##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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Form 10-K



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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACTS OF 1934


For the fiscal year ended: December 31,
2003

Commission File Number: 1-10694



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VISX, Incorporated

(Exact name of Registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 06-1161793                                 
|(State or other Jurisdiction
    of Incorporation or Organization) |  | (I.R.S. Employer
    Identification Number)

3400 Central Expressway

Santa Clara, California 95051


(Address of Principal Executive
Offices)


(408) 733-2020

(Registrants Telephone Number, including
Area Code)


Securities registered pursuant to
Section 12(b) of the Act:

|                                                                               |  |                                                                  
|------------------------------------------------------------------------------ |  | -----------------------------------------------------------------
|Common Stock, $0.01 Par Value
    Common Stock Purchase Rights(Title of Class) |  | New York Stock Exchange(Name of Exchange on Which
    Registered)

Securities registered pursuant to
Section 12(g) of the Act:

None.




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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 þ     No o

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     o

Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o

The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day
of the registrant most recently completed second fiscal quarter
was $832,000,000. Shares of common stock held by each executive
officer, director, and each person who beneficially owns 5% or
more of the outstanding common stock, have been excluded because
such persons may, under certain circumstances, be deemed to be
affiliates. The determination of an affiliate or an executive
officer status is not necessarily conclusive for other purposes.

The number of Common Shares outstanding as of February 24,
2004 was 48,624,823.

DOCUMENTS INCORPORATED BY REFERENCE





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VISX, INCORPORATED

TABLE OF CONTENTS


|             |  |                                                                                               |    |      |    | 
|------------ |  | --------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|             |  |                                                                                               |    | Page
|PART I      
|Item 1.      |  | Business                                                                                      |    |      | 3  | 
|Item 2.      |  | Properties                                                                                    |    |      | 11 | 
|Item 3.      |  | Legal Proceedings                                                                             |    |      | 11 | 
|Item 4.      |  | Submission of Matters to a Vote of Security
    Holders                                       |    |      | 11 | 
|Item 4A.     |  | Executive Officers of the Registrant                                                          |    |      | 11 | 
|PART II     
|Item 5.      |  | Market for VISXs Common Equity and Related
    Stockholder Matters                           |    |      | 13 | 
|Item 6.      |  | Selected Financial Data                                                                       |    |      | 14 | 
|Item 7.      |  | Managements Discussion and Analysis of
    Financial Condition
    and Results of Operations |    |      | 14 | 
|            
|Item 7A.     |  | Quantitative and Qualitative Disclosures about
    Market Risk                                |    |      | 31 | 
|Item 8.      |  | Financial Statements and Supplementary Data                                                   |    |      | 32 | 
|Item 9.      |  | Changes in and Disagreements With Accountants on
    Accounting and Financial
    Disclosure  |    |      | 51 | 
|            
|Item 9A.     |  | Controls and Procedures                                                                       |    |      | 51 | 
|PART III    
|Item 10.     |  | Directors and Executive Officers of VISX                                                      |    |      | 51 | 
|Item 11.     |  | Executive Compensation                                                                        |    |      | 51 | 
|Item 12.     |  | Security Ownership of Certain Beneficial Owners
    and Management                            |    |      | 51 | 
|Item 13.     |  | Certain Relationships and Related Transactions                                                |    |      | 51 | 
|Item 14.     |  | Principal Accountant Fees and Services                                                        |    |      | 51 | 
|PART IV     
|Item 15.     |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                           |    |      | 52 | 
|SIGNATURES   |  |                                                                                               | 54 |     
|EXHIBIT 21.1
|EXHIBIT 23.1
|EXHIBIT 23.2
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1



NOTE: VISX, VISX STAR, VISXPRESS, VISX STAR 2,
VISX STAR S3, STAR S2, STAR S3, VISX STAR S4, STAR S4, VISX STAR
S3 ActiveTrak, VISX University, CustomVue, PreVue, CUSTOM-CAP,
VSS, VisionKey, WaveScan, and WaveScan WaveFront are trademarks
of VISX, Incorporated.

2



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This report contains forward-looking statements
that involve risks and uncertainties. Our actual results may
differ significantly from the results contemplated by the
forward-looking statements. Please carefully review and consider
the sections of this report under the headings, Legal
Proceedingsand Risk Factorsin
addition to the other information presented in this report, for
a description of the risks and uncertainties facing our business.




PART I




Item 1. Business


The Company


VISX, Incorporated (VISX), a Delaware
corporation organized in 1988, is a leader in the design and
development of proprietary technologies and systems for laser
vision correction. We sell products worldwide and generate the
majority of our revenue through the sale of treatment cards that
are required to perform laser vision correction procedures on
the VISX STARTM Excimer Laser System (VISX STAR
System). We have also licensed our technology to other
excimer laser system companies and generally receive royalties
for the sale of their systems or for procedures that are
performed in the United States using their systems.

According to MarketScope, a refractive surgery
market research group, 50% to 60% of the population in North
America, Western Europe and parts of the Asian Pacific region
requires some type of vision correction. In the United States
alone there are 50 to 60 million laser vision correction
candidates who experience some form of nearsightedness,
farsightedness, or astigmatism. To date, the industry has
penetrated less than 6% of the United States population eligible
for refractive surgery.

We have developed and continue to refine a
substantial proprietary position in system and application
technology relating to the use of lasers for vision correction.
Our strategy is to directly apply existing and new proprietary
technologies to the advancement of systems for vision correction
and to acquire technologies and products that enable us to
expand our presence in the refractive surgery market.

Refractive Vision Disorders

The human eye functions much like a camera. It
incorporates a lens system that focuses light (the cornea and
the lens), a variable aperture system that regulates the amount
of light passing through the eye (the iris), and film that
records the image (the retina). In a properly functioning eye,
entering light is refracted by the cornea and lens, causing the
image to focus on the retina. The retina translates the image
into an electrical signal, which it relays to the optic nerve
and from there to the brain.

In a refractive vision disorder, the cornea is
improperly curved and cannot properly focus (or refract) light
passing through it onto the retina. As a result, the image is
blurred. The three refractive vision disorders most commonly
treated today are:



| |                              |                                                                                          
| | ---------------------------- | -----------------------------------------------------------------------------------------
| | (RIGHT POINTING ARROW GRAPH) | Nearsightedness(also known as myopia): images are
    focused in front of the retina; and
|
| | (RIGHT POINTING ARROW GRAPH) | Farsightedness(also
    known as hyperopia): images are focused behind the retina; and   
|
| | (RIGHT POINTING ARROW GRAPH) | Astigmatism:images
    are not focused at any one point on the retina.                   

Currently, eyeglasses or contact lenses are most
often used to correct these vision disorders.

In addition to these refractive vision disorders,
eyeglasses are often used to correct a vision disorder known as
presbyopia, a condition in which images are not focused
at close range due to age-related loss of accommodation by the
lens of the eye.

Other vision disorders, known as higher order
aberrations, can also result in blurred vision. Higher order
aberrations cannot currently be corrected with eyeglasses or
contact lenses and, until recently, were not measurable. Recent
technological advances enable treatment of these higher order
aberrations with laser vision correction.

3



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Laser Vision Correction

Laser Vision Correction (sometimes abbreviated as
LVC) eliminates or reduces reliance on eyeglasses or
contact lenses. It employs a computerized laser that ablates, or
removes, sub-micron layers of tissue from the surface of the
cornea, reshaping the eye and thereby improving vision.

The VISX STAR System employs an excimer laser
that ablates tissue without generating the heat that can cause
unintended thermal damage to surrounding tissue. The excimer
laser operates in the ultraviolet spectrum and acts on the
surface of the cornea; light from the laser does not penetrate
the eye, so there is no measurable effect in the interior of the
eye.

The pulses of laser light ablate submicron layers
of tissue from the surface of the cornea in a pattern to reshape
the cornea. A micron equals 0.001 of a millimeter, and the depth
of tissue ablated during the procedure typically is less than
the width of a strand of human hair. The average procedure lasts
approximately 15 to 40 seconds and consists of
approximately 150 laser pulses, each of which lasts several
billionths of a second. The cumulative exposure of the eye to
laser light is less than one second. The entire patient visit,
including preparation, application of a topical anesthetic, and
post-operative dressing, generally lasts about 30 minutes
when LVC is performed using the VISX STAR System.

LASIK

Laser Assisted In SituKeratomileusis
(LASIK) is the most common method for performing
LVC. To perform LASIK, a device called a microkeratome is
typically used to create a thin flap on the cornea. The
ophthalmologist folds back the flap, ablates the exposed corneal
surface with the laser, and then returns the flap to its
original position. LASIK has gained in popularity primarily
because there is minimal postoperative discomfort and an almost
immediate improvement in uncorrected vision (vision without the
aid of eyeglasses or contact lenses). Nevertheless, LASIK
requires a high degree of surgical skill and can result in
adverse events, often attributable to the microkeratome.

Standard LASIK

Standard LASIK was introduced in the mid
1990s. In performing Standard LASIK, an ophthalmologist
conducts a traditional eye examination and determines the
prescription required to correct the patients vision. The
prescription is then programmed into the VISX STAR System which
calculates the ablation needed to make a precise corneal
correction to treat nearsightedness, farsightedness, and
astigmatism. Unlike Custom LASIK (see below), Standard LASIK
cannot correct higher order aberrations.

Custom LASIK

The most advanced method of performing laser
vision correction is Custom LASIK. Custom LASIK employs a
diagnostic evaluation of the eye that measures refractive errors
in the patients vision more precisely than previously
available technology. VISXs Custom LASIK, known as
CustomVueTM laser vision correction, uses the VISX
WaveScan WaveFront® System (WaveScan®
System) to obtain comprehensive information about the
imperfections, or refractive errors, of each patients
vision. Refractive errors are displayed by the WaveScan System
in the form of an aberration map that offers a unique pattern
for each persons eye, similar to a fingerprint. The map
displays information about refractive errors that result in
nearsightedness, farsightedness, and astigmatism, as well as
information about higher order aberrations that were not
previously measurable by any other instrument.

The information from the WaveScan System is used
to generate a personalized treatment plan that is digitally
transferred to the VISX STAR System. The ablation derived from
this information is therefore customized to the
individuals eye. Because CustomVue laser vision correction
can correct visual errors that were previously not measurable,
it has the potential to improve vision beyond corrections
obtained with contacts or glasses. VISX clinical data, reported
at the American Society of Cataract and Refractive Surgeons
(ASCRS) in April 2003, show that patients treated with
CustomVue laser vision correction experienced considerable
improvement in vision and generally were more satisfied with
night vision compared with their preoperative vision.

VISX introduced CustomVue laser vision correction
internationally in late 2002 and received United States Food and
Drug Administration (FDA) approval for CustomVue
vision correction in the U.S for the treatment of myopia
and astigmatism in May 2003.

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PRK

Laser vision correction can also be performed by
photorefractive keratectomy (PRK). PRK does not
require the use of a microkeratome, and in most procedures the
epithelial layer (or outer layer) of the cornea is removed
before ablation. Patients may experience discomfort for
approximately 24 hours and blurred vision for approximately
48 to 72 hours after the procedure. Drops to promote
corneal healing and alleviate discomfort may be prescribed.
Although most patients experience significant improvement in
uncorrected vision (vision without the aid of eyeglasses or
contact lenses) within a few days of the procedure, unlike LASIK
it generally takes several months for the final correction to
stabilize and for the full benefit of the procedure to be
realized.

The VISX STAR System performs PRK in essentially
the same manner as Standard LASIK.

Corneal Pathologies:
Custom-CAP®and
PTK

VISX offers additional capabilities to
ophthalmologists to enable treatment of corneal pathologies
which are limited in number but provide potential relief to
patients with essentially no alternative treatment. Our
Custom-CAP procedure treats patients who previously had laser
vision correction surgery resulting in symptomatic decentered
ablations. We have been granted a Humanitarian Device Exemption
by the FDA for this treatment, which allows the use and
marketing of a device that is intended to benefit patients in
the treatment of conditions that affect fewer than 4,000
individuals per year.

The VISX STAR System also treats certain types of
corneal pathologies known as PhotoTherapeutic Keratectomy
(PTK). Our PTK procedure treats corneas that are
scarred or have irregularities from prior infection, trauma, or
underlying corneal disease. We estimate that VISX STAR Systems
have been used worldwide to perform approximately 35,000 PTK
procedures.

Although both Custom-CAP and PTK are important
medical procedures for people who suffer from corneal
pathologies, the market opportunity represented by Custom-CAP
and PTK is much smaller than that represented by laser vision
correction in general.

FDA Approvals

In 1987, ophthalmologists used VISX®
equipment to perform the first laser vision correction procedure
for the treatment of nearsightedness in the United States. In
1996, the FDA approved laser vision correction using the VISX
STAR System. Since that time, VISX has expanded the capabilities
of its system to treat a broader range of refractive errors.

To date, the FDA has approved the following
treatments using the VISX STAR System:

| |  |                                                                                                                                                                 |  |  |  |                                                                           
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | --------------------------------------------------------------------------
| |  | FDA Treatment Approval                                                                                                                                          |  |  |  |                                                                           
|
|
| |  |                                                                                                                                                                
| |  | FDA Approval Date                                                                                                                                              
|
|
| |  | Myopia or near sightedness                                                                                                                                      |  |  |  | March 1996                                                                
|
| |  | Astigmatism                                                                                                                                                     |  |  |  | April 1997                                                                
|
| |  | Higher myopia with or without astigmatism                                                                                                                       |  |  |  | January 1998                                                              
|
| |  | Hyperopia or farsightedness                                                                                                                                     |  |  |  | November 1998                                                             
|
| |  | Laser Assisted In SituKeratomileusis
    (LASIK)                                                                                                                |  |  |  | November 1999                                                             
|
| |  | WaveScan System to diagnose refractive errors of
    the eye                                                                                                    |  |  |  | May 2000, received 510(k) clearance                                       
|
| |  | Enlarged treatment zone with a blended ablation
    edge                                                                                                        |  |  |  | March 2001                                                                
|
| |  | Mixed astigmatism                                                                                                                                               |  |  |  | November 2001                                                             
|
| |  | Custom-Contoured Ablation Patterns
    (Custom-CAPTMMethod) for the treatment of patients
    with symptomatic decentered ablations from previous laser surgery |  |  |  | December 2001, under the Humanitarian Device
    Exemption program (HDE)
|
| |  | CustomVue for myopia and astigmatism                                                                                                                            |  |  |  | May 2003                                                                  
|

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International Approvals

VISX has received regulatory approvals where
applicable in essentially all international markets.

Products

VISX STAR Excimer Laser System.The VISX STAR System is a fully
integrated ophthalmic medical device incorporating an excimer
laser and a computer-driven workstation. The laser ablations
produced by the VISX STAR System are the product of a variable
diameter excimer laser beam scanning system. Seven beams that
range in size from 0.65 to 6.5 millimeters are homogenized
as they converge, scan, and rotate to produce an extremely
smooth ablation area on the eye.

Only the VISX STAR System is capable of
performing treatments using a multi-variable sized scanning beam
(which includes small-spot scanning) commonly known as variable
spot scanning, or VSSTM. This enables refractive
corrections to be completed in a shorter time and with less
tissue removal than with other excimer lasers. In addition, the
VISX STAR System centers on the eye and tracks eye movements in
three dimensions during the procedure. This ensures precisely
centered ablations and adds another element of safety and
comfort for both patient and doctor.

The VISX STAR System performs Standard LASIK,
CustomVue laser vision correction, PRK, Custom-CAP, and PTK
procedures.

VISX WaveScan System.The WaveScan System is a diagnostic
device that uses laser beam technology to measure comprehensive
refractive errors of the eye and complex mathematical algorithms
to derive comprehensive refractive information about the
patients individual optical system, and then displays this
information in the form of an aberration map. This unique map,
similar to a fingerprint for each patients eye, offers
objective information about refractive errors associated with
nearsightedness, farsightedness, and astigmatism, as well as
information about higher order aberrations that were previously
unmeasurable by any other instrument.

VISX Treatment Cards.We control the use of the VISX STAR
System with proprietary cards. Each card provides the user with
specific access to proprietary software and is required to
operate the VISX STAR System. Because treatment cards are
required to perform procedures, there is a strong correlation
between treatment card sales and the number of procedures
performed on VISX STAR Systems. Types of VISX treatment cards
include: VisionKey® Cards for performing standard LASIK
procedures, which in the United States carries a license fee for
each procedure that is purchased; CustomVue Cards for performing
Custom LASIK, which carry a worldwide license fee for each
procedure that is purchased; Custom-CAP Cards for performing
laser vision correction with a previously decentered ablation,
which carry a worldwide license fee for each procedure that is
purchased; and the PTK Card, which is offered to physicians at a
nominal charge to treat certain types of corneal pathologies.

Information concerning the amount and percentage
of revenues contributed by our different products and services
is set forth later in this report under the heading,
Managements Discussion and Analysis of Financial
Condition and Results of Operations.

Marketing, Sales and
Distribution

Our primary objective is to maximize consumer
acceptance of laser vision correction by (a) providing
advanced diagnostic and laser technology to the eye care medical
community, (b) developing improvements to that technology,
and (c) providing our customers with various services and
programs designed to increase their operating efficiency,
effectiveness, and volume of laser vision correction procedures.

In the United States, we sell products directly
to our customers and employ sales and service engineers to
support our business. In 2002 we established VISX USA, Inc., a
wholly owned subsidiary, to which we transferred our United
States sales and marketing assets in 2003. Internationally, our
systems are installed in 46 countries. We have established a
subsidiary in Japan and have sales managers that cover key
international sales regions. We have contracts with more than 36
distributors worldwide that are responsible for selling and
servicing VISX products internationally.

Marketing Programs

We believe that ongoing support and training of
customers has enhanced our market position. The programs listed
below are offered to VISX customers in the United States. We are
expanding some of these programs to international markets.

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VISX
University® Programs.VISX
University is a series of educational programs designed to
educate physicians, administrators, coordinators, and
technicians on current practices in laser vision correction and
to teach laser center decision-makers how to effectively manage
and market their laser vision correction practices.

VISX University Refractive Society Symposiums are
continuing medical education (CME) accredited
events, typically held in conjunction with major ophthalmic and
optometric meetings, drawing speakers from around the world to
share their experiences on the latest refractive techniques and
technologies. Refractive surgeons are encouraged to attend these
events to obtain important information about the latest VISX
technology and updates on the development of new technologies.

VISX University Practice Development Seminars
feature a two-day program of small group, interactive workshops
in which participants learn about the experiences of successful
VISX laser vision correction marketers and share their own
experiences. These workshops provide VISX customers with the
opportunity to benefit from marketing and management instruction
regarding successful laser vision correction practices.
Attendees learn about procedure-building techniques in
advertising, marketing, public relations, lead tracking, staff
training, consumer education and recruitment.

In addition to VISX University Programs,
customers who buy or use a VISX STAR System are provided
educational and marketing materials including brochures, videos,
slides, and other tools to help them promote VISX laser vision
correction.

VISX Business Development Program.VISX employs a team of industry
experts known as Business Development Managers who have
geographical account responsibility across the United States.
Each Business Development Manager is responsible for providing
the instruction, information and services necessary to help our
customers maximize their investment in VISX products and
services. Customers that participate in this program receive
intensive hands on consulting and training to help
them increase the number of laser vision correction procedures
they perform. This consulting includes development of a plan
that identifies specific areas to be modified so the customer
can respond more effectively to consumers interested in having
laser vision correction on a VISX STAR System.

Procedure Financing Support Program.We refer our customers to several
financial vendors that provide consumer financing to patients
through eye care professionals. This enables ophthalmologists to
offer consumers the option of paying for their laser vision
correction procedure on a monthly basis. We are not directly
involved with these financing programs and do not benefit from
the financing except to the extent it contributes to growth in
the number of laser vision correction procedures performed.

Customer Support and Service

Customer Response Center.The VISX Customer Response Center
handles customer calls 24 hours a day, seven days a week,
and is staffed by over 80 VISX professionals trained to
respond to calls and inquiries from our customers. Telephone
requests range from orders for parts and treatment cards to
requests for technical support, customer information and field
service. More than 60 members of the Customer Response
Center are field-based service engineers, strategically located
to enable rapid response to customer needs.

VISXPRESS®.We communicate the latest news regarding VISX and laser
vision correction through a publication called VISXPRESS. The
frequency of the publication is determined by the timing of news.

VISX on the Internet.The Internets interactive
capabilities enhance the effectiveness of communications with
customers and the professional eye care community at large. Our
website, at http://www.visx.com,includes the following
resources:



| |                              |                                                                                                                                                                                                                       
| | ---------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (RIGHT POINTING ARROW GRAPH) | Information for consumers regarding the benefits
    of VISX laser vision correction, including an interactive map
    providing consumers with the locations of VISX installations and
    VISX-certified physicians;
|
| | (RIGHT POINTING ARROW GRAPH) | Clinical information for the physician community,
    including downloadable presentations and white papers concerning
    the most recent VISX clinical results from leading
    ophthalmologists worldwide;         
|
| | (RIGHT POINTING ARROW GRAPH) | On-line access to news about new products and
    services, physician certification course schedules, and
    registration for practice development programs such as VISX
    University; and                         
|
| | (RIGHT POINTING ARROW GRAPH) | Marketing and practice development tools,
    including links to services and web sites that provide useful
    information for promotion of laser vision correction by our
    physicians.                           

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Major Customers

TLC Vision Corporation (TLC)
accounted for 16%, 14%, and 17% of total revenues in 2003, 2002,
and 2001, respectively. No other customer accounted for 10% or
more of sales during any of the three years ended
December 31, 2003.

Reliance on Patents and Proprietary
Technology

We own over 200 United States and foreign patents
and have more than 200 patent applications pending. We
believe our patents provide a substantial proprietary position
in system and application technology relating to the use of
lasers for vision correction. We are committed to protecting our
proprietary technology. It is possible, however, that one or
more of our patents may be found to be invalid or unenforceable,
or that a party against whom we are asserting claims of patent
infringement may be found not to be infringing our patents. Such
an outcome could have a material adverse effect on our business,
financial position, and results of operation. Please see
Risk Factors/Patents and Intellectual Property
Disputesbelow for additional discussion of the risks
related to our intellectual property.

Cross License between VISX and Nidek.On April 4, 2003, VISX and Nidek
entered into a global litigation settlement and a worldwide
cross-license of certain of the parties respective
patents. This settlement resulted in the dismissal of all
litigation between the parties worldwide, and involved a payment
by VISX to Nidek of $9.0 million for the settlement of
Nideks antitrust and unfair competition claims. The terms
of the settlement and cross-license are confidential.

License to WaveLight.In September 2002, VISX and WaveLight
Laser Technologie AG (WaveLight) signed an agreement
whereby we licensed our patents relating to refractive excimer
lasers to WaveLight. As consideration, WaveLight will pay VISX a
royalty for each procedure performed in the United States using
WaveLights refractive excimer laser and for international
equipment sales. All pending disputes and litigation between the
two companies were also settled at that time.

License to LaserSight.In May 2001, VISX and LaserSight
Incorporated (LaserSight) signed an agreement
whereby we licensed our patents relating to refractive excimer
lasers to LaserSight. As consideration, LaserSight will pay VISX
a royalty for each procedure performed in the United States
using LaserSights refractive excimer laser. All pending
disputes and litigation between the two companies were also
settled at that time.

In May 2002, LaserSight granted VISX a worldwide,
royalty-free, fully paid-up, nonexclusive license under United
States Patent No. RE37,504 (5,520,697  JT
Lin Patent).

Cross License between VISX and
Bausch & Lomb.In January
2001, VISX and Bausch & Lomb signed an agreement
whereby we licensed our patents relating to refractive excimer
lasers to Bausch & Lomb. As consideration,
Bausch & Lomb licensed its patents relating to
refractive excimer lasers to us and will pay us a royalty for
each procedure performed in the United States using Bausch &
Lombs refractive excimer laser. All pending disputes and
litigation between the two companies were also settled at that
time.

Cross License between VISX and Summit.In June 1998, VISX and Summit
Technology, Inc. (Summit), now owned by Alcon,
signed an agreement whereby VISX and Summit each granted the
other a fully-paid license to its patents relating to laser
ablation of corneal tissue. The licenses cover, with certain
exceptions, technology acquired by the recipient of the license.
At that time, we dissolved Pillar Point Partners and settled all
pending disputes and litigation between the two companies.

Non-United States Licensing Agreements.We have licensed certain patents
issued outside of the United States to the following companies:
Chiron Vision Corporation, now owned by Bausch & Lomb,
Zeiss-Meditec GmbH (Zeiss-Meditec), Herbert Schwind
GmbH & Co. KG (Schwind), Autonomous
Technologies Corporation (Autonomous), previously
owned by Summit and now owned by Alcon, LaserSight, and
WaveLight. Under these agreements, we receive royalties for
international sales of Bausch & Lomb, Zeiss-Meditec,
Schwind, LaserSight, and WaveLight equipment that is covered by
our international patents. In addition, Summit has taken a fully
paid license to our non-United States patents, which covers
sales of the Summit and Autonomous laser systems.

In 1992, International Business Machines
Corporation (IBM) granted VISX nonexclusive rights
under United States and foreign IBM patents that include certain
claims covering ultraviolet laser technology for removal of
human tissue. Under the terms of this license, we agreed to pay
a royalty on VISX STAR Systems made, used, sold or otherwise
transferred by or for VISX in the United States and certain
other countries. In 1997, IBM advised us that it assigned the
patents and the license to LaserSight. In February 1998,
LaserSight advised us that Nidek had acquired the foreign IBM

8



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patents and the licenses to these foreign
patents. As part of the agreement entered into by VISX and
LaserSight in May 2001, we obtained a paid-up license to the
United States IBM patent. We also entered into a nonexclusive,
worldwide license agreement with Patlex Corporation
(Patlex), which holds certain patents on lasers.
Under this agreement, we pay Patlex a royalty on certain laser
components of the VISX STAR System.


Confidentiality Arrangements.We protect our proprietary technology,
in part, through proprietary information and inventions
agreements with employees, consultants and other parties. These
agreements generally contain standard provisions requiring those
individuals to assign to VISX, without additional consideration,
inventions conceived or reduced to practice by them while
employed or retained by VISX, subject to customary exceptions.

Government Regulation

United States Food and Drug Administration.The VISX STAR System and WaveScan
System are medical devices, and as such are subject to
regulation by the FDA under the Food, Drug, and Cosmetic Act and
by similar agencies outside of the United States. Products
manufactured or distributed by us are subject to pervasive and
continuing regulation by the FDA, including, among other things,
post-market surveillance and adverse event reporting
requirements. Labeling and promotional activities are subject to
scrutiny by the FDA and, in certain instances, by the Federal
Trade Commission.

We manufacture our products in accordance with
Good Manufacturing Practices (GMP) regulations,
which impose procedural and documentation requirements with
respect to manufacturing and quality assurance activities. Our
manufacturing facilities, procedures and practices have
undergone and continue to be subject to GMP compliance
inspections conducted by the FDA.

The FDAs Quality System Regulation
(QSR) went into effect on June 1, 1997. The
goal of QSR is to make the existing GMP regulations consistent,
to the extent possible, with the requirements for quality
systems contained in applicable international standards,
primarily, the International Organization for Standardization
(ISO) 9001:1994 Quality Systems/Model for
Quality Assurance in Design, Development, Production,
Installation, and Servicing. On February 3, 1998, we
were certified to ISO 9001/EN46001. To ensure continuing
compliance with ISO standards, we undergo annual recertification
audits, the most recent of which concluded with the issuance of
certificates on December 23, 2003, certifying that VISX has
been assessed and registered as conforming to the requirements
of ISO 9001:2000 and ISO 13485:1996. These
recertification audits are carried out by registered
certification agencies. We have successfully passed each annual
recertification audit since our initial certification.

Other Government Regulation.We are regulated under the Radiation
Control for Health and Safety Act, which requires laser products
to comply with performance standards, and manufacturers to
certify in product labeling and in reports to the FDA that their
products comply with all such standards. In addition, we are
subject to California regulations governing the manufacture of
medical devices, including an annual licensing requirement, and
our facilities have been inspected by, and are subject to
ongoing, periodic inspections by, California regulatory
authorities. Sales, manufacturing and further development of
VISX products also may be subject to additional federal
regulations pertaining to export controls and environmental and
worker protection, as well as to state and local health, safety
and other regulations that vary by locality, which may require
obtaining additional permits. The impact of such regulations
cannot be predicted. Our products have been tested and certified
to comply with all applicable safety requirements for medical
devices in the United States and Canada, and bear the ETL-c Mark
as evidence of compliance.

International.Many
countries outside the United States do not impose safety and
efficacy testing or regulatory approval requirements for medical
laser devices. International regulatory requirements vary by
country, however.

In Europe, the member countries of the European
Union have promulgated rules that require medical products to
receive the certifications necessary to affix the CE Mark to the
device. The CE Mark is an international symbol of adherence to
quality assurance standards and compliance with applicable
European medical device directives. Certification under the ISO
standards for quality assurance and manufacturing processes is
one of the CE Mark requirements. We are licensed to apply the CE
Mark to the VISX STAR System and WaveScan System in accordance
with the European Medical Device Directives.

In Japan, we received regulatory approval for PTK
from the Japanese Ministry of Health, Labor and Welfare in May
1998 and for myopia, or nearsightedness, with astigmatism in
January 2000. The Japanese Ministry of Health, Labour and
Welfare approved the VISX STAR S3 ActiveTrak® System
(a VISX STAR System) that includes three dimensional eye
tracking on December 5, 2001. We are the only United States
manufacturer to receive approval for its laser vision correction
system in Japan.

9



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Competition

There are six companies whose excimer laser
systems have received FDA approval in the United States, namely,
those of VISX, Alcon, Bausch & Lomb, LaserSight, Nidek, and
WaveLight. According to MarketScope VISX holds approximately 60%
of the procedure volume market share and VISX STAR Systems
represent over 50% of laser vision correction systems in use
today in the United States.

We have licensed our technology to Bausch &
Lomb, LaserSight, Nidek, and WaveLight. VISX and Alcon granted
each other cross licenses to patents covering ultraviolet
ablation of corneal tissue.

Our principal international competitors are
Alcon, Bausch & Lomb, LaserSight, Nidek, Schwind, WaveLight,
and Zeiss-Meditec. According to MarketScope, VISX holds
approximately 30% of the installed base of laser vision
correction systems internationally, with no other competitor
exceeding this market share. We have licensed certain of our
patents to Bausch & Lomb, LaserSight, Nidek, Schwind,
WaveLight, and Zeiss-Meditec. In addition, Alcon has taken a
royalty-free license to our non-United States patents, which
covers sales of its systems.

Manufacturing, Components and Raw
Materials

The manufacture of VISX STAR Systems and WaveScan
Systems is a complex operation involving numerous procedures,
and the completed systems must pass a series of quality control
and reliability tests before shipment. We buy from various
independent suppliers many components that are either standard
or built to our proprietary specifications, and which are then
assembled at our California facility. We also contract with
third parties for the manufacture or assembly of certain
components. A single vendor currently provides several of these
components. Please see Risk Factors/Single Sources for
Key Componentsbelow for a description of the risks we
face due to our reliance on sole-source vendors.

Research and Development and
Regulatory

Our research efforts have been the primary source
of our products. We intend to maintain our strong commitment to
research as an essential component of our product development
effort. Toward this end, we incurred research and development
expenses, including clinical trial expenses, of
$18.6 million in 2003, $18.7 million in 2002, and
$19.5 million in 2001. Licensed technology developed by
outside parties is an additional source of potential products.
In 2003, VISX continued funding the early stage research at
Stanford University for future treatments for age-related
macular degeneration. We are also developing an excimer laser
treatment for presbyopia. We conducted clinical trials for
presbyopia in human subjects in Canada during 2003.

Employees

As of December 31, 2003, we had
344 full time employees, 27 temporary employees and
19 consultants. Of our regular employees, 183 are
employed in manufacturing and service, 66 in research and
development and regulatory, and 95 in general
administrative and marketing and sales positions. None of our
employees are covered by a collective bargaining agreement. We
believe that our relations with employees are good.

Seasonal Variation

Typically we experience an increase in
procedure-related revenue in the United States market in the
first quarter of each calendar year. We attribute this increase
to consumers using the annual renewal of funding under the
Internal Revenue Service Code section 125 pre-tax medical
savings plan to purchase laser vision correction for themselves.
Laser vision correction is not generally covered by medical
insurance. Our equipment and procedure revenue tend to decline
in the summer.

Financial Information about Segments and
Geographic Areas

Financial information relating to VISXs
segments and information on revenues generated in different
geographic areas are set forth in Note 2, titled
Segment Reporting, of Notes to Consolidated
Financial Statements in Item 8 of this report. In addition,
information regarding risks attendant to our foreign operations
is set forth under the heading Risk Factors later in
this report.

10



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Where You Can Find More Information

We make our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to such reports filed pursuant
to Section 13(a) or 15(d) of the Exchange Act, available,
free of charge, on or through our Internet web site located at
www.visx.com under the Investor Relations section,
as soon as reasonably practicable after they are filed with or
furnished to the SEC.

In addition, the written charters approved by our
Board of Directors and adopted by our Audit, Compensation, and
Governance committees are posted on our Internet web site
located at www.visx.com under the Investor Relations
section, together with our Corporate Governance Guidelines and
Code of Business Conduct and Ethics. Copies of these documents
will be provided at no-charge to any stockholder who requests a
copy.




Item 2. Properties

Our operations are currently located in a
108,844 square foot leased facility in Santa Clara,
California. The lease for the facility expires in May 2008 with
an option to extend the term an additional five years. We also
lease approximately 25,000 square feet of warehouse space
in Sunnyvale, California under a lease that expires in March
2006.

We also lease space in Osaka and Tokyo, Japan.
Two leases for office space are for 871 and
1,835 square feet and expire on January 31, 2006 and
September 30, 2006, respectively. Two leases for warehouse
space cover 710 and 355 square feet. The first lease
expires on March 31, 2004, and the second lease expires on
December 31, 2004. We believe our facilities are sufficient
to meet our current and reasonably anticipated future
requirements. See Note 9 of Notes to Consolidated Financial
Statements.




Item 3. Legal
Proceedings

In and prior to 2003, VISX and one of its
competitors, Nidek, was involved in litigation in the United
States and elsewhere relating to the parties respective
patent rights and Nideks claims that our activities
violated antitrust and unfair competition laws. On April 4,
2003, VISX and Nidek entered into a global litigation settlement
and a worldwide cross-license of certain of the parties
respective patents. This settlement resulted in the dismissal of
all litigation between the parties worldwide, and involved a
payment by VISX to Nidek of $9.0 million for the settlement
of Nideks antitrust and unfair competition claims. For a
complete description of this litigation, see our annual report
on Form 10-K for the year ended December 31, 2002 and
our quarterly report on Form 10-Q for the quarter ended
March 31, 2003.

Other Litigation

We are involved in various other legal
proceedings and disputes that arise in the normal course of
business. These matters include product liability actions,
contract disputes and other matters. Based on currently
available information, we believe that we have meritorious
defenses to these actions and that the resolution of these cases
is not likely to have a material adverse effect on our business,
financial position or future results of operations.




Item 4. Submission of Matters to a
Vote of Security Holders

No matters were submitted to a vote of security
holders during the fourth quarter of 2003.




Item 4A. Executive Officers of the
Registrant

Each executive officer holds his or her office
for a one-year term. Our principal executive officers are:

|                        |  |     |    |          |  |                                                   |  |  |      | 
|----------------------- |  | --- | -- | -------- |  | ------------------------------------------------- |  |  | ---- | 
|Name                    |  | Age |    | Position |  | Year First Held Current Position                 
|                        |  |     |    |          |  |                                                  
|Elizabeth H. Dávila     |  |     | 59 |          |  | Chairman of the Board and Chief Executive Officer |  |  | 2001 | 
|Douglas H. Post         |  |     | 52 |          |  | President and Chief Operating Officer             |  |  | 2003 | 
|Derek A. Bertocci       |  |     | 50 |          |  | Senior Vice President, Chief Financial Officer    |  |  | 2004 | 
|Carol F.H. Harner, Ph.D |  |     | 60 |          |  | Senior Vice President, Research and Development   |  |  | 1997 | 

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|                       |  |     |    |          |  |                                                 |  |  |      | 
|---------------------- |  | --- | -- | -------- |  | ----------------------------------------------- |  |  | ---- | 
|Name                   |  | Age |    | Position |  | Year First Held Current Position               
|                       |  |     |    |          |  |                                                
|Donald L. Fagen        |  |     | 50 |          |  | Vice President, Global Sales                    |  |  | 2001 | 
|Theresa A. Johnson     |  |     | 41 |          |  | Vice President, Operations                      |  |  | 2003 | 
|Catherine E. Murphy    |  |     | 56 |          |  | Vice President, Human Resources                 |  |  | 2001 | 
|John F. Runkel, Jr.    |  |     | 48 |          |  | Vice President, General Counsel and Secretary   |  |  | 2001 | 
|Alan F. Russell, Ph.D. |  |     | 62 |          |  | Vice President, Regulatory and Clinical Affairs |  |  | 2001 | 
|Joaquin V. Wolff       |  |     | 46 |          |  | Vice President, Global Marketing                |  |  | 2001 | 

Elizabeth H. Dávila.Ms. Dávila joined VISX in
1995 and currently serves as chairman of the board and chief
executive officer. She was appointed chairman of the board in
May 2001, and has served as chief executive officer since
February 2001. She also served as president from February 2001
to July 2003. She was president and chief operating officer from
February 1999 to February 2001, executive vice president and
chief operating officer from May 1995 to February 1999, and
served as a director since December 1995. Prior to joining VISX,
Ms. Dávila was at Syntex Corporation from 1977 to 1994
where she held senior management positions in its medical
device, medical diagnostics, and pharmaceutical divisions.
Ms. Dávila serves on the board of directors of Nugen
Technologies, Inc. and Cholestech Corporation. She holds a
masters degree in chemistry from Notre Dame and an MBA from
Stanford University.

Douglas H. Post.Mr. Post has served as president
and chief operating officer since July 2003. He was executive
vice president, operations from January 2001 to July 2003. Prior
to that time he was vice president, operations and customer
support from September 1996 to January 2001. He served as senior
director, customer support from December 1992 to September 1996
and was senior vice president, sales & customer support,
with VISX Massachusetts Inc. (formerly Questek, Inc.) from
February 1985 to December 1992.

Derek A. Bertocci.Mr. Bertocci has served as senior
vice president and chief financial officer since March 2004. He
was vice president and controller from December 1998 to February
2004. He was controller from November 1995 to December 1998.
Prior to joining VISX, Mr. Bertocci was controller for Time
Warner Interactive from 1993 to 1995. From 1987 to 1993, he was
controller and assistant treasurer for Datron Systems, Inc.

Carol F. H. Harner, Ph.D.Dr. Harner has been senior vice
president, research and development since August, 2003. She was
vice president, research and development from December 1997
to August 2003. Prior to joining VISX, she was vice
president, scientific affairs of Collagen Corporation, and
president of CollOptics, Inc., a subsidiary of Collagen
Corporation. Before joining Collagen Corporation,
Dr. Harner held senior management and scientific positions
at Chiron Ophthalmics Inc. from 1986 to 1993, and CooperVision
Surgical, from 1984 to 1986. Prior to that, she was in academia
for 13 years.

Donald L. Fagen.Mr. Fagen has been vice president, global sales since
February 2001. Prior to joining VISX, Mr. Fagen was vice
president, sales and marketing for The Hillside Group from 2000
to 2001 and executive vice president, sales and marketing with
ClearVision, Inc. from 1999 to 2000. From 1995 to 1999,
Mr. Fagen held the position of director of sales and group
purchasing organizations with Alcon Laboratories. Prior to that
time, Mr. Fagen directed sales organizations at
CooperVision Surgical and Sci Med from 1985 to 1995.

Theresa A. Johnson.Ms. Johnson has been vice president, operations since
October 2003. She was director of materials and logistics
from 1999 to 2003, manager of materials from 1994 to 1999 and
held other management positions at VISX from 1988 to 1994. Prior
to joining VISX, Ms. Johnson held various positions at
CooperVision Laser Division, commencing in 1984.

Catherine E. Murphy.Ms. Murphy has been vice president, human resources, since
September 2001. Prior to joining VISX, Ms. Murphy was
director of compensation, benefits and human resource
information technology for Genentech, from 1998 to 2001. From
1996 to 1998, Ms. Murphy served as a human resource
consultant for a variety of medical device and biopharmaceutical
firms. From 1983 to 1996, she held a variety of management
positions within Syntex Corporation in the areas of
compensation, benefits, employee relations, staffing and related
human resource functions.

John F. Runkel, Jr.Mr. Runkel has been vice president, general counsel, and
secretary since January 2001. Prior to joining VISX,
Mr. Runkel was a partner in the law firm of Sheppard,
Mullin, Richter & Hampton, where he practiced law for
17 years and served as managing partner of the firms
San Francisco office.

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Alan F.
Russell, Ph.D.Dr. Russell
has been vice president, regulatory and clinical affairs since
June 2001. Prior to joining VISX, Dr. Russell was CEO
of AvMax, Inc., a privately held pharmaceutical company, from
1998 to 2000. From 1992 to 1998, Dr. Russell was senior
vice president, scientific affairs at Cygnus, Inc. Prior to
that, he was vice president for scientific affairs at Chiron
Corporation from 1987 to April 1992. He held the same
position at Beecham Laboratories from 1983 to 1987, prior to
which he held various management positions at Syntex Corporation
from 1971 to 1983, including director of regulatory affairs for
investigational drugs.

Joaquin V. Wolff.Mr. Wolff has been vice president of global marketing since
January 2001. Prior to joining VISX, Mr. Wolff worked
at Alcon Laboratories from 1990 to 2000, where he held the
position of director of marketing with responsibilities in both
the Cataract and Vitreoretinal business units of the Surgical
Division. From 1983 to 1990, he held a variety of sales and
marketing positions for CooperVision Surgical.

Our Board of Directors has approved the adoption
by our executive officers and directors of trading plans under
Securities and Exchange Commission Rule 10b5-1. A number of
our executive officers and directors have adopted and are
trading pursuant to Rule 10b5-1 plans.




PART II



Item 5. Market for VISXs Common
Equity and Related Stockholder Matters


Our common stock is traded on the New York Stock
Exchange under the symbol EYE. Prior to
September 7, 2000, our stock was traded on the Nasdaq
National Market tier of The Nasdaq Stock Market under the symbol
VISX. The following table sets forth the high and
low closing prices of our common stock.

|     |                |      |   |       |  |  |   |       | 
|---- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                | High |   | Low  
|     |                |      |   |      
|2002 |                |      |   |       |  |  |   |      
|     | First Quarter  |      | $ | 17.70 |  |  | $ | 12.90 | 
|     | Second Quarter |      |   | 17.80 |  |  |   | 10.90 | 
|     | Third Quarter  |      |   | 10.80 |  |  |   | 7.18  | 
|     | Fourth Quarter |      |   | 10.27 |  |  |   | 7.38  | 
|2003 |                |      |   |       |  |  |   |      
|     | First Quarter  |      | $ | 10.06 |  |  | $ | 7.93  | 
|     | Second Quarter |      |   | 18.81 |  |  |   | 11.06 | 
|     | Third Quarter  |      |   | 23.28 |  |  |   | 17.74 | 
|     | Fourth Quarter |      |   | 25.77 |  |  |   | 18.95 | 

On February 24, 2004, the last reported sale
price of the Common Stock on the New York Stock Exchange was
$17.70 per share. We had approximately 725 holders of record of
our common stock on that date.

We have never declared or paid any cash dividends
on our common stock. We presently intend to retain all future
earnings for use in our business and do not anticipate paying
any cash dividends on our common stock in the foreseeable future.

13



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##### Table of Contents






Item 6. Selected Financial
Data

We derived the following selected financial data
from our audited consolidated financial statements. This
historical financial data should be read in conjunction with our
consolidated financial statements and notes thereto.

Selected Condensed Consolidated Financial
Information

|                                              |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |        | 
|--------------------------------------------- | ------- | ------------------------------------- | ------- | ------ |  | ---- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                              |         |                                      
|                                              |         | Year Ended December 31,              
|                                              |         |                                      
|                                              |         |                                      
|                                              |         | (In thousands, except per share data)
|                                              |         | 2003                                  |         | 2002   |  | 2001 |         | 2000   |  | 1999
|                                              |         |                                       |         |        |  |      |         |        |  |     
|Statement Of Operations Data:                 |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Total revenues                                |         | $                                     | 143,905 |        |  | $    | 139,926 |        |  | $    | 165,016 |        |  | $ | 190,154 |        |  | $ | 268,691 |       
|Cost of revenues                              |         |                                       | 52,070  |        |  |      | 50,805  |        |  |      | 58,440  |        |  |   | 62,684  |        |  |   | 57,513  |       
|Total costs and expenses                      |         |                                       | 109,300 |        |  |      | 112,056 |        |  |      | 119,844 |        |  |   | 134,162 |        |  |   | 126,593 |       
|Income from operations                        |         |                                       | 34,605  |        |  |      | 27,870  |        |  |      | 45,172  |        |  |   | 55,992  |        |  |   | 142,098 |       
|Litigation settlement                         |         |                                       |        |        |  |      | 9,000   |        |  |      | 37,821  |        |  |   | 11,856  |        |  |   |        |       
|Net income                                    |         | $                                     | 23,251  |        |  | $    | 15,342  |        |  | $    | 10,909  |        |  | $ | 35,221  |        |  | $ | 91,768  |       
|Earnings per share:(A)                        |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|                                              | Basic   |                                       | $       | 0.47   |  |      | $       | 0.29   |  |      | $       | 0.19   |  |   | $       | 0.57   |  |   | $       | 1.45   | 
|                                              | Diluted |                                       | $       | 0.46   |  |      | $       | 0.29   |  |      | $       | 0.19   |  |   | $       | 0.55   |  |   | $       | 1.35   | 
|Shares used for earnings per share:(A)        |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|                                              | Basic   |                                       |         | 49,471 |  |      |         | 53,096 |  |      |         | 56,660 |  |   |         | 61,431 |  |   |         | 63,474 | 
|                                              | Diluted |                                       |         | 50,937 |  |      |         | 53,816 |  |      |         | 58,081 |  |   |         | 63,778 |  |   |         | 68,119 | 
|Balance Sheet Data:                           |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Cash, cash equiv., and short-term investments |         | $                                     | 86,076  |        |  | $    | 122,955 |        |  | $    | 123,807 |        |  | $ | 229,453 |        |  | $ | 258,359 |       
|Working capital                               |         |                                       | 103,813 |        |  |      | 138,351 |        |  |      | 159,935 |        |  |   | 245,662 |        |  |   | 303,546 |       
|Total assets                                  |         |                                       | 163,963 |        |  |      | 200,592 |        |  |      | 219,925 |        |  |   | 321,507 |        |  |   | 362,721 |       
|Retained earnings                             |         |                                       | 181,918 |        |  |      | 158,667 |        |  |      | 143,325 |        |  |   | 132,416 |        |  |   | 97,195  |       
|Stockholders equity                          |         | $                                     | 125,799 |        |  | $    | 155,190 |        |  | $    | 176,278 |        |  | $ | 268,772 |        |  | $ | 316,793 |       



---

EITF No. 00-25, Vendor Income
Statement Characterization of Consideration Paid to a Reseller
of the Vendors Products
(EITF 00-25) and EITF No. 01-09,
Accounting for Consideration Given by a Vendor to a
Customer or Reseller of the Vendors Products
(EITF 01-09), were adopted by VISX on
January 1, 2002. The 2001, 2000, and 1999 information
presented in the table above reflects the effects of this
adoption as more fully described in Note 1 to the
consolidated financial statements.




|    |                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | All share and per share amounts have been
    adjusted to give effect for the 2 for 1 stock splits effected as
    100% stock dividends in January and May 1999.




Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations

Forward Looking Statements

This Report contains forward-looking statements,
including but not limited to our belief that: our CustomVue
procedure represents a new standard in laser vision;
correction;ongoing technical advances (including our CustomVue
procedure) have the potential to improve a persons vision
beyond that which can be obtained with contact lenses or glasses
and may reduce concerns perceived by some consumers;
acceleration of the markets acceptance of, and conversion
to, our CustomVue procedure, or our ability to maintain or gain
market share, or an increase in our penetration of the laser
vision correction market in general, could cause a significant
increase in our licensing revenue; there will not be a near-term
change in our level of capital expenditures; an increase in the
number of our FDA-approved indications will increase the pool of
laser vision correction candidates and lead to increased
procedure growth and licensing revenue; improvements in the
United States economy will lead to increased consumer
confidence, continued conversion to our CustomVue procedure,
maintenance of our United States market share, increases in our
revenue and earnings per share, and renewed support for the
United States laser vision correction market in general; our
selling, general and administrative expenses will increase
between 5% and 9% in 2004; we will continue to generate cash
from operations;

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##### Table of Contents



procedure volume and conversion to CustomVue
procedures from standard procedures will increase in 2004; there
will be no significant growth in laser system revenues in 2004,
and fewer WaveScan Systems will be sold in 2004 than in 2003; in
2004 our gross profit margin on license and other revenues will
be similar to 2002 and 2003 levels; our gross profit margin on
system revenues for 2004 will remain low; our research and
development and regulatory expenses will increase slightly in
2004; and our cash flow from operations combined with our
existing cash, cash equivalents and short-term investments will
be sufficient to meet our needs during the coming twelve months.
Forward-looking statements are estimates reflecting the best
judgment of our senior management, and they involve a number of
risks and uncertainties that could cause actual results to
differ materially from those suggested by the forward-looking
statements. Please see the section of this report entitled
Risk Factors for a more thorough description of the
risks that our business faces. Moreover, we caution you not to
place undue reliance on these forward-looking statements, which
speak only as of the date they were made. We do not undertake
any obligation to publicly release any revisions to
forward-looking statements to reflect events or circumstances
after the date of this report or to reflect the occurrence of
unanticipated events.


Overview

VISX, a Delaware corporation organized in 1988,
is a worldwide leader in the design and development of
proprietary technologies and systems for laser vision
correction. Our primary operations are in Santa Clara, CA.

Our products require FDA approval in the United
States and comparable regulatory agency approvals in other
countries. Our approvals in the United States and key markets
worldwide for laser vision correction cover most types of
refractive vision disorders including:

| |   |                    
| | - | -------------------
| |  | Nearsightedness;   
| |  | Farsightedness; and
| |  | Astigmatism.       

In certain key international markets, our
CustomVue procedure is also approved for all of these refractive
vision disorders. In May 2003, we obtained FDA approval for our
new CustomVue procedure for nearsightedness and astigmatism.

We sell products worldwide and generate the
majority of our revenues and cash through licensing fees charged
for the performance of laser vision correction procedures using
the VISX STAR System. The license fee charged for a particular
procedure depends on whether the procedure is performed in the
United States or internationally, and the type of procedure
involved. In the United States, we have always charged a license
fee for our standard procedure and charge a license fee for our
CustomVue procedure that is more than twice the amount charged
for our standard procedure. Additionally, we charge a standard
price of $10 per procedure for the treatment cards.
Internationally, for standard procedures we only charge a small
fee per procedure for the treatment card. For CustomVue
procedures we charge a significantly larger fee per procedure.

We believe our CustomVue procedure, which
requires use of a VISX WaveScan System, represents a new
standard in laser vision correction. It enables doctors to
identify, measure, and correct imperfections in a patients
eye much more precisely than ever before, thus creating the
potential for patients to experience better vision than is
possible with glasses or contact lenses.

We believe we have the largest installed base of
laser vision correction systems, with over 1300 systems in place
worldwide. We also believe we maintained at least 60% share for
procedures performed in the United States in 2003. According to
MarketScope, we have held at least 60% market share since 1997.

Licensing revenues for procedures comprise the
majority of our revenue and profit, and are predominantly
derived from license fees from our United States customers. This
has been especially true in recent years as the laser vision
correction market has matured and the demand for new hardware
systems and upgrades to those systems has declined. Licensing
revenues grew 20% in 2003 compared with 2002 and generated
approximately 96% gross margin on the sale of procedures. We
evaluate this aspect of our business by tracking the following:

| |   |                               
| | - | ------------------------------
| |  | The number of procedures sold;

15



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##### Table of Contents



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | Trends in procedures sales, including conversion
    rates from standard to CustomVue procedures;
|
| |  | Market share for VISX and its competitors; and                                                   
|
| |  | Penetration of the overall laser vision
    correction market.                                   

Any increase in license fee revenue that results
from either an increase in the amount charged for a particular
procedure or from an increase in overall procedure volume
directly impacts our net income. As a result, our management
team is focused on activities that will (i) accelerate the
markets acceptance of, and conversion to, our CustomVue
procedure; (ii) enable VISX to maintain or gain market
share; and (iii) increase the penetration of the laser
vision correction market in general. Progress on any one of
these fronts offers the potential for growth in our licensing
revenue.

We manage our expenses closely and plan to
generate cash from our ongoing business operations in 2004.
Historically, our primary non-operating use of cash has been to
repurchase shares of our stock. We bought 3.5 million
shares of stock in 2003 and intend to repurchase additional
shares in 2004. Cash flow permitting, we will also continue to
investigate areas where we can expand our presence in the
refractive surgery market. This could result in using cash for
the acquisition of technology or a company. Our capital
expenditures have been in the range of $1.4 million to
$4 million per year in the past five years. We do not
expect a near-term change in this level of expenditures. We have
no long term debt.

Looking to 2004, our business is highly leveraged
on procedure volume, and increasingly, the conversion to
CustomVue procedures. A number of factors, the most material of
which are set forth below, could impact our success in 2004 and
beyond:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Market acceptance of laser vision
    correction.Increased acceptance of
    laser vision correction by both doctors and patients in the
    United States and key international markets is essential for our
    continued growth. Laser vision correction has penetrated less
    than 6% of the eligible United States population, and our
    profitability and continued growth will be largely dependent on
    increasing levels of market acceptance and procedure growth,
    especially with regard to our higher-priced CustomVue procedure.
    We expect that ongoing technical advances, such as the CustomVue
    procedure, will enhance the quality of patients vision
    which may also increase consumer confidence in laser vision
    correction surgery.                                                                                                                                                                                                                                
|
| |  | Our ability to expand the refractive vision
    disorder range approved by the FDA for treatment with the VISX
    STAR System.We continue to expand the
    list of FDA-approved refractive vision disorder range that can
    be treated with VISX STAR Systems. As the number of FDA-approved
    indications increases, so does the pool of eligible laser vision
    correction candidates and the potential for increased procedure
    growth and licensing revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Our competition.Competition in the laser vision correction market is intense.
    Many of our competitors have greater resources and a stronger
    international market presence. As a result, we compete
    aggressively to obtain this business and experience low gross
    margins on the sale of equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The United States
    economy.Because we have always
    charged a license fee for procedures sold in the United States,
    the United States remains, by far, our most significant market
    for licensing revenue. Economic conditions in the United States
    therefore impact our licensing revenue more than global economic
    conditions. Industry experts have tracked procedure volume in
    the United States against economic indicators such as consumer
    confidence. They have noted a correlation between consumer
    confidence and the number of laser vision correction procedures
    performed per quarter. We believe that a rebound in the United
    States economy and increases in consumer confidence could
    provide renewed support for the laser vision correction market
    in the United States. Alternatively, a decline in economic
    conditions in the United States could result in a decline in the
    number of laser vision correction procedures performed.

We believe that our revenue and profit will
improve in 2004 as a result of various factors including
continued conversion to the CustomVue procedure maintenance, at
least, of our United States market share and improvements in the
United States economy. We plan for an increase in operating
expenses of 5% to 9% with a goal of increasing our operating
margins to greater than 30% of sales. We expect to continue to
generate cash from operations.

16



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##### Table of Contents



Results of Operations

The following table sets forth, for the periods
indicated, certain financial information as a percentage of
total revenue:

|                                             |                                      |                             |                          |      |   |      |    |    |    |     |    |     |     |     | 
|-------------------------------------------- | ------------------------------------ | --------------------------- | ------------------------ | ---- | - | ---- | -- | -- | -- | --- | -- | --- | --- | --- | 
|                                             |                                      |                            
|                                             |                                      | Year Ended                 
|                                             |                                      | December 31,               
|                                             |                                      |                            
|                                             |                                      | 2003                        |                          | 2002 |   | 2001
|                                             |                                      |                             |                          |      |   |     
|Revenues:                                    |                                      |                             |                          |      |   |      |    |    |    |     |    |    
|                                             | License and other revenues           |                             |                          | 61   | % |      |    | 52 | %  |     |    | 52  | %  
|                                             | System revenues                      |                             |                          | 26   |   |      |    | 35 |    |     |    | 34  |    
|                                             | Service and parts revenues           |                             |                          | 13   |   |      |    | 13 |    |     |    | 14  |    
|                                             |                                      |                             |                          |      |   |      |    |    |    |     |    |    
|                                             |                                      |                             | Total revenues           |      |   | 100  |    |    |    | 100 |    |     |     | 100 | 
|                                             |                                      |                             |                          |      |   |      |    |    |    |     |    |    
|Costs and Expenses:                          |                                      |                             |                          |      |   |      |    |    |    |     |    |    
|                                             | Cost of license and other revenues   |                             |                          | 2    |   |      |    | 2  |    |     |    | 3   |    
|                                             | Cost of system revenues              |                             |                          | 25   |   |      |    | 24 |    |     |    | 24  |    
|                                             | Cost of service and parts revenues   |                             |                          | 9    |   |      |    | 10 |    |     |    | 8   |    
|                                             | Selling, general and administrative  |                             |                          | 27   |   |      |    | 31 |    |     |    | 26  |    
|                                             | Research, development and regulatory |                             |                          | 13   |   |      |    | 13 |    |     |    | 12  |    
|                                             |                                      |                             |                          |      |   |      |    |    |    |     |    |    
|                                             |                                      |                             | Total costs and expenses |      |   | 76   |    |    |    | 80  |    |     |     | 73  | 
|                                             |                                      |                             |                          |      |   |      |    |    |    |     |    |    
|Income From Operations                       |                                      |                             | 24                       |      |   |      | 20 |    |    |     | 27 |    
|                                             |                                      |                             |                          |      |   |      |    |    |    |     |    |    
|Other Income (Expense):                      |                                      |                             |                          |      |   |      |    |    |    |     |    |    
|                                             | Interest income                      |                             |                          | 2    |   |      |    | 4  |    |     |    | 7   |    
|                                             | Litigation settlement                |                             |                          |     |   |      |    | (6 | )  |     |    | (23 | )  
|                                             |                                      |                             |                          |      |   |      |    |    |    |     |    |    
|                                             |                                      | Other income (expense), net |                          |      | 2 |      |    |    | (2 | )   |    |     | (16 | )  
|                                             |                                      |                             |                          |      |   |      |    |    |    |     |    |    
|Income Before Provision For Income
    Taxes |                                      |                             | 26                       |      |   |      | 18 |    |    |     | 11 |    
|                                             | Provision for income taxes           |                             |                          | 10   |   |      |    | 7  |    |     |    | 4   |    
|                                             |                                      |                             |                          |      |   |      |    |    |    |     |    |    
|Net Income                                   |                                      |                             | 16                       | %    |   |      | 11 | %  |    |     | 7  | %  
|                                             |                                      |                             |                          |      |   |      |    |    |    |     |    |    

2003 Compared to 2002

|                           |                     |                         |         |      |   |        |         |      |   |  |     |    | 
|-------------------------- | ------------------- | ----------------------- | ------- | ---- | - | ------ | ------- | ---- | - |  | --- | -- | 
|                           |                     |                        
|                           |                     | Year Ended December 31,
|                           |                     |                        
|                           |                     | 2003                    |         | 2002 |   | Change
|                           |                     |                         |         |      |   |       
|                           |                     |                        
|                           |                     | (000s)                
|License and other revenues |                     | $                       | 87,351  |      |   | $      | 72,524  |      |   |  | 20  | % 
|                           | Percent of revenues |                         |         | 60.7 | % |        |         | 51.8 | % |  |     |    | 
|System revenues            |                     | $                       | 38,248  |      |   | $      | 48,595  |      |   |  | (21 | )%
|                           | Percent of revenues |                         |         | 26.6 | % |        |         | 34.7 | % |  |     |    | 
|Service and parts revenues |                     | $                       | 18,306  |      |   | $      | 18,807  |      |   |  | (3  | )%
|                           | Percent of revenues |                         |         | 12.7 | % |        |         | 13.5 | % |  |     |    | 
|Total                      |                     | $                       | 143,905 |      |   | $      | 139,926 |      |   |  | 3   | % 

License
and Other Revenues

License and other revenues grew 20%, or
$14.8 million, in 2003 compared with 2002, reflecting
primarily the conversion to our new CustomVue procedure by our
United States customers. We introduced the CustomVue procedure
in June in the United States and have sold the product for more
than double the price of our standard procedure. In the United
States, CustomVue procedures represented 24% of the procedure
orders in the third quarter and 29% of the procedure volume in
the fourth quarter. In the United States for the full year, 15%
of our procedure orders were CustomVue procedures.

Our total United States procedure volume for the
year grew by 3% over the prior year and also contributed
modestly to the increase in license and other revenue. As the
economy improved in the second half of 2003, the procedure growth

17



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##### Table of Contents



was more significant. It grew 17% in the second
half of 2003 compared with the second half of 2002. We believe
this increase represents the direct impact of favorable economic
conditions on interest in laser vision correction surgery.


Based on economists projections for a more
favorable economic environment in 2004 and our belief that
customers will continue to adopt our CustomVue product, we
believe that our procedure volume and conversion levels to
CustomVue procedures from standard procedures will increase in
2004. We cannot be certain of this projection since there is
uncertainty in the economic outlook and the decision to have
laser vision correction surgery is influenced by many factors.
The procedure is elective and generally not covered by medical
insurance; therefore it competes with many types of purchases
for consumers discretionary spending. Perceptions about
safety and effectiveness of the procedure are additional
considerations. The lack of long-term follow-up studies of the
procedure combined with media coverage of selected unfavorable
outcomes may contribute to uncertainty and delay by some
potential consumers. As such, we cannot accurately predict when,
or to what extent, these anticipated changes in the economy and
technology will impact our license and other revenues.

System
Revenues

System revenues comprise sales and leases of the
following equipment:



| |   |                                      
| | - | -------------------------------------
| |  | VISX STAR System;                    
|
| |  | Upgrades to the VISX STAR System; and
|
| |  | WaveScan Systems.                    

System revenues were negatively impacted by:



| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Less upgrade revenue, which resulted because 80%
    of our United States customers had already upgraded their VISX
    STAR S2tm to the STAR S3® System by the end of
    2002;                                             
|
| |  | Fewer VISX STAR System sales due to the continued
    weak economic environment, competitive pricing pressures for
    excimer lasers, and in Asia Pacific, political tensions in Korea
    and the outbreak of SARS in 2003.

This was offset by the increase in sales of
WaveScan Systems which:



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased to 440 units compared with 202 units in
    the prior year;                                                                         
|
| |  | Enables over 80% of our United States customers
    to perform CustomVue procedures that generate higher revenue and
    profit per procedure.

The market for laser systems remains competitive.
We experienced lower per unit pricing on laser sales in 2003
compared with 2002. We believe that we have maintained our
system market share in the United States and in our key
international markets. MarketScope estimates that VISX is the
leader in the worldwide market with approximately 30% of
worldwide laser placements.

In 2004, we believe there will be no significant
growth in revenues from laser system revenues and that the sale
of WaveScan systems will be less than in 2003, since most of our
customers have already purchased a WaveScan system.

18



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##### Table of Contents



Service
and Parts Revenues

Service and parts revenues in 2003 were
$0.5 million lower than in 2002. This was primarily the
result of a new service plan which effectively reduces the price
charged for service contracts on laser systems with lower than
average procedure volume.

|                                     |                             |                         |        |      |   |        |        |      |   |  |    |    | 
|------------------------------------ | --------------------------- | ----------------------- | ------ | ---- | - | ------ | ------ | ---- | - |  | -- | -- | 
|                                     |                             |                        
|                                     |                             | Year Ended December 31,
|                                     |                             |                        
|                                     |                             | 2003                    |        | 2002 |   | Change
|                                     |                             |                         |        |      |   |       
|                                     |                             |                        
|                                     |                             | (000s)                
|Cost of license and other revenues   |                             | $                       | 3,507  |      |   | $      | 3,302  |      |   |  | 6  | % 
|                                     | Percent of related revenues |                         |        | 4.0  | % |        |        | 4.6  | % |  |    |    | 
|Cost of system revenues              |                             | $                       | 35,328 |      |   | $      | 33,064 |      |   |  | 7  | % 
|                                     | Percent of related revenues |                         |        | 92.4 | % |        |        | 68.0 | % |  |    |    | 
|Cost of service and parts revenues   |                             | $                       | 13,235 |      |   | $      | 14,439 |      |   |  | (8 | )%
|                                     | Percent of related revenues |                         |        | 72.3 | % |        |        | 76.8 | % |  |    |    | 
|Selling, general and administrative  |                             | $                       | 38,583 |      |   | $      | 42,537 |      |   |  | (9 | )%
|                                     | Percent of total revenues   |                         |        | 26.8 | % |        |        | 30.4 | % |  |    |    | 
|Research, development and regulatory |                             | $                       | 18,647 |      |   | $      | 18,714 |      |   |  | (0 | )%
|                                     | Percent of total revenues   |                         |        | 13.0 | % |        |        | 13.4 | % |  |    |    | 

Cost
of License and Other Revenues

Cost of license and other revenues increased
slightly in 2003 compared with 2002. The increase was due to
slightly higher procedure sales that resulted in additional
licensing support in 2003. We experienced a gross profit margin
on license and other revenues of approximately 96% in 2003 and
95% in 2002. We anticipate similar margins for this product in
2004.

Cost
of System Revenues

Cost of system revenues increased
$2.3 million, due to the increase in WaveScan system sales.
This was partially offset by fewer VISX STAR System sales and
fewer sales of upgrades.

Our gross profit margin on system revenues
declined in 2003 from 2002 because we sold fewer system upgrades
and we earned less revenue on average per unit sold. We believe
that our gross profit margin on system revenues for 2004 will
remain low.

Cost
of Service and Parts Revenues

Cost of service and parts revenues decreased
approximately $1.2 million for the year ended
December 31, 2003 compared with the year ended
December 31, 2002. The decrease was due to fewer
requirements for service on a larger installed base of stable
products in the United States.

Selling,
General, and Administrative Expenses

Selling, general, and administrative expenses
declined by approximately $4.0 million to
$38.6 million in 2003 compared with 2002. The change
reflects primarily the following items:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Legal expenses declined $7.6 million in 2003
    from 2002. We settled a lawsuit against Nidek in the first
    quarter of 2003 which was the main reason for the
    $9.7 million reduction in gross legal expenses in 2003
    compared with 2002. Offsetting gross legal expenses, we received
    insurance reimbursements of $5.3 million and
    $7.5 million in 2003 and 2002, respectively, related to
    legal expenses we incurred in connection with the Nidek lawsuits;
|
| |  | An increase in marketing and sales expenses of
    $4.9 million to promote CustomVue.                                                                                                                                                                                                                                                                                                                                                                                               

19



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##### Table of Contents



In 2004, our current plan for operations includes:



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | A modest increase in marketing and sales expenses
    as we continue to promote our CustomVue procedure;       
|
| |  | Administrative spending similar to 2003 levels,
    and                                                        
|
| |  | An increase in legal expenses, because such
    expenses will not be offset by insurance reimbursement in 2004.

We believe these factors will result in an
increase of 5% to 9% in our selling, general and administrative
expenses.

Research
and Development and Regulatory Expenses

Our research and development and regulatory
expenses in 2003 remained similar to 2002 levels. We focused our
efforts on next generation technologies and developments for
laser vision correction, including:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Laser platforms such as our STAR S4tm
    laser system;                                                                                           
|
| |  | Eye diagnostic units such as our WaveScan System;                                                                                                 
|
| |  | New methods for correcting vision disorders
    including further indications (such as hyperopia and high
    myopia) for our CustomVue treatment;
|
| |  | Continued research and clinical trials for
    treatment of presbyopia; and                                                                       
|
| |  | Continued funding of early stage research at
    Stanford University for future treatments for age-related
    macular degeneration.              

In 2004, we anticipate that our research and
development and regulatory expenses will increase slightly
compared to our expenditures in 2003.

Interest
and Other Income

Interest income declined in 2003 from 2002 as a
result of:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | Lower average cash balances due to use of cash
    for the repurchase of our stock and payment of the Nidek
    settlement; and 
|
| |  | Lower average yields on our portfolio of cash and
    investments compared to 2002 due to market declines in interest
    rates.

Income
Tax Provision

Our effective tax rate increased in 2003 from
2002 due principally to lower research and development tax
credits.

Results of Operations

2002 Compared to 2001

|                           |                     |                         |         |      |   |        |         |      |   |  |     |    | 
|-------------------------- | ------------------- | ----------------------- | ------- | ---- | - | ------ | ------- | ---- | - |  | --- | -- | 
|                           |                     |                        
|                           |                     | Year Ended December 31,
|                           |                     |                        
|                           |                     | 2002                    |         | 2001 |   | Change
|                           |                     |                         |         |      |   |       
|                           |                     |                        
|                           |                     | (000s)                
|License and other revenues |                     | $                       | 72,524  |      |   | $      | 86,616  |      |   |  | (16 | )%
|                           | Percent of revenues |                         |         | 51.8 | % |        |         | 52.5 | % |  |     |    | 
|System revenues            |                     | $                       | 48,595  |      |   | $      | 55,592  |      |   |  | (13 | )%
|                           | Percent of revenues |                         |         | 34.7 | % |        |         | 33.7 | % |  |     |    | 
|Service and parts revenues |                     | $                       | 18,807  |      |   | $      | 22,808  |      |   |  | (18 | )%
|                           | Percent of revenues |                         |         | 13.5 | % |        |         | 13.8 | % |  |     |    | 
|Total                      |                     | $                       | 139,926 |      |   | $      | 165,016 |      |   |  | (15 | )%

20



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##### Table of Contents



License
and Other Revenues

License and other revenue in 2002 was
$14.1 million lower than in 2001 mainly due to a decline in
the volume of US procedures for which VISX earned procedure
fees. We believe the economic recession was the principal cause
of the decline in our procedure volume and the United States
laser vision correction market as a whole in 2002 from 2001.

System
Revenues

System revenues in 2002 were $7.0 million
lower than in 2001 due to a decline in sales of VISX STAR
Systems and VISX STAR System upgrade revenue, which was
partially offset by an increase in the sale of WaveScan Systems.

System revenues were negatively impacted by:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | VISX STAR System revenues revenue declined
    $7.4 million (from $33.8 to $26.4 million) due to the
    recession (both United States and worldwide) and aggressive
    pricing tactics by competitors; and



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Laser upgrade revenue decreased $8.0 million
    (from $19.6 to $11.6 million) because a majority of our US
    customers upgraded their VISX STAR S2 Systems to the new VISX
    STAR S3® model during 2001. Since we began installing the
    VISX STAR S3 upgrade in the fourth quarter of 2000, we had
    upgraded approximately 80% of the VISX STAR S2 lasers based in
    the United States by the end of 2002.

This was offset by the increase in sales of
WaveScan Systems which:



| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | Increased $8.5 million (from $2.1 to
    $10.6 million) as we continued to extend our rollout of
    this product.

Service
and Parts Revenues

Service and parts revenues in 2002 were
$4.0 million lower than in 2001 mainly due to a new service
plan which effectively reduced the price charged for service
contracts on laser systems with lower than average procedure
volume.

|                                     |                             |                         |        |      |   |        |        |      |   |  |     |    | 
|------------------------------------ | --------------------------- | ----------------------- | ------ | ---- | - | ------ | ------ | ---- | - |  | --- | -- | 
|                                     |                             |                        
|                                     |                             | Year Ended December 31,
|                                     |                             |                        
|                                     |                             | 2002                    |        | 2001 |   | Change
|                                     |                             |                         |        |      |   |       
|                                     |                             |                        
|                                     |                             | (000s)                
|Cost of license and other revenues   |                             | $                       | 3,302  |      |   | $      | 5,554  |      |   |  | (41 | )%
|                                     | Percent of related revenues |                         |        | 4.6  | % |        |        | 6.4  | % |  |     |    | 
|Cost of system revenues              |                             | $                       | 33,064 |      |   | $      | 40,248 |      |   |  | (18 | )%
|                                     | Percent of related revenues |                         |        | 68.0 | % |        |        | 72.4 | % |  |     |    | 
|Cost of service and parts revenues   |                             | $                       | 14,439 |      |   | $      | 12,638 |      |   |  | 14  | % 
|                                     | Percent of related revenues |                         |        | 76.8 | % |        |        | 55.4 | % |  |     |    | 
|Selling, general and administrative  |                             | $                       | 42,537 |      |   | $      | 41,946 |      |   |  | 1   | % 
|                                     | Percent of revenues         |                         |        | 30.4 | % |        |        | 25.4 | % |  |     |    | 
|Research, development and regulatory |                             | $                       | 18,714 |      |   | $      | 19,458 |      |   |  | (4  | )%
|                                     | Percent of revenues         |                         |        | 13.4 | % |        |        | 11.8 | % |  |     |    | 

Cost
of License and Other Revenues

Cost of license and other revenues declined
$2.3 million in 2002 compared with 2001. The decrease was
due to lower procedure volume in 2002, as well as additional
licensee support provided in 2001 compared to 2002.

Cost
of System Revenues

Cost of system revenues declined
$7.2 million, which was due primarily to lower cost of
revenues resulting from lower sales of laser upgrades. This was
partially offset by higher cost of VISX STAR System and WaveScan
System revenue, based on increased WaveScan System sales in 2002
compared with 2001.

Cost
of Service and Parts Revenues

Cost of service and parts revenues increased
$1.8 million to $14.4 million in 2002 from
$12.6 million in 2001. The increase was due to higher costs
to service a larger installed base of systems.

21



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##### Table of Contents



Selling,
General, and Administrative Expenses

Selling, general, and administrative expenses
increased $0.6 million in 2002 compared with 2001. The net
increase was due to;



| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | a $1.5 million increase in selling and
    marketing expenses primarily related to additional marketing
    research: and
|
| |  | a $1.2 million increase attributable to an
    impairment charge related to our investment in Medjet Inc.                

These increases were partially offset by;



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a $1.3 million reduction in provision for
    doubtful accounts receivables in 2002 over 2001. Our policy is
    to provide allowances against receivables based on our
    assessment of our customers ability to meet their
    financial obligations. As a result of this analysis, our
    provision for doubtful accounts receivable was $1.4 million
    in 2002 as compared to $2.7 million in 2001; and
|
| |  | a decrease in legal expenses in 2002.                                                                                                                                                                                                                                                                                                                                                                           

Research
and Development and Regulatory Expenses

Our research and development and regulatory
expenses decreased $0.7 million. We continued to focus on
next generation technologies and developments for laser vision
correction. These included laser platforms such as our STAR S4
laser system, eye diagnostic units such as our WaveScan System,
and new methods for correcting vision disorders including our
CustomVue treatment and early research and clinical trials on
treatments for presbyopia. We also continued funding early stage
research at Stanford University for future treatments for
age-related macular degeneration.

Interest
and Other Income

Our average balance of cash invested in interest
bearing securities was lower in 2002 than in 2001 due to cash
used to repurchase our stock. Additionally, as market interest
rates decreased throughout the year the average yield on our
portfolio of cash and investments was lower in 2002 compared to
2001. Accordingly, interest income declined in 2002 from 2001.

Income
Tax Provision

Our effective tax rate decreased in 2002 from
2001 due higher tax benefits associated with our sales outside
the United States and research and development.

Quarterly Results of Operations

In the following table we present selected items
from our recent quarterly financial results (in 000s
except earnings per share).

|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        |  
|------------------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | -
|                                                              |  |         |        |        
|                                                              |  | 2003    |        | 2002   
|                                                              |  |         |        |        
|                                                              |  | 1st Qtr |        | 2nd Qtr |  | 3rd Qtr |        | 4th Qtr |  | 1st Qtr |        | 2nd Qtr |  | 3rd Qtr |        | 4th Qtr
|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |        
|Total revenues                                                |  | $       | 34,433 |         |  | $       | 31,986 |         |  | $       | 39,268 |         |  | $       | 38,218 |         |  | $ | 36,585 |  |  | $ | 36,639 |  |  | $ | 30,560 |  |  | $ | 36,142 |  
|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        |  
|Cost of revenues                                              |  |         | 12,824 |         |  |         | 11,390 |         |  |         | 16,335 |         |  |         | 11,521 |         |  |   | 12,365 |  |  |   | 11,559 |  |  |   | 11,539 |  |  |   | 15,342 |  
|Total costs and expenses                                      |  |         | 26,324 |         |  |         | 27,033 |         |  |         | 31,687 |         |  |         | 24,256 |         |  |   | 27,367 |  |  |   | 28,425 |  |  |   | 24,971 |  |  |   | 31,293 |  
|Income from operations                                        |  |         | 8,109  |         |  |         | 4,953  |         |  |         | 7,581  |         |  |         | 13,962 |         |  |   | 9,218  |  |  |   | 8,214  |  |  |   | 5,589  |  |  |   | 4,849  |  
|Litigation settlement                                         |  |         |       |         |  |         |       |         |  |         |       |         |  |         |       |         |  |   |       |  |  |   |       |  |  |   |       |  |  |   | 9,000  |  
|Income (loss) before provision
    (benefit) for income taxes |  |         | 9,052  |         |  |         | 6,771  |         |  |         | 7,950  |         |  |         | 14,284 |         |  |   | 10,749 |  |  |   | 9,775  |  |  |   | 7,094  |  |  |   | (3,137 | )
|Provision (benefit) for income taxes                          |  |         | 3,576  |         |  |         | 2,673  |         |  |         | 3,085  |         |  |         | 5,472  |         |  |   | 4,246  |  |  |   | 3,859  |  |  |   | 2,625  |  |  |   | (1,591 | )
|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        |  
|Net income (loss)                                             |  | $       | 5,476  |         |  | $       | 4,098  |         |  | $       | 4,865  |         |  | $       | 8,812  |         |  | $ | 6,503  |  |  | $ | 5,916  |  |  | $ | 4,469  |  |  | $ | (1,546 | )
|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        |  
|Earnings (loss) per share, diluted                            |  | $       | 0.11   |         |  | $       | 0.08   |         |  | $       | 0.10   |         |  | $       | 0.17   |         |  | $ | 0.12   |  |  | $ | 0.11   |  |  | $ | 0.08   |  |  | $ | (0.03  | )
|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        |  
|Shares used for earnings (loss) per share,
    diluted        |  |         | 51,805 |         |  |         | 51,406 |         |  |         | 50,132 |         |  |         | 50,716 |         |  |   | 55,581 |  |  |   | 54,809 |  |  |   | 52,904 |  |  |   | 51,541 |  
|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        |  

Seasonal Variation.Typically we experience an increase in
procedure-related revenue in the United States market in the
first quarter of each calendar year. We attribute this increase
to consumers using the annual renewal of funding under the
Internal Revenue Service Code section 125 pre-tax medical
savings plan to purchase laser vision correction for

22



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themselves. Laser vision correction is not
generally covered by medical insurance. Our equipment and
procedure revenues tend to decline in the summer.


Critical Accounting Policies, Estimates and
Judgments

We follow accounting principles generally
accepted in the United States (GAAP) in preparing
our financial statements. As part of this work, we must make
many estimates and judgments about future events. These affect
the value of the assets and liabilities, contingent assets and
liabilities, and revenues and expenses reported in our financial
statements. We believe these estimates and judgments are
reasonable and we make them in accordance with our accounting
policies based on information available at the time. However,
actual results could differ from our estimates and could require
us to record adjustments to expenses or revenues material to our
financial position and results of operations in future periods.
We believe our most critical accounting policies, estimates and
judgments include the following:

Revenue Recognition

Our revenue recognition policy is described in
note 1 to the Financial Statements.

We are also required to ensure that
collectibility is reasonably assured before we recognize
revenue. Accordingly, we evaluate our customers for credit
worthiness and only recognize revenue if we believe that we have
reasonable assurance that amounts will be collected. Where we
are unable to assess with reasonable assurance that amounts will
be collected, we defer revenue recognition until the payments
are received. This is occasionally the case with customers who
have recently set themselves up in business and typically where
the customer is thinly capitalized.

Accounts Receivable

At the end of each accounting period, we estimate
the reserve necessary for accounts receivable that will
ultimately not be collected from customers. To develop this
estimate, we review all receivables and identify those accounts
with problems. For these problem accounts, we estimate
individual, specific reserves based on our analysis of the
payment history, operations and finances of each account. For
all other accounts, we review historical bad debt trends,
general and industry specific economic trends, customer
concentrations, and current payment patterns to estimate the
reserve necessary to provide for payment defaults that cannot be
specifically identified but can be expected with reasonable
probability to occur in the future. We face two particular
challenges in estimating these reserves: concentration of credit
with certain large customers and the potential for significant
change in the overall health of the national economies in the
markets we serve. Unexpected deterioration in the health of
either a large customer or a national economy could lead to a
material adverse impact on the collectibility of our accounts
receivable and our future operating results. Our allowance for
doubtful accounts at December 31, 2003, 2002 and 2001, as a
percentage of gross accounts receivable was 13.3%, 9.4% and
12.3% respectively. At December 31, 2003, a one-percentage
point deviation in our allowance for doubtful accounts as a
percentage of accounts receivable would have resulted in an
increase or decrease in expense of approximately
$0.3 million.

Inventories

Adjustments to the carrying value of inventory
for excess and obsolete items are based, in part, on our
estimate of demand over the following 6 months. This
estimate, though based on our historical experience and
consideration of other relevant factors, (such as the current
economic climate), is subject to some uncertainty. Amounts
charged to income for excess and obsolete inventory for the
years ending December 31, 2003, 2002 and 2001 as a
percentage of total revenues in 2003, 2002 and 2001, were all
less than 0.5%. To date, our estimates have been materially
accurate and subject to any major changes in our business model,
our operating environment or the economy, and taking
consideration of the ongoing development of our technology, we
do not expect either our methodology or the accuracy of our
estimates to change significantly in the future.

Legal Contingencies

At the end of each accounting period, we review
all outstanding legal matters. If we believe it is probable that
we will incur a loss as a result of the resolution of a legal
matter and we can reasonably estimate the amount of the loss, we
accrue our best estimate of the potential loss. It is very
difficult to predict the future results of complex legal
matters, although historically, the amounts we have paid out
have been materially similar to the amounts that we have
accrued. New developments in legal matters can cause changes in
previous estimates and result in significant changes in loss

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accruals. Currently we are not aware of any
pending or threatened legal actions against us that we believe
could materially adversely affect our business, financial
condition or results of operations. However, we could in the
future be subject to litigation claims that could cause us to
incur significant expenses and put our business, financial
position, and results of operations at material risk.


Liquidity and Capital
Resources

Cash, cash equivalents and short-term investments
and working capital were as follows:

|                                                   |  |      |         |        |  |      |       |        |  |      |         |  |  |  |       |  |  |   |         | 
|-------------------------------------------------- |  | ---- | ------- | ------ |  | ---- | ----- | ------ |  | ---- | ------- |  |  |  | ----- |  |  | - | ------- | 
|                                                   |  | 2003 |         | Change |  | 2002 |       | Change |  | 2001
|                                                   |  |      |         |        |  |      |       |        |  |     
|Cash, cash equivalents, and short-term investments |  | $    | 86,076  |        |  |      | (30)% |        |  | $    | 122,955 |  |  |  | (1)%  |  |  | $ | 123,807 | 
|Working capital                                    |  |      | 103,813 |        |  |      | (25)% |        |  |      | 138,351 |  |  |  | (13)% |  |  |   | 159,935 | 
|Stockholders equity                               |  |      | 125,799 |        |  |      | (19)% |        |  |      | 155,190 |  |  |  | (12)% |  |  |   | 176,278 | 

Our cash, cash equivalents, and short-term
investments consist principally of money market funds, and bonds
issued by the United States government, government sponsored
enterprises and corporations. All of our short-term investments
are classified as available-for-sale under the
provisions of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt
and Equity Securities. The securities are carried at fair
market value with the unrealized gains and losses, net of tax,
included in accumulated other comprehensive income, which is
reflected as a separate component of stockholders equity.
Gains and losses are recognized when realized on the
consolidated statements of operations.

Cash, cash equivalents, and short-term
investments were $86.1 million at December 31, 2003, a
decline of $36.9 million compared with December 31,
2002. It was impacted principally by:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | Stock repurchases of $63.0 million;                                                                                                 
|
| |  | Positive cash flow from operating activities of
    $26.8 million; and                                                              
|
| |  | Proceeds from issuance of common stock related to
    employee participation in employee stock programs generating
    $8.2 million.

Operating activities generated $26.8 million
in cash in 2003 compared with $40.2 million provided in
2002. In 2003 we:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Generated $37.4 million of cash from net
    income plus non-cash related expenses ($14.2 million);                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Used cash to pay $9.0 million included in
    accrued liabilities as of December 31, 2002 to Nidek for
    settlement of antitrust and related claims;                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Increased accounts receivables balances due
    primarily to higher sales levels in the latter half of the year;
    and                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Engaged in a higher number of operating lease
    arrangements with our physicians whereby we retain ownership of
    the system and receive revenue for the system generally over
    several years on a per procedure program. As such, we hold these
    leased systems in property, plant and equipment and amortize
    them to cost of system revenues over the term of the lease. New
    placements of equipment under these types of leases negatively
    impacted our cash by approximately $8.1 million in 2003;
    and.
|
| |  | Utilized prepaid taxes and deferred tax assets to
    reduce income tax payments otherwise due during 2003 by
    $6.4 million.                                                                                                                                                                                                                                                                                                                                                                                                      

Net cash provided by investing activities was
$15.2 million in 2003, down from $19.9 million
provided in 2002. The principal movements in cash provided by
investing activities were due to the investment in, and maturity
of short-term investments. This was partially offset in 2003 by
a payment of $5.9 million for acquired patents and
technology assets from 20/10 Perfect Vision Optische Gerate
GmbH. Capital expenditure decreased by $1.2 million to
$1.4 million.

Cash used in financing activities was
$54.8 million in 2003, up from $37.8 million used in
2002. The principal factor that contributed to the cash used in
financing activities was the cash used to repurchase
3.5 million shares and 3.9 million shares of VISX
stock on the open market in 2003 and 2002, respectively. This
was partially offset by cash received upon the issuance of stock
under employee stock programs of $8.2 million and
$4.9 million in 2003 and 2002, respectively.

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On April 4, 2001, our Board of Directors
authorized a Stock Repurchase Program under which up to
10 million shares of VISX common stock may be repurchased.
In accordance with this authorization and applicable securities
laws, we have repurchased 7.0 million shares on the open
market cumulatively through December 31, 2003, at a total
cost of $90.4 million. Accordingly, 3.0 million shares
remain available as of December 31, 2003 for repurchase
under the Board of Directors April 2001 authorization. On
May 28, 2003, the Board of Directors authorized the
repurchase of an additional 3.5 million shares of VISX
stock at a total cost of $63.0 million, all of which were
purchased during the quarter ended June 30, 2003. Before
repurchasing shares we consider a number of factors including
market conditions, the market price of the stock, and the number
of shares needed for employee benefit plans. As a result, we
cannot predict the number of shares that we may repurchase in
the future. Purchases of short-term investments represent
reinvestment into short-term investments of the proceeds from
short-term investments that matured and investment of cash and
cash equivalents. As of December 31, 2003, we did not have
any borrowings outstanding, nor any credit agreements.

Our normal credit terms granted to customers are
net 30 to 60 days. In an effort to promote the growth of
the laser vision correction industry and the use of
VISX STAR Systems and WaveScan Systems, we provide
long-term financing to customers for their purchase of our
equipment in certain markets. We consider a number of factors
including industry practice, competition, and our evaluation of
customers credit worthiness in determining when to offer
such financing.

We believe our operations will generate cash in
2004 at a level equal to or greater than in 2003. We believe
this will exceed cash required to fund our working capital and
capital equipment needs during the coming twelve months. In
addition, we have $86.1 million in cash, cash equivalents,
and short-term investments as of December 31, 2003 to
provide for unforeseen contingencies and to support strategic
objectives including the development or acquisition of new
technologies and our Stock Repurchase Program.

In May 2002, we entered into an exclusive
worldwide license agreement for a portfolio of patents held by
Luis Ruiz, MD, relating to the treatment of presbyopia with
multifocal ablations. VISX also signed an agreement with Tracey
Technologies, LLC for rights to Traceys ray tracing
technology for use in customized laser vision correction
treatments. If clinical and regulatory milestones specified in
both agreements are achieved, VISX will be committed to make
additional payments of approximately $2.0 million in
connection with these two agreements. VISX could be obligated
for royalties in the future based on any future sales of the
associated products.

The impact that our contractual obligations as of
December 31, 2003 are expected to have on our liquidity and
cash flow in future periods is as follows (in thousands):

|                            |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |     |  |  |   |   | 
|--------------------------- |  | ---------------------- | ------ | --------- |  | --------- | ----- | --------- |  | ------- | ----- |  |  | - | --- |  |  | - | - | 
|                            |  |                       
|                            |  | Payments Due by Period
|                            |  |                       
|                            |  |                        |        | Less than |  |           |       | More than
|                            |  | Total                  |        | 1 Year    |  | 1-3 Years |       | 3-5 Years |  | 5 Years
|                            |  |                        |        |           |  |           |       |           |  |        
|Contractual Obligations     |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |     |  |  |   |   | 
|Operating Lease Obligations |  | $                      | 8,788  |           |  | $         | 2,079 |           |  | $       | 5,893 |  |  | $ | 816 |  |  |   |  | 
|Purchase Obligations        |  |                        | 5,559  |           |  |           | 5,491 |           |  |         | 68    |  |  |   |    |  |  |   |  | 
|                            |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |     |  |  |   |   | 
|Total                       |  | $                      | 14,347 |           |  | $         | 7,570 |           |  | $       | 5,961 |  |  | $ | 816 |  |  | $ |  | 
|                            |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |     |  |  |   |   | 

New Accounting Pronouncements

In July 2002, the FASB issued Statement
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (SFAS 146) and
nullified EITF Issue No. 94-3 Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring. SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized
when the liability is incurred, whereas EITF No. 94-3
had recognized the liability at the commitment date to an exit
plan. We are required to adopt the provisions of SFAS 146
effective for exit or disposal activities initiated after
December 31, 2002. The adoption of SFAS 146 did not
have a material impact on our financial position or results of
operations.

In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF Issue No. 00-21 provides
guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or
rights to use assets. The provisions of EITF Issue
No. 00-21 apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The adoption
of EITF Issue No. 00-21 did not have a material impact on
our financial position or results of operations.

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In December 2003, the FASB revised Interpretation
No. 46 (FIN 46), Consolidation of
Variable Interest Entities, an Interpretation of
ARB No. 51 which it had originally issued in
January 2003. As revised, FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. As revised, application of FIN 46 is
required for interests in variable interest entities or
potential variable interest entities (commonly referred to as
special-purpose entities) for periods ending after
December 15, 2003. Application for all other types of
entities covered by FIN 46 is required in financial
statements for periods ending after March 15, 2004. The
adoption of FIN 46 as revised, did not have a material
impact on our financial position or results of operations.

In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150 (SFAS 150),
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.
SFAS 150 requires that certain financial instruments, which
under previous guidance were accounted for as equity, must now
be accounted for as liabilities. The financial instruments
affected include mandatory redeemable stock, certain financial
instruments that require or may require the issuer to buy back
some of its shares in exchange for cash or other assets and
certain obligations that can be settled with shares of stock.
SFAS 150 is effective for all financial instruments entered
into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning
after June 15, 2003, although certain aspects have been
delayed pending further clarifications. We do not expect the
adoption of SFAS 150 to have a material impact on our
financial position or results of operations.

In December 2003, the SEC issued Staff Accounting
Bulletin (SAB) No. 104 Revenue
Recognition which codifies, revises and rescinds certain
sections of SAB No. 101, Revenue Recognition,
in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC
rules and regulations. The changes noted in
SAB No. 104 did not have a material effect on our
financial position or results of operations.

Risk Factors

This report contains forward-looking statements
that involve risk and uncertainty. The factors set forth below,
which are not the only risks we face, may cause our actual
results to vary from those contemplated by forward-looking
statements set forth in this report and should be considered
carefully in addition to the other information presented in this
report. If any of the following risks actually occur, our
business, results of operations or cash flows could be adversely
affected. Our results of operations have varied widely in the
past and could continue to vary significantly. In addition, our
actual results may differ significantly from the results
contemplated by the forward-looking statements. Accordingly, we
believe that our results of operations in any given period may
not be a good indicator of our future performance.

Market Acceptance.Our business depends upon broad market
acceptance of laser vision correction by both doctors and
patients in the United States and key international markets.
Laser vision correction has penetrated less than 6% of the
eligible United States population, and our profitability and
continued growth will be largely dependent on increasing levels
of market acceptance and procedure growth, especially with
regard to our higher-priced CustomVue procedure. Although laser
vision correction offers a more predictable outcome and more
precise results than other surgical methods used to correct
refractive disorders, it is not without risk. Potential
complications and side effects include: post-operative
discomfort, corneal haze (an increase in the light scattering
properties of the cornea) during healing, glare/halos
(undesirable visual sensations produced by bright lights),
decreases in contrast sensitivity, temporary increases in
intraocular pressure in reaction to procedure medication, modest
fluctuations in refractive capabilities during healing, modest
decrease in best corrected vision (i.e., with corrective
eyewear), unintended over- or under-corrections, regression of
effect, disorders of corneal healing, corneal scars, corneal
ulcers, and induced astigmatism (which may result in blurred or
double vision and/or shadow images). Some consumers may choose
not to undergo laser vision correction because of these
complications or more general concerns relating to its safety
and efficacy or a resistance to surgery in general.
Alternatively, some consumers may elect to delay undergoing
laser vision correction surgery because they believe improved
technology or methods of treatment will be available in the near
future. Should either the ophthalmic community or the general
population turn away from laser vision correction as an
alternative to existing methods of treating refractive vision
disorders, or if future technologies replaced laser vision
correction, these developments could have a material adverse
effect on our business, financial position and results of
operations.

Unfavorable Side Effects.The possibility of long-term side
effects and adverse publicity regarding laser correction surgery
could seriously harm our business. Laser vision correction is a
relatively new procedure. Consequently, there is

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no long-term follow-up data beyond ten years that
might reveal additional complications or unknown side effects.
Any future reported side effects, other adverse events or
unfavorable publicity involving patient outcomes resulting from
the use of laser vision correction systems manufactured by VISX
or any participant in the laser vision correction market, may
have a material adverse effect on our business, financial
position, and results of operations.


Government Regulation.We are subject to extensive government
regulation, which increases our costs and could prevent us from
selling our products. Government regulation includes inspection
of and controls over research and development, testing,
manufacturing, safety and environmental controls, efficacy,
labeling, advertising, promotion, pricing, record keeping, the
sale and distribution of pharmaceutical products and samples and
electronic records and electronic signatures. In the United
States, we must obtain FDA approval or clearance for each
medical device that we market. The FDA approval process is
typically lengthy and expensive, and approval is never certain.
Products distributed outside of the United States are also
subject to government regulation, which may be equally or more
demanding. Our new products could take a significantly longer
time than we expect to gain regulatory approval and may never
gain approval. If a regulatory authority delays approval of a
potentially significant product, our market value and operating
results may decline. Even if the FDA or another regulatory
agency approves a product, the approval may limit the indicated
uses for a product, may otherwise limit our ability to promote,
sell and distribute a product or may require post-marketing
studies. If we are unable to obtain regulatory approval of our
products, we will not be able to market these products, which
would result in a decrease in our sales. Currently, we are
actively pursuing approval for a number of our products from
regulatory authorities in a number of countries, including,
among others, the United States, countries in the European Union
and Japan. Continued growth in our sales and profits will
depend, in part, on the timely and successful introduction and
marketing of some or all of these products.

The clinical trials required to obtain regulatory
approvals are complex and expensive and their outcomes are
uncertain. We incur substantial expense for, and devote
significant time to, clinical trials but cannot be certain that
the trials will ever result in the commercial sale of a product.
We may suffer significant setbacks in clinical trials, even
after earlier clinical trials showed promising results. Any of
our products may produce undesirable side effects that could
cause us or regulatory authorities to interrupt, delay or halt
clinical trials of a product candidate. We, the FDA, or another
regulatory authority may suspend or terminate clinical trials at
any time if they or we believe the trial participants face
unacceptable health risks.

Noncompliance with applicable United States
regulatory requirements can result in fines, injunctions,
penalties, mandatory recalls or seizures, suspensions of
production, denial or withdrawal of pre-marketing approvals,
recommendations by the FDA against governmental contracts and
criminal prosecution. The FDA also has authority to request
repair, replacement, or the refund of the cost of any device we
manufacture or distribute. Regulatory authorities outside of the
United States may impose similar sanctions for noncompliance
with applicable regulatory requirements.

New Technologies.If
we fail to keep pace with advances in our industry or fail to
develop new methods of vision correction, customers may not buy
our products and our revenue may decline. We must be able to
manufacture and effectively market those products and persuade a
sufficient number of eye care professionals to use the new
products as well as new methods of vision correction such as our
CustomVue procedure, that we introduce. Sales of our existing
products may decline rapidly if a new product is introduced by
one of our competitors or if we announce a new product that, in
either case, represents a substantial improvement over our
existing products. A decrease in procedure volume may also occur
if consumers elect to delay undergoing laser vision correction
surgery because they believe improved technology or methods of
treatment will be available in the near future.

New Products May Not Be Commercially
Viable.While we devote significant
resources to research and development, our research and
development may not lead to new products that achieve commercial
success. The research and development process is expensive,
prolonged, and entails considerable uncertainty. Development of
a new medical device, from discovery through testing and
registration to initial product launch, typically takes between
three and seven years. Each of these periods varies considerably
from product to product and country to country. Because of the
complexities and uncertainties associated with ophthalmic
research and development, products we are currently developing
may not complete the development process or obtain the
regulatory approvals required to market such products
successfully. The products currently in our development pipeline
may not be approved by regulatory entities and may not be
commercially successful, and our current and planned products
could be surpassed by more effective or advanced products.

Competition.Intense
competition in the laser vision correction industry could result
in the loss of customers, an inability to attract new customers,
or a decrease in prices for our products. The medical device and
ophthalmic laser industries are subject to intense competition
and technological change. Not only does laser vision correction
compete with more

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traditional vision correction options such as
eyeglasses and contact lenses, it also competes with other
technologies and surgical techniques such as intraocular lenses,
and surgery using different types of lasers. In addition, the
market for laser vision correction systems has become
increasingly competitive in recent years as a result of FDA
approval of several laser systems. The VISX STAR System competes
with products marketed or under development by other laser and
medical equipment manufacturers, many of which have greater
financial and other resources. Competitors may offer laser
systems at a lower price, may price their laser systems as part
of a bundle of products or services, may develop procedures that
involve a lower per procedure cost, or may offer products
perceived as preferable to the VISX STAR System. In addition,
medical companies, academic and research institutions and others
could develop new therapies, including new medical devices or
surgical procedures, for the conditions targeted by VISX, which
therapies could be more medically effective and less expensive
than laser vision correction, and could potentially render laser
vision correction obsolete. Any such developments could have a
material adverse effect on our business, financial position and
results of operations.


Procedure Market Share.MarketScope estimates that we are
currently the leader in the United States procedures market with
a market share of over 60%. Because of this position all of our
competitors target us and our market share in order to grow
their own revenues. We can give no assurance that we will be
able to maintain or grow our existing market share and we may,
in fact, be required to incur considerable expenditures in order
to maintain that share. Should our procedure market share
decline, it could have a material adverse effect on our
business, financial position and results of operations as well
as the market price of our common stock.

Economic Conditions.Because laser vision correction is not subject to reimbursement
from third-party payors such as insurance companies or
government programs, the cost of laser vision correction is
typically borne by individuals directly. Accordingly, weak or
uncertain economic conditions may cause individuals to be less
willing to incur the procedure cost associated with laser vision
correction as was evidenced by our decline in revenues from 2002
compared to 2001 and from 2001 compared to 2000. A decline in
economic conditions especially in the United States, could
result in a decline in the number of laservision correction
procedures performed and could have a material adverse effect on
our business, financial position, and results of operations.

Significant
Customers.A significant portion of
our revenues is derived from sales to TLC Vision
(TLC). TLC and its operating subsidiaries accounted
for 16%, 14% and 17% of our total revenues in 2003, 2002 and
2001, respectively. Additionally, TLC, accounted for 22%, 22%,
and 31% of our total receivables at December 31, 2003, 2002
and 2001, respectively. Should we lose a significant customer or
if anticipated sales to a significant customer do not
materialize, our business, financial position and results of
operations may suffer. In addition, should a significant
customer become unable to pay balances owed, we would have to
increase our charges for bad debt expense which could have a
material adverse effect on our business, financial position and
results of operations.

Patents and Intellectual Property
Disputes.Our business is dependent on
the enforceability and the validity of our United States and
foreign patents. We own over 200 United States and foreign
patents and have more than 200 patent applications pending. In
the past, our patents have been challenged on several fronts and
we have asserted our patents against competitors. Generally,
these proceedings centered on whether infringement of the
patents had occurred, and on the validity or enforceability of
the patents. While all of these proceedings have now been
resolved, we may assert our patents against competitors in the
future. If our patents were found to be invalid or unenforceable
(or in the event that parties against whom VISX asserted patent
infringement were found not to be infringing our patents) in any
future proceedings, our ability to collect license fees from the
parties to the litigation or from other sellers or users of
laser vision correction equipment in the United States could
suffer and our revenues could decline. In addition, other
companies own United States and foreign patents covering methods
and apparatus for performing corneal surgery with ultraviolet
lasers. If we were accused of infringing such competitors
patents and found to have infringed such patents, we could be
subject to significant monetary liability and enjoined from
distributing our products. Any one of these results could harm
our business.

Product Liability
Claims.We have and may become subject
to product liability claims. We could be liable for injuries or
damage resulting from use of the VISX STAR System or WaveScan
System. In addition, a claim that an injury resulted from a
defect in any VISX product, even if successfully defended, could
damage our reputation. Although we possess insurance customarily
obtained by businesses of our type (including insurance against
product liability risks associated with the testing,
manufacturing, and marketing of our products), product liability
claims in excess of our insurance coverage could have a material
adverse effect on our business, financial position, and results
of operations.

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International
Operations.We face risks due to our
reliance on sales in international markets. During 2003, 2002,
and 2001, we derived approximately 17%, 23% and 16%,
respectively, of our revenues from sales to customers outside
the United States. Our international presence exposes us to
risks including:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | the need for export licenses;                                                               
|
| |  | unexpected regulatory requirements;                                                         
|
| |  | tariffs and other potential trade barriers and
    restrictions;                            
|
| |  | political, legal and economic instability in
    foreign markets;                           
|
| |  | longer accounts receivable cycles;                                                          
|
| |  | difficulties in managing operations across
    disparate geographic areas;                  
|
| |  | foreign currency fluctuations;                                                              
|
| |  | reduced or limited protection of our intellectual
    property rights in some countries; and
|
| |  | dependence on local distributors.                                                           

If one or more of these risks materialize, our
sales to international customers may decrease and our costs may
increase, which could negatively impact our revenues and
operating results.

Distributors.Internationally, we sell our products through distributors. If
we fail to maintain our existing distribution channels or
develop additional channels in the future, our ability to sell
products internationally could be impaired and our business
harmed.

Third Party Financing
Entities.We have relationships with
third party financing entities that purchase our products
directly and subsequently lease and/or sell these products to
our end-user customers, or provide financing directly to
customers who purchase our products directly from us. Should any
third party financing entity or entities fail or refuse to pay
us in a timely manner or at all, it could negatively affect our
cash flows and could have a material adverse effect on our
business, financial position and results of operations. In fact,
DVI, which provided equipment purchase financing to our
customers, entered into Chapter 11 bankruptcy proceedings
in August 2003, and as a result, we recorded bad debt
expense to increase our reserve for doubtful accounts to cover
the entire $2.3 million of accounts receivables then
outstanding from DVI.

Fixed Short-Term
Expenses.Because our expenses are
relatively fixed in the short term, our earnings will decline if
we do not meet our projected sales. Any shortfall in revenues
below expectations would likely have an immediate impact on our
earnings per share, which could adversely affect the market
price of our common stock. Our operating expenses, which include
sales and marketing, research and development, and general and
administrative expenses, are based on our expectations of future
revenues and are relatively fixed in the short term.
Accordingly, if revenues fall below expectations, we will not be
able to reduce our spending rapidly in response to such a
shortfall.

Acquisitions of Businesses or
Technology.We have acquired
technology assets and may need to continue to do so to retain
our competitive position within the marketplace. If we acquire
businesses, new products or technologies in the future, we may
be required to amortize significant amounts of identifiable
intangible assets and we may record significant amounts of
goodwill that will be subject to annual testing for impairment.
If we consummate one or more significant future acquisitions in
which the consideration consists of stock or other securities,
our existing stockholders ownership could be significantly
diluted. If we were to proceed with one or more significant
future acquisitions in which the consideration included cash, we
could be required to use a substantial portion of our available
cash. Additionally, such an acquisition could have a substantial
impact on our business, our financial position and our results
of operations.

Taxes.We operate
throughout the United States and, consequently, are subject to
various federal, state and local taxes, including sales, income,
payroll, unemployment, property, franchise, capital and use tax
on our operations, payroll, assets and services. Although we
believe we have adequate provisions and accruals in our
financial statements for tax liabilities,

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we cannot predict the outcome of all past and
future tax assessments. If any taxing authority determines we
owe amounts for taxes greater than we expect, our earnings may
be negatively affected.


Key Personnel.The
success of our business depends on the efforts and abilities of
our senior management and other key personnel. We do not have
long term employment agreements with any of our key personnel.
The loss of any of our executive officers or other key employees
could result in significant disruption to our ongoing operations
and hurt our business. Additionally, our inability to attract
new senior executives and key personnel could significantly
impact our business results.

Single Sources For Key
Components.The manufacture of the
VISX STAR System and WaveScan System is a complex operation
involving numerous procedures. We depend on single and limited
sources for several key components. If any of these suppliers
were to cease providing components, we would be required to
locate and contract with a substitute supplier. We could have
difficulty identifying a substitute supplier in a timely manner
or on commercially reasonable terms. If the production of our
products, parts and services were interrupted or could not
continue in a cost-effective or timely manner, our business,
financial position, and results of operations, could be
materially adversely affected.

Volatility of our Stock
Price.The market price of our common
stock has experienced fluctuations and is likely to fluctuate
significantly in the future. Our stock price can fluctuate for a
number of reasons, including:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | announcements about us or our competitors;                                          
|
| |  | results or settlements of litigation;                                               
|
| |  | quarterly variations in operating results;                                          
|
| |  | the introduction or abandonment of new
    technologies or products;                
|
| |  | changes in product pricing policies by us or our
    competitors;                   
|
| |  | changes in earnings estimates by analysts or
    changes in accounting policies; and
|
| |  | economic changes and political uncertainties.                                       

In addition, stock markets have experienced
significant price and volume volatility in recent years. This
volatility has had a substantial effect on the market prices of
securities of many public companies for reasons frequently
unrelated or disproportionate to the operating performance of
the specific companies. In addition, the securities of many
medical device companies, including VISX, have historically been
subject to extensive price and volume fluctuations that may
affect the market price of their common stock. If these broad
market fluctuations continue, they may adversely affect the
market price of our common stock.

Proprietary Information and Inventions
Agreements.We protect our proprietary
technology, in part, through proprietary information and
inventions agreements with employees, consultants and other
parties. These agreements with employees and consultants
generally contain standard provisions requiring those
individuals to assign to us, without additional consideration,
inventions conceived or reduced to practice by them while
employed or retained by us, subject to customary exceptions. If
any of our employees, consultants or others breach these
agreements our competitors may learn of our trade secrets.

Changes to the Accounting for Stock
Options.The Financial Accounting
Standards Board has indicated that possible rule changes
requiring expensing of stock options may be adopted in the near
future. Currently, we include such expenses on a pro forma basis
in the notes to our annual financial statements in accordance
with accounting principles generally accepted in the United
States but do not include stock option expense for employee
options in our reported financial statements. If accounting
standards are changed to require us to expense stock options,
our reported earnings will decrease significantly and our stock
price could decline.

Exercising of Stock
Options.As of December 31, 2003,
there were an aggregate of 6,009,000 shares of our common
stock issuable upon exercise of outstanding vested stock
options. If these stock options are exercised, the total number
of our traded shares will increase and this could adversely
impact our earnings per share.

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Antitakeover Provisions in Our Charter
Documents.In 2000, we adopted a
stockholder rights plan. The presence of this plan could make it
more difficult for a third party to engage in a takeover
attempt, even a takeover attempt in which the potential
purchaser offers to pay a per share price greater than the
current market price for our common stock. In addition, the
presence of the plan could delay or impede the removal of
incumbent directors. These provisions may also impact the amount
of interest investors have in our business.




Item 7A. Quantitative and Qualitative
Disclosures About Market Risk

Interest Rate Risk.We invest our cash, beyond that needed for daily operations, in
high quality debt securities. We seek primarily to preserve the
value and liquidity of our capital, and secondarily to safely
earn income from these investments. To accomplish these goals,
we invest only in debt securities issued by (1) the United
States Treasury and United States government agencies and
corporations and (2) United States corporations that meet
the following criteria:



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | Rated investment grade A or higher by
    the major rating services;
|
| |  | Can readily be resold for cash; and                                   
|
| |  | Mature no more than 3 years from our date of
    purchase.            

The following table shows the expected cash flows
at maturity from our investments in debt securities
($000s).

|                                                                                         |  |      |        |      |  |      |        |      |  |      |   |        |  |   |   |  |  |   |   |  |  |   |   | 
|---------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | - | ------ |  | - | - |  |  | - | - |  |  | - | - | 
|                                                                                         |  | 2004 |        | 2005 |  | 2006 |        | 2007 |  | 2008 |   | Beyond
|                                                                                         |  |      |        |      |  |      |        |      |  |      |   |       
|Cash equivalents and short-term investments
    (amortized cost as of December 31, 2003) |  | $    | 34,909 |      |  | $    | 35,265 |      |  | $    |  |        |  | $ |  |  |  | $ |  |  |  | $ |  | 
|Weighted average effective interest rate                                                 |  |      | 1.47   | %    |  |      | 1.72   | %    |  |      |  |        |  |   |  |  |  |   |  |  |  |   |  | 

Foreign Currency Exchange Rate
Risk.We sell products in various
international markets. Virtually all of these sales are
contracted and paid for in United States Dollars. As of
December 31, 2003 we have no outstanding foreign currency
hedge contracts. Accordingly, we have no material foreign
currency exchange risk as of December 31, 2003.

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Item 8. Financial Statements and
Supplementary Data

VISX, INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS

|                                                                             |  |      |    | 
|---------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                             |  | Page
|                                                                             |  |     
|Consolidated Balance Sheets                                                  |  |      | 33 | 
|Consolidated Statements of Operations                                        |  |      | 34 | 
|Consolidated Statements of Stockholders
    Equity and Comprehensive Income |  |      | 35 | 
|Consolidated Statements of Cash Flows                                        |  |      | 36 | 
|Notes to Consolidated Financial Statements                                   |  |      | 37 | 
|KPMG LLP, Independent Auditors Report                                       |  |      | 49 | 
|Arthur Andersen LLP, Report of Independent Public
    Accountants            |  |      | 50 | 

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VISX, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                          |                                                                                                                              |                            |                                            |         |         |         |          |         |         |         | 
|------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------- | ------- | ------- | -------- | ------- | ------- | ------- | 
|                                                                                                                          |                                                                                                                              |                           
|                                                                                                                          |                                                                                                                              | December 31,              
|                                                                                                                          |                                                                                                                              |                           
|                                                                                                                          |                                                                                                                              | 2003                       |                                            | 2002   
|                                                                                                                          |                                                                                                                              |                            |                                            |        
|                                                                                                                          |                                                                                                                              |                           
|                                                                                                                          |                                                                                                                              | (In thousands, except     
|                                                                                                                          |                                                                                                                              | share and per share       
|                                                                                                                          |                                                                                                                              | amounts)                  
|ASSETS                                                                                                                   
|Current Assets                                                                                                            |                                                                                                                              |                            |                                            |         |         |         |          |        
|                                                                                                                          | Cash and cash equivalents                                                                                                    |                            | $                                          | 24,895  |         |         | $        | 37,687  |        
|                                                                                                                          | Short-term investments                                                                                                       |                            |                                            | 61,181  |         |         |          | 85,268  |        
|                                                                                                                          | Accounts receivable, net of allowances for
    doubtful accounts of $4,195 and $2,563, respectively                          |                            |                                            | 27,432  |         |         |          | 24,559  |        
|                                                                                                                          | Inventories                                                                                                                  |                            |                                            | 11,219  |         |         |          | 12,751  |        
|                                                                                                                          | Deferred tax assets and prepaid expenses                                                                                     |                            |                                            | 17,250  |         |         |          | 23,488  |        
|                                                                                                                          |                                                                                                                              |                            |                                            |         |         |         |          |        
|                                                                                                                          |                                                                                                                              | Total current assets       |                                            |         | 141,977 |         |          |         | 183,753 |        
|Property and Equipment, net                                                                                               |                                                                                                                              |                            | 9,306                                      |         |         |         | 6,498    |        
|Long-Term Deferred Tax and Other
    Assets                                                                               |                                                                                                                              |                            | 12,680                                     |         |         |         | 10,341   |        
|                                                                                                                          |                                                                                                                              |                            |                                            |         |         |         |          |        
|                                                                                                                          |                                                                                                                              |                            | Total Assets                               |         | $       | 163,963 |          |         | $       | 200,592 | 
|                                                                                                                          |                                                                                                                              |                            |                                            |         |         |         |          |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                 
|Current Liabilities                                                                                                       |                                                                                                                              |                            |                                            |         |         |         |          |        
|                                                                                                                          | Accounts payable                                                                                                             |                            | $                                          | 3,442   |         |         | $        | 4,341   |        
|                                                                                                                          | Accrued liabilities and other current liabilities                                                                            |                            |                                            | 34,722  |         |         |          | 41,061  |        
|                                                                                                                          |                                                                                                                              |                            |                                            |         |         |         |          |        
|                                                                                                                          |                                                                                                                              | Total current liabilities  |                                            |         | 38,164  |         |          |         | 45,402  |        
|                                                                                                                          |                                                                                                                              |                            |                                            |         |         |         |          |        
|Commitments and Contingencies (Notes 9
    and 12)                                                                        |                                                                                                                              |                            |                                            |         |         |         |          |        
|Stockholders Equity:                                                                                                     |                                                                                                                              |                            |                                            |         |         |         |          |        
|                                                                                                                          | Common stock  $.01 par value,
    180,000,000 shares authorized; 64,990,089 shares
    issued at December 31, 2003 and 2002 |                            |                                            | 650     |         |         |          | 650     |        
|                                                                                                                          | Additional paid-in capital                                                                                                   |                            |                                            | 201,108 |         |         |          | 202,700 |        
|Less: 16,295,297 and 13,652,256 common stock
    treasury shares at December 31, 2003 and 2002,
    respectively, at cost |                                                                                                                              |                            | (258,218                                   | )       |         |         | (208,748 | )      
|                                                                                                                          | Accumulated other comprehensive income                                                                                       |                            |                                            | 341     |         |         |          | 1,921   |        
|                                                                                                                          | Retained earnings                                                                                                            |                            |                                            | 181,918 |         |         |          | 158,667 |        
|                                                                                                                          |                                                                                                                              |                            |                                            |         |         |         |          |        
|                                                                                                                          |                                                                                                                              | Total stockholders equity |                                            |         | 125,799 |         |          |         | 155,190 |        
|                                                                                                                          |                                                                                                                              |                            |                                            |         |         |         |          |        
|                                                                                                                          |                                                                                                                              |                            | Total Liabilities and Stockholders Equity |         | $       | 163,963 |          |         | $       | 200,592 | 
|                                                                                                                          |                                                                                                                              |                            |                                            |         |         |         |          |        

See accompanying notes to consolidated financial
statements.


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VISX, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |         |         |         | 
|-------------------------------------------- | ------------------------------------ | ------------------------------------- | ------------------------ | ------ | ----- | ------- | ------ | ------ | ------ | ------- | ------ | ------- | ------- | ------- | 
|                                             |                                      |                                      
|                                             |                                      | Year Ended December 31,              
|                                             |                                      |                                      
|                                             |                                      | 2003                                  |                          | 2002   |       | 2001   
|                                             |                                      |                                       |                          |        |       |        
|                                             |                                      |                                      
|                                             |                                      | (In thousands, except per share data)
|Revenues:                                    |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|                                             | License and other revenues           |                                       | $                        | 87,351 |       |         | $      | 72,524 |        |         | $      | 86,616  |        
|                                             | System revenues                      |                                       |                          | 38,248 |       |         |        | 48,595 |        |         |        | 55,592  |        
|                                             | Service and parts revenues           |                                       |                          | 18,306 |       |         |        | 18,807 |        |         |        | 22,808  |        
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|                                             |                                      |                                       | Total revenues           |        |       | 143,905 |        |        |        | 139,926 |        |         |         | 165,016 | 
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|Costs and Expenses:                          |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|                                             | Cost of license and other revenues   |                                       |                          | 3,507  |       |         |        | 3,302  |        |         |        | 5,554   |        
|                                             | Cost of system revenues              |                                       |                          | 35,328 |       |         |        | 33,064 |        |         |        | 40,248  |        
|                                             | Cost of service and parts revenues   |                                       |                          | 13,235 |       |         |        | 14,439 |        |         |        | 12,638  |        
|                                             | Selling, general and administrative  |                                       |                          | 38,583 |       |         |        | 42,537 |        |         |        | 41,946  |        
|                                             | Research, development and regulatory |                                       |                          | 18,647 |       |         |        | 18,714 |        |         |        | 19,458  |        
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|                                             |                                      |                                       | Total costs and expenses |        |       | 109,300 |        |        |        | 112,056 |        |         |         | 119,844 | 
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|Income From Operations                       |                                      |                                       | 34,605                   |        |       |         | 27,870 |        |        |         | 45,172 |        
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|Other Income (Expense):                      |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|                                             | Interest income                      |                                       |                          | 3,452  |       |         |        | 5,611  |        |         |        | 10,680  |        
|                                             | Litigation settlement                |                                       |                          |       |       |         |        | (9,000 | )      |         |        | (37,821 | )      
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|                                             |                                      | Other income (expense), net           |                          |        | 3,452 |         |        |        | (3,389 | )       |        |         | (27,141 | )      
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|Income Before Provision For Income
    Taxes |                                      |                                       | 38,057                   |        |       |         | 24,481 |        |        |         | 18,031 |        
|                                             | Provision for income taxes           |                                       |                          | 14,806 |       |         |        | 9,139  |        |         |        | 7,122   |        
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|Net Income                                   |                                      | $                                     | 23,251                   |        |       | $       | 15,342 |        |        | $       | 10,909 |        
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|Earnings Per Share                           |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|                                             | Basic                                |                                       | $                        | 0.47   |       |         | $      | 0.29   |        |         | $      | 0.19    |        
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|                                             | Diluted                              |                                       | $                        | 0.46   |       |         | $      | 0.29   |        |         | $      | 0.19    |        
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|Shares Used For Earnings Per Share           |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|                                             | Basic                                |                                       |                          | 49,471 |       |         |        | 53,096 |        |         |        | 56,660  |        
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        
|                                             | Diluted                              |                                       |                          | 50,937 |       |         |        | 53,816 |        |         |        | 58,081  |        
|                                             |                                      |                                       |                          |        |       |         |        |        |        |         |        |        

See accompanying notes to consolidated financial
statements.


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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME

|                                                                |                                                                             |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |        |  
|--------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------- | ------ | ------ |  | ---------- | --- | -------- |  | ------------- | ------- | ------------- |  | -------- | -------- | ------------- |  | - | ----- | ------ | - |  | - | ------ | - | - | ------- | ------ |  | - | -------- | ------ | -
|                                                                |                                                                             |                |        | Common |  |            |     |          |  | Accumulated   |         |               |  |          |          |              
|                                                                |                                                                             | Common         |        | Stock  |  | Additional |     |          |  | Other         |         |               |  |          |          | Total        
|                                                                |                                                                             | Shares         |        | Par    |  | Paid-In    |     | Treasury |  | Comprehensive |         | Comprehensive |  | Retained |          | Stockholders
|                                                                |                                                                             | Issued         |        | Value  |  | Capital    |     | Stock    |  | Income_       |         | Income        |  | Earnings |          | Equity       
|                                                                |                                                                             |                |        |        |  |            |     |          |  |               |         |               |  |          |          |              
|                                                                |                                                                             |               
|                                                                |                                                                             | (In thousands)
|Balance, December 31, 2000                                      |                                                                             |                | 64,990 |        |  | $          | 650 |          |  | $             | 214,668 |               |  | $        | (79,946  | )             |  | $ | 984   |        |   |  |   |        |   | $ | 132,416 |        |  | $ | 268,772  |       
|Repurchases of common stock                                     |                                                                             |                |       |        |  |            |    |          |  |               |        |               |  |          | (116,891 | )             |  |   |      |        |   |  |   |        |   |   |        |        |  |   | (116,891 | )     
|Exercise of stock options                                       |                                                                             |                |       |        |  |            |    |          |  |               | (10,197 | )             |  |          | 17,165   |               |  |   |      |        |   |  |   |        |   |   |        |        |  |   | 6,968    |       
|Common stock issued under the Employee Stock
    Purchase Plan  |                                                                             |                |       |        |  |            |    |          |  |               | (345    | )             |  |          | 1,325    |               |  |   |      |        |   |  |   |        |   |   |        |        |  |   | 980      |       
|Income tax benefit arising from employee stock
    option plans |                                                                             |                |        |        |  |            |     |          |  |               | 4,004   |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   | 4,004    |       
|Comprehensive income:                                           |                                                                             |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       
|                                                                | Net income                                                                  |                |        |       |  |            |     |         |  |               |         |              |  |          |          |              |  |   |       |       |   |  | $ | 10,909 |   |   |         | 10,909 |  |   |          | 10,909 |  
|                                                                | Foreign currency translation adjustment                                     |                |        |       |  |            |     |         |  |               |         |              |  |          |          |              |  |   |       | 272    |   |  |   | 272    |   |   |         |       |  |   |          | 272    |  
|                                                                | Adjustment for unrealized holding gain on
    available-for-sale securities |                |        |       |  |            |     |         |  |               |         |              |  |          |          |              |  |   |       | 1,264  |   |  |   | 1,264  |   |   |         |       |  |   |          | 1,264  |  
|                                                                |                                                                             |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       
|                                                                | Comprehensive income                                                        |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  | $ | 12,445 |   |   |         |        |  |   |          |        |  
|                                                                |                                                                             |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       
|Balance, December 31, 2001                                      |                                                                             |                | 64,990 |        |  |            | 650 |          |  |               | 208,130 |               |  |          | (178,347 | )             |  |   | 2,520 |        |   |  |   |        |   |   | 143,325 |        |  |   | 176,278  |       
|Repurchases of common stock                                     |                                                                             |                |       |        |  |            |    |          |  |               |        |               |  |          | (42,740  | )             |  |   |      |        |   |  |   |        |   |   |        |        |  |   | (42,740  | )     
|Exercise of stock options                                       |                                                                             |                |       |        |  |            |    |          |  |               | (6,681  | )             |  |          | 10,566   |               |  |   |      |        |   |  |   |        |   |   |        |        |  |   | 3,885    |       
|Common stock issued under the Employee Stock
    Purchase Plan  |                                                                             |                |       |        |  |            |    |          |  |               | (760    | )             |  |          | 1,773    |               |  |   |      |        |   |  |   |        |   |   |        |        |  |   | 1,013    |       
|Income tax benefit arising from employee stock
    option plans |                                                                             |                |        |        |  |            |     |          |  |               | 2,011   |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   | 2,011    |       
|Comprehensive income:                                           |                                                                             |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       
|                                                                | Net income                                                                  |                |        |       |  |            |     |         |  |               |         |              |  |          |          |              |  |   |       |       |   |  | $ | 15,342 |   |   |         | 15,342 |  |   |          | 15,342 |  
|                                                                | Foreign currency translation adjustment                                     |                |        |       |  |            |     |         |  |               |         |              |  |          |          |              |  |   |       | 37     |   |  |   | 37     |   |   |         |       |  |   |          | 37     |  
|                                                                | Adjustment for unrealized holding gain on
    available-for-sale securities |                |        |       |  |            |     |         |  |               |         |              |  |          |          |              |  |   |       | (636   | ) |  |   | (636   | ) |   |         |       |  |   |          | (636   | )
|                                                                |                                                                             |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       
|                                                                | Comprehensive income                                                        |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  | $ | 14,743 |   |   |         |        |  |   |          |        |  
|                                                                |                                                                             |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       
|Balance, December 31,
    2002.                                 |                                                                             |                | 64,990 |        |  |            | 650 |          |  |               | 202,700 |               |  |          | (208,748 | )             |  |   | 1,921 |        |   |  |   |        |   |   | 158,667 |        |  |   | 155,190  |       
|Repurchases of common stock                                     |                                                                             |                |       |        |  |            |    |          |  |               |        |               |  |          | (63,000  | )             |  |   |      |        |   |  |   |        |   |   |        |        |  |   | (63,000  | )     
|Exercise of stock options                                       |                                                                             |                |       |        |  |            |    |          |  |               | (4,274  | )             |  |          | 11,336   |               |  |   |      |        |   |  |   |        |   |   |        |        |  |   | 7,062    |       
|Common stock issued under the Employee Stock
    Purchase Plan  |                                                                             |                |       |        |  |            |    |          |  |               | (1,078  | )             |  |          | 2,194    |               |  |   |      |        |   |  |   |        |   |   |        |        |  |   | 1,116    |       
|Income tax benefit arising from employee stock
    option plans |                                                                             |                |        |        |  |            |     |          |  |               | 3,760   |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   | 3,760    |       
|Comprehensive income:                                           |                                                                             |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       
|                                                                | Net income                                                                  |                |        |       |  |            |     |         |  |               |         |              |  |          |          |              |  |   |       |       |   |  | $ | 23,251 |   |   |         | 23,251 |  |   |          | 23,251 |  
|                                                                | Foreign currency translation adjustment                                     |                |        |       |  |            |     |         |  |               |         |              |  |          |          |              |  |   |       | (48    | ) |  |   | (48    | ) |   |         |       |  |   |          | (48    | )
|                                                                | Adjustment for unrealized holding gain on
    available-for-sale securities |                |        |       |  |            |     |         |  |               |         |              |  |          |          |              |  |   |       | (1,532 | ) |  |   | (1,532 | ) |   |         |       |  |   |          | (1,532 | )
|                                                                |                                                                             |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       
|                                                                | Comprehensive income                                                        |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  | $ | 21,671 |   |   |         |        |  |   |          |        |  
|                                                                |                                                                             |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       
|Balance, December 31, 2003                                      |                                                                             |                | 64,990 |        |  | $          | 650 |          |  | $             | 201,108 |               |  | $        | (258,218 | )             |  | $ | 341   |        |   |  |   |        |   | $ | 181,918 |        |  | $ | 125,799  |       
|                                                                |                                                                             |                |        |        |  |            |     |          |  |               |         |               |  |          |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       

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VISX, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |          |       |       |         |  
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------- | ----- | ------ | ------ | ------- | ----- | ------ | ------ | -------- | ----- | ----- | ------- | -
|                                                                           |                                                                                       |                                                                                        
|                                                                           |                                                                                       | Year Ended December 31,                                                                
|                                                                           |                                                                                       |                                                                                        
|                                                                           |                                                                                       | 2003                                                                                    |                                           | 2002                                              |       | 2001  
|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |       
|                                                                           |                                                                                       |                                                                                        
|                                                                           |                                                                                       | (In thousands)                                                                         
|Cash Flows From Operating
    Activities:                                  |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|                                                                           | Net income                                                                            |                                                                                         | $                                         | 23,251                                            |       |        | $      | 15,342  |       |        | $      | 10,909   |      
|                                                                           | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |          |      
|                                                                           |                                                                                       | Depreciation and amortization                                                           |                                           |                                                   | 8,727 |        |        |         | 4,320 |        |        |          | 3,617 |      
|                                                                           |                                                                                       | Income tax benefit from exercise of stock options                                       |                                           |                                                   | 3,760 |        |        |         | 2,011 |        |        |          | 4,004 |      
|                                                                           |                                                                                       | Provision for doubtful accounts receivable                                              |                                           |                                                   | 1,686 |        |        |         | 1,397 |        |        |          | 2,710 |      
|                                                                           |                                                                                       | Increase (decrease) in cash flows from
    changes in operating assets and liabilities: |                                           |                                                   |       |        |        |         |       |        |        |          |       |      
|                                                                           |                                                                                       |                                                                                         |                                           | Accounts receivable                               |       |        | (4,574 | )       |       |        | 6,536  |          |       |       | (638    | )
|                                                                           |                                                                                       |                                                                                         |                                           | Inventories                                       |       |        | (6,592 | )       |       |        | (2,692 | )        |       |       | 746     |  
|                                                                           |                                                                                       |                                                                                         |                                           | Deferred tax assets and prepaid expenses          |       |        | 6,238  |         |       |        | 9,726  |          |       |       | (13,570 | )
|                                                                           |                                                                                       |                                                                                         |                                           | Long-term deferred tax and other assets           |       |        | 1,563  |         |       |        | 1,805  |          |       |       | 7,730   |  
|                                                                           |                                                                                       |                                                                                         |                                           | Accounts payable                                  |       |        | (900   | )       |       |        | 1,071  |          |       |       | (4,080  | )
|                                                                           |                                                                                       |                                                                                         |                                           | Accrued liabilities and other current liabilities |       |        | (6,367 | )       |       |        | 690    |          |       |       | (4,792  | )
|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|                                                                           |                                                                                       |                                                                                         | Net cash provided by operating activities |                                                   |       | 26,792 |        |         |       | 40,206 |        |          |       | 6,636 |        
|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|Cash Flows From Investing
    Activities:                                  |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|                                                                           | Capital expenditures, net                                                             |                                                                                         |                                           | (1,444                                            | )     |        |        | (2,605  | )     |        |        | (2,773   | )    
|                                                                           | Cash paid for acquisition of patents and
    technology assets                        |                                                                                         |                                           | (5,900                                            | )     |        |        |        |       |        |        | (1,800   | )    
|                                                                           | Purchases of available for sale securities                                            |                                                                                         |                                           | (67,749                                           | )     |        |        | (77,706 | )     |        |        | (38,430  | )    
|                                                                           | Proceeds from maturities of available for sale
    securities                         |                                                                                         |                                           | 90,304                                            |       |        |        | 100,260 |       |        |        | 141,003  |      
|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|                                                                           | Net cash provided by investing activities                                             |                                                                                         |                                           | 15,211                                            |       |        |        | 19,949  |       |        |        | 98,000   |      
|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|Cash Flows From Financing
    Activities:                                  |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|                                                                           | Proceeds from issuance of common stock                                                |                                                                                         |                                           | 8,178                                             |       |        |        | 4,898   |       |        |        | 7,948    |      
|                                                                           | Repurchases of common stock                                                           |                                                                                         |                                           | (63,000                                           | )     |        |        | (42,740 | )     |        |        | (116,891 | )    
|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|                                                                           | Net cash used in financing activities                                                 |                                                                                         |                                           | (54,822                                           | )     |        |        | (37,842 | )     |        |        | (108,943 | )    
|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|Effect of exchange rate changes on cash and cash
    equivalents           |                                                                                       |                                                                                         | 27                                        |                                                   |       |        | 25     |         |       |        | (30    | )       
|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|Net increase (decrease) in cash and cash
    equivalents                   |                                                                                       |                                                                                         | (12,792                                   | )                                                 |       |        | 22,338 |         |       |        | (4,337 | )       
|Cash and cash equivalents, beginning of year                               |                                                                                       |                                                                                         | 37,687                                    |                                                   |       |        | 15,349 |         |       |        | 19,686 |         
|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|Cash and cash equivalents, end of year                                     |                                                                                       | $                                                                                       | 24,895                                    |                                                   |       | $      | 37,687 |         |       | $      | 15,349 |         
|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|Supplemental Cash Flow Information:                                        |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|Inventory transferred to property and equipment
    under operating leases |                                                                                       | $                                                                                       | 8,095                                     |                                                   |       | $      | 4,016  |         |       | $      |       |         
|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         
|Cash paid for income taxes                                                 |                                                                                       | $                                                                                       | 4,860                                     |                                                   |       | $      | 108    |         |       | $      | 10,181 |         
|                                                                           |                                                                                       |                                                                                         |                                           |                                                   |       |        |        |         |       |        |        |         

See accompanying notes to consolidated financial
statements.


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VISX, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|        |                                                               
|------- | --------------------------------------------------------------
|Note 1. | The Company and Summary of Significant
    Accounting Policies

VISX, Incorporated.We develop products and procedures to improve peoples
vision with laser vision correction. Our current principal
product, the VISX System, is designed to correct the shape of a
persons eyes to reduce or eliminate their need for
eyeglasses or contact lenses. The FDA has approved the VISX
System for use in the treatment of most types of vision problems
including nearsightedness, farsightedness, and astigmatism. We
sell VisionKey cards to control the use of the VISX System and
to collect license fees for the use of our patents.

Use of Estimates.We
follow accounting principles generally accepted in the United
States of America (GAAP) in preparing our financial
statements. As part of this work, we must make many estimates
and judgments about future events. These affect the value of the
assets and liabilities, contingent assets and liabilities, and
revenues and expenses that we report in our financial
statements. Examples include estimates of the reserve for
accounts receivable that we will not be able to collect, the
potential for inventory obsolescence, the expenses we will incur
to provide service under warranty obligations, our various
taxation liabilities, the ongoing value of investments, and
whether and how much to accrue for legal contingencies. We
believe these estimates and judgments are reasonable and we make
them in accordance with our accounting policies based on
information available at the time. However, actual results could
differ from our estimates and this could require us to record
adjustments to expenses or revenues that could be material to
our financial position and results of operations in future
periods.

Principles of
Consolidation.Our consolidated
financial statements include the accounts of VISX, Incorporated
and its wholly owned subsidiaries (VISX) after the
elimination of significant intercompany accounts and
transactions.

Translation of Foreign
Currencies.We follow Statement of
Financial Accounting Standards No. 52, Foreign
Currency Translation (SFAS 52) and related
pronouncements in translating foreign currencies. The local
currency is the functional currency for our foreign operations.
Gains and losses from translation of our foreign operations are
included as a component of accumulated other comprehensive
income. Foreign currency transaction gains and losses are
recognized in the statement of operations and have not been
material.

Cash, Cash Equivalents, and Short-term
Investments.We follow Statement of
Financial Accounting Standards No. 115, Accounting
For Certain Investments In Debt And Equity Securities
(SFAS 115) and related pronouncements in
accounting for cash, cash equivalents, and short-term
investments. Cash equivalents are debt securities that mature
within 90 days from the day we purchase them and can be
resold for cash before they mature. Short-term investments are
debt securities that mature more than 90 days after we
purchase them. Our short-term investments are all classified as
current available-for-sale securities because we may sell them
before they reach maturity. They are carried at fair market
value, with unrealized holding gains and losses recorded in
accumulated other comprehensive income. The cost of securities
sold is based on the specific identification method.

Concentration of Credit
Risks.Financial instruments which
potentially subject us to concentrations of credit risk consist
principally of cash, cash equivalents, investments and accounts
receivable. We invest primarily in marketable securities and
place our investments with high quality financial, government or
corporate institutions. We perform ongoing credit evaluations of
our customers.

Fair Value of Financial
Instruments.We follow Statement of
Financial Accounting Standards No. 107, Disclosures
About Fair Value Of Financial Instruments
(SFAS 107) and related pronouncements in
disclosing the value of financial instruments. The values we
show for our financial assets and liabilities as of
December 31, 2003 and 2002 (including cash and cash
equivalents, short-term investments, accounts receivable, and
accounts payable) approximate the fair market value of these
assets and liabilities due to their short maturity.

Accounts Receivable, Allowances For Doubtful
Accounts.We estimate the amount of
accounts receivables that will ultimately not be collectible
from customers and provide allowances accordingly. To develop
this estimate we review all receivables and identify those
accounts with problems. For these problem accounts, we estimate
individual, specific reserves based on our analysis of the
payment history, operations and finances of each account. For
all other accounts, we review historical bad debts trends,
general and industry specific economic trends, customer
concentrations, and current payment patterns to estimate the
reserve necessary to provide for payment defaults that cannot be
specifically identified but can be expected with reasonable
probability to occur in the future.

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##### Table of Contents



Impaired Loans.We
follow Statement of Financial Accounting Standards No. 114
Accounting by Creditors for Impairment of a Loan,
(SFAS 114) as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a
Loan  Income Recognition and Disclosure,
(SFAS 118) in accounting for and disclosing all
loans for which it is probable that the creditor will be unable
to collect all amounts due according to the terms of the loan
agreement at the loans fair value. We record the current
portion of loans in accounts receivable and the long-term
portion in long-term deferred tax assets and other assets as
appropriate. Fair value may be determined based upon the present
value of expected cash flows, market price of the loan, if
available, or the value of the underlying collateral. Expected
cash flows are required to be discounted at the loans
effective interest rate. SFAS 114 was amended by
SFAS 118 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan and by requiring
additional disclosures about how a creditor recognizes interest
income related to impaired loans.

Inventories.Inventories consist of purchased
parts, subassemblies, and finished systems and are stated at the
lower of cost or market, using the first-in, first-out method.
Inventory costs include material, labor, and overhead. We
regularly review our inventory on hand plus on order and compare
this to our estimate of demand over the following 6 months.
Based on this analysis, we reduce the carrying value of our
inventory for excess and obsolete items. All inventory
write-downs result in a new cost basis and are charged to cost
of revenues. Inventories consisted of the following (in
thousands):

|                                |  |              |        |      |  |   |        | 
|------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                |  |             
|                                |  | December 31,
|                                |  |             
|                                |  | 2003         |        | 2002
|                                |  |              |        |     
|Raw materials and subassemblies |  | $            | 7,786  |      |  | $ | 8,108  | 
|Work-in-process                 |  |              | 1,321  |      |  |   | 1,563  | 
|Finished goods                  |  |              | 2,112  |      |  |   | 3,080  | 
|                                |  |              |        |      |  |   |        | 
|                                |  | $            | 11,219 |      |  | $ | 12,751 | 
|                                |  |              |        |      |  |   |        | 

Property and Equipment.Property and equipment is depreciated
using the straight-line method over the estimated useful lives
of the assets, generally two to seven years, or the lesser of
the estimated useful life or the term of the related lease in
the case of rental equipment and leasehold improvements. Repair
and maintenance costs which do not extend the useful life of the
related asset are expensed as incurred. Any purchases of
property and equipment not greater than $1,000 have been
expensed as incurred and are not material to the consolidated
financial statements. Property and equipment is stated at cost
and consisted of the following (in thousands):

|                                                |  |              |         |      |  |   |         |  
|----------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                                |  |             
|                                                |  | December 31,
|                                                |  |             
|                                                |  | 2003         |         | 2002
|                                                |  |              |         |     
|Furniture and fixtures                          |  | $            | 2,992   |      |  | $ | 2,892   |  
|Machinery and equipment                         |  |              | 14,441  |      |  |   | 12,660  |  
|Rental equipment                                |  |              | 10,756  |      |  |   | 4,016   |  
|Leasehold improvements                          |  |              | 3,379   |      |  |   | 2,929   |  
|                                                |  |              |         |      |  |   |         |  
|                                                |  |              | 31,568  |      |  |   | 22,497  |  
|Less: accumulated depreciation and amortization |  |              | (22,262 | )    |  |   | (15,999 | )
|                                                |  |              |         |      |  |   |         |  
|Property and equipment, net                     |  | $            | 9,306   |      |  | $ | 6,498   |  
|                                                |  |              |         |      |  |   |         |  

Investments.We
follow Accounting Principles Board Opinion No. 18,
The Equity Method Of Accounting For Investments In Common
Stock (APB 18) and related pronouncements
in accounting for our investments. We hold minority investments
in companies developing technologies related to our strategic
focus. Such investments are included in long-term deferred tax
and other assets in the accompanying consolidated balance
sheets. We record an investment impairment charge when we
believe an investment has experienced a decline in value that is
not temporary. To determine whether such an impairment has
occurred, we review a number of factors about each company
including its financial statements, ongoing operations, and
progress on development projects.

Warranties.We
follow Statement of Financial Accounting Standards No. 5,
Accounting For Contingencies
(SFAS 5) and related pronouncements in
accounting for warranty costs. At the time of sale we accrue our
estimate of warranty expenditures to be incurred in the future
based principally on our historical cost of providing warranty
parts and labor. Periodically, we compare actual costs to our
estimates and make adjustments to our warranty accrual
accordingly.

Revenue Recognition.Our revenue is comprised of the
following: sale and rental of system equipment and upgrades,
service and parts revenue, and license fees and related
procedure revenue (procedure revenue). We recognize
revenue

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in accordance with SEC Staff Accounting Bulletin
No. 104, Revenue Recognition in Financial Statements
(SAB 104). Under this standard, revenue is
generally recognized when the following four criteria are met:


(1) Persuasive evidence of an arrangement
exists;

(2) Delivery has occurred or services have
been rendered;

(3) Our selling price is fixed or
determinable; and

(4) Collectibility is reasonably assured.

All of our sales are documented by contract or
purchase orders specifying sales prices and terms.

We sell directly to end customers in the United
States. Within the United States and Japan we directly handle
installation of our systems and upgrades and recognize revenue
on these products after we have completed installation at a
customers site. At this point we accrue an estimate of the
cost of warranty service to be provided in the future. Outside
the United States and Japan our standard terms are FOB VISX and
we sell exclusively through independent, third party
distributors who are generally responsible for all marketing,
sales, installation, training and warranty labor coverage for
our products. Accordingly, we recognize system revenue when we
ship systems for customers outside the United States and Japan
and accrue an estimate of the cost of parts that we are
obligated to provide under warranty. Under sales type lease
agreements, system revenues are recognized upon shipment or
installation, as appropriate, at the net present value of the
expected cash flow. Under rental or operating lease agreements
for systems, rental revenue is recognized over the term of the
agreement. For customers who purchase service contracts, we
recognize service revenue over the term of the contract.
Payments received in advance of services performed are recorded
as deferred revenue. For customers without service contracts, we
recognize service revenue when we provide service. We record
spare parts revenue upon shipment of the parts. We recognize
license fees and related procedure revenue from direct customers
when we ship VisionKey cards. We recognize license fees from
third party licensees when we receive payment.

We assess the credit worthiness of all customers
in connection with their purchases. We only recognize revenue
when collectibility is reasonably assured. If this is not the
case, then we record revenue only as payments are received.

In November 2001, the EITF reached consensus on
EITF No. 01-09, Accounting for Consideration Given by
a Vendor to a Customer (Including a Reseller of the
Vendors Products) (EITF 01-09).
EITF 01-09 clarifies and modifies certain items discussed
in EITF 00-25. We adopted these new standards on
January 1, 2002. In accordance with EITF 00-25 and
EITF 01-09, we have reclassified consideration provided to
customers in our statements of operations. This consideration
was previously reported as selling, general, and administrative
expense. The amounts reclassified as a reduction to license and
other revenues for 2001 were $4,550,000. This reclassification
did not change the amount of net income reported in 2001,
however revenue and expense are reduced in equal and offsetting
amounts in each period. Accordingly, the reclassification of the
consideration previously reported as selling, general, and
administrative expense reduced our gross profit ratio. Based
upon this reclassification, our gross profit ratio decreased to
65% from the previously reported 66% for the year ended
December 31, 2001.

Earnings Per Share.We follow Statement of Financial
Accounting Standards No. 128, Earnings Per
Share (SFAS 128) and related
pronouncements in disclosing and accounting for earnings per
share. Basic earnings per share (EPS) equals net
income divided by the weighted average number of common shares
outstanding. Diluted EPS equals net income divided by the
weighted average number of common shares outstanding plus
dilutive potential common shares

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calculated in accordance with the treasury stock
method. All amounts in the following table are in thousands,
except per share data.


|                                                                        |  |                         |        |      |  |      |        |  |  |   |        | 
|----------------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                                        |  |                        
|                                                                        |  | Year Ended December 31,
|                                                                        |  |                        
|                                                                        |  | 2003                    |        | 2002 |  | 2001
|                                                                        |  |                         |        |      |  |     
|Net Income                                                              |  | $                       | 23,251 |      |  | $    | 15,342 |  |  | $ | 10,909 | 
|                                                                        |  |                         |        |      |  |      |        |  |  |   |        | 
|Basic Earnings Per Share                                                |  |                         |        |      |  |      |        |  |  |   |        | 
|Income available to common stockholders                                 |  | $                       | 23,251 |      |  | $    | 15,342 |  |  | $ | 10,909 | 
|Weighted average common shares outstanding                              |  |                         | 49,471 |      |  |      | 53,096 |  |  |   | 56,660 | 
|                                                                        |  |                         |        |      |  |      |        |  |  |   |        | 
|Basic earnings per share                                                |  | $                       | 0.47   |      |  | $    | 0.29   |  |  | $ | 0.19   | 
|                                                                        |  |                         |        |      |  |      |        |  |  |   |        | 
|Diluted Earnings Per Share                                              |  |                         |        |      |  |      |        |  |  |   |        | 
|Income available to common stockholders                                 |  | $                       | 23,251 |      |  | $    | 15,342 |  |  | $ | 10,909 | 
|                                                                        |  |                         |        |      |  |      |        |  |  |   |        | 
|Weighted average common shares outstanding                              |  |                         | 49,471 |      |  |      | 53,096 |  |  |   | 56,660 | 
|Dilutive potential common shares from stock
    options                 |  |                         | 1,466  |      |  |      | 720    |  |  |   | 1,421  | 
|                                                                        |  |                         |        |      |  |      |        |  |  |   |        | 
|Weighted average common shares and dilutive
    potential common shares |  |                         | 50,937 |      |  |      | 53,816 |  |  |   | 58,081 | 
|                                                                        |  |                         |        |      |  |      |        |  |  |   |        | 
|Diluted earnings per share                                              |  | $                       | 0.46   |      |  | $    | 0.29   |  |  | $ | 0.19   | 
|                                                                        |  |                         |        |      |  |      |        |  |  |   |        | 

Options to purchase 3,177,000, 6,458,000, and
4,047,000 weighted shares outstanding during 2003, 2002, and
2001, respectively, were excluded from the computation of
diluted EPS because the options exercise prices were
greater than the average market price of VISXs common
stock during those years and would have been anti-dilutive.

Legal Contingencies.We follow Statement of Financial
Accounting Standards No. 5, Accounting For
Contingencies (SFAS 5) and related
pronouncements in disclosing and accounting for legal
contingencies. We are involved in a variety of legal proceedings
including those concerning intellectual property rights, claims
that we violated antirust laws, and other litigation
proceedings. In cases brought against us we must assess the
probability of an adverse decision. If we believe it probable
that we will lose in our defense and we can reasonably estimate
the loss, we accrue an estimate of the potential loss. Currently
we do not believe it is probable that we will lose the cases
currently pending and, accordingly, have not accrued any amounts
for legal settlements.

Stock-Based Compensation.We account for stock-based employee
compensation arrangements using the intrinsic value method in
accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and Financial
Accounting Standards Board (FASB) Interpretation
No. 44 (FIN 44), Accounting for
Certain Transactions Involving Stock Compensation  an
Interpretation of APB No. 25, and comply with the
disclosure provisions of Statement of Financial Accounting
Standards No. 148, Accounting For Stock-Based
Compensation  Transition and Disclosure
(SFAS 148).

At December 31, 2003, we have nine
stock-based employee compensation plans, which are described
more fully in Note 6. We account for those plans under the
recognition and measurement principles of APB 25 and
related Interpretations. In accordance with APB 25 and
FIN 44, we record no stock-based employee compensation cost
in our net income because (1) all options granted under our
stock option plans have an exercise price equal to the market
value of the underlying common stock on the date of grant and
(2) stock purchased through our Employee Stock Purchase
Plan (ESPP) is priced at 85% of the fair market
value of the stock on the first day of a two-year offering
period or as of the end of each six month purchase segment of a
two year offering period, whichever is lower. The following
table illustrates the effect on net income and earnings per
share if we had applied the fair value recognition provisions of

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Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation (SFAS 123), to stock-based
employee compensation (in thousands, except per share data).


|                                                                                                                                                    |  |             |  |                         |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                                    |  |             |  |                        
|                                                                                                                                                    |  |             |  | Year Ended December 31,
|                                                                                                                                                    |  |             |  |                        
|                                                                                                                                                    |  |             |  | 2003                    |        | 2002 |  | 2001
|                                                                                                                                                    |  |             |  |                         |        |      |  |     
|Net Income                                                                                                                                          |  | As Reported |  | $                       | 23,251 |      |  | $    | 15,342 |   |  | $ | 10,909 |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |  |             |  |                         | (7,957 | )    |  |      | (9,789 | ) |  |   | (9,738 | )
|                                                                                                                                                    |  |             |  |                         |        |      |  |      |        |   |  |   |        |  
|Net Income                                                                                                                                          |  | Pro Forma   |  | $                       | 15,294 |      |  | $    | 5,553  |   |  | $ | 1,171  |  
|                                                                                                                                                    |  |             |  |                         |        |      |  |      |        |   |  |   |        |  
|Basic Earnings Per Share                                                                                                                            |  | As Reported |  | $                       | 0.47   |      |  | $    | 0.29   |   |  | $ | 0.19   |  
|                                                                                                                                                    |  | Pro Forma   |  |                         | 0.31   |      |  |      | 0.10   |   |  |   | 0.02   |  
|Diluted Earnings Per Share                                                                                                                          |  | As Reported |  | $                       | 0.46   |      |  | $    | 0.29   |   |  | $ | 0.19   |  
|                                                                                                                                                    |  | Pro Forma   |  |                         | 0.31   |      |  |      | 0.10   |   |  |   | 0.02   |  

For purposes of computing pro forma net income,
we estimate the fair value of each option grant and employee
stock purchase plan purchase right on the date of grant using
the Black-Scholes option pricing model. The assumptions used to
value the option grants and purchase rights are stated as
follows:

|                                        |  |                     |      |      |  |      |      |   |  |  |      |  
|--------------------------------------- |  | ------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                        |  |                    
|                                        |  | Assumptions By Year
|                                        |  | Options Granted    
|                                        |  |                    
|                                        |  | 2003                |      | 2002 |  | 2001
|                                        |  |                     |      |      |  |     
|Expected life of options (in years)     |  |                     | 4.40 |      |  |      | 4.22 |   |  |  | 5.99 |  
|Expected life of ESPP rights (in years) |  |                     | 1.25 |      |  |      | 1.25 |   |  |  | 1.25 |  
|Volatility for options                  |  |                     | 75   | %    |  |      | 79   | % |  |  | 65   | %
|Volatility for ESPP rights              |  |                     | 60   | %    |  |      | 61   | % |  |  | 70   | %
|Risk free interest rate for options     |  |                     | 2.50 | %    |  |      | 4.09 | % |  |  | 4.28 | %
|Risk free interest rate for ESPP rights |  |                     | 1.62 | %    |  |      | 1.72 | % |  |  | 2.90 | %
|Dividend yield                          |  |                     | 0.0  | %    |  |      | 0.0  | % |  |  | 0.0  | %

The weighted average fair value of options
granted under our stock option plans during the years ended
December 31, 2003, 2002 and 2001 was $6.76, $8.89 and
$9.65, respectively. The weighted average fair value per share
of options granted under the ESPP during the years ended
December 31, 2003, 2002 and 2001 was $3.76, $3.92 and
$5.65, respectively.

These pro forma amounts may not be representative
of the effects for future years as options vest over several
years and additional awards are generally made each year.

New Accounting
Pronouncements.In July 2002, the FASB
issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities
(SFAS 146) and nullified EITF Issue
No. 94-3 Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring. SFAS
146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is
incurred, whereas EITF No. 94-3 had recognized the
liability at the commitment date to an exit plan. We are
required to adopt the provisions of SFAS 146 effective for exit
or disposal activities initiated after December 31, 2002.
The adoption of SFAS 146 did not have a material impact on our
financial position or results of operations.

In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF Issue No. 00-21 provides guidance
on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 apply to
revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of EITF Issue
No. 00-21 did not have a material impact on our financial
position or results of operations.

In December 2003, the FASB revised Interpretation
No. 46 (FIN 46), Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51 which it had originally issued in January
2003. As revised, FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. As revised, application of

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FIN 46 is required for interests in
special-purpose entities for periods ending after
December 15, 2003. Application for all other types of
entities covered by FIN 46 is required in financial
statements for periods ending after March 15, 2004. The
adoption of FIN 46 as revised, is not expected to have a
material impact on our financial position or results of
operations.


In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150 (SFAS 150),
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.
SFAS 150 requires that certain financial instruments, which
under previous guidance were accounted for as equity, must now
be accounted for as liabilities. The financial instruments
affected include mandatory redeemable stock, certain financial
instruments that require or may require the issuer to buy back
some of its shares in exchange for cash or other assets and
certain obligations that can be settled with shares of stock.
SFAS 150 is effective for all financial instruments entered
into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning
after June 15, 2003, although certain aspects have been
delayed pending further clarifications. We do not expect the
adoption of SFAS 150 to have a material impact on our
financial position or results of operations.

In December 2003, the SEC issued Staff Accounting
Bulletin (SAB) No. 104 Revenue
Recognition which codifies, revises and rescinds certain
sections of SAB No. 101, Revenue Recognition,
in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC
rules and regulations. The changes noted in SAB No. 104 did
not have a material effect on our financial position or results
of operations.

Reclassifications.Certain reclassifications were made to
prior year financial data to conform with current year
presentation

Note 2. Segment Reporting

Segments.Statement
of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related
Information, (SFAS No. 131) established
standards for reporting information about operating segments in
financial statements. Operating segments are defined as
components of an enterprise about which separate financial
information is available that is evaluated regularly by the
chief operating decision maker, or chief operating decision
making group, in deciding how to allocate resources and in
assessing performance. Our CEO is our chief operating decision
maker. Our business is focused on one operating segment,
products and procedures to improve peoples vision with
laser vision correction. All of our revenues and profits are
generated through the sale, licensing, and service of products
for this one segment.

Export Revenues.Export revenues accounted for 17%,
23%, and 16% of total revenues for the years ended
December 31, 2003, 2002, and 2001, respectively. We did not
generate export revenues to any country that equaled or exceeded
10% of our total revenues for any of the three years ended
December 31, 2003. In the following table we have presented
our export revenues by geographic region (in thousands):

|                                       |  |                         |        |      |  |      |        |  |  |   |        | 
|-------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                       |  |                        
|                                       |  | Year Ended December 31,
|                                       |  |                        
|                                       |  | 2003                    |        | 2002 |  | 2001
|                                       |  |                         |        |      |  |     
|Europe                                 |  | $                       | 7,702  |      |  | $    | 7,990  |  |  | $ | 8,763  | 
|Americas (excluding the United States) |  |                         | 3,915  |      |  |      | 3,058  |  |  |   | 3,813  | 
|Asia and Other                         |  |                         | 12,749 |      |  |      | 21,782 |  |  |   | 13,202 | 
|                                       |  |                         |        |      |  |      |        |  |  |   |        | 
|                                       |  | $                       | 24,366 |      |  | $    | 32,830 |  |  | $ | 25,778 | 
|                                       |  |                         |        |      |  |      |        |  |  |   |        | 

Materially all of our long-term assets are
located in the United States.

Major Customers.A
significant portion of our revenues are derived from sales to
TLC Vision Corporation (TLC). Sales to TLC and its
operating subsidiaries accounted for 16%, 14%, and 17% of our
total revenues in 2003, 2002 and 2001, respectively.
Additionally, TLC, accounted for 22%, 22%, and 31% of our total
receivables at December 31, 2003, 2002 and 2001,
respectively. No other customer accounted for 10% or more of
sales or receivables during any of the three years ended
December 31, 2003.

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Note 3. Short-Term Investment in
Securities and Cash Equivalents

Short-term investments in securities and cash
equivalents consisted of the following (in thousands):

|                       |                                 |                                                                              |        |                   |        |            |     |           |    |            |        |           |        |   |         |   |        |   |       |   |       |   |         |   |        | 
|---------------------- | ------------------------------- | ---------------------------------------------------------------------------- | ------ | ----------------- | ------ | ---------- | --- | --------- | -- | ---------- | ------ | --------- | ------ | - | ------- | - | ------ | - | ----- | - | ----- | - | ------- | - | ------ | 
|                       |                                 |                                                                              |        |                  
|                       |                                 | December 31, 2003                                                            |        | December 31, 2002
|                       |                                 |                                                                              |        |                  
|                       |                                 |                                                                              |        | Gross             |        |            |     |           |    | Gross      |        | Aggregate
|                       |                                 | Amortized                                                                    |        | Unrealized        |        | Aggregate  |     | Amortized |    | Unrealized |        | Fair     
|                       |                                 | Cost                                                                         |        | Gain/ (loss)      |        | Fair Value |     | Cost      |    | Gain       |        | Value    
|                       |                                 |                                                                              |        |                   |        |            |     |           |    |            |        |          
|Short-Term Investments |                                 |                                                                              |        |                   |        |            |     |           |    |            |        |           |        |   |         |   |        |   |       |   |       |   |         |  
|                       | (Available-for-Sale Securities) |                                                                              |        |                   |        |            |     |           |    |            |        |           |        |   |         |   |        |   |       |   |       |   |         |   |       
|                       |                                 | US Treasury obligations and direct obligations of
    US Government agencies |        | $                 | 14,287 |            |     | $         | 18 |            |        | $         | 14,305 |   |         | $ | 11,049 |   |       | $ | 214   |   |         | $ | 11,263 | 
|                       |                                 | Federal government sponsored enterprises
    securities                     |        |                   | 22,605 |            |     |           | 34 |            |        |           | 22,639 |   |         |   | 42,324 |   |       |   | 1,016 |   |         |   | 43,340 | 
|                       |                                 | State & local governmental agency securities                                 |        |                   | 4,906  |            |     |           | (6 | )          |        |           | 4,900  |   |         |   |       |   |       |   |      |   |         |   |       | 
|                       |                                 | Debt securities of corporations                                              |        |                   | 19,253 |            |     |           | 84 |            |        |           | 19,337 |   |         |   | 30,285 |   |       |   | 380   |   |         |   | 30,665 | 
|                       |                                 |                                                                              |        |                   |        |            |     |           |    |            |        |           |        |   |         |   |        |   |       |   |       |   |         |  
|                       |                                 |                                                                              | 61,051 |                   |        |            | 130 |           |    |            | 61,181 |           |        |   | 83,658  |   |        |   | 1,610 |   |       |   | 85,268  |  
|Cash Equivalents       |                                 |                                                                              |        |                   |        |            |     |           |    |            |        |           |        |   |         |   |        |   |       |   |       |   |         |  
|                       |                                 | State & local governmental agency securities                                 |        |                   |       |            |     |           |   |            |        |           |       |   |         |   | 4,503  |   |       |   |      |   |         |   | 4,503  | 
|                       |                                 | Debt securities of corporations                                              |        |                   | 9,123  |            |     |           |   |            |        |           | 9,123  |   |         |   | 19,981 |   |       |   |      |   |         |   | 19,981 | 
|                       |                                 |                                                                              |        |                   |        |            |     |           |    |            |        |           |        |   |         |   |        |   |       |   |       |   |         |  
|                       |                                 |                                                                              | 9,123  |                   |        |            |    |           |    |            | 9,123  |           |        |   | 24,484  |   |        |   |      |   |       |   | 24,484  |  
|                       |                                 |                                                                              |        |                   |        |            |     |           |    |            |        |           |        |   |         |   |        |   |       |   |       |   |         |  
|Total investments      |                                 | $                                                                            | 70,174 |                   |        | $          | 130 |           |    | $          | 70,304 |           |        | $ | 108,142 |   |        | $ | 1,610 |   |       | $ | 109,752 |  
|                       |                                 |                                                                              |        |                   |        |            |     |           |    |            |        |           |        |   |         |   |        |   |       |   |       |   |         |  

All available-for-sale securities held at
December 31, 2003 mature within three years of that date.
Unrealized holding losses on available-for-sale securities are
not significant at December 31, 2003.

We invest temporarily unused cash in short-term
investments to earn interest income. The investments are debt
securities issued by the types of organizations noted in the
table above, mature within three years of purchase, and are
rated at least A by nationally recognized credit
quality rating organizations. The unrealized losses arise from
increases in market interest rates from the date when the
securities were purchased to December 31, 2003.
Approximately one third of the individual investments are in an
unrealized loss position at December 31, 2003, though none
were in such a position as of December 31, 2002. We cannot
predict the future direction of interest rates and therefore
cannot estimate if these investments will be in an unrealized
loss position in future reporting periods.

Note 4. Patent and Technology Assets

In April 2003, we acquired technology, including
patents and other assets associated with our WaveScan WaveFront
System (WaveScan System) from 20/10 Perfect Vision
Optische Gerate GmbH. We paid $5.9 million for this
technology, which was previously licensed to us under an
exclusive licensing agreement that is superseded by the
acquisition. These assets are included in other assets and are
being amortized to cost of system revenues over the estimated
useful life of five years.

Note 5. Accrued Liabilities and Other Current
Liabilities

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Accrued liabilities consisted of the following
(in thousands):

|                                     |  |              |        |      |  |   |        | 
|------------------------------------ |  | ------------ | ------ | ---- |  | - | ------ | 
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2003         |        | 2002
|                                     |  |              |        |     
|Payroll and related accruals         |  | $            | 5,190  |      |  | $ | 4,262  | 
|Accrued warranty                     |  |              | 1,779  |      |  |   | 1,963  | 
|Deposits and deferred revenue        |  |              | 9,487  |      |  |   | 7,484  | 
|Accrued sales and marketing expenses |  |              | 2,895  |      |  |   | 2,655  | 
|Accrued taxes                        |  |              | 14,445 |      |  |   | 13,726 | 
|Accrued legal expenses               |  |              | 301    |      |  |   | 994    | 
|Litigation settlement                |  |              |       |      |  |   | 9,000  | 
|Other                                |  |              | 625    |      |  |   | 977    | 
|                                     |  |              |        |      |  |   |        | 
|                                     |  | $            | 34,722 |      |  | $ | 41,061 | 
|                                     |  |              |        |      |  |   |        | 

Changes in the product warranty obligations for
the years ended December 31, 2003 and 2002 are as follows
(in thousands):

|                           |  |      |        |      |  |   |        |  
|-------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                           |  | 2003 |        | 2002
|                           |  |      |        |     
|Balance as of January 1,   |  | $    | 1,963  |      |  | $ | 1,768  |  
|New warranties             |  |      | 3,075  |      |  |   | 2,574  |  
|Payments                   |  |      | (3,259 | )    |  |   | (2,379 | )
|                           |  |      |        |      |  |   |        |  
|Balance as of December 31, |  | $    | 1,779  |      |  | $ | 1,963  |  
|                           |  |      |        |      |  |   |        |  

Note 6. Stock Based Compensation
Plans

We have two open stock option plans, the 2000
Stock Plan (the 2000 Plan) and the 1995 Director
Option and Stock Deferral Plan (the Director Plan),
plus an Employee Stock Purchase Plan (the Purchase
Plan). Only outside directors may be granted options under
the Director Plan. In addition, we have six terminated stock
option plans with options still outstanding.

Under the Purchase Plan, we may sell up to
2,000,000 shares of common stock to our eligible, full-time
employees who do not own 5% or more of our outstanding common
stock. Employees can allocate up to 10% of their wages to
purchase our stock at 85% of the fair market value of the stock
on the first day of a two-year offering period or as of the end
of each six month purchase segment of a two year offering
period, whichever is lower. We sold 141,000 shares, 110,000
shares, and 75,000 shares in 2003, 2002 and 2001,
respectively, and 919,000 shares cumulatively through
December 31, 2003 under the Purchase Plan. Accordingly,
1,081,000 shares were available for grant under the Purchase
Plan at December 31, 2003.

As of December 31, 2003, we were authorized
to grant options for up to 5,500,000 shares under the 2000
Plan and 775,000 shares under the Director Plan.
Additionally, under both the 2000 Plan and the Director Plan,
any forfeited options become available for re-grant. Through
December 31, 2003, we have granted options on 3,510,725
shares and 550,640 shares, respectively, under these plans,
and 2,156,888 shares and 269,360 shares, respectively, were
available for grant under these plans at December 31, 2003.
Under these plans the option exercise price equals the
stocks market price on the date of grant, options
generally vest 25% one year after the date of grant and ratably
thereafter over three years, and options expire ten years from
the date of grant. Options outstanding under the six terminated
stock option plans have generally the same eligibility and
vesting terms as those described for the current plans, though
no further options may be granted under these terminated plans.

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A summary of the status of VISXs stock
option plans at December 31, 2003, 2002, and 2001 and
changes during the years then ended is presented in the
following tables (in thousands, except per share data).

|                                               |  |                         |       |           |  |        |       |           |  |        |       |           |  |   |       |  |  |   |        |   |  |   |       | 
|---------------------------------------------- |  | ----------------------- | ----- | --------- |  | ------ | ----- | --------- |  | ------ | ----- | --------- |  | - | ----- |  |  | - | ------ | - |  | - | ----- | 
|                                               |  |                        
|                                               |  | Year Ended December 31,
|                                               |  |                        
|                                               |  |                         |       |           |  |       
|                                               |  | 2003                    |       | 2002      |  | 2001  
|                                               |  |                         |       |           |  |       
|                                               |  |                         |       | Wtd. Avg. |  |        |       | Wtd. Avg. |  |        |       | Wtd. Avg.
|Activity                                       |  | Shares                  |       | Ex. Price |  | Shares |       | Ex. Price |  | Shares |       | Ex. Price
|                                               |  |                         |       |           |  |        |       |           |  |        |       |          
|Outstanding, start of year                     |  |                         | 8,378 |           |  | $      | 18.30 |           |  |        | 8,465 |           |  | $ | 18.73 |  |  |   | 7,938  |   |  | $ | 19.32 | 
|Granted                                        |  |                         | 1,551 |           |  |        | 11.69 |           |  |        | 1,246 |           |  |   | 14.55 |  |  |   | 2,498  |   |  |   | 15.53 | 
|Exercised                                      |  |                         | (717  | )         |  |        | 9.87  |           |  |        | (620  | )         |  |   | 6.27  |  |  |   | (970   | ) |  |   | 7.19  | 
|Forfeited                                      |  |                         | (212  | )         |  |        | 21.00 |           |  |        | (713  | )         |  |   | 27.27 |  |  |   | (1,001 | ) |  |   | 26.63 | 
|                                               |  |                         |       |           |  |        |       |           |  |        |       |           |  |   |       |  |  |   |        |   |  |   |       | 
|Outstanding, end of year                       |  |                         | 9,000 |           |  |        | 17.77 |           |  |        | 8,378 |           |  |   | 18.30 |  |  |   | 8,465  |   |  |   | 18.73 | 
|                                               |  |                         |       |           |  |        |       |           |  |        |       |           |  |   |       |  |  |   |        |   |  |   |       | 
|Exercisable, end of year                       |  |                         | 6,009 |           |  | $      | 19.92 |           |  |        | 5,341 |           |  | $ | 18.94 |  |  |   | 4,692  |   |  | $ | 17.93 | 
|                                               |  |                         |       |           |  |        |       |           |  |        |       |           |  |   |       |  |  |   |        |   |  |   |       | 
|Weighted average fair value per option granted |  | $                       | 6.76  |           |  |        |       |           |  | $      | 8.89  |           |  |   |       |  |  | $ | 9.65   |   |  |   |       | 
|                                               |  |                         |       |           |  |        |       |           |  |        |       |           |  |   |       |  |  |   |        |   |  |   |       | 

|                 |  |                     |       |                     |  |             |       |        |  |                |      |  |  |  |       |  |  |   |       | 
|---------------- |  | ------------------- | ----- | ------------------- |  | ----------- | ----- | ------ |  | -------------- | ---- |  |  |  | ----- |  |  | - | ----- | 
|                 |  |                    
|                 |  | December 31, 2003  
|                 |  |                    
|                 |  |                     |       |                    
|                 |  | Options Outstanding |       |                    
|                 |  |                     |       | Options Exercisable
|                 |  |                     |       | Wtd. Avg.           |  |            
|                 |  |                     |       | Wtd. Avg.           |  | Years Left  |       |        |  | Wtd. Avg.     
|Exercise Prices  |  | Shares              |       | Exercise Price      |  | to Exercise |       | Shares |  | Exercise Price
|                 |  |                     |       |                     |  |             |       |        |  |               
|$ 2.81 - $  6.35 |  |                     | 995   |                     |  | $           | 5.54  |        |  |                | 3.69 |  |  |  | 995   |  |  | $ | 5.54  | 
|6.61 -   11.94   |  |                     | 1,805 |                     |  |             | 8.56  |        |  |                | 7.43 |  |  |  | 551   |  |  |   | 9.16  | 
|12.02 -   15.14  |  |                     | 1,243 |                     |  |             | 14.70 |        |  |                | 7.90 |  |  |  | 536   |  |  |   | 14.68 | 
|15.47 -   18.25  |  |                     | 2,244 |                     |  |             | 16.52 |        |  |                | 6.97 |  |  |  | 1,680 |  |  |   | 16.63 | 
|18.47 -   22.12  |  |                     | 910   |                     |  |             | 20.03 |        |  |                | 6.92 |  |  |  | 560   |  |  |   | 19.23 | 
|22.13 -   64.94  |  |                     | 1,583 |                     |  |             | 29.85 |        |  |                | 5.86 |  |  |  | 1,467 |  |  |   | 30.26 | 
|65.38 -  100.75  |  |                     | 220   |                     |  |             | 82.42 |        |  |                | 5.58 |  |  |  | 220   |  |  |   | 82.42 | 
|                 |  |                     |       |                     |  |             |       |        |  |                |      |  |  |  |       |  |  |   |       | 
|                 |  |                     | 9,000 |                     |  |             | 17.77 |        |  |                | 6.59 |  |  |  | 6,009 |  |  |   | 19.92 | 
|                 |  |                     |       |                     |  |             |       |        |  |                |      |  |  |  |       |  |  |   |       | 

Note 7. Stockholders Equity

On April 4, 2001, our Board of Directors
authorized a Stock Repurchase Program under which up to
10 million shares of VISX common stock may be repurchased.
In accordance with this authorization and applicable securities
laws, we have repurchased 7.0 million shares cumulatively
on the open market through December 31, 2003, at a total cost of
$90.4 million. Accordingly, 3.0 million shares remain
available as of December 31, 2003 for repurchase under the
Board of Directors April 2001 authorization. On
May 28, 2003, the Board of Directors authorized the
repurchase of an additional 3.5 million shares of VISX
stock at a total cost of $63.0 million, all of which were
purchased during the quarter ended June 30, 2003.

Note 8. Income Taxes

The provision for income taxes is based upon
income before income taxes as follows (in thousands):

|                                         |  |                         |        |      |  |      |        |  |  |   |        | 
|---------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                         |  |                        
|                                         |  | Year Ended December 31,
|                                         |  |                        
|                                         |  | 2003                    |        | 2002 |  | 2001
|                                         |  |                         |        |      |  |     
|Domestic                                 |  | $                       | 38,028 |      |  | $    | 24,404 |  |  | $ | 18,024 | 
|Foreign                                  |  |                         | 29     |      |  |      | 77     |  |  |   | 7      | 
|                                         |  |                         |        |      |  |      |        |  |  |   |        | 
|Income before provision for income taxes |  | $                       | 38,057 |      |  | $    | 24,481 |  |  | $ | 18,031 | 
|                                         |  |                         |        |      |  |      |        |  |  |   |        | 

VISX accounts for income taxes using SFAS
No. 109, Accounting for Income Taxes. SFAS
No. 109 provides for an asset and liability approach under
which deferred income taxes are based upon enacted tax laws and
rates applicable to the periods in which the taxes become
payable.

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Our provision for income taxes consisted of the
following (in thousands):

|                           |         |                         |        |        |     |      |       |       |       |   |       |       |       | 
|-------------------------- | ------- | ----------------------- | ------ | ------ | --- | ---- | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                           |         |                        
|                           |         | Year Ended December 31,
|                           |         |                        
|                           |         |                        
|                           |         | 2003                    |        | 2002   |     | 2001
|                           |         |                         |        |        |     |     
|Current:                   |         |                         |        |        |     |      |       |       |       |   |       |      
|                           | Federal |                         | $      | 11,444 |     |      | $     | (230  | )     |   | $     | 2,062 |      
|                           | State   |                         |        | 1,836  |     |      |       | 631   |       |   |       | 1,580 |      
|                           |         |                         |        |        |     |      |       |       |       |   |       |      
|                           |         |                         | 13,280 |        |     |      | 401   |       |       |   | 3,642 |      
|                           |         |                         |        |        |     |      |       |       |       |   |       |      
|Deferred, net              |         |                         |        |        |     |      |       |       |       |   |       |      
|                           |         | Federal                 |        |        | 965 |      |       |       | 7,139 |   |       |       | 3,595 | 
|                           | State   |                         |        | 561    |     |      |       | 1,599 |       |   |       | (115  | )    
|                           |         |                         |        |        |     |      |       |       |       |   |       |      
|                           |         |                         | 1,526  |        |     |      | 8,738 |       |       |   | 3,480 |      
|                           |         |                         |        |        |     |      |       |       |       |   |       |      
|Provision for income taxes |         | $                       | 14,806 |        |     | $    | 9,139 |       |       | $ | 7,122 |      
|                           |         |                         |        |        |     |      |       |       |       |   |       |      

VISX is entitled to a deduction for federal and
state tax purposes with respect to employees stock option
activity. The net deduction in taxes otherwise payable arising
from that deduction has been credited to additional paid-in
capital. For calendar year 2003, the net deduction in tax
payable arising from employees stock option activity is
approximately $3,760,000.

Our provision for income taxes is comprised of
the following elements, all expressed as a percentage of income
before provision for income taxes.

|                                             |  |                         |      |      |  |      |      |   |  |  |      |  
|-------------------------------------------- |  | ----------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                             |  |                        
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  |                        
|                                             |  | 2003                    |      | 2002 |  | 2001
|                                             |  |                         |      |      |  |     
|Statutory Federal income tax rate            |  |                         | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0 | %
|State income taxes, net of Federal benefit   |  |                         | 5.2  |      |  |      | 5.1  |   |  |  | 5.6  |  
|R&D credit, foreign sales benefit, and other |  |                         | (1.3 | )    |  |      | (2.8 | ) |  |  | (1.1 | )
|                                             |  |                         |      |      |  |      |      |   |  |  |      |  
|Effective income tax rate                    |  |                         | 38.9 | %    |  |      | 37.3 | % |  |  | 39.5 | %
|                                             |  |                         |      |      |  |      |      |   |  |  |      |  

Our net deferred income tax assets were as
follows (in thousands):

|                                 |                                          |              |        |       |  |   |        |       | 
|-------------------------------- | ---------------------------------------- | ------------ | ------ | ----- |  | - | ------ | ----- | 
|                                 |                                          |             
|                                 |                                          | December 31,
|                                 |                                          |             
|                                 |                                          | 2003         |        | 2002 
|                                 |                                          |              |        |      
|Cumulative temporary differences |                                          |              |        |       |  |   |        |      
|                                 | Allowance for doubtful receivables       |              | $      | 1,800 |  |   | $      | 1,100 | 
|                                 | Inventories                              |              |        | 900   |  |   |        | 900   | 
|                                 | Warranty accrual                         |              |        | 800   |  |   |        | 800   | 
|                                 | Accrued sales promotions and commissions |              |        | 300   |  |   |        | 900   | 
|                                 | Deferred revenue                         |              |        | 3,200 |  |   |        | 2,300 | 
|                                 | Capitalized patent                       |              |        | 300   |  |   |        | 300   | 
|                                 | Litigation settlements                   |              |        |      |  |   |        | 3,800 | 
|                                 | Other accrued liabilities                |              |        | 5,400 |  |   |        | 4,500 | 
|                                 |                                          |              |        |       |  |   |        |      
|Net deferred income tax asset    |                                          | $            | 12,700 |       |  | $ | 14,600 |      
|                                 |                                          |              |        |       |  |   |        |      

We believe it is more likely than not that we
will generate sufficient taxable income in the future to realize
our deferred income tax assets. Therefore, in accordance with
GAAP, we have recorded no valuation allowance against our
deferred income tax assets. However, given that the laser vision
correction industry is subject to economic, market and
technology change, we can provide no assurance that our
expectation for future taxable income will be realized. Deferred
tax assets of $1.4 million and $1.6 million were
recorded as non-current at December 31, 2003 and 2002
respectively.

Note 9. Commitments

We lease facilities and equipment under operating
leases that expire through 2008. Our expense under these leases
was $2,007,000, $1,910,000, and $1,494,000 for the years ended
December 31, 2003, 2002, and 2001, respectively. Our
purchase commitments include contractual obligations to purchase
inventory, supplies and capital equipment.

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Our future minimum payments under leases and
purchase commitments with non-cancelable terms in excess of one
year are as follows (in thousands).

|                             |                              |                 |       |             |  |   |       |       | 
|---------------------------- | ---------------------------- | --------------- | ----- | ----------- |  | - | ----- | ----- | 
|                             |                              | Operating Lease |       | Purchase   
|                             |                              | Commitments     |       | Commitments
|                             |                              |                 |       |            
|Year Ended December 31, 2004 |                              | $               | 2,079 |             |  | $ | 5,491 |      
|2005.                        |                              |                 | 2,043 |             |  |   | 68    |      
|2006.                        |                              |                 | 1,918 |             |  |   |      |      
|2007.                        |                              |                 | 1,932 |             |  |   |      |      
|2008.                        |                              |                 | 816   |             |  |   |      |      
|                             |                              |                 |       |             |  |   |       |      
|                             | Total minimum lease payments |                 | $     | 8,788       |  |   | $     | 5,559 | 
|                             |                              |                 |       |             |  |   |       |      

Note 10. Long-Term Receivables

In an effort to promote the growth of the laser
vision correction industry and the use of VISX STAR Systems, in
certain markets we provide long-term financing to customers for
their purchase of VISX STAR Systems. We consider a number of
factors including industry practice, competition, and our
evaluation of customers credit worthiness in determining when to
offer such financing. We had approximately $7.0 million and
$7.8 million of net receivables outstanding at
December 31, 2003 and 2002, respectively, under long-term
financing agreements. Approximately $2.6 million and
$3.9 million of these balances were due to be paid after
one year, respectively, with the balance due within one year. We
include the portion of receivables and long-term notes due to be
paid within one year in accounts receivable and the remaining
balance in long term deferred tax and other assets in the
accompanying balance sheets. We defer the portion attributable
to interest using a market rate of interest.

Note 11. Related Parties

In August 2001, we signed a one-year research and
development agreement with Medjet Inc. (Medjet)
under which we provided funding to Medjet to pursue new
ophthalmic technologies and products. In addition, we signed a
merger agreement with Medjet that provided us with a one-year
option, for which we paid $0.5 million, to acquire all
outstanding Medjet common stock in a merger transaction for
$2.00 per share in cash. During the third quarter of fiscal
2002, our agreements with Medjet were amended to provide us with
up to an additional eleven months to acquire all outstanding
Medjet common stock in a merger transaction for $2.00 per share
in cash. The closing of the potential merger was subject to
Medjets stockholder approval and to other customary
conditions to closing. In August 2001, we also paid
$1.3 million to purchase from a third party all outstanding
shares of Medjets Series B Convertible Preferred
Stock, which are entitled to votes equivalent to
1,040,000 shares of Medjet common stock and vote together
with Medjets common stock. These shares owned by VISX
represent 21% of Medjets voting stock. We account for this
investment under the equity method prescribed by Accounting
Principles Board No. 18, The Equity Method of
Accounting for Investments in Common Stock. In connection
with these agreements, we also entered into a voting agreement
with Dr. Eugene Gordon, founder of Medjet, under which
Dr. Gordon agreed to vote all of his shares of common stock
in favor of the merger, and agreed to sell all of his stock to
VISX in the event that VISX offered to complete the merger.
Additionally, VISX acquired warrants from Medjet to purchase
1,320,000 shares of Medjet common stock exercisable at
$0.75 per share. VISX also acquired warrants from a third party
to purchase 1,365,000 shares of Medjet common stock
exercisable at $3.50 per share. The warrants expire during the
second half of 2004. Under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, the warrants are
treated as derivatives and measured at fair value. At each
balance sheet date, the warrants are remeasured at fair value
and all gains and losses are recorded in the statements of
operations. The carrying value of the warrants was approximately
$2,000 at both December 31, 2003 and 2002.

Under our R&D agreement with Medjet, we paid
approximately $2.0 million and $1.0 million to Medjet
to fund research and development work they performed during 2002
and 2001, respectively. We expensed payments made to Medjet as
research, development, and regulatory expense in our financial
statements.

In November 2002, VISX terminated its merger and
research and development agreements with Medjet. In accordance
with these agreements, VISX paid Medjet termination fees of
$250,000 in the fourth quarter of 2002. Under generally accepted
accounting principles, we are required to review our investment
in Medjets Series B Convertible Preferred Stock for
losses that are other than temporary. We performed an impairment
analysis as a result of the continued decline

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in market capitalization of Medjet common stock.
As a result, we recorded an impairment charge equal to the
carrying value of our investment of $1.3 million in 2002.


Note 12. Litigation

In and prior to 2003, VISX was involved in
litigation in the United States and elsewhere with one of its
competitors, Nidek, relating to the parties respective
patent rights and Nideks claims that our activities
violated antitrust and unfair competition laws. On April 4,
2003, VISX and Nidek concluded a global litigation settlement
and a worldwide cross-license of certain of the parties
respective patents. This settlement was based on a term sheet
signed on March 31, 2003 and resulted in the dismissal of
all litigation between the parties worldwide, and involved a
payment by VISX to Nidek of $9.0 million for the settlement
of Nideks antitrust and unfair competition claims. The
settlement amount of $9.0 million was accrued at
December 31, 2003.

Other Litigation

We are involved in various other legal
proceedings and disputes that arise in the normal course of
business. These matters include product liability actions,
contract disputes and other matters. Based on currently
available information, we believe that we have meritorious
defenses to these actions and that the resolution of these cases
is not likely to have a material adverse effect on our business,
financial position or future results of operations.

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Independent Auditors Report

The Board of Directors and Stockholders

VISX, Incorporated:


We have audited the accompanying consolidated
balance sheets of VISX, Incorporated and subsidiaries as of
December 31, 2003 and 2002 and the related consolidated
statements of operations, stockholders equity and
comprehensive income and cash flows for the years then ended. In
connection with our audits of the financial statements, we also
have audited the financial statement schedule as of and for the
years ended December 31, 2003 and 2002 listed in
Item 15(a)2. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. The related consolidated statements of operations,
stockholders equity and comprehensive income and cash
flows for the year ended December 31, 2001 and financial
statement schedule as of and for the year ended
December 31, 2001 were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified
opinion on those financial statements and financial statement
schedule, before the revision described in Note 1 to the
financial statements, in their report dated January 18,
2002.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements present fairly, in all material respects, the
financial position of VISX, Incorporated and subsidiaries as of
December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related
financial statement schedule as of and for the years ended
December 31, 2003 and 2002, when considered in relation to
the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.

As discussed above, the consolidated financial
statements of VISX, Incorporated and subsidiaries for the year
ended December 31, 2001 were audited by other auditors who
have ceased operations. As described in Note 1, these
financial statements have been restated to reflect the adoption
of Emerging Issues Task Force (EITF) 01-09,
Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors
Products). We audited the adjustments described in
Note 1 that were applied to restate the statements of
operations for the year ended December 31, 2001. In our
opinion, such adjustments are appropriate and have been properly
applied. However, we were not engaged to audit, review, or apply
any procedures to the 2001 consolidated financial statements of
VISX, Incorporated and subsidiaries other than with respect to
such adjustments and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 financial statements
taken as a whole.

/s/ KPMG LLP

Mountain View, California

January 27, 2004


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##### Table of Contents



VISX is including in this Annual Report on
Form 10-K, pursuant to guidance stated in SEC FRR 62,
for the year ended December 31, 2001 Independent Public
Accountants Opinion, from the prior auditors Arthur Andersen
LLP. This report was previously issued by Arthur Andersen LLP,
for filing with our Form 10-K, for the fiscal year ended
December 31, 2001 and has not been reissued by Arthur
Andersen LLP. This opinion refers to previous financial
statements, which are not included in this current filing
(balance sheet as of December 31, 2001 and 2000 and
statements referred to for the fiscal year ended
December 31, 2000 and 1999.)

REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To VISX, Incorporated:

We have audited the accompanying consolidated
balance sheets of VISX, Incorporated (a Delaware corporation)
and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2001. These
financial statements and the schedule referred to below are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of VISX, Incorporated and subsidiaries as of
December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of
America.

Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole.
The schedule listed under Item 14(a) is presented for
purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial
statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.



| |                        
| | -----------------------
| | /s/ ARTHUR ANDERSEN LLP

San Jose, California

January 18, 2002


50



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##### Table of Contents






Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure

None.




Item 9A. Controls and
Procedures

An evaluation was performed under the supervision
and with the participation of our management, including the
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures (as
defined by Exchange Act Rules 13a-15(e) and 15d-15(e)) as
of the end of the period covered by this annual report. Based on
that evaluation, our management, including the Chief Executive
Officer and Chief Financial Officer, concluded that our
disclosure controls and procedures were effective to ensure that
information required to be disclosed is accumulated and
communicated to management to allow timely decisions regarding
required disclosures.

There have been no significant changes in our
internal controls or in other factors that could significantly
affect internal controls subsequent to their evaluation.




PART III




Item 10. Directors and Executive
Officers of VISX

The information required by this Item 10
regarding directors of VISX is incorporated into this item by
reference to VISXs definitive Proxy Statement (the
2004 Proxy Statement) to be filed with the SEC and
relating to its Annual Meeting of Stockholders to be held in
2004. For information regarding the executive officers of VISX,
reference is made to Part I, Item 4A of this report.

VISX has adopted a Code of Business Conduct and
Ethics that incorporates guidelines designed to deter wrongdoing
and to promote honest and ethical conduct and compliance with
applicable laws and regulations. In addition, the Code of
Business Conduct and Ethics incorporates VISXs guidelines
pertaining to topics such as conflicts of interest, insider
trading and workplace environment.

The full text of our Code of Business Conduct and
Ethics is available at our Internet web site at www.visx.com
under the Investor Relations section. A copy will be
provided at no-charge to any stockholder who requests one.




Item 11. Executive
Compensation

The information required by this Item 11
regarding compensation of VISXs directors and executive
officers is incorporated into this item by reference (except to
the extent allowed by Item 402(a)(8) of
Regulation S-K) to the 2004 Proxy Statement.




Item 12. Security Ownership of Certain
Beneficial Owners and Management

The information required by this Item 12
regarding beneficial ownership of Common Stock by certain
beneficial owners and by management of VISX is incorporated into
this item by reference to the 2004 Proxy Statement.




Item 13. Certain Relationships and
Related Transactions

The information required by this Item 13
regarding certain relationships and related transactions with
management of VISX is incorporated into this item by reference
to the 2004 Proxy Statement.




Item 14. Principal Accountant Fees and
Services

The information appearing in our 2004 Proxy
Statement under the headings Report of Audit
Committee, Ratification of Appointment of
Independent Auditors and Fees Paid to KPMG LLP
is incorporated by reference.

51



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PART IV




Item 15. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a)(1) Financial Statements.The
    following consolidated financial statements of VISX,
    Incorporated and its subsidiaries are found in this Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2003:

|                                                                             |  |      |    | 
|---------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                             |  | Page
|                                                                             |  |     
|Consolidated Balance Sheets                                                  |  |      | 33 | 
|Consolidated Statements of Operations                                        |  |      | 34 | 
|Consolidated Statements of Stockholders
    Equity and Comprehensive Income |  |      | 35 | 
|Consolidated Statements of Cash Flows                                        |  |      | 36 | 
|Notes to Consolidated Financial Statements                                   |  |      | 37 | 
|KPMG LLP, Independent Auditors Report                                       |  |      | 49 | 
|Arthur Andersen, Report of Independent Public
    Accountants                |  |      | 50 | 



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | (a)(2) Financial Statement Schedules.The following financial statement schedule is filed as
    part of this report:                    
|
| | Schedule II  Valuation and
    Qualifying Accounts                                                                                     
|
| | (a)(3) ExhibitsThe Exhibits filed
    as a part of this Report are listed in the Index to Exhibits.                                     
|
| | (b) Reports on Form 8-K.Visx
    filed reports on Form 8-K during the last quarter of the
    period covered by this report, as follows:



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Report on Form 8-K filed on
    October 22, 2003 under Item 12 (results of operations
    and financial condition) covering VISXs third quarter 2003
    financial results.



| |                                                          
| | ---------------------------------------------------------
| | (c) Exhibits.See Index to Exhibits.                      
|
| | (d) Financial Statement Schedules.See Item 15(a)2, above.

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VISX, INCORPORATED AND SUBSIDIARIES

FINANCIAL STATEMENT SCHEDULES

The following additional consolidated financial
statement schedule should be considered in conjunction with
VISXs consolidated financial statements. All other
schedules have been omitted because the required information is
either not applicable, not sufficiently material to require
submission of the schedule, or is included in the consolidated
financial statements or the notes thereto. All amounts are shown
in thousands.

SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS

|                             |                                     |           |   |            |  |            |   |           |  |  |   |       |  |  |   |       | 
|---------------------------- | ----------------------------------- | --------- | - | ---------- |  | ---------- | - | --------- |  |  | - | ----- |  |  | - | ----- | 
|                             |                                     |           |   | Additions  |  |            |   |          
|                             |                                     | Balance   |   | Charged to |  |            |   | Balance  
|                             |                                     | at Start  |   | Costs and  |  |            |   | at End   
|Description                  |                                     | of Period |   | Expenses   |  | Deductions |   | of Period
|                             |                                     |           |   |            |  |            |   |          
|Year Ended December 31, 2001 |                                     |           |   |            |  |            |   |           |  |  |   |       |  |  |   |      
|                             |   Allowances for doubtful accounts |           | $ | 5,771      |  |            | $ | 2,710     |  |  | $ | 3,914 |  |  | $ | 4,567 | 
|Year Ended December 31, 2002 |                                     |           |   |            |  |            |   |           |  |  |   |       |  |  |   |      
|                             |   Allowances for doubtful accounts |           |   | 4,567      |  |            |   | 1,397     |  |  |   | 3,401 |  |  |   | 2,563 | 
|Year Ended December 31, 2003 |                                     |           |   |            |  |            |   |           |  |  |   |       |  |  |   |      
|                             |   Allowances for doubtful accounts |           |   | 2,563      |  |            |   | 1,686     |  |  |   | 54    |  |  |   | 4,195 | 

53



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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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.



| |                       
| | ----------------------
| | VISX, INCORPORATED    
| | a Delaware corporation



| |     |                       
| | --- | ----------------------
| | By: | /s/ELIZABETH H. DÁVILA

| |                        
| | -----------------------
| |                        
| | Elizabeth H. Dávila    
| | Chief Executive Officer

Date: March 12, 2004

POWER OF ATTORNEY

Each person whose signature appears below hereby
constitutes and appoints Elizabeth H. Dávila and Derek A.
Bertocci, and each of them, his or her attorneys-in-fact, each
with the power of substitution, for him or her in any and all
capacities, to sign any amendments to this Report on
Form 10-K, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities
and Exchange Commission, granting to said attorneys-in-fact, or
his substitute or substitutes, the power and authority to
perform each and every act and thing requisite and necessary to
be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby
ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities
and Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                           |  |                                                                                      |  |               
|------------------------------------------ |  | ------------------------------------------------------------------------------------ |  | --------------
|Signature                                  |  | Title                                                                                |  | Date          
|                                           |  |                                                                                      |  |               
|Principal Executive Officer:              
|/s/ ELIZABETH H. DÁVILAElizabeth H. Dávila |  | Chairman of the Board,
    and Chief Executive Officer                               |  | March 12, 2004
|                                          
|                                          
|Principal Financial Officer:              
|/s/ DEREK A. BERTOCCIDerek A. Bertocci     |  | Senior Vice President,
    Chief Financial Officer
    (principal financial officer) |  | March 12, 2004
|                                          
|                                          
|Directors:                                
|/s/ LAUREEN DE BUONOLaureen De Buono       |  | Director                                                                             |  | March 12, 2004
|/s/ GLENDON E. FRENCHGlendon E. French     |  | Director                                                                             |  | March 12, 2004
|/s/ JOHN W. GALIARDOJohn W. Galiardo       |  | Director                                                                             |  | March 12, 2004

54



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|                                         |  |          |  |               
|---------------------------------------- |  | -------- |  | --------------
|Signature                                |  | Title    |  | Date          
|                                         |  |          |  |               
|/s/ JAY T. HOLMESJay T. Holmes           |  | Director |  | March 12, 2004
|/s/ GARY PETERSMEYERGary Petersmeyer     |  | Director |  | March 12, 2004
|/s/ RICHARD B. SAYFORDRichard B. Sayford |  | Director |  | March 12, 2004

55



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##### Table of Contents



INDEX TO EXHIBITS

[Item 14(c)]


|        |         |             |  |                                                                                                                                                                                                                                            
|------- | ------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 3.1*    |             |  | Amended and Restated Certificate of Incorporation
    (previously filed as Exhibit 3 to Quarterly Report on
    Form 10-Q for the quarter ended September 30, 1996)                                                                        
|        | 3.2*    |             |  | Amended and Restated Bylaws as revised through
    December 12, 2001 (previously filed as Exhibit 3.1 to
    Form 8-K dated December 21, 2001)                                                                                             
|        | 4.1*    |             |  | Reference is made to Exhibits 3.1 and 3.2                                                                                                                                                                                                  
|        | 4.2*    |             |  | Specimen Common Stock Certificate (previously
    filed as Exhibit 4.2 to Annual Report on Form 10-K,
    File No. 1-10694, for the fiscal year ended
    December 31, 1990)                                                               
|        | 4.3*    |             |  | Rights Agreement dated August 3, 2000
    between VISX, Incorporated and Fleet National Bank, as Rights
    Agent (previously filed as Exhibit 4.1 to Form 8-K
    filed on August 4, 2000)                                                
|        | 4.4*    |             |  | Amendment to the Rights Agreement, dated as of
    April 25, 2001, between VISX, Incorporated and Fleet
    National Bank, as Rights Agent (previously filed as
    Exhibit 4.2 to Form 8-K filed on May 1, 2001)                          
|        | 10.1*   |             |  | Stock Option Plan (previously filed as
    Exhibit 10(E) to Form S-1 Registration Statement
    No. 33-23844)                                                                                                                              
|        | 10.2*   |             |  | 1990 Stock Option Plan (previously filed as
    Exhibit 10.39 to Annual Report on Form 10-K, File
    No. 1-10694, for the fiscal year ended December 31,
    1990)                                                                        
|        | 10.3*   |             |  | Agreement dated as of January 1, 1992,
    between International Business Machines Corporation and the
    Company (previously filed as Exhibit 10.34 to Amendment
    No. 1 to Form S-1 Registration Statement
    No. 33-46311)          
|        | 10.4*   |             |  | Formation Agreement dated June 3, 1992,
    among Summit Technology, Inc., VISX, Incorporated, Summit
    Partner, Inc., and VISX Partner, Inc. (previously filed as
    Exhibit 10.1 to Form 8-K dated June 3, 1992)                      
|        | 10.5*   |             |  | General Partnership Agreement of Pillar Point
    Partners dated June 3, 1992, between VISX Partner, Inc. and
    Summit Partner, Inc. (previously filed as Exhibit 10.2 to
    Form 8-K dated June 3, 1992)                               
|        | 10.6*   |             |  | License-back to VISX Agreement dated June 3,
    1992, between Pillar Point Partners and the Company (previously
    filed as Exhibit 10.3 to Form 8-K dated June 3,
    1992)                                                             
|        | 10.7*   |             |  | Lease dated July 16, 1992, as amended
    October 2, 1992, between the Company and Sobrato Interests,
    a California limited partnership (previously filed as
    Exhibit 10.1 to Form 10-Q for the quarter ended
    September 30, 1992)
|        | 10.8*   |             |  | 1993 Flexible Stock Incentive Plan (previously
    filed as Exhibit 10.28 to Annual Report on Form 10-K
    dated March 30, 1993)                                                                                                          
|        | 10.9*   |             |  | 1993 Employee Stock Purchase Plan (previously
    filed as Exhibit 10.29 to Annual Report on Form 10-K
    dated March 30, 1993)                                                                                                           
|        | 10.10*  |             |  | Form of Subscription Agreement (previously filed
    as Exhibit 10.24 to Form 10-K for the year ended
    December 31, 1994)                                                                                                               
|        | 10.11* |             |  | Agreement effective as of November 20, 1995,
    among the Company, Alcon Laboratories, Inc., and Alcon
    Pharmaceuticals, Ltd. (previously filed as Exhibit 10.28 to
    Form 10-K for the year ended December 31, 1995)                
|        | 10.12*  |             |  | Agreement and Stipulation of Settlement filed on
    November 20, 1995, in the Superior Court for the County of
    Santa Clara (previously filed as Exhibit 10.29 to
    Form 10-K for the year ended December 31, 1995)                  
|        | 10.13*  |             |  | Second Amendment to Lease dated March 8,
    1996, between the Company and Sobrato Interests, a California
    limited partnership (previously filed as Exhibit 10.29 to
    Form 10-K for the year ended December 31, 1995)               
|        | 10.14*  |             |  | 1995 Stock Plan (previously filed as
    Exhibit 10.2 to Quarterly Report on Form 10-Q for the
    quarter ended June 30, 1996)                                                                                                            
|        | 10.15*  |             |  | 1995 Director Option Plan (previously filed as
    Exhibit 10.1 to Quarterly Report on Form 10-Q for the
    quarter ended June 30, 1996)                                                                                                  

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|        |         |             |  |                                                                                                                                                                                              
|------- | ------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 10.16*  |             |  | 1996 Supplemental Stock Plan (previously filed as
    Exhibit 10.3 to Form S-8 Registration Statement
    No. 333-23999)                                                                     
|        | 10.17* |             |  | Settlement Agreement dated June 17, 1997
    (previously filed as Exhibit 99.1 to Current Report on
    Form 8-K dated June 17, 1997)                                                        
|        | 10.18* |             |  | Settlement and Dissolution Agreement dated
    June 4, 1998 (previously filed as Exhibit 99.1 to
    Current Report on Form 8-K filed June 23, 1998 and
    Form 8-K/ A filed July 28, 1999).
|        | 10.19*  |             |  | 2000 Stock Plan (previously filed as
    Exhibit 10.20 to Annual Report on Form 10-K for the
    year ended December 31, 2000)                                                               
|        | 10.20*  |             |  | 2001 Nonstatutory Stock Option Plan (previously
    filed as Exhibit 10.2 to Registration Statement on
    Form S-8 (No. 333-57524) filed on March 23, 2001)                                 
|        | 16.1*   |             |  | Letter from Arthur Andersen LLP to the Securities
    & Exchange Commission (previously filed as Exhibit 16.1 to
    Current Report on Form 8-K filed June 7, 2002)                          
|        | 21.1    |             |  | Subsidiaries                                                                                                                                                                                 
|        | 23.1    |             |  | Independent Auditors Consent                                                                                                                                                                
|        | 23.2    |             |  | Notice Regarding Consent of Arthur Andersen LLP                                                                                                                                              
|        | 24.1    |             |  | Power of Attorney (see page 54)                                                                                                                                                              
|        | 31.1    |             |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                       
|        | 31.2    |             |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                       
|        | 32.1    |             |  | Certification of Chief Executive Officer and
    Chief Financial Officer                                                                                                                     






|  |                  
|- | -----------------
|* | Previously filed.



|  |                                                                                                
|- | -----------------------------------------------------------------------------------------------
| | Confidential Treatment has been requested and
    granted for certain portions of this exhibit.

57