
significantly impacted by litigation costs incurred in our Delaware trial
against Computer Motion and charges taken for unauthorized purchases of
administrative supplies, unusable by the company and expensed during the
quarter.  Intuitive is actively pursuing a refund for these purchases and has
taken appropriate measures to ensure no recurrence in the future.
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 $0.1 million and $0.2
million for the three months ended September 30, 2002 and 2001, respectively.
Non-cash deferred compensation expense included in selling, general and
administrative expenses was $0.1 million and $0.1 million for the three months
ended September 30, 2002 and 2001, respectively.  Non-cash deferred compensation
expense included in research and development expenses was $0.4 million and $0.8
million for the nine months ended September 30, 2002 and 2001, respectively.
Non-cash deferred compensation expense included in selling, general and
administrative expenses was $0.2 million and $0.5 million for the nine months
ended September 30, 2002 and 2001, respectively.  The remaining $0.3 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, 2002 was $0.4 million, down $0.6 million compared to
$1.0 million for the three months ended September 30, 2001.  For the nine months
ended September 30, 2002 other income (expense) was $1.4 million, down $1.5
million compared to $2.9 million for the nine months ended September 30, 2001.
The decrease was due primarily to lower interest income earned in 2002 resulting
mostly from lower average cash and short-term investment balances and lower
interest rates than in the same periods of 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been financed through the sales
of our convertible preferred stock, yielding net proceeds of approximately
$127.3 million, our initial public offering of 5,750,000 shares of our common
stock, yielding approximately $46.8 million, and equipment financing
arrangements, yielding approximately $10.3 million. The equipment arrangements
provide financing at specific interest rates for periods of up to 48 months, by
which time the principal is repaid to the lessors.  As collateral for the
equipment financing, we have granted the lessors a security interest in
equipment specified under each arrangement.
As of September 30, 2002, we had working capital of $54.2
million, compared to $67.9 million as of December 31, 2001.  The decrease over
the first nine months of 2002 resulted primarily from our net loss of $15.8
million and investments in fixed assets of $5.2 million, offset by proceeds from
issuance of stock of $1.9 million, net increase in long-term borrowings of $0.8
million, unrealized gains on investments of $0.9 million, and non-cash expenses
of $3.5 million.
Net cash used in operating activities for the nine months
ended September 30, 2002 was $16.6 million, comprised primarily of our net loss
of $15.8 million and working capital requirements of $4.3 million, offset by
non-cash expenses of $3.5 million. Cash used in operations during the first nine
months of 2001 was $23.2 million, comprised primarily of our net loss of $12.4
million and working capital requirements of $14.3 million, offset by non-cash
expenses of $3.5 million.
Net cash provided by investing activities was $21.7 million
for the nine months ended September 30, 2002, compared to $24.0 million for the
nine months ended September 30, 2001.  The decrease between periods was
primarily due to the additional acquisition of property and equipment in
2002.
Net cash provided by financing activities was $2.7 million
for the nine months ended September 30, 2002, compared to $1.2 million for the
nine months ended September 30, 2001.  The difference was primarily due to
additional proceeds from long-term borrowings in 2002.
Our capital requirements depend on numerous factors,
including market acceptance of our products, the resources we devote to
developing and supporting our products and other factors. We expect to devote
substantial capital resources to continue our research and development efforts,
to expand our support and product development activities and for other general
corporate activities. We believe that our current cash and short-term investment
balances, together with revenue to be derived from the sale of our products,
will be sufficient to fund our operations at least through 2003. During or after
this period, if cash generated by operations is insufficient to satisfy our
liquidity requirements, we may need to sell additional equity or debt securities
or obtain additional credit arrangements. Additional financing may not be
available on terms acceptable to us or at all. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders.
CRITICAL ACCOUNTING POLICIES
The Company believes the following represent its critical accounting
policies:
Revenue Recognition.  In certain cases, revenue from direct
system sales is generated from multiple element  arrangements which require
judgement in the areas of delivery, customer acceptance, installation and
collectibility.  Revenue is recognized as specific elements indicated in sales
contracts are executed. If an element is essential to the functionality of the
system, revenue is deferred until that essential element is delivered. The fair
value of each undelivered element that is not essential to the functionality of
the system is deferred until performance occurs. The fair value of an
undelivered element is based upon an estimate made by management. Amounts billed
in excess of revenue recognized is recorded as deferred revenue on the balance
sheet.
Warranties.  We provide for the estimated costs of product
warranties at the time revenue is recognized.  The Company's estimate of costs
to service its warranty obligations is based upon historical experience and
expectation of future conditions.  Should warranty claim activity and the costs
associated with servicing those claims differ from the Company's estimates,
revisions to the estimated warranty liability may be required.
Allowance for Doubtful Accounts.  The allowance for doubtful
accounts is based upon management estimates.  Factors underlying these estimates
include analysis of days outstanding, customer payment history and management
judgement.  The allowance is adjusted regularly to reflect current data and
activity.
Inventory Reserves. We write our inventory down for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are
less favorable than those projected by management, additional inventory write-
downs may be required.
Intangible Assets.  We have intangible assets on our balance
sheet related to the acquisition of patents.  The valuation and classification
of these assets and the assignment of useful amortization lives involves
judgments and the use of estimates. The testing of these intangibles for
impairment under established accounting guidelines would be required if
indicators of impairment exist. Changes in business conditions could potentially
require future adjustments to asset valuations.
Contingencies. We are subject to proceedings, lawsuits and
other claims related to our products, patents and other matters. We are required
to assess the likelihood of any adverse judgments or outcomes to these matters
as well as potential ranges of probable losses. A determination of the amount of
reserves required, if any, for these contingencies is made after careful
analysis of each individual issue. The required reserves may change in the
future due to new developments in each matter or changes in approach such as a
change in settlement strategy in dealing with these matters.
FACTORS AFFECTING OPERATING RESULTS
OUR FUTURE OPERATING RESULTS MAY BE BELOW SECURITIES
ANALYSTS' OR INVESTORS' EXPECTATIONS, WHICH COULD CAUSE OUR STOCK PRICE TO
DECLINE.
Because of our limited operating history, we have
limited insight into trends that may emerge in our market and affect our
business. The revenue and income potential of our market are largely unproven.
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 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;
our ability to protect our intellectual proprietary rights;
the progress and results of clinical trials;
actions relating to regulatory matters;
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 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
year, 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, 2002 was
$6.5 million compared to a net loss of $4.8 million for the third quarter last
year. Our year-to-date loss for the nine months ended September 30, 2002 was
$15.8 million, compared to $12.4 million for the first nine months of 2001.  As
of September 30, 2002, we had an accumulated deficit of $126.2 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. As a result, we
may experience 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. While no customer accounted for over
10% of total sales for the three or nine months ended September 30, 2002, AB
Medica SRL, our Italian distributor, accounted for 14% of total sales for the
nine months ended September 30, 2001.
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.
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, 5,762,458, 5,815,640, 5,855,583, 5,878,193, 5,907,664 and
6,001,108 in willful disregard of Computer Motion's patent rights.  On June 1,
2000, Computer Motion amended its lawsuit to allege that we also infringe U.S.
Patent Number 6,063,095. In late 2000, Computer Motion alleged our infringement
of a ninth patent, and so added U.S. Patent Number 6,102,850 to the litigation.
Computer Motion has since also accused us of infringing U.S. Patent No.
6,244,809, which it added to the litigation in May 2002.  These ten patents
concern various methods and devices for conducting various aspects of robotic
surgery.  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 us and three of Computer Motion's patents, Numbers
5,855,583, 5,878,193, and 5,907,664, two of which Computer Motion has already
now lost as a result of final judgments in Intuitive's favor.  In light of those
declarations of interference, the District Court on February 2001 stayed -- put
on hold -- all proceedings in the litigation while the PTO conducted the
interference proceedings. On March 30, 2002, the PTO rendered decisions in each
of the interferences.  As a result of the PTO's decisions, the District Court
lifted the stay on May 1, 2002 and set trial to begin in late April 2003. The
parties have now begun to file their motions for summary judgment.  As of
September 30, 2002, Intuitive had four motions for summary judgment of
noninfringement on file to address four of Computer Motion's eight remaining
patents-in-suit, numbers 5,907,664, 6,001,108, 6,102,850, and 6,244,809; as of
that same date, Computer Motion had not filed any, although it has filed cross-
motions on three of these same four patents.  Decisions on these motions are
expected to begin to issue sometime before year-end.  At the Court's request, we
will not file further motions for summary judgment until our first four motions
are decided.
If we ultimately lose Computer Motion's suit against us, it
will hurt our competitive position, may be costly to us and may prevent us from
selling our products. In addition, if we lose the patent suit, 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.  If Computer Motion is successful in its suit against us and is
unwilling to grant us a license, we will be required to stop selling our
products that are found to infringe Computer Motion's patents unless we can
redesign them so they do not infringe Computer Motion's patents, which we may be
unable to do. In addition, if we lose the patent suit, 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 the '015 patent against Intuitive. On
November 8, 2001, the District Court granted summary judgment of noninfringement
of the '003 patent in our favor and dismissed Wilk's complaint in its entirety
without prejudice.  Wilk appealed the summary judgment ruling to the U.S. Court
of Appeals for the Federal Circuit.  A decision on the merits of the appeal is
expected sometime in the next year.  If we lose on appeal and ultimately also
lose Wilk's suit against us, it will hurt our competitive position, may be
costly to us and may prevent us from selling our products.  If we lose the
patent suit, we may need to obtain from Wilk a license to this technology if we
are to continue to market our products that have been found to infringe Wilk's
patents.  This license could be expensive, which could seriously harm our
business.  If Wilk is successful in its suit against us and is unwilling to
grant us a license, we may be required to stop selling our products that are
found to infringe Wilk's patents unless we can redesign them so they do not
infringe Wilk's patents, which we may be unable to do.  In addition, 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.
The foregoing proceedings, will be expensive to litigate, may be protracted
and our confidential information may be compromised. Whether or not we are
successful in this lawsuit, these proceedings could consume substantial amounts
of our financial and managerial resources. At any time 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."
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, Olympus Optical Co.,
Ltd., and Heartport, Inc. (now part of Johnson & Johnson). Any of these
agreements may be terminated for breach.  If any of these agreements is
terminated, we may be unable to reacquire the necessary license on satisfactory
terms, or at all. The loss or failure to maintain these licenses could prevent
or delay further development or commercialization of our products. See "Item 1:
Business -- Intellectual Property," included in the Annual Report on Form 10-K
of Intuitive Surgical, Inc., filed with the SEC.
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.
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.
Our products and operations are subject to extensive
regulation in Japan by the Ministry of Health, Labour, and Welfare, or MHLW.
Like the FDA in the United States, the MHLW regulates the research, testing,
manufacturing, safety, labeling, storage, promotion, distribution and production
of medical devices in Japan.  In order for us to market either directly in Japan
or indirectly through a partner, we must first obtain an approval from MHLW,
pursuant to Japanese law, demonstrating that all regulatory needs have been
satisfied.  This approval, or Shonin, is typically received following submission
of an application by the manufacturer or partner to the MHLW requesting
permission to commercialize the device for a specific intended use.  Only after
successful review of the application by the MHLW can we initiate commercial
distribution of our device in Japan.  If we modify our products after they
receive the initial approval from the MHLW, we may be required to submit a
separate application to the MHLW for the modified product before we are
permitted to market the product in Japan.
The MHLW may not act favorably or quickly in its review of
any of our applications, or we may encounter significant difficulties and costs
in our efforts to obtain MHLW approval, all of which could delay or preclude
sale of new products in Japan.  Furthermore, the MHLW may request additional
data, require us to conduct further testing, or compile more data, including
clinical data, in support of an application.  Even if we receive an approval,
the MHLW may place significant limitations upon the intended use of our products
as a condition of 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 MHLW approval of new products we develop, any limitations imposed by the
MHLW on new product use or the costs of obtaining approval in Japan could have a
material adverse effect on our business, financial condition and results of
operations.
In order to conduct a clinical investigation in Japan
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 MHLW) to human health, the sponsor of the investigation must
also submit and obtain MHLW approval of the investigational protocol/test plan.
We may not be able to obtain MHLW and/or IRB approval to undertake clinical
trials in Japan for any new devices we intend to market in Japan in the future.
If we obtain such approvals, we may not be able to comply with the
investigational protocol and other regulations governing clinical investigations
or the data from any such trials may not support 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.
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.
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 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 ISO 9000 series standards in order to produce
products for sale in Europe. If we fail to continue to comply with Good
Manufacturing Practice requirements or ISO 9000 series standards, we may be
required to cease all or part of our operations until we comply with these
regulations.  We are currently in compliance with ISO 9000 series standards. 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. Maintaining such compliance is difficult and costly. We
cannot be certain that our facilities will be found to comply with Good
Manufacturing Practice requirements or 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. In March 2002, our facilities and manufacturing
processes in our Sunnyvale facility were re-inspected by the Food and Drug
Branch (FDB).  We passed this audit and are awaiting issuance of our device
manufacturing license renewal.  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, field service,
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 10% of our sales for the three months ended
September 30, 2002 and 22% for the three months ended September 30, 2001.  On a
year-to-date basis, sales to markets outside of the United States accounted for
approximately 15% of our sales for the nine months ended September 30, 2002 and
36% for the nine months ended September 30, 2001.
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.
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 2003. 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, 2002,
several entities beneficially owned more than 5% of the outstanding shares of
our common stock, including Bear Stearns Asset Management, Allan G. Lozier,
Investor Growth Capital, Ltd., Merrill Lynch & Co., and PaTMarK Company,
Inc.
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. We classify our cash
equivalents and marketable securities as "fixed-rate" if the rate of
return on such instruments remains fixed over their term. These "fixed-rate"
investments include commercial paper and government and non-government debt
securities. We classify our cash equivalents and marketable
securities as "variable-rate" if the rate of return on such
investments varies based on the change in a predetermined index or set of
indices during their term.  These "variable-rate" investments
primarily include money market accounts. The average time to maturity of all of
our investments as of September 2002 was approximately 1.53 years.  At September
30, 2002, approximately 32% of our investment portfolio was composed of
investments with original maturities of one year or less.
ITEM 4.  CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that
are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.  In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
Within 90 days prior to the date of this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures.   Based on the foregoing, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective.
Other than implementation of additional internal controls
related to our cash disbursement process, there have been no significant changes
in our internal controls or in other factors that could significantly affect the
internal controls subsequent to the date we completed our evaluation.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 10, 2000, Computer Motion, Inc. filed a
lawsuit in United States District Court for the Central District of California
(Case No. CV00-4988 CBM) alleging that by making, using, selling or offering for
sale our
da Vinci
Surgical System, we are infringing United States Patent
Numbers 5,524,180, 5,762,458, 5,815,640, 5,855,583, 5,878,193, 5,907,664, and
6,001,108, in willful disregard of Computer Motion's patent rights.  On June 1,
2000, Computer Motion amended its lawsuit to allege that we also infringe U.S.
Patent Number 6,063,095.  In late 2000, Computer Motion alleged our infringement
of a ninth patent, and so added U.S. Patent Number 6,102,850 to the litigation.
Computer Motion has since also added U.S. Patent No. 6,244,809 to the
litigation, alleging that we also infringe that tenth patent. Each of these ten
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 "interference" proceedings between a single
SRI patent application exclusively licensed to us and three of Computer Motion's
patents (see next paragraph).  Now that the PTO has acted in each of the
interferences, the stay has lifted and trial has been set for late April 2003.
As is explained in the next paragraph, subject to appeal, Computer Motion has
already lost all of its rights to two of its asserted patents, numbers 5,878,193
and 5,855,583, due to the interference judgments entered against it.  In
addition, we have now filed four motions for summary judgment of
noninfringement, addressing four more of Computer Motion's patents-in-suit,
numbers 6,001,108, 5,907,664, 6,102,850 and 6,244,809, on the latter three of
which Computer Motion has cross-moved.  Decisions on one or more of these
motions may begin to issue sometime before year-end.  Intuitive intends to file
motions for summary judgment addressing the other four of Computer Motion's
eight remaining patents by early 2003, once the Court has decided our first four
motions. 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 each patent
asserted in 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.
On December 7 and 8, 2000, the PTO declared three
interferences between a single SRI patent application exclusively licensed to
Intuitive and three of Computer Motion's patents, Numbers 5,855,583, 5,878,193
and 5,907,664.  An interference is a proceeding within the U.S. Patent Office to
resolve questions regarding the patentability of inventions and who first
invented subject matter claimed by two or more patents or patent applications.
The Patent Office has now entered final judgment in each interference
proceeding.    In the interference involving the 5,878,193 patent, the PTO
entered final judgment in Intuitive's favor.  Subject to review by or appeal to
a federal court, which could reverse or modify any or all of the following, this
judgment establishes that the disputed invention of, generally speaking, image-based
control of robotic surgical instruments is prior art to all of Computer
Motion's remaining patents, that Intuitive is entitled to patent that invention
for itself, and that Computer Motion is no longer entitled to any of the three
claims of the 5,878,193 patent.  In the interference involving the 5,855,583
patent, the PTO again entered final judgment in Intuitive's favor. Subject to
review by or appeal to a federal court, which could reverse or modify any or all
of the following, this judgment establishes that the disputed invention of,
generally speaking, proportional movement of articulating robotic surgical
instruments is prior art to all of Computer Motion's remaining patents, that
Intuitive is entitled to patent that invention for itself, and that Computer
Motion is no longer entitled to any of the fifteen claims of the 5,855,583
patent. In the interference involving the 5,907,664 patent, the PTO entered
final judgment against us, deciding that our patent claim is unpatentable for
noncompliance with the "written description" requirement of Title 35
of the U.S. Code. The PTO declined to decide our motion challenging the validity
of certain claims of the '664 patent, leaving that issue in question. This
5,907,664 patent was the subject of our first motion for summary judgment of
noninfringement mentioned in the previous paragraph.  In July 2002, Computer
Motion filed suit against us in the U.S. District Court for the Central District
of California to challenge the PTO's two interference judgments in our favor.
That suit is pending.
In September 2000, we filed a Notice of Opposition in the
European Patent Office ("EPO") challenging European Patent No. 0653,922, which
issued to Computer Motion in 1999 and is related to several of the patents now
involved in the U.S. litigation and the interference proceedings. An Opposition
proceeding allows the EPO to determine whether the challenged patent should be
revoked in its entirety, should be amended, or should remain unaltered. In its
Notice of Opposition, Intuitive cited numerous prior art references not cited to
the EPO during the '922 patent's original prosecution. An initial ruling in
March 2002 indicated that the EPO was not then inclined to alter the '922 patent
in any way.  However, during a hearing held in Germany on July 2, 2002, the EPO
sanctioned Computer Motion for its "abuse" of the Opposition process.
As a result of Computer Motion's actions, the preliminary EPO decision is
mooted, both sides will now provide further written briefing and evidence on the
substantive issues, and another hearing is anticipated for sometime in 2003.
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. The complaint alleged that
by continuing to make, use, sell, and offer for sale its AESOP and ZEUS voice-controlled
products, Computer Motion willfully infringes U.S. Patent No.
6,201,984. The '984 patent, which concerns various aspects of voice control of
surgical instruments, issued to IBM in early March 2001 and is exclusively
licensed to us.  The '984 patent predates by several years Computer Motion's
development of voice-controlled surgical robots. Trial was held in August 2002.
After evidence and argument was presented, the seven-member Delaware jury
returned a verdict in our favor, finding that Computer Motion had failed to
prove any claim of the '984 patent invalid and awarding us $4.4 million for
damage caused by Computer Motion's sales of its infringing AESOP and ZEUS
products.  The suit is now in the post-trial briefing phase.  Computer Motion's
"prosecution laches" defense has now been fully briefed and we await a
decision from the Court as to whether prosecution laches applies to the
circumstances of our case.
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 in its entirety.
Wilk appealed the summary judgment ruling to the U.S. Court of Appeals for the
Federal Circuit.  A decision on the substantive issue on appeal is expected
sometime in the next year.  We believe the appellate court will uphold the
summary judgment of noninfringement.  If we lose the appeal, the case will
return for further proceedings in the District Court.  We remain confident that
we will prevail in Wilk's suit against us and that we have multiple meritorious
defenses to Wilk's assertion of its '003 patent. However, litigation is
unpredictable and we may not prevail with any of our defenses or on appeal. If
we ultimately lose Wilk's suit against us, however, 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. 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.
The Company is subject to legal proceedings and claims that arise in the
normal course of its business. We cannot assure that we will prevail in these
matters nor can we assure that any remedy could be reached on commercially
viable terms, if at all. Due to the inherent uncertainties of litigation, the
Company cannot accurately predict the ultimate outcome of these matters at this
time and, therefore, cannot estimate the range of possible loss.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit Number
Description
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.
99.1
Certification by Chief Executive Officer pursuant to 18 U.S.C.   1350, as
adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
99.2
Certification by Chief Financial Officer pursuant to 18 U.S.C.  1350, as
adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
_____________
(1) 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,
2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTUITIVE SURGICAL, INC.
(Registrant)
By:
/s/ SUSAN K. BARNES
Susan K. Barnes
Senior Vice President, Chief Financial Officer and Assistant Secretary
Date: November 8, 2002
CERTIFICATIONS
I, Lonnie M. Smith, certify that:
I have reviewed this quarterly report on Form 10-Q of Intuitive Surgical,
Inc.;
Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ Lonnie M. Smith
Lonnie M. Smith
Chief Executive Officer
November 8, 2002
I, Susan K. Barnes, certify that:
I have reviewed this quarterly report on Form 10-Q of Intuitive Surgical,
Inc.;
Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ Susan K. Barnes
Susan K. Barnes
Chief Financial Officer
November 8, 2002
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.
99.1
Certification by Chief Executive Officer pursuant to 18 U.S.C.   1350, as
adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
99.2
Certification by Chief Financial Officer pursuant to 18 U.S.C.  1350, as
adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
_____________
(1) 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.