Edgar Filing: INTUITIVE SURGICAL INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

¨	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

LOGO

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)

1266 Kifer Road

Sunnyvale, California 94086

(Address of Principal Executive Offices) (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 such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller Reporting company ¨
			(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

The Registrant had 39,352,498 shares of Common Stock, $0.001 par value per share, outstanding as of July 12, 2010.

INTUITIVE SURGICAL, INC.

TABLE OF CONTENTS


		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited):	3

	Condensed consolidated balance sheets as of June 30, 2010 and December 31, 2009	3

	Condensed consolidated statements of income for the three and six-month periods ended June 30, 2010 and June 30, 2009	4

	Condensed consolidated statements of cash flows for the six-month periods ended June 30, 2010 and June 30, 2009	5

	Notes to condensed consolidated financial statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults Upon Senior Securities	27

Item 5.	Other Information	27

Item 6.	Exhibits	28

	Signature	29

PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements

INTUITIVE SURGICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT PAR VALUE)

(UNAUDITED)


	June 30, 2010		December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	420.0	$	221.4
Short-term investments		547.9		334.0
Accounts receivable, net		194.7		205.4
Inventory		74.0		57.6
Prepaids and other assets		20.3		20.9
Deferred tax assets		7.2		7.3

Total current assets		1,264.1		846.6
Property, plant and equipment, net		144.4		125.7
Long-term investments		620.3		616.6
Long-term deferred tax assets		53.2		53.4
Intangible assets, net		49.8		56.2
Goodwill		110.7		110.7
Other assets		0.6		0.5

Total assets	$	2,243.1	$	1,809.7

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	41.6	$	27.6
Accrued compensation and employee benefits		42.1		49.8
Deferred revenue		107.6		99.4
Other accrued liabilities		52.0		26.0

Total current liabilities		243.3		202.8
Long-term liabilities		75.4		69.6

Total liabilities		318.7		272.4

Commitments and contingencies		—		—
Stockholders’ equity:
Preferred stock, 2.5 shares authorized, $0.001 par value, issuable in series; no shares issued and outstanding as of June 30, 2010 and December 31, 2009		—		—
Common stock, 100.0 shares authorized, $0.001 par value, 39.4 and 38.5 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively		—		—
Additional paid-in capital		1,238.0		1,024.3
Retained earnings		685.7		511.7
Accumulated other comprehensive income		0.7		1.3

Total stockholders’ equity		1,924.4		1,537.3

Total liabilities and stockholders’ equity	$	2,243.1	$	1,809.7

See accompanying Notes to Condensed Consolidated Financial Statements.

INTUITIVE SURGICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Revenue:
Product	$	295.3	$	219.3	$	573.3	$	368.4
Service		55.4		41.3		106.0		80.6

Total revenue		350.7		260.6		679.3		449.0
Cost of revenue:
Product		72.7		55.5		140.7		100.8
Service		21.2		14.9		41.3		29.3

Total cost of revenue		93.9		70.4		182.0		130.1

Gross profit		256.8		190.2		497.3		318.9

Operating expenses:
Selling, general, and administrative		88.6		67.3		171.4		129.7
Research and development		28.5		23.4		56.5		44.7

Total operating expenses		117.1		90.7		227.9		174.4

Income from operations		139.7		99.5		269.4		144.5
Interest and other income, net		4.5		5.2		8.6		10.2

Income before taxes		144.2		104.7		278.0		154.7
Income tax expense		55.5		42.3		104.0		64.2

Net income	$	88.7	$	62.4	$	174.0	$	90.5

Earnings per share:
Basic	$	2.26	$	1.65	$	4.45	$	2.36

Diluted	$	2.19	$	1.62	$	4.31	$	2.32

Shares used in computing earnings per share:
Basic		39.3		37.9		39.1		38.4

Diluted		40.5		38.6		40.4		38.9

See accompanying Notes to Condensed Consolidated Financial Statements.

INTUITIVE SURGICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

(UNAUDITED)


	Six Months Ended June 30,
	2010			2009
Operating Activities:
Net income	$	174.0		$	90.5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		11.4			9.1
Amortization of intangible assets		7.9			7.9
Deferred income taxes		0.4			(8.4	)
Income tax benefits from employee stock option plans		40.7			0.7
Excess tax benefit from stock-based compensation		(46.9	)		(1.0	)
Share-based compensation expense		57.1			47.4
Changes in operating assets and liabilities:
Accounts receivable		10.7			(5.1	)
Inventory		(16.4	)		4.2
Prepaids and other assets		0.8			(4.0	)
Accounts payable		14.3			6.0
Accrued compensation and employee benefits		(7.5	)		(7.6	)
Deferred revenue		8.3			10.3
Accrued liabilities		36.3			23.1

Net cash provided by operating activities		291.1			173.1

Investing Activities:
Purchase of investments		(604.3	)		(303.2	)
Proceeds from sales and maturities of investments		386.6			286.1
Purchase of property and equipment and acquisition of intellectual property		(36.5	)		(40.3	)

Net cash used in investing activities		(254.2	)		(57.4	)

Financing Activities:
Proceeds from issuance of common stock, net		115.9			12.0
Excess tax benefit from stock-based compensation		46.9			1.0
Repurchase and retirement of common stock		—			(150.0	)

Net cash provided by (used in) financing activities		162.8			(137.0	)

Effect of exchange rate changes on cash and cash equivalents		(1.1	)		0.1

Net increase (decrease) in cash and cash equivalents		198.6			(21.2	)
Cash and cash equivalents, beginning of period		221.4			194.6

Cash and cash equivalents, end of period	$	420.0		$	173.4

See accompanying Notes to Condensed Consolidated Financial Statements.

INTUITIVE SURGICAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In this report, “Intuitive Surgical,” “Intuitive,” and the “Company” refer to Intuitive Surgical, Inc. and its wholly-owned subsidiaries.

NOTE 1. DESCRIPTION OF BUSINESS

Intuitive Surgical, Inc. designs, manufactures, and markets the da Vinci Surgical System, an advanced minimally invasive robotic assisted surgical system that the Company believes represents a new generation of surgery. The da Vinci Surgical System consists of a surgeon’s console or consoles, a patient-side cart, a high performance vision system and proprietary “wristed” instruments. The da Vinci Surgical System translates the surgeon’s natural hand movements on instrument controls at the console into corresponding micro-movements of instruments positioned inside the patient through small puncture incisions, or ports. By placing computer-enhanced technology between the surgeon and the patient, the da Vinci Surgical system enables higher value surgical procedures to patients through increased effectiveness and reduced invasiveness.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements (“financial statements”) of Intuitive Surgical, Inc. and its wholly-owned subsidiaries have been prepared on a consistent basis with the December 31, 2009 audited Consolidated Financial Statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth herein. These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), and, therefore, omit certain information and footnote disclosure necessary to present the statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). These financial statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, which was filed on January 29, 2010. The results of operations for the first six months of fiscal 2010 are not indicative of the results to be expected for the entire fiscal year or any future periods.

New Accounting Standards Recently Adopted

Revenue Recognition for Arrangements with Multiple Deliverables

The Company’s revenue consists of product revenue resulting from the sales of systems, instruments and accessories, and service revenue. The Company recognizes revenue when all four revenue recognition criteria have been met: 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. The Company’s revenue recognition policy generally results in revenue recognition at the following points:

•

System sales. For system sales directly to end customers, revenue is recognized when acceptance occurs, which is deemed to have occurred upon the receipt by the Company of a form executed by the customer acknowledging delivery and/or installation. For system sales through distributors, revenue is recognized upon transfer of title and risk of loss, which is generally at the time of shipment. Distributors do not have price protection rights. The Company’s system contracts do not allow rights of return. The Company’s system revenue contains a software component. Since the da Vinci System’s software and non-software elements function together to deliver the System’s essential functionality, they are considered to be one deliverable that is excluded from the software revenue recognition guidance.

•

Instruments and accessories. Revenue from sales of instruments and accessories is recognized when the product has been shipped. The Company records an allowance on instruments and accessories sales returns based on historical returns experience.

•

Service. Service contract revenue is recognized ratably over the term of the service period. Revenue related to services performed on a time-and-materials basis is recognized when it is earned and billable.

The Company determined that its multiple-element arrangements are generally comprised of the following elements that would qualify as separate units of accounting: system sales, service contracts and instruments and accessories sales.

In September 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards related to revenue recognition for arrangements with multiple deliverables and arrangements that include software elements (“new accounting principles”). The new accounting principles permit prospective or retrospective adoption, and the Company elected prospective adoption at the beginning of the first quarter of 2010.

For multiple-element arrangements (which are generally comprised of system sales and service contracts) entered into prior to January 1, 2010, revenue was allocated to each element based on the relative fair value of each element. Fair value is generally determined by vendor specific objective evidence (VSOE) which is based on the price charged when each element is sold separately. The Company’s systems sales generally include a first year service obligation. The Company typically does not sell the systems on a stand-alone basis and therefore does not have VSOE for its systems. The Company has established VSOE for services. When the fair value of a delivered element had not been established, but fair value existed for the undelivered elements, prior to January 1, 2010, the Company used the residual method to recognize revenue. Under the residual method, the fair value of the undelivered elements was deferred and the remaining portion of the arrangement fee was allocated to the delivered elements.

Subsequent to the adoption of the new revenue accounting principles, for multiple-element arrangements entered into on or after January 1, 2010, revenue is allocated to each element based on their relative selling prices. Relative selling prices are based first on VSOE, then on third-party evidence of selling price (TPE) when VSOE does not exist, and then on estimated selling price (ESP) when VSOE and TPE do not exist.

Because the Company has neither VSOE nor TPE for its systems, the allocation of revenue has been based on the Company’s ESPs. The objective of ESP is to determine the price at which the Company would transact a sale if the product was sold on a stand-alone basis. The Company determines ESP for its systems by considering multiple factors including, but not limited to, features and functionality of the system, geographies, type of customer, and market conditions. The Company regularly reviews ESP and maintains internal controls over the establishment and updates of these estimates.

Had the new accounting guidance been applied to revenue at the beginning of 2009, the resultant revenue for the year ended December 31, 2009 would have been substantially the same. However, primarily due to the da Vinci Si upgrade offers made to certain first quarter 2009 customers, had the new accounting guidance been applied to the three and six months ended June 30, 2009, system revenue for the three months ended June 30, 2009 would have been approximately $3.8 million lower, while system revenue for the six months ended June 30, 2009 would have been approximately $3.1 million higher. Under the new accounting guidance, less of the discount associated with the da Vinci Si upgrades would have been allocated to the initial system sale.

Fair Value Measurements Disclosures

Effective January 1, 2010, the Company adopted revised guidance intended to improve disclosures related to fair value measurements, issued by FASB. This guidance requires us to separate information about significant transfers in and out of Level 1 and Level 2 and the reason for such transfers, and also requires information related to purchases, sales, issuances, and settlements information of Level 3 financial assets to be included in the rollforward of activity. The guidance also requires us to provide certain disaggregated information on the fair value of financial assets and requires us to disclose valuation techniques and inputs used for both recurring and nonrecurring fair value measurements of our Level 2 and Level 3 financial assets. We have provided the additional required disclosures effective January 1, 2010.

NOTE 3. CASH, CASH EQUIVALENTS & INVESTMENTS

The following tables summarize the Company’s cash, cash equivalents and investments as of June 30, 2010 and December 31, 2009 (in millions):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2010
Cash and cash equivalents:
Cash	$	34.9	$	—	$	—		$	34.9
Cash equivalents		385.1		—		—			385.1

Total cash and cash equivalents	$	420.0	$	—	$	—		$	420.0

Available for sale investments:
Short-term
Commercial paper	$	54.6	$	—	$	—		$	54.6
Municipal notes		73.6		0.5		—			74.1
U.S. corporate debt		181.0		0.9		(0.1	)		181.8
U.S. treasuries		81.4		—		—			81.4
U.S. government agencies		121.3		0.3		—			121.6

Total short-term	$	511.9	$	1.7	$	(0.1	)	$	513.5

Long-term
Municipal notes	$	132.0	$	0.9	$	(4.4	)	$	128.5
U.S. corporate debt		248.0		2.3		(0.1	)		250.2
U.S. treasuries		12.5		0.1		—			12.6
U.S. government agencies		228.3		0.7		—			229.0

Total long-term	$	620.8	$	4.0	$	(4.5	)	$	620.3


Total cash, cash equivalents and available for sale investments	$	1,552.7	$	5.7	$	(4.6	)	$	1,553.8
Other securities (included in short-term investments):
Trading securities, auction rate securities	$	30.4	$	—	$	—		$	30.4
Put option		4.0		—		—			4.0

Total cash, cash equivalents and investments:	$	1,587.1	$	5.7	$	(4.6	)	$	1,588.2


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2009
Cash and cash equivalents:
Cash	$	28.6	$	—	$	—		$	28.6
Cash equivalents		192.8		—		—			192.8

Total cash and cash equivalents	$	221.4	$	—	$	—		$	221.4

Available for sale investments:
Short-term
Commercial paper	$	13.1	$	—	$	—		$	13.1
Municipal notes		21.3		0.2		—			21.5
U.S. corporate debt		150.5		1.3		—			151.8
U.S. treasuries		31.6		0.2		—			31.8
U.S. government agencies		45.5		0.5		—			46.0

Total short-term	$	262.0	$	2.2	$	—		$	264.2

Long-term
Municipal notes	$	161.0	$	1.5	$	(4.5	)	$	158.0
U.S. corporate debt		222.5		2.1		(0.1	)		224.5
U.S. treasuries		29.5		—		(0.2	)		29.3
U.S. government agencies		204.6		0.6		(0.4	)		204.8

Total long-term	$	617.6	$	4.2	$	(5.2	)	$	616.6

Total cash, cash equivalents and available for sale investments	$	1,101.0	$	6.4	$	(5.2	)	$	1,102.2
Other securities (included in short-term investments):
Trading securities, auction rate securities	$	62.2	$	—	$	—		$	62.2
Put option		7.6		—		—			7.6

Total cash, cash equivalents and investments	$	1,170.8	$	6.4	$	(5.2	)	$	1,172.0

The following table summarizes the maturities of the Company’s cash equivalents and available-for-sale investments at June 30, 2010 (in millions):


	Amortized Cost		Fair Value
Mature in less than one year	$	897.0	$	898.6
Mature in one to five years		597.9		601.8
Mature in more than five years		22.9		18.5

Total	$	1,517.8	$	1,518.9

During the three and six months ended June 30, 2010 and 2009, realized gains or losses recognized on the sale of investments were not significant. As of June 30, 2010 and December 31, 2009, net unrealized gains on available-for-sale securities, net of tax, of $0.9 million were included in accumulated other comprehensive income in the accompanying unaudited Condensed Consolidated Balance Sheets. At June 30, 2010, the majority of the Company’s gross unrealized losses were from auction-rate securities (ARS). The Company determined these unrealized losses to be temporary. Factors considered in determining whether a loss is temporary included the length

of time and extent to which the investment’s fair value has been less than the cost basis; the financial condition and near-term prospects of the investee; extent of the loss related to credit of the issuer; the expected cash flows from the security; the Company’s intent to sell the security; and whether or not the Company will be required to sell the security before the recovery of its amortized cost.

NOTE 4. FAIR VALUE MEASUREMENTS

The Company measures certain financial assets including cash equivalents, available-for-sale securities, trading securities and foreign currency derivatives at their fair value. The fair value of these financial assets was determined based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following tables represent the Company’s fair value hierarchy for its financial assets and liabilities as of June 30, 2010 and December 31, 2009 (in millions):


	Fair Value Measurements at June 30, 2010 Using
Assets	Level 1		Level 2		Level 3		Total
Municipal notes - trading security	$	—	$	—	$	30.4	$	30.4
Put option		—		—		4.0		4.0
Available-for-sale securities
Money Market funds		313.6		—		—		313.6
U.S. treasuries		94.0		—		—		94.0
Commercial paper		—		122.7		—		122.7
Corporate debt		—		432.0		—		432.0
U.S. government agencies		—		354.0		—		354.0
Municipal notes		—		184.1		18.5		202.6

Total available-for-sale securities		407.6		1,092.8		18.5		1,518.9

Foreign Currency Derivatives		—		2.4		—		2.4

Total assets measured at fair value	$	407.6	$	1,095.2	$	52.9	$	1,555.7


	Fair Value Measurements at December 31, 2009 Using
Assets	Level 1		Level 2		Level 3		Total
Municipal notes - trading security	$	—	$	—	$	62.2	$	62.2
Put option		—		—		7.6		7.6
Available-for-sale securities
Money Market funds		175.7		—		—		175.7
U.S. treasuries		61.1		—		—		61.1
Commercial paper		—		27.4		—		27.4
Corporate debt		—		379.0		—		379.0
U.S. government agencies		—		250.9		—		250.9
Municipal notes		—		160.4		19.1		179.5

Total available-for-sale securities		236.8		817.7		19.1		1,073.6

Total assets measured at fair value	$	236.8	$	817.7	$	88.9	$	1,143.4


Liabilities
Foreign Currency Derivatives	$	—	$	0.4	$	—	$	0.4

Total liabilities measured at fair value	$	—	$	0.4	$	—	$	0.4

The following table provides a reconciliation of the beginning and ending balances for the assets measured at fair value using significant unobservable inputs (Level 3) (in millions):


	Fair Value Measurements at Reporting Date Using Significant Unobservable Inputs (Level 3)
	Put Option			ARS		Total
Balance at January 1, 2010	$	7.6		81.3		88.9
Sales/Maturities		—		(8.1	)	(8.1	)
Total gains or (losses):
Included in other comprehensive income (loss)		—		0.2		0.2
Included in earnings		(0.4	)	0.4		—

Balance at March 31, 2010		7.2		73.8		81.0
Sales/Maturities		—		(28.0	)	(28.0	)
Total gains or (losses):
Included in other comprehensive income (loss)		—		(0.1	)	(0.1	)
Included in earnings		(3.2	)	3.2		—

Balance at June 30, 2010	$	4.0		48.9		52.9

Level 2 securities are priced using quoted market prices for similar instruments, nonbinding market prices that are corroborated by observable market data, or discounted cash flow techniques. The Company’s derivative instruments are primarily classified as Level 2 as they are not actively traded and are valued using pricing models that use observable market inputs. There have been no transfers between Level 1 and Level 2 measurements during the three and six months ended June 30, 2010. Level 3 assets consist of municipal bonds with an auction reset feature (ARS) whose underlying assets are student loans which are substantially backed by the federal government. The auctions for these securities have continued to fail since February 2008. These investments are not currently trading and therefore do not have a readily determinable fair value. Pursuant to the terms of the UBS Rights Offering, on June 30, 2010 the Company exercised its right to sell all ARS subject to the Rights Offering to UBS at par value. As of June 30 2010, the Company had $34.4 million par value of ARS with UBS. Subsequently, the Company received the full par value in cash on July 1, 2010.

Foreign currency derivative

On a monthly basis, the Company enters into foreign currency forward contracts with one to seven month terms. It does not purchase derivatives for trading purposes. As of June 30, 2010, the Company had entered into €18.5 million and £1.4 million of foreign currency forward contracts to hedge non-functional currency net monetary assets.

The fair value of derivative instruments in the unaudited Condensed Consolidated Balance Sheet as of June 30, 2010 was approximately $2.4 million in assets. For the three and six months ended June 30, 2010, $1.9 million and $2.5 million of accumulated hedging gains were reclassified from other comprehensive income to revenue related to the impact of derivative instruments designated as cash flow hedges. The amounts recognized in revenue for the three and six months ended June 30, 2009 were not significant. Other impacts of derivative instruments designated as cash flow hedges were not significant for the three and six months ended June 30, 2010. Interest and other income, net for the three and six months ended June 30, 2010 includes approximately $1.9 million and $4.1 million, respectively, of income related to derivative instruments, including those used to hedge against balance sheet foreign currency exposures. These amounts were offset by approximately $2.2 million and $4.9 million of losses related to the remeasurement of balance sheet foreign currency exposures for the three and six months ended June 30, 2010, respectively. The Company recognized a loss of approximately $1.4 million for derivative instruments used to hedge against balance sheet foreign currency exposure during the three months ended June 30, 2009 and the recognized loss was not significant during the six months ended June 30, 2009. These amounts were offset by approximately $1.6 million of gains related to the remeasurement of balance sheet foreign currency exposures for the three months ended June 30, 2009 and the impact related to the six months ended June 30, 2009 was not significant.

NOTE 5. INVENTORY

The following table provides details of selected balance sheet items (in millions):


	June 30, 2010		December 31, 2009
Inventory
Raw materials	$	17.2	$	16.3
Work-in-process		4.8		2.5
Finished goods		52.0		38.8

Total	$	74.0	$	57.6

NOTE 6. STOCKHOLDERS’ EQUITY

Comprehensive Income

The components of comprehensive income, net of tax, are as follows (in millions):


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Net income	$	88.7		$	62.4		$	174.0		$	90.5
Foreign currency translation gains (losses)		(0.4	)		0.3			(0.6	)		0.1
Unrealized gains (losses) on derivative instruments, net of tax:
Unrealized gains (losses) on derivative instruments		1.1			(1.1	)		3.1			(0.7	)
Reclassification adjustment for (gains) losses on derivative instruments recognized during the period		(2.2	)		0.6			(3.1	)		0.4
Unrealized gains (losses) on available-for-sale securities, net of tax:
Unrealized gains arising during the period		—			1.9			—			3.9

Total other comprehensive income	$	87.2		$	64.1		$	173.4		$	94.2

The components of accumulated other comprehensive income are as follows (in millions):


	June 30, 2010			December 31, 2009
Foreign currency translation gains (losses)	$	(0.2	)	$	0.4
Accumulated net unrealized gains on available-for-sale securities, net of tax		0.9			0.9

Total accumulated other comprehensive income	$	0.7		$	1.3

NOTE 7. STOCK-BASED COMPENSATION

Stock Option Plans

2010 Incentive Award Plan

In April 2010, the Company’s stockholders approved the 2010 Incentive Award Plan (“2010 Plan”), which authorized approximately 1.3 million shares of common stock for issuance. Under this plan, the Company issues nonqualified stock options (“NSOs”) to employees and certain consultants. The 2010 Plan generally permits NSOs to be granted at no less than the fair market value of the common stock on the date of grant, with terms of 10 years from the date of grant. Options generally vest 12.5% upon completion of 6 months service and 1/48th per month thereafter; however, options may have different vesting terms as determined by the Compensation Committee. The plan expires in 2020.

A summary of stock option activity under the 2000 Equity Incentive Plan, the 2000 Non-Employee Directors’ Plan, the 2009 Employment Commencement Incentive Plan and the 2010 Plan for the six months ended June 30, 2010 is presented as follows (in millions, except per share amounts):


	Shares Available for Grant		Stock Options Outstanding
	Shares Available for Grant		Number Outstanding		Weighted Average Exercise Price Per Share
Balance at December 31, 2009	8.9		4.6		$	157.25
Options authorized	1.3		—			—
Options granted	(1.3	)	1.3			333.50
Options exercised	—		(0.8	)		141.23
Options forfeited/expired (1)	(7.3	)	(0.1	)		209.37

Balance at June 30, 2010	1.6		5.0		$	202.91

(1)	Primarily related to the expiration of the 2000 Equity Incentive Plan.

As of June 30, 2010, 2.0 million shares of options were exercisable at a weighted-average price of $146.07 per share.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan (“ESPP”), employees purchased 82,948 shares for $7.7 million and 55,185 shares for $4.7 million during the six months ended June 30, 2010 and 2009, respectively.

The following table summarizes stock-based compensation charges (in millions):


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Cost of sales - products	$	2.4	$	1.9	$	4.5	$	3.7
Cost of sales - services		2.2		1.7		4.1		3.2

Total cost of sales		4.6		3.6		8.6		6.9
Selling, general and administrative		20.0		15.5		37.8		29.9
Research and development		5.7		5.5		10.7		10.5

Stock-based compensation expense before income taxes		30.3		24.6		57.1		47.3
Income tax effect		8.3		6.8		15.9		14.1

Stock-based compensation expense after income tax effect	$	22.0	$	17.8	$	41.2	$	33.2

The fair value of each option grant and the fair value of the option component of the ESPP shares were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions, assuming no expected dividends:


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Stock Options
Average risk free interest rate		2.33	%		2.10	%		2.33	%		1.68	%
Average expected term (years)		4.6			5.1			4.8			5.3
Average expected volatility		37	%		51	%		35	%		56	%
Weighted average fair value at grant date	$	115.53		$	62.26		$	111.69		$	55.18
Total stock-based compensation expense (in millions)	$	28.3		$	23.0		$	53.2		$	44.2

ESPP
Average risk free interest rate								0.49	%		0.58	%
Average expected term (years)								1.3			1.3
Average expected volatility								35	%		65	%
Weighted average fair value at grant date							$	99.34		$	43.94
Total stock-based compensation expense (in millions)	$	2.0		$	1.6		$	3.9		$	3.1

There were no new ESPP offerings during the three months ended June 30, 2010 and 2009.

NOTE 8. INCOME TAXES

As part of the process of preparing the unaudited Condensed Consolidated Financial Statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the current tax liability under the most recent tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the accompanying unaudited Condensed Consolidated Balance Sheets.

The Company intends these foreign earnings to be indefinitely reinvested outside the United States. The effective tax rate for the three and six months ended June 30, 2009 differs from the federal statutory rate primarily due to state income taxes and non-deductible stock option expenses, partially offset by 2009 research and development (“R&D”) credits and domestic production deductions. The state income taxes for the six months ended June 30, 2009 included a discrete increase of approximately 1.0% resulting from re-measurement of long term deferred tax assets due to a California law change enacted in February 2009.

As of June 30, 2010, the Company has total gross unrecognized tax benefits of approximately $75.4 million compared with approximately $70.0 million as of December 31, 2009, representing an increase of approximately $5.4 million for the six months ended June 30, 2010. Of the total gross unrecognized tax benefits, $71.1 million and $65.7 million as of June 30, 2010 and December 31, 2009, respectively, if recognized, would reduce the Company’s effective tax rate in the period of recognition. Gross interest related to unrecognized tax benefit accrued was approximately $4.2 million and $3.3 million, respectively, as of June 30, 2010 and December 31, 2009.

The Company files federal, state and foreign income tax returns in many jurisdictions in the United States and abroad. For U.S. federal and California income tax purposes, the statute of limitations currently remain open for all years since inception due to utilization of net operating losses and R&D credits generated in prior years.

NOTE 9. NET INCOME PER SHARE

The following table presents the computation of basic and diluted net income per share (in millions, except per share data):


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Net income	$	88.7	$	62.4	$	174.0	$	90.5
Basic:
Weighted-average shares outstanding		39.3		37.9		39.1		38.4

Basic net income per share		2.26		1.65		4.45	$	2.36

Diluted:
Weighted-average shares outstanding used in basic calculation		39.3		37.9		39.1		38.4
Add common stock equivalents		1.2		0.7		1.3		0.5

Weighted-average shares used in computing diluted net income per share		40.5		38.6		40.4		38.9

Diluted net income per share	$	2.19	$	1.62	$	4.31	$	2.32

Employee stock options to purchase approximately 1.4 million and 2.9 million weighted shares for the three months ended June 30, 2010 and 2009, respectively, and 1.1 million and 3.0 million weighted shares for the six months ended June 30, 2010 and 2009, respectively, were outstanding, but were not included in the computation of diluted net income per share because the effect of including such shares would have been antidilutive in the periods presented.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this report, “Intuitive Surgical,” “Intuitive,” the “Company,” “we,” “us,” and “our” refer to Intuitive Surgical, Inc. and its wholly-owned subsidiaries.

This management’s discussion and analysis of financial condition as of June 30, 2010 and results of operations for the three and six months ended June 30, 2010 and 2009 should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2009.

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements relate to expectations concerning matters that are not historical facts. Words such as “projects,” “believes,” “anticipates,” “plans,” “expects,” “intends,” “may,” “will,” “could,” “should,” “would,” and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements related to our expected business, new product introductions, results of operations, future financial position, our ability to increase our revenues, the mix of our revenues between product and service revenues, our financing plans and capital requirements, our costs of revenue, our expenses, our potential tax assets or liabilities, the effect of recent accounting pronouncements, our investments, cash flows and our ability to finance operations from cash flows and similar matters and include statements based on current expectations, estimates, forecasts and projections about the economies and markets in which we operate and our beliefs and assumptions regarding these economies and markets. These forward-looking statements should be considered in light of various important factors, including the following: the impact of the global and regional economic conditions and related credit markets and related impact on health care spending; health care reform legislation in the United States and its implications on hospital spending, reimbursement and fees which will be levied on certain medical device companies; timing and success of product development and market acceptance of developed products; regulatory approvals, clearances and restrictions; guidelines and recommendations in the health care and patient communities; intellectual property positions and litigation; competition in the medical device industry and in the specific markets of surgery in which Intuitive Surgical operates; unanticipated manufacturing disruptions; delays in regulatory approvals of new manufacturing facilities or the inability to meet demand for products; the results of the year-end audit and other risk factors. Readers are cautioned that these forward-looking statements are based on current expectation and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those risk factors described throughout this filing and detailed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and other periodic filings with the Securities and Exchange Commission, particularly in Part I, “Item 1A: Risk Factors”. Our actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

Intuitive^®, Intuitive Surgical^®, da Vinci^®, da Vinci S^®, da Vinci^® S HD Surgical System™, da Vinci^® Si™, EndoWrist^®, and InSite^® are trademarks of Intuitive Surgical, Inc.

Overview

Products. We design, manufacture and market da Vinci Surgical Systems, which are advanced surgical systems that we believe represent a new generation of surgery. We believe that this new generation of surgery, which we call da Vinci surgery, is a significant advancement similar in scope to previous generations of surgery—open surgery and minimally invasive surgery, or conventional MIS. The da Vinci Surgical System consists of a surgeon’s console, or consoles, a patient-side cart and a high performance vision system. The da Vinci Surgical System translates the surgeon’s natural hand movements, which are performed on instrument controls at a console, into corresponding micro-movements of instruments positioned inside the patient through small incisions, or ports. We believe that the da Vinci Surgical System provides the surgeon with intuitive control, range of motion, fine tissue manipulation capability and high definition 3-D vision, while simultaneously allowing the surgeons to work through the small ports of MIS.

By placing computer-enhanced technology between the surgeon and the patient, we believe that the da Vinci Surgical System enables surgeons to deliver higher value surgical procedures to their patients. We model patient value as equal to: procedure efficacy / invasiveness. Here efficacy is a measure of the success of the surgery in resolving the underlying disease and invasiveness is how disruptive and painful the treatment is itself. When the patient value of robotic surgery is significantly higher than competing treatment options, we have seen that patients will seek out surgeons and hospitals that offer da Vinci procedures, resulting in a local shift of treatment approach and market share. The combination of these local adoptions drives a disruptive change in the marketplace and leads to the broad adoption of robotic surgery. These adoptions occur procedure by procedure, and are driven by the relative patient value of da Vinci procedures against alternatives for the same disease state.

Business Model. In our business model, we generate revenue from both the initial capital sales of da Vinci Surgical Systems as well as recurring revenue, derived from sales of instruments, accessories, and service revenue. The da Vinci Surgical System generally sells for $1.0 million to $2.3 million, depending on configuration and geography, and represents a significant capital equipment investment for our customers. We then generate recurring revenue as our customers purchase our EndoWrist instruments and accessory products for use in performing procedures with the da Vinci Surgical System. EndoWrist instruments and accessories will either expire or wear out as they are used in surgery and will need to be replaced as they are consumed. We generate additional recurring revenue from ongoing system service. We typically enter into service contracts at the time the system is sold. These service contracts have been generally renewable at the end of the service period, typically at an annual rate of approximately $100,000 to $180,000 per year, depending on the configuration of the underlying system.

Since the introduction of the da Vinci Surgical System in 1999, robotic surgery volume has increased and our established base of da Vinci Surgical Systems has grown. Recurring revenue has grown at an equal or faster rate than system revenue. Recurring revenue increased from $276.4 million, or 46% of total revenue in 2007, to $419.6 million, or 48% of total revenue in 2008 to $561.7 million, or 53% of total revenue in 2009. Recurring revenue for the three months ended June 30, 2010 was $182.9 million or 52% of total revenue and for the six months ended June 30, 2010 was $356.2 million, or 52% of total revenue. The increase in recurring revenue relative to system revenue reflects continuing adoption of procedures on a growing base of installed da Vinci Surgical Systems. We expect recurring revenue to become a larger percentage of total revenue in the future. The installed base of da Vinci Surgical Systems has grown to 1,571 at June 30, 2010, compared with 1,242 at June 30, 2009 and 1,482 at March 31, 2010.

Regulatory Activities

We believe that we have obtained the clearances required to market our products to our targeted surgical specialties within the United States. As we make additions to target procedures, we will continue to seek the necessary clearances. The following table lists chronologically our FDA clearances to date:

•

July 2000 – General laparoscopic procedures

•

March 2001 – Non-cardiac thoracoscopic procedures

•

May 2001 – Prostatectomy procedures

•

November 2002 – Cardiotomy procedures

•

July 2004 – Cardiac revascularization procedures

•

March 2005 – Urologic surgical procedures

•

April 2005 – Gynecologic surgical procedures

•

June 2005 – Pediatric surgical procedures

•

December 2009 – Transoral Otolaryngologic surgical procedures

During the first quarter of 2009, we received clearance to market our da Vinci Si Surgical System in the United States and Europe.

In November 2009, we received regulatory (Shonin) approval from the Japanese Ministry of Health, Labor, and Welfare (MHLW) for our da Vinci S System in Japan. During the three months ended March 31, 2010 and six months ended June 30, 2010, we sold seven and eight da Vinci S Systems, respectively, in Japan. These sales were primarily made to early adopters in Japan who were anticipating our Shonin approval. We are currently focusing our efforts on obtaining the appropriate reimbursement for da Vinci procedures in Japan. If we are not successful in obtaining the necessary reimbursement approvals or obtaining approvals for future products and procedures, then the demand of our products could be limited. We have partnered with the experienced regulatory team from Johnson & Johnson K.K. Medical Company (Japan) in our Japanese regulatory process and are continuing to work with them to meet government requirements. We have partnered with Adachi Co., LTD as our separate independent distribution partner in Japan who is responsible for marketing, selling, and servicing our products in Japan.

2010 Business Events and Trends

Economic Environment. During the first half of 2009, the world-wide economic recession curtailed hospital demand for capital purchases of our da Vinci Surgical Systems. Driven by the U.S. market, demand for our da Vinci Surgical Systems improved towards the end of 2009 and into 2010. The 212 total da Vinci Surgical Systems sold in the six months ended June 30, 2010 exceeded those sold during the same period of 2009 by 70 systems. The increase was primarily in the United States. However, the macro-economic environment in Europe has constrained capital spending such that system sales in the six months ended June 30, 2010 were 25 compared with 30 for the six months ended June 30, 2009 despite significant procedure growth.

da Vinci Si Surgical System Product Launch. During the second quarter of 2009 we launched our newest da Vinci model, the da Vinci Si. The da Vinci Si brings to market three significant innovations. First, our InSite™ imaging system has been substantially redesigned for increased visual acuity and improved ease-of-use. The HD imaging system’s increased performance is similar to the move from 720p to 1080i in commercial television. We believe that the increased visual performance will continue to enhance

surgeon precision and confidence and will contribute to improved patient outcomes and shorter procedure times. Secondly, the da Vinci Si surgeon console’s user interface was redesigned to allow simplified and integrated control of da Vinci products and other operating room devices, such as electro-surgical units. The new user interface also includes a set of ergonomic controls for surgeon comfort. We believe the simplified interface will allow for easier surgeon training. The third significant improvement is the introduction of a dual surgeon’s console for use during surgery, which will allow new methods of training da Vinci surgeons and enable collaborative da Vinci surgery. With the da Vinci Si, a surgeon sitting at a second console can view the same surgery as the primary surgeon and can be passed control of some or all of the da Vinci arms during a case. We believe this will both shorten the learning curve for new surgeons and will allow collaborative surgery in complex cases.

The da Vinci Si Surgical System was FDA approved and CE marked upon launch and is currently available in the United States, Europe, and certain other countries. da Vinci Si Systems are available with an option to purchase a second console. Existing da Vinci S instruments and most da Vinci S accessories are compatible with the da Vinci Si system. An upgrade from a da Vinci S System to the da Vinci Si System is available for our current customers. We will continue to sell, service and support the da Vinci S Surgical System. Our sales of the standard da Vinci Surgical System have substantially ended; however, we will continue to service and support this product line.

We offered certain of our customers who purchased da Vinci S Surgical Systems in the first quarter of 2009 the opportunity to upgrade their recently purchased da Vinci S Surgical Systems to da Vinci Si Surgical Systems at a discount to the list price of our upgrade. The upgrade program also provided our customers the opportunity to return their recently purchased da Vinci S camera accessories and receive a credit towards the purchase of da Vinci Si camera or other accessories. These customers were given until June 30, 2009 to accept our offer. Total revenue in an amount equal to the discount, of approximately $20.1 million, was deferred in the first quarter of 2009. During the second quarter of 2009, we recognized $13.8 million of revenue from offers declined, upgrades completed or accessories delivered. In the third quarter of 2009, we completed all accepted da Vinci Si system upgrade offers and recognized the remaining $6.3 million of deferred revenue.

Market acceptance of the da Vinci Si Surgical System has been positive since its market introduction in the second quarter of 2009. In the second quarter of 2010, 89 out of 108 systems sold were da Vinci Si Surgical Systems, representing approximately 82% of system sales.

Second Quarter 2010 Financial Highlights

•

Second quarter 2010 surgical procedures performed with the da Vinci Surgical System grew by approximately 36% compared to the second quarter of 2009.

•

Second quarter 2010 da Vinci Hysterectomy (dVH) procedure volume surpassed da Vinci Prostatectomy (dVP) volume, becoming the highest volume da Vinci surgery procedure.

•

Total revenue increased to $350.7 million from $260.6 million during the second quarter of 2010. Second quarter 2009 total revenue included recognition of $13.8 million of $20.1 million of revenue deferred in the first quarter of 2009 related to da Vinci Si system upgrade offers made.

•

Recurring revenue increased to $182.9 million from $137.1 million during the second quarter of 2010. Second quarter 2009 recurring revenue included recognition of $1.4 million of $2.1 million of revenue deferred in the first quarter of 2009 related to da Vinci Si system upgrade offers made.

•

Instruments and accessories revenue increased to $127.5 million from $95.8 million during the second quarter of 2010. Second quarter 2009 instruments and accessories revenue included recognition of $1.4 million of $2.1 million of revenue deferred in the first quarter of 2009 related to da Vinci Si system upgrade offers made.

•

We sold 108 da Vinci Surgical Systems during the second quarter of 2010 compared with 76 in the second quarter of 2009.

•

System revenue was $167.8 million compared with $123.5 million during the second quarter of 2009. Second quarter 2009 system revenue included recognition of $12.4 million of $18.0 million of revenue deferred in the first quarter of 2009 related to da Vinci Si system upgrade offers made.

•

As of June 30, 2010, we had a da Vinci Surgical System installed base of 1,571 systems, 1,160 in the United States, 276 in Europe, and 135 in the rest of the world.

•

We added 119 employees during the second quarter of 2010, primarily in field sales and product operations functions, bringing our total headcount to 1,476 at June 30, 2010.

•

Operating income was $139.7 million compared to $99.5 million during the second quarter of 2009. Second quarter 2009 operating income included recognition of $13.8 million of $20.1 million related to revenue deferred in the first quarter of 2009 for da Vinci Si system upgrade revenue offers made. Operating income included $30.3 million and $24.6 million during the second quarter of 2010 and 2009, respectively, of stock-based compensation expense for the estimated fair value of employee stock options and stock purchases.

•

We ended the second quarter of 2010 with $1,588.2 million in cash and investments. Cash and investments increased by $192.7 million during the second quarter of 2010.

Procedure adoption

We believe the adoption of da Vinci surgery occurs surgical procedure by surgical procedure, and is being adopted for those procedures which offer significant patient value. The value of a surgical procedure to a patient is higher if it offers superior clinical outcomes, less surgical trauma, or both.

The procedures that have driven the most growth in our business recently are the da Vinci Hysterectomy (dVH) and da Vinci Prostatectomy (dVP). Other gynecologic procedures such as da Vinci Myomectomy and da Vinci Sacral Colpopexy, other urologic procedures such as da Vinci Nephrectomy, da Vinci Cystectomy and da Vinci Pyeloplasty, cardiothoracic procedures such as da Vinci Mitral Valve Repair and da Vinci Revascularization, and da Vinci colorectal procedures have also contributed to our growth. We anticipate total 2010 procedures to grow approximately 35% from approximately 205,000 procedures performed in 2009.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain unaudited Condensed Consolidated Statements of Income information (in millions):


	Three months Ended June 30,								Six months Ended June 30,
	2010		% of total revenue		2009		% of total revenue		2010		% of total revenue		2009		% of total revenue
Revenue:
Products	$	295.3	84	%	$	219.3	84	%	$	573.3	84	%	$	368.4	82	%
Services		55.4	16	%		41.3	16	%		106.0	16	%		80.6	18	%

Total revenue		350.7	100	%		260.6	100	%		679.3	100	%		449.0	100	%

Cost of revenue:
Products		72.7	21	%		55.5	21	%		140.7	21	%		100.8	22	%
Services		21.2	6	%		14.9	6	%		41.3	6	%		29.3	7	%

Total cost of revenue		93.9	27	%		70.4	27	%		182.0	27	%		130.1	29	%

Products gross profit		222.6	63	%		163.8	63	%		432.6	63	%		267.6	60	%
Services gross profit		34.2	10	%		26.4	10	%		64.7	10	%		51.3	11	%

Gross profit		256.8	73	%		190.2	73	%		497.3	73	%		318.9	71	%

Operating expenses:
Selling, general, and administrative		88.6	25	%		67.3	26	%		171.4	25	%		129.7	29	%
Research and development		28.5	8	%		23.4	9	%		56.5	8	%		44.7	10	%

Total operating expenses		117.1	33	%		90.7	35	%		227.9	34	%		174.4	39	%

Income from operations		139.7	40	%		99.5	38	%		269.4	40	%		144.5	32	%
Interest and other income, net		4.5	1	%		5.2	2	%		8.6	1	%		10.2	2	%

Income before taxes		144.2	41	%		104.7	40	%		278.0	41	%		154.7	34	%
Income tax expense		55.5	16	%		42.3	16	%		104.0	15	%		64.2	14	%

Net income	$	88.7	25	%	$	62.4	24	%	$	174.0	26	%	$	90.5	20	%

Total Revenue

Total revenue was $350.7 million for the three months ended June 30, 2010 compared to $260.6 million for the three months ended June 30, 2009. For the six months ended June 30, 2010, revenue increased to $679.3 million from $449.0 million for the six months ended June 30, 2009. Second quarter 2009 total revenue was impacted by recognition of $13.8 million of the $20.1 million of revenue deferred in the first quarter of 2009 related to da Vinci Si system upgrade revenue offers made. Total revenue in the first half of 2009 excluded the remaining unrecognized $6.3 million of revenue in connection with the upgrade offers described above. Revenue growth for the first half of 2010 was driven by the continued adoption of da Vinci surgery, driving higher system and recurring revenue. We believe that robotic surgery will be adopted surgical procedure by surgical procedure. Our revenue growth during the periods presented reflects adoption progress made in our target procedures. dVH and dVP are our two largest procedures, representing more than 70% of our total procedures over the past several years. An increasing body of peer review literature has indicated that dVP offers superior surgical outcomes compared to traditional open prostatectomy in the critical categories of cancer removal, continence, and sexual potency. Favorable clinical results have been reported in hysterectomies for cancerous pathology, which includes increased lymph node retrieval counts and significant reduction in blood transfusion. For most patients, a minimally invasive approach using the da Vinci Surgical System offers reduced pain, less blood loss, shorter hospital stays, reduced post-operative complications and a quicker return to normal daily activities.

Revenue within the United States accounted for 82% and 81% of total revenue for the three and six month periods ended June 30, 2010, respectively, and 78% and 77% of total revenue for the three and six month periods ended June 30, 2009, respectively. We believe domestic revenue accounts for the large majority of total revenue primarily due to the ability of patients to choose their provider and method of treatment. The increase in second quarter and first half 2010 revenue in the United States relative to the rest of the world reflects increased hospital capital spending in the United States and decreased spending in Europe due to the economic environment, compared to the second quarter and first half of 2009.

The following table summarizes our revenue and da Vinci Surgical System unit sales for the three and six month periods ended June 30, 2010 and 2009 (in millions, except percentages and unit sales):


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenue
Instruments and accessories	$	127.5		$	95.8		$	250.2		$	175.4
Systems		167.8			123.5			323.1			193.0

Total product revenue		295.3			219.3			573.3			368.4
Services		55.4			41.3			106.0			80.6

Total revenue	$	350.7		$	260.6		$	679.3		$	449.0

Recurring revenue	$	182.9		$	137.1		$	356.2		$	256.0

% of total revenue		52	%		53	%		52	%		57	%
Domestic	$	287.7		$	202.8		$	547.9		$	344.7
International		63.0			57.8			131.4			104.3

Total revenue	$	350.7		$	260.6		$	679.3		$	449.0

% of Revenue - Domestic		82	%		78	%		81	%		77	%
% of Revenue - International		18	%		22	%		19	%		23	%

Domestic Unit Sales		86			56			166			100
International Unit Sales		22			20			46			42

Total Unit Sales		108			76			212			142

Product Revenue

Product revenue was $295.3 million for the three months ended June 30, 2010 compared with $219.3 million for the three months ended June 30, 2009. Second quarter 2009 product revenue included recognition of $13.8 million of $20.1 million of revenue deferred in the first quarter of 2009 associated with da Vinci Si launch described above.

Instruments and accessories revenue increased to $127.5 million for the three months ended June 30, 2010 compared with $95.8 million for the three months ended June 30, 2009. Instruments and accessories revenue for the three months ended June 30, 2009 included recognition of $1.4 million of $2.1 million of camera accessories revenue associated with the da Vinci Si launch described above. The increase in revenue was driven by an increase in procedures performed and increased stocking orders associated with increased system sales. Procedure growth was primarily driven by hysterectomy adoption.

Systems revenue increased to $167.8 million during the three months ended June 30, 2010 from $123.5 million during the three months ended June 30, 2009 primarily due to 32 more systems sold, more second quarter 2010 system upgrade revenue, and higher average selling prices (ASPs) resulting from a higher percentage of the higher-priced single and dual console da Vinci Si Surgical Systems in the systems product mix. Second quarter 2009 systems revenue includes $12.4 million recognition of $18.0 million of system revenue deferred in the first quarter 2009 system revenue associated with da Vinci Si upgrade offers. We sold 108 da Vinci Surgical Systems during the three months ended June 30, 2010, compared with 76 in the same period last year. 89 of the 108 systems sold during the second quarter of 2010 were the da Vinci Si Surgical Systems, of which 15 systems were dual console configurations. We had 19 standard da Vinci Surgical Systems traded in during the three months ended June 30, 2010, compared with 5 standard systems traded in during the same period last year.

Product revenue was $573.3 million for the six months ended June 30, 2010 compared with $368.4 million for the six months ended June 30, 2009. Product revenue in the first half of 2009 excluded the remaining unrecognized $6.3 million of revenue deferred in connection with the da Vinci Si Surgical launch described above.

Instruments and accessories revenue increased to $250.2 million for the six months ended June 30, 2010 compared with $175.4 million for the six months ended June 30, 2009. Instruments and accessories revenue for the first half of 2009 excluded the remaining unrecognized $0.7 million of revenue deferrals in connection with the da Vinci Si launch described above. The increase for the six months ended June 30, 2010 resulted from the same factors as the three months ended June 30, 2010.

Systems revenue was $323.1 million during the six months ended June 30, 2010 compared with $193.0 million during the six months ended June 30, 2009. The increase was primarily due to 70 more systems sold, more system upgrade revenue during the first half of 2010, and higher average selling prices (ASPs) resulting from a higher percentage of the higher-priced single and dual console da Vinci Si Surgical Systems in the systems product mix. Systems revenue during the first half of 2009 excluded the remaining unrecognized $5.6 million of $18.0 million associated with da Vinci Si upgrade offers. We sold 212 da Vinci Surgical Systems during the first half of 2010, compared with 142 in the same period last year. 169 of the 212 systems sold during the first half of 2010 were the da Vinci Si Surgical Systems, of which 30 systems were dual console configurations. We had 36 standard da Vinci Surgical Systems traded in during the six months ended June 30, 2010, compared with 11 standard systems traded in during the same period last year.

Service Revenue

Service revenue, comprised primarily of system service and customer training, increased 34% to $55.4 million for the three months ended June 30, 2010 compared with $41.3 million for the three months ended June 30, 2009. We typically enter into system

service contracts at the time systems are sold. These service contracts have been generally renewed at the end of the service period. Higher service revenue for second quarter of 2010 was primarily driven by a larger base of da Vinci Surgical Systems producing contract service revenue. There were approximately 1,482 and 1,171 systems installed, entering the second quarter of 2010 and 2009, respectively.

Service revenue increased 32% to $106.0 million for the six months ended June 30, 2010 compared with $80.6 million for the six months ended June 30, 2009. Higher service revenue during the first six months of 2010 was primarily driven by a larger base of da Vinci Surgical Systems producing contract service revenue.

Gross Profit

Product gross profit for the three months ended June 30, 2010 increased 36% to $222.6 million, or 75.4% of product revenue, compared with $163.8 million, or 74.7% of product revenue, for the three months ended June 30, 2009. Product gross profit for the six months ended June 30, 2010 increased 62% to $432.6 million, or 75.4% of product revenue, compared with $267.6 million, or 72.6% of product revenue, for the six months ended June 30, 2009. The higher product gross profit was driven by higher 2010 product revenue, as described above. The higher product gross profit percentage for the three and six months ended June 30, 2010 was driven by higher first and second quarter 2010 system ASPs, system and instrument material cost reductions, and leveraging manufacturing overhead across higher revenue.

Service gross profit for the three months ended June 30, 2010 increased 30% to $34.2 million, or 61.7% of service revenue, compared with $26.4 million, or 63.9% of service revenue, for the three months ended June 30, 2009. Service gross profit for the six months ended June 30, 2010 increased 26% to $64.7 million, or 61.0% of service revenue, compared with $51.3 million, or 63.6% of service revenue, for the six months ended June 30, 2009. The higher 2010 service gross profit was driven by higher service revenue as described above. The lower 2010 gross service profit percentage was primarily driven by increased service costs per system.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include costs for sales, marketing and administrative personnel, proctoring expenses, tradeshow expenses, legal expenses, regulatory fees and general corporate expenses.

Selling, general and administrative expenses for the three months ended June 30, 2010 increased 32% to $88.6 million compared with $67.3 million for the three months ended June 30, 2009. Selling, general and administrative expenses for the six months ended June 30, 2010 increased 32% to $171.4 million compared with $129.7 million for the six months ended June 30, 2009. The increases were due to organizational growth to support our expanding business, higher commissions related to higher revenue levels, and increased stock-based compensation. Stock-based compensation expense charged to sales, general and administrative expenses were approximately $20.0 million and $37.8 million for the three and six months ended June 30, 2010, compared with $15.5 million and $29.9 million during the three and six months ended June 30, 2009, respectively.

Research and Development Expenses

Research and development costs are expensed as incurred. 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 for the three months ended June 30, 2010 increased 21% to $28.5 million compared with $23.4 million for the three months ended June 30, 2009. Research and development expenses for the six months ended June 30, 2010 increased 26% to $56.5 million compared with $44.7 million for the six months ended June 30, 2009. The increases were due to the growth in our research and development organization and higher prototype costs. Amortization expense related to purchased intellectual property during the quarter ended June 30, 2010 was $3.7 million compared to $3.8 million during the quarter ended June 30, 2009. Amortization expense related to purchased intellectual property during the six months ended June 30, 2010 was $7.3 million compared to $7.2 million during the six months ended June 30, 2009. Stock-based compensation expense increased to approximately $5.7 million and $10.7 million for the three and six months ended June 30, 2010, compared with $5.5 million and $10.5 million during the three and six months ended June 30, 2009. We expect to continue to make substantial investments in research and development and anticipate that research and development expense, including co-development arrangements with industry partners, will continue to increase in the future.

Interest and Other Income, Net

Interest and other income, net for the three months ended June 30, 2010 was $4.5 million compared with $5.2 million for the three months ended June 30, 2009. Interest and other income, net for the six months ended June 30, 2010 was $8.6 million, which was $1.6 million less than the $10.2 million recorded for the six months ended June 30, 2009. The change was primarily due to lower interest rates earned on higher cash and investment balances in 2010, and partially offset by lower foreign exchange losses for 2010.

Income Tax Expense

We record provision for income taxes during interim periods based on our estimate of the effective tax rate for the year. Discrete items and changes in our estimate of the annual effective tax rate are recorded in the period in which they occur. We recognize interest related to uncertain tax positions in income tax expense.

Income tax expense for the three months ended June 30, 2010 was $55.5 million, or 38.5% of pre-tax income, compared with $42.3 million, or 40.4% of pre-tax income for the three months ended June 30, 2009. Income tax expense for the six months ended June 30, 2010 was $104.0 million, or 37.4% of pre-tax income, compared with $64.2 million, or 41.5% of pre-tax income for the six months ended June 30, 2009. The effective tax rate for the three and six months ended June 30, 2010 differs from the U.S. federal statutory rate of 35% primarily due to state income taxes and non-deductible stock option expenses, partially offset by the effect of income earned by certain of our overseas entities being taxed at rates lower than the federal statutory rate. As a result of the macro-economic environment in Europe, we now estimate U.S. pretax income will represent a greater portion of our total pretax income than we estimated at the end of the first quarter. As a result, we are now estimating our annual effective tax rate for 2010 will be approximately 37% versus the 36% estimated at the end of the first quarter. We intend these foreign earnings to be indefinitely reinvested outside the United States. The effective tax rate for the three and six months ended June 30, 2009 differs from the federal statutory rate primarily due to state income taxes and non-deductible stock option expenses, partially offset by 2009 research and development (“R&D”) credits and domestic production deductions. The state income taxes for the six month period ended June 30, 2009 included a discrete increase of approximately 1.0% resulting from re-measurement of long term deferred tax assets due to a California law change enacted in February 2009.

As of June 30, 2010, we had total gross unrecognized tax benefits of approximately $75.4 million compared with approximately $70.0 million as of December 31, 2009, representing an increase of approximately $5.4 million for the six months ended June 30, 2010. Of the total gross unrecognized tax benefits, $71.1 million and $65.7 million as of June 30, 2010 and December 31, 2009, respectively, if recognized, would reduce our effective tax rate in the period of recognition. Gross interest related to unrecognized tax benefit accrued was approximately $4.2 million and $3.3 million, respectively, as of June 30, 2010 and December 31, 2009.

We file federal, state and foreign income tax returns in many jurisdictions in the United States and abroad. For U.S. federal and California income tax purposes, the statute of limitations currently remain open for all years since inception due to utilization of net operating losses and R&D credits generated in prior years.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Our principal source of liquidity is cash provided by operations and the exercise of stock options. Cash and cash equivalents plus short and long-term investments increased from $1,172 million at December 31, 2009 to $1,588 million at June 30, 2010. Cash generation is one of our fundamental strengths and provides us with substantial financial flexibility in meeting our operating, investing and financing needs.

Consolidated Cash Flow Data (unaudited)


	Six Months Ended June 30,
	2010			2009
	(in millions)
Net cash provided by (used in)
Operating activities	$	291.1		$	173.1
Investing activities		(254.2	)		(57.4	)
Financing activities		162.8			(137.0	)
Effect of exchange rates on cash and cash equivalents		(1.1	)		0.1

Net increase (decrease) in cash and cash equivalents	$	198.6		$	(21.2	)

Operating Activities

For the six months ended June 30, 2010, cash flow from operating activities of $291.1 million exceeded our net income of $174.0 million for two primary reasons:

Our net income included substantial non-cash charges in the form of stock-based compensation, amortization of intangible assets, taxes, and depreciation. These non-cash charges totaled $70.6 million during the six months ended June 30, 2010.

Cash used in working capital and other assets during the six months ended June 30, 2010 was approximately $46.5 million.

Working capital is comprised primarily of accounts receivable, inventory, deferred revenue and other liabilities. Accounts receivable decreased by $10.7 million or 5% during the six months ended June 30, 2010 reflecting timing of system sales. Inventory increased by $16.4 million or 28% during the six months ended June 30, 2010 reflecting below optimal quantities at December 31, 2009. Other liabilities including accounts payable, accrued compensation and employee benefits, and accrued liabilities increased by $43.1 million or approximately 25% during the six months ended June 30, 2010 primarily due to taxes payable later this year and timing of vendor payments during the six months ended June 30, 2010.

For the six months ended June 30, 2009, cash flow from operating activities of $173.1 million exceeded our net income of $90.5 million for two primary reasons:

Our net income included substantial non-cash charges in the form of stock-based compensation, amortization of intangible assets, taxes, and depreciation. These non-cash charges totaled $55.7 million during the six months ended June 30, 2009.

Cash provided by working capital and other assets during the six months ended June 30, 2009 was approximately $26.9 million.

Working capital is comprised primarily of deferred revenue and other current liabilities. Deferred revenue increased by $10.3 million or 13% during the six months ended June 30, 2009 related to the increase in the number of installed systems for which service contracts exist and due to the deferral associated with the da Vinci Si upgrade offers. Other liabilities including accounts payable, accrued compensation and employee benefits, and accrued liabilities increased by $21.5 million or 17% during the six months ended June 30, 2009 primarily due to timing of vendor payments.

Investing Activities

Net cash used in investing activities during the six months ended June 30, 2010 and 2009 consisted primarily of purchases of investments (net of proceeds from sales and maturities of investments) of $217.7 million and $17.1 million respectively, and, capital expenditures and acquisitions of intellectual property of $36.5 million and $40.3 million respectively. We invest predominantly in high quality, fixed income securities. Our investment portfolio may at any time contain investments in U.S. Treasury and U.S. government agency securities, taxable and/or tax exempt municipal notes (some of which may have an auction reset feature), corporate notes and bonds, commercial paper, and money market funds.

Financing Activities

Net cash provided by financing activities during the six months ended June 30, 2010 consisted primarily of proceeds from stock option exercises and employee stock purchases of $115.9 million. Net cash used in financing activities during the six months ended June 30, 2009 consisted primarily of payment of $150.0 million for the repurchase of 1.4 million shares of our common stock, offset by proceeds from stock option exercises and employee stock purchases of $12.0 million.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based upon our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. With the exception of the updates to the following critical accounting estimates, there have been no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Revenue recognition. We frequently enter into revenue arrangements that contain multiple elements or deliverables such as system and services. Judgments as to the allocation of the proceeds received from an arrangement to the multiple elements of the arrangement, the determination of whether any undelivered elements are essential to the functionality of the delivered elements and the appropriate timing of revenue recognition are critical in respect to these arrangements to ensure compliance with U.S. GAAP. Changes to the elements in an arrangement and the ability to establish objective and reliable evidence of fair value for those elements could affect the timing of revenue recognition. Revenue recognition also depends on the timing of shipment and is subject to customer acceptance. If shipments are not made on scheduled timelines or if the products are not accepted by the customer in a timely manner, our reported revenues may differ materially from expectations.

In September 2009, the FASB amended the accounting standards related to revenue recognition for arrangements with multiple deliverables and arrangements that include software elements (“new accounting principles”). The new accounting principles permit prospective or retrospective adoption, and we elected prospective adoption at the beginning of the first quarter of 2010.

These new accounting principles do not generally change the units of accounting for our revenue transactions and we continue to have system and service as the different elements in our multiple element arrangements. For multiple element arrangements entered into on or after January 1, 2010, we allocate revenue to all deliverables based on their relative selling prices. Because we have neither VSOE nor TPE for our systems, the allocation of revenue has been based on ESPs. The objective of ESP is to determine the price at which we would transact a sale if the product was sold on a stand-alone basis. We determine ESP for our systems by considering multiple factors including, but not limited to, features and functionality of the system, geographies, type of customer and market conditions. We expect to review ESP regularly and maintain internal controls over the establishment and updates of these estimates. We do not expect material changes to ESPs established as of January 1, 2010 in future periods. However, since we apply significant judgment in arriving at the ESPs, any material changes would significantly affect the allocation of the total consideration to the different elements of a multiple element arrangement.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk during the six months ended June 30, 2010 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2009.

ITEM 4.

CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in SEC Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are involved in various ordinary and routine legal proceedings and disputes that arise in the normal course of business. These matters include product liability actions, patent infringement actions, contract disputes, and other matters. We do not know whether we will prevail in these matters nor can we assure that any remedy could be reached on commercially reasonable terms, if at all. Based on currently available information, we believe that we have meritorious defenses to these actions and that the resolution of these cases is not likely to have a material adverse effect on our business, financial position or future results of operations. In accordance with U.S. GAAP, we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case.

ITEM 1A.

RISK FACTORS

There have been no changes to the Risk Factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, except for the below.

HEALTHCARE POLICY CHANGES, INCLUDING RECENTLY ENACTED LEGISLATION REFORMING THE U.S. HEALTHCARE SYSTEM, MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In March 2010, the President signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”), which makes changes that are expected to significantly impact the pharmaceutical and medical device industries. One of the principal aims of the PPACA as currently enacted is to expand health insurance coverage to approximately 32 million Americans who are currently uninsured. The consequences of these significant coverage expansions on the sales of the Company’s products are unknown and speculative at this point.

The PPACA contains a number of provisions designed to generate the revenues necessary to fund the coverage expansions among other things. This includes new fees or taxes on certain health-related industries, including medical device manufacturers. Beginning in 2013, each medical device manufacturer will have to pay an excise tax (or sales tax) in an amount equal to 2.3 percent of the price for which such manufacturer sells its medical devices. Though there are some exceptions to the excise tax, this excise tax does apply to all of the Company’s products and product candidates.

Other significant measures contained in the PPACA include, by way of example, coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. The PPACA also includes significant new fraud and abuse measures, lowering the government’s thresholds to find violations and increasing potential penalties for such violations.

In addition to PPACA discussed above, the effect of which cannot presently be fully quantified given its recent enactment, various healthcare reform proposals have also emerged at the state level. We cannot predict whether future healthcare initiatives will be implemented at the federal or state level, or the effect any future legislation or regulation will have on us. The taxes imposed by the new federal legislation and the expansion in government’s role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursements by payors for our products, reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations, possibly materially.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS


Exhibit Number		Description

3.1		Amended and Restated Certificate of Incorporation of Intuitive Surgical, Inc. (incorporated by reference to Exhibit 3.1 on Form 10-K filed with the Securities and Exchange Commission on February 6, 2009).

3.2		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Intuitive Surgical, Inc. (incorporated by reference to Exhibit 3.2 on Form 10-K filed with the Securities and Exchange Commission on February 6, 2009).

3.3		Amended and Restated Bylaws of Intuitive Surgical, Inc. (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on March 6, 2009).

10.1		Intuitive Surgical Inc. 2010 Incentive Award Plan (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 23, 2010).

31.1		Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Company’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Company’s Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		The following materials from Intuitive Surgical, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Condensed Consolidated Balance Sheets, (ii) the unaudited Condensed Consolidated Statements of Income, (iii) the unaudited Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.

Users of the XBRL data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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/ MARSHALL L. MOHR
				Marshall L. Mohr
				Senior Vice President and Chief Financial Officer (Principal Financial Officer and duly authorized signatory)

Date: July 22, 2010

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