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. (Check one):

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 ~~39,763,191shares~~40,161,022 shares of Common Stock, $0.001 par value per share, outstanding as of ~~October~~April 10, ~~2012.~~2013.


	September 30, 2012		December 31, 2011		March 31, 2013		December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	396.2	$	465.8	$	427.5	$	553.7
Short-term investments		745.2		563.4		930.7		770.7
Accounts receivable, net		336.2		297.9		345.1		370.3
Inventory		125.8		112.1
Inventories						135.5		121.5
Prepaids and other current assets		42.6		20.9		46.5		67.3
Deferred tax assets		7.1		6.2		9.4		9.3

Total current assets		1,653.1		1,466.3		1,894.7		1,892.8
Property, plant and equipment, net		223.4		197.2		249.9		241.8
Long-term investments		1,559.7		1,142.6		1,757.8		1,596.1
Long-term deferred tax assets		88.1		69.1		95.6		87.0
Intangible and other assets, net		69.8		71.0		99.8		103.4
Goodwill		138.1		116.9		138.0		138.1

Total assets	$	3,732.2	$	3,063.1	$	4,235.8	$	4,059.2

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	56.1	$	45.8	$	67.9	$	57.6
Accrued compensation and employee benefits		74.9		83.1		66.0		104.0
Deferred revenue		171.8		154.2		192.1		185.7
Other accrued liabilities		62.1		37.5		51.6		54.3

Total current liabilities		364.9		320.6
Total currrent liabilities						377.6		401.6
Other long-term liabilities		73.8		96.9		86.0		77.5

Total liabilities		438.7		417.5		463.6		479.1

Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, 2.5 shares authorized, $0.001 par value, issuable in series; no shares issued and outstanding as of September 30, 2012 and December 31, 2011		—		—
Common stock, 100.0 shares authorized, $0.001 par value, 39.8 and 39.3 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively		—		—
Preferred stock, 2.5 shares authorized, $0.001 par value, issuable in series; no shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively						—		—
Common stock, 100.0 shares authorized, $0.001 par value, 40.2 shares and 40.2 shares outstanding as of March 31, 2013 and December 31, 2012, respectively						—		—
Additional paid-in capital		2,078.9		1,742.8		2,378.5		2,240.1
Retained earnings		1,208.8		901.9		1,385.6		1,333.4
Accumulated other comprehensive income		5.8		0.9		8.1		6.6

Total stockholders’ equity		3,293.5		2,645.6		3,772.2		3,580.1

Total liabilities and stockholders’ equity	$	3,732.2	$	3,063.1	$	4,235.8	$	4,059.2

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2012		2011		2012		2011		2013		2012
Revenue:
Product	$	450.0	$	374.9	$	1,317.5	$	1,057.5	$	517.0	$	414.4
Service		87.8		71.8		252.0		203.0		94.4		80.8

Total revenue		537.8		446.7		1,569.5		1,260.5		611.4		495.2
Cost of revenue:
Product		119.3		96.2		353.9		274.5		146.3		111.7
Service		28.4		25.0		83.2		75.1		30.8		27.6

Total cost of revenue		147.7		121.2		437.1		349.6		177.1		139.3

Gross profit		390.1		325.5		1,132.4		910.9		434.3		355.9

Operating expenses:
Selling, general, and administrative		129.0		111.2		374.1		316.8
Selling, general and administrative										141.5		124.2
Research and development		49.7		35.4		128.3		98.8		41.6		38.4

Total operating expenses		178.7		146.6		502.4		415.6		183.1		162.6

Income from operations		211.4		178.9		630.0		495.3		251.2		193.3
Interest and other income (expense), net		4.3		1.9		12.1		11.3		4.3		3.8

Income before taxes		215.7		180.8		642.1		506.6		255.5		197.1
Income tax expense		32.4		58.4		160.4		162.7		66.6		53.6

Net income	$	183.3	$	122.4	$	481.7	$	343.9	$	188.9	$	143.5

Net income per share:
Basic	$	4.59	$	3.13	$	12.10	$	8.77	$	4.69	$	3.63

Diluted	$	4.46	$	3.05	$	11.72	$	8.55	$	4.56	$	3.50

Shares used in computing net income per share:
Basic		39.9		39.1		39.8		39.2		40.3		39.5

Diluted		41.1		40.1		41.1		40.2		41.4		41.0

Total comprehensive income	$	185.5	$	121.3	$	486.6	$	343.8	$	190.4	$	144.1

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).


	Nine Months Ended September 30,						Three Months Ended March 31,
	2012			2011			2013			2012
Operating Activities:
Operating activities:
Net income	$	481.7		$	343.9		$	188.9		$	143.5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		25.2			20.9			10.4			7.5
Amortization of intangible assets		17.2			13.1			5.6			5.8
Accretion of discounts and amortization of premiums on investments, net		23.8			16.0			9.8			7.0
Deferred income taxes		(19.3	)		8.2			(9.5	)		(1.4	)
Income tax benefits from employee stock option plans		54.8			36.2			19.9			20.2
Excess tax benefit from stock-based compensation		(54.7	)		(44.9	)		(20.6	)		(20.2	)
Stock-based compensation expense		115.0			101.8			38.2			34.4
Changes in operating assets and liabilities, net of effects of acquisitions:
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable		(34.8	)		(18.2	)		25.3			1.6
Inventory		(11.4	)		(21.8	)
Inventories								(15.8	)		(6.0	)
Prepaids and other assets		(5.5	)		(7.6	)		18.5			(3.4	)
Accounts payable		6.9			7.5			10.3			0.5
Accrued compensation and employee benefits		(8.1	)		(3.2	)		(38.0	)		(25.2	)
Deferred revenue		16.3			17.7
Other accrued liabilities		(10.1	)		(5.7	)
Other liabilities								15.0			0.7

Net cash provided by operating activities		597.0			463.9			258.0			165.0

Investing Activities:
Investing activities:
Purchase of investments		(1,448.8	)		(1,176.0	)		(576.0	)		(646.3	)
Proceeds from sales of investments		262.8			371.1			50.0			133.2
Proceeds from maturities of investments		569.1			532.0			194.7			153.2
Purchase of property, plant and equipment, intellectual property and business		(53.1	)		(67.7	)		(16.7	)		(48.3	)
Acquisition of business, net of cash acquired		(27.6	)		—
Acquisition-related restricted cash		(15.0	)		—

Net cash used in investing activities		(712.6	)		(340.6	)		(348.0	)		(408.2	)

Financing Activities:
Financing activities:
Proceeds from issuance of common stock, net		176.5			181.6			89.3			82.9
Excess tax benefit from stock-based compensation		54.7			44.9			20.6			20.2
Repurchase and retirement of common stock		(185.1	)		(331.8	)		(145.7	)		—

Net cash provided by (used in) financing activities		46.1			(105.3	)
Net cash provided by (used in) provided by financing activities								(35.8	)		103.1

Effect of exchange rate changes on cash and cash equivalents		(0.1	)		0.4			(0.4	)		0.2

Net increase (decrease) in cash and cash equivalents		(69.6	)		18.4			(126.2	)		(139.9	)
Cash and cash equivalents, beginning of period		465.8			279.8			553.7			465.8

Cash and cash equivalents, end of period	$	396.2		$	298.2		$	427.5		$	325.9

See accompanying 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.

Intuitive designs, manufactures and marketsda Vinci Surgical Systems and related instruments and accessories, which taken together, are advanced surgical systems that the Company believes represent a new generation of surgery. The Company believes that this new generation of surgery, which the Company callsda Vinci ~~Surgery,~~surgery, combines the benefits of minimally invasive surgery (“MIS”) for patients with the ease of use, precision and dexterity of open surgery. Ada Vinci Surgical System consists of a surgeon’s console, a patient-side cart and a high performance vision system. Theda Vinci Surgical System translates a 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. Theda Vinci Surgical System is designed to provide its operating surgeons with intuitive control, range of motion, fine tissue manipulation capability and 3-D, High-Definition (“HD”) vision while simultaneously allowing them to work through the small ports of MIS.

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, 2011~~ audited Consolidated Financial Statements for the fiscal year ended December 31, 2012 and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth herein. The 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, ~~2011,~~2012, which was filed on February ~~6, 2012.~~4, 2013. The results of operations for the first ~~nine~~three months of fiscal ~~2012~~2013 are not necessarily indicative of the results to be expected for the entire fiscal year or any future periods. ~~Certain prior year amounts in the financial statements and notes thereto have been reclassified to conform to the current year’s presentation.~~

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 collectability is reasonably assured. The Company’s revenue recognition policy generally results in revenue recognition at the following points:

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.

The Company offers its customers the opportunity to trade in their older systems for credit towards the purchase of a newer generation system. The Company generally does not provide specified trade-in rights or upgrade rights at the time of system purchase. Such trade-in or upgrade transactions are separately negotiated based on the circumstances at the time of the trade-in or upgrade and are generally not based on any pre-existing rights granted by the Company. Accordingly, such trade-ins and upgrades are not considered as separate deliverables in the arrangement for a system sale.

As part of a trade-in transaction, the customer receives a new generation system in exchange for its older used system. The trade-in credit is negotiated at the time of the trade-in and is applied towards the purchase price of the new generation unit. Traded-in systems can be reconditioned and resold. The Company accounts for trade-ins consistent with the guidance in AICPA Technical Practice Aid 5100.01,~~Equipment Sales Net of Trade-Ins~~ (“~~TPA 5100.01”~~). The Company applies the accounting guidance by crediting system revenue for the negotiated price of the new generation system, and the difference between (a) the trade-in allowance and (b) the amount determined by pricing the trade-in system at net realizable value minus a normal profit margin, is treated as a sales allowance.The value of the traded-in system is determined as the amount to which when reconditioning costs are added, will allow a normal profit margin on the sale of the reconditioned unit. When there is no market for the traded-in units, no value is assigned. Traded-in units are reported as a component of inventory until reconditioned and resold, or otherwise disposed.

~~In addition, customers may also have the opportunity to upgrade their systems, for example, by adding a fourth arm to a three-arm system, adding a second surgeon console for use with the~~~~da Vinci Si~~ ~~Surgical System or adding new vision systems to the~~~~Standard da Vinci~~~~and~~~~da Vinci S~~ Surgical Systems. Such upgrades are performed by completing component level upgrades at the customer’s site. Upgrade revenue is recognized when the component level upgrades are complete and the four revenue recognition criteria are met.

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. The new accounting principles permit prospective or retrospective adoption, and the Company elected prospective adoption at the beginning of the first quarter of 2010.

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 vendor specific objective evidence (“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.

Effective January 1, ~~2012,~~2013 the Company adopted the accounting guidance which ~~eliminates~~requires an entity to provide information about the ~~current option to report~~amounts reclassified out of accumulated other comprehensive income ~~(“OCI”)~~by component. The Company elected to present the information in the notes to the Company’s unaudited condensed consolidated financial statements.

Effective January 1, 2013 the Company adopted the accounting standard which requires an entity to provide enhanced disclosures about certain financial instruments and ~~its components~~derivative instruments that are offset in the statement of ~~changes in stockholders’ equity and elected~~financial position or that are subject to ~~disclose OCI in a single continuous statement during interim reporting periods.~~

~~Effective January 1, 2012, the Company adopted the new accounting guidance which allows a qualitative assessment on goodwill impairment to determine whether a quantitative assessment is necessary.~~enforceable master netting arrangements. The adoption did not have any impact on the Company’s unaudited condensed consolidated financial statements.

The following tables summarize the Company’s cash and available-for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short-term or long-term investments as of ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012 (in millions):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short- term Investments		Long- term Investments		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short- term Investments		Long- term Investments
December 31, 2011
March 31, 2013
Cash	$	51.6	$	—	$	—		$	51.6	$	51.6	$	—	$	—	$	66.8	$	—	$	—		$	66.8	$	66.8	$	—	$	—
Level 1:
Money market funds		403.2		—		—			403.2		403.2		—		—		263.2		—		—			263.2		263.2		—		—
U.S. Treasuries & corporate equity securities		183.9		0.5		—			184.4		—		130.5		53.9
U.S. Treasuries																	200.3		0.1		—			200.4		—		179.0		21.4

Sub-total		587.1		0.5		—			587.6		403.2		130.5		53.9
Subtotal																	463.5		0.1		—			463.6		263.2		179.0		21.4

Level 2:
Commercial paper		63.5		—		—			63.5		11.0		52.5		—		181.4		—		—			181.4		81.5		99.9		—
Corporate securities		586.6		3.0		(1.4	)		588.2		—		162.4		425.8		1,104.0		5.3		(0.2	)		1,109.1		10.0		395.2		703.9
U.S. government agencies		521.1		1.4		(0.1	)		522.4		—		126.6		395.8		668.8		2.4		—			671.2		6.0		115.5		549.7
Non-U.S. government securities		68.7		0.4		(0.1	)		69.0		—		1.3		67.7		90.2		0.5		—			90.7		—		23.0		67.7
Municipal securities		272.1		1.1		(0.1	)		273.1		—		90.1		183.0		524.1		1.7		—			525.8		—		118.1		407.7

Sub-total		1,512.0		5.9		(1.7	)		1,516.2		11.0		432.9		1,072.3
Subtotal																	2,568.5		9.9		(0.2	)		2,578.2		97.5		751.7		1,729.0

Level 3:
Municipal securities		20.0		—		(3.6	)		16.4		—		—		16.4		8.0		—		(0.6	)		7.4		—		—		7.4

Sub-total		20.0		—		(3.6	)		16.4		—		—		16.4
Subtotal																	8.0		—		(0.6	)		7.4		—		—		7.4

Total assets measured at fair value	$	2,170.7	$	6.4	$	(5.3	)	$	2,171.8	$	465.8	$	563.4	$	1,142.6	$	3,106.8	$	10.0	$	(0.8	)	$	3,116.0	$	427.5	$	930.7	$	1,757.8


																Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Short- term Investments		Long- term Investments
December 31, 2012
Cash																$	89.7	$	—	$	—		$	89.7	$	89.7	$	—	$	—
Level 1:
Money market funds																	388.1		—		—			388.1		388.1		—		—
U.S. Treasuries & corporate equity securities																	179.2		0.2		—			179.4		—		155.4		24.0

Subtotal																	567.3		0.2		—			567.5		388.1		155.4		24.0

Level 2:
Commercial paper																	157.4		—		—			157.4		75.9		81.5		—
Corporate securities																	952.1		5.8		(0.4	)		957.5		—		274.6		682.9
U.S. government agencies																	636.9		2.6		—			639.5		—		133.6		505.9
Non-U.S. government securities																	90.8		0.5		—			91.3		—		21.8		69.5
Municipal securities																	409.3		1.1		(0.2	)		410.2		—		103.8		306.4

Subtotal																	2,246.5		10.0		(0.6	)		2,255.9		75.9		615.3		1,564.7

Level 3:
Municipal securities																	8.0		—		(0.6	)		7.4		—		—		7.4

Subtotal																	8.0		—		(0.6	)		7.4		—		—		7.4

Total assets measured at fair value																$	2,911.5	$	10.2	$	(1.2	)	$	2,920.5	$	553.7	$	770.7	$	1,596.1

The following table summarizes the contractual maturities of the Company’s cash equivalents and available-for-sale investments, excluding corporate equity securities, at ~~September 30, 2012~~March 31, 2013 (in millions):


	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Mature in less than one year	$	1,082.3	$	1,083.5	$	1,289.8	$	1,291.4
Mature in one to five years		1,537.9		1,548.6		1,742.2		1,750.4
Mature after five years		13.0		11.1
Mature in after five years						8.0		7.4

Total	$	2,633.2	$	2,643.2	$	3,040.0	$	3,049.2

~~During the three and nine months ended September 30, 2012,~~Net realized gains or losses recognized on the sale of investments during the three month periods ended March 31, 2013 and 2012, respectively, were not significant. ~~Net realized gains recognized on the sale of investments during the three and nine months ended September 30, 2011 were approximately $2.5 million.~~ As of ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011,~~2012, net unrealized gains (losses)~~, net~~ of ~~tax of $6.9~~$7.3 million and ~~$1.1~~$6.2 million, respectively, were included in accumulated other comprehensive income in the accompanying unaudited Condensed Consolidated Balance Sheets. At September 30, 2012, the Company evaluated its gross unrealized losses, the majority of which are from auction-rate securities (“ARS”), and 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 issuer; 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.

There have been no transfers between Level 1 and Level 2 measurements ~~since December~~during the three months ended March 31, ~~2011,~~2013, and there were no changes in the Company’s valuation technique. Level 3 assets consist of ~~ARS~~municipal bonds with auction rate securities (“ARS”) whose underlying assets are student loans which are generally backed by the federal government. Since 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. The Company has valued the ARS using a discounted cash flow model based on Level 3 assumptions, including estimates of, based on data available as of ~~September 30, 2012,~~March 31, 2013, interest rates, timing and amount of cash flows, credit and liquidity premiums and expected holding periods of the ARS.

The Company ~~had $2.2~~has $2.4 million of derivative assets recorded as prepaid and other current assets in the unaudited Condensed Consolidated Balance Sheets at March 31, 2013, compared to $2.7 million of derivative liabilities recorded as other accrued liabilities in the Condensed Consolidated Balance Sheets at ~~September 30, 2012, compared to $3.5 million of derivative assets recorded as prepaid and other assets at~~ December 31, ~~2011.~~2012. The derivative assets and liabilities are measured using Level 2 fair value inputs.

The Company enters into currency forward contracts as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar, primarily the European Euro (“Euro or €”)~~, the British Pound (“GBP or £”)~~ and the Korean Won (“KRW”).

As of ~~September 30, 2012,~~March 31, 2013, the Company had notional amounts of ~~€19.4~~€9.8 million and ~~KRW1.6~~KRW2.2 billion of outstanding currency forward contracts entered into to hedge Euro and KRW denominated sales, compared to ~~none~~€20.0 million and KRW4.4 billion of outstanding currency forward contracts at December 31, ~~2011.~~2012. The net gains (losses) reclassified to revenue related to the hedged revenue transactions for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~ were not significant. Other impacts of derivative instruments designated as cash flow hedges were not significant for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 and ~~2011.~~2012.

Other derivatives not designated as hedging instruments consist primarily of forward contracts that the Company uses to hedge intercompany balances and other monetary assets or liabilities denominated in currencies other than the U.S. dollar, primarily the Euro, the British Pound (“GBP or £”), the Swiss Franc (“CHF”), Japanese Yen (“JPY”) and the KRW.

As of ~~September 30, 2012,~~March 31, 2013, the Company had notional amounts of ~~€21.7~~€21.9 million, ~~£2.3~~£2.5 million, ~~CHF(1.5)~~CHF1.0 million, JPY1.2 million and ~~KRW6,327.0 million~~KRW6.6 billion of outstanding currency forward contracts that were entered into to hedge non-functional currency denominated net monetary assets and liabilities, compared to ~~€35.0~~€37.6 million, ~~£1.8~~£5.4 million, CHF(1.0) million and ~~CHF(1.7) million~~KRW4.6 billion at December 31, ~~2011.~~2012. For the three months ended ~~September 30,~~March 31, 2013 and 2012, ~~and 2011,~~ the Company had recognized gains (losses) of approximately ~~$(0.2)~~$1.0 million and ~~$0.8~~$(0.5) million, respectively, in interest and other income (expense), net, related to derivative instruments used to hedge against balance sheet foreign currency exposures. This was offset by approximately $0$(1.4) million and ~~$(1.7)~~$0.5 million of net foreign exchange gains (losses) during the three months ended ~~September 30,~~March 31, 2013 and 2012, ~~and 2011,~~ respectively, primarily related to the re-measurement of non-functional currency denominated net monetary assets and liabilities. For the nine months ended September 30, 2012 and 2011, the Company had recognized gains (losses) of approximately $0.4 million and $(2.4) million, respectively, in interest and other income (expense), net, related to derivative instruments used to hedge against balance sheet foreign currency exposures. This was offset by approximately $(0.6) million and $1.5 million of net foreign exchange gains (losses) during the nine months ended September 30, 2012 and 2011, respectively.

The following table ~~provides inventory details~~summarizes the Company’s inventories as of March 31, 2013 and December 31, 2012 (in millions):

The increases in goodwill and intangible assets as of September 30, 2012 compared with December 31, 2011 were primarily related to the acquisition of the Company’s Korean distributor on January 11, 2012. The intangible assets acquired are primarily being amortized over seven years.

On August 6, 2010, a ~~shareholder~~ purported class action lawsuit entitledPerlmutter v. Intuitive Surgical et ~~al.~~al., No. CV10-3451, was filed against ~~the Company and~~ seven of ~~the Company’s~~our current and former officers and directors in the United States District Court for the Northern District of California. The lawsuit seeks unspecified damages on behalf of a putative class of persons who purchased or otherwise acquired the Company’s common stock between February 1, 2008 and January 7, 2009. The complaint alleges that the defendants violated federal securities laws by making allegedly false and misleading statements and omitting certain material facts in ~~the Company’s~~our filings with the Securities and Exchange Commission. On February 15, 2011, the Police Retirement System of St. Louis was appointed Lead ~~Plaintiff~~plaintiff in the case pursuant to the Private Securities Litigation Reform Act of 1995. An amended complaint was filed on April 15, 2011, making allegations substantially similar to the allegations described above. On May 23, 2011, the Company filed a motion to dismiss the amended complaint. On August 10, 2011 that motion was granted and the action was dismissed; the plaintiffs were given 30 days to file an amended complaint. On September 12, 2011, plaintiffs filed their amended complaint. The allegations contained therein are substantially similar to the allegations in the prior complaint. The Company filed a motion to dismiss the amended complaint. A hearing occurred on February 16, 2012, and on May 22, 2012 ~~the Company’s~~our motion was granted. The complaint was dismissed with prejudice, and a final judgment was entered in ~~the Company’s~~our favor on June 1, 2012. ~~Plaintiffs~~On June 20, 2012, plaintiffs filed a notice of appeal with the United States Court of Appeals for the Ninth Circuit. The appeal is styled Police Retirement System of St. Louis v. Intuitive Surgical, Inc. et al., No. 12-16430. Plaintiffs filed their opening brief on ~~June 20,~~September 28, 2012. ~~That~~The Company filed an answering brief on November 13, 2012, and plaintiffs filed a reply brief on December 17, 2012. No oral argument date has been set, and the appeal remains pending.

On August 19, 2010, an alleged stockholder caused a purported stockholder’s derivative lawsuit entitledHimmel v. Smith et al.,, No. 1-10-CV-180416, to be filed in the Superior Court of California for the County of Santa Clara naming ~~the Company~~us as a nominal defendant, and naming 14 of the Company’s current and former officers and directors as defendants. The lawsuit seeks to recover, for the Company’s benefit, unspecified damages purportedly sustained by ~~the Company~~us in connection with allegedly misleading statements and/or omissions made in connection with the Company’s financial reporting for the period between February 1, 2008 and January 7, 2009. It also seeks a series of changes to the Company’s corporate governance policies and an award of attorneys’ fees. On September 15, 2010, another purported stockholder filed an essentially identical lawsuit entitledApplebaum v. Guthart et ~~al.~~al., No. 1-10-CV-182645, in the same court against 15 of the Company’s current and former officers and directors. On October 5, 2010 the court ordered that the two cases be consolidated for all purposes. By agreement with the plaintiffs, all activity in the case has been stayed pending the results of the appeal in the purported shareholder class action lawsuit discussed above.

The Company is currently a defendant in approximately 26 individual product liability lawsuits filed in various state and federal courts by plaintiffs who allege that they underwent surgical procedures that utilized theda Vinci Surgical System and sustained a variety of personal injuries and, in some cases, death as a result of such surgery. The cases raise a variety of allegations including, to varying degrees, that their injuries resulted from purported defects in theda Vinci Surgical System and/or failure on the part of the Company to provide adequate training resources to the healthcare professionals who performed plaintiffs’ surgeries. The cases further allege that the Company failed to adequately disclose and/or misrepresented the potential risks and/or benefits of theda Vinci Surgical System. Plaintiffs also assert a variety of causes of action, including for example, strict liability based on purported design defects, negligence, fraud, breach of express and implied warranties, unjust enrichment, and loss of consortium. Plaintiffs seek recovery for alleged personal injuries and, in many cases, punitive damages. Except for the case described below, these cases generally are in the early stages of pretrial activity.

On December 17, 2009, a product liability action entitledJosette Taylor, as Personal Representative of the Estate of Fred E. Taylor, deceased; and on behalf of the Estate of Fred E. Taylor; and Josette Taylor v. Intuitive Surgical, Inc., No. 09-2-03136-5, was filed in Washington State Superior Court for Kitsap County against the Company and the healthcare providers and hospital involved in decedent’s surgery. In Taylor, plaintiffs assert wrongful death and product liability claims against the Company, generally alleging that the decedent died four years after surgery as a result of injuries purportedly suffered during the surgery, which was conducted with the use of theda Vinci Surgical System. The plaintiffs in Taylor assert that such injuries were caused, in whole or in part, by the Company’s purported failure to properly train, warn, and instruct the surgeon. The lawsuit seeks unspecified damages for past medical expenses, pain and suffering, loss of consortium as well as punitive damages. A trial commenced in the action on April 15, 2013.

Plaintiffs’ attorneys are engaged in growing and well-funded national advertising campaigns soliciting clients who have undergoneda Vinci surgery and claim to have suffered an injury. The Company has seen a substantial increase in these claims, however it has only received detailed information regarding a small number of them. In an effort to provide an orderly process for evaluating claims before they result in costly litigation, we have entered into tolling agreements with certain plaintiff’s counsel acting on behalf of such claimants. The tolling agreements provide that the statute of limitations for each individual will be tolled for a period of three to six months in exchange for the individual’s agreement that, if he or she ultimately files a lawsuit, it will be filed in certain agreed upon venues. The tolling agreements provide the parties and their legal counsel with additional time to evaluate the claims, to explore whether the claims have merit and whether they can be resolved without litigation. The Company does not currently know how many of such individuals will ultimately file lawsuits, nor is it able at this time to estimate the financial implications of their claims or predict the final disposition of such claims. The Company intends to vigorously defend lawsuits that are ultimately filed.

Due to the uncertainty surrounding the litigation process, the Company is unable to reasonably estimate the ultimate outcome of the above cases at this time, and therefore no amounts have been accrued related to the outcome of the cases above. Based on currently available information, the Company believes that it has meritorious defenses to the above actions and that the resolution of these cases is not likely to have a material adverse effect on the Company’s business, financial position or future results of operations.

The Company is also a party to various other legal actions that ~~arose~~have arisen in the ordinary course of its business. The Company does not believe that any of these other legal actions will have a material adverse impact on its business, financial position or results of operations.

As of September 30, 2012, the total amount of share repurchases authorized by the Company’s Board of Directors (the “Board”) and the cumulative share repurchases made to date were $1,248.7 million and $865.6 million, respectively. As of September 30, 2012, the remaining authorized amount of share repurchases that may be made under the Board-authorized share repurchase program was approximately $383.1 million.

The following table provides the share repurchase activities during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~ (in millions, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2012		2011		2012		2011		2013		2012
Shares repurchased		0.3		0.5		0.4		1.0		0.3		—
Average price per share	$	495.09	$	344.36	$	497.28	$	344.72	$	487.24	$	—
Value of shares repurchased	$	169.8	$	181.1	$	185.1	$	331.8	$	145.7	$	—

On March 20, 2013, the Company’s Board of Directors (the “Board”) authorized an additional $1.0 billion of stock repurchases. As of March 31, 2013, the remaining amount of share repurchases authorized by the Board was approximately $1.2 billion.

The components of accumulated other comprehensive income, net of tax, for the three months ended March 31, 2013 and 2012 are as follows (in millions):

In January 2013, the Board amended and restated the 2009 Employment Commencement Incentive Plan (“2009 Plan”) to provide for an increase in the number of shares of common stock authorized for issuance pursuant to awards granted under the 2009 Plan from 430,000 to 555,000.

A summary of stock option activity under all stock plans for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 is presented as follows (in millions, except per share amounts):


				Stock Options Outstanding								STOCK OPTIONS OUTSTANDING
	Shares						Weighted Average								Weighted
	Available			Number			Exercise Price		Shares						Average
	for Grant			Outstanding			Per Share		Available			Number			Exercise Price
Balance at December 31, 2011		1.6			4.7		$	254.19
									for Grant			Outstanding			Per Share
Balance at December 31, 2012										1.7			4.8		$	340.83
Options authorized		1.4			—			—		0.1			—
Options granted		(1.4	)		1.4			512.50		(0.7	)		0.7			564.21
Options exercised		—			(0.7	)		214.82		—			(0.3	)		261.84
Options forfeited/expired		0.1			(0.2	)		361.44		—			—			—

Balance at September 30, 2012		1.7			5.2		$	324.59
Balance at March 31, 2013										1.1			5.2		$	373.33

As of ~~September 30, 2012, 2.7~~March 31, 2013, options to purchase an aggregate of 2.5 million ~~options~~shares of common stock were exercisable at a weighted-average price of ~~$247.29~~$278.31 per share.

In the past, annual stock option awards were granted on February 15th (or the next business day if February 15th was not a business day). These stock option awards typically vested 1/8 at the end of six months and 1/48 per month thereafter through a four-year period and had a ten-year term. Beginning in 2012, stock options have been awarded to employees bi-annually on February 15th and August 15th (or the next business day if the date is not a business day). The February 15th stock option awards are subjected to a four-year vesting period, while the August 15th stock option awards are subjected to a 3.5-year vesting period, with 7/48 vesting at the end of one month and 1/48 per month thereafter.

Under the Employee Stock Purchase Plan (“ESPP”), employees purchased approximately 0.1 million shares for ~~$27.8~~$16.4 million and 0.1 million shares for ~~$18.5~~$13.9 million during the ~~nine~~three months ended ~~September 30,~~March 31, 2013 and 2012, ~~and 2011,~~ respectively.

The following table summarizes stock-based compensation ~~charges~~expense for the three months ended March 31, 2013 and 2012 (in millions):


	Three Months Ended March 31,
	2013		2012
Cost of sales - products	$	3.9	$	3.1
Cost of sales - services		2.9		2.8

Total cost of sales		6.8		5.9
Selling, general and administrative		23.0		21.2
Research and development		8.4		7.3

Stock-based compensation expense before income taxes		38.2		34.4
Income tax effect		12.2		11.0

Stock-based compensation expense after income taxes	$	26.0	$	23.4

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						Nine Months Ended						Stock Options						ESPP
	September 30,						September 30,						Three Months Ended						Three Months Ended
	2012			2011			2012			2011			March 31,						March 31,
Stock Options
													2013			2012			2013			2012
Average risk free interest rate		0.80	%		1.13	%		0.81	%		2.24	%		0.86	%		0.81	%		0.19	%		0.16	%
Average expected term (years)		4.1			4.5			4.3			4.8			4.6			4.5			1.3			1.3
Average expected volatility		35	%		35	%		33	%		35	%		28	%		33	%		33	%		32	%
Weighted average fair value at grant date	$	148.05		$	115.09		$	145.60		$	114.69		$	143.09		$	142.75		$	170.51		$	133.75
Total stock-based compensation expense (in millions)	$	43.3		$	32.9		$	105.1		$	95.7		$	35.3		$	31.6		$	2.9		$	2.8

ESPP
Average risk free interest rate		0.19	%		0.27			0.17	%		0.32	%
Average expected term (years)		1.3			1.3			1.3			1.3
Average expected volatility		32	%		31			32	%		33	%
Weighted average fair value at grant date		143.36		$	112.75		$	138.61		$	99.94
Total stock-based compensation expense (in millions)	$	4.0		$	2.0		$	9.9		$	6.1

Income tax expense for the three months ended ~~September 30, 2012~~March 31, 2013 was ~~$32.4~~$66.6 million, or ~~15.0%~~26.1% of pre-tax income, compared with ~~$58.4~~$53.6 million, or ~~32.3%~~27.2% of pre-tax income for the three months ended September 30, 2011. Income tax expense for the nine months ended September 30, 2012 was $160.4 million, or 25% of pre-tax income, compared with $162.7 million, or 32.1% of pre-tax income for the nine months ended September 30, 2011.March 31, 2012. The Company’s effective tax rates for ~~all~~ these periods differ from the United States (“U.S.”) federal statutory rate of 35% due primarily to the effect of income earned by certain of the Company’s overseas entities being taxed at rates lower than the federal statutory rate, partially offset by state income taxes and non-deductible stock option expenses. The ~~Company intends~~income tax provision for the three months ended March 31, 2013 also reflected a discrete net benefit of $7.5 million, or 2.9% of pre-tax income, related to ~~indefinitely reinvest all of its undistributed foreign earnings outside~~2012 federal research and development (“R&D”) credit which was retroactively reinstated in the ~~United States.~~three months ended March 31, 2013. No federal R&D credit benefit was recorded in the income tax provision for the three months ended March 31, 2012. The income tax provision for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012 reflected discrete benefits of $35.1 million primarily associated with the reversal of unrecognized tax benefits in connection with the expiration of certain statutes of limitations in multiple jurisdictions and $2.5 million associated with the filing of the Company’s 2011 federal tax returns. The income tax provision for the nine months ended September 30, 2012 also included a discrete recognition of $8.5 million, or 4.3% of pre-tax income, related to certain previously unrecognized tax benefits ~~as a result of~~reflecting new ~~IRS~~Internal Revenue Service (“IRS”) guidance issued in the ~~first quarter~~three months ended March 31, 2012. The Company intends to indefinitely reinvest outside the U.S. all of ~~2012.~~its undistributed foreign earnings that were not previously subject to U.S. tax.

As of ~~September 30, 2012,~~March 31, 2013, the Company had total gross unrecognized tax benefits of approximately ~~$81.1~~$96.6 million compared with approximately ~~$98.1~~$88.0 million as of December 31, ~~2011,~~2012, representing ~~a net decrease~~an increase of approximately ~~$17.0~~$8.6 million for the ~~nine~~three months ended September 30, 2012. The net decrease is primarily related to the reversal of previously unrecognized tax benefits of $41.2 million as a result of the expiration of certain statutes of limitations in multiple jurisdictions, and the release of reserves due to re-evaluation of certain previously unrecognized tax positions as a result of new IRS guidance issued in February 2012, partially offset by increases during the first nine months of 2012 related to other uncertain tax positions.March 31, 2013. Of the total gross unrecognized tax benefits, ~~$76.8~~$92.3 million and ~~$93.8~~$83.8 million as of ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011,~~2012, respectively, if recognized, would reduce the effective tax rate in the period of recognition. Gross interest related to unrecognized tax benefit accrued was approximately ~~$4.0~~$3.8 million and ~~$7.9~~$3.2 million, respectively, as of ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011,~~2012, representing ~~a decrease~~an increase of ~~$3.9 million related to the expiration of statutes of limitations, net with increase related to other unrecognized tax positions.~~$0.6 million.

The Company files federal, state and foreign income tax returns in many jurisdictions in the United States and abroad. Generally, years before 2009 are closed for most significant jurisdictions except for ~~certain states,~~California, for which all years since inception remain open due to utilization of net operating losses and R&D credits generated in prior ~~years or longer statutes of limitations.~~years. Certain of the Company’s unrecognized tax benefits could reverse based on the normal expiration of various statutes of limitations, which could affect ~~our~~the Company’s effective tax rate in the period in which they reverse.

The following table presents the computation of basic and diluted net income per share for the three months ended March 31, 2013 and 2012 (in millions, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2012		2011		2012		2011		2013		2012
Numerator:
Net income	$	183.3	$	122.4	$	481.7	$	343.9	$	188.9	$	143.5
Basic:
Weighted-average shares outstanding		39.9		39.1		39.8		39.2

Denominator:
Weighted-average shares outstanding used in basic calculation										40.3		39.5
Add: Dilutive potential shares										1.1		1.5

Weighted-average shares used in computing diluted net income per share										41.4		41.0

Basic net income per share	$	4.59	$	3.13	$	12.10	$	8.77	$	4.69	$	3.63

Diluted:
Weighted-average shares outstanding used in basic calculation		39.9		39.1		39.8		39.2
Add common stock equivalents		1.2		1.0		1.3		1.0

Weighted-average shares used in computing diluted net income per share		41.1		40.1		41.1		40.2

Diluted net income per share	$	4.46	$	3.05	$	11.72	$	8.55	$	4.56	$	3.50

Employee stock options to purchase approximately ~~1.1~~1.7 million and ~~2.2~~0.4 million weighted shares for the three months ended ~~September 30,~~March 31, 2013 and 2012, ~~and 2011, respectively, and 0.8 million and 2.2 million weighted shares for the nine months ended September 30, 2012 and 2011,~~ 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.~~antidilutive.

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

This management’s discussion and analysis of financial condition as of ~~September 30, 2012~~March 31, 2013 and results of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~ 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, ~~2011.~~2012.

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. Forward-looking statements relate to expectations concerning matters that are not historical facts. Words such as “estimates,” “projects,” “believes,” “anticipates,” “plans,” “expects,” “intends,” “may,” “will,” “could,” “should,” “would,” “targeted” 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, procedures and procedure adoption, 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 global and regional economic and credit market conditions on health care spending; health care reform legislation in the United States and its impact on hospital spending, reimbursement and fees which will be levied on certain medical device revenues; timing and success of product development and market acceptance of developed products; procedure counts; 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 we operate; unanticipated manufacturing disruptions; the inability to meet demand for products; the results of legal proceedings to which we are or may become a party; product liability and other litigation claims; adverse publicity regarding the Company and the safety of our products and adequacy of training; our ability to expand into foreign markets; and other risk factors. Readers are cautioned ~~that~~not to place undue reliance on these forward-looking statements,

which 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, ~~2011~~2012 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~~publicly update or ~~update~~release any revisions to these forward-looking statements, ~~for any reason.~~except as required by law.

Intuitive^®, Intuitive Surgical^®,da Vinci^®,da Vinci S^®,da Vinci^® SiHD Surgical System™,da Vinci S HD Surgical System^®,da Vinci^®Si™,da Vinci^®Si-e™,EndoWrist^®,EndoWrist^® One™,~~Single-Site~~EndoWrist^®™ Stapler 45, Single-Site™, DVSTAT^®, Firefly™ andInSite^® are trademarks of Intuitive Surgical, Inc.

~~Products~~~~. We design, manufacture~~Intuitive designs, manufactures and ~~market~~marketsda Vinci Surgical Systems and related instruments and accessories, which taken together, are advanced surgical systems that we believe represent a new generation of surgery. We believe that this new generation of surgery, which we callda Vincisurgery, ~~extends~~combines the benefits of minimally invasive surgery (“MIS”) ~~to a broader patient base. The~~for patients with the ease of use, precision and dexterity of open surgery. Ada Vinci Surgical System consists of a surgeon’s console, ~~or consoles,~~ a patient-side cart and a high performance vision system. Theda Vinci Surgical System translates ~~the~~a 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 3-D, HD 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~~Theda Vinci Surgical System enables surgeons to ~~deliver higher value minimally invasive~~extend the benefits of MIS to many patients who would otherwise undergo open surgery by using computational, robotic and imaging technologies to overcome many of the limitations of conventional MIS. Surgeons using theda Vinci system operate while seated comfortably at a console viewing a 3-D, High Definition (“HD”) image of the surgical ~~procedures~~field. This immersive visualization connects surgeons to the surgical field and their ~~patients.~~ instruments. While seated at the console, the surgeon manipulates instrument controls in a natural manner, similar to the way he or she has been trained to do in open surgery. Our technology is designed to provide surgeons with a range of motion in the surgical field analogous to the motions of a human wrist, while filtering out the tremor inherent in a surgeon’s hand. In designing our products, we focus on making our technology easy to use.

Our products fall into four broad categories –da Vinci Surgical Systems,InSite andFirefly Fluorescence imaging systems (“Firefly”), instruments and accessories (e.g.,EndoWrist,EndoWrist One,EndoWrist OneVessel Sealer,da Vinci Single-Site andEndoWristStapler 45) and training technologies. We have commercialized three generations ofda Vinci Surgical Systems; the first is ourda VincistandardSurgical System, first commercialized in 1999, the second is ourda Vinci S Surgical System, commercialized in 2006, and the third and most current is ourda Vinci Si Surgical System, commercialized in 2009. Systems include a surgeon’s console, imaging electronics, a patient-side cart and computational hardware and software. In the first quarter of 2011, we launched ourFireflyfor use with theda Vinci SiSurgical System in the U.S. and Europe. This imaging capability combines a fluorescent dye with a specializedda Vincicamera head, endoscope and laser-based illuminator to allow surgeons to identify vasculature in three dimensions beneath tissue surfaces to visualize critical anatomy. Adoption ofFireflyis progressing, with its primary utilization in partial nephrectomy procedures.Fireflyis also being used in certain gynecology and general surgery cases. Instruments and accessories are used with systems to allow surgeons the flexibility in choosing the types of tools needed in a particular surgery. Training technologies include our recently developedda Vinci Skills Simulator and our dual console for use in surgeon proctoring and collaborative surgery.

We model patient value as equal ~~to:~~to procedure efficacy / ~~invasiveness~~~~. Here~~invasiveness. In this equation procedure efficacy is defined as a measure of the success of the surgery in resolving the underlying disease andinvasiveness is ~~how disruptive~~defined as a measure of patient pain and ~~painful the treatment is itself.~~disruption of regular activities. When the patient value of ada Vinciprocedure is ~~deemed higher~~greater than ~~alternate~~that of alternative treatment options, patients may ~~seek~~benefit from seeking out surgeons and hospitals that offer ~~that specific~~da Vinci ~~procedure,~~surgery, which potentially ~~resulting in~~could result a local market share ~~shift for the specific treatment.~~shift. Adoption occurs procedure by procedure, and is driven by the relative patient value ofda Vinci procedures compared to alternative treatment options for the same disease state.

The adoption ofda Vinci surgery has the potential to grow for those procedures that offer greater patient value than nonda Vinci alternatives. We focus our organization and investments on developing, marketing and training for those products and procedures where we believeda Vinci can bring significant patient value relative to alternative treatment options. In 2012,da Vinci was used primarily in gynecology, urology, general surgery, cardiothoracic surgery and head and neck surgery. Target procedures in gynecology includeda Vinci Hysterectomy (“dVH”), sacrocolpopexy, myomectomy, and endometriosis resection. Target procedures in urology includeda Vinci Prostatectomy (“dVP”), partial nephrectomy and pyeloplasty. Target procedures in general surgery include Single-Site Cholecystectomy and colorectal procedures. In cardiothoracic surgery, target procedures includeda VinciLobectomy andda Vinci Mitral Valve Repair. In head and neck surgery, target procedures includeda Vinci Trans-oral Robotic Surgery (“TORS”) for throat and base of tongue cancers.

In 2012, approximately 450,000 surgical procedures were performed with theda Vinci Surgical System, compared to approximately 360,000 and 278,000 procedures performed in 2011 and 2010 respectively. The growth in our overall procedure volume was driven by the growth in U.S. gynecologic procedures, U.S. general surgery procedures, and international dVP procedures in 2012, partially offset by a decline of approximately 15% in U.S. dVP procedures compared to 2011.

Overall U.S. procedure volume grew to approximately 367,000 in 2012, compared to approximately 292,000 in 2011 and 228,000 in 2010.

Gynecology is our largest U.S. surgical specialty. Overall U.S. gynecology procedure volume grew from approximately 123,000 cases in 2010 to approximately 170,000 in 2011 and to approximately 222,000 in 2012. The growth was driven by adoption of dVH, our highest volume procedure, and other gynecologic procedures, including sacrocolpopexy, endometriosis resection, and myomectomy. U.S. dVH procedure volume grew from approximately 140,000 cases in 2011 to approximately 176,000 cases in 2012, of which approximately 38,000 were for the treatment of cancer and approximately 138,000 were related to benign conditions. We estimate the total annual U.S. addressable robotic hysterectomy market to consist of those procedures previously performed in open surgery, which we estimate to be approximately 300,000 to 350,000 cases, of which approximately 50,000 are for cancer.

Urology is our second largest surgical specialty. U.S. urology procedure volume was approximately 88,000 in 2012, compared to approximately 93,000 in 2011 and 85,000 in 2010. The 2012 decline was driven by lower dVP procedure volume. We consider dVP to be the standard of care for the surgical treatment of prostate cancer in the U.S. About 62,000 dVPs were performed in 2012, compared to 73,000 in 2011 and 68,000 in 2010. The approximately 15% reduction in 2012 dVP procedures in the U.S. reflects pressures from reduced levels of prostate-specific antigen (“PSA”) testing and increased use of non-surgical disease management. Other (non-dVP) urology procedures, including partial and full nephrectomy, increased approximately 27% in 2012 to 26,000 cases.

General surgery is our third largest and fastest growing specialty. Overall U.S. general surgery procedure volume grew from approximately 10,000 cases in 2010 to approximately 15,000 in 2011 and to approximately 42,000 in 2012. General surgery growth was led by an increase in cholecystectomy and colorectal procedures.da Vinci Single-Site instrumentation was FDA cleared for U.S. cholecystectomies in December 2011. Since its launch, approximately 630 customers have purchased Single-Site instruments. Multi-port robotic cholecystectomies are also being performed.

Overall international procedure volume grew to approximately 83,000 in 2012, compared to approximately 68,000 in 2011 and 50,000 in 2010. dVP accounted for the majority of international procedures, having grown from about 30,000 in 2010 to 40,000 in 2011 and to 47,000 in 2012. The overall international procedure growth rate of approximately 22% in 2012 was lower than the 36% growth rate in 2011, primarily due to lower European growth rates resulting from the implementation of austerity measures by European governments, reduced levels of PSA testing, increased use of non-surgical disease management and other Company specific matters.

We generate revenue from both the initial capital sales of ~~new and refurbished~~da Vinci Surgical Systems as well as recurring revenue, derived from sales of instruments, accessories and service. The ~~new and refurbished~~da Vinci Surgical System generally sells for between $1.0 million and $2.3 million, depending onupon configuration and geography, and represents a significant capital equipment investment for our customers. We ~~then~~ generate recurring revenue as our customers consume ourEndoWrist instruments and accessory products ~~for use~~used in performing procedures with theda Vinci Surgical System.EndoWrist instruments and accessories have a limited life and will either expire or wear out as they are used in surgery, at which point they are replaced. ~~We also~~Also, we generate recurring revenue from ongoing system service. ~~We typically~~Typically, we enter into ~~multi-year~~ service contracts at the time systems are sold ~~generally~~ at an annual rate of approximately $100,000 to $170,000 per year, depending onupon the configuration of the underlying system. ~~The large majority of these~~These service contracts have generally been renewed at the end of the initial ~~contract~~contractual service periods.

Recurring revenue has grown at a rate equal to or faster than the rate of growth of system revenue. Recurring revenue increased from ~~$752.7 million, or 53% of total revenue in 2010 to~~ $979.5 million, or 56% of total revenue in 2011, to ~~$901.5~~$1,245.9 million, or 57% of total revenue, in 2012. Recurring revenue increased from $288.6 million, or 58% of total revenue, for the ~~nine~~three months ended ~~September 30, 2012.~~March 31, 2012 to $355.5 million, or 58% of total revenue, for the three months ended March 31, 2013. The increase in recurring revenue relative to system revenue reflects continuing adoption of procedures on a growing base of installedda Vinci Surgical ~~Systems and gradually increasing customer utilization per system.~~Systems. We expect recurring revenue to become a larger percentage of total revenue in the future. The installed base ofda Vinci Surgical Systems has grown to ~~2,462~~2,710 at ~~September 30, 2012,~~March 31, 2013, compared with ~~2,132~~2,585 at December 31, ~~2011~~2012 and ~~2,031~~2,226 at ~~September 30, 2011.~~March 31, 2012.

We ~~have~~provide our products through a direct sales ~~force~~organization in the ~~United States, Korea~~U.S. and in Europe, excluding Spain, Italy, Greece and Eastern European countries. ~~We utilize distributors in all other markets that we serve. On~~In January ~~11,~~ 2012, we ~~completed the acquisition of~~acquired our Korean distributor and began selling directly to Korean customers. ~~The transaction was not material~~In January 2013, we began to provide our ~~financial statements and is not expected to have~~products through a ~~material impact on our future operations.~~

~~The adoption of~~~~da Vinci~~ ~~surgery has the potential to progress for those procedures that offer greater patient value than non-~~~~da Vinci~~ ~~alternatives. We model patient value as equal to~~~~procedure efficacy / invasiveness~~~~. Here~~~~procedure 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 higher than alternate treatment options, patients may seek out surgeons and hospitals that offer that specific~~da Vinci~~ ~~procedure. Adoption occurs procedure by procedure, and is driven by the relative patient value of~~~~da Vinci~~ ~~procedures compared to alternatives for the same disease state.~~

~~We focus our~~direct sales organization ~~and investments on developing, marketing and training those products and procedures where we believe~~~~da Vinci~~ ~~can bring significant patient value relative to competitive therapies. An increasing body of peer reviewed literature has indicated that~~~~da Vinci~~ ~~Prostatectomy (dVP) and~~~~da Vinci~~ ~~Hysterectomy (dVH) may offer improved functional outcomes as compared to traditional open surgery. Similarly, early indications are that~~~~da Vinci~~ ~~Surgery in our other key surgeries (~~~~da Vinci~~~~Partial Nephrectomy,~~~~da Vinci~~ ~~Myomectomy,~~~~da Vinci~~~~Sacrocolpopexy,~~~~da Vinci~~ ~~Mitral Valve Repair,~~~~da Vinci~~~~Lobectomy,~~~~da Vinci~~~~Low Anterior Colon Resections, and~~~~da Vinci~~~~Transoral Robotic Surgery (for cancers of the throat), may also offer improved functional outcomes as compared to traditional open surgery. For many patients, a minimally invasive approach using the~~~~da Vinci~~ Surgical System may also offer reduced pain, reduced blood loss, shorter hospital stays, reduced post-operative complications and a quicker return to normal daily activities when compared to open surgery.

~~In 2011, approximately 360,000 surgical procedures were performed with the~~~~da Vinci~~ ~~Surgical System, up approximately 29% compared with 2010. The growth in our overall procedure volume was driven primarily by~~~~da Vinci~~ ~~Hysterectomy (dVH)~~ in the ~~U.S.,~~~~da Vinci~~ ~~Prostatectomy (dVP) outside~~Czech Republic, Slovakia, and Hungary, whereas prior to 2013, these markets were served by a distributor. In the U.S. and other urologic and gynecologic procedures including Nephrectomy (partial and full), Sacrocolpopexy, Myomectomy and Endometriosis Resection in the U.S. Emerging procedures within other specialties, including lobectomy for lung cancer and low anterior resection for colon cancer also contributed to 2011 procedure growth.

dVH is our highest volume procedure, having surpassed dVP in 2010. dVH procedure volume grew from approximately 110,000 cases in 2010 to approximately 146,000 cases in 2011, of which approximately 39,000 were for the treatment of cancer and the remaining 107,000 related to benign conditions. The very large majorityremainder of our ~~2011 dVH volume came from the U.S. market, where~~world markets, we ~~estimate the total annual addressable robotic market to be approximately 300,000 to 350,000 cases, of which approximately 50,000 are for cancer.~~

dVP procedure volume grew from approximately 98,000 cases in 2010 to approximately 113,000 cases worldwide in 2011. We estimate that the majority of the approximately 85,000 prostatectomies performed in the U.S. in 2011 were done robotically with the~~da Vinci~~ ~~Surgical System. The majority of~~provide our ~~2011 worldwide dVP growth came from European markets, led by Germany and France.~~

~~Other procedures (non-dVH/dVP) grew over approximately 40% in 2011 to approximately 101,000 cases. Growth in these other procedures was driven by~~~~da Vinci~~ ~~adoption in urologic and gynecologic procedures such as~~~~da Vinci~~ ~~Partial Nephrectomy and~~~~da Vinci~~Sacrocolpopexy as well as early stage growth in other emerging procedures from other surgical specialties, including lobectomy for lung cancer, low anterior resection for colon cancer, and transoral robotic surgery (“TORS”) for head and neck surgery. While early results in emerging procedures are encouraging and may point to significant patient value, their growth is off of smaller absolute bases and their future growth rates are uncertain.

~~Total 2012~~~~da Vinci~~ ~~procedures~~products through the first three quarters grew approximately 25%, driven by growth in Gynecology and General Surgery procedures in the U.S., partially offset by an approximately 20% reduction in dVP procedures in the U.S. We believe the reduction in dVP procedures in the U.S. primarily reflects pressures from reduced levels of prostate-specific antigen (“PSA”) testing and increases in non-surgical disease management. dVP’s and total procedures have declined in Europe from the first quarter of 2012 to the second and third quarters of 2012, reflecting seasonality and austerity measures as well as the PSA testing and non-surgical disease management trends that have impacted the U.S.distributors.

We believe that we have obtained the clearances required to market our multiport products to our targeted surgical specialties within the ~~United States~~U.S. and most of Europe. As we make additions to target procedures and introduce new products, we will continue to seek necessary clearances. In February 2013, we received FDA clearance to market our Single-Site instruments for benign hysterectomy and salpingo oophorectomy procedures. FDA clearance for Single-Site Cholecystectomy was received in December 2011. However, as we are in the early stages of introducing this instrumentation to the U.S. market, we are not able to predict the extent to which da Vinci Single-Site may be adopted.

In November 2009, we received ~~regulatory (Shonin)~~Shonin approval from the Japanese Ministry of Health, Labor, and Welfare (“MHLW”) for ourda Vinci S Surgical System in Japan. We have sold 70 systems into Japan through September 30, 2012. These sales were primarily made to early adopters. Since receiving Shonin approval, we have been focusing our efforts on obtaining specific reimbursement for~~da Vinci~~ ~~procedures in Japan and building our own organization, Intuitive Surgical Japan. Prior to~~Until April 2012, we had partnered with the experienced regulatory team from Johnson & Johnson K.K. Medical Company (“JJKK”) to assist in ~~our~~navigating the Japanese regulatory process. In

April 2012, the Marketing Authorization Application forda Vinciproducts was transferred to Intuitive Surgical Japan from JJKK, and Intuitive Surgical Japan now has primary responsibility for regulatory support of our products in Japan. We continue to partner with Adachi Co., ~~LTD~~Ltd as our separate independent distribution partner ~~in Japan who is responsible~~ for marketing, selling, and servicing our products in Japan. Effective April 2012, we obtained national reimbursement for the dVP procedures in Japan, our only reimbursed procedure to date. In October 2012, we obtained MHLW approval forda Vinci Si Surgical Systems in Japan. If we are not successful in obtaining additional regulatory clearances, importation licenses, and adequate procedure reimbursements for future products and procedures, then the demand for our products in Japan could be limited.

The credit and sovereign debt issues impacting Europe have slowed capital sales and curtailed procedure growth ~~throughout most of 2012. European procedure growth of approximately 17% for the nine months ended September 30,~~during 2012 ~~was lower than we anticipated.~~and 2013. Although capital sales and procedure growth outside of Europe have been strong, European uncertainties could adversely impact demand for our products globally. Demand forda Vinci systems fluctuates quarter to quarter based upon changing economic and geopolitical factors.

Recently, including during the first quarter of 2013, there have been articles published and papers written questioning patient safety and efficacy associated withda Vinci ~~Prostatectomy.~~Surgery, the cost ofda VinciSurgery relative to other disease management methods, and the adequacy of surgeon training. We believe thatda Vinci Surgery continues to be a safe and effective surgical method, as supported by a substantial and growing number of scientific studies and peer reviewed papers, and that the training we provide to surgeons helps ensure that they are able to operate our systems with the requisite skill and expertise. The recent negative press could delay or adversely impact procedure adoption and our revenue growth in future periods.

Overall. During the first quarter 2013, totalda Vinci procedures grew approximately 18% compared to the first quarter of 2012, driven by growth in general surgery and gynecology procedures in the U.S. and international urology procedures, partially offset by an approximately 11% reduction in dVP procedures in the U.S.

dVP. We believe the U.S. Preventive ~~Service~~Services Task Force recommendation against PSA screening, as well as changes in treatment ~~patterns~~pattern for low risk prostate cancer away from definitive treatment, have led to a decline in our dVP business. We estimate that ~~U.S.~~ dVP ~~declined approximately 20%~~procedures in the ~~third~~U.S. decreased approximately 11% in the first quarter of ~~2012~~2013 compared with the same period in ~~2011.~~2012. First quarter 2013 U.S. dVP procedures were approximately 4% higher than the fourth quarter of 2012. We are unable to predict the extent to which these recommendations and treatment pattern changes will be followed by governments or clinicians within non-U.S. jurisdictions.

~~da Vinci~~Working Days.~~Skills Simulator~~. InThe number of surgical procedures performed in any given quarter is largely a function of the number of working days in that quarter. The first quarter of 2013 had fewer working days than the first quarter of ~~2011, we began shipping our~~2012 due to the extra leap year day in 2012 and, to a lesser extent, the timing of the Easter holiday during the first quarter of 2013.

Procedure Seasonality. The majority ofda Vinci ~~Skills Simulator.~~procedures performed are now for benign conditions, most notably benign hysterectomy. The ~~simulator~~proportion of these benign procedures is growing in relation to the total number of procedures performed. Hysterectomies for benign conditions and other short-term elective procedures tend to be more seasonal than cancer operations and surgeries for other life threatening conditions. Seasonality for these benign procedures results in higher fourth quarter procedure volume when more patients have met annual deductibles and lower first quarter procedure volume when deductibles are reset. Third quarter activity is also slower given vacation periods, particularly in Europe. As we achieve deeper penetration in certain procedures, seasonality has a more substantive impact on our business.

EndoWrist Stapler 45.In October 2012, we received FDA clearance for theEndoWrist Stapler 45 instrument with Blue (3.5mm open staple height) and Green (4.3mm open staple height) 45 mm reloads. TheEndoWristStapler 45 is a ~~practice tool~~wristed, stapling instrument intended for resection, transection and/or creation of anastomoses in general, gynecologic and urologic surgery. This instrument enables operators of theda Vinci Si ~~Surgical System that gives~~to precisely position and fire theEndoWristStapler 45. We expect its initial surgical use to be directed towards colorectal procedures. During the first quarter 2013, initial use of theEndoWristStapler 45 occurred in a ~~user~~limited number of customers. We expect to expand slowly to a broader set of customers later in 2013. Although we believe the opportunity to practice in his or her facility with the surgeon console controls. The simulator incorporates three-dimensional, physics-based computer simulation technology to immerse the user within a virtual environment. The user navigates through the environment and completes exercises by controlling virtual instruments from the surgeon console. Upon completion of a skills exercise, the simulator provides a quantitative assessment of user performance based on a variety of task-specific metrics. The simulator is intended to augment, not replace, existing training programs for the~~da Vinci Si~~ ~~Surgical System. Most~~~~da Vinci~~ ~~Skills Simulators~~first customer experiences have been ~~sold in connection with new~~~~da Vinci Si~~ ~~Surgical System sales. We sold 87 and 310~~~~da Vinci~~ ~~Skills Simulators during the three and nine months ended September, 2012, respectively, compared with 98 and 260 units during the same periods in 2011.~~

~~da Vinci Single-Site~~~~Instruments~~.~~da Vinci Single-Site~~ ~~is a set of instruments and accessories that allow the~~~~da Vinci Si~~ systems to work through a single incision, typically in the umbilicus, rather than multiple incisions. Single incision surgery is intended to minimize trauma to patients by reducing the number of ports required to enter the body. Non-robotic single incision surgery today is typically performed with modified laparoscopic instruments. Early clinical adoption of this manual technique has been mostly positive, ~~however, physicians have reported that manual single incision surgery is technically and ergonomically challenging.~~~~da Vinci Single-Site~~ ~~instruments and accessories were designed to address these issues. In February 2011, we received the CE mark for our~~~~da Vinci Single-Site~~ ~~instrument kit and began selling these new products in Europe. The majority of~~~~da Vinci Single-Site~~ ~~procedures performed in Europe to date has been cholecystectomies. In December 2011, we received Food and Drug Administration (“FDA”) FDA regulatory clearance to market our~~~~Single-Site~~ ~~instrumentation in the United States for laparoscopic cholecystectomy procedures, our only United States clearance to date. We are encouraged by early hospital, surgeon, and patient interest in~~~~da Vinci Single-Site~~~~, with over 350 U.S. customers having purchased~~~~da Vinci Single-Site~~~~kits as of September 30, 2012. However, as~~ we are in the early stages of ~~introducing this instrumentation to the U.S. market,~~sellingEndoWristStapler 45 and we are not able to predict the extent to which~~da Vinci Single-Site~~ ~~may be adopted. We are working on expanding our~~~~da Vinci Single-Site~~~~instrument offering to enable its use in additional indications. In~~ the ~~third quarter of 2012, we submitted and have received from the FDA questions on our 510(k) submission for~~~~da Vinci Single-Site~~ ~~instruments and indications for use in benign Hysterectomy and Salpingo oophorectomy.~~

~~da Vinci Firefly~~~~Fluorescence Imaging~~. ~~In the first quarter of 2011, we launched our~~~~Firefly~~ ~~Fluorescence Imaging product (“~~~~Firefly”~~~~) for use with the~~~~da Vinci Si~~ ~~Surgical System in the U.S. and Europe. This new imaging capability combines a fluorescent dye with a specialized~~~~da Vinci~~ ~~camera head, endoscope and laser-based illuminator to allow surgeons to identify vasculature in three dimensions beneath tissue surfaces to visualize critical anatomy.~~~~Firefly~~ ~~kits configured into new~~~~da Vinci~~ ~~system sales are included in systems revenue, while~~~~Firefly~~ ~~kits sold separately for existing systems are included in instruments and accessories revenue. Adoption of~~~~Firefly~~~~is progressing, with its primary utilization in partial nephrectomy procedures.~~~~Firefly~~~~is also being used in certain gynecology and general surgery cases.~~

~~EndoWrist One~~~~Vessel Sealer.~~ ~~In December 2011, we received FDA clearance for the~~~~EndoWrist One~~ ~~Vessel Sealer. The~~~~EndoWrist One~~ ~~Vessel Sealer is a wristed, single-use~~ instrument ~~intended for bipolar coagulation and mechanical transection of vessels up to 7 mm in diameter and tissue bundles that fit in the jaws of the instrument. This instrument enables~~~~da Vinci Si~~ ~~surgeons to fully control vessel sealing, while providing the benefits of~~~~da Vinci~~ ~~Surgery. This instrument is designed to enhance surgical efficiency and autonomy in a variety of general surgery and gynecologic procedures. Clinical response to the~~~~EndoWrist One~~~~Vessel Sealer has been encouraging, with positive commentary on precision, articulation, vessel sealing quality and thermal spread. We expect applications~~

~~for the~~~~EndoWrist One~~~~Vessel Sealer to be centered on general surgery and gynecologic oncology procedures. We are still in the early stages of introducing~~~~EndoWrist One~~ ~~Vessel Sealer and are not able to predict the extent to which the~~~~EndoWrist One~~ ~~Vessel Sealer~~ may be adopted.

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


	Three months Ended September 30,										Nine months Ended September 30,										Three Months Ended March 31,
	2012		% of total revenue			2011		% of total revenue			2012		% of total revenue			2011		% of total revenue			2013		% of total revenue			2012		% of total revenue
Revenue:
Products	$	450.0		84	%	$	374.9		84	%	$	1,317.5		84	%	$	1,057.5		84	%
Services		87.8		16	%		71.8		16	%		252.0		16	%		203.0		16	%
Product																					$	517.0		85	%	$	414.4		84	%
Service																						94.4		15	%		80.8		16	%

Total revenue		537.8		100	%		446.7		100	%		1,569.5		100	%		1,260.5		100	%		611.4		100	%		495.2		100	%

Cost of revenue:
Products		119.3		22	%		96.2		22	%		353.9		23	%		274.5		22	%
Services		28.4		5	%		25.0		6	%		83.2		5	%		75.1		6	%
Product																						146.3		24	%		111.7		23	%
Service																						30.8		5	%		27.6		5	%

Total cost of revenue		147.7		27	%		121.2		27	%		437.1		28	%		349.6		28	%		177.1		29	%		139.3		28	%

Products gross profit		330.7		61	%		278.7		62	%		963.6		61	%		783.0		61	%
Services gross profit		59.4		11	%		46.8		10	%		168.8		11	%		127.9		10	%
Product gross profit																						370.7		61	%		302.7		61	%
Service gross profit																						63.6		10	%		53.2		11	%

Gross profit		390.1		73	%		325.5		73	%		1,132.4		72	%		910.9		72	%		434.3		71	%		355.9		72	%

Operating expenses:
Selling, general, and administrative		129.0		24	%		111.2		25	%		374.1		24	%		316.8		25	%
Selling, general and administrative																						141.5		23	%		124.2		25	%
Research and development		49.7		9	%		35.4		8	%		128.3		8	%		98.8		8	%		41.6		7	%		38.4		8	%

Total operating expenses		178.7		33	%		146.6		33	%		502.4		32	%		415.6		33	%		183.1		30	%		162.6		33	%

Income from operations		211.4		39	%		178.9		40	%		630.0		40	%		495.3		39	%		251.2		41	%		193.3		39	%
Interest and other income, net		4.3		1	%		1.9		0	%		12.1		1	%		11.3		1	%
Interest and other income (expense), net																						4.3		1	%		3.8		1	%

Income before taxes		215.7		40	%		180.8		40	%		642.1		41	%		506.6		40	%		255.5		42	%		197.1		40	%
Income tax expense		32.4		5	%		58.4		13	%		160.4		10	%		162.7		13	%		66.6		11	%		53.6		11	%

Net income	$	183.3		34	%	$	122.4		27	%	$	481.7		31	%	$	343.9		27	%	$	188.9		31	%	$	143.5		29	%

Total revenue was ~~$537.8~~$611.4 million for the three months ended ~~September 30, 2012,~~March 31, 2013, compared with ~~$446.7~~$495.2 million for the three months ended ~~September 30, 2011. For the nine months ended September 30, 2012, total revenue increased to $1,569.5 million from $1,260.5 million for the nine months ended September 30, 2011.~~March 31, 2012. Total revenue growth for these periods was driven by the continued adoption ofda Vinci ~~Surgery,~~surgery, resulting largely from the growth in ~~U.S. gynecologic procedures, including dVH, Sacrocolpopexy, Endometriosis Resection, and Myomectomy;~~ U.S. general surgery procedures, including ~~Cholecystectomy~~cholecystectomy and ~~colon procedures;~~colorectal procedures, and gynecologic procedures, including dVH, sacrocolpopexy, endometriosis resection, and myomectomy, and the growth in dVP procedures ~~growth~~ in international markets, partially offset by a decline of approximately ~~20%~~11% in dVP procedures in the U.S. The total revenue growth was also driven by higher system sales into the Japanese market. The reduction in dVP procedures in the U.S. reflects pressures from reduced levels of PSA testing and non-surgical disease management. Procedure growth in Europe was lower than our overall growth due to broad economic pressures, structural issues, need for increased depth in our commercial organization as well as the PSA testing and non-surgical disease management trends that have impacted the U.S.

Revenue within the ~~United States~~U.S. accounted for ~~79%~~75% and ~~80%~~79% of total revenue for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2013 and 2012, ~~and 79% and 78% of total revenue for the three and nine months ended September 30, 2011,~~ respectively. We believe domestic revenue has accounted for the large majority of total revenue primarily due to rapid procedure adoption in the ~~United States~~U.S. driven by the ability of patients to choose their provider and method of treatment. For the three ~~and nine~~ months ended ~~September 30, 2012,~~March 31, 2013, international revenue grew ~~in absolute dollars compared with the prior year,~~at a faster rate than U.S. revenue primarily due to higher system sales in the Japanese ~~market and higher instrument and accessory sales driven by increased procedures.~~market. The credit and sovereign debt issues impacting Europe have slowed capital sales and procedure growth in that region, and our European sales reflect a challenging economic environment.

In September 2012, we entered into a contract with Department of Veteran Affairs (“VA”) for $34.0 million of systems, skill simulators and instruments and accessories. The products are required to be delivered to the customer’s designated sites within a period of 120 calendar days after the execution of the contract. The contract is cancellable and the customer is not obligated to purchase the full amount of the contract. In September 2012, we entered into a separate contract with Department of Defense for $34.0 million with a customer for instruments and accessories over a five-year period. The contract is cancellable and the customer is not obligated to purchase the full amount of the contract. No deliveries have occurred under the two contracts during the quarter ended September 30, 2012.

The following table summarizes our revenue andda Vinci Surgical System unit sales for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~ (in millions, except percentages and unit sales):


	Three Months Ended March 31,
	2013			2012
Revenue
Instruments and accessories	$	261.1		$	207.8
Systems		255.9			206.6

Total product revenue		517.0			414.4
Services		94.4			80.8

Total revenue	$	611.4		$	495.2

Recurring revenue	$	355.5		$	288.6
% of total revenue		58	%		58	%
Domestic	$	458.1		$	390.7
International		153.3			104.5

Total revenue	$	611.4		$	495.2

% of Revenue - Domestic		75	%		79	%
% of Revenue - International		25	%		21	%
Unit Sales by Region:
Domestic Unit Sales		115			105
International Unit Sales		49			35

Total Unit Sales		164			140

Unit Sales by Model:
da Vinci Si-e - Single console Unit Sales (3 arm)		5			1
da Vinci Si - Single console Unit Sales (4 arm)		109			106
da Vinci Si - Dual console Unit Sales		48			25

Totalda Vinci SiUnit Sales		162			132
da Vinci S Unit Sales		2			8

Total Unit Sales		164			140

Unit Sales involving System Trade-ins:
Unit sales trading inda Vinci standard Surgical Systems		9			19
Unit sales trading inda Vinci SSurgical Systems		30			27

Total unit sales involving trade-ins		39			46
Unit Sales not trading in any systems		125			94

Total Unit Sales		164			140

Product revenue was ~~$450.0~~$517.0 million for the three months ended ~~September 30, 2012~~March 31, 2013 compared with ~~$374.9~~$414.4 million for the three months ended ~~September 30, 2011.~~March 31, 2012.

Instruments and accessories revenue increased ~~24%~~26% to ~~$218.0~~$261.1 million for the three months ended ~~September 30, 2012~~March 31, 2013 compared with ~~$175.8~~$207.8 million for the three months ended ~~September 30, 2011.~~March 31, 2012. Instrument and accessory revenue growth was driven by approximately ~~22%~~18% higherda Vinci surgical procedure volume and revenue generated from ~~initial~~ sales of new instrument and accessory products, including Single-Site,~~Single-Site,~~ Firefly, ~~thoracic lung kit~~ and theEndoWrist One Vessel ~~Sealer, prior to procedures being performed.~~Sealer. Overall procedure growth was ~~led by U.S. gynecologic procedures,~~ driven by ~~dVH, Sacrocolpopexy, Endometriosis Resection, and Myomectomy;~~the growth in U.S. general surgery procedures, including cholecystectomy and colorectal procedures, and gynecologic procedures, including dVH, sacrocolpopexy, endometriosis resection, and myomectomy, and the growth ~~driven by Cholecystectomy and colon procedures; and~~in dVP ~~growth~~procedures in international markets, partially offset by a decline of approximately 11% in dVP procedures in the U.S. ~~by approximately 20%..~~

Systems revenue increased to ~~$232.0~~$255.9 million during the three months ended ~~September 30, 2012~~March 31, 2013 from ~~$199.1~~$206.6 million during the three months ended ~~September 30, 2011~~March 31, 2012 primarily due to higherda Vinci system unit sales and a higher average selling price (“ASP”). We sold ~~155~~164da Vinci Surgical Systems during the three months ended ~~September 30, 2012,~~March 31, 2013 compared with ~~133~~140 in the same period last year. The growth in system ~~units~~unit sales reflects higher first quarter 2013 system sales into U.S. and Japanese markets. During the first quarter of 2013, 115 systems were sold into the U.S., 16 ~~systems to Japanese customers compared to 6 systems in the same period last year~~into Europe and ~~a greater number of~~33 into other markets, including 25 systems sold tointo Japan. During the first quarter 2012, 105 systems were sold into the U.S. ~~customers; partially offset by 5 fewer~~, 14 into Europe and 21 into other markets, including 7 systems sold ~~to European customers.~~into Japan. Theda Vincisystem ASP was ~~$1.49 million during the three months ended September 30, 2012, compared with $1.46~~$1.55 million for the three months ended ~~September 30, 2011,~~March 31, 2013, compared with $1.47 million for the three months ended March 31, 2012, driven primarily by product mix as system sales during the three months ended ~~September 30, 2012~~March 31, 2013 contained a higher proportion of~~FireflyFluorescence Imaging configurations, which have higher prices than standard HD vision~~ dual console configurations.

~~Product revenue was $1,317.5 million for~~ During the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013, 48 of the 164 systems sold were dual console systems, compared ~~with $1,057.5 million for~~to 25 of 140 during the ~~nine~~three months ended ~~September 30, 2011.~~

Instruments and accessories revenue increased 29% to $649.5 million for the nine months ended September 30, 2012 compared with $504.7 million for the nine months ended September 30, 2011. Instrument and accessory revenue growth was driven by approximately 25% higher~~da Vinci~~ ~~surgical procedure volume and revenue generated from initial sales of new instrument and accessory products, including~~~~da Vinci Single-Site, Firefly~~~~, and the~~~~EndoWrist One~~ Vessel Sealer prior to first cases being completed. Overall procedure growth was led by U.S. gynecologic procedures, driven by dVH, Sacrocolpopexy, Endometriosis Resection, and Myomectomy; U.S. general surgery growth, driven by Cholecystectomy and colon procedures; and dVP growth in international markets partially offset by a decline in dVP in the U.S.

~~Systems revenue increased to $668.0 million during the nine months ended September 30, 2012 from $552.8 million during the nine months ended September 30, 2011 primarily due to higher~~~~da Vinci~~ ~~system unit sales and a higher average selling price (“ASP”). We sold 445~~~~da Vinci~~ ~~Surgical Systems during the nine months ended September 30, 2012, compared with 382 in the same period last year. The~~~~da Vinci~~ system ASP was $1.49 million during the nine months ended September 30, 2012, compared with $1.43 million for the nine months ended September 30, 2011, driven primarily by product mix as system sales during the nine months ended September 30, 2012 contained a higher proportion of surgical simulator, and~~FireflyFluorescence Imaging configurations, which have higher prices than standard HD vision configurations and favorable geographical mix.~~March 31, 2012.

Service revenue ~~comprised primarily of system service and customer training,~~ increased ~~22%~~17% to ~~$87.8~~$94.4 million for the three months ended ~~September 30, 2012~~March 31, 2013 compared with ~~$71.8~~$80.8 million for the three months ended ~~September 30, 2011 and increased 24% to $252.0 million for the nine months ended September 30, 2012 compared with $203.0 million for the nine months ended September 30, 2011.~~March 31, 2012. We typically enter into ~~multi-year, fixed revenue system~~ service contracts at the time systems are sold. The large majority of these service contracts have been renewed at the end of the initial contract periods. Higher service revenue during the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 was primarily driven by a larger base ofda Vinci Surgical ~~Systems.~~Systems producing contract service revenue.

Product gross profit for the three months ended ~~September 30, 2012~~March 31, 2013 increased ~~19%~~22% to ~~$330.7~~$370.7 million, or ~~73.5%~~71.7% of product revenue, compared with ~~$278.7~~$302.7 million, or ~~74.3%~~73.0% of product revenue, for the three months ended September 30, 2011. Product gross profit for the nine months ended September 30, 2012 increased 23% to $963.6 million, or 73.1% of product revenue, compared with $783.0 million, or 74.0% of product revenue, for the nine months ended September 30, 2011.March 31, 2012. The higher ~~2012~~2013 product gross profit was driven by higher product revenue, as described above. The ~~slightly~~ lower ~~2012~~2013 product gross profit percentage ~~primarily~~largely reflects the ~~introduction~~impact of ~~newly launched~~the new U.S. medical device excise tax and lower gross margins earned on recently released instrument and accessory products. First quarter 2013 product cost of revenue included $6.5 million related to the U.S. medical device excise tax, which became effective January 1, 2013. First quarter 2013 product revenue included a higher proportion of recently introduced instrument and accessory products ~~possessing~~which yield lower ~~margins at their introduction point,~~gross margin percentages, particularlyda VinciSingle-Site

Instruments and theEndoWrist OneVessel ~~Sealer, and higher charges taken for inventory.~~Sealer. Margins on newly launched products will typically be lower than our mature products reflecting vendor pricing on low volumes, temporary tooling costs and other start-up costs. Over time, as volumes increase, and we refine the manufacturing processes and products, we ~~would~~ expect to see improvement in the margins of these newer products. However, gross margins may ultimately differ for these newer products relative to our previous products based on the volume and complexity of the product. Product gross profit for the three months ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~ reflected stock-based compensation expense of ~~$4.3~~$3.9 million and ~~$3.2~~$3.1 million, respectively. ~~Product gross profit for the nine months ended September 30, 2012 and 2011 reflected stock-based compensation expense of $10.6 million and $9.2 million, respectively.~~

Service gross profit during the three months ended ~~September 30, 2012~~March 31, 2013 was ~~$59.4~~$63.6 million, or ~~67.7%~~67.4% of service revenue, compared with ~~$46.8~~$53.2 million, or ~~65.2%~~65.8% of service revenue during the three months ended September 30, 2011. Service gross profit during the nine months ended September 30, 2012 was $168.8 million, or 67.0% of service revenue, compared with $127.9 million, or 63.0% of service revenue during the nine months ended September 30, 2011.March 31, 2012. The higher ~~2012~~2013 service gross profit was driven by a larger installed base ofda Vinci Surgical Systems. The higher 2012 service gross ~~service~~ profit percentage was primarily driven by reduced service parts consumption rates. Service gross profit for the three months ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~ reflected stock-based compensation expense of ~~$4.1~~$2.9 million and ~~$2.9~~$2.8 million, respectively. ~~Service gross profit for the nine months ended September 30, 2012 and 2011 reflected stock-based compensation expense of $9.6 million and $8.2 million, respectively.~~

~~In the past, annual stock option awards were granted on February 15~~^th ~~(or the next business day if February 15~~^th was not a business day). These stock option awards typically vested 1/8 at the end of six months and 1/48 per month thereafter through a four-year period and had a ten-year term. Beginning 2012, stock options have been awarded bi-annually on February 15^th ~~and August 15~~^th ~~(or the next business day if the date is not a business day). The February 15~~^th ~~stock option awards are subjected to a four-year vesting period, while the August 15~~^th stock option awards are subjected to a 3.5-year vesting period, with 7/48 vesting at the end of one month and 1/48 per month thereafter. As a result of this change in option grant practice our stock-based compensation in the first and second quarters of 2012 was $34.4 million and $33.3 million compared to $47.3 million in the third quarter. As of September 30, 2012, all of the quarterly timing differences related to our revised 2012 employee grant process have cycled through.

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

Selling, general and administrative expenses for the three months ended ~~September 30, 2012~~March 31, 2013 increased ~~16%~~14% to ~~$129.0~~$141.5 million compared with ~~$111.2~~$124.2 million for the three months ended September 30, 2011. Selling, general and administrative expenses for the nine months ended September 30, 2012 increased 18% to $374.1 million compared with $316.8 million for the nine months ended September 30, 2011.March 31, 2012. The increase ~~in absolute dollars~~ was primarily due to ~~stock-based compensation expenses,~~ organizational growth to support our expanding business, particularly in the clinical field sales function, and higher ~~commissions related to higher revenue levels.~~non-cash stock-based compensation expense. Stock-based compensation expense ~~during~~for the three months ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011 were~~was approximately ~~$28.2~~$23.0 million and ~~$21.4~~$21.2 million, respectively. ~~Stock-based compensation expense during the nine months ended September 30, 2012 and 2011 were approximately $69.7 million and $63.0 million, respectively.~~

~~Please refer to our stock option grant practice discussion in the Gross Profit section above for information on the increase of our stock-based compensation expense in the third quarter of 2012.~~

Research and development ~~(“R&D”)~~ costs are expensed as incurred. R&D expenses include costs associated with the design, development, testing and enhancement of our products. These enhancements represent significant improvements to our products.

R&D expenses for the three months ended ~~September 30, 2012~~March 31, 2013 increased ~~40%~~8% to ~~$49.7~~$41.6 million compared with ~~$35.4~~$38.4 million for the three months ended ~~September 30, 2011. R&D expenses for the nine months ended September 30, 2012 increased 30% to $128.3 million compared with $98.8 million for the nine months ended September 30, 2011.~~March 31, 2012. The increase ~~in absolute dollars~~ was driven by ~~higher stock-based compensation expense, higher prototype costs and~~ growth in our ~~organization. Prototype costs vary by quarter to quarter due to product development life cycles.~~R&D headcount and higher non-cash stock compensation expense. Stock-based compensation expense for the three months ended March 31, 2013 and 2012 was approximately $8.4 million and $7.3 million, respectively. Amortization expense related to purchased intellectual property during the three months ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~ were ~~$3.2~~$2.8 million and $3.2 million, respectively. Amortization expense related to purchased intellectual property during the nine months ended September 30, 2012 and 2011 were $9.8 million and $10.2 million, respectively. Stock-based compensation expense during the three months ended September 30, 2012 and 2011 were approximately $10.7 million and $7.4 million, respectively. Stock-based compensation expense during the nine months ended September 30, 2012 and 2011 were approximately $25.1 million and $21.4$3.3 million, respectively. We expect to continue to make substantial investments in R&D and anticipate that R&D expense ~~including co-development arrangements with industry partners,~~ will continue to increase in the future.

~~Please refer to our stock option grant practice discussion in the Gross Profit section above for information on the increase of our stock-based compensation expense in the third quarter of 2012.~~

Interest and other income (expense), net for the three months ended ~~September 30,~~March 31, 2013 and 2012 ~~and 2011~~ was $4.3 million and ~~$1.9~~$3.8 million, respectively. ~~This~~Higher interest and other income, net was driven by higher interest income ~~resulting from lower rates earned on higher cash and investment balances and offset by lower other non-operating gains.~~

Interest and other income, net for the nine months ended September 30, 2012 was $12.1 million compared with $11.3 million for the nine months ended September 30, 2011. This was driven by higher interest income resulting from lower rates earned on higher cash and investment balances.

Income tax expense for the three months ended ~~September 30, 2012~~March 31, 2013 was ~~$32.4~~$66.6 million, or ~~15.0%~~26.1% of pre-tax income, compared with ~~$58.4~~$53.6 million, or ~~32.3%~~27.2% of pre-tax income for the three months ended September 30, 2011. Income tax expense for the nine months ended September 30, 2012 was $160.4 million, or 25% of pre-tax income, compared with $162.7 million, or 32.1% of pre-tax income for the nine months ended September 30, 2011.March 31, 2012. Our effective tax rates for ~~all~~ these periods differ from the U.S. federal statutory rate of 35% due primarily to the effect of income earned by certain of our overseas entities being taxed at rates lower than the federal statutory rate, partially offset by state income taxes and non-deductible stock option expenses. ~~We intend to indefinitely reinvest all of our undistributed foreign earnings outside the United States.~~ The income tax provision for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2013 also reflected a discrete net benefit of $7.5 million, or 2.9% of pre-tax income, related to 2012 ~~reflected discrete benefits of $35.1 million primarily associated with~~federal R&D credit which was retroactively reinstated in the ~~reversal of unrecognized~~three months ended March 31, 2013. No federal R&D credit benefit was recorded in the income tax ~~benefits in connection with~~provision for the ~~expiration of certain statutes of limitations in multiple jurisdictions and $2.5 million associated with the filing of our 2011 federal tax returns~~three months ended March 31, 2012. The income tax provision for the ~~nine~~three months ended ~~September 30,~~March 31, 2012 ~~also~~ included a discrete recognition of $8.5 million, or 4.3% of pre-tax income, related to certain previously unrecognized tax benefits ~~as a result of~~reflecting new IRS guidance issued in the ~~first quarter~~three months ended March 31, 2012. We intend to indefinitely reinvest outside the U.S. all of ~~2012.~~our undistributed foreign earnings that were not previously subject to U.S. tax.

As of ~~September 30, 2012,~~March 31, 2013, we had total gross unrecognized tax benefits of approximately ~~$81.1~~$96.6 million compared with approximately ~~$98.1~~$88.0 million as of December 31, ~~2011,~~2012, representing ~~a net decrease~~an increase of approximately ~~$17.0~~$8.6 million for the ~~nine~~three months ended September 30, 2012. The net decrease is primarily related to the reversal of previously unrecognized tax benefits of $41.2 million as a result of the expiration of certain statutes of limitations in multiple jurisdictions, and the release of reserves due to re-evaluation of certain previously unrecognized tax positions as a result of new IRS guidance issued in February 2012, partially offset by increases during the first nine months of 2012 related to other uncertain tax positions.March 31, 2013. Of the total gross unrecognized tax benefits, ~~$76.8~~$92.3 million and ~~$93.8~~$83.8 million as of ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011,~~2012, respectively, if recognized, would reduce the effective tax rate in the period of recognition. Gross interest related to unrecognized tax benefit accrued was approximately ~~$4.0~~$3.8 million and ~~$7.9~~$3.2 million, respectively, as of ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011,~~2012, representing ~~a decrease~~an increase of ~~$3.9 million related to the expiration of statutes of limitations, net with increase related to other unrecognized tax positions.~~$0.6 million.

We file federal, state and foreign income tax returns in many jurisdictions in the United States and abroad. Generally, years before 2009 are closed for ~~our~~ most significant jurisdictions except for ~~certain states,~~California, for which all years since inception remain open due to utilization of net operating losses and R&D credits generated in prior ~~years or longer statutes of limitations.~~years. Certain of our unrecognized tax benefits could reverse based on the normal expiration of various statutes of limitations, which could affect our effective tax rate in the period in which ~~they~~we reverse.

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 ~~$2.2~~$2.9 billion at December 31, ~~2011~~2012 to ~~$2.7~~$3.1 billion at ~~September 30, 2012.~~March 31, 2013. Cash generation is one of our fundamental strengths and provides us with substantial financial flexibility in meeting our operating, investing and financing needs.

As of ~~September 30, 2012, $418.8~~March 31, 2013, $523.9 million of our cash, cash equivalents and investments were held by foreign subsidiaries. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S. We currently have no plans to repatriate any foreign earnings back to the U.S. as we believe our cash flows provided by our U.S. operations will meet our U.S. liquidity needs.

The following table summarizes our cash flow activities as of March 31, 2013 and 2012 (in millions):


	Nine Months
	Ended September 30,						Three Months Ended March 31,
	2012			2011			2013			2012
Net cash provided by (used in):
Operating activities	$	597.0		$	463.9		$	258.0		$	165.0
Investing activities		(712.6	)		(340.6	)		(348.0	)		(408.2	)
Financing activities		46.1			(105.3	)		(35.8	)		103.1
Effect of exchange rates on cash and cash equivalents		(0.1	)		0.4			(0.4	)		0.2

Net decrease (increase) in cash and cash equivalents	$	(69.6	)	$	18.4
Net increase in cash and cash equivalents							$	(126.2	)	$	(139.9	)

For the ~~nine~~three months ended ~~September 30, 2012,~~March 31, 2013, cash flow from operations of ~~$597.0~~$258.0 million exceeded our net income of ~~$481.7~~$188.9 million for two primary reasons:

Working capital is comprised primarily of accounts receivable, ~~inventory,~~inventories, deferred revenue and other liabilities. Accounts receivable ~~increased~~decreased by ~~$34.8~~$25.3 million ~~or 13%~~ during the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 reflecting timing of our system ~~sales. Inventory~~sales and strong collections. Inventories increased by ~~$11.4~~$15.8 million ~~or 12%~~ during the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 primarily due to our business growth and expanded product offerings. Other liabilities including accounts payable, accrued compensation and employee benefits, and other accrued liabilities decreased by ~~$11.3~~$12.7 million during the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 primarily due to the payments of ~~2011~~2012 incentive compensation and the purchase of stock by employees under the Employee Stock Purchase Plan during the ~~nine~~three months ended ~~September 30, 2012. Deferred revenue increased by $16.3 million or 11% due to the increase in the number of installed systems for which service contracts exist.~~March 31, 2013.

For the ~~nine~~three months ended ~~September 30, 2011,~~March 31, 2012, cash flow from operations of ~~$463.9~~$165.0 million exceeded our net income of ~~$343.9~~$143.5 million for two primary reasons:

Working capital is comprised primarily of accounts receivable, ~~inventory,~~inventories, deferred revenue and other liabilities. ~~Accounts receivable increased~~The increase in inventories by ~~$18.2~~$6.0 million ~~or 7%~~ during the ~~nine~~three months ended ~~September 30, 2011 reflecting timing of system sales. Inventory increased by $21.8 million or 25% during the nine months ended September 30, 2011~~March 31, 2012 due to our business growth and expanded product ~~offerings,~~offerings. Prepaid and ~~safety stock acquired for key components. Deferred revenue~~other assets increased ~~$17.7~~by $3.4 million ~~or 14%~~ during the ~~nine~~three months ended ~~September 30, 2011~~March 31, 2012 primarily due to payment of estimated taxes. Other liabilities including accounts payable, accrued compensation and employee benefits, and other accrued liabilities decreased by $24.0 million during the three months ended March 31, 2012 primarily due to the ~~increase in~~payments of 2011 incentive compensation and the ~~number~~purchase of ~~installed systems for which service contracts exist.~~stock by employees under the Employee Stock Purchase Plan during the three months ended March 31, 2012.

Net cash used in investing activities during the ~~nine~~three months ended ~~September 30,~~March 31, 2013 consisted of purchases of investments (net of proceeds from sales and maturities of investments) of $331.3 million and purchase of property and equipment of $16.7 million. Net cash used in investing activities during the three months ended March 31, 2012 consisted of purchases of investments (net of proceeds from sales and maturities of investments) of ~~$616.9~~$359.9 million and purchase of property and equipment, intellectual property and business of ~~$68.1~~$48.3 million, including the increase in acquisition-related restricted cash. Net cash used in investing activities during the nine months ended September 30, 2011 consisted primarily of purchases of investments (net of proceeds from sales and maturities of investments) of $272.9 million and property, plant and equipment and acquisitions of intellectual property of $67.7 million. The $67.7 million of property, plant and equipment and acquisitions of intellectual property includes $33.1 million in cash used when we completed our purchase of land and buildings near our headquarters in Sunnyvale, California. 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, cash deposits and money market funds. We are not a capital intensive business.

Net cash ~~provided by~~used in financing activities during the ~~nine~~three months ended ~~September 30, 2012 consisted~~March 31, 2013 was primarily ~~of proceeds from stock option exercises and employee stock purchases of $176.5 million and excess tax benefits from stock-based compensation of $54.7 million, offset by $185.1 million used in~~due to the repurchase of ~~approximately 372,155~~299,112 shares of our common stock through open market ~~transactions. Net cash used in financing activities during the nine months ended September 30, 2011 consisted primarily~~transactions of ~~$331.8~~$145.7 million, ~~for the repurchase of approximately 1.0 million shares of our common stock through open market transactions,~~ offset by proceeds from stock option exercises and employee stock purchases of ~~$181.6~~$89.3 million and excess tax benefits from stock-based compensation of ~~$44.9~~$20.6 million. Net cash provided by financing activities during the three months ended March 31, 2012 was primarily due to proceeds from stock option exercises and employee stock purchases of $82.9 million and excess tax benefits from stock-based compensation of $20.2 million.

Our cash 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 continue to devote substantial resources to expand procedure adoption and acceptance of our products. Based upon our business model, we anticipate that we will continue to be able to fund future growth through cash provided from operations. We believe that our current cash, cash equivalents and investment balances, together with income to be derived from the sale of our products, will be sufficient to meet our liquidity requirements for the foreseeable future.

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 U.S. GAAP. 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. 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, ~~2011.~~

There have been no material changes in our market risk during the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, ~~2011.~~2012.

~~Conclusion Regarding the Effectiveness~~Evaluation 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~~principal executive officer and ~~Chief Financial Officer,~~principal 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~~principal executive officer and ~~Chief Financial Officer,~~principal 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~~principal executive officer and ~~Chief Financial Officer~~principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

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

~~From time to time, we may be~~We are involved in a variety of claims, lawsuits, investigations and proceedings relating to securities laws, product liability, patent infringement, contract disputes and other matters relating to various claims that arise from time to time in the normal course of our business. Certain of these lawsuits are described in further detail below. 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 and intend to vigorously defend these ~~actions and that the resolution of these cases~~actions. It is not ~~likely~~possible to predict the outcome of pending or threatened litigation. Nevertheless, it is possible that future legal costs (including settlements, judgments, legal fees and other related defense costs) could have a material adverse effect on our business, financial ~~position or future~~condition, results of ~~operations.~~operations or cash flows. 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.

On August 6, 2010, a purported class action lawsuit entitledPerlmutter v. Intuitive Surgical et ~~al.~~al., No. CV10-3451, was filed against ~~us and~~ seven of our current and former officers and directors in the ~~U.S.~~United States District Court for the Northern District of California. The lawsuit seeks unspecified damages on behalf of a putative class of persons who purchased or otherwise acquired our common stock between February 1, 2008 and January 7, 2009. The complaint alleges that the defendants violated federal securities laws by making allegedly false and misleading statements and omitting certain material facts in our filings with the Securities and Exchange Commission. On February 15, 2011, the Police Retirement System of St. Louis was appointed Lead ~~Plaintiff~~plaintiff in the case pursuant to the Private Securities Litigation Reform Act of 1995. An amended complaint was filed on April 15, 2011, making allegations

substantially similar to the allegations described above. On May 23, 2011 we filed a motion to dismiss the amended complaint. On August 10, 2011 that motion was granted and the action was dismissed; the plaintiffs were given 30 days to file an amended complaint. On September 12, 2011, plaintiffs filed their amended complaint. The allegations contained therein are substantially similar to the allegations in the prior complaint. We filed a motion to dismiss the amended complaint. A hearing occurred on February 16, 2012, and on May 22, 2012 ~~the Company’s~~our motion was granted. The complaint was dismissed with prejudice, and a final judgment was entered in ~~the Company’s~~our favor on June 1, 2012. ~~Plaintiffs~~On June 20, 2012, plaintiffs filed a notice of appeal with the United States Court of Appeals for the Ninth Circuit. The appeal is styled Police Retirement System of St. Louis v. Intuitive Surgical, Inc. et al., No. 12-16430. Plaintiffs filed their opening brief on ~~June 20,~~September 28, 2012. ~~That~~We filed an answering brief on November 13, 2012, and plaintiffs filed a reply brief on December 17, 2012. No oral argument date has been set, and the appeal remains pending.

On August 19, 2010, an alleged ~~shareholder~~stockholder caused a purported ~~shareholder’s~~stockholder’s derivative lawsuit entitledHimmel v. Smith et ~~al.~~al., No. 1-10-CV-180416, to be filed in the Superior Court of California for the County of Santa Clara naming us as a nominal defendant, and naming 14 of our current and former officers and directors as defendants. The lawsuit seeks to recover, for our benefit, unspecified damages purportedly sustained by us in connection with allegedly misleading statements and/or omissions made in connection with our financial reporting for the period between February 1, 2008 and January 7, 2009. It also seeks a series of changes to our corporate governance policies and an award of ~~attorney’s~~attorneys’ fees. On September 15, 2010, another purported ~~shareholder~~stockholder filed an essentially identical lawsuit entitledApplebaum v. Guthart et ~~al.~~al., No. 1-10-CV-182645, in the same court against 15 of the our current and former officers and directors. On October 5, 2010 the court ordered that the two cases be consolidated for all purposes. By agreement with the plaintiffs, all activity in the case has been stayed pending the results of the appeal in the purported shareholder class action lawsuit discussed above.

Plaintiffs’ attorneys are engaged in growing and well-funded national advertising campaigns soliciting clients who have undergoneda Vinci surgery and claim to have suffered an injury. The Company has seen a substantial increase in these claims, however it has only received detailed information regarding a small number of them. In an effort to provide an orderly process for evaluating claims before they result in costly litigation, we have entered into tolling agreements with certain plaintiff’s counsel acting on behalf of such claimants. The tolling agreements provide that the statute of limitations for each individual will be tolled for a period of three to six months in exchange for the individual’s agreement that, if he or she ultimately files a lawsuit, it will be filed in certain agreed upon venues. The tolling agreements provide the parties and their legal counsel with additional time to evaluate the claims, to explore whether the claims have merit and whether they can be resolved without litigation. We do not currently know how many of such individuals will ultimately file lawsuits nor are we able at this time to estimate the financial implications of their claims or predict the final disposition of such claims. We intend to vigorously defend lawsuits that are ultimately filed.

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, ~~2011.~~2012, other than the following:

WE ARE SUBJECT TO PRODUCT LIABILITY AND NEGLIGENCE CLAIMS RELATING TO THE USE OF OUR PRODUCTS THAT COULD BE EXPENSIVE, DIVERT MANAGEMENT’S ATTENTION AND HARM OUR BUSINESS.

Our business exposes us to significant risks of product liability claims, which are inherent to the medical device industry. Product liability claims may be brought by individuals or by groups seeking to represent a class. We currently are subject to product liability claims, which are described in more detail under Part II, “Item 1., Legal Proceedings.,” and which have been brought by individuals alleging that they have sustained personal injuries and/or death as a result of purported product defects, the alleged failure to warn, and/or the alleged inadequate training by us of physicians regarding the use of theda Vinci Surgical System. The individuals who have brought the product liability claims seek recovery for the alleged personal injuries and in many cases, punitive damages. Current product liability claims have resulted in negative publicity regarding our Company, and these and any other product liability or negligence claims or product recalls also could harm our reputation. In addition, there have been articles published and papers written questioning patient safety and efficacy associated withda Vinci surgery, the cost ofda Vinci surgery relative to other disease management methods, and the adequacy of surgeon training. Negative publicity, whether accurate or inaccurate, concerning our products or our Company could reduce market acceptance of our products and could result in decreased product demand and a decline in revenues. In addition, significant negative publicity could result in an increased number of product liability claims, regardless of whether these claims are meritorious. The number of claims could be further increased by plaintiffs’ law firms that use a wide variety of media to advertise their services and solicit clients for product liability cases against the Company.

The outcome of product liability litigation is inherently uncertain and difficult to quantify, and the magnitude of potential damages, if any, may not be known for a substantial period of time. Although we maintain product liability insurance, the coverage limits of these policies may not be adequate to cover current or future claims. Particularly as sales of our products increase, we may be unable to maintain product liability insurance in the future at satisfactory rates or in adequate amounts. In addition, current or future product liability claims, regardless of their merit or eventual outcome, could result in significant legal costs (including settlements, judgments, legal fees and other related defense costs). It is possible that future legal costs could have a material adverse effect on our business, financial condition, results of operations or cash flows.

UNFAVORABLE RESULTS OF LEGAL PROCEEDINGS COULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION.

We are and may become subject to various legal proceedings and claims that arise in or outside the ordinary course of business. Certain current lawsuits and pending proceedings are described under Part II, “Item 1., Legal Proceedings.”

The results of these lawsuits and other legal proceedings cannot be predicted with certainty. Accordingly, we cannot determine whether our insurance coverage would be sufficient to cover the costs or potential losses, if any. Regardless of merit, litigation may be both time-consuming and disruptive to our operations and cause significant expense and diversion of management attention. If we do not prevail in the purported class action lawsuit or other legal proceedings, we may be faced with significant monetary damages or injunctive relief against us that could have a material adverse effect on our business, financial condition, results of operations or cash flows.

There were no unregistered sales of equity securities during the period covered by this report.

On March 20, 2013, the Board has authorized an additional $1.0 billion for stock repurchases.

The table below summarizes our stock repurchase activity for the three months ended ~~September 30, 2012:~~March 31, 2013:

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.


~~PART I. FINANCIAL INFORMATION~~		Page No.

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited):

	Condensed consolidated balance sheets as of ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011~~2012		3

	Condensed consolidated statements of comprehensive income for the ~~three-and nine-month periods~~three -months ended ~~September 30,~~March 31, 2013 and March 31, 2012 ~~and September 30, 2011~~		4

	Condensed consolidated statements of cash flows for the ~~nine-month periods~~three -months ended ~~September 30,~~March 31, 2013 and March 31, 2012 ~~and September 30, 2011~~		5

	Notes to condensed consolidated financial statements ~~(unaudited)~~		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1413

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		2623

Item 4.	Controls and Procedures		2623

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		2624

Item 1A.	Risk Factors		2725

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		2726

Item 3.	Defaults Upon Senior Securities		2726

Item 4.	Mine Safety Disclosures		2726

Item 5.	Other Information		2726

Item 6.	Exhibits		2827

	Signature		2928


Fiscal Period	Total Number of Shares Repurchased		Average Price Paid Per Share		Total Number of Shares Purchased As Part of a Publicly Announced Program		Approximate Dollar Value of Shares That May Yet be Purchased Under the Program
July 1, 2012 to July 31, 2012		11,866	$	489.63		11,866	$	547.1 million
August 1, 2012 to August 31, 2012		198,592	$	497.03		198,592	$	448.4 million
September 1, 2012 to September 30, 2012		132,591	$	492.67		132,591	$	383.1 million

Total during quarter ended September 30, 2012		343,049	$	495.09		343,049	$	383.1 million


Fiscal Period	Total Number of Shares Repurchased		Average Price Paid Per Share		Total Number of Shares Purchased As Part of a Publicly Announced Program		Approximate Dollar Amount of Shares That May Yet be Purchased Under the Program
Jan 1, 2013 to Jan 31, 2013		—	$	—		—	$	329.8 million
Feb 1, 2013 to Feb 28, 2013		—	$	—		—	$	329.8 million
Mar 1, 2013 to Mar 31,2013		299,112	$	487.24		299,112	$	1,184.1 million

Total during quarter ended March 31, 2013		299,112	$	487.24		299,112	$	1,184.1 million


Exhibit Number		Exhibit 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		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Intuitive Surgical, ~~Inc~~Inc. (incorporated by reference to Exhibit A to Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on March 1, 2012).

3.4		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 April 24, 2012).

~~10.1~~		~~2009 Employment Commencement Incentive Plan adopted October 22, 2009.~~

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 ~~September 30, 2012,~~March 31, 2013, 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 ~~Comprehensive Income, (iv) the unaudited Condensed Consolidated Statements of~~ Cash Flows, and ~~(v)~~(iv) Notes to Condensed Consolidated Financial Statements (unaudited), tagged at Level I through IV.


	March 31, 2013		December 31, 2012
Raw materials	$	43.8	$	41.2
Work-in-process		4.0		4.4
Finished goods		87.7		75.9

Total inventories	$	135.5	$	121.5


	Three Months Ended March 31, 2013
	Gains (Losses) on Hedge Instruments			Unrealized Gains (Losses) on Available-for- Sale Securities		Foreign Currency Translation Gains (Losses)			Total
Beginning balance	$	—		$	6.2	$	0.4		$	6.6
Other comprehensive income before reclassifications		1.4			0.9		(0.4	)		1.9
Reclassified from accumulated other comprehensive income		(0.6	)		0.2		—			(0.4	)

Net current-period other comprehensive income		0.8			1.1		(0.4	)		1.5

Ending balance	$	0.8		$	7.3	$	—		$	8.1


	Three Months Ended March 31, 2012
	Gains (Losses) on Hedge Instruments			Unrealized Gains (Losses) on Available-for- Sale Securities		Foreign Currency Translation Gains (Losses)			Total
Beginning balance	$	—		$	1.1	$	(0.2	)	$	0.9
Other comprehensive income before reclassifications		(1.1	)		0.9		0.3			0.1
Reclassified from accumulated other comprehensive income		0.3			0.2		—			0.5

Net current-period other comprehensive income		(0.8	)		1.1		0.3			0.6

Ending balance	$	(0.8	)	$	2.2	$	0.1		$	1.5


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)

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