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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,
2002

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s most recently completed second fiscal
quarter was $585,000,000.

The number of Common Shares outstanding as of March 13,
2003 was 51,350,833.

DOCUMENTS INCORPORATED BY REFERENCE





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TABLE OF CONTENTS



|                  |                                                                                               |  |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                  | PART I                                                                                       
|                  | Item 1. Business                                                                             
|                  | Item 2. Properties                                                                           
|                  | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                  | Item 4A. Executive Officers of the Registrant                                                
|                  | PART II                                                                                      
|                  | Item 5. Market for VISXs Common Equity and Related Stockholder Matters                      
|                  | Item 6. Selected Financial Data                                                              
|                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                  | Item 8. Financial Statements and Supplementary Data                                          
|                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III         
|                  | Item 10. Directors and Executive Officers of VISX                                            
|                  | Item 11. Executive Compensation                                                              
|                  | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                  | Item 13. Certain Relationships and Related Transactions                                      
|PART IV          
|                  | Item 14. Disclosure Controls and Procedures                                                  
|                  | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES       
|POWER OF ATTORNEY
|EXHIBIT 21.1     
|EXHIBIT 23.1     
|EXHIBIT 23.2     
|EXHIBIT 99.1     



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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                                       |    |      | 13 | 
|Item 4A.   |  | Executive Officers of the Registrant                                                          |    |      | 13 | 
|PART II   
|Item 5.    |  | Market for VISXs Common Equity and Related
    Stockholder Matters                           |    |      | 15 | 
|Item 6.    |  | Selected Financial Data                                                                       |    |      | 15 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and
    Results of Operations |    |      | 16 | 
|          
|Item 7A.   |  | Quantitative and Qualitative Disclosure 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      |    |      | 52 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of VISX                                                      |    |      | 52 | 
|Item 11    |  | Executive Compensation                                                                        |    |      | 52 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and
    Management                        |    |      | 52 | 
|          
|Item 13.   |  | Certain Relationships and Related Transactions                                                |    |      | 52 | 
|PART IV   
|Item 14.   |  | Disclosure Controls and Procedures                                                            |    |      | 53 | 
|Item 15.   |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                           |    |      | 53 | 
|SIGNATURES |  |                                                                                               | 55 |     

NOTE: VISX, VISX STAR, VISXPRESS, VISX STAR 2,
VISX STAR S3, STAR S2, STAR S3, VISX STAR 3Active Track, VISX
University, CustomVue, PreVue, VisionKey, WaveScan, and WaveScan
WaveFront are trademarks of VISX, Incorporated.

2



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PART I




Item 1. Business


The Company


VISX, Incorporated (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. We sell products worldwide
and generate the majority of our revenue through the sale of
VisionKey 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 U.S. 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 eligible laser vision
correction candidates who experience some form of
nearsightedness, farsightedness, or astigmatism. To date, the
industry has penetrated less than 5% of the U.S. 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.

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.

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,
light that enters 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 that are commonly
treated today are:



| |                              |                                                                                      
| | ---------------------------- | -------------------------------------------------------------------------------------
| | (RIGHT POINTING ARROW GRAPH) | Nearsightedness(also known as myopia): images are
    focused in front of the retina;
| | (RIGHT POINTING ARROW GRAPH) | Farsightedness(also
    known as hyperopia): images are focused behind the retina;   
| | (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 (requiring reading glasses to see images at
close range).

Other vision disorders, known as higher order
aberrations, can also result in blurred vision. Until recently,
these aberrations were not measurable. They cannot currently be
corrected with eyeglasses or contact lenses, but can now be
treated with laser vision correction.

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.

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The VISX STAR System employs an excimer laser
that ablates tissue without generating the heat associated with
many other types of lasers 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.

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 back 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.

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
CustomVue laser vision correction, uses the VISX WaveScan
WaveFront® System (WaveScan® System),
which enables an ophthalmologist 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, previously not measurable by any other instrument.

The personalized information from the WaveScan
System is used to generate a 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 and glasses. VISX clinical data, reported
at the American Academy of Ophthalmologists in late 2002, 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 has recently introduced CustomVue laser
vision correction internationally. We are awaiting United States
Food and Drug Administration (FDA) approval of
CustomVue vision correction in the U.S for the treatment of
myopia and astigmatism.

Standard LASIK

The vast majority of laser vision correction
procedures performed today are Standard LASIK. With Standard
LASIK, an ophthalmologist performs a traditional eye examination
and determines the prescription required to correct the
patients vision in the same method used to prescribe
eyeglasses or contact lenses. 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, Standard LASIK cannot correct higher order aberrations.

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. The ophthalmologist may
prescribe drops to promote corneal healing and alleviate
discomfort. Although most patients experience significant
improvement in uncorrected vision (vision without the aid of
eyeglasses or contact

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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.

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. In the
third quarter of 2002, VISX filed with the FDA, and is currently
awaiting approval of, its Pre-Market Application
(PMA) to perform Custom LASIK in the U.S.

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 WaveFront 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)
|

International Approvals

VISX has received regulatory approvals where
applicable in essentially all international markets. We have
launched CustomVue laser vision correction in most of these
markets.

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.

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Products

VISX STAR Excimer Laser System (VISX
STAR 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 CustomVue laser
vision correction, Standard LASIK, PRK, Custom-CAP, and PTK,
procedures.

VISX WaveScan WaveFront System (WaveScan
System).The WaveScan System is
a diagnostic device that uses laser beam technology to measure
comprehensive refractive errors of the eye that are displayed by
the system in the form of an aberration map. The WaveScan System
takes advantage of complex mathematical algorithms to derive
comprehensive refractive information about the patients
individual optical system. The system generates a unique map,
similar to a fingerprint, for each persons eye, offering
objective information about refractive errors associated with
nearsightedness, farsightedness, and astigmatism, as well as
information about higher order aberrations, previously
unmeasurable by any other instrument.

VISX PreVue®
Lens.VISX is the only manufacturer that allows a patient
to preview their potential post surgical vision prior to
undergoing laser vision correction. This is accomplished by
taking the patients custom WaveScan System results and,
using the VISX STAR System, creating a plastic lens utilizing
the exact ablation pattern that would correct the patients
vision. The patient checks their visual acuity with the PreVue
Lens, enabling them to see preoperatively what their vision
might be after the procedure. This provides additional comfort
to the patient and, in some cases, also enables the
ophthalmologist to make minor corrections to ensure optimal
patient outcome.

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 card sales and the number of procedures performed on
VISX STAR Systems. Types of VISX treatment cards include: the
VisionKey® Card, which in the U.S. carries a license fee
for each procedure that is purchased; CustomVue Cards for
performing Custom LASIK and Custom-CAP Cards, which carry a
worldwide license fee for each procedure that is purchased; and
the PTK Card, which is offered to physicians at a nominal fee 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 U.S., we sell products directly to our
customers and employ sales and service engineers to support our
business. Additionally, during 2002 we established VISX USA,
Inc., a wholly owned subsidiary, and plan to transfer our
U.S. sales and marketing assets to the subsidiary 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 34 distributors worldwide that are
responsible for selling and servicing VISX products
internationally.

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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 U.S. We are expanding
some of these programs to international markets.

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. They 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, VISX
offers educational and marketing materials including brochures,
videos, slides, and other tools to customers who buy or use a
VISX STAR System to help them promote VISX laser vision
correction.

VISX Business Development Program.VISX employs a team of industry
experts 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 that the customer can modify in
order to respond more successfully 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 VisionKey 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.

Certification Programs.We require customers to participate in
a thorough and rigorous training process to ensure they can
safely operate VISX products and perform laser vision correction
surgery. Physicians are trained and certified by a VISX
Physician Trainer (an independent ophthalmologist experienced in
the use of the VISX STAR System). The initial training of
operators and physicians is included with the purchase of the
VISX STAR System. Over 8,500 ophthalmologists in the U.S. have
been trained to use the VISX STAR System

VISXPRESS®.We broadcast a fax bulletin, called VISXPRESS, communicating
the latest news regarding VISX and laser vision correction. The
frequency of the publication is determined by the timing of
news. The bulletin is also used to communicate breaking news
immediately to our customers.

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;

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| |                              |                                                                                                                                                                                                              
| | ---------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                  

Major Customers

In May 2002, Laser Vision Centers, Inc. and TLC
Laser Eye Centers, Inc., both customers of ours, announced their
business combination was consummated and became effective. The
entitys new name is TLC Vision Corporation
(TLC). The combined company, TLC, accounted for 14%,
17%, and 18% of total revenues in 2002, 2001, and 2000,
respectively. No other customer accounted for 10% or more of
sales during any of the three years ended December 31, 2002.

Reliance on Patents and Proprietary
Technology

We own over 200 United States and foreign
patents and have 184 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and Risk Factors/Intellectual Property
Disputes below for additional discussion of the risks
related to our intellectual property.

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 (Pillar
Point) and settled all pending disputes and litigation
between the two companies.

Non-U.S. 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-U.S. patents, which covers sales of
the Summit and Autonomous laser systems.

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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
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 confidentiality and nondisclosure agreements
with employees, consultants and other parties. Our
confidentiality agreements with employees and consultants
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

U.S. 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 was completed on
November 18, 2002. 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, and failure to receive approval in, or meet
the requirements of, any country would prevent us from selling
our products in that country.

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

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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 ActiveTrack® 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.

Competition

In the United States, there are five companies
whose excimer laser systems have received FDA approval, namely,
those of VISX, Alcon, Bausch & Lomb, LaserSight, and
Nidek. 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 U.S., according to
the industry research firm Market Scope.

We have licensed our technology to other
companies that are engaged in the sale of excimer laser systems.
Bausch & Lomb, LaserSight, and WaveLight have taken a
per procedure license from us, and VISX and Alcon granted each
other cross licenses to patents covering ultraviolet ablation of
corneal tissue. Nidek is engaged in commercializing their laser
system in the United States and does not have a license to our
patents. Nidek is currently offering laser systems for sale in
the United States without requiring purchasers to pay license
fees upon use of the system. Please see Note 12 to our
consolidated financial statements for information concerning the
term sheet signed on March 31, 2003 by VISX and Nidek
outlining a global litigation settlement and patent
cross-license.

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, Schwind, WaveLight,
and Zeiss-Meditec each of which is obligated to pay us royalties
when it sells a system covered by our patents outside of the
United States. In addition, Alcon has taken a royalty-free
license to our non-U.S. 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 system 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 then assemble
these components 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
$18.7 million in 2002, $19.5 million in 2001, and
$15.0 million in 2000. Licensed technology developed by
outside parties is an additional source of potential products.
In 2002, VISX continued funding the early stage research at
Stanford University for future treatments for age-related
macular degeneration (AMD). We are also in the early
stages of development for an excimer laser treatment for
presbyopia. We initiated clinical trials for presbyopia in human
subjects in Canada during 2002.

Employees

As of December 31, 2002, we had 331 full
time employees, 12 temporary employees and 37 consultants.
Of the regular employees, 180 are employed in manufacturing and
service, 64 in research and development and regulatory, and 87
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.

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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.

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 website located at
www.visx.com, as soon as reasonably practicable after they are
filed with or furnished to the SEC.




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 Tokyo and Osaka, Japan.
Two leases for office space are for 871 and 1,835 square
feet and expire on January 31, 2005 and September 30,
2003, respectively. Two leases for warehouse space each cover
355 square feet. The first lease expires on March 31,
2005, 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 8 of
Notes to Consolidated Financial Statements.

Item 3. Legal
Proceedings

We have been involved in a variety of legal
proceedings that include proceedings relating to patents and
intellectual property rights, and claims that our activities
have violated antitrust and securities laws. On March 31,
2003, VISX and Nidek signed a term sheet outlining a global
settlement of our patent and antitrust litigation with Nidek.
During the past year, we also settled or otherwise resolved our
securities class action litigation and our patent litigation
with WaveLight. The nature and resolution of these proceedings
are described below.

Patent Litigation: Nidek and Users of Nidek
Lasers

On March 31, 2003, VISX and Nidek signed a
term sheet outlining a global litigation settlement and patent
cross-license. The settlement outlined in the term sheet will
resolve all litigation between the parties worldwide, including
all of the parties patent and antitrust lawsuits in the
United States. The settlement also will involve a worldwide
cross-license of certain of the parties respective
patents, and a payment by VISX to Nidek of $9.0 million for
the settlement of Nideks antitrust and related claims. We
expect that this payment will be more than offset by future
savings realized from the avoidance of legal fees.

The settlement and cross-license will not become
effective until the signing of a final written agreement. Upon
the signing of the agreement, the parties will submit requests
for dismissal of the lawsuits to the appropriate courts for
approval. We expect that the actions described below will be
dismissed or otherwise resolved as a result of the settlement:

United
States.In December 1998, we
filed a lawsuit in United States District Court in Northern
California alleging that Nideks laser systems infringe
certain VISX patents (USDC ND Cal C98-4842-CRB). In March 1999,
Nidek filed a lawsuit against us in the same court seeking
damages for, among other things, alleged violations of federal
and state

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antitrust laws and a declaration of
noninfringement, invalidity and unenforceability of the patents
asserted by us (USDC ND Cal C99-1528-CRB). This case was
consolidated with our action against Nidek for patent
infringement.


In 1999, we filed four patent infringement
lawsuits against certain users of the Nidek laser system in
various jurisdictions (captioned VISX, Incorporated v.
Farmington Eye Center PLLC and Donald C. Fiander, MD(USDC
ED Mich 99-60139); VISX, Incorporated v. OR Providers,
Inc., Refractive Support, Inc., and Robert G. Wiley, M.D.(USDC ND Ohio 1:99CV00508); VISX, Incorporated v.
Southwest Eye Care Center, Inc. et al.(USDC SD Cal 99
CV 1029L); and VISX, Incorporated v. Antoine L. Garabet
et al.(USDC CD Cal 99-05284)). The defendants filed
counterclaims seeking, in some cases, damages for alleged unfair
competition and, in all cases, a declaration of noninfringement,
invalidity and unenforceability of the patents asserted by us.

In February 2000, these latter actions were
transferred to Multi-District Litigation in United States
District Court in Northern California for the purpose of
consolidating them with the actions between VISX and Nidek for
pre-trial proceedings (MDL Docket No. 1319, the
California MDL).

In January 2001, Nidek filed a lawsuit against us
in United States District Court in Northern California alleging
infringement of certain Nidek patents and seeking damages and
injunctive relief (USDC ND Cal C01-20015 JF). We filed an
answer to this complaint denying infringement and asserting
certain other defenses.

The settlement negotiations which led up to the
parties March 31 term sheet began in February 2003.
On March 5, 2003, after learning of the parties
discussions, the court in the California MDL vacated all
scheduled court dates, including the summary judgment hearing
date and the trial date of April 14, 2003, and
conditionally dismissed the cases in the California MDL without
prejudice. Under the terms of the courts March 5
order, should the parties fail to conclude a settlement within
30 days of the date of the order, the court, upon notice by
either party, will vacate the order and restore the cases to the
calendar to be set for trial.

We expect that as a result of the settlement, our
patent lawsuits against Nidek and the Nidek users, Nideks
patent lawsuit against us, and Nideks and the Nidek
users declaratory relief claims will be dismissed without
prejudice. We further expect that Nideks and the Nidek
users damages claims will be dismissed with prejudice.

International.We
also brought patent infringement litigation against Nidek and
certain Nidek users in Canada and against Nidek in France, in
1994 and 1997, respectively. The defendants contested our
infringement claims as well as the validity of our patents. In
2001, a final judgment was entered in the Canadian proceeding
holding that VISXs patents were valid, but that defendants
had not infringed them. We expect that as a result of the
settlement, the parties will resolve certain court costs issues
still pending in the Canadian litigation. We further expect that
our patent infringement action against Nidek in France will be
dismissed with prejudice.

In August 2000, Nidek filed an action in the
Tokyo District Court in Japan against VISXs Japanese
subsidiary and others alleging infringement of Nideks
Japanese Patent No. 2,809,959 (the
959 patent). VISX thereafter initiated
two proceedings in the Japanese Patent Office (JPO)
challenging the validity of the 959 patent. In
November 2001, the Tokyo District Court held that the VISX
system does not infringe the 959 patent because the
patent appears to be invalid. In January 2002, the JPO in the
first invalidity proceeding held that the 959 patent
is invalid. Nidek appealed both of these decisions to the Tokyo
High Court.

On June 19, 2002, the JPO in the second
invalidity proceeding issued a Notice of Reasons for
Invalidation of the 959 patent based on additional
grounds. In October 2002, Nidek filed with the JPO an Argument
to rebut these additional grounds for invalidity and a Request
for Correction of the 959 patent claims found invalid
by the JPO. We expect that as a result of the settlement, our
invalidity proceedings and Nideks infringement action will
be withdrawn, rendering the appeals moot.

As a result of the signing of the March 31,
2003 term sheet, we believe that a final settlement is probable
and the amount of the settlement is estimable at
$9 million; therefore we have recorded a $9.0 million
charge for litigation settlement expense in 2002. However, in
the event the parties fail to reach a final settlement, the
litigation described above will continue and the effect of the
final outcome of these legal matters may differ from the
$9 million recorded. Any adverse determination could have a
material adverse effect on VISXs business, financial
position and future results of operations.

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Patent Litigation: WaveLight

In March 2002, we filed a lawsuit in Duesseldorf,
Germany against WaveLight Laser Technologie AG and its senior
manager, Max Reindl, alleging infringement of our German Patent
No. P3481164.8. In September 2002, VISX and WaveLight
entered into Settlement and License Agreements. Under the
Settlement and License Agreements, we licensed its patents
relating to refractive excimer lasers in the United States and
international markets to WaveLight. As consideration, WaveLight
will pay a royalty to us for each procedure performed in the
United States using a WaveLight refractive laser and, in
addition, WaveLight will pay a royalty to us for international
equipment sales.

In September 2002, pursuant to the terms of the
Settlement and License Agreements, the parties filed a
stipulated order dismissing the patent infringement action filed
by us against WaveLight and Mr. Reindl in Germany.

Securities Class Action Litigation

In August 2002, the United States Court of
Appeals for the Ninth Circuit affirmed the district court
s dismissal of the securities fraud class action against VISX
and the individual defendants in the case captioned in re
VISX Inc. Securities Litigation(No. C00-0649-CRB). The
plaintiffs in these actions purported to represent a class of
all persons who purchased our common stock between March 1,
1999 and February 22, 2000. The complaint alleged that the
defendants made misleading statements in violation of the
federal securities laws, including Section 10(b) of the
Securities Exchange Act of 1934. The plaintiff did not appeal
the Ninth Circuits decision, and therefore that decision
and the district courts dismissal are now final.

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 2002.




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      |  |     | 58 |          |  | Chairman of the Board, President and Chief
    Executive Officer    |  | 2001, 1999 and 2001, respectively
|Timothy R. Maier         |  |     | 54 |          |  | Executive Vice President, Chief Financial Officer
    and Treasurer |  | 1999                             
|Douglas H. Post          |  |     | 51 |          |  | Executive Vice President, Operations                                |  | 2001                             
|Derek A. Bertocci        |  |     | 49 |          |  | Vice President, Controller                                          |  | 1998                             
|Donald L. Fagen          |  |     | 49 |          |  | Vice President, Global Sales                                        |  | 2001                             
|Carol F.H. Harner, Ph.D. |  |     | 59 |          |  | Vice President, Research and Development                            |  | 1997                             
|Catherine E. Murphy      |  |     | 55 |          |  | Vice President, Human Resources                                     |  | 2001                             
|John F. Runkel, Jr.      |  |     | 47 |          |  | Vice President, General Counsel and Secretary                       |  | 2001                             
|Alan F. Russell, Ph.D.   |  |     | 61 |          |  | Vice President, Regulatory and Clinical Affairs                     |  | 2001                             
|Joaquin V. Wolff         |  |     | 45 |          |  | Vice President, Global Marketing                                    |  | 2001                             

Elizabeth H. Dávila.Ms. Dávila joined VISX in
1995 and currently serves as chairman of the board, president
and chief executive officer. She was appointed chairman of the
board in May 2001, and has served as president and chief
executive

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officer since February 2001. 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. She holds masters
degree in chemistry from Notre Dame and an MBA from Stanford
University.


Timothy R. Maier.Mr. Maier has been executive vice
president, chief financial officer and treasurer since December
1999. He was vice president, chief financial officer and
treasurer from June 1995 to November 1999. Prior to joining
VISX, Mr. Maier was at GenPharm International, Inc., a
privately held international biotechnology company, where he
served as vice president, chief financial officer from 1991 to
June 1995. From 1976 to 1991, Mr. Maier held various
positions with Spectra-Physics, Inc., including vice president
of finance, operations manager, and international finance and
administration manager. He is a CPA and holds an MBA from UCLA.

Douglas H. Post.Mr. Post has been executive vice
president, operations since January 2001. He was vice president,
operations and customer support from September 1996 to January
2001, senior director, customer support from December 1992 to
September 1996, and held various management positions at VISX
Massachusetts Inc. (formerly Questek, Inc.) from February 1985
to December 1992.

Derek A. Bertocci.Mr. Bertocci has been vice
president, controller since December 1998. 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.

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.

Carol F. H. Harner, Ph.D.Dr. Harner has been vice
president, research and development since December 1997. 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.

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
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.

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 was 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.
Consequently, some or all of our executive officers and
directors may choose to adopt such a plan in the future.

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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  
|     |                |      |   |      
|2001 |                |      |   |       |  |  |   |      
|     | First Quarter  |      | $ | 18.00 |  |  | $ | 10.25 | 
|     | Second Quarter |      |   | 23.80 |  |  |   | 15.93 | 
|     | Third Quarter  |      |   | 18.75 |  |  |   | 12.11 | 
|     | Fourth Quarter |      |   | 13.77 |  |  |   | 11.38 | 
|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  | 

On March 13, 2003, the last reported sale
price of the Common Stock on the New York Stock Exchange was
$9.00 per share. We had approximately 764 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.




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)
|                                       |         | 2002                                  |         | 2001   |  | 2000 |         | 1999   |  | 1998
|                                       |         |                                       |         |        |  |      |         |        |  |     
|Statement Of Operations Data:          |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Total revenues                         |         | $                                     | 139,926 |        |  | $    | 165,016 |        |  | $    | 190,154 |        |  | $ | 268,691 |        |  | $ | 131,879 |       
|Cost of revenues                       |         |                                       | 52,007  |        |  |      | 58,440  |        |  |      | 62,684  |        |  |   | 57,513  |        |  |   | 31,109  |       
|Total costs and expenses               |         |                                       | 112,056 |        |  |      | 119,844 |        |  |      | 134,162 |        |  |   | 126,593 |        |  |   | 72,659  |       
|Income from operations                 |         |                                       | 27,870  |        |  |      | 45,172  |        |  |      | 55,992  |        |  |   | 142,098 |        |  |   | 59,220  |       
|Litigation settlement                  |         |                                       | 9,000   |        |  |      | 37,821  |        |  |      | 11,856  |        |  |   |        |        |  |   | 35,000  |       
|Net income                             |         | $                                     | 15,342  |        |  | $    | 10,909  |        |  | $    | 35,221  |        |  | $ | 91,768  |        |  | $ | 25,590  |       
|Earnings per share:(A)                 |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|                                       | Basic   |                                       | $       | 0.29   |  |      | $       | 0.19   |  |      | $       | 0.57   |  |   | $       | 1.45   |  |   | $       | 0.42   | 
|                                       | Diluted |                                       | $       | 0.29   |  |      | $       | 0.19   |  |      | $       | 0.55   |  |   | $       | 1.35   |  |   | $       | 0.39   | 
|Shares used for earnings per share:(A) |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|                                       | Basic   |                                       |         | 53,096 |  |      |         | 56,660 |  |      |         | 61,431 |  |   |         | 63,474 |  |   |         | 61,014 | 
|                                       | Diluted |                                       |         | 53,816 |  |      |         | 58,081 |  |      |         | 63,778 |  |   |         | 68,119 |  |   |         | 65,398 | 

15



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##### Table of Contents



|                                              |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|--------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                              |  |                                      
|                                              |  | Year Ended December 31,              
|                                              |  |                                      
|                                              |  |                                      
|                                              |  | (In thousands, except per share data)
|                                              |  | 2002                                  |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                              |  |                                       |         |      |  |      |         |      |  |     
|Balance Sheet Data:                           |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Cash, cash equiv., and short-term investments |  | $                                     | 122,955 |      |  | $    | 123,807 |      |  | $    | 229,453 |  |  | $ | 258,359 |  |  | $ | 116,539 | 
|Working capital                               |  |                                       | 138,351 |      |  |      | 159,935 |      |  |      | 245,662 |  |  |   | 303,546 |  |  |   | 129,008 | 
|Total assets                                  |  |                                       | 200,592 |      |  |      | 219,925 |      |  |      | 321,507 |  |  |   | 362,721 |  |  |   | 176,619 | 
|Retained earnings                             |  |                                       | 158,667 |      |  |      | 143,325 |      |  |      | 132,416 |  |  |   | 97,195  |  |  |   | 5,427   | 
|Stockholders equity                          |  | $                                     | 155,190 |      |  | $    | 176,278 |      |  | $    | 268,772 |  |  | $ | 316,793 |  |  | $ | 138,989 | 



---

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, 1999 and 1998 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

This Report contains forward-looking statements,
including but not limited to: approval for the treatment of
patients using data from our WaveScan System; declining upgrade
revenue and costs; our belief that improvements in the economy
and consumer spending will provide renewed support for the U.S.
laser vision correction market; our belief that ongoing
technical advances have the potential to improve vision beyond
that which can be obtained with contact lenses or glasses and
that these technical advances will reduce customers
concerns regarding unfavorable outcomes; research and
development expenses; our probable litigation settlement with
Nidek; and the sufficiency of our cash in the next twelve
months. These statements are subject to risks and uncertainties
that may cause actual results to differ significantly. The risks
and uncertainties include the potential reduction in demand for
VISX equipment and upgrades, and the potential decline in demand
for procedures caused by the continued weakness in the economy,
consumer confidence and stock markets in the United States.
These forward-looking statements are estimates reflecting the
best judgment of the senior management of VISX, 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. This Report, including
forward-looking statements contained herein, should therefore be
considered in light of various important factors, including
those set forth in this report under the caption Risk
Factors, Legal Proceedings, and elsewhere in
this report. 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 these
forward-looking statements to reflect events or circumstances
after the date of this report or to reflect the occurrence of
unanticipated events.

Overview

VISX, Incorporated (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. We sell products worldwide and
generate the majority of our revenue through the sale of
VisionKey Cards that are required to perform laser vision
correction procedures on the VISX STAR Excimer Laser System
(VISX STAR System). We have also licensed our
technology to other excimer laser system companies and generally
receive royalties from the sale of their systems outside the
U.S. and from procedures that are performed in the U.S. using
their systems.

The Food and Drug Administration
(FDA) and comparable international regulatory
agencies have approved the VISX System for use in the treatment
of most types of refractive vision disorders including
nearsightedness, farsightedness, and astigmatism. The FDA has
also approved our WaveScan WaveFront System (WaveScan
System), a diagnostic device that measures refractive
errors in a persons vision more precisely than previously
available technology. In international markets, the WaveScan is
used in conjunction with our VISX STAR System to perform
CustomVue laser vision correction, which enhances laser vision
correction and potentially improves vision beyond that of
contacts and glasses. In the U.S., we are awaiting FDA approval
for the treatment of patients using the data from our WaveScan
System.

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Economic, market, and technology changes
frequently affect the laser vision correction industry and VISX
and could harm our business in the future. Please see the
section of this report entitled Risk Factors, which
begins on page 27, for a more thorough description of the
risks that our business faces. If any of the risks in this Risk
Factors section materialize, orders and revenues for VISX
Systems and VisionKey cards could fluctuate or decline.
Accordingly, our past results may not be useful in predicting
our future results.

Results of Operations

2002 Compared to 2001

|                           |                     |                         |         |      |   |        |         |      |   |  |     |    | 
|-------------------------- | ------------------- | ----------------------- | ------- | ---- | - | ------ | ------- | ---- | - |  | --- | -- | 
|                           |                     |                        
|                           |                     | Year Ended December 31,
|                           |                     |                        
|                           |                     | 2002                    |         | 2001 |   | Change
|                           |                     |                         |         |      |   |       
|                           |                     |                        
|                           |                     | (000s)                
|Revenue                    |                     |                         |         |      |   |        |         |      |   |  |     |   
|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 | % |  |     |    | 
|License and other revenues |                     | $                       | 72,524  |      |   | $      | 86,616  |      |   |  | (16 | )%
|                           | Percent of revenues |                         |         | 51.8 | % |        |         | 52.5 | % |  |     |    | 
|Total                      |                     | $                       | 139,926 |      |   | $      | 165,016 |      |   |  | (15 | )%

System
Revenues

System revenues in 2002 were $7 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.
VISX STAR System revenues revenue declined $8 million (from
$34 to $26 million) due to the recession (both U.S. and
worldwide) and aggressive pricing tactics by competitors. Laser
upgrade revenue decreased $8 million (from $20 to
$12 million) because a majority of our U.S. customers
upgraded their VISX STAR S2TM 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 have upgraded approximately 80% of the VISX
STAR S2 lasers based in the U.S. Accordingly, we anticipate
that upgrade revenue will decline significantly in 2003.
WaveScan System sales increased $9 million (from $2 to
$11 million) as we continued to extend our rollout of this
product.

Service
and Parts Revenues

Service and parts revenues in 2002 were
$4 million lower than in 2001 mainly due to a new service
plan which effectively reduces the price charged for service
contracts on laser systems with lower than average procedure
volume.

License
and Other Revenues

License and other revenue in 2002 was
$14 million lower than in 2001 mainly due to a decline in
the volume of U.S. procedures for which VISX earned procedure
fees.

Declines in the volume of laser vision correction
procedures in the U.S. have correlated with deterioration in the
health of the U.S. economy (the rise in unemployment, declines
in the stock market, and lower consumer confidence). This is
consistent with the view that consumers current
perceptions and expectations about the future health of the
economy affect their spending habits. We believe that the
rebound generally forecast for the U.S. economy and consumer
confidence will provide renewed support for the U.S. laser
vision correction market in the future.

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. We believe that ongoing technical advances (including

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##### Table of Contents



Custom LASIK), which have the potential to
improve a persons vision beyond that which can be obtained
with contact lenses or glasses, will reduce concerns perceived
by some consumers.


Notwithstanding, we cannot accurately predict
when, or to what extent, these anticipated changes in the
economy and technology will impact our License and Other
Revenues.

|                                     |                     |                         |        |      |   |        |        |      |   |  |     |    | 
|------------------------------------ | ------------------- | ----------------------- | ------ | ---- | - | ------ | ------ | ---- | - |  | --- | -- | 
|                                     |                     |                        
|                                     |                     | Year Ended December 31,
|                                     |                     |                        
|                                     |                     | 2002                    |        | 2001 |   | Change
|                                     |                     |                         |        |      |   |       
|                                     |                     |                        
|                                     |                     | (000s)                
|Costs and Expenses                   |                     |                         |        |      |   |        |        |      |   |  |     |   
|Cost of system revenues              |                     | $                       | 32,559 |      |   | $      | 40,681 |      |   |  | (20 | )%
|                                     | Percent of revenues |                         |        | 23.3 | % |        |        | 24.7 | % |  |     |    | 
|Cost of service and parts revenues   |                     | $                       | 12,932 |      |   | $      | 11,899 |      |   |  | 9   | % 
|                                     | Percent of revenues |                         |        | 9.2  | % |        |        | 7.2  | % |  |     |    | 
|Cost of license and other revenues   |                     | $                       | 6,516  |      |   | $      | 5,860  |      |   |  | 11  | % 
|                                     | Percent of revenues |                         |        | 4.7  | % |        |        | 3.6  | % |  |     |    | 
|Selling, general and administrative  |                     | $                       | 41,335 |      |   | $      | 41,946 |      |   |  | (1  | )%
|                                     | Percent of revenues |                         |        | 29.5 | % |        |        | 25.4 | % |  |     |    | 
|Research, development and regulatory |                     | $                       | 18,714 |      |   | $      | 19,458 |      |   |  | (4  | )%
|                                     | Percent of revenues |                         |        | 13.4 | % |        |        | 11.8 | % |  |     |    | 

Cost
of System Revenues

Cost of system revenues declined $8 million,
which was due to lower cost of revenues for laser upgrades
(approximately $9 million) partially offset by higher cost
of system revenues (approximately $1 million). Cost of
upgrade revenues were lower due to reduced laser upgrade
revenues in 2002 than in 2001. Higher cost of VISX STAR System
and WaveScan System revenue is attributable to increased
WaveScan System revenue in 2002 than in 2001 offset in part by a
reduction of VISX STAR System sales in 2002 than in 2001. The
gross profit margin on upgrade revenue was higher in 2002 than
in 2001 due to the introduction of new product technologies.
Since we have upgraded 80% of the VISX STAR S2 Systems based in
the U.S., we anticipate upgrade revenue and gross profit will
decline significantly in 2003.

Cost
of Service and Parts Revenues

Cost of service and parts revenues increased
$1 million to $13 million for the year ended
December 31, 2002 from $12 million for the year ended
December 31, 2001. The increase was due to higher costs to
service a larger installed base.

Cost
of License and Other Revenues

Cost of license and other revenues increased
slightly from 2001 to 2002. The increase was due to additional
licensee support provided in 2002 compared to 2001. Our gross
profit margin on cost of license and other revenue was lower due
predominately to the decline in our U.S. procedure volume.

Selling,
General, and Administrative Expenses

Selling, general, and administrative expenses
declined slightly from 2001 to 2002. The net decrease was due to
a $1 million reduction in provision for uncollectible
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 million in 2002 as compared to
$3 million in 2001. Additionally, legal expenses decreased
in 2002 as the result of insurance reimbursements of
$8 million received during 2002. Excluding these
reimbursements, legal expenses increased $3 million in 2002
over 2001. Also recorded in 2002 was a $1 million increase
in selling, general, and administrative expenses attributable to
an impairment charge related to our investment in Medjet Inc.

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##### Table of Contents



Research,
Development, and Regulatory Expenses

Our research, development, and regulatory
expenses decreased less than $1 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
(AMD). We anticipate that our R&D and regulatory
expenses in 2003 will be consistent with our expenditures in
2002.

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 to tax benefits associated with a larger percentage of
our sales occurring outside the U.S. and a lower state income
tax rate due to apportionment differences.

Legal
Contingencies

We have signed a term sheet with Nidek outlining
a global litigation settlement and patent cross-license. The
settlement outlined in the term sheet will resolve all
litigation between the parties worldwide, including all of the
parties patent and antitrust lawsuits in the United
States. The settlement also will involve a worldwide
cross-license of certain of the parties respective
patents, and the payment by VISX to Nidek of approximately
$9 million for the settlement of Nideks antitrust and
related claims. We expect that this payment will be more than
offset by future savings realized from the avoidance of legal
fees.

The settlement and cross-license will not become
effective until the signing of a final written agreement. Upon
the signing of this agreement, the parties will submit requests
for dismissal of the lawsuits to the appropriate courts for
approval. As a result of the signing of the March 31, 2003
term sheet, we believe that a final settlement is probable and
have recorded a $9 million charge for litigation settlement
expense in 2002.

Results of Operations

2001 Compared to 2000

|                           |                     |                         |         |       |  |        |         |       |  |  |       |  | 
|-------------------------- | ------------------- | ----------------------- | ------- | ----- |  | ------ | ------- | ----- |  |  | ----- |  | 
|                           |                     |                        
|                           |                     | Year Ended December 31,
|                           |                     |                        
|                           |                     | 2001                    |         | 2000  |  | Change
|                           |                     |                         |         |       |  |       
|                           |                     |                        
|                           |                     | (000s)                
|Revenue                    |                     |                         |         |       |  |        |         |       |  |  |       | 
|System revenues            |                     | $                       | 55,592  |       |  | $      | 60,678  |       |  |  | (8)%  | 
|                           | Percent of revenues |                         |         | 33.7% |  |        |         | 31.9% |  |  |       |  | 
|Service and parts revenues |                     | $                       | 22,808  |       |  | $      | 17,198  |       |  |  | 33%   | 
|                           | Percent of revenues |                         |         | 13.8% |  |        |         | 9.0%  |  |  |       |  | 
|License and other revenues |                     | $                       | 86,616  |       |  | $      | 112,278 |       |  |  | (23)% | 
|                           | Percent of revenues |                         |         | 52.5% |  |        |         | 59.1% |  |  |       |  | 
|Total                      |                     | $                       | 165,016 |       |  | $      | 190,154 |       |  |  | (13)% | 

System
Revenues

System revenues in 2001 were $5 million
lower than in 2000 due to a decline in sales of VISX STAR
Systems, which was partially offset by an increase in revenue
from VISX STAR System upgrades and the introduction of our new
WaveScan System in 2001. VISX STAR Systems revenue declined
$25 million (from $59 to $34 million) due to a number
of factors: the recession (both U.S. and worldwide), increased
competition, and delay in regulatory approval of

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##### Table of Contents



our VISX STAR S3 System in Japan. Laser
upgrade revenue increased $18 million (from $2 to
$20 million) because a majority of our U.S. customers
upgraded their STAR S2 laser systems to the new
STAR S3® model during 2001. We began installing the
VISX STAR S3 upgrade in the fourth quarter of 2000. At the
end of 2001, we had upgraded approximately 60% of the
STAR S2 lasers based in the U.S. The introduction of our
new WaveScan System generated a small amount of additional sales
revenue in 2001.


Service
and Parts Revenues

Service and parts revenues in 2001 were
$6 million higher than in 2000 mainly due to a larger
installed base of laser systems.

License
and Other Revenues

License and other revenues in 2001 were
$26 million lower than in 2000 mainly due to a decline in
license and other procedure fees from U.S. customers.
Procedure fees declined due to a combination of lower volume of
procedures for which VISX earned procedure fees
($12 million) and lower procedure prices
($19 million). Effective February 22, 2000, we reduced
the price of our license fee from $250 to $100 per procedure
performed on a VISX laser in the U.S.

The decision to have laser vision correction
surgery is influenced by many factors including consumers
confidence in and perception of the health of the economy. We
believe the economic recession, drop in consumer confidence in
2001 and the stock market decline in the United States were the
principal causes of the decline in our procedure volume and the
U.S. laser vision correction market as a whole in 2001 from 2000.

|                                      |                     |                         |        |       |  |        |        |       |  |  |       |  | 
|------------------------------------- | ------------------- | ----------------------- | ------ | ----- |  | ------ | ------ | ----- |  |  | ----- |  | 
|                                      |                     |                        
|                                      |                     | Year Ended December 31,
|                                      |                     |                        
|                                      |                     | 2001                    |        | 2000  |  | Change
|                                      |                     |                         |        |       |  |       
|                                      |                     |                        
|                                      |                     | (000s)                
|Costs and Expenses                    |                     |                         |        |       |  |        |        |       |  |  |       | 
|Cost of system revenues               |                     | $                       | 40,681 |       |  | $      | 45,642 |       |  |  | (11)% | 
|                                      | Percent of revenues |                         |        | 24.7% |  |        |        | 24.0% |  |  |       |  | 
|Cost of service and parts revenues    |                     | $                       | 11,899 |       |  | $      | 10,603 |       |  |  | 12%   | 
|                                      | Percent of revenues |                         |        | 7.2%  |  |        |        | 5.6%  |  |  |       |  | 
|Cost of license and other revenues    |                     | $                       | 5,860  |       |  | $      | 6,439  |       |  |  | (9)%  | 
|                                      | Percent of revenues |                         |        | 3.6%  |  |        |        | 3.4%  |  |  |       |  | 
|Selling, general, and administrative  |                     | $                       | 41,946 |       |  | $      | 56,519 |       |  |  | (26)% | 
|                                      | Percent of revenues |                         |        | 25.4% |  |        |        | 29.7% |  |  |       |  | 
|Research, development, and regulatory |                     | $                       | 19,458 |       |  | $      | 14,959 |       |  |  | 30%   | 
|                                      | Percent of revenues |                         |        | 11.8% |  |        |        | 7.9%  |  |  |       |  | 

Cost
of System Revenues

Cost of system revenues declined $5 million,
which was due to lower unit sales of VISX STAR Systems
(approximately $15 million), partially offset by additional
cost of revenues for laser upgrades (approximately
$12 million). Cost of upgrade revenues were higher due to
increased laser upgrade revenues in 2001 than in 2000. The gross
profit margin on cost of revenue was lower in 2001 than in 2000
due to less product sold in 2001.

Cost
of Service and Parts Revenues

Cost of service and parts revenues increased
slightly from 2000 to 2001. The increase was due to higher costs
to service a larger installed base.

Cost
of License and Other Revenues

Cost of license and other revenues decreased less
than $1 million in 2001. The decrease was due to a
reduction in keycards sold in 2001 compared to 2000. Our gross
profit margin on cost of license and other revenue was lower due
predominately to the decline in our U.S. procedure volume and
the reduction in our license fee per procedure in February 2000.

20



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##### Table of Contents



Selling,
General, and Administrative Expenses

Selling, general, and administrative expenses
declined due to a $2 million reduction in expense for
uncollectible accounts receivables and $3 million less in
spending on marketing and promotional programs. 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 additions to
reserves against accounts receivable were $3 million in
2001 as compared to $5 million in 2000. The reserves added
in 2000 were higher than in other years because a number of
customers developed significant problems due to a variety of
factors including over expansion and the rapid transition in the
U.S. economy from high growth to contraction. Approximately
$4 million of receivables identified as potential problems
in 2000 subsequently became uncollectible and were written off
in 2001. Our selling, general and administrative expenses in
2000 also included a charge to fully reserve a $15 million
long-term note we advanced to a customer. This long-term note
was subsequently written off due to the bankruptcy of this
customer in 2001.

Research,
Development, and Regulatory Expenses

Our research and development expenses increased
due to increased spending in our three main areas of focus: new
capabilities for the VISX STAR Excimer Laser platform,
development of new products such as our WaveScan System and
wavefront-driven ablations, and research into new technologies.

Interest
and Other Income

Our average balance of cash invested in interest
bearing securities was lower in 2001 than in 2000 due to cash
used to repurchase our stock. Additionally, our average yields
on our portfolio of cash and investments were lower in 2001
compared to 2000 as market interest rates decreased throughout
the year. Accordingly, interest income declined in 2001 from
2000.

Litigation
Settlement

Lawsuits were filed against us in 1998 in
connection with the activities of Pillar Point Partners
(Pillar Point), a partnership between subsidiaries
of VISX and Summit Technologies, Inc. (Summit). The
purported class action lawsuits alleged, among other things,
violations of various state and federal antitrust and unfair
competition laws. Other claims involving Pillar Point were filed
against VISX, Summit and others at various times. The Pillar
Point partnership was dissolved in 1998, and in 2001 we and
Summit, now a subsidiary of Alcon, Inc., settled certain of
these actions. In connection with the settlements, VISX paid a
total of $37.8 million in payments and related costs and
fees. As a result of the settlements, all of the lawsuits have
been dismissed with prejudice.

We settled a number of litigation matters during
2000 and paid a total of $11.9 million in one-time payments
and related costs and fees in connection with these settlements.
We settled antitrust and other claims against VISX filed by Jon
Dishler and associated parties (Dishler). This
settlement included a resolution of the claims filed in 1996 by
Pillar Point, Summit Partner, and VISX Partner against Dishler.
We also settled a lawsuit filed by John Taboada against Stephen
Trokel, VISX, and VISX Partner seeking, among other things, a
declaration that Taboada was the inventor of our U.S. Patent
No. B1 5,108,388 (388) and a payment of royalties
received by VISX for the 388 patent. In connection
with the Taboada settlement, the parties signed and filed with
the court a stipulated judgment stating that Dr. Trokel is
the sole inventor of the 388 patent, and
Taboadas proceeding seeking a stay of the reexamination of
the 388 patent was dismissed. Finally, we settled an
action filed by a group of former clinical investigators of the
system made by Taunton Technologies Corporation (a predecessor
of VISX) in which the plaintiffs alleged federal antitrust law
violations, breach of contract, and unjust enrichment.

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Quarterly Results of Operations

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

|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |   |  |   |        |  |  |   |        | 
|------------------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ |  |  | - | ------- | - |  | - | ------ |  |  | - | ------ | 
|                                                              |  |         |        |        
|                                                              |  | 2002    |        | 2001   
|                                                              |  |         |        |        
|                                                              |  | 1st Qtr |        | 2nd Qtr |  | 3rd Qtr |        | 4th Qtr |  | 1st Qtr |        | 2nd Qtr |  | 3rd Qtr |        | 4th Qtr
|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |        
|Total revenues                                                |  | $       | 36,585 |         |  | $       | 36,639 |         |  | $       | 30,560 |         |  | $       | 36,142 |         |  | $ | 50,465 |  |  | $ | 48,261  |   |  | $ | 37,032 |  |  | $ | 29,258 | 
|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |   |  |   |        |  |  |   |        | 
|Cost of revenues                                              |  |         | 12,604 |         |  |         | 11,985 |         |  |         | 11,818 |         |  |         | 15,600 |         |  |   | 17,828 |  |  |   | 15,809  |   |  |   | 14,463 |  |  |   | 10,340 | 
|Total costs and expenses                                      |  |         | 27,367 |         |  |         | 28,425 |         |  |         | 24,971 |         |  |         | 31,293 |         |  |   | 33,047 |  |  |   | 30,889  |   |  |   | 31,490 |  |  |   | 24,418 | 
|Income from operations                                        |  |         | 9,218  |         |  |         | 8,214  |         |  |         | 5,589  |         |  |         | 4,849  |         |  |   | 17,418 |  |  |   | 17,372  |   |  |   | 5,542  |  |  |   | 4,840  | 
|Litigation settlement                                         |  |         |       |         |  |         |       |         |  |         |       |         |  |         | 9,000  |         |  |   |       |  |  |   | 37,821  |   |  |   |       |  |  |   |       | 
|Income (loss) before provision
    (benefit) for income taxes |  |         | 10,749 |         |  |         | 9,775  |         |  |         | 7,094  |         |  |         | (3,137 | )       |  |   | 20,860 |  |  |   | (17,690 | ) |  |   | 7,873  |  |  |   | 6,988  | 
|Provision (benefit) for income taxes                          |  |         | 4,246  |         |  |         | 3,859  |         |  |         | 2,625  |         |  |         | (1,591 | )       |  |   | 8,240  |  |  |   | (6,988  | ) |  |   | 3,113  |  |  |   | 2,757  | 
|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |   |  |   |        |  |  |   |        | 
|Net income (loss)                                             |  | $       | 6,503  |         |  | $       | 5,916  |         |  | $       | 4,469  |         |  | $       | (1,546 | )       |  | $ | 12,620 |  |  | $ | (10,702 | ) |  | $ | 4,760  |  |  | $ | 4,231  | 
|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |   |  |   |        |  |  |   |        | 
|Earnings (loss) per share, diluted                            |  | $       | 0.12   |         |  | $       | 0.11   |         |  | $       | 0.08   |         |  | $       | (0.03  | )       |  | $ | 0.21   |  |  | $ | (0.19   | ) |  | $ | 0.08   |  |  | $ | 0.08   | 
|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |   |  |   |        |  |  |   |        | 
|Shares used for earnings (loss) per share,
    diluted        |  |         | 55,581 |         |  |         | 54,809 |         |  |         | 52,904 |         |  |         | 51,541 |         |  |   | 61,018 |  |  |   | 56,536  |   |  |   | 57,141 |  |  |   | 55,895 | 
|                                                              |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |   |  |   |        |  |  |   |        | 

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 quarterly information presented
in the table above reflects the effects of this adoption as more
fully described in Note 1 to the consolidated financial
statements.

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 revenues tend to decline
in the summer.

Critical Accounting Policies

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 that we report 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 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. Our critical accounting policies
used in making these estimates and judgments are as follows.

Revenue Recognition

Our revenue is comprised of the following: sale
and rental of system equipment and upgrades, service revenue,
and license fees and related procedure revenue (procedure
revenue). We recognize revenue in accordance with SEC
Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101). 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 U.S.
Within the U.S. 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 U.S. and Japan
our

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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 U.S. 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. 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 Vision Keycards. We recognize license fees from
third party licensees when we receive payment. We classify
shipping costs, net of any billings, in cost of revenues.


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.

Accounts Receivable

Customers are evaluated for credit worthiness and
we recognize revenue when collectibility is reasonably assured.
At the end of each accounting period, we estimate the reserve
necessary for accounts receivables that will ultimately not be
collectible 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.

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. 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. Changes in competition,
the economy, and technology can lead to variation in demand for
our products. If the change in demand is significant, we may
need to further reduce the carrying value of our inventory. All
inventory write-downs result in a new cost basis and are charged
to cost of revenues, accordingly any inventory write-down would
impact our reported cost of revenues.

Legal Contingencies

We are involved in a variety of legal proceedings
including those concerning intellectual property rights, claims
that we violated antitrust 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 cases
currently pending and, accordingly, have not accrued any amounts
for legal settlements. Please see Note 12 to our
consolidated financial statements for information concerning the
term sheet signed on March 31, 2003 by VISX and Nidek
outlining a global litigation settlement and patent
cross-license. However, the results of these complex legal
proceedings are very difficult to predict with certainty. In
addition, because a number of the proceedings have issues in
common, an adverse determination in one proceeding could lead to
adverse determinations in one or more of the other pending
proceedings. Adverse determinations in any of these proceedings
could limit our ability to collect equipment and use fees in
certain markets, could give rise to significant monetary
damages, or could prevent us from manufacturing and selling our
laser system, and therefore could have a material adverse effect
on our business, financial position, and results of operations.

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Liquidity and Capital
Resources

|                                                   |  |      |         |        |  |      |       |        |  |      |         |  |  |  |       |  |  |   |         | 
|-------------------------------------------------- |  | ---- | ------- | ------ |  | ---- | ----- | ------ |  | ---- | ------- |  |  |  | ----- |  |  | - | ------- | 
|                                                   |  | 2002 |         | Change |  | 2001 |       | Change |  | 2000
|                                                   |  |      |         |        |  |      |       |        |  |     
|Cash, cash equivalents, and short-term investments |  | $    | 122,955 |        |  |      | (1)%  |        |  | $    | 123,807 |  |  |  | (46)% |  |  | $ | 229,453 | 
|Working capital                                    |  |      | 138,351 |        |  |      | (13)% |        |  |      | 159,935 |  |  |  | (35)% |  |  |   | 245,662 | 
|Stockholders equity                               |  |      | 155,190 |        |  |      | (12)% |        |  |      | 176,278 |  |  |  | (34)% |  |  |   | 268,772 | 

Our cash, cash equivalents, and short-term
investments consist principally of money market funds, and
government and corporate bonds. All of our short-term
investments are classified as available-for-sale
under the provisions of SFAS 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. Realized gains and losses are
recognized when realized on the consolidated statements of
operations.

Cash, cash equivalents, and short-term
investments decreased by $1 million in 2002 principally
because we spent $43 million to repurchase 3.9 million
shares of VISX stock on the open market. This was offset by
$40 million of net cash provided by operating activities
and $5 million from the issuance of common stock related to
employee participation in employee stock programs. The extent to
which our employees exercise stock options can vary due to a
number of factors, especially changes in the market price of our
common stock. As a result, our cash flow resulting from the
issuance of common stock related to employee participation in
employee stock programs can vary.

Operating activities provided $40 million of
cash in 2002, up from $6 million provided in 2001. The
principal factors that contributed to this difference are as
follows. Net income increased by $4 million due mainly to
the legal settlement of $38 million (pre-tax) in 2001 and
the legal fee reimbursement of $8 million in 2002 offset by
a decline in revenue of $25 million in 2002. Deferred
income tax assets and prepaid expenses decreased by
$10 million due primarily to the utilization of net
operating loss carryforwards ($6 million) and a reduction
of deferred temporary tax timing differences ($2 million).
Accounts receivable, net of reserves, decreased by
$8 million in 2002 primarily due to lower sales.

Cash provided by investing activities was
$20 million in 2002, down from $98 million provided in
2001. Capital expenditure remained flat at approximately
$3 million. The principal factor that contributed to the
cash provided by investing activities was the proceeds from
maturities of short-term investments.

Cash used in financing activities was
$38 million in 2002, down from $109 million used in
2001. The principal factor that contributed to the cash used in
financing activities was the cash used to repurchase
3.9 million shares and 7.2 million shares of VISX
stock on the open market in 2002 and 2001, respectively.

On April 4, 2001, our Board of Directors
authorized a new Stock Repurchase Program under which up to
10 million shares of VISX common stock may be repurchased.
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, 2002, 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, in certain markets we provide long-term financing to
customers for their purchase of VISX 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 believe that our operations will provide
sufficient cash flow to meet our working capital and capital
equipment needs during the coming twelve months. In addition, we
have $123 million of cash, cash equivalents, and short-term
investments as of December 31, 2002 to provide for
unforeseen contingencies and to support strategic objectives
including the development or acquisition of new technologies and
our Stock Repurchase Program.

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

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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.


Under our R&D agreement with Medjet, we paid
approximately $2 million and $1 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. 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 in market
capitalization of Medjet common stock. As a result, we recorded
an impairment charge equal to the carrying value of our
investment of $1.2 million in 2002.

In May 2002, VISX announced that it 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. During 2002, VISX made payments of
approximately $1 million related to these agreements, which
were expensed in 2002. If clinical and regulatory milestones
specified in both agreements are achieved, VISX would be
committed to make additional payments of approximately
$2 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.

New Accounting Pronouncements

On June 29, 2001, the Financial Accounting
Standard Board (FASB) approved for issuance
Statement of Financial Accounting Standards No. 141,
Business Combinations (SFAS 141),
and Statement of Financial Accounting Standards No. 142,
Goodwill and Intangible Assets
(SFAS 142). Adoption of these statements did
not have any impact on our financial position or results of
operations as we did not have any goodwill recorded as of the
adoption date.

In July 2001, the FASB Emerging Issues Task Force
(EITF) reached final consensus on EITF
No. 00-25, Vendor Income Statement Characterization
of Consideration Paid to a Reseller of the Vendors
Products (EITF 00-25). EITF 00-25
generally requires that consideration, including equity
instruments, given to a customer be classified in a
vendors financial statements not as an expense, but as a
reduction to revenue up to the amount of cumulative revenue
recognized or to be recognized. In November 2001, the EITF
reached consensus on EITF No. 01-09, Accounting for
Consideration Given by a Vendor to a Customer or 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 and 2000 are $4,550,000 and $10,094,000,
respectively. These reclassifications do not change the amount
of net income reported for each period, 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 reduces our gross profit ratio. Based upon this

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reclassification, our gross profit ratio
decreased to 65% from the previously reported 66% for the year
ended December 31, 2001 and decreased to 67% from the
previously reported 69% for the year ended December 31,
2000.


In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets
(SFAS 144) which superseded Statement of
Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of and the accounting and disclosure
provisions of Accounting Principles Board Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and
Transactions. The provisions of SFAS 144 became
effective for us on January 1, 2002, and adoption of this
statement did not have any impact on our financial position or
results of operations.

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. We are currently
evaluating the impact of adoption of this statement but do not
expect a material impact on our financial position or results of
operations.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that a liability be recorded
in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about
the guarantees that an entity has issued, including a
rollforward of the entitys product warranty liabilities.
The disclosure requirements are effective for financial
statements issued after December 15, 2002 and the
recognition/measurement requirements are effective on a
prospective basis for guarantees issued or modified after
December 31, 2002. The application of the requirements of
FIN 45 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 will apply
to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. We are currently evaluating the effect
that the adoption of EITF Issue No. 00-21 will have on our
results of operations and financial position.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based Compensation,
Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures
of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed
more prominently and in a tabular format. Additionally, SFAS
No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning
after December 15, 2002. As we did not make a voluntary
change to the fair value based method of accounting for
stock-based employee compensation in 2002, the adoption of SFAS
No. 148 did not have a material impact on our financial
position or results of operations. The disclosure requirements
have been adopted and incorporated in the footnotes to the
financial statements.

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. 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. FIN 46 is
effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We are
currently evaluating the effect that the adoption of FIN 46
but does not expect a material impact on our financial position
or results of operations.

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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 certain
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 they 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 about 5% of the eligible
U.S. population, and our profitability and continued growth
will be largely dependent on increasing levels of market
acceptance and procedure growth both in the United States and
internationally. 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 not
choose to undergo laser vision correction because of these
complications or more general concerns relating to its safety
and efficacy and a general resistance to surgery. Alternatively,
some consumers may elect to delay undergoing laser vision
correction surgery because they believe improved technology
and/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.

Patents and Intellectual Property.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 approximately 180 patent applications pending.
Although we are committed to protecting our proprietary
technology, it is possible that one or more of our patents will
be found to be invalid or unenforceable, or that a party against
whom we are asserting claims of patent infringement will be
found not to be infringing our patents. Such an outcome could
result in, among other things, our inability to sell, license,
use or incorporate products that use the challenged technology;
increased competition by new or existing competitors or the
payment of substantial monetary damages, any of which could have
a material adverse effect on our business, financial position
and results of operations.

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 traditional vision correction options such as
eyeglasses and contact lenses, it also competes with other
technologies and surgical techniques such as corneal implants,
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 new laser systems. The VISX 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 System. We also do not
currently collect license fees from an unlicensed competitor. 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.

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, and
longer-term follow-up data 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.


Economic Conditions.Laser vision correction is not subject
to reimbursement from third-party payors such as insurance
companies or government programs, and adverse economic
conditions have, and may continue to cause, our revenues to
decline. The costs of laser vision correction are typically
borne by individuals directly. Accordingly, individuals may be
less willing to incur the procedure cost associated with laser
vision correction in weak or uncertain economic conditions, as
was evidenced by our decline in revenues from 2002 compared to
2001 and from 2001 compared to 2000. Any resulting decline in
the number of VISX STAR Systems sold or laser vision correction
procedures performed may have a material adverse effect on our
business, financial position, and results of operations.

Loss Of Significant Customers.If we lose one or more of our
significant customers, or if purchases by one or more of our key
customers decrease, our net sales may decline and our business
could be harmed. A significant portion of our revenues is
derived from sales to TLC Vision Corporation (TLC)
formed in May 2002 through the merger of Laser Vision Centers,
Inc. and TLC Laser Eye Centers, Inc., both long-term customers
of ours. The combined company, TLC, accounted for 14%, 17% and
18% of our total revenues in 2002, 2001 and 2000, respectively.
Should we lose a major customer or if anticipated sales to a
major customer do not materialize, our business, financial
position and results of operations may suffer.

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.

Governmental Regulation.We are subject to extensive
governmental 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. In particular, we are awaiting
approval from the FDA of our Pre-Market Application to perform
Custom LASIK in the United States. 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, yet 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 show 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

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request repair, replacement, or 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 Products May Not Be Commercially Viable.Our research and development may not
lead to new products that achieve commercial success. We devote
significant resources to research and development. The research
and development process is expensive, prolonged, and entails
considerable uncertainty. Development of a new product, from
discovery through testing and registration to initial product
launch, typically takes between three and seven years for a
medical device. 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.

International Operations.We face risks due to our reliance on
sales in international markets. Our future success will depend
in part on the continued expansion of our international sales
and operations. In particular, during 2002, 2001, and 2000, we
derived approximately 23%, 16% and 18%, respectively, of our
revenues from sales to customers outside the United States. Our
growing 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.

Intellectual Property Disputes.The laser vision correction industry
has been the subject of substantial litigation, both in the
United States and internationally, specifically focusing on
patents and proprietary rights. Other companies own United
States and foreign patents covering methods and apparatus for
performing corneal surgery with ultraviolet lasers. If we were
found to infringe our competitors patents, we could be
subject to significant monetary liability and we could be
enjoined from distributing our products. Moreover, it is
possible 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. In that event, 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 may suffer and our revenues may decline. Any one
of these results could harm our business.

Settlement Negotiations with Nidek.On March 31, 2003, VISX and Nidek
signed a term sheet outlining a global litigation settlement and
patent cross-license. The settlement outlined in the term sheet
will resolve all litigation between the parties worldwide,
including all of the parties patent and antitrust lawsuits
in the United States. The settlement also will involve a
worldwide cross-license of certain of the parties
respective patents, and a payment by VISX to Nidek of
$9.0 million for the settlement of Nideks antitrust
and related claims. We expect that this payment will be more
than offset by future savings realized from the avoidance of
legal fees.

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The settlement and cross-license will not become
effective until the signing of a final written agreement, which
is currently being drafted. Upon the signing of the agreement,
the parties will submit requests for dismissal of the lawsuits
to the appropriate courts for approval. However, if the parties
fail to effect a final settlement, the litigation described
above will continue. In that event, we are unable to predict
either the outcome or estimate the potential adverse financial
and operational impact, if any, that might arise from these
cases. Adverse determinations in these lawsuits could limit our
ability to collect per procedure license fees in the United
States from sellers and users of laser vision correction
systems, could give rise to significant monetary damages and
could result in an order enjoining the manufacture and sale of
the VISX STAR System. Any such adverse determination could
therefore have a material adverse effect on VISXs
business, financial position and future results of operations.

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.

Single Sources For Key Components.The manufacture of VISX STAR Systems
and WaveScan Systems 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 any 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; and           
|
| |  | changes in earnings estimates by analysts or
    changes in accounting policies.
|
| |  | 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.

Confidentiality Agreements.We rely on confidentiality agreements
to protect our proprietary technology. We protect our
proprietary technology, in part, through confidentiality and
nondisclosure agreements with employees, consultants and other
parties. Our confidentiality 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 confidentiality agreements, we may not have
adequate remedies for any breach, and our competitors may learn
of our trade secrets.

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

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effectively market those products and persuade a
sufficient number of eye care professionals to use the new
products 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 and/or methods
of treatment will be available in the near future.


Antitakeover Provisions in Our Charter
Documents.In 2000, we adopted a
stockholder rights plan, which we subsequently amended in 2001.
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 U.S. Treasury and U.S. government
agencies and corporations and (2) U.S. 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).

|                                                                                         |  |      |        |      |  |      |        |      |  |      |       |        |  |   |   |  |  |   |   |  |  |   |   | 
|---------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ----- | ------ |  | - | - |  |  | - | - |  |  | - | - | 
|                                                                                         |  | 2003 |        | 2004 |  | 2005 |        | 2006 |  | 2007 |       | Beyond
|                                                                                         |  |      |        |      |  |      |        |      |  |      |       |       
|Cash equivalents and short-term investments
    (amortized cost as of December 31, 2002) |  | $    | 44,864 |      |  | $    | 57,876 |      |  | $    | 5,402 |        |  | $ |  |  |  | $ |  |  |  | $ |  | 
|Weighted average effective interest rate                                                 |  |      | 2.7    | %    |  |      | 4.4    | %    |  |      | 5.8   | %      |  |   |  |  |  |   |  |  |  |   |  | 

Foreign Currency Exchange Rate Risk.We sell products in various
international markets. Virtually all of these sales are
contracted and paid for in U.S. Dollars. As of December 31,
2002 we have no outstanding foreign currency hedge contracts.
Accordingly, we have no material foreign currency exchange risk
as of December 31, 2002.

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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                                       |  |      | 50 | 
|Arthur Andersen LLP, Report of Independent Public
    Accountants            |  |      | 51 | 

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VISX, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                          |                                                                                                                               |                            |          |         |         |   |          |         |         | 
|------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------- | ------- | ------- | - | -------- | ------- | ------- | 
|                                                                                                                          |                                                                                                                               |                           
|                                                                                                                          |                                                                                                                               | December 31,              
|                                                                                                                          |                                                                                                                               |                           
|                                                                                                                          |                                                                                                                               | 2002                       |          | 2001   
|                                                                                                                          |                                                                                                                               |                            |          |        
|                                                                                                                          |                                                                                                                               |                           
|                                                                                                                          |                                                                                                                               | (In thousands, except     
|                                                                                                                          |                                                                                                                               | share and per share       
|                                                                                                                          |                                                                                                                               | amounts)                  
|ASSETS                                                                                                                   
|Current Assets                                                                                                            |                                                                                                                               |                            |          |         |         |   |          |        
|                                                                                                                          | Cash and cash equivalents                                                                                                     |                            | $        | 37,687  |         |   | $        | 15,349  |        
|                                                                                                                          | Short-term investments                                                                                                        |                            |          | 85,268  |         |   |          | 108,458 |        
|                                                                                                                          | Accounts receivable, net of allowances for
    doubtful accounts of $2,563 and $4,567, respectively                           |                            |          | 24,559  |         |   |          | 32,490  |        
|                                                                                                                          | Inventories                                                                                                                   |                            |          | 12,751  |         |   |          | 14,071  |        
|                                                                                                                          | Deferred tax assets and prepaid expenses                                                                                      |                            |          | 23,488  |         |   |          | 33,214  |        
|                                                                                                                          |                                                                                                                               |                            |          |         |         |   |          |        
|                                                                                                                          |                                                                                                                               | Total current assets       |          |         | 183,753 |   |          |         | 203,582 | 
|Property and Equipment, net                                                                                               |                                                                                                                               |                            | 6,498    |         |         |   | 4,152    |        
|Long-Term Deferred Tax and Other
    Assets                                                                               |                                                                                                                               |                            | 10,341   |         |         |   | 12,191   |        
|                                                                                                                          |                                                                                                                               |                            |          |         |         |   |          |        
|                                                                                                                          |                                                                                                                               | $                          | 200,592  |         |         | $ | 219,925  |        
|                                                                                                                          |                                                                                                                               |                            |          |         |         |   |          |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                 
|Current Liabilities                                                                                                       |                                                                                                                               |                            |          |         |         |   |          |        
|                                                                                                                          | Accounts payable                                                                                                              |                            | $        | 4,341   |         |   | $        | 3,270   |        
|                                                                                                                          | Accrued liabilities and other current liabilities                                                                             |                            |          | 41,061  |         |   |          | 40,377  |        
|                                                                                                                          |                                                                                                                               |                            |          |         |         |   |          |        
|                                                                                                                          |                                                                                                                               | Total current liabilities  |          |         | 45,402  |   |          |         | 43,647  | 
|                                                                                                                          |                                                                                                                               |                            |          |         |         |   |          |        
|Commitments and Contingencies (Notes 8 and
    11)                                                                        |                                                                                                                               |                            |          |         |         |   |          |        
|Stockholders Equity:                                                                                                     |                                                                                                                               |                            |          |         |         |   |          |        
|                                                                                                                          | Common stock  $.01 par value,
    180,000,000 shares authorized; 64,990,089 shares issued at
    December 31, 2002 and 2001. |                            |          | 650     |         |   |          | 650     |        
|                                                                                                                          | Additional paid-in capital                                                                                                    |                            |          | 202,700 |         |   |          | 208,130 |        
|Less: 13,652,256 and 10,436,238 common stock
    treasury shares at December 31, 2002 and 2001,
    respectively, at cost |                                                                                                                               |                            | (208,748 | )       |         |   | (178,347 | )      
|                                                                                                                          | Accumulated other comprehensive income                                                                                        |                            |          | 1,921   |         |   |          | 2,520   |        
|                                                                                                                          | Retained earnings                                                                                                             |                            |          | 158,667 |         |   |          | 143,325 |        
|                                                                                                                          |                                                                                                                               |                            |          |         |         |   |          |        
|                                                                                                                          |                                                                                                                               | Total stockholders equity |          |         | 155,190 |   |          |         | 176,278 | 
|                                                                                                                          |                                                                                                                               |                            |          |         |         |   |          |        
|                                                                                                                          |                                                                                                                               | $                          | 200,592  |         |         | $ | 219,925  |        
|                                                                                                                          |                                                                                                                               |                            |          |         |         |   |          |        

See accompanying notes to consolidated financial
statements.


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VISX, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |         |       |         | 
|-------------------------------------------- | ------------------------------------ | ------------------------------------- | ------------------------ | ------ | ------ | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ----- | ------- | 
|                                             |                                      |                                      
|                                             |                                      | Year Ended December 31,              
|                                             |                                      |                                      
|                                             |                                      | 2002                                  |                          | 2001   |        | 2000   
|                                             |                                      |                                       |                          |        |        |        
|                                             |                                      |                                      
|                                             |                                      | (In thousands, except per share data)
|Revenues:                                    |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|                                             | System revenues                      |                                       | $                        | 48,595 |        |         | $      | 55,592  |         |         | $      | 60,678  |      
|                                             | Service and parts revenues           |                                       |                          | 18,807 |        |         |        | 22,808  |         |         |        | 17,198  |      
|                                             | License and other revenues           |                                       |                          | 72,524 |        |         |        | 86,616  |         |         |        | 112,278 |      
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|                                             |                                      |                                       | Total revenues           |        |        | 139,926 |        |         |         | 165,016 |        |         |       | 190,154 | 
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|Costs and Expenses:                          |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|                                             | Cost of system revenues              |                                       |                          | 32,559 |        |         |        | 40,681  |         |         |        | 45,642  |      
|                                             | Cost of service and parts revenues   |                                       |                          | 12,932 |        |         |        | 11,899  |         |         |        | 10,603  |      
|                                             | Cost of license and other revenues   |                                       |                          | 6,516  |        |         |        | 5,860   |         |         |        | 6,439   |      
|                                             | Selling, general and administrative  |                                       |                          | 41,335 |        |         |        | 41,946  |         |         |        | 56,519  |      
|                                             | Research, development and regulatory |                                       |                          | 18,714 |        |         |        | 19,458  |         |         |        | 14,959  |      
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|                                             |                                      |                                       | Total costs and expenses |        |        | 112,056 |        |         |         | 119,844 |        |         |       | 134,162 | 
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|Income From Operations                       |                                      |                                       | 27,870                   |        |        |         | 45,172 |         |         |         | 55,992 |        
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|Other Income (Expense):                      |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|                                             | Interest income                      |                                       |                          | 5,611  |        |         |        | 10,680  |         |         |        | 14,080  |      
|                                             | Litigation settlement                |                                       |                          | (9,000 | )      |         |        | (37,821 | )       |         |        | (11,856 | )    
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|                                             |                                      | Other income (expense), net           |                          |        | (3,389 | )       |        |         | (27,141 | )       |        |         | 2,224 |        
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|Income Before Provision For Income
    Taxes |                                      | $                                     | 24,481                   |        |        |         | 18,031 |         |         |         | 58,216 |        
|                                             | Provision for income taxes           |                                       |                          | 9,139  |        |         |        | 7,122   |         |         |        | 22,995  |      
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|Net Income                                   |                                      | $                                     | 15,342                   |        |        | $       | 10,909 |         |         | $       | 35,221 |        
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|Earnings Per Share                           |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|                                             | Basic                                |                                       | $                        | 0.29   |        |         | $      | 0.19    |         |         | $      | 0.57    |      
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|                                             | Diluted                              |                                       | $                        | 0.29   |        |         | $      | 0.19    |         |         | $      | 0.55    |      
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|Shares Used For Earnings Per Share           |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|                                             | Basic                                |                                       |                          | 53,096 |        |         |        | 56,660  |         |         |        | 61,431  |      
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        
|                                             | Diluted                              |                                       |                          | 53,816 |        |         |        | 58,081  |         |         |        | 63,778  |      
|                                             |                                      |                                       |                          |        |        |         |        |         |         |         |        |        

See accompanying notes to consolidated financial
statements.


34



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME

|                                                                |                                                                             |                |        |        |  |            |     |          |  |            |         |               |   |          |          |               |  |   |       |       |   |  |   |        |   |   |         |        |  |   |          |        |  
|--------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------- | ------ | ------ |  | ---------- | --- | -------- |  | ---------- | ------- | ------------- | - | -------- | -------- | ------------- |  | - | ----- | ----- | - |  | - | ------ | - | - | ------- | ------ |  | - | -------- | ------ | -
|                                                                |                                                                             |                |        |        |  |            |     |          |  | Foreign    |         |               |   |          |          |              
|                                                                |                                                                             |                |        | Common |  |            |     |          |  | Currency/  |         |               |   |          |          |              
|                                                                |                                                                             | Common         |        | Stock  |  | Additional |     |          |  | Unrealized |         |               |   |          |          | Total        
|                                                                |                                                                             | Shares         |        | Par    |  | Paid-In    |     | Treasury |  | Holding    |         | Comprehensive |   | Retained |          | Stockholders
|                                                                |                                                                             | Issued         |        | Value  |  | Capital    |     | Stock    |  | Gains      |         | Income        |   | Earnings |          | Equity       
|                                                                |                                                                             |                |        |        |  |            |     |          |  |            |         |               |   |          |          |              
|                                                                |                                                                             |               
|                                                                |                                                                             | (In thousands)
|Balance, December 31, 1999.                                     |                                                                             |                | 64,891 |        |  | $          | 649 |          |  | $          | 220,049 |               |   | $        | (153     | )             |  | $ | (947  | )     |   |  |   |        |   | $ | 97,195  |        |  | $ | 316,793  |       
|Repurchases of common stock                                     |                                                                             |                |       |        |  |            |    |          |  |            |        |               |   |          | (90,772  | )             |  |   |      |       |   |  |   |        |   |   |        |        |  |   | (90,772  | )     
|Exercise of stock options                                       |                                                                             |                | 99     |        |  |            | 1   |          |  |            | (5,583  | )             |   |          | 9,871    |               |  |   |      |       |   |  |   |        |   |   |        |        |  |   | 4,289    |       
|Common stock issued under the                                   |                                                                             |                |        |        |  |            |     |          |  |            |         |               |   |          |          |               |  |   |       |       |   |  |   |        |   |   |         |        |  |   |          |       
|                                                                | Employee Stock Purchase                                                     |                |        |        |  |            |     |          |  |            |         |               |   |          |          |               |  |   |       |       |   |  |   |        |   |   |         |        |  |   |          |        |  
|                                                                | Plan                                                                        |                |        |       |  |            |     |         |  |            |         | (222          | ) |          |          | 1,108         |  |   |       |      |   |  |   |        |   |   |         |       |  |   |          | 886    |  
|Income tax benefit arising                                      |                                                                             |                |        |        |  |            |     |          |  |            |         |               |   |          |          |               |  |   |       |       |   |  |   |        |   |   |         |        |  |   |          |       
|                                                                | from employee stock option                                                  |                |        |        |  |            |     |          |  |            |         |               |   |          |          |               |  |   |       |       |   |  |   |        |   |   |         |        |  |   |          |        |  
|                                                                | plans                                                                       |                |        |       |  |            |     |         |  |            |         | 424           |   |          |          |              |  |   |       |      |   |  |   |        |   |   |         |       |  |   |          | 424    |  
|Comprehensive income:                                           |                                                                             |                |        |        |  |            |     |          |  |            |         |               |   |          |          |               |  |   |       |       |   |  |   |        |   |   |         |        |  |   |          |       
|                                                                | Net income                                                                  |                |        |       |  |            |     |         |  |            |         |              |   |          |          |              |  |   |       |      |   |  | $ | 35,221 |   |   |         | 35,221 |  |   |          | 35,221 |  
|                                                                | Foreign currency translation adjustment                                     |                |        |       |  |            |     |         |  |            |         |              |   |          |          |              |  |   |       | (67   | ) |  |   | (67    | ) |   |         |       |  |   |          | (67    | )
|                                                                | Adjustment for unrealized holding gain on
    available-for-sale securities |                |        |       |  |            |     |         |  |            |         |              |   |          |          |              |  |   |       | 1,998 |   |  |   | 1,998  |   |   |         |       |  |   |          | 1,998  |  
|                                                                |                                                                             |                |        |        |  |            |     |          |  |            |         |               |   |          |          |               |  |   |       |       |   |  |   |        |   |   |         |        |  |   |          |       
|                                                                | Comprehensive income                                                        |                |        |        |  |            |     |          |  |            |         |               |   |          |          |               |  |   |       |       |   |  | $ | 37,152 |   |   |         |        |  |   |          |        |  
|                                                                |                                                                             |                |        |        |  |            |     |          |  |            |         |               |   |          |          |               |  |   |       |       |   |  |   |        |   |   |         |        |  |   |          |       
|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 loss 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  |       
|                                                                |                                                                             |                |        |        |  |            |     |          |  |            |         |               |   |          |          |               |  |   |       |       |   |  |   |        |   |   |         |        |  |   |          |       

See accompanying notes to consolidated financial
statements.

35



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                           |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |         |        |        |  
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------------------------------- | ------- | ----- | ------ | ------ | -------- | ----- | ------- | ------ | ------- | ------ | ------ | -
|                                                                           |                                                                                       |                                                                                        
|                                                                           |                                                                                       | Year Ended December 31,                                                                
|                                                                           |                                                                                       |                                                                                        
|                                                                           |                                                                                       | 2002                                                                                    |                                                   | 2001    |       | 2000  
|                                                                           |                                                                                       |                                                                                         |                                                   |         |       |       
|                                                                           |                                                                                       |                                                                                        
|                                                                           |                                                                                       | (In thousands)                                                                         
|Cash Flows From Operating
    Activities:                                  |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|                                                                           | Net income                                                                            |                                                                                         | $                                                 | 15,342  |       |        | $      | 10,909   |       |         | $      | 35,221  |       
|                                                                           | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                         |                                                   |         |       |        |        |          |       |         |        |         |       
|                                                                           |                                                                                       | Depreciation and amortization                                                           |                                                   |         | 4,320 |        |        |          | 3,617 |         |        |         | 3,515  |       
|                                                                           |                                                                                       | Income tax benefit from exercise of stock options                                       |                                                   |         | 2,011 |        |        |          | 4,004 |         |        |         | 424    |       
|                                                                           |                                                                                       | Provision for doubtful accounts receivable                                              |                                                   |         | 1,397 |        |        |          | 2,710 |         |        |         | 4,894  |       
|                                                                           |                                                                                       | Provision for doubtful long-term note receivable                                        |                                                   |         |      |        |        |          |      |         |        |         | 15,000 |       
|                                                                           |                                                                                       | Increase (decrease) in cash flows from
    changes in operating assets and liabilities: |                                                   |         |       |        |        |          |       |         |        |         |        |       
|                                                                           |                                                                                       |                                                                                         | Accounts receivable                               |         |       | 6,534  |        |          |       | (660    | )      |         |        | 11,820 |  
|                                                                           |                                                                                       |                                                                                         | Inventories                                       |         |       | (2,696 | )      |          |       | 691     |        |         |        | (4,093 | )
|                                                                           |                                                                                       |                                                                                         | Deferred tax assets and prepaid expenses          |         |       | 9,726  |        |          |       | (13,572 | )      |         |        | 9,550  |  
|                                                                           |                                                                                       |                                                                                         | Long-term deferred tax and other assets           |         |       | 1,805  |        |          |       | 7,723   |        |         |        | (7,148 | )
|                                                                           |                                                                                       |                                                                                         | Accounts payable                                  |         |       | 1,071  |        |          |       | (4,083  | )      |         |        | 2,197  |  
|                                                                           |                                                                                       |                                                                                         | Accrued liabilities and other current liabilities |         |       | 684    |        |          |       | (5,005  | )      |         |        | 4,610  |  
|                                                                           |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|                                                                           |                                                                                       |                                                                                         | Net cash provided by operating activities         |         |       | 40,194 |        |          |       | 6,334   |        |         |        | 75,990 |  
|                                                                           |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|Cash Flows From Investing
    Activities:                                  |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|                                                                           | Capital expenditures, net                                                             |                                                                                         |                                                   | (2,605  | )     |        |        | (2,773   | )     |         |        | (2,830  | )     
|                                                                           | Equity investments                                                                    |                                                                                         |                                                   |        |       |        |        | (1,800   | )     |         |        | (3,400  | )     
|                                                                           | Long-term note receivable                                                             |                                                                                         |                                                   |        |       |        |        |         |       |         |        | (15,000 | )     
|                                                                           | Purchases of available for sale securities                                            |                                                                                         |                                                   | (77,706 | )     |        |        | (38,430  | )     |         |        | (96,367 | )     
|                                                                           | Proceeds from maturities of available for sale
    securities                         |                                                                                         |                                                   | 100,260 |       |        |        | 141,003  |       |         |        | 121,115 |       
|                                                                           |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|                                                                           | Net cash provided by investing activities                                             |                                                                                         |                                                   | 19,949  |       |        |        | 98,000   |       |         |        | 3,518   |       
|                                                                           |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|Cash Flows From Financing
    Activities:                                  |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|                                                                           | Proceeds from issuance of common stock                                                |                                                                                         |                                                   | 4,898   |       |        |        | 7,948    |       |         |        | 5,175   |       
|                                                                           | Repurchases of common stock                                                           |                                                                                         |                                                   | (42,740 | )     |        |        | (116,891 | )     |         |        | (90,772 | )     
|                                                                           |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|                                                                           | Net cash used in financing activities                                                 |                                                                                         |                                                   | (37,842 | )     |        |        | (108,943 | )     |         |        | (85,597 | )     
|                                                                           |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|Effect of exchange rate changes                                            |                                                                                       |                                                                                         | 37                                                |         |       |        | 272    |          |       |         | (67    | )      
|                                                                           |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|Net increase (decrease) in cash and cash
    equivalents                   |                                                                                       |                                                                                         | 22,338                                            |         |       |        | (4,337 | )        |       |         | (6,156 | )      
|Cash and cash equivalents, beginning of year                               |                                                                                       |                                                                                         | 15,349                                            |         |       |        | 19,686 |          |       |         | 25,842 |        
|                                                                           |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|Cash and cash equivalents, end of year                                     |                                                                                       | $                                                                                       | 37,687                                            |         |       | $      | 15,349 |          |       | $       | 19,686 |        
|                                                                           |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|Non-Cash Investing Activities:                                             |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        
|Inventory transferred to property and equipment
    under operating leases |                                                                                       | $                                                                                       | 4,016                                             |         |       | $      |       |          |       | $       |       |        
|                                                                           |                                                                                       |                                                                                         |                                                   |         |       |        |        |          |       |         |        |        

See accompanying notes to consolidated financial
statements.


36



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##### Table of Contents



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, 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 subsidiary, VISX Japan, K.K.
(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.

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
accounting for and disclosing the value of financial
instruments. The values we show for our financial assets and
liabilities as of December 31, 2002 and 2001 (including
cash and cash equivalents, accounts receivable, accounts
payable, and accrued liabilities) 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.

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

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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. 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,
|                                |  |             
|                                |  | 2002         |        | 2001
|                                |  |              |        |     
|Raw materials and subassemblies |  | $            | 8,108  |      |  | $ | 8,901  | 
|Work-in-process                 |  |              | 1,563  |      |  |   | 1,491  | 
|Finished goods                  |  |              | 3,080  |      |  |   | 3,679  | 
|                                |  |              |        |      |  |   |        | 
|                                |  | $            | 12,751 |      |  | $ | 14,071 | 
|                                |  |              |        |      |  |   |        | 

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 incurred, 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,
|                                                |  |             
|                                                |  | 2002         |         | 2001
|                                                |  |              |         |     
|Furniture and fixtures                          |  | $            | 2,892   |      |  | $ | 2,915   |  
|Machinery and equipment                         |  |              | 12,660  |      |  |   | 13,194  |  
|Rental equipment                                |  |              | 4,016   |      |  |   |        |  
|Leasehold improvements                          |  |              | 2,929   |      |  |   | 2,847   |  
|                                                |  |              |         |      |  |   |         |  
|                                                |  |              | 22,497  |      |  |   | 18,956  |  
|Less: accumulated depreciation and amortization |  |              | (15,999 | )    |  |   | (14,804 | )
|                                                |  |              |         |      |  |   |         |  
|Property and equipment, net                     |  | $            | 6,498   |      |  | $ | 4,152   |  
|                                                |  |              |         |      |  |   |         |  

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 for
differences.

Revenue Recognition.Our revenue is comprised of the following: sale and rental of
system equipment and upgrades, service revenue, and license fees
and related procedure revenue (procedure revenue).
We recognize revenue in accordance with SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101). 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;

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(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 U.S.
Within the U.S. 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 U.S. 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 U.S. 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 is recognized upon
shipment or installation, as appropriate. 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
Vision Keycards. We recognize license fees from third party
licensees when we receive payment. We classify shipping costs,
net of any billings, in cost of revenues

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.

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 available to common stockholders divided by the weighted
average number of common shares outstanding. Diluted EPS equals
net income available to common stockholders divided by the
weighted average number of common shares outstanding plus
dilutive potential common shares 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,
|                           |                                                                         |                        
|                           |                                                                         | 2002                    |        | 2001   |  | 2000
|                           |                                                                         |                         |        |        |  |     
|Net Income                 |                                                                         | $                       | 15,342 |        |  | $    | 10,909 |        |  | $ | 35,221 |       
|                           |                                                                         |                         |        |        |  |      |        |        |  |   |        |       
|Basic Earnings Per Share   |                                                                         |                         |        |        |  |      |        |        |  |   |        |       
|                           | Income available to common stockholders                                 |                         | $      | 15,342 |  |      | $      | 10,909 |  |   | $      | 35,221 | 
|                           | Weighted average common shares outstanding                              |                         |        | 53,096 |  |      |        | 56,660 |  |   |        | 61,431 | 
|                           |                                                                         |                         |        |        |  |      |        |        |  |   |        |       
|                           | Basic earnings per share                                                |                         | $      | 0.29   |  |      | $      | 0.19   |  |   | $      | 0.57   | 
|                           |                                                                         |                         |        |        |  |      |        |        |  |   |        |       
|Diluted Earnings Per Share |                                                                         |                         |        |        |  |      |        |        |  |   |        |       
|                           | Income available to common stockholders                                 |                         | $      | 15,342 |  |      | $      | 10,909 |  |   | $      | 35,221 | 
|                           |                                                                         |                         |        |        |  |      |        |        |  |   |        |       
|                           | Weighted average common shares outstanding                              |                         |        | 53,096 |  |      |        | 56,660 |  |   |        | 61,431 | 
|                           | Dilutive potential common shares from stock
    options                 |                         |        | 720    |  |      |        | 1,421  |  |   |        | 2,347  | 
|                           |                                                                         |                         |        |        |  |      |        |        |  |   |        |       
|                           | Weighted average common shares and dilutive
    potential common shares |                         |        | 53,816 |  |      |        | 58,081 |  |   |        | 63,778 | 
|                           |                                                                         |                         |        |        |  |      |        |        |  |   |        |       
|                           | Diluted earnings per share                                              |                         | $      | 0.29   |  |      | $      | 0.19   |  |   | $      | 0.55   | 
|                           |                                                                         |                         |        |        |  |      |        |        |  |   |        |       

Options to purchase 6,458,000, 4,047,000 and
2,756,000 weighted shares outstanding during 2002, 2001 and
2000, 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. Please see Note 12 to our
consolidated financial statements for

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information concerning the term sheet signed on
March 31, 2003 by VISX and Nidek outlining a global
litigation settlement and patent cross-license.


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, 2002, we have nine
stock-based employee compensation plans, which are described
more fully in Note 5. We account for those plans under the
recognition and measurement principles of APB 25 and
related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. The following
table illustrates the effect on net income and earnings per
share if we had applied the fair value recognition provisions of
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,
|                                                                                                                                                    |  |  |             |                        
|                                                                                                                                                    |  |  |             | 2002                    |  | 2001 |        | 2000
|                                                                                                                                                    |  |  |             |                         |  |      |        |     
|Net Income                                                                                                                                          |  |  | As Reported |                         |  | $    | 15,342 |      |  | $ | 10,909 |   |  | $ | 35,221  |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |  |  |             |                         |  |      | (9,789 | )    |  |   | (9,738 | ) |  |   | (13,546 | )
|                                                                                                                                                    |  |  |             |                         |  |      |        |      |  |   |        |   |  |   |         |  
|Net Income                                                                                                                                          |  |  | Pro Forma   |                         |  | $    | 5,553  |      |  | $ | 1,171  |   |  | $ | 21,675  |  
|                                                                                                                                                    |  |  |             |                         |  |      |        |      |  |   |        |   |  |   |         |  
|Basic Earnings Per Share                                                                                                                            |  |  | As Reported |                         |  | $    | 0.29   |      |  | $ | 0.19   |   |  | $ | 0.57    |  
|                                                                                                                                                    |  |  | Pro Forma   |                         |  |      | 0.10   |      |  |   | 0.02   |   |  |   | 0.35    |  
|Diluted Earnings Per Share                                                                                                                          |  |  | As Reported |                         |  | $    | 0.29   |      |  | $ | 0.19   |   |  | $ | 0.55    |  
|                                                                                                                                                    |  |  | Pro Forma   |                         |  |      | 0.10   |      |  |   | 0.02   |   |  |   | 0.34    |  

Under SFAS 123 the fair value of each option
is estimated on the date of grant using the Black-Scholes option
pricing model. The following weighted average assumptions were
used for grants issued in 2002, 2001 and 2000, respectively:
risk-free interest rates of 3.6%, 3.8% and 6.3%, expected
volatility of 75%, 65% and 78%, no expected dividends, and an
expected life of 1.38, 0.95 and 0.97 years beyond the vest date
for each years vesting increment of an option.

New Accounting Pronouncements.On June 29, 2001, the Financial
Accounting Standard Board (FASB) approved for
issuance Statement of Financial Accounting Standards
No. 141, Business Combinations
(SFAS 141), and Statement of Financial
Accounting Standards No. 142, Goodwill and Intangible
Assets (SFAS 142). Adoption of these
statements did not have any impact on our financial position or
results of operations as we did not have any goodwill recorded
as of the adoption date.

In July 2001, the FASB Emerging Issues Task Force
(EITF) reached final consensus on EITF
No. 00-25, Vendor Income Statement Characterization
of Consideration Paid to a Reseller of the Vendors
Products (EITF 00-25). EITF 00-25
generally requires that consideration, including equity
instruments, given to a customer be classified in a
vendors financial statements not as an expense, but as a
reduction to revenue up to the amount of cumulative revenue
recognized or to be recognized. 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 and 2000 are $4,550,000
and $10,094,000, respectively. These reclassifications do not
change the amount of net income reported for each period,
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 reduces 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 and decreased to 67% from the previously reported 69%
for the year ended December 31, 2000.

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In August 2001, the FASB issued Statement of
Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets
(SFAS 144) which superseded Statement of
Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of and the accounting and disclosure
provisions of Accounting Principles Board Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and
Transactions. The provisions of SFAS 144 became
effective for us on January 1, 2002, and adoption of this
statement did not have any impact on our financial position or
results of operations.

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. We are currently evaluating the
impact of adoption of this statement but do not expect a
material impact on our financial position or results of
operations.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that a liability be recorded
in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about
the guarantees that an entity has issued, including a
rollforward of the entitys product warranty liabilities.
The disclosure requirements are effective for financial
statements issued after December 15, 2002 and the
recognition/measurement requirements are effective on a
prospective basis for guarantees issued or modified after
December 31, 2002. The application of the requirements of
FIN 45 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 will apply
to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. We are currently evaluating the effect
that the adoption of EITF Issue No. 00-21 will have on our
results of operations and financial position.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based Compensation,
Transition and Disclosure. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures
of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed
more prominently and in a tabular format. Additionally, SFAS
No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning
after December 15, 2002. As we did not make a voluntary
change to the fair value based method of accounting for
stock-based employee compensation in 2002, the adoption of SFAS
No. 148 did not have a material impact on our financial
position or results of operations. The disclosure requirements
have been adopted and incorporated in the footnotes to the
financial statements.

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. 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. FIN 46
is effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or
annual period beginning after June 15, 2003. We are
currently evaluating the effect that the adoption of FIN 46
but does not expect a material impact on our financial position
or results of operations.

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

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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 decision maker, or chief decision making group, in
deciding how to allocate resources and in assessing performance.
Our President and CEO is our chief 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 23%, 16%
and 18% of total revenues for the years ended December 31,
2002, 2001 and 2000, 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, 2002. In the following table we have presented
our export revenues by geographic region (in thousands):

|                                       |  |                         |        |      |  |      |        |  |  |   |        | 
|-------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                       |  |                        
|                                       |  | Year Ended December 31,
|                                       |  |                        
|                                       |  | 2002                    |        | 2001 |  | 2000
|                                       |  |                         |        |      |  |     
|Europe                                 |  | $                       | 7,990  |      |  | $    | 8,763  |  |  | $ | 6,056  | 
|Americas (excluding the United States) |  |                         | 3,058  |      |  |      | 3,813  |  |  |   | 5,221  | 
|Asia and Other                         |  |                         | 21,782 |      |  |      | 13,202 |  |  |   | 22,256 | 
|                                       |  |                         |        |      |  |      |        |  |  |   |        | 
|                                       |  | $                       | 32,830 |      |  | $    | 25,778 |  |  | $ | 33,533 | 
|                                       |  |                         |        |      |  |      |        |  |  |   |        | 

Major Customers.A
significant portion of our revenues is derived from sales to TLC
Vision Corporation (TLC), formed in May 2002 through
the merger of TLC Laser Eye Centers, Inc. and Laser Vision
Centers, Inc., both long-term customers of ours. The combined
company, TLC, accounted for 14%, 17% and 18% of our total
revenues in 2002, 2001 and 2000, respectively. Additionally,
TLC, accounted for 22%, 31% and 22% of our total receivables in
2002, 2001 and 2000, respectively. No other customer accounted
for 10% or more of sales or receivables during any of the three
years ended December 31, 2002.

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, 2002                                                                      |                   | December 31, 2001
|                       |                               |                                                                                        |                   |                  
|                       |                               |                                                                                        |                   | Gross             |        | Aggregate |       |           |       | Gross      |        | Aggregate
|                       |                               | Amortized                                                                              |                   | Unrealized        |        | Fair      |       | Amortized |       | Unrealized |        | Fair     
|                       |                               | Cost                                                                                   |                   | Gain              |        | Value     |       | Cost      |       | Gain       |        | Value    
|                       |                               |                                                                                        |                   |                   |        |           |       |           |       |            |        |          
|Short-Term Investments |                               |                                                                                        |                   |                   |        |           |       |           |       |            |        |           |        |         |         |   |        |         |       |   |       |       |         |  
|                       | Available-for-Sale Securities |                                                                                        |                   |                   |        |           |       |           |       |            |        |           |        |         |         |   |        |         |       |   |       |       |         |   |       
|                       |                               | Debt securities of the U.S. Treasury and U.S.
    government agencies and corporations |                   | $                 | 53,373 |           |       | $         | 1,230 |            |        | $         | 54,603 |         |         | $ | 35,244 |         |       | $ | 519   |       |         | $ | 35,763 |        
|                       |                               | Debt securities of U.S. corporations                                                   |                   |                   | 30,284 |           |       |           | 380   |            |        |           | 30,664 |         |         |   | 70,968 |         |       |   | 1,727 |       |         |   | 72,695 |        
|                       |                               |                                                                                        |                   |                   |        |           |       |           |       |            |        |           |        |         |         |   |        |         |       |   |       |       |         |  
|                       |                               |                                                                                        | 83,657            |                   |        |           | 1,610 |           |       |            | 85,267 |           |        |         | 106,212 |   |        |         | 2,246 |   |       |       | 108,458 |  
|Cash Equivalents       |                               |                                                                                        |                   |                   |        |           |       |           |       |            |        |           |        |         |         |   |        |         |       |   |       |       |         |  
|                       | Available-for-Sale Securities |                                                                                        |                   |                   |        |           |       |           |       |            |        |           |        |         |         |   |        |         |       |   |       |       |         |   |       
|                       |                               | Debt securities of U.S. corporations                                                   |                   |                   | 24,485 |           |       |           |      |            |        |           | 24,485 |         |         |   | 4,659  |         |       |   |      |       |         |   | 4,659  |        
|                       |                               |                                                                                        |                   |                   |        |           |       |           |       |            |        |           |        |         |         |   |        |         |       |   |       |       |         |  
|                       |                               |                                                                                        | Total investments |                   | $      | 108,142   |       |           | $     | 1,610      |        |           | $      | 109,752 |         |   | $      | 110,871 |       |   | $     | 2,246 |         |   | $      | 113,117 | 
|                       |                               |                                                                                        |                   |                   |        |           |       |           |       |            |        |           |        |         |         |   |        |         |       |   |       |       |         |  

All available-for-sale securities held at
December 31, 2002 mature within three years of that date.

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Note 4. Accrued Liabilities and Other
Current Liabilities

Accrued liabilities consisted of the following
(in thousands):

|                                     |  |              |        |      |  |   |        | 
|------------------------------------ |  | ------------ | ------ | ---- |  | - | ------ | 
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2002         |        | 2001
|                                     |  |              |        |     
|Payroll and related accruals         |  | $            | 4,262  |      |  | $ | 3,934  | 
|Accrued warranty                     |  |              | 1,963  |      |  |   | 1,768  | 
|Deposits and deferred revenue        |  |              | 7,484  |      |  |   | 15,787 | 
|Accrued sales and marketing expenses |  |              | 2,655  |      |  |   | 3,373  | 
|Accrued taxes                        |  |              | 13,726 |      |  |   | 13,422 | 
|Accrued legal expenses               |  |              | 994    |      |  |   | 892    | 
|Litigation settlement                |  |              | 9,000  |      |  |   |       | 
|Other                                |  |              | 977    |      |  |   | 1,201  | 
|                                     |  |              |        |      |  |   |        | 
|                                     |  | $            | 41,061 |      |  | $ | 40,377 | 
|                                     |  |              |        |      |  |   |        | 

Changes in the product warranty obligations for
the years ended December 31, 2002 and 2001 are as follows
(in thousands):

|                           |  |      |        |      |  |   |        |  
|-------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                           |  | 2002 |        | 2001
|                           |  |      |        |     
|Balance as of January 1,   |  | $    | 1,768  |      |  | $ | 2,292  |  
|New warranties             |  |      | 2,574  |      |  |   | 3,310  |  
|Payments                   |  |      | (2,379 | )    |  |   | (3,834 | )
|                           |  |      |        |      |  |   |        |  
|Balance as of December 31, |  | $    | 1,963  |      |  | $ | 1,768  |  
|                           |  |      |        |      |  |   |        |  

Note 5. Stock Based Compensation
Plans

We have three open stock option plans, the 2001
Nonstatutory Stock Option Plan (the 2001 Plan), the
2000 Stock Plan (the 2000 Plan) and the 1995
Director Option Plan (the Director Plan), plus an
Employee Stock Purchase Plan (the Purchase Plan). In
addition, we have five 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 or the end of each six month segment of a two
year offering period, whichever is lower. We sold 110,000
shares, 75,000 shares and 58,000 shares in 2002, 2001 and 2000,
respectively, and 778,000 shares cumulatively through
December 31, 2002 under the Purchase Plan. Accordingly,
1,222,000 shares were available for grant under the Purchase
Plan at December 31, 2002. The weighted average fair market
value of shares sold in 2002 was $9.17 per share.

As of December 31, 2002, we were authorized
to grant options for up to 3,000,000 shares under each of the
2001 and 2000 Plans and 1,000,000 shares under the Director
Plan. Through December 31, 2002, we have granted options on
1,349,850 shares, 2,578,475 shares and 465,000 shares,
respectively, under these plans, and 1,817,639 shares, 559,125
shares and 535,000 shares, respectively, were available for
grant under these plans at December 31, 2002. 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 five 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, 2002, 2001, and 2000 and
changes during the years then ended is presented in the
following tables (in thousands, except per share data).

|                                               |  |                         |       |           |  |        |       |           |  |        |        |           |  |   |       |  |  |   |       |   |  |   |       | 
|---------------------------------------------- |  | ----------------------- | ----- | --------- |  | ------ | ----- | --------- |  | ------ | ------ | --------- |  | - | ----- |  |  | - | ----- | - |  | - | ----- | 
|                                               |  |                        
|                                               |  | Year Ended December 31,
|                                               |  |                        
|                                               |  |                         |       |           |  |       
|                                               |  | 2002                    |       | 2001      |  | 2000  
|                                               |  |                         |       |           |  |       
|                                               |  |                         |       | Wtd. Avg. |  |        |       | Wtd. Avg. |  |        |        | Wtd. Avg.
|Activity                                       |  | Shares                  |       | Ex. Price |  | Shares |       | Ex. Price |  | Shares |        | Ex. Price
|                                               |  |                         |       |           |  |        |       |           |  |        |        |          
|Outstanding, start of year                     |  |                         | 8,465 |           |  | $      | 18.73 |           |  |        | 7,938  |           |  | $ | 19.32 |  |  |   | 6,759 |   |  | $ | 17.61 | 
|Granted                                        |  |                         | 1,246 |           |  |        | 14.55 |           |  |        | 2,498  |           |  |   | 15.53 |  |  |   | 2,260 |   |  |   | 22.80 | 
|Exercised                                      |  |                         | (620  | )         |  |        | 6.27  |           |  |        | (970   | )         |  |   | 7.19  |  |  |   | (597  | ) |  |   | 7.19  | 
|Forfeited                                      |  |                         | (713  | )         |  |        | 27.27 |           |  |        | (1,001 | )         |  |   | 26.63 |  |  |   | (484  | ) |  |   | 26.64 | 
|                                               |  |                         |       |           |  |        |       |           |  |        |        |           |  |   |       |  |  |   |       |   |  |   |       | 
|Outstanding, end of year                       |  |                         | 8,378 |           |  |        | 18.30 |           |  |        | 8,465  |           |  |   | 18.73 |  |  |   | 7,938 |   |  |   | 19.32 | 
|                                               |  |                         |       |           |  |        |       |           |  |        |        |           |  |   |       |  |  |   |       |   |  |   |       | 
|Exercisable, end of year                       |  |                         | 5,341 |           |  | $      | 18.94 |           |  |        | 4,692  |           |  | $ | 17.93 |  |  |   | 4,033 |   |  | $ | 16.02 | 
|                                               |  |                         |       |           |  |        |       |           |  |        |        |           |  |   |       |  |  |   |       |   |  |   |       | 
|Weighted average fair value per option granted |  | $                       | 8.90  |           |  |        |       |           |  | $      | 7.52   |           |  |   |       |  |  | $ | 11.31 |   |  |   |       | 
|                                               |  |                         |       |           |  |        |       |           |  |        |        |           |  |   |       |  |  |   |       |   |  |   |       | 

|                 |  |                     |       |                     |  |             |       |        |  |                |     |  |  |  |       |  |  |   |       | 
|---------------- |  | ------------------- | ----- | ------------------- |  | ----------- | ----- | ------ |  | -------------- | --- |  |  |  | ----- |  |  | - | ----- | 
|                 |  |                    
|                 |  | December 31, 2002  
|                 |  |                    
|                 |  |                     |       |                    
|                 |  | Options Outstanding |       |                    
|                 |  |                     |       | Options Exercisable
|                 |  |                     |       | Wtd. Avg.           |  |            
|                 |  |                     |       | Wtd. Avg.           |  | Years Left  |       |        |  | Wtd. Avg.     
|Exercise Prices  |  | Shares              |       | Exercise Price      |  | to Exercise |       | Shares |  | Exercise Price
|                 |  |                     |       |                     |  |             |       |        |  |               
|$ 2.81 - $  6.31 |  |                     | 1,303 |                     |  | $           | 5.35  |        |  |                | 4.4 |  |  |  | 1,303 |  |  | $ | 5.35  | 
|6.35 -   14.81   |  |                     | 1,299 |                     |  |             | 10.63 |        |  |                | 6.6 |  |  |  | 820   |  |  |   | 9.85  | 
|14.90 -   15.74  |  |                     | 1,717 |                     |  |             | 15.38 |        |  |                | 8.7 |  |  |  | 347   |  |  |   | 15.71 | 
|15.75 -   18.25  |  |                     | 1,626 |                     |  |             | 16.88 |        |  |                | 7.8 |  |  |  | 861   |  |  |   | 17.07 | 
|18.56 -   25.81  |  |                     | 1,258 |                     |  |             | 22.48 |        |  |                | 6.9 |  |  |  | 957   |  |  |   | 22.13 | 
|26.13 -   64.94  |  |                     | 939   |                     |  |             | 33.17 |        |  |                | 6.4 |  |  |  | 849   |  |  |   | 33.27 | 
|65.38 - $100.75  |  |                     | 236   |                     |  |             | 81.84 |        |  |                | 6.6 |  |  |  | 204   |  |  |   | 81.34 | 
|                 |  |                     |       |                     |  |             |       |        |  |                |     |  |  |  |       |  |  |   |       | 
|$ 2.81 - $100.75 |  |                     | 8,378 |                     |  |             | 18.30 |        |  |                | 6.9 |  |  |  | 5,341 |  |  |   | 18.94 | 
|                 |  |                     |       |                     |  |             |       |        |  |                |     |  |  |  |       |  |  |   |       | 

Note 6. Stockholders Equity

In February 2000 the Board of Directors
authorized management to repurchase up to 10,000,000 shares of
VISX common stock, replacing a prior authorization to repurchase
shares. In April 2001 the Board of Directors replaced the
February 2000 plan with a new authorization for management to
repurchase up to an additional 10,000,000 shares of VISX common
stock. Through purchases on the open market in accordance with
Board of Director authorizations and applicable securities laws,
we repurchased 15,980,800 shares at a total cost of $250,404,000
from 2000 through 2002. Accordingly, 2,950,600 shares remain
available as of December 31, 2002 for repurchase under the
Board of Directors April 2001 authorization.

Note 7. Income Taxes

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

|                                         |  |                         |        |      |  |      |        |  |  |   |        |  
|---------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | -
|                                         |  |                        
|                                         |  | Year Ended December 31,
|                                         |  |                        
|                                         |  | 2002                    |        | 2001 |  | 2000
|                                         |  |                         |        |      |  |     
|Domestic                                 |  | $                       | 24,404 |      |  | $    | 18,024 |  |  | $ | 58,468 |  
|Foreign                                  |  |                         | 77     |      |  |      | 7      |  |  |   | (252   | )
|                                         |  |                         |        |      |  |      |        |  |  |   |        |  
|Income before provision for income taxes |  | $                       | 24,481 |      |  | $    | 18,031 |  |  | $ | 58,216 |  
|                                         |  |                         |        |      |  |      |        |  |  |   |        |  

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,
|                           |         |                        
|                           |         |                        
|                           |         | 202                     |       | 201   |   | 200
|                           |         |                         |       |       |   |    
|Current:                   |         |                         |       |       |   |     |       |       |   |   |        |       
|                           | Federal |                         | $     | (230  | ) |     | $     | 2,062 |   |   | $      | 15,431 |  
|                           | State   |                         |       | 631   |   |     |       | 1,580 |   |   |        | 5,930  |  
|                           |         |                         |       |       |   |     |       |       |   |   |        |       
|                           |         |                         | 401   |       |   |     | 3,642 |       |   |   | 21,361 |       
|                           |         |                         |       |       |   |     |       |       |   |   |        |       
|Deferred, net              |         |                         |       |       |   |     |       |       |   |   |        |       
|                           | Federal |                         |       | 7,139 |   |     |       | 3,595 |   |   |        | 3,315  |  
|                           | State   |                         |       | 1,599 |   |     |       | (115  | ) |   |        | (1,681 | )
|                           |         |                         |       |       |   |     |       |       |   |   |        |       
|                           |         |                         | 8,738 |       |   |     | 3,480 |       |   |   | 1,634  |       
|                           |         |                         |       |       |   |     |       |       |   |   |        |       
|Provision for income taxes |         | $                       | 9,139 |       |   | $   | 7,122 |       |   | $ | 22,995 |       
|                           |         |                         |       |       |   |     |       |       |   |   |        |       

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 2002, the net deduction in tax
payable arising from employees stock option activity is
approximately $2,011,000.

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,
|                                             |  |                        
|                                             |  |                        
|                                             |  | 202                     |      | 201 |  | 200
|                                             |  |                         |      |     |  |    
|Statutory Federal income tax rate            |  |                         | 35.0 | %   |  |     | 35.0 | % |  |  | 35.0 | %
|State income taxes, net of Federal benefit   |  |                         | 5.1  |     |  |     | 5.6  |   |  |  | 5.6  |  
|R&D credit, foreign sales benefit, and other |  |                         | (2.8 | )   |  |     | (1.1 | ) |  |  | (1.1 | )
|                                             |  |                         |      |     |  |     |      |   |  |  |      |  
|Effective income tax rate                    |  |                         | 37.3 | %   |  |     | 39.5 | % |  |  | 39.5 | %
|                                             |  |                         |      |     |  |     |      |   |  |  |      |  

We paid $108,000, $10,181,000 and $19,319,000 in
income taxes during 2002, 2001, and 2000, respectively.

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

|                                 |                                          |              |        |       |  |   |        |       | 
|-------------------------------- | ---------------------------------------- | ------------ | ------ | ----- |  | - | ------ | ----- | 
|                                 |                                          |             
|                                 |                                          | December 31,
|                                 |                                          |             
|                                 |                                          | 2002         |        | 2001 
|                                 |                                          |              |        |      
|Net operating loss carryforwards |                                          |              |        |       |  |   |        |      
|                                 | Federal                                  |              | $      |      |  |   | $      | 5,200 | 
|                                 | State                                    |              |        |      |  |   |        | 500   | 
|Cumulative temporary differences |                                          |              |        |       |  |   |        |      
|                                 | Allowance for doubtful receivables       |              |        | 1,100 |  |   |        | 2,000 | 
|                                 | Inventory                                |              |        | 900   |  |   |        | 1,500 | 
|                                 | Warranty accrual                         |              |        | 800   |  |   |        | 800   | 
|                                 | Accrued sales promotions and commissions |              |        | 900   |  |   |        | 1,100 | 
|                                 | Deferred revenue                         |              |        | 2,300 |  |   |        | 5,900 | 
|                                 | Capitalized patent                       |              |        | 300   |  |   |        | 300   | 
|                                 | Litigation settlements                   |              |        | 3,800 |  |   |        |      | 
|                                 | Other accrued liabilities                |              |        | 4,500 |  |   |        | 5,000 | 
|Tax credit carryforwards         |                                          |              |       |       |  |   | 900    |      
|                                 |                                          |              |        |       |  |   |        |      
|Net deferred income tax asset    |                                          | $            | 14,600 |       |  | $ | 23,200 |      
|                                 |                                          |              |        |       |  |   |        |      

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 no valuation allowance for 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.

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Note 8. Commitments

We lease facilities and equipment under operating
leases that expire through 2006. Our expense under these leases
was $1,910,000 $1,494,000 and $1,074,000 for the years ended
December 31, 2002, 2001, and 2000, respectively. Our future
minimum lease commitments are as follows (in thousands).

|                        |                              |        |        |        | 
|----------------------- | ---------------------------- | ------ | ------ | ------ | 
|                        |                              | Amount
|                        |                              |       
|Year Ended December 31, |                              |        |        |       
|2003                    |                              |        | $1,996 |       
|2004                    |                              |        | 2,060  |       
|2005                    |                              |        | 2,019  |       
|2006                    |                              |        | 1,909  |       
|2007                    |                              |        | 1,932  |       
|Thereafter              |                              |        | 816    |       
|                        |                              |        |        |       
|                        | Total minimum lease payments |        | $      | 10,732 | 
|                        |                              |        |        |       

Note 9. Long-Term Receivables

In an effort to promote the growth of the laser
vision correction industry and the use of VISX Systems, in
certain markets we provide long-term financing to customers for
their purchase of VISX 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 $8 and $12 million of net
receivables outstanding at December 31, 2002 and 2001,
respectively, under long-term financing agreements.
Approximately $4 million of each years balance was
due to be paid after one year, 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.

In January 2000, we extended $15 million to
one customer under a five-year note (payable in quarterly
installments bearing interest at approximately the prime bank
rate) with the goal of contributing to their expansion and the
growth of the laser vision correction market as a whole in the
United States. In December 2000, we determined that the future
collectibility of this note receivable was in doubt due to a
significant deterioration of the customers operations and
financial position during the fourth quarter of 2000.
Accordingly, we reserved for this $15 million long-term
note receivable in its entirety in the fourth quarter of 2000.
In 2001, we wrote off this long-term note receivable due to the
bankruptcy of this customer in 2001.

Note 10. 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

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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.


Under our R&D agreement with Medjet, we paid
approximately $2 million and $1 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. 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 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 11. Litigation

We have been involved in a variety of legal
proceedings that include proceedings relating to patents and
intellectual property rights, and claims that our activities
have violated antitrust and securities laws. On March 31,
2003, VISX and Nidek signed a term sheet outlining a global
settlement of our patent and antitrust litigation with Nidek.
During the past year, we also settled or otherwise resolved our
securities class action litigation and our patent litigation
with WaveLight. The nature and resolution of these proceedings
are described below.

Patent Litigation: Nidek and Users of Nidek
Lasers

On March 31, 2003, VISX and Nidek signed a
term sheet outlining a global litigation settlement and patent
cross-license. See Note 12 to the Consolidated Financial
Statements.

Patent Litigation: WaveLight

In March 2002, we filed a lawsuit in Duesseldorf,
Germany against WaveLight Laser Technologie AG and its senior
manager, Max Reindl, alleging infringement of our German Patent
No. P3481164.8. In September 2002, VISX and WaveLight
entered into Settlement and License Agreements. Under the
Settlement and License Agreements, we licensed its patents
relating to refractive excimer lasers in the United States and
international markets to WaveLight. As consideration, WaveLight
will pay a royalty to us for each procedure performed in the
United States using a WaveLight refractive laser and, in
addition, WaveLight will pay a royalty to us for international
equipment sales.

In September 2002, pursuant to the terms of the
Settlement and License Agreements, the parties filed a
stipulated order dismissing the patent infringement action filed
by us against WaveLight and Mr. Reindl in Germany.

Securities Class Action Litigation

In August 2002, the United States Court of
Appeals for the Ninth Circuit affirmed the district courts
dismissal of the securities fraud class action against VISX and
the individual defendants in the case captioned in re VISX
Inc. Securities Litigation(No. C00-0649-CRB). The
plaintiffs in these actions purported to represent a class of
all persons who purchased our common stock between March 1,
1999 and February 22, 2000. The complaint alleged that the
defendants made misleading statements in violation of the
federal securities laws, including Section 10(b) of the
Securities Exchange Act of 1934. The plaintiff did not appeal
the Ninth Circuits decision, and therefore that decision
and the district courts dismissal are now final.

Litigation Settlements

We settled a number of litigation matters during
2000 and paid a total of $11.9 million in one-time payments
and related costs and fees in connection with these settlements.
We settled antitrust and other claims against VISX filed by Jon
Dishler and associated parties (Dishler). This
settlement included a resolution of the claims filed in 1996 by
Pillar Point, Summit Partner, and VISX Partner against Dishler.
We also settled a lawsuit filed by John Taboada against Stephen
Trokel, VISX, and VISX Partner seeking, among other things, a
declaration that Taboada was the inventor of our
U.S. Patent No. B1 5,108,388 (388) and a
payment of royalties received by VISX for the
388 patent. In connection with the Taboada
settlement, the parties signed and filed with the court a
stipulated judgment stating that Dr. Trokel is the sole
inventor of the 388 patent, and Taboadas
proceeding seeking a stay of the reexamination of the
388 patent

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was dismissed. Finally, we settled an action
filed by a group of former clinical investigators of the system
made by Taunton Technologies Corporation (a predecessor of VISX)
in which the plaintiffs alleged federal antitrust law
violations, breach of contract, and unjust enrichment.


Lawsuits were filed against us in 1998 in
connection with the activities of Pillar Point Partners
(Pillar Point), a partnership between subsidiaries
of VISX and Summit Technologies, Inc. (Summit). The
purported class action lawsuits alleged, among other things,
violations of various state and federal antitrust and unfair
competition laws. Other claims involving Pillar Point were filed
against VISX, Summit and others at various times. The Pillar
Point partnership was dissolved in 1998, and in 2001 we and
Summit, now a subsidiary of Alcon, Inc., settled certain of
these actions. In connection with the settlements, VISX paid a
total of $37.8 million in payments and related costs and
fees. As a result of the settlements, all of the lawsuits have
been dismissed with prejudice.

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.

Note 12. Subsequent Events

On March 31, 2003 VISX and NIDEK signed a
term sheet outlining a global litigation settlement and patent
cross-license.

The settlement outlined in the term sheet will
resolve all litigation between the parties worldwide, including
all of the parties patent and antitrust lawsuits in the
United States. The settlement also will involve a worldwide
cross-license of certain of the parties respective
patents, and a payment by VISX to Nidek of $9.0 million for
the settlement of Nideks antitrust and related claims.

The settlement and cross-license will not become
effective until the signing of a final written agreement. Upon
the signing of the agreement, the parties will submit requests
for dismissal of the lawsuits to the appropriate courts for
approval. We expect that the actions described below will be
dismissed or otherwise resolved as a result of the settlement:

United
States.In December 1998, we
filed a lawsuit in United States District Court in Northern
California alleging that Nideks laser systems infringe
certain VISX patents (USDC ND Cal C98-4842-CRB). In March 1999,
Nidek filed a lawsuit against us in the same court seeking
damages for, among other things, alleged violations of federal
and state antitrust laws and a declaration of noninfringement,
invalidity and unenforceability of the patents asserted by us
(USDC ND Cal C99-1528-CRB). This case was consolidated with our
action against Nidek for patent infringement.

In 1999, we filed four patent infringement
lawsuits against certain users of the Nidek laser system in
various jurisdictions (captioned VISX, Incorporated v.
Farmington Eye Center PLLC and Donald C. Fiander, MD(USDC
ED Mich 99-60139); VISX, Incorporated v. OR Providers,
Inc., Refractive Support, Inc., and Robert G. Wiley, M.D.(USDC ND Ohio 1:99CV00508); VISX, Incorporated v.
Southwest Eye Care Center, Inc. et al.(USDC SD Cal 99
CV 1029L); and VISX, Incorporated v. Antoine L. Garabet
et al.(USDC CD Cal 99-05284)). The defendants filed
counterclaims seeking, in some cases, damages for alleged unfair
competition and, in all cases, a declaration of noninfringement,
invalidity and unenforceability of the patents asserted by us.

In February 2000, these latter actions were
transferred to Multi-District Litigation in United States
District Court in Northern California for the purpose of
consolidating them with the actions between VISX and Nidek for
pre-trial proceedings (MDL Docket No. 1319, the
California MDL).

In January 2001, Nidek filed a lawsuit against us
in United States District Court in Northern California alleging
infringement of certain Nidek patents and seeking damages and
injunctive relief (USDC ND Cal C01-20015 JF). We filed an
answer to this complaint denying infringement and asserting
certain other defenses.

The settlement negotiations which led up to the
parties March 31 term sheet began in February 2003.
On March 5, 2003, after learning of the parties
discussions, the court in the California MDL vacated all
scheduled court dates, including the summary judgment hearing
date and the trial date of April 14, 2003, and
conditionally dismissed the cases in the California MDL without
prejudice. Under the terms of the courts March 5
order, should the parties fail to

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conclude a settlement within 30 days of the
date of the order, the court, upon notice by either party, will
vacate the order and restore the cases to the calendar to be set
for trial.


We expect that as a result of the settlement, our
patent lawsuits against Nidek and the Nidek users, Nideks
patent lawsuit against us, and Nideks and the Nidek
users declaratory relief claims will be dismissed without
prejudice. We further expect that Nideks and the Nidek
users damages claims will be dismissed with prejudice.

International.We
also brought patent infringement litigation against Nidek and
certain Nidek users in Canada and against Nidek in France, in
1994 and 1997, respectively. The defendants contested our
infringement claims as well as the validity of our patents. In
2001, a final judgment was entered in the Canadian proceeding
holding that VISXs patents were valid, but that defendants
had not infringed them. We expect that as a result of the
settlement, the parties will resolve certain court costs issues
still pending in the Canadian litigation. We further expect that
our patent infringement action against Nidek in France will be
dismissed with prejudice.

In August 2000, Nidek filed an action in the
Tokyo District Court in Japan against VISXs Japanese
subsidiary and others alleging infringement of Nideks
Japanese Patent No. 2,809,959 (the
959 patent). VISX thereafter initiated
two proceedings in the Japanese Patent Office (JPO)
challenging the validity of the 959 patent. In
November 2001, the Tokyo District Court held that the VISX
system does not infringe the 959 patent because the
patent appears to be invalid. In January 2002, the JPO in the
first invalidity proceeding held that the 959 patent
is invalid. Nidek appealed both of these decisions to the Tokyo
High Court.

On June 19, 2002, the JPO in the second
invalidity proceeding issued a Notice of Reasons for
Invalidation of the 959 patent based on additional
grounds. In October 2002, Nidek filed with the JPO an Argument
to rebut these additional grounds for invalidity and a Request
for Correction of the 959 patent claims found invalid
by the JPO. We expect that as a result of the settlement, our
invalidity proceedings and Nideks infringement action will
be withdrawn, rendering the appeals moot.

As a result of the signing of the March 31,
2003 term sheet, we believe that a final settlement is probable
and the amount is estimable at $9 million; therefore we
have recorded a $9.0 million charge for litigation
settlement expense in the accompanying consolidated financial
statements as of and for the year ended December 31, 2002.
However, in the event the parties fail to reach a final
settlement, the litigation described above will continue and the
effect of the final outcome of these legal matters may differ
from the $9 million recorded. Any adverse determination
could have a material adverse effect on VISXs business,
financial position and 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 sheet of VISX, Incorporated and subsidiaries as of
December 31, 2002 and the related consolidated statements
of operations, stockholders equity and comprehensive
income and cash flows for the year then ended. In connection
with our audit of the financial statements, we also have audited
the financial statement schedule as of and for the year ended
December 31, 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 audit.
The accompanying consolidated balance sheet of VISX,
Incorporated as of December 31, 2001 and the related
consolidated statements of operations, stockholders equity
and comprehensive income and cash flows for the years ended
December 31, 2001 and 2000 and financial statement schedule
as of and for the years ended December 31, 2001 and 2000
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 audit 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 audit
provides 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, 2002, and the results of their operations and
their cash flows for the year 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 year ended December 31, 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 as of
December 31, 2001 and for the years ended December 31,
2001 and 2000 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 years ended
December 31, 2001 and 2000. 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 and 2000 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
and 2000 financial statements taken as a whole.

/s/ KPMG LLP

Mountain View, California

March 31, 2003


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VISX is including in this Annual Report on
Form 10-K, pursuant to guidance stated in SEC FRR 62,
the prior years 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,
2000 and statements referred to for the fiscal year ended
December 31, 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


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

On June 7, 2002, the Board of Directors of
VISX, upon recommendation of its Audit Committee, dismissed
Arthur Andersen LLP (Arthur Andersen) as VISXs
independent auditors.

Arthur Andersens reports on the financial
statements for the two most recent fiscal years have contained
no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or
accounting principle. During VISXs two most recent fiscal
years, and through June 7, 2002, VISX has had no
disagreements, as defined in Instruction 4 of Item 304
of Regulation S-K, with Arthur Andersen on any matter of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not
resolved to the satisfaction of Arthur Andersen, would have
caused them to make reference thereto in their reports on
VISXs financial statements for such years, and there were
no reportable events, as defined in Item 304(a)(1)(v) of
Regulation S-K.

VISX has provided Arthur Andersen a copy of the
above statements, and has received from Arthur Andersen a letter
dated June 7, 2002, addressed to the Securities and
Exchange Commission stating its agreement with such statements.

Effective as of June 7, 2002, the Board of
Directors of the Company, upon recommendation of its Audit
Committee, appointed KPMG LLP (KPMG) as VISXs
independent auditors.

During VISXs two most recent fiscal years,
and through June 7, 2002, VISX has not consulted with KPMG
regarding the application of accounting principles to a specific
transaction, either completed or proposed, or the type of audit
opinion that might be rendered on VISXs consolidated
financial statements, or any other matters or reportable events
set forth in Item 304(a)(2)(i) or (ii) of
Regulation S-K.

There have been no disagreements with KPMG on
accounting and financial disclosure.




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
2003 Proxy Statement) to be filed with the SEC and
relating to its Annual Meeting of Stockholders to be held in
2003. For information regarding the executive officers of VISX,
reference is made to Part I, Item 4A of this report.




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 2003 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 2003 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 2003 Proxy Statement.

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PART IV






Item 14.Disclosure 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-14(c) and 15d-14(c))
within 90 days before the filing date of the 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.




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, 2002:

|                                                                             |  |      |    | 
|---------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                             |  | 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                                       |  |      | 50 | 
|Arthur Andersen, Report of Independent Public
    Accountants                |  |      | 51 | 



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.No
    reports on Form 8-K were filed during the last quarter of
    the period covered by this Report.                                         
|
| | (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, 2000 |                                     |           |   |            |  |            |   |           |  |  |   |       |  |  |   |      
|                             |   Allowances for doubtful accounts |           | $ | 1,773      |  |            | $ | 4,894     |  |  | $ | 896   |  |  | $ | 5,771 | 
|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 | 

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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 31, 2003




POWER OF ATTORNEY

Each person whose signature appears below hereby
constitutes and appoints Elizabeth H. Dávila and
Timothy R. Maier, 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,
    President and Chief Executive Officer                                      |  | March 31, 2003
|                                          
|                                          
|Principal Financial Officer:              
|/s/ TIMOTHY R. MAIERTimothy R. Maier       |  | Executive Vice President,
    Chief Financial Officer and Treasurer
    (principal financial officer) |  | March 31, 2003
|                                          
|                                          
|Principal Accounting Officer:             
|/s/ DEREK A. BERTOCCIDerek A. Bertocci     |  | Vice President, Controller
    (principal accounting officer)                                         |  | March 31, 2003
|                                          
|                                          
|Directors:                                
|Laureen De Buono                           |  | Director                                                                                              |  |               
|/s/ GLENDON E. FRENCHGlendon E. French     |  | Director                                                                                              |  | March 31, 2003
|/s/ JOHN W. GALIARDOJohn W. Galiardo       |  | Director                                                                                              |  | March 31, 2003

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|                                         |  |          |  |               
|---------------------------------------- |  | -------- |  | --------------
|Signature                                |  | Title    |  | Date          
|                                         |  |          |  |               
|/s/ JAY T. HOLMESJay T. Holmes           |  | Director |  | March 31, 2003
|/s/ GARY PETERSMEYERGary Petersmeyer     |  | Director |  | March 31, 2003
|/s/ RICHARD B. SAYFORDRichard B. Sayford |  | Director |  | March 31, 2003

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CERTIFICATIONS

I, Elizabeth H. Dávila, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of VISX, Incorporated;                                                                                                                                                                                                                                                                  
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                                                                  
| | -----------------------------------------------------------------
| | /s/ ELIZABETH H. DÁVILA                                          
| | _______________________________________ 
     Elizabeth H. Davila
| | Chief Executive Officer                                          
| | March 31, 2003                                                   

57



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##### Table of Contents



CERTIFICATIONS

I, Timothy R. Maier, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of VISX, Incorporated;                                                                                                                                                                                                                                                                  
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                        
| | -----------------------
| | /s/ TIMOTHY R. MAIER   
| |                        
| | Timothy R. Maier       
| | Chief Financial Officer
| | March 31, 2003         

58



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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)                                                                                                  

59



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##### Table of Contents



|        |         |             |  |                                                                                                                                                                                             
|------- | ------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 57)                                                                                                                                                             
|        | 99.1    |             |  | Certification of Chief Executive Officer and
    Chief Financial Officer                                                                                                                    






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



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

60