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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,
2001

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  |  | New York Stock Exchange                
|(Title of Class)              |  | (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

The aggregate market value of the voting Common
Stock held by non-affiliates of the registrant as of
March 18, 2002 was approximately $947,867,226.90 based on
the per share closing price of the Common Stock on the New York
Stock Exchange composite transactions tape of $17.49 on
March 18, 2002. The number of shares of Common Stock
outstanding as of March 18, 2002 was 54,194,810.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrants Proxy
Statement for its Annual Meeting of Stockholders to be held on
May 3, 2002 are incorporated by reference into Part III.



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TABLE OF CONTENTS



|                  |                                                                                               |  |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I           
|                  | Item 1. Business                                                                             
|                  | Item 2. Properties                                                                           
|                  | Item 3. Legal Proceedings                                                                    
|                  | 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 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. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES       
|INDEX TO EXHIBITS
|EXHIBIT 23.1     
|EXHIBIT 99.2     



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PART I






Item 1.     Business


The Company

VISX, a Delaware corporation organized in 1988,
is a global leader in the development of proprietary
technologies and systems for laser vision correction (sometimes
abbreviated as LVC). Laser vision correction relies
on a computerized laser to treat nearsightedness,
farsightedness, and astigmatism with the goal of eliminating or
reducing reliance on eyeglasses and contact lenses. The
VISX® Excimer Laser System (the VISX System)
ablates, or removes, submicron layers of tissue from the surface
of the cornea to reshape the eye, thereby improving vision. The
laser vision correction market is comprised of 50 to
60 million eligible candidates in the United States alone
who experience some form of nearsightedness, farsightedness, or
astigmatism. To date the industry has penetrated less than 4% of
the eligible U.S. population. Typically, the individual
receiving vision correction pays directly for the treatment, and
so the industry is not reliant on reimbursement from
governmental or private health care payors. A secondary market
for the VISX System is the treatment of corneal pathologies.

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 commercialize this intellectual property
position by broadening the installed base of VISX Systems around
the world, and by collecting procedure license fees and
equipment royalties for each laser vision correction procedure
performed from licensed users and manufacturers.

This report contains forward-looking statements
that involve risks and uncertainties and our actual results may
differ significantly from the results contemplated by the
forward-looking statements. The factors set forth under
Legal Proceedings and Risk
Factors may cause 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.

Refractive Vision Disorders and Laser Vision
Correction

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). Images enter the human eye
through the cornea. In a properly functioning eye, the cornea
bends, or refracts, the incoming images, causing the images 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. When the cornea is improperly curved, it
cannot properly focus (or refract) the light passing through it
onto the retina, resulting in a refractive vision disorder. As a
result, the viewer perceives a blurred image. The three most
common refractive vision disorders are:



| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | nearsightedness(also known as myopia): images are
	focused in front of the retina; 
|
| |  | farsightedness(also
	known as hyperopia): images are focused behind the retina; and
|
| |  | astigmatism:images
	are not focused at any one point on the retina.                

Currently, eyeglasses or contact lenses are most
often used to correct these refractive vision disorders. The
VISX System changes the shape of the cornea so that images are
properly focused on the retina, which in turn reduces or
eliminates the need for corrective eyewear.

In the early 1980s, experts thought it was
impossible to operate directly on the front of the cornea. In
1987, doctors using VISX equipment performed the first procedure
for the treatment of nearsightedness in the United States. The
United States Food and Drug Administration (FDA) has
since approved laser vision correction using the VISX System as
safe and effective for the treatment of nearsightedness,
farsightedness, and astigmatism. We estimate that approximately
1.25 million LVC procedures were performed in the United
States using FDA-approved excimer laser systems in 2001.

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In March 1996, the FDA approved the use of the
VISX® System to correct mild to moderate nearsightedness.
That approval was supplemented in April 1997 with approval to
correct astigmatism. In January 1998, VISX became the first
company ever to receive FDA approval to use a laser to treat
higher myopia with or without astigmatism. In November 1998, we
received the first FDA approval for the correction of hyperopia
or farsightedness with a laser. In November 1999, the FDA
approved the use of the VISX System for Laser in Situ
Keratomileusis (LASIK). In May 2000, we received 510(k)
clearance from the FDA of the WaveScan WaveFrontTM
System. In March 2001, the FDA approved the use of the VISX
System for an enlarged treatment zone with a blended ablation
edge. In November 2001, the FDA approved the VISX treatment
of mixed astigmatism, and in December 2001, we received FDA
approval under the Humanitarian Device Exemption program
(HDE) for Custom-Contoured Ablation Patterns
(Custom-CAPTM Method) for the treatment of patients
with symptomatic decentered ablations from previous laser
surgery.

To perform laser vision correction, an
ophthalmologist first measures the correction required by
performing the same examination used to prescribe eyeglasses or
contact lenses. The ophthalmologist programs the
prescription into the VISX System, and the computer
calculates the ablation needed to make a precise corneal
correction. The VISX System emits laser pulses to 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 no more
than 30 minutes.

Laser vision correction includes LASIK and
PhotoRefractive Keratectomy (PRK). The vast majority of laser
vision correction procedures performed in the United States are
LASIK procedures. In performing LASIK, the ophthalmologist uses
a device called a microkeratome to create a thin flap on the
cornea. The ophthalmologist folds back the flap, uses the laser
to ablate the exposed corneal surface under the flap, and then
returns the flap back to its original position. LASIK has gained
in popularity primarily because there can be less postoperative
discomfort and a more immediate improvement in uncorrected
vision than is sometimes experienced with PRK. Nevertheless,
LASIK has a higher incidence of adverse events, often
attributable to the microkeratome, and requires a high degree of
surgical skill.

Unlike LASIK, PRK does not use 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 lenses) within a few days of
the procedure, it generally takes several months for the final
correction to stabilize and for the full benefit of the
procedure to be realized.

Corneal Pathologies: PTK and
Custom-CAP

The VISX System also treats certain types of
corneal pathologies in an outpatient procedure known as
PhotoTherapeutic Keratectomy (PTK). We estimate that VISX
Systems have been used worldwide to perform approximately 35,000
PTK procedures. Although PTK is an important medical procedure
for people who suffer from corneal pathologies, the market
opportunity represented by PTK is much smaller than that
represented by laser vision correction.

In December 2001, we were granted an HDE for
Custom-CAPTM treatment, a procedure for treating
symptomatic decentered ablations. An HDE 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.

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Products

VISX® System.The VISX System is a fully integrated
ophthalmic medical device incorporating an excimer laser and a
computer-driven workstation. The laser ablations produced by the
VISX System are the product of a variable diameter beam scanning
system, in which seven beams are homogenized as they converge,
scan and rotate to produce an extremely smooth ablation area on
the eye. Only the VISX System is capable of performing
treatments using a variable sized scanning beam (which includes
small-spot scanning) commonly known as variable spot scanning,
or VSSTM.

The VISX STAR S3 ActiveTrakTM Excimer
Laser also employs an active, three-dimensional eye tracker that
is capable of following eye movements during the procedure,
ensuring precisely centered ablations and adding another element
of safety and comfort for both patient and doctor.

Excimer lasers ablate tissue without generating
the heat associated with many other types of lasers that use
different wavelengths and 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; the
light does not penetrate the eye, so there is no measurable
effect in the interior of the eye. In the VISX System, the
presence of seven scanning, variable sized beams means that
refractive corrections can be completed in a shorter time and
with less tissue removal than with other excimer lasers.

VISX Treatment Cards.Use of the VISX System is controlled
by proprietary cards, which are sold separately. Each card
provides the user with specific access to proprietary software
and is required to operate the VISX System. Because each
procedure performed requires the use of a treatment card, there
is a strong correlation between the sales of cards and the
number of procedures performed. Types of VISX treatment cards
include: the VisionKey® Card, the Custom-CAPTM
Card and the PTK Card.

WaveScan
WaveFrontTMSystem.In order to enhance treatments
with the VISX System, VISX, in conjunction with 20/10 Perfect
Vision, GmbH, has developed the WaveScan WaveFront System, which
uses wavefront technology to diagnose refractive errors of the
eye. These refractive errors are displayed by the system in the
form of an aberration map. The WaveScan® takes advantage of
complex mathematical algorithms to derive complete refractive
information about the patients entire optical system. The
WaveScan accomplishes this by projecting a beam of light onto
the retina and analyzing the reflected light waves. The
wavefront data also contains additional higher order aberration
information, previously unmeasureable by any other instrument.

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 marketing objective is to maximize consumer
acceptance of laser vision correction by (a) offering
advanced laser technology to the eyecare 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.



| |                   
| | ------------------
| | Marketing Programs

VISX
University® Programs.VISX
University is a series of educational programs designed to teach
laser center decision-makers how to effectively manage and
market their excimer laser practices. Three national sessions
were held in 2001, and two are planned for 2002. Seventeen
regional practice development sessions, known as Fast Tracks,
were also held in 2001, and twelve are planned for 2002.
Attendees learn about procedure-building techniques in
advertising, marketing, public relations, lead tracking, staff
training, and consumer education and recruitment. The VISX
University curriculum features 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. VISX University programs
provide all our customers

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with the opportunity to benefit from world-class
marketing and management instruction regarding successful laser
vision correction practices.


Business Development Managers.We employ a team of industry experts
as Business Development Managers who have geographical account
responsibility across the nation. Each Business Development
Manager is responsible for providing the instruction,
information and services necessary to help our customers
maximize their VISX® laser investment. Accounts that
participate in this program receive intensive
hands-on consulting and training to help them
increase the number of laser vision correction procedures
performed. The plan developed during the consultation phase
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 System.

The Refractive Society Symposium.The Refractive Society Symposium is a
continuing medical education (CME) accredited event, typically
held in conjunction with major ophthalmic 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.

Marketing Communication Materials.Customers who buy or use a VISX System
receive educational and marketing materials including brochures,
videos, slides, and other tools to help them promote VISX laser
vision correction.

Procedure Financing Support.Consumers are accustomed to making
monthly payments to purchase goods and services, and VISX laser
vision correction is well suited to that approach. We have
referred our customers to several financial vendors that
specialize in patient financing to consumers through eye care
professionals. 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 trained VISX professionals 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
them to respond rapidly to customer needs.

Laser Installation/ Training Process.We require new customers to
participate in a thorough and rigorous training process to
ensure they know how to safely operate the VISX System and
perform laser vision correction surgery. After a VISX field
service engineer installs the VISX System, the operators are
trained on-site in the use and maintenance of the VISX System.
Physicians are trained and certified by an independent
ophthalmologist selected by us to serve as a VISX Physician
Trainer. The initial training of operators and physicians is
included with the purchase of the VISX System, and we receive no
profit from training courses given throughout the United States.
Instead, it is our philosophy that ophthalmologists are uniquely
qualified to train ophthalmologists, and we authorize certified
VISX Physician Trainers to train other physicians in the proper
use of the VISX System. Over 8,500 United States
ophthalmologists have been trained to use the VISX System.

VISXPRESS®.
At least once a month 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.We believe that Internet-based
marketing is particularly well suited to the demographics of our
potential consumers. The Internets interactive
capabilities enhance the effectiveness of

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communications with customers and the
professional eyecare community at large. Our website at
http://www.visx.comincludes the following resources:




| |   |                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Information for consumers regarding the benefits
	of VISX® laser vision correction, including multimedia
	testimonials from patients, and an interactive map providing
	consumers with the locations of VISX installations and
	VISX-certified physicians;
|
| |  | Clinical information for the physician community,
	including downloadable presentations and white papers concerning
	the most recent VISX clinical results from leading
	ophthalmologists worldwide;                                                      
|
| |  | On-line access to the Customer Response Center,
	including news about new products and services, physician
	certification course schedules, and registration for practice
	development programs such as VISX University; and                              
|
| |  | VISX University® Online, which gives our
	customers access to some of the same valuable educational
	information about practice building and marketing offered in the
	live seminars, but from the convenience of their computers.                        



| |                                            
| | -------------------------------------------
| | International Sales and Marketing
	Strategy

Our international sales and marketing strategy is
to establish and maintain a presence and quality image in
selected markets either directly or indirectly through
distributors. To support this strategy, we have established a
subsidiary in Japan and have sales managers that cover key
international sales regions. We also support international
markets by sponsoring speaking engagements and by attending
select exhibitions and trade shows. VISX Systems are installed
in more than 46 countries, and we have contracts with more
than 32 distributors worldwide that are responsible for
servicing those systems.

Major Customers

Laser Vision Centers, Inc. (LVCI)
accounted for 14%, 10% and 13% of total revenues in 2001, 2000,
and 1999, respectively. TLC Laser Eye Centers, Inc.
(TLC) accounted for 5%, 9% and 12% of total revenues
in 2001, 2000, and 1999, respectively.

Reliance on Patents and Proprietary
Technology

We own over 200 United States and foreign patents
and have 145 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. Two of our fundamental patents have survived
reexamination proceedings by the United Stated Patent and
Trademark Office. U.S. Patent No. B1 5,108,388 survived
reexamination with amendment to the original claims and the
addition of 60 new claims. U.S. Patent No. 4,903,695 C1
survived reexamination without amendment of the original claims
and with the addition of 39 new claims. 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 LaserSight.In May 2001, VISX and LaserSight
Incorporated signed an agreement by which they settled all
pending disputes and litigation between the two companies. Under
the agreement, we licensed our patents relating to refractive
excimer lasers to LaserSight. As consideration, LaserSight will
pay a royalty to us for each procedure performed in the United
States using LaserSights refractive excimer laser.

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Cross License between VISX and Bausch &
Lomb.In January 2001, VISX and Bausch
& Lomb signed an agreement by which they settled all pending
disputes and litigation between the two companies. Under the
agreement, 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.

Cross License between VISX and Summit.In June 1998, VISX and Summit
Technology, Inc. (Summit), now owned by Alcon,
signed an agreement by which they dissolved Pillar Point
Partners (Pillar Point) and settled all pending
disputes and litigation between the two companies. Under the
agreement, 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.

Other 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,
Aesculap-Meditec GmbH, now known as Asclepion
(Asclepion), Herbert Schwind GmbH & Co. KG
(Schwind), Autonomous Technologies Corporation
(Autonomous), previously owned by Summit and now
owned by Alcon, and LaserSight. Under these agreements, we
receive royalties for international sales of Bausch & Lomb,
Asclepion, Schwind, and LaserSight 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.

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 have agreed to
pay a royalty on VISX 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 have 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 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.
We cannot give any assurance that employees, consultants and
others will not breach these confidentiality agreements, that we
would have adequate remedies for any breach, or that our
competitors will not learn of or independently develop our trade
secrets.

Government Regulation

U.S. Food and Drug Administration.The VISX STARTM Excimer
Laser System and VISX WaveScan WaveFrontTM 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, postmarket
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.

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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
October 19, 2001. These recertification audits are carried
out by registered certification agencies. We have successfully
passed each annual recertification audit since its 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 the
VISX® System 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 systems. 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 apply the CE Mark to the VISX System and VISX
WaveScanTM in accordance with the European Medical
Device Directives.

In Japan, we received regulatory approval for PTK
from the Japanese Ministry of Health 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 STAR S3TM Excimer Laser System 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 (which purchased Summit Autonomous, Inc.),
Nidek, LaserSight and Bausch & Lomb. Alcon and
Nidek received FDA approval to commercialize their laser systems
at the end of 1998, LaserSight at the end of 1999 and Bausch
& Lomb in February 2000. While Bausch & Lomb took a per
procedure license from us in January 2001, and LaserSight took a
per procedure license from us in May 2001, and VISX and Summit
granted each other cross licenses to patents covering
ultraviolet ablation of corneal tissue, Nidek is actively
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. We are pursuing several actions against Nidek and
certain of its users for patent infringement. See Legal
Proceedings  Patent and Antitrust
Proceedings below.

Our principal international competitors are
Alcon, Asclepion, Bausch & Lomb, LaserSight, Nidek, Schwind
and WaveLight. We have licensed certain of our patents to
Asclepion, Bausch & Lomb, LaserSight, and Schwind, each of
which is obligated to pay us royalties when it sells a system
covered by our patents

7



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##### Table of Contents



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® 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
$19.4 million in 2001, $14.9 million in 2000, and
$15.5 million in 1999. Licensed technology developed by
outside parties is an additional source of potential products.
In 2001, VISX continued funding the early stage research at
Stanford University for future treatments for age-related
macular degeneration (AMD). We anticipate that research,
development and regulatory expenses could be approximately
$18 million in 2002.

Employees

As of December 31, 2001, we had 333 full
time employees, 10 temporary employees and
50 consultants. Of the regular employees, 185 are employed
in manufacturing and service, 63 in research and development and
regulatory, and 85 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.

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.




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 2003 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 warehouse and office space in Tokyo
and Osaka, Japan. The two warehouse leases each cover 355 square
feet. The first lease expires on March 31, 2003, and the
second lease expires on December 31, 2002. The two leases
for office space are for 871 and 1,835 square feet and expire on
January 31, 2003 and September 30, 2003, respectively.

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 are involved in a variety of legal proceedings
that affect our business. These include proceedings relating to
patents and intellectual property rights, proceedings relating
to claims that VISXs activities have violated antirust
laws, class actions filed under federal securities laws and
other litigation proceedings. In 2001,

8



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##### Table of Contents



we settled or otherwise resolved many of these
proceedings, including the LaserSight patent litigation, the
Bausch & Lomb patent litigation, the Federal Trade
Commission antitrust proceedings, the antitrust class actions
and other litigation involving Pillar Point Partners, and the
stockholder derivative action. The nature of the settled and
remaining proceedings, and the effect that adverse
determinations in the remaining proceedings could have on VISX
and our business, financial condition and results of operations,
are described below.


Patent and Antitrust Proceedings



| |         
| | --------
| | Overview

The patents owned by VISX are being challenged on
several fronts. Generally, the litigation and other proceedings
center on whether infringement of the patents has occurred, and
on the validity or enforceability of the patents. In addition,
our use of patents and our business practices are being
contested as violations of antitrust and securities laws. The
results of these complex legal proceedings are very difficult to
predict with certainty. 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 per
procedure license fees in certain markets, could give rise to
significant monetary damages, could prevent us from
manufacturing and selling the VISX® System, and therefore
could have a material adverse effect on our business, financial
position and results of operations.

Patent Litigation: Nidek and Users of Nidek
Lasers



| |               
| | --------------
| | United States.

In December 1998, Nidek received approval to
market its laser vision correction systems in the United States,
and subsequently VISX filed a lawsuit in the United States
District Court in Northern California alleging that Nideks
laser systems infringe certain VISX patents (USDC ND
Cal C98-04842). We are seeking injunctive relief and
monetary damages in that case. Nidek filed a lawsuit against us
on March 30, 1999 in the United States District Court in
Northern California alleging, among other things, various
violations of federal antitrust and state unfair competition
laws, based in part upon VISXs procurement and assertion
of its patents. This case was consolidated with VISXs
action against Nidek for patent infringement.

In February 2000, four lawsuits filed during 1999
by VISX against certain users of the Nidek laser system were
transferred to Multi-District Litigation in the 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 these cases (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)), we
have alleged, among other things, that the defendants use
of the Nidek laser system infringes one or more of our patents
and are seeking monetary damages and an injunction against the
defendants prohibiting the use of the Nidek laser systems. The
defendants in these actions have filed counterclaims seeking,
among other things, a declaration of non-infringement,
invalidity and unenforceability of the patents asserted by VISX.

In October 2000, we amended our suits against
Nidek and certain users of the Nidek laser system to assert only
VISX United States Patents Nos. B1 5,108,388 (the
 388 patent) and 5,735,843 (the
 843 patent). The court has entered a
scheduling order in the California MDL setting a trial date of
February 3, 2003 in the actions between VISX and Nidek. In
September 2001, VISX received a claims construction ruling in
the California MDL. In the ruling, the court determined the
scope of certain patent claims asserted by VISX. Among other
things, the court found that the asserted claims of the
843 patent cover laser vision correction systems
using a mask with an aperture to provide a graded intensity to
the cornea. The court also found that the asserted claims of the
388 patent require ablation of layers above the
stroma in addition to stroma. Discovery is ongoing in the
California MDL.

9



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##### Table of Contents



In January 2001, Nidek filed a lawsuit against
VISX in the United States District Court in Northern California
(USDC ND Cal C01-20015 JF) alleging infringement of
Nidek United States Patents Nos. 5,445,633, 5,624,436 and
6,136,012 and seeking monetary damages and injunctive relief.
VISX has filed an answer to this complaint denying infringement
and asserting certain other defenses. The court held a claims
construction hearing in this case in January 2002, but has not
yet issued its claims construction ruling.

These proceedings are still in the discovery
stage, and at present 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.
However, adverse determinations in these lawsuits could limit
VISXs ability to collect per procedure license fees in the
United States from Nidek as well as from other 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® System. Any
such adverse determination could therefore have a material
adverse effect on VISXs business, financial position and
future results of operations.



| |               
| | --------------
| | International.

VISX has brought patent litigation against Nidek
in Canada and France. These proceedings, which allege patent
infringement by Nidek and certain of its users, were filed by
VISX in February 1994 (Canada) and May 1997 (France). The
defendants have contested VISXs infringement claims as
well as the validity of VISXs patents. Trial in the
Canadian proceeding took place in September 1999, and in
December 1999, the Canadian federal court ruled that VISXs
patents were valid, but that defendants had not infringed them.
Both sides appealed this decision, and in June 2001, the
Canadian court of appeal upheld the trial courts
determination of validity and non-infringement. Neither side
appealed from this latter decision.

The proceeding in France is currently in the
pleading stage, and at present we are unable to predict either
the outcome or estimate the potential adverse financial and
operational impact, if any, that might arise from that case.
However, any determination that our patents are invalid could
limit our ability to collect equipment license fees in France
and elsewhere in Europe from Nidek as well as from other sellers
of laser vision correction systems. Any such adverse
determination could therefore have a material adverse effect on
VISXs business, financial position and future results of
operations.

In August 2000, Nidek filed an action in Japan
against VISXs Japanese subsidiary and others alleging
infringement of Nideks Japanese Patent No. 2,809,959 (the
 959 patent) and seeking monetary damages
and injunctive relief (Tokyo District Court, the 47th Civil
Division, Case No. (WA) 16531/2000). VISX thereafter initiated
proceedings in the Japanese Patent Office (JPO)
challenging the validity of that Nidek patent. In November 2001,
the Tokyo District Court held that the 959 patent is
invalid and, as a result, is unenforceable. In January 2002, the
JPO also found that the 959 patent is invalid. Nidek has
appealed both of these decisions to the Tokyo High Court and
stated that it may attempt to amend the claims of the 959
patent.

At present we are unable to predict either the
outcome or estimate the potential adverse financial and
operational impact, if any, that might arise from the Japanese
proceeding. However, an adverse determination in this suit could
give rise to significant monetary damages and result in an order
enjoining the importation and sale of VISX products to Japan.
Any such adverse determination could therefore have a material
adverse effect on our business, financial position and future
results of operations.

Patent Litigation: LaserSight

In November 1999, VISX filed an action alleging
that LaserSight had infringed VISX United States Patent
No. 4,718,418 (the  418 patent) in
the United States District Court in Delaware (USDC
Del. 99-789). In May 2001, the parties reached a settlement
of this action, which provided, among other things, for the
licensing of the 418 patent and other VISX United States
patents to LaserSight.

In February 2000, LaserSight filed a lawsuit
against VISX in the same District Court (USDC Del. 00-059)
alleging that VISX infringes United States Patent
No. 5,630,810 (the  810 patent),
which is licensed to LaserSight. In May 2001, LaserSight
dismissed its infringement claim with prejudice and granted

10



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##### Table of Contents



VISX and our customers a worldwide covenant not
to sue for infringement of the 810 patent, any present and
future continuations, continuations in part, divisionals,
reissues or reexaminations thereof, or its foreign counterparts.
VISX did not compensate LaserSight in any manner for the
dismissal or covenant.


Patent Litigation: Bausch & Lomb

In September 2000, VISX filed an action against
Bausch & Lomb in the United States District Court in
Delaware alleging that Bausch & Lomb infringed the 388
patent (USDC Del. CA No 00-849 JJF). In January 2001, the
parties reached a settlement of this action, which provided,
among other things, for the licensing of the 388 patent
and other VISX United States patents to Bausch & Lomb.

Federal Trade Commission Antitrust
Proceedings

On March 24, 1998, the Federal Trade
Commission (FTC) filed an administrative complaint
(Docket No. 9286) challenging the existence of Pillar Point
Partners, a now-dissolved partnership between VISX Partner, Inc.
(VISX Partner) and Summit Partner, Inc.
(Summit Partner), and challenging the enforceability
of certain patents owned by VISX. On July 8, 1998, we
reached a settlement with the FTC and entered into a consent
decree regarding the dissolution of Pillar Point. On
March 4, 1999, the FTC entered an order finalizing that
consent decree. The consent decree did not address the portion
of the FTCs complaint directed towards the enforceability
of certain VISX patents. On June 4, 1999, the FTC released
the initial decision of its administrative law judge dismissing
the remaining portions of the FTCs complaint against VISX
and, on June 21, 1999, the FTC attorneys filed notice that
they would appeal the judges decision to the full
Commission. On December 1, 1999, the FTC attorneys filed a
conditional motion to dismiss the FTCs complaint. The
Commission dismissed the remaining portions of the FTCs
complaint on February 7, 2001, and the FTC proceedings
against VISX have been concluded.

Antitrust Class Actions And Litigation
Involving Pillar Point Partners

Since the commencement of the FTC administrative
proceeding on March 24, 1998, a large number of purported
class actions were filed against VISX, Summit and, in some
cases, also against their affiliates, VISX Partner, Summit
Partner, and Pillar Point. Other claims involving Pillar Point
were filed against VISX, Summit and others at various times.
These actions alleged, among other things, violations of various
state and federal antitrust and unfair competition laws.

In the summer of 2001, VISX and Summit
Autonomous, Inc., a subsidiary of Alcon, settled the following
actions: In re PRK/ LASIK Consumer Litigation(California
Superior Court for Santa Clara County, No. CV772894);
The Antitrust Class Actions(USDC AZ, MDL
No. 1202); Burlingame v. Pillar Point Partners, et al.(USDC AZ, MDL No. 1202); Freedom Vision Laser
Center, LP v. VISX, Incorporated et al.(USDC AZ, MDL
No. 1202); and Antoine L. Garabet, M.D. and Abraham v.
Shammas, M.D. v. Summit Technology, Inc. and VISX(California Superior Court for Santa Clara County,
No. CV 787359) (the settlements). In connection
with the settlements, VISX paid a total of $37.8 million in
one-time payments and related costs and fees. As a result of the
settlements, all of the lawsuits described below have been or
will likely be dismissed with prejudice.



| |                                             
| | --------------------------------------------
| | Patient Class Actions Filed in State
	Court.

Several actions filed in California state court
on behalf of purported classes of patients were consolidated
into one case in the Superior Court of the State of California
for the County of Santa Clara, captioned In re PRK/ LASIK
Consumer Litigation,No. CV772894 (In re
PRK), filed on June 12, 1998, and naming VISX, VISX
Partner, Summit, and Summit Partner as defendants. The
plaintiffs in the consolidated action alleged violations of the
California Business and Professions Code (under the Cartwright
Act and the Unfair Business Practices Act) on behalf of a
putative nationwide class of patients. In August 2001, the
parties to this action reached a settlement agreement whereby
VISX and Summit Autonomous, Inc. paid money into a settlement
fund. The court certified a settlement class of patients from
twenty states and the District of Columbia who underwent laser
vision correction surgery using a VISX or Summit laser system
between October 1, 1995 and

11



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##### Table of Contents



February 22, 2000. Publication notice was
made to the members of the class. No members of the class
objected to the settlement agreement, and only one member of the
class opted out of the agreement. In December 2001, the court
granted final approval of the settlement agreement. On
February 15, 2002, the settlement agreement became
effective and the matter was dismissed with prejudice as to all
parties. Members of the class have until June 1, 2002 to
submit proof of claim forms.


In addition to the In re PRKaction, VISX
was named in several duplicative actions in other states on
behalf of purported classes of patients:

In Marks v. Summit Technology Inc., et
al., filed on April 27, 1998 in Florida state court,
plaintiff brought suit on behalf of a purported class of
patients in several states alleging violations of the Florida
antitrust and unfair competition laws. No class has been
certified in this action. On December 15, 1999, pursuant to
the parties joint motion, the court stayed this proceeding
pending resolution of the In re PRKaction. In light of
the settlement of the In re PRKaction, VISX expects that
the Marksaction will be dismissed in 2002.

Worcester v. Summit Technology, Inc. et al.was filed on June 11, 1998 in
Wisconsin state court on behalf of a purported class of
Wisconsin patients alleging violations of the Wisconsin
antitrust and unfair competition laws. In December 1998, the
Worcesteraction was removed to federal court and
transferred to the Multi-District Litigation in Arizona
described below. On February 15, 2002, pursuant to the
parties stipulation, this action was dismissed with
prejudice.

In May 1999, Brisson v. Summit Technology,
Inc., VISX, Inc., Summit Partner, Inc., VISX Partner, Inc. and
Pillar Point Partnerswas filed by plaintiff on behalf of a
purported class of Minnesota patients alleging violations of
Minnesota antitrust laws, seeking unspecified damages and
injunctive relief. No class has been certified in this action.
In June 2000, the court stayed this proceeding pending
resolution of the In re PRKaction. In light of the
settlement of the In re PRKaction, VISX expects that the
Brisson action will be dismissed in 2002.



| |                                                        
| | -------------------------------------------------------
| | Direct Purchaser Class Actions Filed in
	Federal Court.

In addition to the state court actions discussed
above, a number of purported class actions alleging violations
of federal antitrust laws on behalf of a purported class of
direct purchasers were filed in federal court against VISX,
Summit, and, in some cases, Pillar Point. All of these actions
were transferred to the Multi-District Litigation in Arizona
described below. In October 1998, the United States District
Court in Arizona entered an order for consolidation of these
class actions into a case captioned The Antitrust Class
Actions(USDC AZ Oct. 21, 1998). In July 2001, the parties
entered into a settlement agreement whereby VISX and Summit
Autonomous, Inc. paid money into a settlement fund. The court
certified a settlement class of all persons and entities in the
United States who were charged a per procedure fee by VISX or
Summit between October 1, 1995 and February 22, 2000.
Individual notices were sent out to the members of the class. No
members of the class opted out of the settlement agreement. In
November 2001, the court granted final approval of the
settlement agreement. On December 28, 2001, the settlement
agreement became effective, and the matter was dismissed with
prejudice as to all parties. Pursuant to the settlement
agreement and plan of allocation, the settlement administrator
will disburse the settlement fund to members of the class who
timely submitted proof of claim forms.



| |                                                                      
| | ---------------------------------------------------------------------
| | Multi-District Antitrust Litigation Involving
	Pillar Point Partners.

On June 4, 1998, VISX and Summit agreed to
dissolve Pillar Point and settle all pending disputes and
litigation between them. However, Pillar Point continued to be a
party in a number of cases, which were transferred for pre-trial
purposes to Multi-District Litigation in the United States
District Court in Arizona under the caption In re Pillar
Point Partners Antitrust and Patent Litigation(MDL
No. 1202, the Arizona

12



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##### Table of Contents



MDL). In addition to the Worcestercase and the direct purchaser class actions described above,
the following cases were pending in the Arizona MDL at the time
of the settlements:


Burlingame v. Pillar Point Partners, et al.;
John R. Shepherd, M.D., Ltd. v. Pillar Point Partners, et al.In June 1996, Dr. Burlingame
filed suit against Pillar Point, Summit, Summit Partner, VISX,
and VISX Partner. In September 1996, a corporation controlled by
Dr. Shepherd filed suit against the same parties. Both
actions were filed in the United States District Court in
Northern California. Generally, plaintiffs alleged that the per
procedure license fee charged by Pillar Point was a violation of
the Sherman Act or of corresponding state antitrust laws. In
2001, as a result of the settlements, these cases were dismissed
with prejudice.

Freedom Vision Laser Center, LP v. VISX,
Incorporated et al.On May 28,
1999, Freedom Vision Laser Center and other plaintiffs filed an
action containing allegations similar to those made in the
antitrust class actions described above. On January 18,
2002, following the final approval of the settlement agreement
in the direct purchaser class actions, this action was dismissed
with prejudice.



| |                                                            
| | -----------------------------------------------------------
| | Unfair Competition Action Filed in California
	State Court.

On January 24, 2000, a case captioned
Antoine L. Garabet, M.D. and Abraham v. Shammas, M.D. v.
Summit Technology, Inc. and VISX(CV 787359), was filed in
the Superior Court of the State of California for the County of
Santa Clara. Plaintiffs brought this action purportedly on
behalf of the public under Section 17200 of the Business
and Professions Code, Californias unfair competition law.
The complaint contained allegations similar to those made in the
antitrust class actions described above. On December 26,
2000, the court granted defendants motion to stay the
action pending further court action or final resolution of the
suits in the In re PRKaction and the Arizona MDL. In
2001, as a result of the settlements, this case was dismissed
with prejudice.

Securities Class Actions and Derivative
Litigation

VISX and certain of our officers were named as
defendants in several substantially similar securities class
action lawsuits filed in February and March 2000 in the United
States District Court in Northern California. The plaintiffs in
these actions purport to represent a class of all persons who
purchased VISXs common stock between March 1, 1999
and February 22, 2000. The complaints allege that the
defendants made misleading statements in violation of the
federal securities laws, including Section 10(b) of the
Securities Exchange Act of 1934. In April 2000, the court
consolidated the various actions under the caption In re
VISX, Inc. Securities LitigationC-00-0649-CRB, and
appointed a lead plaintiff. The lead plaintiff thereafter filed
his consolidated amended complaint, and the parties stipulated
to the certification of a plaintiff class. On September 20,
2000, defendants filed a motion to dismiss the consolidated
amended complaint, and on February 27, 2001, the District
Court granted defendants motion and dismissed the
consolidated amended complaint with prejudice. Plaintiffs have
appealed this decision to the United States Court of Appeals for
the Ninth Circuit. The appeal has been fully briefed and was
heard on March 13, 2002. VISX believes it has meritorious
defenses to plaintiffs claims and expects to vigorously
pursue these defenses. However, there can be no assurance that
this action will be resolved favorably to VISX or will not have
a material adverse effect on VISXs business, financial
position and future results of operation.

On April 24, 2000, a purported stockholder
derivative action was filed in the Superior Court of the State
of California for the County of Santa Clara (captioned
Michael S. Glassman v. Mark B. Logan, et al., CV789364).
The complaint alleged that certain of VISXs officers and
directors breached fiduciary duties owed to VISX in connection
with the circumstances alleged in the securities class action
complaints described above. On May 30, 2000, the defendants
filed demurrers to the derivative complaint. On October 3,
2000, the court sustained the demurrers but granted leave to
file an amended derivative complaint. Plaintiffs filed their
amended derivative complaint in August 2001 and shortly
thereafter defendants renewed their demurrers. On
December 13, 2001, the court sustained the renewed
demurrers without leave to amend. On January 30, 2002, the
court entered judgment in defendants favor. Plaintiffs
agreed not to appeal from this judgment in return for
defendants waiver of court costs. This action has thus
been concluded.

13



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##### Table of Contents



Other Litigation

We are involved in various other legal
proceedings 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 2001.






|         |                                      
|-------- | -------------------------------------
|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      |  |     | 57 |          |  | Chairman of the Board, President and Chief
	Executive Officer    |  | 2001, 1999 and 2001, respectively
|Timothy R. Maier         |  |     | 53 |          |  | Executive Vice President, Chief Financial Officer
	and Treasurer |  | 1999                             
|Douglas H. Post          |  |     | 50 |          |  | Executive Vice President, Operations                             |  | 2001                             
|Derek A. Bertocci        |  |     | 48 |          |  | Vice President, Controller                                       |  | 1998                             
|Donald L. Fagen          |  |     | 48 |          |  | Vice President, Global Sales                                     |  | 2001                             
|Carol F.H. Harner, Ph.D. |  |     | 58 |          |  | Vice President, Research and Development                         |  | 1997                             
|Catherine E. Murphy      |  |     | 54 |          |  | Vice President, Human Resources                                  |  | 2001                             
|John F. Runkel, Jr.      |  |     | 46 |          |  | Vice President, General Counsel and Secretary                    |  | 2001                             
|Alan F. Russell, Ph.D.   |  |     | 60 |          |  | Vice President, Regulatory and Clinical Affairs                  |  | 2001                             
|Joaquin V. Wolff         |  |     | 44 |          |  | Vice President, Global Marketing                                 |  | 2001                             

Elizabeth H. Dávila.Ms. Dávila has served as our
Chairman of the Board since May 2001, President and Chief
Executive Officer since February 2001, President and Chief
Operating Officer from February 1999 to February 2001, Executive
Vice President and Chief Operating Officer from May 1995 through
February 1999, and as a Director since December 1995. From 1977
to 1994, Ms. Dávila held senior management positions with
Syntex Corporation in its medical device, medical diagnostics,
and pharmaceutical divisions. Ms. Dávila also serves
on the Board of Directors of VidaMed, Inc.

Timothy R. Maier.Mr. Maier has been Executive Vice
President, Chief Financial Officer and Treasurer since December
1999, prior to which he had been Vice President, Chief Financial
Officer and Treasurer since June 1995. From 1991 to June 1995,
he served as Vice President, Chief Financial Officer of GenPharm
International, Inc., a privately held international
biotechnology company. From 1976 to 1991, Mr. Maier held
various positions with Spectra-Physics, Inc., an international
manufacturer of scientific and commercial laser products. His
positions included Vice President of Finance, Operations
Manager, and International Finance and Administration Manager.

Douglas H. Post.Mr. Post has been Executive Vice
President, Operations since January 2001. Prior to that time he
was Vice President, Operations and Customer Support from
September 1996 to January 2001. He served as Senior Director,
Customer Support from December 1992 to September 1996 and was
Senior Vice President, Sales & Customer Support, with VISX
Massachusetts Inc. (formerly Questek, Inc.) from February 1985
to December 1992.

14



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##### Table of Contents



Derek A. Bertocci.Mr. Bertocci has been Vice
President, Controller since December 1998. He served as
Controller from November 1995 until December 1998. Prior to
joining VISX, Mr. Bertocci was Controller for Time Warner
Interactive from 1993 to 1995 and Controller and Assistant
Treasurer for Datron Systems, Inc. from 1987 to 1993.

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. From 1999 to 2000, Mr.
Fagen was Executive Vice President, Sales and Marketing with
ClearVision, Inc. 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 from 1985
to 1993 and Sci Med from 1993 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 time,
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 she was Director, Compensation, Benefits and Human
Resource Information Technology for Genentech from 1998 to 2001.
Ms. Murphy served as human resource consultant for a
variety of medical device and biopharmaceutical firms from 1996
to 1998, and she held a variety of management positions within
Syntex Corporation from 1983 to 1996 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.
Before joining VISX, Mr. Runkel was a partner in the law
firm of Sheppard, Mullin, Richter & Hampton, where he
practiced law for 17 years.

Alan F. Russell, Ph.D.Dr. Russell joined VISX as Vice
President, Regulatory and Clinical Affairs in June 2001. Before
joining VISX he was CEO of AvMax, Inc., a privately held
pharmaceutical company. From 1992 to 1998, Dr. Russell was
Senior Vice President, Scientific Affairs at Cygnus, Inc. Before
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. He holds a Ph.D. in Organic Chemistry
from the University of New South Wales in Australia and M.B.A.
and J.D. degrees from the University of Santa Clara.

Joaquin V. Wolff.Mr. Wolff has been Vice President
of Global Marketing since January 2001. Mr. Wolff held the
position of Director of Marketing with responsibilities in both
the Cataract and Vitreoretinal business units of the Surgical
Division at Alcon Laboratories from 1990 to 2000. 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.

15



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##### Table of Contents






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 MarketSM
under the symbol VISX. The following table sets
forth the high and low closing prices of our common stock.

|     |                |      |   |       |  |  |   |       | 
|---- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                | High |   | Low  
|     |                |      |   |      
|2000 |                |      |   |       |  |  |   |      
|     | First Quarter  |      | $ | 53.50 |  |  | $ | 15.50 | 
|     | Second Quarter |      |   | 32.94 |  |  |   | 14.38 | 
|     | Third Quarter  |      |   | 35.00 |  |  |   | 22.00 | 
|     | Fourth Quarter |      |   | 26.13 |  |  |   | 9.31  | 
|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 | 

On March 18, 2002, the last reported sale
price of the Common Stock on the New York Stock Exchange was
$17.49 per share. We had approximately 768 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.

16



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##### Table of Contents



Item 6.     Selected
Financial Data

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

Selected Consolidated Financial
Information

|                                        |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |        | 
|--------------------------------------- | ------- | ------------------------------------- | ------- | ------ |  | ---- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                        |         |                                      
|                                        |         | Year Ended December 31,              
|                                        |         |                                      
|                                        |         | 2001                                  |         | 2000   |  | 1999 |         | 1998   |  | 1997
|                                        |         |                                       |         |        |  |      |         |        |  |     
|                                        |         |                                      
|                                        |         | (In thousands, except per share data)
|Statement Of Operations Data:           |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Total revenues                          |         | $                                     | 169,566 |        |  | $    | 200,248 |        |  | $    | 271,252 |        |  | $ | 133,750 |        |  | $ | 68,631  |       
|Cost of revenues                        |         |                                       | 58,440  |        |  |      | 62,684  |        |  |      | 57,513  |        |  |   | 31,109  |        |  |   | 20,598  |       
|Total costs and expenses                |         |                                       | 124,394 |        |  |      | 144,256 |        |  |      | 129,154 |        |  |   | 74,530  |        |  |   | 53,111  |       
|Income from operations                  |         |                                       | 45,172  |        |  |      | 55,992  |        |  |      | 142,098 |        |  |   | 59,220  |        |  |   | 15,520  |       
|Litigation settlement                   |         |                                       | 37,821  |        |  |      | 11,856  |        |  |      |        |        |  |   | 35,000  |        |  |   | 4,500   |       
|Net income                              |         | $                                     | 10,909  |        |  | $    | 35,221  |        |  | $    | 91,768  |        |  | $ | 25,590  |        |  | $ | 14,097  |       
|Earnings per share:(A)                  |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|                                        | Basic   |                                       | $       | 0.19   |  |      | $       | 0.57   |  |      | $       | 1.45   |  |   | $       | 0.42   |  |   | $       | 0.23   | 
|                                        | Diluted |                                       | $       | 0.19   |  |      | $       | 0.55   |  |      | $       | 1.35   |  |   | $       | 0.39   |  |   | $       | 0.22   | 
|Shares used for earnings per share:(A)  |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|                                        | Basic   |                                       |         | 56,660 |  |      |         | 61,431 |  |      |         | 63,474 |  |   |         | 61,014 |  |   |         | 61,716 | 
|                                        | Diluted |                                       |         | 58,081 |  |      |         | 63,778 |  |      |         | 68,119 |  |   |         | 65,398 |  |   |         | 63,272 | 
|Balance Sheet Data:                     |         |                                       |         |        |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Cash and short-term investments         |         | $                                     | 123,807 |        |  | $    | 229,453 |        |  | $    | 258,359 |        |  | $ | 116,539 |        |  | $ | 100,833 |       
|Working capital                         |         |                                       | 159,935 |        |  |      | 245,662 |        |  |      | 303,546 |        |  |   | 129,008 |        |  |   | 103,880 |       
|Total assets                            |         |                                       | 219,925 |        |  |      | 321,507 |        |  |      | 362,721 |        |  |   | 176,619 |        |  |   | 130,352 |       
|Retained earnings (accumulated deficit) |         |                                       | 143,325 |        |  |      | 132,416 |        |  |      | 97,195  |        |  |   | 5,427   |        |  |   | (20,163 | )     
|Stockholders equity                    |         | $                                     | 176,278 |        |  | $    | 268,772 |        |  | $    | 316,793 |        |  | $ | 138,989 |        |  | $ | 110,299 |       



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
within the meaning of the Private Securities Litigation Reform
Act of 1995. When we use the words, anticipate,
estimate, project, intend,
expect, plan, believe,
should, likely and similar expressions,
we are making forward-looking statements. In addition,
forward-looking statements in this report include, but are not
limited to, statements about our beliefs, estimates or plans
regarding the following topics: our research efforts; the
outcome of various lawsuits to which we are a party; the use of
our WaveScan® System; system upgrade revenues in 2002;
renewed support in the U.S. laser vision correction market in
2002; the amount of our R&D and regulatory expenses in 2002.
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. Forward-looking statements should
therefore be considered in light of various important factors,
including those set forth in this report under the caption
Risk Factors beginning on page 26, Legal
Proceedings beginning on page 8, 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-

17



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##### Table of Contents



looking statements to reflect events or
circumstances after the date of this report or to reflect the
occurrence of unanticipated events.


Overview

We develop products and procedures to improve
peoples eyesight using lasers. Our principal product, the
VISX STAR Excimer Laser SystemTM (VISX
System), is designed to correct the shape of a
persons eyes to reduce or eliminate the need for
eyeglasses or contact lenses. The Food and Drug Administration
(FDA) has 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 WaveScanTM Wavefront System
(WaveScan System), which provides a complete
refractive analysis of the eyes entire optical system. In
the future, we anticipate that doctors will be able to use this
analysis to enhance treatments with the VISX System. We sell
VisionKey® cards to control the use of the VISX System and
to collect license fees for the use of our patents.

The laser vision correction industry is evolving
rapidly. Economic, market, and technology changes frequently
affect VISX and could harm our business in the future. Please
see the section of this report entitled Risk
Factors, which begins on page 26, for a more thorough
description of the risks that our business faces. If any of the
risks in the Risk Factors section described below 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



| |                      
| | ---------------------
| | 2001 Compared to 2000

|                                   |                    |                         |         |      |   |        |         |      |   |  |     |    | 
|---------------------------------- | ------------------ | ----------------------- | ------- | ---- | - | ------ | ------- | ---- | - |  | --- | -- | 
|                                   |                    |                        
|                                   |                    | Year Ended December 31,
|                                   |                    |                        
|                                   |                    | 2001                    |         | 2000 |   | Change
|                                   |                    |                         |         |      |   |       
|                                   |                    |                        
|                                   |                    | (000s)                
|Revenue                            |                    |                         |         |      |   |        |         |      |   |  |     |   
|System sales                       |                    | $                       | 55,592  |      |   | $      | 60,678  |      |   |  | (8  | )%
|                                   | Percent of revenue |                         |         | 32.8 | % |        |         | 30.3 | % |  |     |    | 
|License, service and other revenue |                    | $                       | 113,974 |      |   | $      | 139,570 |      |   |  | (18 | )%
|                                   | Percent of revenue |                         |         | 67.2 | % |        |         | 69.7 | % |  |     |    | 
|Total                              |                    | $                       | 169,566 |      |   | $      | 200,248 |      |   |  | (15 | )%

System sales revenue in 2001 was $5 million
lower than in 2000 due to a decline in sales of laser systems,
which was partially offset by an increase in revenue from
upgrades of laser systems and the introduction of our new
WaveScan system in 2001. Laser system sales revenue declined
$25 million due to a number of factors: the recession (both
U.S. and worldwide), increased competition, and delay in
regulatory approval of our STAR S3 laser 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 S2TM laser systems to the
new STAR S3TM model during 2001. Since we began
installing the STAR S3 upgrade in the fourth quarter of
2000, we have upgraded approximately 60% of the STAR S2
lasers based in the U.S. Accordingly, we anticipate that upgrade
revenue will decline in 2002. The introduction of our new
WaveScan system generated a small amount of additional sales
revenue in 2001.

License, service and other revenue in 2001 was
$25.6 million lower than in 2000 mainly due to a decline in
license and other procedure fees (procedure fees)
from U.S. customers, which was partially offset by increased
U.S. service revenue. 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. Laser vision correction is
not generally covered by medical insurance. 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 and
drop in consumer confidence

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##### Table of Contents



in 2001 were the principal causes of the decline
in our procedure volume and the U.S. laser vision correction
market as a whole. We believe that the rebound of the U.S.
economy and consumer confidence will provide renewed support for
the U.S. laser vision correction market in 2002, though the
timing and extent of the rebound is difficult to predict.


|                                      |                    |                         |        |      |   |        |        |      |   |  |     |    | 
|------------------------------------- | ------------------ | ----------------------- | ------ | ---- | - | ------ | ------ | ---- | - |  | --- | -- | 
|                                      |                    |                        
|                                      |                    | Year Ended December 31,
|                                      |                    |                        
|                                      |                    | 2001                    |        | 2000 |   | Change
|                                      |                    |                         |        |      |   |       
|                                      |                    |                        
|                                      |                    | (000s)                
|Costs and Expenses                    |                    |                         |        |      |   |        |        |      |   |  |     |   
|Cost of revenues                      |                    | $                       | 58,440 |      |   | $      | 62,684 |      |   |  | (7  | )%
|                                      | Percent of revenue |                         |        | 34.5 | % |        |        | 31.3 | % |  |     |    | 
|Marketing, general and administrative |                    | $                       | 46,496 |      |   | $      | 66,613 |      |   |  | (30 | )%
|                                      | Percent of revenue |                         |        | 27.4 | % |        |        | 33.3 | % |  |     |    | 
|Research, development and regulatory  |                    | $                       | 19,458 |      |   | $      | 14,959 |      |   |  | 30  | % 
|                                      | Percent of revenue |                         |        | 11.5 | % |        |        | 7.5  | % |  |     |    | 

Cost of revenues declined $4 million, which
was due to lower unit sales of laser systems (approximately
$15 million), partially offset by additional cost of
revenues for laser upgrades (approximately $12 million).
Our gross profit margin 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. Marketing, general
and administrative expenses declined principally due to a
$2 million reduction in expense for reserves for
uncollectible accounts receivables and $3 million less in
spending on marketing and promotional programs. Our policy is to
accrue reserves 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 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. Our research and
development expenses increased due to increased spending in our
three main areas of focus: new capabilities for the VISX
STARTM Excimer Laser platform, development of new
products such as our WaveScan® System and wavefront-driven
ablations, and research into new technologies. We anticipate
that our R&D and regulatory expenses will total
approximately $18 million in 2002.



| |                       
| | ----------------------
| | Other Income (Expense)

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 one-time payments and related
costs and fees. As a result of the settlements, the lawsuits
have been or we believe will likely be dismissed with prejudice.

19



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##### Table of Contents





| |                      
| | ---------------------
| | 2000 Compared to 1999

|                                   |                    |                         |         |      |   |        |         |      |   |  |      |   | 
|---------------------------------- | ------------------ | ----------------------- | ------- | ---- | - | ------ | ------- | ---- | - |  | ---- | - | 
|                                   |                    |                        
|                                   |                    | Year Ended December 31,
|                                   |                    |                        
|                                   |                    | 2000                    |         | 1999 |   | Change
|                                   |                    |                         |         |      |   |       
|                                   |                    |                        
|                                   |                    | (000s)                
|Revenue                            |                    |                         |         |      |   |        |         |      |   |  |      |  
|System sales                       |                    | $                       | 60,678  |      |   | $      | 74,415  |      |   |  | (18) | %
|                                   | Percent of revenue |                         |         | 30.3 | % |        |         | 27.4 | % |  |      |   | 
|License, service and other revenue |                    | $                       | 139,570 |      |   | $      | 196,837 |      |   |  | (29) | %
|                                   | Percent of revenue |                         |         | 69.7 | % |        |         | 72.6 | % |  |      |   | 
|Total                              |                    | $                       | 200,248 |      |   | $      | 271,252 |      |   |  | (26) | %

Our laser system unit sales and revenue in
international markets increased in 2000 over 1999, but in the
United States they declined from the prior year. In
international markets, the increase totaled $9 million and
was most significant in Asian and Latin American countries. We
believe this was due to a combination of factors including
customers enthusiasm for VISXs new products and
technology, new distributors, and additional marketing programs.
The decline in United States sales of $23 million was
due principally to lower unit sales caused by increased
competition, the slowdown in the economy, and customers
deferring purchases until we began production of our next
generation STAR S3TM Excimer Laser System in the
fourth quarter of 2000. Average selling prices during 2000 were
lower than in the prior year as the result of increased
competition and the anticipated introduction of our next
generation STAR S3TMExcimer Laser System and our
WaveScan® System.

Our U.S. license revenue declined due to our
reduction in February 2000 of our U.S. license fee to $100 per
procedure from the $250 we had charged since we first entered
the U.S. market in 1996. Based on our analysis of sales data and
developments in the U.S. laser vision correction market during
the first quarter of 2000, we concluded that consumer concerns
about the pricing of laser vision correction were dampening the
industrys potential for growth. In an effort to address
these concerns and to help broaden the appeal for laser vision
correction, we reduced our U.S. license fee. Sales of
VisionKey® cards for licensed procedures in the U.S.
increased in 2000 over 1999. However the benefit from the
increase in unit volume ($21 million revenue from
additional procedures at the new prices) was not sufficient to
offset the reduction in revenue (approximately $84 million)
resulting from the lower per procedure license fee.

|                                      |                    |                         |        |      |   |        |        |      |   |  |    |    | 
|------------------------------------- | ------------------ | ----------------------- | ------ | ---- | - | ------ | ------ | ---- | - |  | -- | -- | 
|                                      |                    |                        
|                                      |                    | Year Ended December 31,
|                                      |                    |                        
|                                      |                    | 2000                    |        | 1999 |   | Change
|                                      |                    |                         |        |      |   |       
|                                      |                    |                        
|                                      |                    | (000s)                
|Costs and Expenses                    |                    |                         |        |      |   |        |        |      |   |  |    |   
|Cost of revenues                      |                    | $                       | 62,684 |      |   | $      | 57,513 |      |   |  | 9  | % 
|                                      | Percent of revenue |                         |        | 31.3 | % |        |        | 21.2 | % |  |    |    | 
|Marketing, general and administrative |                    | $                       | 66,613 |      |   | $      | 56,166 |      |   |  | 19 | % 
|                                      | Percent of revenue |                         |        | 33.3 | % |        |        | 20.7 | % |  |    |    | 
|Research, development and regulatory  |                    | $                       | 14,959 |      |   | $      | 15,475 |      |   |  | (3 | )%
|                                      | Percent of revenue |                         |        | 7.5  | % |        |        | 5.7  | % |  |    |    | 

Cost of revenues increased in 2000 over 1999
primarily because we serviced a larger installed base of
systems. Our gross profit margin was lower in 2000 than in 1999
due to lower license fees (due to the reduction in per procedure
license fee) and lower average selling prices of laser systems
as discussed in the preceding section on revenue. Our marketing,
general and administrative expenses increased in 2000 over 1999
due to additions to our reserves for uncollectible amounts due
from customers. Our policy is to accrue reserves 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
due from customers were $5 million in 2000 as compared to
less than $1 million in 1999. We increased our additions to
reserves in 2000 because a number of customers developed
significant problems due to a variety of factors including the
rapid transition in the U.S. economy from high growth to
contraction, over expansion and increased competition. In

20



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##### Table of Contents



addition, 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, which was included in marketing, general and
administrative expense. Excluding additions to reserves against
amounts due from customers, our marketing, general and
administrative expenses were 14% lower in 2000 than in 1999.
Legal expenses declined because settlements were reached and
trials were completed in several cases in the first half of
2000. This contrasts with 1999 during which we incurred
substantial legal expenses due to the International Trade
Commission (ITC) trial regarding its investigation
of Nidek Co., Ltd. (Nidek), the FTC administrative
action, and other patent litigation. Marketing expenses declined
principally because we eliminated our direct consumer
advertising campaign and focused on other marketing programs in
the U.S. Administrative expenses decreased due to lower payments
to employees under performance based incentive programs. We
increased spending in research and development. Our efforts were
focused on developing new capabilities for the VISX
STARTM Excimer Laser platform, designing new products
such as our WaveScan® System, and researching new
technologies. Our regulatory expenses were lower, mainly due to
reduced work outside the U.S. We continued to conduct clinical
studies and prepared submissions to obtain additional approvals
from the FDA and regulatory authorities in other countries.




| |                       
| | ----------------------
| | Other Income (Expense)

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.

21



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##### Table of Contents



Quarterly Results of Operations

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

|                                                           |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |   |  |   |        |  |  |   |        | 
|---------------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ |  |  | - | ------- | - |  | - | ------ |  |  | - | ------ | 
|                                                           |  |         |        |        
|                                                           |  | 2000    |        | 2001   
|                                                           |  |         |        |        
|                                                           |  | 1st Qtr |        | 2nd Qtr |  | 3rd Qtr |        | 4th Qtr |  | 1st Qtr |        | 2nd Qtr |  | 3rd Qtr |        | 4th Qtr
|                                                           |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |        
|Total revenues                                             |  | $       | 63,997 |         |  | $       | 48,005 |         |  | $       | 45,714 |         |  | $       | 42,532 |         |  | $ | 51,576 |  |  | $ | 49,382  |   |  | $ | 38,540 |  |  | $ | 30,068 | 
|                                                           |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |   |  |   |        |  |  |   |        | 
|Cost of revenues                                           |  |         | 16,969 |         |  |         | 16,929 |         |  |         | 13,905 |         |  |         | 14,881 |         |  |   | 17,828 |  |  |   | 15,809  |   |  |   | 14,463 |  |  |   | 10,340 | 
|Total costs and expenses                                   |  |         | 35,067 |         |  |         | 32,866 |         |  |         | 29,232 |         |  |         | 47,091 |         |  |   | 34,158 |  |  |   | 32,010  |   |  |   | 32,998 |  |  |   | 25,228 | 
|Income (loss) from operations                              |  |         | 28,930 |         |  |         | 15,139 |         |  |         | 16,482 |         |  |         | (4,559 | )       |  |   | 17,418 |  |  |   | 17,372  |   |  |   | 5,542  |  |  |   | 4,840  | 
|Litigation settlement                                      |  |         |       |         |  |         | 11,856 |         |  |         |       |         |  |         |       |         |  |   |       |  |  |   | 37,821  |   |  |   |       |  |  |   |       | 
|Income (loss) before provision
	(benefit) for income taxes |  |         | 32,597 |         |  |         | 6,594  |         |  |         | 19,899 |         |  |         | (874   | )       |  |   | 20,860 |  |  |   | (17,690 | ) |  |   | 7,873  |  |  |   | 6,988  | 
|Provision (benefit) for income taxes                       |  |         | 13,039 |         |  |         | 2,441  |         |  |         | 7,861  |         |  |         | (346   | )       |  |   | 8,240  |  |  |   | (6,988  | ) |  |   | 3,113  |  |  |   | 2,757  | 
|                                                           |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |   |  |   |        |  |  |   |        | 
|Net income (loss)                                          |  | $       | 19,558 |         |  | $       | 4,153  |         |  | $       | 12,038 |         |  | $       | (528   | )       |  | $ | 12,620 |  |  | $ | (10,702 | ) |  | $ | 4,760  |  |  | $ | 4,231  | 
|                                                           |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |   |  |   |        |  |  |   |        | 
|Earnings (loss) per share, diluted                         |  | $       | 0.30   |         |  | $       | 0.07   |         |  | $       | 0.19   |         |  | $       | (0.01  | )       |  | $ | 0.21   |  |  | $ | (0.19   | ) |  | $ | 0.08   |  |  | $ | 0.08   | 
|                                                           |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |   |  |   |        |  |  |   |        | 
|Shares used for earnings (loss) per share,
	diluted        |  |         | 66,147 |         |  |         | 62,910 |         |  |         | 63,248 |         |  |         | 60,800 |         |  |   | 61,018 |  |  |   | 56,536  |   |  |   | 57,141 |  |  |   | 55,895 | 
|                                                           |  |         |        |         |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |   |  |   |        |  |  |   |        | 

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.
Our equipment and procedure revenue tend to decline in the
summer.

Critical Accounting Policies

We follow generally accepted accounting
principles (GAAP) for the United States 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

We have three main sources of revenue: system
equipment sales, service, and license fees and related procedure
revenue (procedure revenue). We recognize revenue in
each of these categories 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.

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Within the U.S. we directly handle the sale and
installation of our systems and recognize revenue on these
products after we have completed installation of systems 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. 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 sales revenue when we ship systems for customers
outside the U.S. and accrue an estimate of the cost of parts
that we are obligated to provide under warranty. For customers
who purchase service contracts, we recognize service revenue
over the term of the contract. 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 procedure revenue when we ship VisionKey®cards in
the U.S. and when we receive payments from third party licensees.

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.
After a receivable is recorded, we estimate the reserves
necessary for 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
12 months. Based on this analysis, we adjust our reserves
for excess and obsolete inventory. 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
adjust our inventory reserves. All inventory reserves are
charged to cost of revenues, accordingly any adjustment to
inventory reserves 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 antirust laws, and class actions filed under
federal securities laws. 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 must 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 reserves for legal settlements. 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, 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

Cash, cash equivalents and short-term investments
(cash) and working capital were as follows:

|                |  |              |         |      |  |   |         | 
|--------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                |  |             
|                |  | December 31,
|                |  |             
|                |  | 2001         |         | 2000
|                |  |              |         |     
|                |  |             
|                |  | (000s)     
|Cash            |  | $            | 123,807 |      |  | $ | 229,453 | 
|Working capital |  |              | 159,935 |      |  |   | 245,662 | 

Cash decreased by $106 million in 2001
principally because we spent $117 million to repurchase
7.2 million shares of VISX stock on the open market. This
was partially offset by $6 million of net cash provided by
operating activities and $8 million received upon the
exercise of stock options.

Operating activities provided $6 million of
cash in 2001, down from $76 million provided in 2000. The
principal factors that contributed to this difference are as
follows. Net income declined by $24 million due mainly to
the decline in sales and the legal settlement of
$37.8 million (pre-tax). Deferred income tax assets
increased by $7 million due to timing differences that we
anticipate will be realized in 2002. Accounts receivable, net of
reserves, declined in both years due to lower sales. Cash
generated by these declines was $12 million larger in 2000
than in 2001 due mainly to the correspondingly larger change in
sales that year. Reductions in accounts payable and accrued
liabilities (increased in 2000, then declined in 2001)
contributed $16 million to the difference in cash provided
by operating activities. Accounts payable declined due to
reductions in purchases of inventory in the fourth quarter of
2001 compared to the fourth quarter of 2000. The change in
accrued liabilities was principally due to lower deferred
revenue (a backlog for laser upgrades grew in 2000 and a
substantial portion was recognized as revenue in 2001 when the
upgrades were shipped and installed) and declines in warranty
and compensation accruals.

Interest income was lower in 2001 than in 2000
due to the decline in cash available for investment in interest
bearing securities. Conversely, the average balance of cash
invested in interest bearing securities and interest income were
higher in 2000 than in 1999.

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, 2001, 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®
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 $124 million of cash as of
December 31, 2001 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 provide funding to Medjet to pursue new
ophthalmic technologies and products. In addition, we signed an
agreement with Medjet that provides 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. The closing of the potential merger is subject to
Medjets shareholder approval and is subject to other
customary conditions to closing. At the same time, we 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

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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. In
connection with these agreements, we also entered into a voting
agreement with Dr. Eugene Gordon, founder of Medjet, under
which Dr. Gordon has agreed to vote all of his shares of
common stock in favor of the merger, and has agreed to sell all
of his stock to VISX in the event that VISX offers to complete
the merger. Dr. Gordon currently holds
1,596,787 shares, representing 32% of Medjets voting
stock. Lastly, we now have one of seven seats on Medjets
Board of Directors. We account for this investment under the
equity method prescribed by APB 18.


Under our R&D agreement we paid approximately
$1 million to Medjet to fund research and development work
they performed during 2001 and anticipate higher funding from
January through August 2002. We expense 100% of the payments
made to Medjet as research, development and regulatory expense
in our financial statements. To exercise our option to acquire
Medjet, we would have to pay approximately $9 million based
on the $2.00 per share purchase price and the number of shares
of Medjet common stock, options and warrants outstanding at
December 31, 2001.

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 Other Intangible Assets (SFAS
142). Major provisions of these statements are as follows:



| |     |                                                                                                     
| | --- | ----------------------------------------------------------------------------------------------------
| | (i) | All business combinations initiated after
	June 30, 2001 must use the purchase method of accounting;



| |        |                                                                                                                                                                                                                                                                                                                                          
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii)   | The pooling of interests method of accounting is
	prohibited except for transactions initiated before July 1,
	2001;                                                                                                                                                                                                                     
|
| | (iii)  | Intangible assets acquired in a business
	combination must be recorded separately from goodwill if they
	arise from contractual or other legal rights or are separable
	from the acquired entity and can be sold, transferred, licensed,
	rented or exchanged, either individually or as part of a related
	contract, asset or liability;
|
| | (iv)   | Goodwill and intangible assets with indefinite
	lives are not amortized but are tested for impairment annually
	using a fair value approach, except in certain circumstances,
	and whenever there is an impairment indicator;                                                                                                            
|
| | (v)    | Other intangible assets will continue to be
	valued and amortized over their estimated lives;                                                                                                                                                                                                                                            
|
| | (vi)   | In-process research and development will continue
	to be written off immediately;                                                                                                                                                                                                                                                        
|
| | (vii)  | All acquired goodwill must be assigned to
	reporting units for purposes of impairment testing and segment
	reporting;                                                                                                                                                                                                                    
|
| | (viii) | Effective January 1, 2002, goodwill existing
	as of June 30, 2001 will no longer be subject to
	amortization.                                                                                                                                                                                                                            

Goodwill arising between June 29, 2001 and
December 31, 2001 will not be subject to amortization. Upon
adoption of SFAS 142, on January 1, 2002, we will no longer
be required to amortize goodwill. However, since we have no
goodwill assets or amortization, adoption of these statements
will have no impact on our financial statements or results of
operations.

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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). An impairment loss must be recognized if
the net book value of long-lived assets exceeds:



| |       |                                                                                                     
| | ----- | ----------------------------------------------------------------------------------------------------
| | (i)   | The future cash flows to be generated by these
	assets, whether through continued operation or sale;
|
| | (ii)  | The fair value of assets to be distributed to
	owners in a spinoff; or                              
|
| | (iii) | The fair value of productive assets for which
	they are exchanged.                                  

This statement applies to long-term leases,
certain oil and gas properties, and long-term prepaid assets. It
does not apply to goodwill, intangible assets not being
amortized, investments in equity securities accounted for under
the cost or equity method, and certain other types of long-term
assets. The provisions of SFAS 144 are effective for
financial statements issued for fiscal years beginning after
December 15, 2001. We believe this statement will not have
any material impact on VISXs financial statements or
results of operations.

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 are
required to adopt these new standards no later than the quarter
ending March 31, 2002. In accordance with the transition
guidance in EITF 00-25, adoption will require the
reclassification of financial statements for prior periods
presented for comparative purposes. We believe that
reclassification under EITF 00-25 and EITF 01-09 will not
significantly affect our gross margin or net income, although
reclassification will change the presentation of certain revenue
and expense items contained within the financial statements.

Risk Factors

This report contains forward-looking statements
that involve risk and uncertainty. The factors set forth below,
which are not the only risks facing us, 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 less than 4% 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). Consumers may be slow to
adopt laser vision correction because of these complications or
more general concerns relating to its safety and efficacy and a
general resistance to surgery. Should either the ophthalmic
community or the general population turn away from laser

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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 145 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, increased competition by new or existing
competitors or the payment of substantial monetary damages,
which could have a material adverse effect on our business,
financial position and results of operation.

Competition.Intense
competition in the laser vision correction industry could result
in the loss of customers and an inability to attract new
customers. 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 be able to 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 that are
perceived as preferable to the VISX System. In addition, medical
companies, academic and research institutions and others could
develop new therapies, including new medical devices or surgical
procedures, for the conditions targeted by VISX, which therapies
could be more medically effective and less expensive than laser
vision correction, and could potentially render laser vision
correction obsolete. Any such developments could have a material
adverse effect on our business, financial position and results
of operations.

Price
Competition.We have experienced, and may continue
to experience, price competition, which has resulted in a
decrease in prices for our products and which has impacted our
revenues. A number of factors, including the proliferation of
competitors, have resulted in a increase in product pricing
pressures faced by us. We are also currently not collecting
license fees from competitors that have not entered into
licenses with us. If we face additional pressure to decrease our
prices, our revenue may decrease, and our business, financial
position and results of operations may suffer.

Unfavorable Outcomes.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 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 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 economic conditions may
cause our sales 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 during the recent economic
downturn and following the events of September 11, 2001.
Any resulting decline in the number of VISX 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

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significant portion of our revenues is derived
from sales to a small number of customers. Laser Vision Centers,
Inc. (LVCI) accounted for 14%, 10% and 13% of total
revenues in 2001, 2000, and 1999, respectively. TLC Laser Eye
Centers, Inc. (TLC) accounted for 5%, 9% and 12% of total
revenues in 2001, 2000, and 1999, respectively. In August 2001,
LVCI and TLC announced their intention to merge and expect the
transaction will be completed in 2002. 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. 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 we or they believe the trial participants face
unacceptable health risks.

Noncompliance with applicable United States
regulatory requirements can result in fines, injunctions,
penalties, mandatory recalls or seizures, suspensions of
production, denial or withdrawal of pre-marketing approvals,
recommendations by the FDA against governmental contracts and
criminal prosecution. The FDA also has authority to request
repair, replacement or 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

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research and development, products we are
currently developing may not complete the development process or
obtain the regulatory approvals required for us to market such
products successfully. None of the products currently in our
development pipeline may 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 2001, 2000 and 1999, we
derived approximately 15%, 17% and 8%, 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. Our patents are being challenged
on several fronts. Generally, the litigation and other
proceedings center on whether infringement of the patents has
occurred, and on the validity or enforceability of the patents.
In addition, our use of patents and our business practices are
being contested as violations of antitrust laws. Moreover, other
companies own United States and foreign patents covering methods
and apparatus for performing corneal surgery with ultraviolet
lasers, and one of our competitors has filed two lawsuits
against us alleging that we infringe certain United States and
foreign patents. The results of these complex legal proceedings
are very difficult to predict with certainty. 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.
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. If our patents are
found to be invalid or unenforceable (or in the event that
parties against whom VISX is asserting patent infringement are
found not to be infringing our patents), 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. See Note 11 to
our financial statements, Litigation, for a
detailed analysis of our currently-pending legal proceedings.

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® System. In addition,
a claim that an injury resulted from a defect in the VISX
System, 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.We depend on single and limited
sources for key components. If we lose one or more of these
sources, delivery of our products could be delayed or prevented
and our business would suffer. The manufacture of VISX Systems
is a complex operation involving numerous procedures.

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Several of these components are currently
provided by a single vendor. 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 we were unable to produce the
VISX® System in a cost-effective or timely manner, or if
the manufacturing of VISX Systems were interrupted, 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 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.

In addition, stock markets have experienced
extreme 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. These broad
market fluctuations 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 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.

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.

Critical Accounting Policies.We follow generally accepted
accounting principles for the United States 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 identified

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and discussed in detail in Part II,
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, of this report.





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).

|                                                                                      |  |      |        |      |  |      |        |      |  |      |        |        |  |   |   |  |  |   |   |  |  |   |   | 
|------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ------ |  | - | - |  |  | - | - |  |  | - | - | 
|                                                                                      |  | 2002 |        | 2003 |  | 2004 |        | 2005 |  | 2006 |        | Beyond
|                                                                                      |  |      |        |      |  |      |        |      |  |      |        |       
|Cash equivalents and short-term investments
	(amortized cost as of December 31, 2001) |  | $    | 68,662 |      |  | $    | 22,385 |      |  | $    | 19,824 |        |  | $ |  |  |  | $ |  |  |  | $ |  | 
|Weighted average effective interest rate                                              |  |      | 6.5    | %    |  |      | 5.7    | %    |  |      | 5.0    | %      |  |   |  |  |  |   |  |  |  |   |  | 

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, 2001 we have no outstanding foreign currency
hedge contracts. Accordingly, we have no material foreign
currency exchange risk as of December 31, 2001.

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Item 8.     Financial
Statements and Supplementary Data

VISX, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                |                                                                                                                         |                            |         |          |         |   |         |         |         | 
|----------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | -------- | ------- | - | ------- | ------- | ------- | 
|                                                |                                                                                                                         |                           
|                                                |                                                                                                                         | December 31,              
|                                                |                                                                                                                         |                           
|                                                |                                                                                                                         | 2001                       |         | 2000    
|                                                |                                                                                                                         |                            |         |         
|                                                |                                                                                                                         |                           
|                                                |                                                                                                                         | (In thousands, except     
|                                                |                                                                                                                         | share and per share       
|                                                |                                                                                                                         | amounts)                  
|ASSETS                                         
|Current Assets                                  |                                                                                                                         |                            |         |          |         |   |         |        
|                                                | Cash and cash equivalents                                                                                               |                            | $       | 15,349   |         |   | $       | 19,686  |        
|                                                | Short-term investments                                                                                                  |                            |         | 108,458  |         |   |         | 209,767 |        
|                                                | Accounts receivable, net of allowances for
	doubtful accounts of $4,567 and $5,771, respectively                        |                            |         | 32,490   |         |   |         | 34,540  |        
|                                                | Inventories                                                                                                             |                            |         | 14,071   |         |   |         | 14,762  |        
|                                                | Deferred tax assets and prepaid expenses                                                                                |                            |         | 33,214   |         |   |         | 19,642  |        
|                                                |                                                                                                                         |                            |         |          |         |   |         |        
|                                                |                                                                                                                         | Total current assets       |         |          | 203,582 |   |         |         | 298,397 | 
|Property and Equipment, net                     |                                                                                                                         |                            | 4,152   |          |         |   | 4,996   |        
|Long-Term Deferred Tax and Other
	Assets        |                                                                                                                         |                            | 12,191  |          |         |   | 18,114  |        
|                                                |                                                                                                                         |                            |         |          |         |   |         |        
|                                                |                                                                                                                         | $                          | 219,925 |          |         | $ | 321,507 |        
|                                                |                                                                                                                         |                            |         |          |         |   |         |        
|LIABILITIES AND STOCKHOLDERS
	EQUITY          
|Current Liabilities                             |                                                                                                                         |                            |         |          |         |   |         |        
|                                                | Accounts payable                                                                                                        |                            | $       | 3,270    |         |   | $       | 7,353   |        
|                                                | Accrued liabilities and other current liabilities                                                                       |                            |         | 40,377   |         |   |         | 45,382  |        
|                                                |                                                                                                                         |                            |         |          |         |   |         |        
|                                                |                                                                                                                         | Total current liabilities  |         |          | 43,647  |   |         |         | 52,735  | 
|                                                |                                                                                                                         |                            |         |          |         |   |         |        
|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, 2001 and 2000. |                            |         | 650      |         |   |         | 650     |        
|                                                | Additional paid-in capital                                                                                              |                            |         | 208,130  |         |   |         | 214,668 |        
|                                                | Less: 10,436,238 and 4,233,989 common stock
	treasury shares at December 31, 2001 and 2000,
	respectively, at cost      |                            |         | (178,347 | )       |   |         | (79,946 | )      
|                                                | Accumulated other comprehensive income                                                                                  |                            |         | 2,520    |         |   |         | 984     |        
|                                                | Retained earnings                                                                                                       |                            |         | 143,325  |         |   |         | 132,416 |        
|                                                |                                                                                                                         |                            |         |          |         |   |         |        
|                                                |                                                                                                                         | Total stockholders equity |         |          | 176,278 |   |         |         | 268,772 | 
|                                                |                                                                                                                         |                            |         |          |         |   |         |        
|                                                |                                                                                                                         | $                          | 219,925 |          |         | $ | 321,507 |        
|                                                |                                                                                                                         |                            |         |          |         |   |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

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VISX, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |         |        |         | 
|----------------------------------------- | ------------------------------------- | ------------------------------------- | ------------------------ | ------- | ------- | ------- | ------ | ------- | ----- | ------- | ------- | ------- | ------ | ------- | 
|                                          |                                       |                                      
|                                          |                                       | Year Ended December 31,              
|                                          |                                       |                                      
|                                          |                                       | 2001                                  |                          | 2000    |         | 1999   
|                                          |                                       |                                       |                          |         |         |        
|                                          |                                       |                                      
|                                          |                                       | (In thousands, except per share data)
|Revenues:                                 |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|                                          | System sales                          |                                       | $                        | 55,592  |         |         | $      | 60,678  |       |         | $       | 74,415  |       
|                                          | License, service and other revenue    |                                       |                          | 113,974 |         |         |        | 139,570 |       |         |         | 196,837 |       
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|                                          |                                       |                                       | Total revenues           |         |         | 169,566 |        |         |       | 200,248 |         |         |        | 271,252 | 
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|Costs and Expenses:                       |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|                                          | Cost of revenues                      |                                       |                          | 58,440  |         |         |        | 62,684  |       |         |         | 57,513  |       
|                                          | Marketing, general and administrative |                                       |                          | 46,496  |         |         |        | 66,613  |       |         |         | 56,166  |       
|                                          | Research, development and regulatory  |                                       |                          | 19,458  |         |         |        | 14,959  |       |         |         | 15,475  |       
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|                                          |                                       |                                       | Total costs and expenses |         |         | 124,394 |        |         |       | 144,256 |         |         |        | 129,154 | 
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|Income From Operations                    |                                       |                                       | 45,172                   |         |         |         | 55,992 |         |       |         | 142,098 |        
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|Other Income (Expense):                   |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|                                          | Interest income                       |                                       |                          | 10,680  |         |         |        | 14,080  |       |         |         | 10,848  |       
|                                          | Litigation settlement                 |                                       |                          | (37,821 | )       |         |        | (11,856 | )     |         |         |        |       
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|                                          |                                       | Other income (expense), net           |                          |         | (27,141 | )       |        |         | 2,224 |         |         |         | 10,848 |        
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|Income Before Provision For Income
	Taxes |                                       |                                       | 18,031                   |         |         |         | 58,216 |         |       |         | 152,946 |        
|                                          | Provision for income taxes            |                                       |                          | 7,122   |         |         |        | 22,995  |       |         |         | 61,178  |       
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|Net Income                                |                                       | $                                     | 10,909                   |         |         | $       | 35,221 |         |       | $       | 91,768  |        
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|Earnings Per Share                        |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|                                          | Basic                                 |                                       | $                        | 0.19    |         |         | $      | 0.57    |       |         | $       | 1.45    |       
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|                                          | Diluted                               |                                       | $                        | 0.19    |         |         | $      | 0.55    |       |         | $       | 1.35    |       
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|Shares Used For Earnings Per Share        |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|                                          | Basic                                 |                                       |                          | 56,660  |         |         |        | 61,431  |       |         |         | 63,474  |       
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        
|                                          | Diluted                               |                                       |                          | 58,081  |         |         |        | 63,778  |       |         |         | 68,119  |       
|                                          |                                       |                                       |                          |         |         |         |        |         |       |         |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

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VISX, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                             |                                                                          |                |        |        |  |            |     |          |  |            |         |               |  |              |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |        |  
|------------------------------------------------------------ | ------------------------------------------------------------------------ | -------------- | ------ | ------ |  | ---------- | --- | -------- |  | ---------- | ------- | ------------- |  | ------------ | -------- | ------------- |  | - | ----- | ------ | - |  | - | ------ | - | - | ------- | ------ |  | - | -------- | ------ | -
|                                                             |                                                                          |                |        |        |  |            |     |          |  | Foreign    |         |               |  |              |          |              
|                                                             |                                                                          |                |        | Common |  |            |     |          |  | Currency/  |         |               |  | Retained     |          |              
|                                                             |                                                                          | Common         |        | Stock  |  | Additional |     |          |  | Unrealized |         | Comprehensive |  | Earnings     |          | Total        
|                                                             |                                                                          | Shares         |        | Par    |  | Paid-In    |     | Treasury |  | Holding    |         | Income        |  | (Accumulated |          | Stockholders
|                                                             |                                                                          | Issued         |        | Value  |  | Capital    |     | Stock    |  | Gains      |         | (Loss)        |  | Deficit)     |          | Equity       
|                                                             |                                                                          |                |        |        |  |            |     |          |  |            |         |               |  |              |          |              
|                                                             |                                                                          |               
|                                                             |                                                                          | (In thousands)
|Balance, December 31, 1998                                   |                                                                          |                | 62,070 |        |  | $          | 620 |          |  | $          | 137,335 |               |  | $            | (4,581   | )             |  | $ | 188   |        |   |  |   |        |   | $ | 5,427   |        |  | $ | 138,989  |       
|Repurchases of common stock                                  |                                                                          |                |       |        |  |            |    |          |  |            |        |               |  |              | (12,785  | )             |  |   |      |        |   |  |   |        |   |   |        |        |  |   | (12,785  | )     
|Exercise of stock options                                    |                                                                          |                | 2,789  |        |  |            | 28  |          |  |            | 7,070   |               |  |              | 17,213   |               |  |   |      |        |   |  |   |        |   |   |        |        |  |   | 24,311   |       
|Common stock issued under the Employee Stock
	Purchase Plan  |                                                                          |                | 32     |        |  |            | 1   |          |  |            | 761     |               |  |              |         |               |  |   |      |        |   |  |   |        |   |   |        |        |  |   | 762      |       
|Income tax benefit arising from employee stock
	option plans |                                                                          |                |       |        |  |            |    |          |  |            | 74,883  |               |  |              |         |               |  |   |      |        |   |  |   |        |   |   |        |        |  |   | 74,883   |       
|Comprehensive income:                                        |                                                                          |                |        |        |  |            |     |          |  |            |         |               |  |              |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       
|                                                             | Net income                                                               |                |        |       |  |            |     |         |  |            |         |              |  |              |          |              |  |   |       |       |   |  | $ | 91,768 |   |   |         | 91,768 |  |   |          | 91,768 |  
|                                                             | Foreign currency translation adjustment                                  |                |        |       |  |            |     |         |  |            |         |              |  |              |          |              |  |   |       | 68     |   |  |   | 68     |   |   |         |       |  |   |          | 68     |  
|                                                             | Adjustment for unrealized holding loss on
	available-for-sale securities |                |        |       |  |            |     |         |  |            |         |              |  |              |          |              |  |   |       | (1,203 | ) |  |   | (1,203 | ) |   |         |       |  |   |          | (1,203 | )
|                                                             |                                                                          |                |        |        |  |            |     |          |  |            |         |               |  |              |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       
|                                                             | Comprehensive income                                                     |                |        |        |  |            |     |          |  |            |         |               |  |              |          |               |  |   |       |        |   |  | $ | 90,633 |   |   |         |        |  |   |          |        |  
|                                                             |                                                                          |                |        |        |  |            |     |          |  |            |         |               |  |              |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       
|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  |       
|                                                             |                                                                          |                |        |        |  |            |     |          |  |            |         |               |  |              |          |               |  |   |       |        |   |  |   |        |   |   |         |        |  |   |          |       

The accompanying notes are an integral part of
these consolidated financial statements.

34



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                             |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |          |        |          |  
|-------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------- | -------- | ----- | ------- | ------ | ------- | ------ | ------- | ------ | -------- | ------ | -------- | -
|                                             |                                                                                    |                                                                                     
|                                             |                                                                                    | Year Ended December 31,                                                             
|                                             |                                                                                    |                                                                                     
|                                             |                                                                                    | 2001                                                                                 |                                                   | 2000     |       | 1999   
|                                             |                                                                                    |                                                                                      |                                                   |          |       |        
|                                             |                                                                                    |                                                                                     
|                                             |                                                                                    | (In thousands)                                                                      
|Cash flows from operating
	activities:       |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |         
|                                             | Net income                                                                         |                                                                                      | $                                                 | 10,909   |       |         | $      | 35,221  |        |         | $      | 91,768   |       
|                                             | Adjustments to reconcile net income to net cash
	provided by operating activities: |                                                                                      |                                                   |          |       |         |        |         |        |         |        |          |       
|                                             |                                                                                    | Depreciation and amortization                                                        |                                                   |          | 3,617 |         |        |         | 3,515  |         |        |          | 3,132  |         
|                                             |                                                                                    | Income tax benefit from exercise of stock options                                    |                                                   |          | 4,004 |         |        |         | 424    |         |        |          | 74,883 |         
|                                             |                                                                                    | Provision for doubtful accounts receivable                                           |                                                   |          | 2,710 |         |        |         | 4,894  |         |        |          | 166    |         
|                                             |                                                                                    | Provision for doubtful long-term note receivable                                     |                                                   |          |      |         |        |         | 15,000 |         |        |          |       |         
|                                             |                                                                                    | Increase (decrease) in cash flows from
	changes in operating assets and liabilities: |                                                   |          |       |         |        |         |        |         |        |          |        |         
|                                             |                                                                                    |                                                                                      | Accounts receivable                               |          |       | (660    | )      |         |        | 11,820  |        |          |        | (23,598  | )
|                                             |                                                                                    |                                                                                      | Inventories                                       |          |       | 691     |        |         |        | (4,093  | )      |          |        | (3,849   | )
|                                             |                                                                                    |                                                                                      | Deferred tax assets and prepaid expenses          |          |       | (13,572 | )      |         |        | 9,550   |        |          |        | (13,735  | )
|                                             |                                                                                    |                                                                                      | Long-term deferred tax and other assets           |          |       | 7,723   |        |         |        | (7,148  | )      |          |        | (2,441   | )
|                                             |                                                                                    |                                                                                      | Accounts payable                                  |          |       | (4,083  | )      |         |        | 2,197   |        |          |        | 1,474    |  
|                                             |                                                                                    |                                                                                      | Accrued liabilities and other current liabilities |          |       | (5,005  | )      |         |        | 4,610   |        |          |        | 6,824    |  
|                                             |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |         
|                                             |                                                                                    |                                                                                      | Net cash provided by operating activities         |          |       | 6,334   |        |         |        | 75,990  |        |          |        | 134,624  |  
|                                             |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |         
|Cash flows from investing
	activities:       |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |         
|                                             | Capital expenditures, net                                                          |                                                                                      |                                                   | (2,773   | )     |         |        | (2,830  | )      |         |        | (3,957   | )     
|                                             | Equity investments                                                                 |                                                                                      |                                                   | (1,800   | )     |         |        | (3,400  | )      |         |        |         |       
|                                             | Long-term note receivable                                                          |                                                                                      |                                                   |         |       |         |        | (15,000 | )      |         |        |         |       
|                                             | Short-term investments                                                             |                                                                                      |                                                   |          |       |         |        |         |        |         |        |          |       
|                                             |                                                                                    | Available-for-sale securities:                                                       |                                                   |          |       |         |        |         |        |         |        |          |        |         
|                                             |                                                                                    |                                                                                      | Purchases                                         |          |       | (38,430 | )      |         |        | (96,367 | )      |          |        | (240,322 | )
|                                             |                                                                                    |                                                                                      | Proceeds from maturities                          |          |       | 141,003 |        |         |        | 121,115 |        |          |        | 93,271   |  
|                                             |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |         
|                                             | Net cash provided by (used in) investing
	activities                               |                                                                                      |                                                   | 98,000   |       |         |        | 3,518   |        |         |        | (151,008 | )     
|                                             |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |         
|Cash flows from financing
	activities:       |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |         
|                                             | Exercise of stock options                                                          |                                                                                      |                                                   | 7,948    |       |         |        | 5,175   |        |         |        | 25,073   |       
|                                             | Repurchases of common stock                                                        |                                                                                      |                                                   | (116,891 | )     |         |        | (90,772 | )      |         |        | (12,785  | )     
|                                             |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |         
|                                             | Net cash provided by (used in) financing
	activities                               |                                                                                      |                                                   | (108,943 | )     |         |        | (85,597 | )      |         |        | 12,288   |       
|                                             |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |         
|Effect of exchange rate changes on cash      |                                                                                    |                                                                                      | 272                                               |          |       |         | (67    | )       |        |         | 68     |         
|                                             |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |         
|Net decrease in cash and cash equivalents    |                                                                                    |                                                                                      | (4,337                                            | )        |       |         | (6,156 | )       |        |         | (4,028 | )       
|Cash and cash equivalents, beginning of year |                                                                                    |                                                                                      | 19,686                                            |          |       |         | 25,842 |         |        |         | 29,870 |         
|                                             |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |         
|Cash and cash equivalents, end of year       |                                                                                    | $                                                                                    | 15,349                                            |          |       | $       | 19,686 |         |        | $       | 25,842 |         
|                                             |                                                                                    |                                                                                      |                                                   |          |       |         |        |         |        |         |        |         

The accompanying notes are an integral part of
these consolidated financial statements.

35



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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 generally accepted accounting principles
(GAAP) for the U.S. 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 amount of our
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. (the Company or
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 stockholders equity. 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 when 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
stockholders equity. 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, 2001
and 2000 (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
receivables that we will not be able to collect from customers
and provide reserves 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

36



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

payment defaults that cannot be specifically
identified but can be expected with reasonable probability to
occur in the future.

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
12 months. Based on this analysis, we adjust our reserves
for excess and obsolete inventory. All inventory reserves are
charged to cost of revenues. Inventories consisted of the
following (in thousands):

|                                |  |              |        |      |  |   |        | 
|------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                |  |             
|                                |  | December 31,
|                                |  |             
|                                |  | 2001         |        | 2000
|                                |  |              |        |     
|Raw Materials and Subassemblies |  | $            | 8,901  |      |  | $ | 9,278  | 
|Work-in-Process                 |  |              | 1,491  |      |  |   | 4,099  | 
|Finished Goods                  |  |              | 3,679  |      |  |   | 1,385  | 
|                                |  |              |        |      |  |   |        | 
|                                |  | $            | 14,071 |      |  | $ | 14,762 | 
|                                |  |              |        |      |  |   |        | 

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 term of the
related lease in the case of 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,
|                                                |  |             
|                                                |  | 2001         |         | 2000
|                                                |  |              |         |     
|Furniture and fixtures                          |  | $            | 2,915   |      |  | $ | 2,822   |  
|Machinery and equipment                         |  |              | 13,194  |      |  |   | 12,366  |  
|Leasehold improvements                          |  |              | 2,847   |      |  |   | 1,904   |  
|                                                |  |              |         |      |  |   |         |  
|                                                |  |              | 18,956  |      |  |   | 17,092  |  
|Less: accumulated depreciation and amortization |  |              | (14,804 | )    |  |   | (12,096 | )
|                                                |  |              |         |      |  |   |         |  
|Property and equipment, net                     |  | $            | 4,152   |      |  | $ | 4,996   |  
|                                                |  |              |         |      |  |   |         |  

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 record
reserves for 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 reserves
for differences.

Revenue Recognition.We have three main sources of revenue:
system equipment sales, service, and license fees and related
procedure revenue (procedure revenue). We recognize
revenue in each of these

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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

categories 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.

Within the U.S. we directly handle the sale and
installation of our systems and recognize revenue on these
systems after we have completed installation of systems 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
of the U.S. our standard shipping 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 sales revenue when we ship
systems for customers outside the U.S. and accrue an estimate of
the cost of parts that we are obligated to provide under
warranty. For customers who purchase service contracts, we
recognize service revenue over the term of the contract. 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 procedure revenue when
we ship VisionKey® cards in the U.S. We recognize license
fees when we receive payments from third party licensees.

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.

We classify shipping costs in cost of revenues in
the accompanying consolidated statement of operations.

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

38



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,
|                           |                                                                      |                        
|                           |                                                                      | 2001                    |        | 2000   |  | 1999
|                           |                                                                      |                         |        |        |  |     
|Net Income                 |                                                                      | $                       | 10,909 |        |  | $    | 35,221 |        |  | $ | 91,768 |       
|                           |                                                                      |                         |        |        |  |      |        |        |  |   |        |       
|Basic Earnings Per Share   |                                                                      |                         |        |        |  |      |        |        |  |   |        |       
|                           | Income available to common shareholders                              |                         | $      | 10,909 |  |      | $      | 35,221 |  |   | $      | 91,768 | 
|                           | Weighted average common shares outstanding                           |                         |        | 56,660 |  |      |        | 61,431 |  |   |        | 63,474 | 
|                           |                                                                      |                         |        |        |  |      |        |        |  |   |        |       
|                           | Basic earnings per share                                             |                         | $      | 0.19   |  |      | $      | 0.57   |  |   | $      | 1.45   | 
|                           |                                                                      |                         |        |        |  |      |        |        |  |   |        |       
|Diluted Earnings Per Share |                                                                      |                         |        |        |  |      |        |        |  |   |        |       
|                           | Income available to common shareholders                              |                         | $      | 10,909 |  |      | $      | 35,221 |  |   | $      | 91,768 | 
|                           |                                                                      |                         |        |        |  |      |        |        |  |   |        |       
|                           | Weighted average common shares outstanding                           |                         |        | 56,660 |  |      |        | 61,431 |  |   |        | 63,474 | 
|                           | Dilutive potential common shares from stock
	options                 |                         |        | 1,421  |  |      |        | 2,347  |  |   |        | 4,645  | 
|                           |                                                                      |                         |        |        |  |      |        |        |  |   |        |       
|                           | Weighted average common shares and dilutive
	potential common shares |                         |        | 58,081 |  |      |        | 63,778 |  |   |        | 68,119 | 
|                           |                                                                      |                         |        |        |  |      |        |        |  |   |        |       
|                           | Diluted earnings per share                                           |                         | $      | 0.19   |  |      | $      | 0.55   |  |   | $      | 1.35   | 
|                           |                                                                      |                         |        |        |  |      |        |        |  |   |        |       

Options to purchase 4,047,000, 2,756,000 and
125,000 weighted shares outstanding during 2001, 2000 and 1999,
respectively, were excluded from the computation of diluted EPS
because the options exercise prices were greater than the
average market price of the Company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 patents and intellectual property
rights, claims that we violated antirust laws, and class actions
filed under federal securities laws. 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 must accrue an estimate of the
potential loss. For most cases, we must provide disclosure about
the significant claims and parties to a lawsuit. Currently we do
not believe it is probable that we will lose the cases currently
pending and, accordingly, have not accrued any reserves for
legal settlements.

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 Other
Intangible Assets (SFAS 142). Major
provisions of these statements are as follows:



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) All business combinations initiated
	after June 30, 2001 must use the purchase method of
	accounting;                                                                                                                                                                                                                                      
|
| | (ii) The pooling of interests method of
	accounting is prohibited except for transactions initiated
	before July 1, 2001;                                                                                                                                                                                                                      
|
| | (iii) Intangible assets acquired in a
	business combination must be recorded separately from goodwill
	if they arise from contractual or other legal rights or are
	separable from the acquired entity and can be sold, transferred,
	licensed, rented or exchanged, either individually or as part of
	a related contract, asset or liability;

39



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VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (iv) Goodwill and intangible assets with
	indefinite lives are not amortized but are tested for impairment
	annually using a fair value approach, except in certain
	circumstances, and whenever there is an impairment indicator;
|
| | (v) Other intangible assets will continue to
	be valued and amortized over their estimated lives;                                                                                                                                 
|
| | (vi) In-process research and development
	will continue to be written off immediately;                                                                                                                                            
|
| | (vii) All acquired goodwill must be assigned
	to reporting units for purposes of impairment testing and
	segment reporting;                                                                                                       
|
| | (viii) Effective January 1, 2002,
	goodwill existing as of June 30, 2001 will no longer be
	subject to amortization.                                                                                                              

Goodwill arising between June 29, 2001 and
December 31, 2001 will not be subject to amortization. Upon
adoption of SFAS 142, on January 1, 2002, we will no
longer be required to amortize goodwill. However, since we have
no goodwill assets, adoption of these statements will have no
impact on our financial statements or results of operations.

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). An impairment loss must be
recognized if the net book value of long-lived assets exceeds:



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | (i) The future cash flows to be generated by
	these assets, whether through continued operation or sale;
|
| | (ii) The fair value of assets to be
	distributed to owners in a spin-off; or                            
|
| | (iii) The fair value of productive assets
	for which they are exchanged.                                

This statement applies to long-term leases,
certain oil and gas properties, and long-term prepaid assets. It
does not apply to goodwill, intangible assets not being
amortized, investments in equity securities accounted for under
the cost or equity method, and certain other types of long-term
assets. The provisions of SFAS 144 are effective for financial
statements issued for fiscal years beginning after
December 15, 2001. We believe this statement will not have
any material impact on VISXs financial statements or
results of operations.

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 are required to adopt these new standards
no later than the quarter ending March 31, 2002. In
accordance with the transition guidance in EITF 00-25,
adoption will require the reclassification of financial
statements for prior periods presented for comparative purposes.
We believe that reclassification under EITF 00-25 and
EITF 01-09 will not significantly affect our gross margin
or net income, although reclassification will change the
presentation of certain revenue and expense items contained
within the financial statements.

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

40



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 industry 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 15%, 17%
and 8% of total revenues for the years ended December 31,
2001, 2000 and 1999, 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, 2001. In the following table we have presented
our export revenues by geographic region (in thousands):

|                                       |  |                         |        |      |  |      |        |  |  |   |        | 
|-------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                       |  |                        
|                                       |  | Year Ended December 31,
|                                       |  |                        
|                                       |  | 2001                    |        | 2000 |  | 1999
|                                       |  |                         |        |      |  |     
|Europe                                 |  | $                       | 8,763  |      |  | $    | 6,056  |  |  | $ | 4,554  | 
|Americas (excluding the United States) |  |                         | 3,813  |      |  |      | 5,221  |  |  |   | 3,287  | 
|Asia and Other                         |  |                         | 13,202 |      |  |      | 22,256 |  |  |   | 14,640 | 
|                                       |  |                         |        |      |  |      |        |  |  |   |        | 
|                                       |  | $                       | 25,778 |      |  | $    | 33,533 |  |  | $ | 22,481 | 
|                                       |  |                         |        |      |  |      |        |  |  |   |        | 

Major Customers.Laser Vision Centers, Inc. accounted
for 14%, 10% and 13% of total revenues in 2001, 2000 and 1999,
respectively. TLC Laser Eye Centers, Inc. accounted for 5%, 9%
and 12% of total revenues in 2001, 2000 and 1999, respectively.
No other customer accounted for 10% or more of sales during any
of the three years ended December 31, 2001.

41



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2001                                                                   |                   | December 31, 2000
|                       |                               |                                                                                     |                   |                  
|                       |                               |                                                                                     |                   | Gross             |        |           |       |           |       | Gross      |         |          
|                       |                               |                                                                                     |                   | Unrealized        |        | Aggregate |       |           |       | Unrealized |         | Aggregate
|                       |                               | Amortized                                                                           |                   | Gain              |        | Fair      |       | Amortized |       | Gain       |         | Fair     
|                       |                               | Cost                                                                                |                   | (Loss)            |        | Value     |       | Cost      |       | (Loss)     |         | Value    
|                       |                               |                                                                                     |                   |                   |        |           |       |           |       |            |         |          
|Short-Term Investments |                               |                                                                                     |                   |                   |        |           |       |           |       |            |         |           |        |         |         |   |         |         |     |   |     |     |         |  
|                       | Available-for-Sale Securities |                                                                                     |                   |                   |        |           |       |           |       |            |         |           |        |         |         |   |         |         |     |   |     |     |         |   |        
|                       |                               | Debt securities of the U.S. Treasury and U.S.
	government agencies and corporations |                   | $                 | 35,244 |           |       | $         | 519   |            |         | $         | 35,763 |         |         | $ | 53,607  |         |     | $ | 93  |     |         | $ | 53,700  |        
|                       |                               | Debt securities of U.S. corporations                                                |                   |                   | 70,968 |           |       |           | 1,727 |            |         |           | 72,695 |         |         |   | 155,177 |         |     |   | 890 |     |         |   | 156,067 |        
|                       |                               |                                                                                     |                   |                   |        |           |       |           |       |            |         |           |        |         |         |   |         |         |     |   |     |     |         |  
|                       |                               |                                                                                     | 106,212           |                   |        |           | 2,246 |           |       |            | 108,458 |           |        |         | 208,784 |   |         |         | 983 |   |     |     | 209,767 |  
|Cash Equivalents       |                               |                                                                                     |                   |                   |        |           |       |           |       |            |         |           |        |         |         |   |         |         |     |   |     |     |         |  
|                       | Available-for-Sale Securities |                                                                                     |                   |                   |        |           |       |           |       |            |         |           |        |         |         |   |         |         |     |   |     |     |         |   |        
|                       |                               | Debt securities of U.S. corporations                                                |                   |                   | 4,659  |           |       |           |      |            |         |           | 4,659  |         |         |   | 8,759   |         |     |   |    |     |         |   | 8,759   |        
|                       |                               |                                                                                     |                   |                   |        |           |       |           |       |            |         |           |        |         |         |   |         |         |     |   |     |     |         |  
|                       |                               |                                                                                     | Total investments |                   | $      | 110,871   |       |           | $     | 2,246      |         |           | $      | 113,117 |         |   | $       | 217,543 |     |   | $   | 983 |         |   | $       | 218,526 | 
|                       |                               |                                                                                     |                   |                   |        |           |       |           |       |            |         |           |        |         |         |   |         |         |     |   |     |     |         |  

There were $1,037,000 of gross realized gains on
available-for-sale securities in 2001. All available-for-sale
securities held at December 31, 2001 mature within three
years of that date.

Note 4.     Accrued
Liabilities and Other Current Liabilities

Accrued liabilities consisted of the following
(in thousands):

|                                       |  |              |        |      |  |   |        | 
|-------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                       |  |             
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2001         |        | 2000
|                                       |  |              |        |     
|Payroll and related accruals           |  | $            | 5,501  |      |  | $ | 3,898  | 
|Accrued warranty and training expenses |  |              | 3,656  |      |  |   | 5,930  | 
|Deposits and deferred revenue          |  |              | 16,617 |      |  |   | 20,662 | 
|Accrued sales and marketing expenses   |  |              | 3,373  |      |  |   | 1,847  | 
|Accrued income and sales taxes         |  |              | 9,129  |      |  |   | 9,419  | 
|Accrued legal expenses                 |  |              | 892    |      |  |   | 1,143  | 
|Other                                  |  |              | 1,209  |      |  |   | 2,483  | 
|                                       |  |              |        |      |  |   |        | 
|                                       |  | $            | 40,377 |      |  | $ | 45,382 | 
|                                       |  |              |        |      |  |   |        | 

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), and an
Employee Stock Purchase Plan (the Purchase Plan). In
addition, we have five terminated stock option plans with
options still outstanding.

42



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

We may account for these plans following either
Accounting Principles Board Opinion No. 25 (APB
No. 25) or Statement of Financial Accounting
Standards No. 123 (SFAS No. 123). We have
elected to follow APB No. 25 and, accordingly, have
recorded no compensation expense associated with these plans as
the exercise price of options granted equaled the fair market
value on the date of grant. If we had elected to follow SFAS
No. 123, we would have recorded compensation expense for
options granted under these plans and our net income and
earnings per share would have been adjusted to the following pro
forma amounts (in thousands, except per share data).

|                           |  |             |  |                         |        |      |  |      |        |  |  |   |        | 
|-------------------------- |  | ----------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                           |  |             |  |                        
|                           |  |             |  | Year Ended December 31,
|                           |  |             |  |                        
|                           |  |             |  | 2001                    |        | 2000 |  | 1999
|                           |  |             |  |                         |        |      |  |     
|Net Income                 |  | As Reported |  | $                       | 10,909 |      |  | $    | 35,221 |  |  | $ | 91,768 | 
|                           |  | Pro Forma   |  |                         | 1,171  |      |  |      | 21,675 |  |  |   | 78,519 | 
|Diluted Earnings Per Share |  | As Reported |  | $                       | 0.19   |      |  | $    | 0.55   |  |  | $ | 1.35   | 
|                           |  | Pro Forma   |  |                         | 0.02   |      |  |      | 0.34   |  |  |   | 1.16   | 

Under SFAS No. 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 2001, 2000 and 1999,
respectively: risk-free interest rates of 3.8, 6.3 and
5.4 percent, expected volatility of 65, 78 and
68 percent, no expected dividends, and an expected life of
0.95, 0.97 and 1.15 years beyond the vest date for each
years vesting increment of an option.

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 75,240 shares,
58,198 shares and 31,675 shares in 2001, 2000 and 1999,
respectively, and 667,617 shares cumulatively through
December 31, 2001 under the Purchase Plan. Accordingly,
1,332,383 shares were available for grant under the Purchase
Plan at December 31, 2001. The weighted average fair market
value of shares sold in 2001 was $16.62 per share.

As of December 31, 2001, 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, 2001, we have granted options on
698,900 shares, 2,010,975 shares and 437,000 shares,
respectively, under these plans, and 2,399,400 shares, 1,114,100
shares and 563,000 shares, respectively, were available for
grant under these plans at December 31, 2001. 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.

43



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of the status of the Companys
stock option plans at December 31, 2001, 2000 and 1999 and
changes during the years then ended is presented in the
following tables. Share amounts are shown in thousands.

|                                               |  |                         |        |           |  |        |       |           |  |        |       |           |  |   |       |  |  |   |        |   |  |   |       | 
|---------------------------------------------- |  | ----------------------- | ------ | --------- |  | ------ | ----- | --------- |  | ------ | ----- | --------- |  | - | ----- |  |  | - | ------ | - |  | - | ----- | 
|                                               |  |                        
|                                               |  | Year Ended December 31,
|                                               |  |                        
|                                               |  |                         |        |           |  |       
|                                               |  | 2001                    |        | 2000      |  | 1999  
|                                               |  |                         |        |           |  |       
|                                               |  |                         |        | Wtd. Avg. |  |        |       | Wtd. Avg. |  |        |       | Wtd. Avg.
|Activity                                       |  | Shares                  |        | Ex. Price |  | Shares |       | Ex. Price |  | Shares |       | Ex. Price
|                                               |  |                         |        |           |  |        |       |           |  |        |       |          
|Outstanding, start of year                     |  |                         | 7,938  |           |  | $      | 19.32 |           |  |        | 6,759 |           |  | $ | 17.61 |  |  |   | 8,308  |   |  | $ | 7.34  | 
|Granted                                        |  |                         | 2,498  |           |  |        | 15.53 |           |  |        | 2,260 |           |  |   | 22.80 |  |  |   | 2,048  |   |  |   | 41.70 | 
|Exercised                                      |  |                         | (970   | )         |  |        | 7.19  |           |  |        | (597  | )         |  |   | 7.19  |  |  |   | (3,499 | ) |  |   | 7.10  | 
|Forfeited                                      |  |                         | (1,001 | )         |  |        | 26.63 |           |  |        | (484  | )         |  |   | 26.64 |  |  |   | (98    | ) |  |   | 25.30 | 
|                                               |  |                         |        |           |  |        |       |           |  |        |       |           |  |   |       |  |  |   |        |   |  |   |       | 
|Outstanding, end of year                       |  |                         | 8,465  |           |  |        | 18.73 |           |  |        | 7,938 |           |  |   | 19.32 |  |  |   | 6,759  |   |  |   | 17.61 | 
|                                               |  |                         |        |           |  |        |       |           |  |        |       |           |  |   |       |  |  |   |        |   |  |   |       | 
|Exercisable, end of year                       |  |                         | 4,692  |           |  | $      | 17.93 |           |  |        | 4,033 |           |  | $ | 16.02 |  |  |   | 2,229  |   |  | $ | 11.33 | 
|                                               |  |                         |        |           |  |        |       |           |  |        |       |           |  |   |       |  |  |   |        |   |  |   |       | 
|Weighted average fair value per option granted |  | $                       | 7.52   |           |  |        |       |           |  | $      | 11.31 |           |  |   |       |  |  | $ | 17.16  |   |  |   |       | 
|                                               |  |                         |        |           |  |        |       |           |  |        |       |           |  |   |       |  |  |   |        |   |  |   |       | 

|                 |  |                     |       |                     |  |             |       |        |  |                |     |  |  |  |       |  |  |   |       | 
|---------------- |  | ------------------- | ----- | ------------------- |  | ----------- | ----- | ------ |  | -------------- | --- |  |  |  | ----- |  |  | - | ----- | 
|                 |  |                    
|                 |  | December 31, 2001  
|                 |  |                    
|                 |  |                     |       |                    
|                 |  | Options Outstanding |       |                    
|                 |  |                     |       | Options Exercisable
|                 |  |                     |       | Wtd. Avg.           |  |            
|                 |  |                     |       | Wtd. Avg.           |  | Years Left  |       |        |  | Wtd. Avg.     
|Exercise Prices  |  | Shares              |       | Exercise Price      |  | to Exercise |       | Shares |  | Exercise Price
|                 |  |                     |       |                     |  |             |       |        |  |               
|$ 2.81 - $  5.66 |  |                     | 1,478 |                     |  | $           | 5.34  |        |  |                | 5.6 |  |  |  | 1,431 |  |  | $ | 5.33  | 
|5.72 -   12.28   |  |                     | 1,235 |                     |  |             | 8.34  |        |  |                | 6.0 |  |  |  | 976   |  |  |   | 7.74  | 
|12.36 -   15.74  |  |                     | 1,117 |                     |  |             | 15.00 |        |  |                | 9.0 |  |  |  | 78    |  |  |   | 14.95 | 
|15.75 -   18.25  |  |                     | 1,641 |                     |  |             | 16.92 |        |  |                | 8.8 |  |  |  | 312   |  |  |   | 17.94 | 
|18.56 -   25.81  |  |                     | 1,456 |                     |  |             | 22.88 |        |  |                | 8.0 |  |  |  | 707   |  |  |   | 22.44 | 
|26.13 -   30.50  |  |                     | 1,019 |                     |  |             | 30.18 |        |  |                | 7.3 |  |  |  | 847   |  |  |   | 30.37 | 
|30.56 -  100.75  |  |                     | 519   |                     |  |             | 61.10 |        |  |                | 7.5 |  |  |  | 341   |  |  |   | 60.38 | 
|                 |  |                     |       |                     |  |             |       |        |  |                |     |  |  |  |       |  |  |   |       | 
|$ 2.81 - $100.75 |  |                     | 8,465 |                     |  | $           | 18.73 |        |  |                | 7.4 |  |  |  | 4,692 |  |  | $ | 17.93 | 
|                 |  |                     |       |                     |  |             |       |        |  |                |     |  |  |  |       |  |  |   |       | 

Note
6.     Stockholders
Equity

In 1997 the Board of Directors authorized
management to repurchase up to 8,000,000 shares of VISX common
stock. In February 2000 the Board of Directors replaced this
plan with a new authorization for management to repurchase up to
10,000,000 shares of VISX common stock. In April 2001 the Board
of Directors replaced the February 2000 plan with a new
authorization for management to repurchase up to 10,000,000
shares of VISX common stock. Through purchases on the open
market in accordance with these authorizations and applicable
securities laws, we repurchased 12,265,000 shares at a total
cost of $220,448,000 from 1999 through 2001. Accordingly,
6,898,000 shares remain available as of December 31, 2001
for repurchase under the Board of Directors April 2001
authorization. These share figures have been adjusted for the 2
for 1 stock splits distributed in January and May 1999.

44



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 7.     Income
Taxes

The provision (benefit) for income taxes
attributable to continuing operations is based upon income
(loss) before income taxes from continuing operations as
follows (dollars in thousands):

|                                  |  |                         |        |      |  |      |        |   |  |   |         |  
|--------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                  |  |                        
|                                  |  | Year Ended December 31,
|                                  |  |                        
|                                  |  | 2001                    |        | 2000 |  | 1999
|                                  |  |                         |        |      |  |     
|Domestic                          |  | $                       | 18,024 |      |  | $    | 58,468 |   |  | $ | 154,191 |  
|Foreign                           |  |                         | 7      |      |  |      | (252   | ) |  |   | (1,245  | )
|                                  |  |                         |        |      |  |      |        |   |  |   |         |  
|Income (loss) before income taxes |  | $                       | 18,031 |      |  | $    | 58,216 |   |  | $ | 152,946 |  
|                                  |  |                         |        |      |  |      |        |   |  |   |         |  

The Company 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.

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

|                  |         |                         |       |       |   |      |        |        |   |   |         |         |  
|----------------- | ------- | ----------------------- | ----- | ----- | - | ---- | ------ | ------ | - | - | ------- | ------- | -
|                  |         |                        
|                  |         | Year Ended December 31,
|                  |         |                        
|                  |         | 2001                    |       | 2000  |   | 1999
|                  |         |                         |       |       |   |     
|Current:          |         |                         |       |       |   |      |        |        |   |   |         |        
|                  | Federal |                         | $     | 2062  |   |      | $      | 15,431 |   |   | $       | 60,764  |  
|                  | State   |                         |       | 1,580 |   |      |        | 5,930  |   |   |         | 14,340  |  
|                  |         |                         |       |       |   |      |        |        |   |   |         |        
|                  |         |                         | 3,642 |       |   |      | 21,361 |        |   |   | 75,104  |        
|                  |         |                         |       |       |   |      |        |        |   |   |         |        
|Deferred, net     |         |                         |       |       |   |      |        |        |   |   |         |        
|                  | Federal |                         |       | 3,595 |   |      |        | 3,315  |   |   |         | (11,891 | )
|                  | State   |                         |       | (115  | ) |      |        | (1,681 | ) |   |         | (2,035  | )
|                  |         |                         |       |       |   |      |        |        |   |   |         |        
|                  |         |                         | 3,480 |       |   |      | 1,634  |        |   |   | (13,926 | )      
|                  |         |                         |       |       |   |      |        |        |   |   |         |        
|Net tax provision |         | $                       | 7,122 |       |   | $    | 22,995 |        |   | $ | 61,178  |        
|                  |         |                         |       |       |   |      |        |        |   |   |         |        

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,
|                                                          |  |                        
|                                                          |  | 2001                    |      | 2000 |  | 1999
|                                                          |  |                         |      |      |  |     
|Statutory Federal income tax rate                         |  |                         | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0 | %
|State income taxes, net of Federal benefit                |  |                         | 5.6  |      |  |      | 5.6  |   |  |  | 5.2  |  
|R&D credit, foreign sales corporation
	benefit, and other |  |                         | (1.1 | )    |  |      | (1.1 | ) |  |  | (0.2 | )
|                                                          |  |                         |      |      |  |      |      |   |  |  |      |  
|Effective income tax rate                                 |  |                         | 39.5 | %    |  |      | 39.5 | % |  |  | 40.0 | %
|                                                          |  |                         |      |      |  |      |      |   |  |  |      |  

We paid $10,181,000 and $19,319,000 in income
taxes during 2001 and 2000, respectively. We received $171,000
in net income tax refunds during 1999.

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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                 |                                          |              |        |       |  |   |        |       | 
|-------------------------------- | ---------------------------------------- | ------------ | ------ | ----- |  | - | ------ | ----- | 
|                                 |                                          |             
|                                 |                                          | December 31,
|                                 |                                          |             
|                                 |                                          | 2001         |        | 2000 
|                                 |                                          |              |        |      
|Net operating loss carryforwards |                                          |              |        |       |  |   |        |      
|                                 | Federal                                  |              | $      | 5,200 |  |   | $      |      | 
|                                 | State                                    |              |        | 500   |  |   |        |      | 
|Cumulative temporary differences |                                          |              |        |       |  |   |        |      
|                                 | Allowance for doubtful receivables       |              |        | 2,000 |  |   |        | 9,000 | 
|                                 | Inventory reserves                       |              |        | 1,500 |  |   |        | 1,500 | 
|                                 | Warranty reserves                        |              |        | 1,400 |  |   |        | 2,300 | 
|                                 | Accrued sales promotions and commissions |              |        | 1,100 |  |   |        | 600   | 
|                                 | Deferred revenue                         |              |        | 5,900 |  |   |        | 6,500 | 
|                                 | State income taxes                       |              |        |      |  |   |        | 1,500 | 
|                                 | Capitalized patent                       |              |        | 300   |  |   |        | 1,000 | 
|                                 | Other temporary differences              |              |        | 4,400 |  |   |        | 4,000 | 
|Tax credit carryforwards         |                                          |              | 900    |       |  |   | 300    |      
|                                 |                                          |              |        |       |  |   |        |      
|Net deferred income tax asset    |                                          | $            | 23,200 |       |  | $ | 26,700 |      
|                                 |                                          |              |        |       |  |   |        |      

We believe it is more likely than not that we
will generate sufficient taxable income in the future to take
full benefit of temporary differences and the net operating loss
and tax credit carryforwards. 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 rapidly evolving, we can provide no assurance that our
expectation for future taxable income will be realized. As of
December 31, 2001 we had net operating loss carryforwards
of approximately $20,000,000 and tax credit carryforwards of
approximately $900,000 that expire through 2021.

Note
8.     Commitments

We lease facilities and equipment under operating
leases that expire through 2006. Our expense under these leases
was $1,494,000, $1,074,000 and $1,040,000 for the years ended
December 31, 2001, 2000 and 1999, respectively. Our future
minimum lease commitments are as follows (all amounts are shown
in thousands).

|                        |                              |        |       |       | 
|----------------------- | ---------------------------- | ------ | ----- | ----- | 
|                        |                              | Amount
|                        |                              |       
|Year Ended December 31, |                              |        |       |      
|2002                    |                              | $      | 1,741 |      
|2003                    |                              |        | 853   |      
|2004                    |                              |        | 217   |      
|2005                    |                              |        | 213   |      
|2006                    |                              |        | 42    |      
|Thereafter              |                              |        |      |      
|                        |                              |        |       |      
|                        | Total minimum lease payments |        | $     | 3,066 | 
|                        |                              |        |       |      

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

46



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 $12 million and $8 million of net
receivables outstanding at December 31, 2001 and 2000,
respectively, under long-term financing agreements.
Approximately $3 million and $4 million of these
balances were due to be paid after one year, respectively, with
the balance due within one year. We include the portion of
receivables and long-term notes due to be paid within one year
in accounts receivable and the remaining balance in long term
deferred tax and other assets in the accompanying balance
sheets. We defer the portion attributable to interest using a
market rate of interest.

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 provide funding to Medjet to pursue new
ophthalmic technologies and products. In addition, we signed an
agreement with Medjet that provides 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. The closing of the potential merger is subject to
Medjets shareholder approval and is subject to other
customary conditions to closing. At the same time, we 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. In connection with these
agreements, we also entered into a voting agreement with
Dr. Eugene Gordon, founder of Medjet, under which
Dr. Gordon has agreed to vote all of his shares of common
stock in favor of the merger, and has agreed to sell all of his
stock to VISX in the event that VISX offers to complete the
merger. Dr. Gordon currently holds 1,596,787 shares,
representing 32% of Medjets voting stock. Lastly, we now
have one of seven seats on Medjets Board of Directors. We
account for this investment under the equity method prescribed
by APB 18.

Under our R&D agreement we paid approximately
$1 million to Medjet to fund research and development work
they performed during 2001 and anticipate higher funding from
January through August 2002. We expense 100% of the payments
made to Medjet as research, development and regulatory expense
in our financial statements. To exercise our option to acquire
Medjet, we would have to pay approximately $9 million based
on the $2.00 per share purchase price and the number of shares
of Medjet common stock, options and warrants outstanding at
December 31, 2001.

Note
11.     Litigation

VISX is involved in a variety of legal
proceedings that affect its business. These include proceedings
relating to patents and intellectual property rights,
proceedings relating to claims that VISXs activities have
violated antirust laws, class actions filed under federal
securities laws and other litigation proceedings. The nature of
these proceedings is described below.

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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Patent and Antitrust Proceedings



| |         
| | --------
| | Overview

The patents owned by VISX are being challenged on
several fronts. Generally, the litigation and other proceedings
center on whether infringement of the patents has occurred, and
on the validity or enforceability of the patents. In addition,
our use of patents and our business practices are being
contested as violations of antitrust and securities laws.



| |                                                    
| | ---------------------------------------------------
| | Patent Litigation: Nidek and Users of Nidek
	Lasers



| |               
| | --------------
| | United States.

In December 1998, Nidek received approval to
market its laser vision correction systems in the United States,
and subsequently VISX filed a lawsuit in the United States
District Court in Northern California alleging that Nideks
laser systems infringe certain VISX patents (USDC ND Cal
C98-04842). We are seeking injunctive relief and monetary
damages in that case. Nidek filed a lawsuit against us on
March 30, 1999 in the United States District Court in
Northern California alleging, among other things, various
violations of federal antitrust and state unfair competition
laws, based in part upon VISXs procurement and assertion
of its patents. This case was consolidated with VISXs
action against Nidek for patent infringement.

In February 2000, four lawsuits filed during 1999
by VISX against certain users of the Nidek laser system were
transferred to Multi-District Litigation in the 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 these cases (captioned VISX,
Incorporated v. Farmington Eye Center PLLC and Donald C.
Fiander, M.D.(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)). We have alleged,
among other things, that the defendants use of the Nidek
laser system infringes one or more of our patents and are
seeking monetary damages and an injunction against the
defendants prohibiting the use of the Nidek laser systems. The
defendants in these actions have filed counterclaims seeking,
among other things, a declaration of non-infringement,
invalidity and unenforceability of the patents asserted by VISX.

In October 2000, we amended our suits against
Nidek and certain users of the Nidek laser system to assert only
VISX United States Patents Nos. B1 5,108,388 (the
 388 patent) and 5,735,843 (the
 843 patent). The court has entered a
scheduling order in the California MDL setting a trial date of
February 3, 2003 in the actions between VISX and Nidek. In
September 2001, VISX received a claims construction ruling in
the California MDL. In the ruling, the court determined the
scope of certain patent claims asserted by VISX. Among other
things, the court found that the asserted claims of the
843 patent cover laser vision correction systems using a
mask with an aperture to provide a graded intensity to the
cornea. The court also found that the asserted claims of the
388 patent require ablation of layers above the stroma in
addition to stroma. Discovery is ongoing in the California MDL.

In January 2001, Nidek filed a lawsuit against
VISX in the United States District Court in Northern California
(USDC ND Cal C01-20015 JF) alleging infringement of Nidek
United States Patents Nos. 5,445,633, 5,624,436 and
6,136,012 and seeking monetary damages and injunctive relief.
VISX has filed an answer to this complaint denying infringement
and asserting certain other defenses. The court held a claims
construction hearing in this case in January 2002, but has not
yet issued its claims construction ruling.

These proceedings are still in the discovery
stage and at present, we are unable to predict either the
outcome or estimate the potential adverse financial and
operational impact, if any, that might arise from these

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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

cases. Accordingly, no accrual for any adverse
impact has been made in the accompanying financial statements.



| |               
| | --------------
| | International.

VISX has brought patent litigation against Nidek
in Canada and France. These proceedings, which allege patent
infringement by Nidek and certain of its users, were filed by
VISX in February 1994 (Canada) and May 1997 (France). The
defendants have contested VISXs infringement claims as
well as the validity of VISXs patents. Trial in the
Canadian proceeding took place in September 1999, and in
December 1999, the Canadian federal court ruled that VISXs
patents were valid, but that defendants had not infringed them.
Both sides appealed this decision, and in June 2001, the
Canadian court of appeal upheld the trial courts
determination of validity and non-infringement. Neither side
appealed from this latter decision.

The proceeding in France is currently in the
pleading stage, and at present we are unable to predict either
the outcome or estimate the potential adverse financial and
operational impact, if any, that might arise from that case.
Accordingly, no accrual for any adverse impact has been made in
the accompanying financial statements.

In August 2000, Nidek filed an action in Japan
against VISXs Japanese subsidiary and others alleging
infringement of Nideks Japanese Patent No. 2,809,959 (the
 959 patent) and seeking monetary damages
and injunctive relief (Tokyo District Court, the 47th Civil
Division, Case No. (WA) 16531/2000). VISX thereafter initiated
proceedings in the Japanese Patent Office (JPO)
challenging the validity of that Nidek patent. In November 2001,
the Tokyo District Court held that the 959 patent is
invalid and, as a result, is unenforceable. In January 2002, the
JPO also found that the 959 patent is invalid. Nidek
has appealed both of these decisions to the Tokyo High Court and
stated that it may attempt to amend the claims of the
959 patent. At present we are unable to predict
either the outcome or estimate the potential adverse financial
and operational impact, if any, that might arise from the
Japanese proceeding. Accordingly, no accrual for any adverse
impact has been made in the accompanying financial statements.



| |                              
| | -----------------------------
| | Patent Litigation: LaserSight

In November 1999, VISX filed an action alleging
that LaserSight had infringed VISX United States Patent
No. 4,718,418 (the  418 patent)
in the United States District Court in Delaware (USDC
Del. 99-789). In May 2001, the parties reached a settlement
of this action, which provided, among other things, for the
licensing of the 418 patent and other VISX United States
patents to LaserSight.

In February 2000, LaserSight filed a lawsuit
against VISX in the same District Court (USDC Del. 00-059)
alleging that VISX infringes United States Patent
No. 5,630,810 (the
 810 patent), which is licensed to
LaserSight. In May 2001, LaserSight dismissed its infringement
claim with prejudice and granted VISX and its customers a
worldwide covenant not to sue for infringement of the
810 patent, any present and future continuations,
continuations in part, divisionals, reissues or reexaminations
thereof, or its foreign counterparts. VISX did not compensate
LaserSight in any manner for the dismissal or covenant.



| |                                  
| | ---------------------------------
| | Patent Litigation: Bausch &
	Lomb

In September 2000, VISX filed an action against
Bausch & Lomb in the United States District Court in
Delaware alleging that Bausch & Lomb infringed the
388 patent (USDC Del. CA No 00-849 JJF). In
January 2001, the parties reached a settlement of this action,
which provided, among other things, for the licensing of the
388 patent and other VISX United States patents to
Bausch & Lomb.

49



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Federal Trade Commission Antitrust
Proceedings

On March 24, 1998, the Federal Trade
Commission (FTC) filed an administrative complaint
(Docket No. 9286) challenging the existence of Pillar Point
Partners, a now-dissolved partnership between VISX Partner, Inc.
(VISX Partner) and Summit Partner, Inc.
(Summit Partner), and challenging the enforceability
of certain patents owned by VISX. On July 8, 1998, we
reached a settlement with the FTC and entered into a consent
decree regarding the dissolution of Pillar Point. On
March 4, 1999, the FTC entered an order finalizing that
consent decree. The consent decree did not address the portion
of the FTCs complaint directed towards the enforceability
of certain VISX patents. On June 4, 1999, the FTC released
the initial decision of its administrative law judge dismissing
the remaining portions of the FTCs complaint against VISX
and, on June 21, 1999, the FTC attorneys filed notice that
they would appeal the judges decision to the full
Commission. On December 1, 1999, the FTC attorneys filed a
conditional motion to dismiss the FTCs complaint. The
Commission dismissed the remaining portions of the FTCs
complaint on February 7, 2001, and the FTC proceedings
against VISX have been concluded.

Antitrust Class Actions and Litigation
Involving Pillar Point Partners

Since the commencement of the FTC administrative
proceeding on March 24, 1998, a large number of purported
class actions were filed against VISX, Summit and, in some
cases, also against their affiliates, VISX Partner, Summit
Partner, and Pillar Point. Other claims involving Pillar Point
were filed against VISX, Summit and others at various times.
These actions alleged, among other things, violations of various
state and federal antitrust and unfair competition laws.

In the summer of 2001, VISX and Summit
Autonomous, Inc., a subsidiary of Alcon, settled the following
actions: In re PRK/ LASIK Consumer Litigation (California
Superior Court for Santa Clara County, No. CV772894);
The Antitrust Class Actions(USDC AZ, MDL
No. 1202); Burlingame v. Pillar Point Partners, et al.(USDC AZ, MDL No. 1202); Freedom Vision Laser
Center, LP v. VISX, Incorporated et al.(USDC AZ, MDL
No. 1202); and Antoine L. Garabet, M.D. and Abraham v.
Shammas, M.D. v. Summit Technology, Inc. and VISX(California Superior Court for Santa Clara County,
No. CV 787359) (the settlements). In connection
with the settlements, VISX paid a total of $37.8 million in
one-time payments and related costs and fees. As a result of the
settlements, all of the lawsuits described below have been or
will likely be dismissed with prejudice. Accordingly, no accrual
for any adverse impact has been made in the accompanying
financial statements in connection with the lawsuits described
below.



| |                                             
| | --------------------------------------------
| | Patient Class Actions Filed in State
	Court.

Several actions filed in California state court
on behalf of purported classes of patients were consolidated
into one case in the Superior Court of the State of California
for the County of Santa Clara, captioned In re PRK/ LASIK
Consumer Litigation,No. CV772894 (In re
PRK), filed on June 12, 1998, and naming VISX, VISX
Partner, Summit, and Summit Partner as defendants. The
plaintiffs in the consolidated action alleged violations of the
California Business and Professions Code (under the Cartwright
Act and the Unfair Business Practices Act) on behalf of a
putative nationwide class of patients. In August 2001, the
parties to this action reached a settlement agreement whereby
VISX and Summit Autonomous, Inc. paid money into a settlement
fund. The court certified a settlement class of patients from
twenty states and the District of Columbia who underwent laser
vision correction surgery using a VISX or Summit laser system
between October 1, 1995 and February 22, 2000.
Publication notice was made to the members of the class. No
members of the class objected to the settlement agreement, and
only one member of the class opted out of the agreement. In
December 2001, the court granted final approval of the
settlement agreement. On February 15, 2002, the settlement
agreement became effective and the matter was dismissed with
prejudice as to all parties. Members of the class have until
June 1, 2002 by which to submit proof of claim forms.

50



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In addition to the In re PRKaction, VISX
was named in several duplicative actions in other states on
behalf of purported classes of patients:

In Marks v. Summit Technology Inc., et
al., filed on April 27, 1998 in Florida state court,
plaintiff brought suit on behalf of a purported class of
patients in several states alleging violations of the Florida
antitrust and unfair competition laws. No class has been
certified in this action. On December 15, 1999, pursuant to
the parties joint motion, the court stayed this proceeding
pending resolution of the In re PRKaction. In light of
the settlement of the In re PRKaction, VISX expects that
the Marksaction will be dismissed in 2002.

Worcester v. Summit Technology, Inc. et al.was filed on June 11, 1998 in
Wisconsin state court on behalf of a purported class of
Wisconsin patients alleging violations of the Wisconsin
antitrust and unfair competition laws. In December 1998, the
Worcesteraction was removed to federal court and
transferred to the Multi-District Litigation in Arizona
described below. On February 15, 2002, pursuant to the
parties stipulation, this action was dismissed with
prejudice.

In May 1999, Brisson v. Summit Technology,
Inc., VISX, Inc., Summit Partner, Inc., VISX Partner, Inc. and
Pillar Point Partnerswas filed by plaintiff on behalf of a
purported class of Minnesota patients alleging violations of
Minnesota antitrust laws, seeking unspecified damages and
injunctive relief. No class has been certified in this action.
In June 2000, the court stayed this proceeding pending
resolution of the In re PRKaction. In light of the
settlement of the In re PRKaction, VISX expects that the
Brisson action will be dismissed in 2002.



| |                                                        
| | -------------------------------------------------------
| | Direct Purchaser Class Actions Filed in
	Federal Court.

In addition to the state court actions discussed
above, a number of purported class actions alleging violations
of federal antitrust laws on behalf of a purported class of
direct purchasers were filed in federal court against VISX,
Summit, and, in some cases, Pillar Point. All of these actions
were transferred to the Multi-District Litigation in Arizona
described below. In October 1998, the United States District
Court in Arizona entered an order for consolidation of these
class actions into a case captioned The Antitrust Class
Actions(USDC AZ Oct. 21, 1998). In July 2001, the parties
entered into a settlement agreement whereby VISX and Summit
Autonomous, Inc. paid money into a settlement fund. The court
certified a settlement class of all persons and entities in the
United States who were charged a per procedure fee by VISX or
Summit between October 1, 1995 and February 22, 2000.
Individual notices were sent out to the members of the class. No
members of the class opted out of the settlement agreement. In
November 2001, the court granted final approval of the
settlement agreement. On December 28, 2001, the settlement
agreement became effective, and the matter was dismissed with
prejudice as to all parties. Pursuant to the settlement
agreement and plan of allocation, the settlement administrator
will disburse the settlement fund to members of the class who
timely submitted proof of claim forms.



| |                                                                      
| | ---------------------------------------------------------------------
| | Multi-District Antitrust Litigation Involving
	Pillar Point Partners.

On June 4, 1998, VISX and Summit agreed to
dissolve Pillar Point and settle all pending disputes and
litigation between them. However, Pillar Point continued to be a
party in a number of cases, which were transferred for pre-trial
purposes to Multi-District Litigation in the United States
District Court in Arizona under the caption In re Pillar
Point Partners Antitrust and Patent Litigation(MDL
No. 1202, the Arizona MDL). In addition to the
Worcestercase and the direct purchaser class actions
described above, the following cases were pending in the Arizona
MDL at the time of the settlements:

Burlingame v. Pillar Point Partners, et al.;
John R. Shepherd, M.D., Ltd. v. Pillar Point Partners, et al.In June 1996, Dr. Burlingame
filed suit against Pillar Point, Summit, Summit Partner, VISX,
and VISX Partner. In September 1996, a corporation controlled by
Dr. Shepherd filed suit against the same parties. Both
actions were filed in the United States District Court in
Northern California. Generally, plaintiffs alleged that the per

51



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##### Table of Contents



VISX, INCORPORATED AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

procedure license fee charged by Pillar Point was
a violation of the Sherman Act or of corresponding state
antitrust laws. In 2001, as a result of the settlements, these
cases were dismissed with prejudice.

Freedom Vision Laser Center, LP v. VISX,
Incorporated et al.On May 28,
1999, Freedom Vision Laser Center and other plaintiffs filed an
action containing allegations similar to those made in the
antitrust class actions described above. On January 18,
2002, following the final approval of the settlement agreement
in the direct purchaser class actions, this action was dismissed
with prejudice.



| |                                                            
| | -----------------------------------------------------------
| | Unfair Competition Action Filed in California
	State Court.

On January 24, 2000, a case captioned
Antoine L. Garabet, M.D. and Abraham v. Shammas, M.D. v.
Summit Technology, Inc. and VISX(CV 787359) was filed in
the Superior Court of the State of California for the County of
Santa Clara. Plaintiffs brought this action purportedly on
behalf of the public under Section 17200 of the Business
and Professions Code, Californias unfair competition law.
The complaint contained allegations similar to those made in the
antitrust class actions described above. On December 26,
2000, the court granted defendants motion to stay the
action pending further court action or final resolution of the
suits in the In re PRKaction and the Arizona MDL. In
2001, as a result of the settlements, this case was dismissed
with prejudice.

Securities Class Actions and Derivative
Litigation

VISX and certain of our officers were named as
defendants in several substantially similar securities class
action lawsuits filed in February and March 2000 in the United
States District Court in Northern California. The plaintiffs in
these actions purport to represent a class of all persons who
purchased VISXs common stock between March 1, 1999
and February 22, 2000. The complaints allege that the
defendants made misleading statements in violation of the
federal securities laws, including Section 10(b) of the
Securities Exchange Act of 1934. In April 2000, the court
consolidated the various actions under the caption In re
VISX, Inc. Securities LitigationC-00-0649-CRB, and
appointed a lead plaintiff. The lead plaintiff thereafter filed
his consolidated amended complaint, and the parties stipulated
to the certification of a plaintiff class. On September 20,
2000, defendants filed a motion to dismiss the consolidated
amended complaint, and on February 27, 2001, the District
Court granted defendants motion and dismissed the
consolidated amended complaint with prejudice. Plaintiffs have
appealed this decision to the United States Court of Appeals for
the Ninth Circuit. The appeal has been fully briefed and was
heard on March 13, 2002. VISX believes it has meritorious
defenses to plaintiffs claims and expects to prevail
regardless of the outcome of the appeal. Accordingly, no accrual
for any adverse impact has been made in the accompanying
financial statements.

On April 24, 2000, a purported stockholder
derivative action was filed in the Superior Court of the State
of California for the County of Santa Clara (captioned
Michael S. Glassman v. Mark B. Logan, et al., CV789364).
The complaint alleged that certain of VISXs officers and
directors breached fiduciary duties owed to VISX in connection
with the circumstances alleged in the securities class action
complaints described above. On May 30, 2000, the defendants
filed demurrers to the derivative complaint. On October 3,
2000, the court sustained the demurrers but granted leave to
file an amended derivative complaint. Plaintiffs filed their
amended derivative complaint in August 2001 and shortly
thereafter defendants renewed their demurrers. On
December 13, 2001, the court sustained the renewed
demurrers without leave to amend. On January 30, 2002, the
court entered judgment in defendants favor. Plaintiffs
agreed not to appeal from this judgment in return for
defendants waiver of court costs. This action has thus
been concluded.

Other Litigation

We are involved in various other legal
proceedings 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
therefore no accrual for any adverse impact has been made in the
accompanying financial statements.

52



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##### Table of Contents



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.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

San Jose, California

January 18, 2002


53



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##### Table of Contents








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

There have been no disagreements with the
independent public accountants 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 the information set forth under Election of
Directors and Further Information Concerning the
Board of Directors in VISXs definitive Proxy
Statement (the 2002 Proxy Statement) to be filed
with the SEC and relating to its Annual Meeting of Stockholders
to be held on May 3, 2002. 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 2002 Proxy Statement sections
Further Information Concerning the Board of Directors
 Director Compensation,  Executive
Compensation and Performance Graph.






|         |                                                                
|-------- | ---------------------------------------------------------------
|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 2002 Proxy Statement section
Principal Stockholders.






|         |                                                
|-------- | -----------------------------------------------
|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 2002 Proxy Statement section Further Information
Concerning the Board of Directors and Executive
Compensation.

54



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##### Table of Contents






PART IV






|         |                                                                  
|-------- | -----------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules,
	and Reports on Form 8-K

(a) 1. 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, 2001:

Financial Statements

|                                                 |  |      |    | 
|------------------------------------------------ |  | ---- | -- | 
|                                                 |  | Page
|                                                 |  |     
|Consolidated Balance Sheets                      |  |      | 32 | 
|Consolidated Statements of Operations            |  |      | 33 | 
|Consolidated Statements of Stockholders
	Equity |  |      | 34 | 
|Consolidated Statements of Cash Flows            |  |      | 35 | 
|Notes to Consolidated Financial Statements       |  |      | 36 | 
|Report of Independent Public Accountants         |  |      | 53 | 

2. The following financial statement
schedule is filed as part of this report:

Schedule II  Valuation and
Qualifying Accounts

3. The Exhibits filed as a part of this
Report are listed in the Index to Exhibits.

(b) Reports on Form 8-K.

On December 21, 2001, we filed a current
report on Form 8-K, which reported an amendment to our
bylaws and which included our revised bylaws as an exhibit
thereto.

(c) Exhibits.

See Index to Exhibits.

(d) Financial Statement
Schedules.

See Item 14(a)2, above.

55



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##### Table of Contents



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

|                             |                                                       |          |   |            |  |            |   |         |  |  |   |       |  |  |   |       | 
|---------------------------- | ----------------------------------------------------- | -------- | - | ---------- |  | ---------- | - | ------- |  |  | - | ----- |  |  | - | ----- | 
|                             |                                                       | Balance  |   | Additions  |  |            |   | Balance
|                             |                                                       | at       |   | Charged to |  |            |   | at     
|                             |                                                       | Start of |   | Costs and  |  |            |   | End of 
|Description                  |                                                       | Period   |   | Expenses   |  | Deductions |   | Period 
|                             |                                                       |          |   |            |  |            |   |        
|Year Ended December 31, 1999 |                                                       |          |   |            |  |            |   |         |  |  |   |       |  |  |   |      
|                             |  Allowance for reserves against
	accounts receivable |          | $ | 1,620      |  |            | $ | 166     |  |  | $ | 13    |  |  | $ | 1,773 | 
|Year Ended December 31, 2000 |                                                       |          |   |            |  |            |   |         |  |  |   |       |  |  |   |      
|                             |  Allowance for reserves against
	accounts receivable |          |   | 1,773      |  |            |   | 4,894   |  |  |   | 896   |  |  |   | 5,771 | 
|Year Ended December 31, 2001 |                                                       |          |   |            |  |            |   |         |  |  |   |       |  |  |   |      
|                             |  Allowance for reserves against
	accounts receivable |          |   | 5,771      |  |            |   | 2,710   |  |  |   | 3,914 |  |  |   | 4,567 | 

56



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##### Table of Contents






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: April 1, 2002

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                                  |  | April 1, 2002
|                                          
|Principal Financial Officer:               |  |                                                                                                |  |              
|                                          
|/s/ TIMOTHY R. MAIERTimothy R. Maier       |  | Executive Vice President, Chief Financial Officer
	and Treasurer (principal financial officer) |  | April 1, 2002
|                                          
|Principal Accounting Officer:              |  |                                                                                                |  |              
|                                          
|/s/ DEREK A. BERTOCCIDerek A. Bertocci     |  | Vice President, Controller
	(principal accounting officer)                                     |  | April 1, 2002
|                                          
|Directors:                                 |  |                                                                                                |  |              
|                                          
|/s/ KATHRYN FALBERGKathryn Falberg         |  | Director                                                                                       |  | April 1, 2002

57



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##### Table of Contents



|                                         |  |          |  |              
|---------------------------------------- |  | -------- |  | -------------
|Signature                                |  | Title    |  | Date         
|                                         |  |          |  |              
|                                        
|/s/ GLENDON E. FRENCHGlendon E. French   |  | Director |  | April 1, 2002
|                                        
|/s/ JOHN W. GALIARDOJohn W. Galiardo     |  | Director |  | April 1, 2002
|                                        
|/s/ JAY T. HOLMESJay T. Holmes           |  | Director |  | April 1, 2002
|                                        
|/s/ GARY PETERSMEYERGary Petersmeyer     |  | Director |  | April 1, 2002
|                                        
|/s/ RICHARD B. SAYFORDRichard B. Sayford |  | Director |  | April 1, 2002

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)                                                                                                      



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##### Table of Contents



|        |         |             |  |                                                                                                                                                                                                                           
|------- | ------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 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)                                                                                       
|        | 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)                                                                    
|        | 21.1*   |             |  | Subsidiaries (previously filed as
	Exhibit 21.1 to Annual Report on Form 10-K for the
	year ended December 31, 1999)                                                                                                      
|        | 23.1    |             |  | Consent of Independent Public Accountants                                                                                                                                                                                 
|        | 24.1    |             |  | Power of Attorney (see page 57)                                                                                                                                                                                           
|        | 99.1*   |             |  | Complaint filed on September 26, 1994 in the
	Superior Court for the County of Santa Clara by CAP Advisers
	Limited, CAP Trust, and Osterfak, Ltd. (previously filed as
	Exhibit 5.1 to Form 8-K dated September 26, 1994)
|        | 99.2    |             |  | Letter to U.S. Securities and Exchange Commission                                                                                                                                                                         



---



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



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