NOTE 1. DESCRIPTION OF BUSINESS

Intuitive Surgical, Inc. designs, manufactures, and markets the da Vinci Surgical System, which is an advanced surgical system that the Company believes represents a new generation of surgery. The da Vinci Surgical System consists of a surgeon’s console or consoles, a patient-side cart, a high performance vision system and proprietary “wristed” instruments. The da Vinci Surgical System seamlessly translates the surgeon’s natural hand movements on instrument controls at the console into corresponding micro-movements of instruments positioned inside the patient through small puncture incisions, or ports. The Company markets its products through sales representatives in the United States, and through a combination of sales representatives and distributors in its international markets.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements (“financial statements”) of Intuitive Surgical, Inc., and its wholly-owned subsidiaries (collectively, the “Company”) have been prepared on a consistent basis with the December 31, 2008 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth herein. These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), and, therefore, omit certain information and footnote disclosure necessary to present the statements in accordance with accounting principles generally accepted in the United States. 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, 2008, which was filed on February 6, 2009. The results of operations for the first nine months of fiscal 2009 are not indicative of the results to be expected for the entire fiscal year or any future periods.

Subsequent Events Evaluation

Management has reviewed and evaluated material subsequent events from the balance sheet date of September 30, 2009 through the financial statements issue date of October 21, 2009. All appropriate subsequent event disclosures, if any, have been made in notes to our unaudited Condensed Consolidated Financial Statements.

Foreign Currency and Other Hedging Instruments

The accounts of the Company’s foreign subsidiaries are translated in accordance with Accounting Standards Codification (ASC) 830, “Foreign Currency Matters.” The Company has determined that the functional currency of its subsidiaries should be their local currency, with the exception of its subsidiaries in the Cayman Islands and Switzerland, whose functional currency is the U.S. dollar. For subsidiaries whose local currency is their functional currency, their assets and liabilities are translated into U.S. dollars at exchange rates at the balance sheet date and revenues and expenses are translated using average exchange rates in effect during the quarter. Gains and losses from foreign currency translation are included in accumulated other comprehensive income (loss) within stockholders’ equity in the accompanying unaudited condensed consolidated balance sheets.

For all non functional currency account balances, the re-measurement of such balances to the functional currency will result in either a foreign exchange gain or loss which is recorded to interest and other income, net in the same accounting period that the re-measurement occurred.

In January 2009, the Company began a hedging program to address the risk associated with non-functional currency (primarily Euro) financial statement exposures. The Company accounts for these instruments in accordance with ASC 815, “Derivatives and Hedging,” which requires that every derivative instrument be recorded on the balance sheet as either an asset or a liability measured at its fair value as of the reporting date. Derivative valuations are determined using Level 2 inputs (as defined on Note 4), including closing currency prices and observable inputs other than quoted prices, including interest rates, forward points and credit risk.

The Company sells products to certain European customers in foreign currencies. Fluctuations in exchange rates can change the Company’s U.S. dollar equivalent revenue and hence the Company’s U.S. dollar earnings. The Company hedges a portion of forecasted foreign currency denominated sales (primarily Euro-denominated) utilizing foreign exchange forward contracts. These transactions are designated as cash flow hedges and are accounted for under the hedge accounting provisions of ASC 815. The effective portion of the hedge gain or loss is reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into net revenues when the hedged exposure affects earnings. Any ineffective portions of related gains or losses are recorded in the statements of income immediately. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company will reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to interest and other income, net on its consolidated statement of income.

The Company also hedges the net recognized non-functional currency balance sheet exposures with foreign exchange forward contracts to reduce the risk that its earnings and cash flows will be adversely affected by changes in exchange rates. These derivative instruments are carried at fair value with changes in the fair value recorded to interest and other income, net on the Company’s consolidated statement of income and are intended to offset gains and losses on the assets and liabilities being hedged.

The bank counterparties to the foreign exchange forward contracts expose the Company to credit-related losses in the event of their nonperformance. However, to mitigate that risk, the Company only contracts with counterparties that meet certain minimum requirements under its counterparty risk assessment process. The Company monitors ratings and potential downgrades on at least a quarterly basis. Based on its on-going assessment of counterparty risk, the Company will adjust its exposure to various counterparties.

Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three and nine months ended September 30, 2009, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, that are of significance, or potential significance to the Company.

Adopted Accounting Pronouncements

Effective July 1, 2009, the Company adopted The “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles (ASC 105). This standard establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. The Company began using the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on the Company’s consolidated financial statements.

Effective April 1, 2009, the Company adopted three accounting standard updates which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC 320-10-65, changes accounting requirements for other-than-temporary-impairment (OTTI) for debt securities by replacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it will not be required to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates did not have any impact on the Company’s consolidated financial statements.

Effective April 1, 2009, the Company adopted a new accounting standard for subsequent events, as codified in ASC 855-10. The update modifies the names of the two types of subsequent events either as recognized subsequent events (previously referred to in practice as Type I subsequent events) or non-recognized subsequent events (previously referred to in practice as Type II subsequent events). In addition, the standard modifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). It also requires the disclosure of the date through which subsequent events have been evaluated. The update did not result in significant changes in the practice of subsequent event disclosures, and therefore the adoption did not have any impact on the Company’s consolidated financial statements.

Effective January 1, 2009, the Company adopted a new accounting standard update from the Emerging Issues Task Force (EITF) consensus regarding the accounting of defensive intangible assets. This update, as codified in ASC 350-30, clarifies accounting for defensive intangible assets subsequent to initial measurement. It applies to acquired intangible assets which an entity has no intention of actively using, or intends to discontinue use of, the intangible asset but holds it to prevent others from obtaining access to it (i.e., a defensive intangible asset). Under this update, a consensus was reached that an acquired defensive asset should be accounted for as a separate unit of accounting (i.e., an asset separate from other assets of the acquirer); and the useful life assigned to an acquired defensive asset should be based on the period during which the asset would diminish in value. The adoption did not have any impact on the Company’s consolidated financial statements.

Effective January 1, 2009, the Company adopted an accounting standard update regarding the determination of the useful life of intangible assets. As codified in ASC 350-30-35, this update amends the factors considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under intangibles accounting. It also requires a consistent approach between the useful life of a recognized intangible asset under prior business combination accounting and the period of expected cash flows used to measure the fair value of an asset under the new business combinations accounting (as currently codified under ASC 850). The update also requires enhanced disclosures when an intangible asset’s expected future cash flows are affected by an entity’s intent and/or ability to renew or extend the arrangement. The adoption did not have any impact on the Company’s consolidated financial statements.

Effective January 1, 2009, the Company adopted an accounting standard update that required additional quantitative disclosures (provided in tabular form) and qualitative disclosures for derivative instruments. As codified in ASC 815-10, the required disclosures include how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows; the relative volume of derivative activity; the objectives and strategies for using derivative instruments; the accounting treatment for those derivative instruments formally designated as the hedging instrument in a hedge relationship; and the existence and nature of credit-risk-related contingent features for derivatives. This accounting standard update does not change the accounting treatment for derivative instruments. Since this update only required additional disclosure, the Company has included the additional disclosures required effective January 1, 2009.

In February 2008, the FASB issued an accounting standard update that delayed the effective date of fair value measurements accounting for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of the first quarter of fiscal 2009. These include goodwill and other non-amortizable intangible assets. The Company adopted this accounting standard update effective January 1, 2009. The adoption of this update to non-financial assets and liabilities, as codified in ASC 820-10, did not have any impact on the Company’s consolidated financial statements.

Effective January 1, 2009, the Company adopted a new accounting standard update regarding business combinations. As codified under ASC 805, this update requires an entity to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. For Intuitive, this accounting update was effective on a prospective basis for all business combinations for which the acquisition date is on or after January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired contingencies under ASC 805-740. With the adoption of this accounting standard update, any tax related adjustments associated with acquisitions that closed prior to January 1, 2009 will be recorded through income tax expense, whereas the previous accounting treatment would require any adjustment to be recognized through the purchase price. The adoption did not have any impact on the Company’s consolidated financial statements.

In June 2008, the FASB ratified the consensus reached on EITF and issued an accounting standard update. As codified in ASC 815-40, Derivatives and Hedging, this update provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. The update applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative, for purposes of determining whether that instrument or embedded feature qualifies for the first part of the scope exception under ASC 815-10-15-2. The update also applies to any freestanding financial instrument that is potentially settled in an entity’s own stock, regardless of whether the instrument has all the characteristics of a derivative under previous derivative GAAP accounting, for purposes of determining whether the instrument is within the scope of derivative accounting. This accounting update was effective beginning first quarter of fiscal 2009. The Company applied this update in its accounting for the share repurchase program. See Note 7 for further discussion.

 

New Accounting Pronouncements

In September 2009, the FASB issued Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21). The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently assessing the future impact of this new accounting update to its consolidated financial statements.

In August 2009, the FASB issued Update No. 2009-05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value” (ASU 2009-05). ASU 2009-05 amends ASC 820, Fair Value Measurements and Disclosures, of the FASB Accounting Standards Codification (the Codification) to provide further guidance on how to measure the fair value of a liability, an area where practitioners have been seeking further guidance. It primarily does three things: 1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is not available, 2) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and 3) clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This standard is effective beginning fourth quarter of 2009 for the Company. The adoption of this standard update is not expected to impact the Company’s consolidated financial statements.

NOTE 3. INVESTMENTS

The following table summarizes the Company’s investments (in thousands):

 

		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses				Fair Value
September 30, 2009
Cash and cash equivalents		$	206,095		$	—		$	—			$	206,095
Short-term investments:
Commercial paper		$	13,670		$	—		$	—			$	13,670
Municipal notes			81,074			85			(7,780	)			73,379
U.S. corporate debt			123,811			1,007			(45	)			124,773
U.S. treasuries			29,666			253			—				29,919
U.S. government agencies			56,593			590			(2	)			57,181
Put option			—			7,780			—				7,780
Total short-term investments		$	304,814		$	9,715		$	(7,827	)		$	306,702
Long-term investments:
Municipal notes		$	124,970		$	1,366		$	(4,012	)		$	122,324
U.S. corporate debt			235,100			2,425			(838	)			236,687
U.S. Treasuries			24,000			211			—				24,211
U.S government agencies			127,064			913			(12	)			127,965
Total long-term investments		$	511,134		$	4,915		$	(4,862	)		$	511,187
Total cash, cash equivalents and investments		$	1,022,043		$	14,630		$	(12,689	)		$	1,023,984
December 31, 2008
Cash and cash equivalents		$	194,621		$	2		$	—			$	194,623
Short-term investments:
Commercial paper		$	34,186		$	81		$	—			$	34,267
U.S. corporate debt			109,048			590			(582	)			109,056
U.S. treasuries			12,408			145			—				12,553
U.S. government agencies			100,032			858			(20	)			100,870
Total short-term investments		$	255,674		$	1,674		$	(602	)		$	256,746
Long-term investments:
Municipal notes		$	143,088		$	170		$	(15,597	)		$	127,661
U.S. corporate debt			166,215			1,152			(3,970	)			163,397
U.S. treasuries			21,987			648			—				22,635
U.S. government agencies			123,458			1,748			—				125,206
Put option			—			11,605			—				11,605
Total long-term investments		$	454,748		$	15,323		$	(19,567	)		$	450,504
Total cash, cash equivalents and investments		$	905,043		$	16,999		$	(20,169	)		$	901,873

 

The following is a summary of the amortized cost and estimated fair value of the Company’s cash, cash equivalents and investments at September 30, 2009 by maturity date (in thousands):

 

		Amortized Cost			Fair Value
Mature in less than one year		$	510,909		$	512,797
Mature in one to five years			487,634			491,699
Mature in more than five years			23,500			19,488
Total		$	1,022,043		$	1,023,984

During the three and nine months ended September 30, 2009 and 2008, realized gains or losses recognized on the sale of investments were not significant. As of September 30, 2009 and December 31, 2008, net unrealized gains (losses) on available-for-sale securities, net of tax, of $1.3 million and ($3.2) million, respectively, were included in accumulated other comprehensive income (loss) in the accompanying unaudited Condensed Consolidated Balance Sheets. At September 30, 2009, the Company evaluated its net unrealized losses, the majority of which are from auction-rate securities, and determined them to be temporary. Factors considered in determining whether a loss is temporary included the length of time and extent to which the investments fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, extent of the loss related to credit of the issuer, the expected cash flows from the security, the Company’s intent to sell the security and whether or not the Company will be required to sell the security before the recovery of its amortized cost.

NOTE 4. FAIR VALUE MEASUREMENTS

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, available-for-sale securities, trading securities and foreign currency derivatives. The fair value of these financial assets and liabilities was determined based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

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

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

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

 

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities (cash equivalents and investments) measured at fair value on a recurring basis as of September 30, 2009 (in thousands):

 

		Fair Value Measurements at September 30, 2009 Using
Assets		Level 1			Level 2			Level 3			Total
Money Market funds (1)		$	158,433		$	—		$	—		$	158,433
U.S. Treasuries (3)			54,130			—			—			54,130
Commercial paper (2)			—			34,114			—			34,114
Corporate debt (3)			—			361,459			—			361,459
U.S. government agencies (3)			—			185,146			—			185,146
Municipal notes (3)			—			113,496			82,207			195,703
Put option (4)			—			—			7,780			7,780
Total assets measured at fair value		$	212,563		$	694,215		$	89,987		$	996,765
Liabilities
Foreign Currency Derivatives (5)		$	—		$	896		$	—		$	896
Total liabilities measured at fair value		$	—		$	896		$	—		$	896

 

(1)	Included in cash and cash equivalents on our unaudited Condensed Consolidated Balance Sheet.

(2)	Included in both cash and cash equivalents and short-term investments on our unaudited Condensed Consolidated Balance Sheet.

(3)	Included in both short-term and long-term investments on our unaudited Condensed Consolidated Balance Sheet.

(4)	Included in short-term investments on our unaudited Condensed Consolidated Balance Sheet.

(5)	Included in other accrued liabilities on our unaudited Condensed Consolidated Balance Sheet.

The fair value of these financial assets was determined using the following level of inputs as of December 31, 2008 and are presented on the Company’s unaudited Condensed Consolidated Balance Sheets as follows (in thousands):

 

		Fair Value Measurements at December 31, 2008 Using
Assets		Level 1			Level 2			Level 3			Total
Money Market funds (1)		$	156,729		$	—		$	—		$	156,729
U.S. Treasuries (2)			45,188			—			—			45,188
Commercial paper (4)			—			37,465			—			37,465
Corporate debt (3)			—			272,453			—			272,453
U.S. government agencies (2)			—			226,077			—			226,077
Municipal notes (5)			—			48,590			79,070			127,660
Put option (5)			—			—			11,605			11,605
Total assets measured at fair value		$	201,917		$	584,585		$	90,675		$	877,177

 

(1)	Included in cash and cash equivalents on our unaudited Condensed Consolidated Balance Sheet.

(2)	Included in cash and cash equivalents, short-term and long-term investments on our unaudited Condensed Consolidated Balance Sheet.

(3)	Included in both short-term and long-term investments on our unaudited Condensed Consolidated Balance Sheet.

(4)	Included in both cash and cash equivalents and short-term investments on our unaudited Condensed Consolidated Balance Sheet.

(5)	Included in long-term investments on our unaudited Condensed Consolidated Balance Sheet.

 

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

 

		Fair Value Measurements at Reporting Date Using Significant Unobservable Inputs (Level 3)
		Put Option				ARS
Balance at January 1, 2009		$	11,605			$	79,070
Total gains or (losses):
Included in other comprehensive income (loss)			—				(454	)
Included in earnings			(3,675	)			3,675
Balance at March 31, 2009			7,930				82,291
Sales/Maturities			—				(200	)
Total gains or (losses):
Included in other comprehensive income (loss)			—				673
Included in earnings			(239	)			239
Balance at June 30, 2009		$	7,691			$	83,003
Sales/Maturities			—				(450	)
Total gains or (losses):
Included in other comprehensive income (loss)			—				(257	)
Included in earnings			89				(89	)
Balance at September 30, 2009		$	7,780			$	82,207

Level 3 assets consist of municipal bonds with an auction reset feature (ARS) whose underlying assets are student loans which are substantially backed by the federal government. 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 market value. Accordingly, the estimated fair value of the ARS no longer approximates par value. A large portion of these ARS are held by UBS AG (UBS), one of the Company’s investment providers. In November 2008, the Company accepted an offer (the “Right”) from UBS entitling the Company to sell at par value auction-rate securities originally purchased from UBS (approximately $70.5 million, par value) at anytime during a two-year period from June 30, 2010 through July 2, 2012. Although the Company expects to sell its ARS under the Right, if the Right is not exercised before July 2, 2012, it will expire and UBS will have no further rights or obligation to buy the Company’s ARS. The Company has valued the ARS and put option using a discounted cash flow model based on Level 3 assumptions. The assumptions used in valuing the ARS and the put option include estimates of, based on data available as of September 30, 2009, interest rates, timing and amount of cash flows, credit and liquidity premiums, expected holding periods of the ARS, loan rates per the UBS Rights offering and bearer risk associated with UBS’s financial ability to repurchase the ARS beginning June 30, 2010. The Company intends to exercise the Right from UBS on June 30, 2010 and as a result has classified these ARS as short-term investments as of September 30, 2009.

Foreign currency derivative

On a monthly basis, the Company enters into foreign currency forward contracts with one to seven month terms. It does not purchase derivatives for trading purposes. As of September 30, 2009, the Company had the notional amount of €11.0 million and £3.8 million outstanding currency forward contracts that were entered into to hedge non-functional currency denominated net monetary assets and €8.0 million to hedge Euro denominated sales.

The fair value of derivative instruments in the unaudited condensed consolidated balance sheet as of September 30, 2009 was approximately $0.9 million in liabilities. The effect of derivative instruments designated as cash flow hedges on the Company’s unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2009 was not significant. The Company recognized a loss of approximately $0.6 million for derivative instruments not designated as hedges during the three and nine months ended September 30, 2009.

 

NOTE 5. INVENTORY

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

 

		September 30, 2009			December 31, 2008
Inventory
Raw materials		$	16,096		$	19,901
Work-in-process			3,341			4,097
Finished goods			37,209			39,462
Total		$	56,646		$	63,460

NOTE 6. STOCKHOLDERS’ EQUITY

Comprehensive Income

The components of comprehensive income are as follows (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Net income, as reported		$	64,524			$	57,594			$	155,054			$	153,557
Foreign currency translation adjustments			165				(282	)			231				229
Unrealized gains (losses) on derivative instruments, net of tax:
Unrealized gains (losses) on derivative			(566	)			—				(1,262	)			—
Reclassification adjustment for (gain) loss on derivative instruments recognized during the period			242				—				678				—
Unrealized gains (losses) on available-for-sale securities, net of tax:
Unrealized gains (losses) arising during period			570				(4,871	)			4,501				(11,651	)
Total other comprehensive income		$	64,935			$	52,441			$	159,202			$	142,135

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

 

		September 30, 2009				December 31, 2008
Foreign currency translation adjustments		$	458			$	227
Accumulated net unrealized gains (losses) on derivatives, net of tax			(584	)			—
Accumulated net unrealized gains (losses) on available-for-sale securities, net of tax			1,331				(3,170	)
Total accumulated other comprehensive income (loss)		$	1,205			$	(2,943	)

 

Stock Option Plans

A summary of stock option activity under the Plans for the nine months ended September 30, 2009 is presented as follows (in thousands, except per share amounts):

 

					Stock Options Outstanding
		Shares Available for Grant			Number Outstanding			Weighted Average Exercise Price Per Share
Balance at December 31, 2008 (with 1,791 options exerciseable at a weighted-average exercise price of $100.71 per share and with 3,551 options vested and expected to vest at a weighted- average exercise price of $160.68 per share)		8,449			3,749			$	163.25
Options authorized		2,046
Options granted		(1,573	)		1,573				114.62
Options exercised		—			(320	)			80.35
Options forfeited/expired		143			(143	)			201.56
Balance at September 30, 2009 (with 2,302 options exerciseable at a weighted-average exercise price of $128.99 per share and with 4,602 options vested and expected to vest at a weighted-average exercise price of $150.50 per share)		9,065			4,859			$	151.84

Employee Stock Purchase Plan (ESPP)

Under the Employee Stock Purchase Plan, employees purchased approximately 37,248 shares for $3.3 million and 39,100 shares for $4.3 million during the three months ended September 30, 2009 and 2008, respectively and 92,433 shares for $8.0 million and 85,850 shares for $8.9 million during the nine months ended September 30, 2009 and 2008, respectively.

 

Stock-based Compensation

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

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2009			2008			2009			2008
Cost of sales - products		$	1,957		$	1,722		$	5,697		$	4,627
Cost of sales - services			1,694			1,378			4,924			3,648
Total cost of sales			3,651			3,100			10,621			8,275
Selling, general and administrative			15,524			13,197			45,390			34,567
Research and development			5,422			4,668			15,968			12,405
Stock-based compensation expense before income taxes			24,597			20,965			71,979			55,247
Income taxes			7,233			7,491			21,375			19,838
Stock-based compensation expense after income taxes		$	17,364		$	13,474		$	50,604		$	35,409

The fair value of each option grant and the fair value of the option component of the Employee Stock Purchase Plan 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 September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Stock Options
Average risk free interest rate			2.47	%			3.20	%			1.73	%			2.82	%
Average expected term (years)			4.8				5.4				5.3				5.0
Average expected volatility			46	%			49	%			56	%			51	%
Weighted average fair value at grant date		$	87.92			$	131.45			$	57.11			$	142.01
Total stock-based compensation expense (000’s)		$	22,862			$	19,818			$	67,121			$	52,154
ESPP
Average risk free interest rate			0.69	%			2.24	%			0.63	%			2.18	%
Average expected term (years)			1.3				1.3				1.3				1.3
Average expected volatility			47	%			50	%			56	%			54	%
Weighted average fair value at grant date		$	79.89			$	115.13			$	51.23			$	108.08
Total stock-based compensation expense (000’s)		$	1,735			$	1,147			$	4,858			$	3,093