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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2005

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

Commission File Number 000-50939



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INTRALASE CORP.

(Exact Name of Registrant as Specified in Its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 38-3380954                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|9701 Jeronimo Road Irvine, California                          |  | 92618                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (949) 859-5230



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Securities registered pursuant
to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par
value



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Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x

Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈No  x

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 (the Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark 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. ̈

Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated, or a non-accelerated filer (as defined in Rule 12b-2).    Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act.    Yes ̈No  x

The aggregate market value of the registrants common stock held by non-affiliates was $538,959,830 based on the last sale price of common stock on
June 30, 2005.

The number of shares of the registrants Common Stock outstanding as of February 24, 2006 was 28,293,138.

Documents Incorporated by Reference



|                                                                                                                                                                                                                                                                       |  |          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|Document Description                                                                                                                                                                                                                                                   |  | 10-K Part
|Portions of the Registrants notice of annual meeting of stockholders and proxy statement to be filed pursuant to Regulation 14A within 120 days after Registrants fiscal year ended of
December 31, 2005 are incorporated by reference into Part III of this report. |  | III      



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INTRALASE CORP.

ANNUAL REPORT ON

FORM 10-K

For the Fiscal Year Ended December 31, 2005

TABLE OF CONTENTS



|           |  |                                                                                                              |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                              |  | Page
|PART I     |  |                                                                                                             
|           |  |                                                                                                             
|Item 1     |  | Business                                                                                                     |  | 3   
|Item 1A    |  | Risk Factors                                                                                                 |  | 18  
|Item 1B    |  | Unresolved Staff Comments                                                                                    |  | 25  
|Item 2     |  | Properties                                                                                                   |  | 25  
|Item 3     |  | Legal Proceedings                                                                                            |  | 25  
|Item 4     |  | Submission of Matters to a Vote of Security Holders                                                          |  | 27  
|           | 
|PART II    |  |                                                                                                             
|           |  |                                                                                                             
|Item 5     |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 27  
|Item 6     |  | Selected Financial Data                                                                                      |  | 28  
|Item 7     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 29  
|Item 7A    |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 41  
|Item 8     |  | Financial Statements and Supplementary Data                                                                  |  | 42  
|Item 9     |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |  | 42  
|Item 9A    |  | Controls and Procedures                                                                                      |  | 42  
|Item 9B    |  | Other Information                                                                                            |  | 45  
|           | 
|PART III   |  |                                                                                                             
|           |  |                                                                                                             
|Item 10    |  | Directors and Executive Officers of the Registrant                                                           |  | 45  
|Item 11    |  | Executive Compensation                                                                                       |  | 45  
|Item 12    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 45  
|Item 13    |  | Certain Relationships and Related Transactions                                                               |  | 45  
|Item 14    |  | Principal Accounting Fees and Services                                                                       |  | 45  
|           | 
|PART IV    |  |                                                                                                             
|           |  |                                                                                                             
|Item 15    |  | Exhibits, Financial Statement Schedules                                                                      |  | 45  
|SIGNATURES |  | 50                                                                                                          



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our managements beliefs and assumptions and on information currently available to us. All statements regarding future events, our future financial
performance and results of operations, our business strategy and our financing plans are forward-looking statements. Forward-looking statements can be identified by the use of words such as believe, expect,
anticipate, intend, plan, estimate, project, or words of similar meaning or conditional verbs such as will, should, could, or may.

These statements are only predictions. Our actual results may differ materially from those anticipated in these forward-looking
statements. In evaluating these forward-looking statements, you should specifically consider various other risks, uncertainties and factors, including those risks discussed under Item 1A - Risk Factors.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.

We assume no obligation to publicly update or revise any of these forward-looking statements or
changes in our expectations after the date of this Annual Report on Form 10-K for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes
available in the future.

PART I

Item 1 Business

Overview

IntraLase Corp. designs, develops and manufactures an ultra-fast laser that is revolutionizing refractive and corneal surgery by creating safe and more precise corneal incisions. Delivering on the promise of
ophthalmic laser technology, the IntraLase® FS
Laser, related software, and disposable devices replace the hand-held microkeratome blade used during LASIK surgery. The unsurpassed accuracy of IntraLases computer-controlled femtosecond laser has been shown to improve safety profiles and
visual outcomes when used during LASIK. Additionally the IntraLase® FS laser creates precision-designed intracorneal incisions that when combined can be used during lamellar and penetrating keratoplasties, and intrastromal ring implantation. IntraLase is presently in the process of
commercializing applications of its technology in the treatment of corneal diseases that require corneal transplant surgery. Our proprietary laser and disposable patient interfaces are presently marketed through the United States and 26 other
countries. IntraLase is headquartered and manufactures its products in Irvine, California.

Our business model is to target the most active
LASIK surgery practices in the United States and in key international markets to buy or lease our IntraLase® FS laser in order to generate repeat revenues by collecting a per procedure fee inclusive of a single disposable patient interface for each eye treated with our laser. We began
commercial introduction of our product offering in late 2001 and, as of December 31, 2005, we had sold or leased 373 lasers and we had sold over 600,000 per procedure fees, each inclusive of a single disposable patient interface. In the
three months ended December 31, 2005, we captured approximately 25% of the U.S. market for LASIK corneal flap creation.

In addition
to the medical and safety benefits of our product offering, our advanced laser technology allows our surgeon customers to improve the profitability of their LASIK surgery practices. We believe this combination of better medicine and
better business will continue to positively impact the adoption of our product offering and drive our growth.

Company Background

We were incorporated in Delaware in 1997. From 1997 through 2001, we devoted substantially all of our resources toward the development
of an ultra-fast laser, as well as the related software and patient interface, and toward testing to develop a commercial product to be used for eye surgery. In 2001, we also began developing manufacturing capabilities and selling to prospective
customers. In 2002 and 2003, we continued to expand our customer base, primarily in the United States. We obtained our CE Mark and ISO EN 13485 approval in March 2004, allowing us to significantly expand our international product launch.



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Our initial public offering, which was effective under applicable securities laws on October 6, 2004
and closed on October 13, 2004, resulted in our receipt of net proceeds of $86.1 million from the sale of 7,295,447 shares of common stock, including the sale of 995,447 over-allotment shares. The proceeds were net of the payment of expenses
for the initial public offering of $2.2 million. The net proceeds of the offering were used, in part, for the repayment of our bank debt in the amount of $1.3 million and the payment to the University of Michigan of $765,000 for partial payment due
under an agreement to convert a royalty license agreement to a fully-paid royalty-free license. In addition, 22,191,333 shares of redeemable convertible preferred stock converted to 16,797,103 shares of common stock.

Financial Information

Please refer to Item 6,
Selected Financial Data, and Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, for a review of revenue, net income (loss), and total assets for the last three years.

Market Opportunity

The Surgical
Vision Correction Market

Vision correction represents one of the largest medical markets in the United States. According to Market
Scope, approximately 171.7 million people in the United States require some form of vision correction, and industry sources estimate that approximately $24.2 billion was spent on eyeglasses, contact lenses and other corrective eyewear in the
United States in 2005. Of the approximately 171.7 million people in the United States who require vision correction, approximately 53.8 million people, or 107.5 million eyes, are eligible for surgical vision correction and have not
yet been treated.

LASIK surgery is the most common means of surgical vision correction. According to Market Scope, approximately 87% of
all refractive surgical vision corrections today are LASIK corrections. LASIK surgery corrects refractive errors associated with myopia, the inability to see objects in the distance, and hyperopia, the inability to see up close, by reshaping the
cornea. Approximately 32.9 million people, or 65.8 million eyes, are myopic, also called nearsighted, and approximately 20.8 million people, or 41.7 million eyes, are hyperopic, also called farsighted. Both of these common vision
problems are caused by irregularities in the shape of the eye, called refractive errors. The vision problem which typically requires reading glasses is called presbyopia and is not treated with LASIK surgery.

The market for LASIK surgery is currently under-penetrated. To date, only about 9.7 million LASIK eye surgeries have been performed in the United
States, which amounts to a nominal market penetration rate of approximately 8%. The total U.S. annual market size for LASIK surgery is approximately $2.8 billion, based on an estimated 1.46 million LASIK procedures expected to be performed in
2006 at an industry average price of approximately $1,950 per eye treated. Industry analysts expect the growth rate in U.S. LASIK procedures to be approximately 4.5% in 2006, based on approximately 65,000 more procedures expected in 2006 than were
performed in 2005.

Outside the United States there were approximately 2.3 million surgical vision surgeries performed in 2005,
primarily LASIK. Industry analysts expect the growth rate outside the United States in LASIK procedures to be approximately 16% in 2006, to approximately 2.7 million procedures, with LASIK volume concentrated in Europe and the Asia-Pacific
region.

We believe LASIK surgery procedure volume and market penetration will be driven by the following factors:



| |  |  | Technology advances.LASIK surgery has grown in procedure volume as successive technological innovations have improved safety, efficacy and visual acuity, increasing surgeon
and patient confidence in LASIK surgery. Two recent technological advances are the laser created corneal flap and the custom correction procedure.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Demographics. As the general population grows, and an increasing number of young people with visual problems reach an age where their eye conditions stabilize, the pool of
people eligible for LASIK surgery will continue to be replenished.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Economic factors. Since patients typically pay for LASIK surgery directly with their own discretionary funds, instead of through insurance programs or government
reimbursement, general changes in economic conditions will affect the number of people willing and able to purchase the procedure.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The IntraLase Market Opportunity

There are approximately 4,500 LASIK surgery practices worldwide. Of these surgery
practices, our key target customers are the 1,400 most active LASIK surgery practices in the United States and in key international markets. As of



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December 31, 2005, approximately 371 of these 1,400 LASIK surgery practices worldwide were IntraLase customers, and, of the total number of LASIK
procedures performed in the United States in the three months ended December 31, 2005, approximately 25% were performed using our product offering to create the corneal flap. We believe the other approximately 75% of total procedures performed
in this time period were performed using the traditional microkeratome.

U.S. Market



| |  |  | There are approximately 3,500 LASIK surgeons in the United States who are expected to perform 1.46 million LASIK procedures in 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | These procedures are performed in approximately 1,270 U.S. LASIK surgery practices, of which approximately 700 perform over 50 procedures per month, largely concentrated in LASIK
surgery practices owned by individual surgeons or group surgery practices and corporate centers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

International Market



| |  |  | Outside the United States there are approximately 3,500 LASIK surgery practices that are expected to perform over 2.7 million LASIK procedures in 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We estimate that there are approximately 700 LASIK surgery practices performing over 50 LASIK procedures per month in our primary target markets in the Asia-Pacific region, Europe
and the Middle East.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

LASIK Surgery

LASIK surgery involves two steps:



|             |  |                                                                                                                                                                                                                                                                                                                                                                                                            
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|First step:  |  | A thin flap of tissue is created on the surface of the cornea. This is called a corneal flap.                                                                                                                                                                                                                                                                                                              
|             | 
|             |  | Traditionally, this first step has been done manually by the LASIK surgeon using a hand-held mechanical device called a microkeratome with a metal razor blade that oscillates across the face
of the cornea at high speed.                                                                                                                                                                                
|             | 
|             |  | Microkeratomes are manufactured and sold by companies such as Bausch & Lomb, Moria/Microtech, Advanced Medical Optics and Nidek.                                                                                                                                                                                                                                                                           
|             | 
|             |  | Our solution replaces microkeratomes in this first step with a computer-controlled laser. The IntraLase® FS laser optically focuses its beam of light at a focal point below the surface of the cornea to create the corneal
flap.                                                                                                                                                                         
|             | 
|Second step: |  | Once the corneal flap has been created, the surgeon then folds it back and a computer-controlled excimer laser is used to remove, or ablate, tissue from the surface of the cornea to reshape
the eye to correct the patients vision.                                                                                                                                                                     
|             | 
|             |  | Excimer lasers are manufactured and sold by companies such as Advanced Medical Optics, Alcon, Nidek, Bausch & Lomb and Wavelight.                                                                                                                                                                                                                                                                          
|             | 
|             |  | Recently, excimer laser manufacturers introduced a more precise form of measuring the refractive aberrations of a particular eye with a device called a wavefront device. They then map these
precise measurements into a software program to more precisely reshape the cornea to correct vision. This improvement to reshaping the cornea with an excimer laser is commonly called a custom correction.

Both steps are necessary for LASIK surgery. Excimer lasers, used in the second step, remove tissue
at the point the beam of light comes into contact with tissue and are not capable of focusing below the surface of the clear eye tissue to create the corneal flap. Therefore, the IntraLase® FS laser used in the first step and the excimer lasers used in the second step are
complementary in LASIK surgery.

While using the microkeratome in the first step of the LASIK procedure is a successful and relatively safe
procedure, the majority of complications with LASIK arise from the use of microkeratomes. Microkeratome complications arise in up to 10% of all LASIK procedures, including the most serious complications that may affect the visual outcome in a LASIK
surgery.



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The IntraLase SolutionBetter Medicine and Better Business

Our IntraLase® FS laser and proprietary IntraLASIK® software complement and improve LASIK surgery by providing a computer-controlled laser solution as an alternative to the microkeratome for creating flaps in the cornea during the
essential first step of LASIK surgery. When the IntraLase® FS laser is combined with the excimer laser used in the second step of the LASIK procedure, this results in an all-laser LASIK solution. The advantages of our product offering over the traditional method include fewer
severe sight-threatening complications, greater predictability, greater control, greater precision and uniformity of flap depth. Additional advantages are a more centrally located flap, better sterility and greater likelihood of completed surgeries.
In all of the commercial procedures performed by our customers to date, there have been no reported incidents of loss of corneal tissue (free cap) or anterior chamber penetration, serious complications historically associated with creation of the
corneal flap with a bladed microkeratome. In addition, the use of our product offering reduces the incidence of less serious complications such as epithelial defects and dry eye. The disadvantages of our product offering over the traditional
microkeratome approach are the higher costs to the LASIK surgeon to acquire our product offering and the higher cost to the patient, as well as the additional training that is required for a surgeon to become accustomed to using our technology and
slightly higher procedure times, although we believe our planned release of a 60 kilohertz (kHz) FS laser will reduce our procedure times further. We believe that the advantages of our technology outweigh the disadvantages and give our LASIK surgeon
customers and their patients a new level of confidence in LASIK surgery, which in turn will help further penetrate the market for LASIK surgery.

Benefits of the IntraLase Solution

We offer our surgeon customers and their patients the benefits of Better
Medicine. LASIK surgeons who have adopted the IntraLase technology are now able to offer their patients improved safety and predictability and, as a result, patients achieve better visual acuity. Surgeons who use our solution also derive the
benefits of Better Business, since they are able to increase their prices and procedure volume, thus enhancing profitability.

The benefits of Better Medicine and Better Business are:

Better vision. Patients achieve statistically
significant better vision when the IntraLase® FS
laser is used in the LASIK procedure, as supported in prospective, comparative studies. In a prospective study, the study design is made in advance of the collection of data, whereas in a retrospective study, a design is applied to existing data. In
two of these prospective studies, the corneal flap for one eye of each patient was created with the IntraLase® FS laser, and the corneal flap for the other eye was created with the microkeratome. In one study, the 37 participants were treated with standard excimer laser vision correction, and in
the other, the other 51 participants were treated with the new custom excimer laser vision correction. Results showed that the eyes treated with the IntraLase® FS laser had better vision and fewer induced aberrations compared to the mechanical, metal-bladed microkeratome. In two
other prospective studies, one comparing eyes of patients treated with the IntraLase® FS laser and the other with the microkeratome, and another comparing approximately 300 patients, or 600 eyes, with corneal flaps created by an IntraLase laser or two types of microkeratomes, similar results
were reported. We believe these better vision results were achieved using our product offering, in part, due to a reduction in the tissue variabilities caused by the microkeratome, which can affect the precision of the excimer laser.

Improved safety. Our product offering eliminates loss of corneal tissue (free cap) and anterior chamber penetration, the most
severe complications associated with the creation of the corneal flap with a bladed microkeratome. Seven comparative studies showed improved safety and elimination of certain risks of flap creation with our product offering, when compared to
traditional microkeratomes. Additionally, since corneal flaps created with our product offering possess a unique edge profile, they are easily and securely repositioned following the excimer ablation, reducing the possibility of induced visual
aberrations and slipped flaps.

Greater predictability and accuracy. The IntraLase® FS laser produces flaps that are accurate within ± 12 microns, whereas
the microkeratome manufacturers report variability of approximately ± 40 microns with their newer microkeratome models. Nine studies have shown that our approach generated significantly more predictable and accurate flap dimensions,
including, most critically, reproducible flap thickness. This increased accuracy in flap creation preserves corneal tissue by precisely creating optimal flap thickness, and improves the predictability of the overall LASIK treatment.

Fewer retreatments. The number of LASIK retreatments are significantly lower when our product offering is used to create the
corneal flap. This avoids the patient inconvenience and increased surgeon costs entailed with retreatments. In one study of 500 eyes treated with the traditional microkeratome, 5.8% of the eyes required retreatment



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within 13 months after the initial surgery while in 508 eyes where the IntraLase® FS laser was used, there were no retreatments in an equivalent time period. In a separate survey of our surgeon
customers, retreatment rates were reduced from an average of 10% to an average of 4% when using our product offering.

Reduced dry eye.A frequently reported side effect of LASIK surgery is dry eye. Three studies show a significant reduction in dry eye with the use of our product offering. In the largest of these three studies, comparing 300 LASIK
procedures with the microkeratome to 300 LASIK procedures with the IntraLase® FS laser, patient incidences of dry eye were reduced by 72%. We believe that this lower occurrence of dry eye is due to our laser creating a uniform and typically thinner flap that does not sever important nerves in
the cornea.

Higher procedure volume and revenues for our customers.Our surgeon customers receive an average of $394
more per eye when using our product offering instead of the traditional microkeratome. An independent survey of our U.S. customers in early 2005 indicated that our customers experienced a 15% increase in procedure volume and a 41% increase in
revenues in the comparable time period during which the industry experienced a 13% increase in procedure volume and a 25% increase in revenues. Patients readily understand the safety profile of the IntraLase® FS laser, are attracted to the concept of a bladeless procedure and surveys of our
customers demonstrate that patients are willing to pay for this new level of safety and assurance. In addition, according to the same independent survey of our customers, with our laser, approximately 50% of our customers improve the rate at which
laser vision correction consultations translate into actual surgery from 65% to 78%.

The 24 clinical studies referred to above were each
conducted by LASIK surgeons who compared the attributes and results of creating the corneal flap using our laser versus with the microkeratome. The studies ranged in size from 20 to 1,000 eyes. We paid an aggregate of approximately $472,000 to the
LASIK surgeon conducting the studies in two instances, including, in one instance, when we sponsored the study. We believe a portion of such payments was used to subsidize lower patient fees for patients to agree to participate in the studies. In
addition, to the extent they provide advisory and consulting services to us separate from their work on the studies, or in connection with their presenting their studies, some of these LASIK surgeons have been issued options to purchase shares of
our common stock, have been paid cash or have been reimbursed for costs.

Our Strategy

Our goals are to establish our product offering as the standard of care for corneal flap creation in LASIK surgery, and to leverage our technology to
develop new products and applications. Key elements of our strategy for achieving these goals include:

Replacing
microkeratome with our laser. We intend to replace the mechanical, metal-bladed microkeratome with our IntraLase® FS laser in LASIK surgery practices. Our business model is to target the most active LASIK surgery practices in the United States and in key
international markets to buy or lease our IntraLase® FS laser in order to generate repeat revenues from the sale of our per procedure fee inclusive of a disposable patient interface, required in connection with each successive use of our laser. In addition, we target
prestigious teaching institutions and key industry thought leaders to drive adoption of our product offering by other practicing LASIK surgeons.

Expanding our market share. We intend to expand our market share for LASIK procedures and facilitate the rapid adoption of our product offering by leveraging clinical data that supports the benefits of our
product offering and by engaging in marketing activities that target surgeons and optometrists. We believe these strategies will enable us to sell more of our higher gross margin per procedure fees (each inclusive of a disposable patient interface)
to users of our existing installed base of lasers, in addition to new users of our laser. An independent survey conducted in 2005 indicated that our U.S. surgeon customers had adopted our product offering in 88% of all the LASIK procedures they
perform. We estimate that we captured 25% of the U.S. LASIK surgery market for creation of the corneal flap in the three months ended December 31, 2005.

Refining and enhancing our existing product offering. In the third quarter of 2005 IntraLase doubled the speed of its laser from
15kHz to 30kHz, approximately halving the procedure time, while enabling tighter spot placement which facilitates easier flap lift, enhancing the surgical experience and reducing the potential for post-operative inflammatory response. In addition,
IntraLase introduced a reasonably priced upgrade path to 30kHz for all of its existing customers, completing 145 upgrades in the second half of 2005. In February 2006, we again announced a further improvement in our technology, again almost doubling
the speed of the laser with the expected introduction of a 60kHz laser in the second quarter of 2006 and an upgrade program and fee for all of its existing customers. We intend to continue to devote resources to improving and optimizing our
technology and product offering, with the goal of continuously increasing the safety, accuracy, efficiency and ease-of-use of our solution.



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Developing innovative applications for our technology. We are currently in the
process of developing new therapeutic applications to expand the use of our current technology and product offering. The IntraLase® FS laser is the first femtosecond laser cleared by the FDA for use in intrastromal incisions used with ring implants, lamellar keratoplasty,
penetrating keratoplasty and for the preparation of the donor tissue used in corneal transplants. In January 2006, IntraLase announced that the first corneal transplant cases using the IntraLase® FS laser had been successfully performed in patients. The use of IntraLases laser
to create a contoured, full-thickness corneal resection in preparation for corneal transplant has the potential to make corneal transplantation a safer, more precise procedure. Launch of this new therapeutic application is expected in Fall 2006. We
believe the unique capabilities of our laser will enable us to introduce additional applications within ophthalmology.

Providing quality products and superior customer service. We intend to continue to offer high quality products and extensive support to our direct customers and to our international distributors to continue to build our reputation as
a premier service provider and establish a loyal customer base. We believe that providing superior service is instrumental in maintaining and growing our market share, as our surgeon customers often actively refer our product offering to other
surgeons. We currently provide services including a 24/7 technical support hotline, installation, clinical training and other marketing support services for our direct customers as well as technical and clinical training for our distributors. We
believe our reputation for providing quality products and superior responsiveness will differentiate us from any potential direct competitors.

Our
Product Offering

Our product offering consists of three key elements:



| |  |  | IntraLase® FS laser;
| | - |  | --------------------



| |  |  | IntraLASIK® software; and
| | - |  | -------------------------



| |  |  | per procedure fee inclusive of a disposable patient interface.
| | - |  | --------------------------------------------------------------

The creation of the corneal flap using our product offering begins with the set up of the laser, followed by the placement of our disposable patient interface onto the patients eye. Using the IntraLASIK® software, the surgeon then centers a video display of a 2-millimeter circle
overlaid on an image of the patients eye. Once the desired location has been determined and set, the surgeon initiates the flap procedure by engaging the computer- controlled laser. The laser creates the flap by focusing its beam of light
below the surface of the corneal tissue, thereby creating a precise cut, leaving an uncut section of tissue to act as a hinge. It takes approximately 30 seconds for our 30 kHz laser to create the corneal flap.

IntraLase® FS Laser

Our IntraLase® FS laser is an ultra-fast femtosecond, or FS, laser that produces a stream of
high-repetition, short-duration light pulses with an extremely high-quality optical beam. Our 30 kHz laser generates thirty thousand pulses per second, with each pulse having a duration of six hundred femtoseconds, the equivalent of less than a
billionth of a second per pulse.

Our IntraLASIK® software controls our laser and beam delivery device that focuses the laser into tiny spots, passing through the outer
layers of the cornea until reaching the exact focal point within the cornea. In an inside out process, the laser beam creates a cut, leaving an uncut section of tissue to act as a hinge. As with the traditional microkeratome procedure,
the surgeon then folds the tissue back to expose the underlying layer of the cornea for the excimer laser treatment that will make the vision correction by reshaping the cornea.

Each pulse of light creates a bubble, less than five microns in diameter, a process known as photodisruption. Our laser aligns hundreds of thousands of
bubbles contiguously along predetermined three-dimensional surfaces to create precise surgical incisions. Because our laser uses low energy pulses and is computer controlled, a very precise surgical procedure is accomplished without damage to the
surrounding tissue.

Our laser is a solid-state laser, meaning that the light pulses are generated using solid-state optical materials.
Many lasers, including the excimer lasers used for the second step of LASIK surgery, produce their pulses of light utilizing a chamber of toxic gas. By comparison, our solid-state laser does not require laser gases or dye to operate and is therefore
easier to support at LASIK surgery practices.



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Our laser is completely self-contained, consisting of a laser engine, a delivery system, a user interface
and a chassis to house the system. The laser is extremely compatible for installation in surgical centers, as it requires only a grounded electrical supply.

IntraLASIK®
Software

We design, program, test and periodically update our IntraLASIK® software that controls the IntraLase® FS laser, which enables the surgeon to make precise cuts at predetermined parameters
within the eyes corneal tissue. Each patients surgical parameters, including flap diameter and thickness, location and angle of the hinge, and angle of the side cut, can be input into the IntraLASIK® software prior to surgery. The software then directs the laser to create a precise
corneal flap or perform the selected therapeutic procedure based on the input parameters. Prior to each surgery, the software automatically performs multiple pre-procedure system checks to verify the readiness of the laser and multiple calibration
checks are also available to the surgeon.

The software allows the surgeon to perform a pre-determined number of procedures in conjunction
with our per procedure fees inclusive of disposable patient interfaces separately purchased by the surgeon. To prevent reuse or unauthorized reproduction of the per procedure disposable patient interface, the software maintains a record of the
number of procedures performed and available, and notifies the surgeon when to order additional per procedure disposable patient interfaces. In addition, the software includes a patient and surgeon database, system utilities and diagnostic tools.
The diagnostic software is also proprietary to us and is used to detect the source of any errors in our laser. When an error is detected, a message appears with a brief description of the error. Depending upon the severity of the error, the message
may provide the user with steps to follow for continued use, or for more technical issues, the information displayed may be used to contact us for diagnostic or on-site field service support.

Per Procedure Fee and Disposable Patient Interface

A per procedure fee is required for each eye treated. The per procedure fee is inclusive of a disposable patient interface. The disposable patient interface consists of a metal cone and glass lens that interfaces
between our laser and the patient by attaching to the laser at one end and docking at the other end to the patients eye, and a proprietary plastic gripper and syringe that is used to locate the glass lens in the metal cone and create suction
between the glass lens and the patients eye.

The disposable patient interface is integral to depth control and accuracy. The
disposable patient interface comes in a sealed, sterile package, which ensures a high level of patient safety and protection from infection. The disposable patient interface is unique to our laser and we believe that we are the only available source
for these devices.

Historically, we have protected our per procedure revenue stream with a combination of contract terms, software
controls and manual periodic counts of machine usage, as necessary, to compare our shipments of disposable patient interfaces with the individual counter embedded in each IntraLase® FS laser. During 2005 we and our international distributors converted approximately 90% of IntraLase® FS lasers to new software versions that require either
remote electronic activation when the customer orders procedures or an IntraLase-generated secure activation code used by the customer at their site. These methods allow the customer to perform only the number of procedures purchased, which we
believe to be a more scalable and secure method of securing our per procedure revenue stream. For further discussion, see Risk Factors  Risks Related to our Business- Measures we take to ensure collection of per procedure charges may
be inadequate. In addition, the electronic link facilitates remote software upgrades and in the future we intend to offer our customers new features, such as remote diagnostics using this electronic link.

Sales and Marketing

Our primary objective is to
rapidly expand our market share for the creation of corneal flaps in the first step of LASIK surgery. Of the 1,270 LASIK surgery practices in the United States, approximately 700 perform over 50 procedures per month. Of the 3,500 LASIK surgery
practices outside the United States, we estimate that there are approximately 700 laser centers performing over 50 LASIK procedures per month in our primary international target markets in the Asia-Pacific region, Europe and the Middle East. We
focus our sales and marketing efforts on these high volume LASIK surgery practices.



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We began selling the IntraLase® FS laser and our per procedure fee inclusive of a disposable patient interface in the United States during the fourth
quarter of 2001, in Asia during the third quarter of 2003 and in Europe during the first quarter of 2004. As of December 31, 2005, we had an installed base of 243 lasers in the United States and 128 outside the United States. In addition, we
had sold over 600,000 per procedure disposable patient interfaces worldwide.

Sales

We sell our laser through our direct sales force in the United States and through our direct sales efforts and distributors internationally. In the United
States, we have six direct sales personnel, plus an executive managing our sales efforts. The U.S. sales force primarily consists of personnel with extensive experience in the sale of lasers and other products to refractive surgeons.
Internationally, we sell through local country distributors and three sales consultants and an executive devoted to direct sales efforts and international distributor development. We have approximately 18 distributor contracts with distributors in
the Asia Pacific region, Europe and the Middle East, and we also sell our product offering directly to customers in selected countries. Our sales team is supported by internal sales administration and a customer service team based in Irvine,
California. We do not anticipate adding to our sales force substantially. However, it is likely that we will continue to add international distributors as we expand into new countries.

Each distributor contract typically gives the appointed distributor the exclusive right to promote, market, sell, service and support our IntraLase® FS Laser, IntraLASIK® software, per procedure fee inclusive of a disposable patient interface and
the associated tool kit within a specified country or set of countries, for use in the field of ophthalmology surgical centers. Distributors are obligated to develop customer prospects, sell product and provide servicing and training relating to our
product offering in their territory. Distributor contract terms are typically between one and three years. However, there are termination rights for either party in the event the other party fails to perform any material obligations. Payments by the
distributor to us are in U.S. currency and generally are made cash in advance or by irrevocable letter of credit; however, in the second quarter of 2005, we began selling to selected and qualified distributors on credit terms. Title to the equipment
transfers upon shipment and there is no right of return of any product to us. The distributor contracts provide a standard twelve month warranty for defective components, subject to customary exclusions. All of the contracts contain standard
provisions regarding our ownership of our intellectual property and the distributors obligations to maintain the confidentiality of our intellectual property. Distributors are obligated to indemnify us for liabilities arising from the
distributors failure to perform its obligations under the distributor contract, or for its misconduct or negligence in handling the products. Under some of the contracts, we will indemnify the distributor for claims arising out of or relating
to the manufacture, use and sale of our product offering or any infringement by us of the intellectual property of third parties with respect to our product offering.

Marketing

Our marketing efforts involve two key strategies:



| |  |  | Marketing to prospective customers. We market our product offering to LASIK surgery practices with a combination of printed and electronic media sales literature and
educational seminars and training, the publication of clinical studies and articles in ophthalmic journals by surgeons who are users of our product offering, advertising in ophthalmology magazines and journals, and public speaking by surgeon
customers at the major ophthalmology shows and conferences we attend. We provide a consistent message about our product offering, and our better medicine and better business model.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Complementing our surgeon customers marketing efforts. LASIK surgery practices generally obtain patients through direct advertising in their local markets or through
referrals from the patients optometrists. Our marketing efforts are designed to complement these dual marketing strategies of our customers. Many large LASIK surgery practices advertise directly to potential patients. We complement and support
our customers marketing strategies by providing public relations support, a strong branding, product and consumer brochures, educational CD ROMs, as well as literature and templates for radio and print advertising which our surgeon customers
can use in their own advertising. In addition, since many LASIK surgeons rely on their potential patients optometrists for referrals, we assist surgeons in strengthening their optometrist referral network by sponsoring continuing medical
education seminars, soliciting key opinion leaders in optometry to make presentations and write articles on our technology, as well as sponsoring training wet labs in which optometrists are brought to the surgeons center for
education about our technology and an opportunity to use our technology to make a flap cut on a non-live animal eye.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Customer Service and Support

Our customer support strategy is to continue to offer extensive support to our customers to build a reputation as a premier service provider. In the United States, we provide customer service through the following
measures:



| |  |  | Technical Services. Our technical services personnel are responsible for our technical support hotline that handles customer calls 24 hours a day, seven days a week. These
personnel also are responsible for phone support to customers and distributors, scheduling on-site routine maintenance visits by our field service personnel and dispatching our personnel to the customers site if necessary.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Field Services. Our field service engineers are responsible for laser site inspection, installation, training, on-going routine maintenance and necessary repair.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Clinical Applications. Our clinical applications personnel are responsible for clinical training on the use of our IntraLase® FS laser and per procedure disposable patient interface, telephone support and on-site
support to ensure successful clinical integration of our product offering at customer sites. These personnel also provide free per procedure fees inclusive of disposable patient interfaces on the first surgery day where the surgeon typically
performs a majority of LASIK surgeries with our technology.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We provide laser site inspection, installation and clinical
training prior to the acceptance of our laser by our surgeon customers. Clinical training typically takes no more than one day, since most of our surgeon customers have already acquired some of the skills necessary for the operation of our laser
based on prior experience using the excimer laser. The surgeon is likely to become more proficient with our product offering as he or she gains additional experience, similar to other devices and surgical techniques.

In international markets, we provide customer service through our distributors. Our technical services, field service and clinical applications personnel
each provide training and support to our distributors and their personnel, and our distributors in turn provide all customer services and support to the end-user surgeons. All international distributors are required to send at least one service
engineer to our training facility in Irvine, California, for an intensive training course on the installation, routine maintenance and repair of our laser and are required to send their engineer(s) for additional training provided by IntraLase at
specified times. We expect to establish training facilities in one or more select international locations in the near future.

As of
December 31, 2005, we had 69 field service, technical services and clinical applications personnel worldwide who are responsible for servicing customers in direct sales markets and supporting our distributors.

All of our direct customers who purchase or lease our laser receive a one-year limited warranty and are required either to maintain a maintenance
contract thereafter or to pay for service and preventive maintenance on a time and materials basis in order to use our laser and to receive on-going maintenance and support. International distributor agreements generally provide for a one-year parts
only warranty, with the distributor responsible for customer support to the end-user surgeons. The international distributor is responsible for obtaining a fee based maintenance agreement from their customer and servicing the equipment.

Intellectual Property Rights

We rely on a
combination of patent, trademark, copyright, trade secret and other intellectual property laws, nondisclosure agreements and other measures to protect our intellectual property. We believe that in order to have a competitive advantage, we must
develop and maintain the proprietary aspects of our technologies. We require our employees, consultants and advisors to execute confidentiality agreements in connection with their employment, consulting or advisory relationships with us. We also
require our employees, consultants and advisors who we expect to work on our product offering to agree to disclose and assign to us all inventions conceived during the work day, using our property, or which relate to our business. Despite any
measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our product offering or to obtain and use information that we regard as proprietary.

Patents

We have developed a patent
portfolio that covers many aspects of our laser, laser beam guidance, other components of our laser, methods for inducing breakdown of corneal tissue and our per procedure disposable patient interface. As of December 31, 2005, we own 16 issued
U.S. patents and nine U.S. pending patent applications, nine issued foreign patents and 29 pending foreign patent applications. Our patents expire between 2016 and 2023. We have multiple patents covering unique aspects of our laser and per procedure
disposable patient interface.



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We have entered into three licenses for several key patents and patent applications relating to different
aspects of our laser and our per procedure fee inclusive of a disposable patient interface. As of December 31, 2005, we exclusively license, for human health, 19 issued U.S. patents, with expiration dates from 2006 through 2019, and three U.S.
pending patent applications, 11 foreign patents and nine foreign pending patent applications. One of these licenses is for exclusive worldwide use of the intellectual property covered by such patents in the fields of lasers designed for human health
applications and another is for exclusive worldwide use of the intellectual property covered by such patents in the fields of ultra-fast lasers designed for human health applications. Under two of these licenses we pay periodic license maintenance
fees.

In addition, we have entered into two non-exclusive worldwide license agreements with third parties relating to patents that apply
either to components of our laser or our disposable patient interface, as applicable. We pay royalties on the sale or lease of our laser or the sale of our disposable patient interface, as applicable, under these license agreements and are also
required to pay a minimum amount of royalties per year.

On July 15, 2004, we entered an agreement to acquire a fully-paid
royalty-free irrevocable and worldwide license from the University of Michigan for the use of certain technology and to settle all past contract disputes for aggregate consideration of $2,000,000. Upon closing this agreement on July 15, 2004 we
recorded a charge of $765,000, which is included within research and development expenses in 2004, related to the settlement of the contract disputes and capitalized $1,235,000, which is included at its amortized value within total long-term assets
at December 31, 2005, associated with acquired licenses in accordance with the terms of the agreement.

On August 23, 2004, the
United States Patent and Trademark Office, or PTO, granted a request for re-examination with respect to U.S. Patent RE 37,585, one of the four U.S. patents licensed to us by the University of Michigan, which means that the PTO found that the request
raised a new issue of patentability with regard to some of the claims. Re-examination may result in the scope of protection and rights provided by the patent license being lost or narrowed. The irrevocable license we acquired and the payment we made
pursuant to the July 15, 2004 license agreement will not be affected by the granting of re-examination, regardless of the outcome. Although we believe that the intellectual property covered by the patent subject to the re-examination is
important to our business, if this patent is invalidated there will be no effect on our ability to sell our products. However, invalidation or narrowing of this patent might allow others to market competitive products that would otherwise have
infringed the patent.

The medical device industry is characterized by the existence of a large number of patents and frequent litigation
based on allegations of patent infringement. Patent litigation can involve complex factual and legal questions and its outcome is uncertain. Any claim relating to infringement of patents that is successfully asserted against us may require us to pay
substantial damages or discontinue the manufacture and sale of our products. Even if we were to prevail, any litigation could be costly and time consuming and would divert the attention of our management and key personnel from our business
operations. Our success also will depend in part on our not infringing patents issued to others, including our competitors and potential competitors. If any key aspect of our product offering is found to infringe the patents of others, our
development, manufacture and sale of our product offering could be severely restricted or prohibited. In addition, third parties including our competitors may independently develop similar technologies. Because of the importance of our patent
portfolio to our business, we may lose market share to our potential competitors if we fail to protect our intellectual property rights.

If an entrant with products or technology directly competitive to our products or technology should arise, the possibility of a patent infringement claim against us grows. While we make an effort to ensure that our product offering does not
infringe other parties patents and proprietary rights, our product offering and related methods may be covered by patents held by others. In addition, third parties may assert that future products we may market infringe their patents.

Further, a patent infringement suit brought against us may force us to stop or delay developing, manufacturing or selling potential
products that are claimed to infringe a third partys intellectual property, unless that party grants us rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in
order to continue to commercialize such potential products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if we were able to obtain rights to
the third partys intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to
cease some of our business operations as a result of patent infringement claims, which could severely harm our business.



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Under our license agreements with Escalon Medical and the University of Michigan, we are obligated to
indemnify the party granting the license against claims, losses and expenses arising out of the manufacture, use, sale or other disposition by us of the products we manufacture using the licensed technology, out of any other persons use of the
products we manufacture, or our other use of the licensed technology or patents. Under our license agreement with Mr. Shui Lai, we are obligated to indemnify Mr. Lai against claims, losses and expenses arising out of the distribution of
the products we manufacture using the licensed technology.

Trademarks

We own or have rights to material trademarks or trade names that we use in conjunction with the sale of our product offering, which include, among others,
IntraLase®, IntraLase® FS, IntraLASIK® and The New Shape of Vision®. Generally, elements of our product offering are marketed under one of these trademarks
or brand names.

Manufacturing

We have
one manufacturing facility located in Irvine, California where our IntraLase® FS laser is assembled and tested and our IntraLASIK® software is designed, programmed and tested. This facility is also where we assemble, in a semi-automated process, the metal cone and glass lens for our disposable patient interface, the components of which
are manufactured by outside vendors. We then ship the disposable patient interface to a third party for sterilization and packaging. At December 31, 2005, we had approximately 91 employees in operations, regulatory and quality assurance.

We purchase all of the components used in the manufacture and assembly of our product offering from outside vendors. These outside vendors
produce the components we require, including the printed circuit boards and objective lens used in the laser and the metal cone, glass and packaging used for our disposable patient interface, to our specifications and in many instances to our
design. Our quality assurance personnel audit our vendors for conformance to our specifications, policies and procedures and inspect and test the components or assemblies at various steps in the manufacturing and assembly cycle. This process
facilitates compliance with the regulatory requirements for the manufacturing and sale of our product offering.

A portion of components
for our laser product are made by sole source vendors. Although these components constitute only a portion of the total components in our product offering, these components are integral to the success of our product offering and as a result our
success is tied to our continuing ability to obtain supplies of these components. We have never experienced any significant disruption in supply of any of our components. We endeavor to manage the risk of single sources by maintaining inventories in
excess of lead time requirements and by maintaining good vendor relationships. In addition, we continuously seek to identify and qualify additional suppliers based on our volume requirements. We purchase our product inventories through standard
purchase orders and do not currently have supply agreements with our outside vendors. In the event of any disruption in our vendor relationships, arrangements for additional or replacement suppliers for some of these parts may not be achieved
quickly and our business could be harmed by such delays. See Risk FactorsRisks Related to our BusinessWe depend on certain single-source suppliers and manufacturers for key components of our laser, and the loss of any of these
suppliers or manufacturers, or their inability to supply us with an adequate supply of materials, could harm our business.

Research and
Development

We believe that research and development activities are essential to maintaining and enhancing our business. We
continuously improve our product by introducing product enhancements such as the 30 kHz laser introduced in mid 2005, which doubled the speed of our laser and the anticipated second quarter 2006 introduction of our 60 kHz laser, which again doubles
the speed. We also sponsor clinical studies to validate our existing product offering are developing new therapeutic applications for our technology. Our research and development group consists of 40 individuals with research, engineering, medical
and regulatory affairs experience. Our research and development expenses, including regulatory and clinical study expenses, were approximately $11.7 million in 2005, $12.7 million in 2004 and $9.1 million in 2003.

Competition

Although we believe that our product
offering has substantial advantages over existing and prospective corneal flap creation technologies, we face, and will continue to face, intense competition from medical device companies, as well as numerous academic and research institutions and
governmental agencies, both in the United States and abroad. The principal elements of competition in the surgical vision correction market include safety, quality, functionality, better outcomes, support and service, the ability to develop new
technologies and new therapeutic applications, as well as pricing. We believe that overall we compete favorably with respect to the increased safety, precision and visual acuity achieved when using our laser technology and our extensive support
structure.



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The principal sources of this competition are as follows:

Competition in Creating the Corneal Flap



| |  |  | Microkeratome companies. Principal microkeratome manufacturers and suppliers with whom we compete include Bausch & Lomb, with approximately 40% of the U.S.
microkeratome and blade market, Moria/Microtech, the second largest supplier of microkeratomes and blades in the U.S. market, Advanced Medical Optics and Nidek. We believe that these microkeratome manufacturers will continue to enhance and further
develop microkeratomes to improve performance and accuracy to compete with our laser. Microkeratomes are less expensive than our laser, although surgeons typically need to purchase more than one microkeratome because the machine must be serviced at
the manufacturers location. In addition, our competitors may offer microkeratome systems at a lower price, may price their microkeratome systems as part of a bundle of products or services, including the excimer laser used in the second step
of LASIK surgery, or may enhance or further develop products to improve performance and accuracy of their existing product to compete against us. Some of these competitors have substantially greater resources, larger customer bases, longer operating
histories and greater name recognition than we have.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Competing femtosecond lasers. We may also in the future compete with manufacturers of other femtosecond lasers to create the corneal flap. Several manufacturers have
announced their intention to launch new femtosecond lasers that would compete directly with our products. These include Wavelight Technologies, Zeimer Ophthalmic Systems and 20/10 Perfect Vision. Successful introduction of competing products by
these or other manufacturers could reduce demand for our products, particularly if the competing products were perceived to offer superior capabilities or were marketed at a lower price. However, even if these potential competitors are able to fully
commercialize their products, they may not be able to successfully compete against our product offering.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other competing technologies.Since our product offering is used in the first step of LASIK surgery, we also compete with other vision disorder treatments that compete with
LASIK, such as eyeglasses, contact lenses and other surgical products and techniques. Such techniques include PRK and similar so-called surface procedures, where no corneal flap is created prior to refractive treatment with the excimer
laser. Surface procedures represent a small but growing portion of the laser vision correction market. Other techniques include intra-ocular lenses and epithelial flaps, also known as Epi-LASIK.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

New intraocular lenses have been developed and recently approved for use in the U.S. for correction of refractive error. These lenses, termed phakic
intraocular lenses are inserted into the anterior chamber or posterior chamber of the eye with the patients crystalline lens left in place. They are primarily used for correction of high refractive errors when corneal surgical procedures are
contraindicated. However, if used in patients that would otherwise be candidates for LASIK, they could impact our market.

Presbyopic intraocular lenses
(accommodative lenses and multifocal lenses) have also been developed for correction of distance and near vision after cataract surgery. Although not approved for this use in the U.S., some surgeons are using these lenses to correct refractive error
in patients that do not have a cataract. This procedure is known as refractive lens exchange and involves removal of the patients clear crystalline lens and implantation of the presbyopic intraocular lens. Patients with a
refractive correction that do not have a cataract would normally fall within our market segment. If the use of refractive lens exchange increases in popularity, this could impact our market.

Corneal based refractive procedures which begin with removal of the epithelial layer of the corneal include PRK, LASEK and epi-LASIK. An increase in any of these three
procedures could impact the volume of the LASIK market. If any of these alternative treatments result in decreased demand for LASIK surgery, this would decrease demand for our product offering.

Government Regulation

Our product offering is
regulated as a medical device. Accordingly, our product design and development, testing, labeling, manufacturing, processes, promotional activities and sales are regulated extensively by government agencies in the United States and other countries
in which we market and sell our product offering. We have clearance from the U.S. Food and Drug Administration, or FDA, to market our laser in the United States. We also have the approvals necessary to sell our product offering in the European Union
and other international markets in which we currently sell our product offering.



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United States

In the United States, the FDA regulates the design, manufacture, distribution, quality standards and marketing of medical devices. FDA regulation includes, among other things, post-market surveillance and adverse
event reporting requirements.

There are two principal methods by which FDA regulated devices may be marketed in the United States: 510(k)
clearance and pre-market approval, or PMA. To obtain 510(k) clearance, we must demonstrate that our product offering is substantially equivalent to a previously cleared 510(k) device or other appropriate predicate device. A PMA application is a
longer and more complicated process, and is required for a device that does not qualify for 510(k) clearance. We intend to utilize the 510(k) notification procedure whenever possible. To date, all components of our product offering have qualified
for 510(k) clearance, and have not required a PMA application.

After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new 510(k) clearance, or could even require a PMA application. The FDA requires each manufacturer to make this
determination initially, but the FDA can review any such decision and can disagree with a manufacturers determination. If the FDA disagrees with a manufacturers determination, the FDA can require the manufacturer to cease marketing or
recall the modified device until 510(k) clearance or a PMA is obtained.

We received 510(k) clearance in December 1999 to market our
IntraLase® FS laser and our disposable patient
interface in the United States. In addition, we have received 510(k) clearances for the creation of channels for intracorneal ring segments for lamellar keratoplasty and for penetrating keratoplasty, all of which are used in therapeutic corneal
procedures. As we develop new products and applications or make significant modifications to our existing product offering, we will need to obtain the regulatory approvals necessary to market such products for vision correction and other medical
procedures in our target markets.

After the FDA permits a device to enter commercial distribution, numerous regulatory requirements apply.
These include:



| |  |  | the registration and listing regulation, which requires manufacturers to register all manufacturing facilities and list all medical devices placed into commercial distribution;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | quality system regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing
process;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | labeling regulations;
| | - |  | ---------------------



| |  |  | the FDAs general prohibition against promoting products for unapproved or off-label uses;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | medical device reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned
in a way that would likely cause or contribute to a death or serious injury if it were to recur; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reporting of corrections and removals of devices that are intended to reduce a risk to health.
| | - |  | ----------------------------------------------------------------------------------------------

We also are subject to unannounced inspections for our U.S. facility by the FDA and the Food and Drug Branch of the California Department of Health
Services, and these inspections may include the manufacturing facilities of our subcontractors.

Our laser is a radiation emitting product
as well as a medical device. Therefore, we are also regulated by the FDA under the Radiation Control for Health and Safety Act. This law is intended to ensure that medical devices are safe and effective and seeks to reduce unnecessary exposure to
radiation from medical, occupational, and consumer products.

If we do not comply with the FDAs regulatory requirements we may be
subject to an FDA enforcement action, which may include any of the following sanctions:



| |  |  | fines, injunctions and civil penalties;
| | - |  | ---------------------------------------



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| |  |  | recall or seizure of our product offering;
| | - |  | ------------------------------------------



| |  |  | operating restrictions, partial suspension or total shutdown of production;
| | - |  | ---------------------------------------------------------------------------



| |  |  | refusing our request for 510(k) clearance or PMA approval of new products;
| | - |  | --------------------------------------------------------------------------



| |  |  | withdrawing 510(k) clearance or PMA approvals that are already granted;
| | - |  | -----------------------------------------------------------------------



| |  |  | suspension in the issuance of export certificates; and
| | - |  | ------------------------------------------------------



| |  |  | criminal prosecution.
| | - |  | ---------------------

To date, we have not been subject
to any material enforcement action by the FDA.

International

Sales of our laser-based product offering outside the United States are subject to the regulatory requirements of the foreign country or, if applicable,
the harmonized standards of the European Union. These regulatory requirements vary widely among countries and may include technical approvals, such as electrical safety, as well as demonstration of clinical efficacy. In Europe, the 25 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 our product offering
in accordance with the European Medical Device Directives, which permits us to commercially distribute our lasers throughout the European Union and to perform flap procedures and corneal transplant procedures using our product offering. We rely on
foreign regulatory approvals and export certifications from the FDA to comply with certain regulatory requirements in several foreign jurisdictions, such as Australia, Canada, Korea, Taiwan and countries in Western Europe. We intend to meet
applicable foreign country regulatory requirements for our product offering.

Other Regulatory Requirements

We also are subject to extensive and frequently changing regulations under many other laws administered by U.S. and foreign governmental agencies on the
national, state and local levels, including requirements regarding occupational health and safety and the use, handling and disposing of toxic or hazardous substances.

Product Liability Insurance

We maintain product liability insurance with respect to our product
offering with a general coverage limit of $10.0 million in the aggregate.

Employees

As of December 31, 2005, we had 267 full-time employees, approximately two thirds of whom are located in our facilities in Irvine, California, and
with worldwide-based sales, field service and clinical applications personnel located primarily outside of California. We have 33 sales and marketing employees; 40 research, development and engineering employees; 91 operations, regulatory and
quality assurance employees: 69 technical services, field services and clinical applications employees and 34 general and administrative employees. None of our employees is represented by a collective bargaining agreement and we have not experienced
any work stoppage. We believe that we have good relations with our employees.



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Executive Officers of the Registrant

The following table sets forth information with respect to our executive officers and directors as of December 31, 2005:



|                               |  |     |  |                                                      
|------------------------------ |  | --- |  | -----------------------------------------------------
|Name                           |  | Age |  | Position                                             
|Robert J. Palmisano            |  | 61  |  | President and Chief Executive Officer, Director      
|Shelley B. Thunen              |  | 53  |  | Executive Vice President and Chief Financial Officer 
|P. Bernard Haffey              |  | 43  |  | Executive Vice President and Chief Commercial Officer
|Charline Gauthier, O.D., Ph.D. |  | 43  |  | Executive Vice President and Chief Operating Officer 
|James Lightman                 |  | 48  |  | Senior Vice President and General Counsel            
|Kevin Harley                   |  | 46  |  | Vice President, Human Resources                      
|Tibor Juhasz, Ph.D.            |  | 47  |  | Vice President and Chief Technical Officer           
|Eric Weinberg                  |  | 45  |  | Vice President, Marketing and Professional Affairs   

Robert J. Palmisano. Mr. Palmisano joined us as our President, Chief Executive
Officer and a director in April 2003. From April 2001 to April 2003, Mr. Palmisano was the President, Chief Executive Officer and a director of MacroChem Corporation, a development stage pharmaceutical corporation. From April 1997 to January
2001 Mr. Palmisano served as President and Chief Executive Officer and a director of Summit Autonomous, Inc., a global medical products company that was acquired by Alcon, Inc. in October 2000. Prior to 1997, Mr. Palmisano held various
executive positions with Bausch & Lomb Incorporated, a global eye care company. Mr. Palmisano earned his B.A. in Political Science from Providence College. Since March 2005, Mr. Palmisano has served as a member of the Board of
Directors of Osteotech, Inc. Since May 2002, Mr. Palmisano has served as a member of the Board of Directors of Songbird Hearing, Inc.

Shelley B. Thunen.Ms. Thunen joined us as our Chief Financial Officer in May 2001. Ms. Thunen was promoted to Executive Vice President and Chief Financial Officer in October 2004. From January 2000 to January 2001,
she was the Executive Vice President, Chief Financial Officer and Corporate Secretary of Versifi, Inc., which designs, develops and markets Java internet infrastructure software. Versifi was acquired by Reef SA/NV in December 2000. From August 1992
to January 2000, Ms. Thunen was the Chief Financial Officer, Vice President of Operations and Corporate Secretary of VitalCom, Inc., a leading manufacturer of computer networks for cardiac monitoring systems. VitalCom was acquired by General
Electric Corp. in 2001. Ms. Thunen earned her M.B.A. and her B.A. in Economics from the University of California, Irvine.

P.
Bernard Haffey.Mr. Haffey has served as our Executive Vice President and Chief Commercial Officer since July 2004. From March 2003 to July 2004, Mr. Haffey served as our Vice President, Business Development. From September 2001 to
September 2002, Mr. Haffey was the Chief Executive Officer of NeuroVision, Inc., an early stage vision therapy company. From September 1997 to December 2000, Mr. Haffey was Executive Vice President, Chief Commercial Officer and Vice
President of Marketing and Sales at Summit Autonomous, Inc. Prior to September 1997, Mr. Haffey held key sales and marketing positions with Mentor Corporation, a medical device company serving multiple markets including the ophthalmic market.
Mr. Haffey earned his B.A. from Colgate University and his M.B.A. from Cornell University.

Charline Gauthier, O.D.,
Ph.D. Dr. Gauthier joined us as our Vice President, Research, Development and Corporate Affairs in July 2003. Ms. Gauthier was promoted to Executive Vice President and Chief Operating Officer in October 2004. After Summit
Autonomous Inc. was acquired by Alcon, Inc. in October 2000, Dr. Gauthier was hired by Alcon, Inc. and from October 2000 to December 2001 served as its Vice President and General Manager of the Orlando Technology Center and was responsible for
medical lasers and accessories for eye surgery. From April 2000 to October 2000, she was the Executive Vice President and Chief Operations Officer of Summit Autonomous, Inc. From October 1998 to April 2000, Dr. Gauthier was the Chief Operating
Officer of Autonomous Technologies Corporation or ATC. ATC was acquired by Summit Autonomous in April 2000. Dr. Gauthier earned her M.B.A. from Crummer Graduate School of Business, Rollins College, her Ph.D. from the University of New
South Wales in Sydney, Australia and her Doctor of Optometry, from the University of Waterloo, Canada.

James Lightman.Mr. Lightman has served as our Senior Vice President and General Counsel since February 2005, From December 2004 to January 2005, Mr. Lightman was the Vice President, Finance and Administration and General Counsel at Amicore, Inc.,
which provides software and services to physicians. From May 2002 to December 2004, Mr. Lightman was Vice President and General Counsel at Amicore, Inc. From January 2001 to May 2002, Mr. Lightman was Vice President, General Counsel and
Secretary at Zaiq Technologies, Inc., a semiconductor design engineering solutions firm. From January 2000 through December 2000, Mr. Lightman was Senior Vice President, General Counsel and Clerk for



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Summit Autonomous, Inc., a global medical products company that was acquired by Alcon, Inc. in October 2000. Mr. Lightman earned his law degree, cum
laude, from Boston University School of Law and his B.S., magna cum laude, from Boston University School of Management.

Kevin
Harley. Mr. Harley has served as our Vice President, Human Resources since August 2004. From July 2001 to August 2004, Mr. Harley served as Vice President of Employee Relations for Edwards Lifesciences Corporation, a cardiology
company. From April 2000 to July 2001, Mr. Harley served as Vice President of Human Resources for Edwards. From December 1999 to April 2000, Mr. Harley served as Vice President of Human Resources for Baxter Healthcare Corporation
(Cardiovascular Group), the principal U.S. operating subsidiary of Baxter International Inc., a global medical products and services company. From May 1994 to December 1999, Mr. Harley served as Director of Human Resources for Baxter and, prior
to May 1994, Mr. Harley held various other positions with Baxter. Mr. Harley earned his B.A. from the University of Buffalo in Psychology and his M.B.A. in Human Resources from National University.

Tibor Juhasz, Ph.D.Dr. Juhasz is a co-founder of IntraLase. Dr. Juhasz has served as our Chief Technical Officer since September
1997. From August 1988 to March 1996, Dr. Juhasz was the Chief Scientist at Intelligent Surgical Lasers Inc., where he led a team in developing the first ultra-fast laser ever used in ophthalmology. From March 1996 to September 1997,
Dr. Juhasz held key research positions with Escalon Medical. From 1996 to the present, Dr. Juhasz has been an associate professor of biomedical engineering and ophthalmology at the University of Michigan. Dr. Juhasz earned his B.A.
and Ph.D. in Physics from JATE University of Szeged, Hungary in 1986, along with post-doctoral training at the University of Rochester and the University of California, Irvine.

Eric Weinberg. Mr. Weinberg has served as our Vice President, Marketing and Professional Affairs since September 1999. From March 1993
to September 1999, Mr. Weinberg was the Global Director of Refractive Surgery at Chiron Vision, a subsidiary of the Chiron Corporation specializing in ophthalmic surgical products. At Chiron Vision, Mr. Weinberg was responsible for the
management of its microkeratome blade technology, laser product lines and its LASIK education program.

Available Information

Our website is located at www.intralase.com. We make available free of charge through this website all of our SEC filings including our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after those reports are electronically filed with the SEC. You also may obtain all our SEC
filings free of charge via EDGAR through the SEC website at www.sec.gov.

Item 1A Risk Factors

Risks Related to our Industry

Our success depends upon the continued acceptance of LASIK surgery.

Our business depends upon continued market acceptance of LASIK surgery by both surgeons and patients in the United States and international markets. LASIK surgery has only been approved since 1995 and commercially
available since 1996 and, to date, has penetrated approximately 8% of the eligible U.S. population. We believe that if market acceptance of LASIK surgery declines, demand for our product offering by LASIK surgery practices and potential patients
will decline, resulting in a decrease in our revenues.

Some consumers may choose not to undergo LASIK surgery due to concerns with the
safety and efficacy of an elective surgery in general or the LASIK procedure in particular, due to concerns about price or due to their belief that improved technology or alternative methods of treatment will be available in the near future. LASIK
surgery itself can result in potential complications and side effects, such as post-operative discomfort, unintended over- or under-corrections, disorders in corneal healing, undesirable visual sensations caused by bright lights such as glare or
halos and dry eye.

Should either the ophthalmic community or the general population turn away from LASIK surgery as an alternative to
existing methods of treating refractive vision disorders, or if future technologies replace LASIK surgery, these developments would have a material adverse effect on our business, financial condition and results of operations.



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Weak or uncertain economic conditions could adversely affect demand for our product offering.

Because LASIK surgery is not generally paid for through insurance programs or government reimbursement, patients typically pay for LASIK surgery directly
with their own discretionary funds. Accordingly, weak or uncertain economic conditions may cause individuals to be less willing to pay for LASIK surgery, as was evidenced by the 14% decline in LASIK procedures in the United States in 2002 as
compared to 2001. A decline in economic conditions in the United States or in international markets could result in a decline in demand for LASIK surgery and could have a material adverse effect on our business, financial condition and results of
operations.

Changes in U.S. federal tax laws governing the ability of potential LASIK patients to use pre-tax dollars to pay for LASIK surgery could
adversely affect demand for our product offering.

We believe a significant number of U.S. patients pay for LASIK surgery with pre-tax
dollars pursuant to plans sponsored under Section 125 of the Internal Revenue Code. These plans are commonly referred to as cafeteria plans. Changes in the U.S. tax laws or regulations governing cafeteria plans could reduce or eliminate the
ability of patients to use pre-tax dollars to pay for LASIK surgery, resulting in an increase in the total cost borne by patients, which would likely reduce the volume of LASIK surgeries, and thus demand for our per procedure fee inclusive of a
disposable patient interface, which would have a material adverse effect on our business, financial condition and results of operations.

Risks Related to our Business

We are subject to extensive government regulation, and a failure to comply may increase our costs and
prevent us from selling our product offering.

We are subject to extensive government regulation, including inspections and controls
over research and development, testing, manufacturing, safety and environmental controls, efficacy, labeling, advertising, promotion, pricing, record keeping and the sale and distribution of our product offering. Although we have obtained all
necessary clearances from the Food and Drug Administration, or FDA, as well as all necessary foreign governmental approvals to market and sell our product offering, we must continue to comply with such regulations to continue to manufacture, market
and sell our product offering. Noncompliance with FDA requirements can result in fines, injunctions, penalties, mandatory recalls or seizures, manufacturing suspensions, recommendations by the FDA against governmental contracts, suspension in the
issuance of export certificates and criminal prosecution. The FDA also has authority to request repair, replacement or the refund of the cost of any product we manufacture or distribute. Regulatory authorities outside of the United States may impose
similar sanctions for noncompliance with applicable regulatory requirements. If we are subject to any sanctions by the FDA or a foreign regulatory agency, our costs may increase and we may be prevented from manufacturing or selling our product
offering, which would have a material adverse effect on our business, financial condition and results of operations.

LASIK surgeons must continue to
adopt our product offering as an attractive alternative to the microkeratome for creating the corneal flap.

In the three months ended
December 31, 2005, we believe we captured approximately 25% of the U.S. market for creating the corneal flap. We believe that LASIK surgeons may not continue to adopt our product offering unless they determine, based on experience, clinical
data and studies and published journal articles, including peer review articles, that our product offering provides significant benefits or an attractive alternative over the traditional method of creating the corneal flap using the microkeratome. A
small number of surgeons have informed us, based on their experiences, of the following issues with our product offering when compared to the traditional microkeratome approach:



| |  |  | surgeons may need to perform multiple procedures with our product offering to become skilled with our laser and related techniques; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the overall procedure to prepare the patient and create the corneal flap with our laser may take slightly longer per patient.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------

LASIK surgeons also must determine that the advantages and benefits of our product offering outweigh the increased costs associated with switching to our
technology from the microkeratome. The microkeratome device costs between $40,000 and $60,000 per device, and, because the devices must be cleaned after each patient use and must be returned to the manufacturer for any service, LASIK surgeons
typically purchase multiple devices to ensure a device is available for each surgery being performed. In comparison, our laser costs approximately $375,000. Additionally, using the microkeratome results in a cost between $25 and $50 per procedure to
purchase the disposable blades, while our per procedure fee inclusive



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of a disposable patient interface costs new LASIK surgeons approximately $160 per procedure. The additional costs associated with our product offering could
hinder continued adoption of our technology by LASIK surgeons, which would have a material adverse effect on our business, financial condition and results of operations.

In addition, we believe that recommendations and support of our laser by influential LASIK surgeons are essential for its market acceptance and adoption. If we do not receive support from such surgeons or from the
data and experience of users, it may become difficult to have additional LASIK surgeons adopt our product offering. In such circumstances, we may not achieve expected revenues or profits.

Presently unknown side effects related to the use of our laser could emerge in the future.

Use of the IntraLase® FS laser to create the LASIK flap is a relatively new technique. Consequently there is no long term follow up data beyond five years that might reveal
unknown side effects or complications associated specifically with this technique. The possibility of unfavorable side effects, and any concomitant adverse publicity, could seriously harm our business. In addition to the potential side effects and
complications associated with LASIK generally, some LASIK surgeons have observed incidents of transient light sensitivity in patients treated with our system, although this has affected only a small percentage of patients and appears to resolve
quickly with treatment. Any future reported adverse outcomes or pattern of side effects involving the use of our laser specifically, or with respect to LASIK procedures generally, could have a material adverse effect on our business, financial
condition and results of operations.

Patients must continue to be willing to pay for LASIK surgery using our product offering despite it being more
expensive than LASIK surgery with the microkeratome.

LASIK surgeons typically receive an average of $394 more per eye when using our
product offering instead of the traditional microkeratome. To date, LASIK surgeons have been able to improve the rate at which laser vision correction consultations translate into actual surgery from approximately 65% to 78% when using our product
offering instead of the traditional microkeratome, according to an independent survey of our customers conducted in early 2005. This indicates that patients have been willing to pay for LASIK surgery using our product offering despite its higher
cost. There can be no assurance that this trend will continue.

We may not be able to compete successfully against our current and future competitors.

To date, we have competed primarily with manufacturers of the microkeratome, the traditional method used to create the corneal flap as
the first step in LASIK surgery. Principal manufacturers of the microkeratome include Bausch & Lomb, with approximately 40 percent of the U.S. microkeratome and blade market, Moria/Microtech, the second largest supplier of microkeratomes
and blades in the U.S. market, Advanced Medical Optics and Nidek. Microkeratomes are less expensive to manufacture than our laser and our competitors may offer microkeratome systems at a lower price as part of a bundle of products or services,
including the excimer laser used in the second step of LASIK surgery. Further, we expect that our competitors will continue to release new or enhanced microkeratome models which may offer improved performance over earlier generation products. Any of
these actions could decrease demand for our product offering, which would have a material adverse effect on our business, financial condition and results of operations. Some of these competitors, particularly Bausch & Lomb, have
substantially greater resources, larger customer bases, longer operating histories and greater name recognition than we have.

We may also
in the future compete with manufacturers of alternative technologies to create the corneal flap. In addition, several manufacturers have announced their intention to launch new femtosecond lasers that would compete directly with our products. These
include Wavelight Technologies, Zeimer Ophthalmic Systems, which has displayed its system, and 20/10 Perfect Vision, which we believe has commercially sold at least one system internationally. Successful introduction of competing products by these
or other manufacturers could reduce demand for our products, particularly if the competing products were perceived to offer superior capabilities or were marketed at a lower price. If alternative technologies gain market acceptance, this may also
reduce demand for our product offering.

Since our product offering is used in the first step of LASIK surgery, we also compete with other
vision disorder treatments that compete with LASIK, such as eyeglasses, contact lenses and other surgical products and techniques. Such techniques include intra-ocular lenses, corneal inlays and epithelial flaps, also known as Epi-LASIK. If any of
these alternative treatments result in decreased demand for LASIK surgery, this would decrease demand for our product offering. In addition, medical companies, academic and research institutions and others could develop new therapies, medical
devices or surgical procedures that could potentially render LASIK surgery obsolete. Any such developments would have a material adverse effect on our business, financial condition and results of operations.



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The medical device and ophthalmic laser industries are subject to rapid and significant technological
change, frequent new device introductions and evolving surgical techniques. Demand for our product offering may decline if a new or alternative product or technology is introduced by one of our competitors that represents a substantial improvement
over our existing product offering, which would have a material adverse effect on our business, financial condition and results of operations.

Measures
we take to ensure collection of per procedure charges may be inadequate.

Generating per procedure revenues from our installed base of
lasers is a key aspect of our business. We charge our customers a per procedure fee for each eye treated. This fee is inclusive of a disposable patient interface, which is intended to be used on a single eye and discarded. We typically charge our
customers procedure fees based on our shipments to them of per procedure disposable interfaces.

We believe that a small percentage of our
customers, in an effort to avoid procedure fees, are using a single patient interface to treat multiple eyes. If this practice (or other fee avoidance practices) were to proliferate, it could have a material adverse effect on our business.

Our proprietary IntraLASIK® software contains a feature which requires the laser to periodically be reprogrammed in order to perform additional procedures. We have introduced
technology which allows us to do this remotely using secure activation techniques. Approximately 90 percent of IntraLase lasers have been upgraded to new software versions that require either remote electronic activation when the customers order
procedures or an IntraLase-generated activation code used by the customers at their sites. Secure activation capabilities allow us to align the number of procedures available on the laser with the number of patient interfaces purchased to prevent
reuse. However, if these capabilities prove inadequate, or if other fee avoidance methods are devised which we are unable to detect or counter, or if we are unable to enhance the majority of lasers in our worldwide installed base, this could have a
material adverse effect on our business. By way of example, circumstances that could potentially hamper our enforcement efforts include: theft or disclosure of confidential passwords, improper or unauthorized tampering with laser hardware or
software, lack of cooperation from international distributors, inability to obtain access to lasers in the field, legal impediments imposed by foreign jurisdictions and/or counterfeit patient interfaces.

Product liability suits brought against us could result in expensive and time-consuming litigation, payment of substantial damages and an increase in our insurance
rates.

If our IntraLase® FS laser or our per procedure disposable patient interface is defectively designed or manufactured or contains defective components, our
IntraLASIK® software is defective, any component of
our product offering is misused or if a customer fails to adhere to operating guidelines, or if someone claims any of the foregoing, whether or not such claims are meritorious, we may become subject to substantial and costly litigation. Any product
liability claims brought against us, with or without merit, could divert managements attention from our business, be expensive to defend, result in sizable damage awards against us, damage our reputation, increase our product liability
insurance rates, prevent us from securing continuing coverage, or prevent or interfere with commercialization efforts for our product offering, any of which occurrences would have a material adverse effect on us. In addition, we may not have
sufficient insurance coverage for all future claims. Product liability claims brought against us in excess of our insurance coverage would likely be paid out of cash reserves, harming our financial condition and results of operations.

From time to time, we make field corrections to our laser that are typically made by our field service representatives during scheduled service calls but
which may sometimes be made using remote diagnostics. Although these field corrections have not had a financial impact on us to date, any future corrections or recalls, especially any that result in preventing use of our laser or customers returning
the laser to us for repair, would have a material adverse effect on us.

Our inability to adequately protect our intellectual property could allow our
competitors and others to produce products based on our intellectual property rights, which could substantially impair our ability to compete.

Our success and ability to compete depends in part upon our ability to maintain the proprietary nature of our technologies. We rely on a combination of patent, trade secret, copyright and trademark law and license agreements, as well as
nondisclosure agreements, to protect our intellectual property. These legal means, however, afford only limited protection and may not be adequate to protect our rights. In addition, we cannot assure you that any of our pending patent applications
will issue. The U.S. Patent and Trademark Office, or PTO, may deny or significantly narrow claims made under our patent applications and, even if issued, these patents may be challenged or may otherwise not provide us with commercial



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protection. On August 23, 2004, the PTO granted a request for re-examination with respect to U.S. Patent RE 37,585, one of the patents licensed to us by
the University of Michigan, which means that the PTO found that the request raised a new issue of patentability with regard to a number of claims. Re-examination may result in the scope of protection and rights provided by the patent license being
lost or narrowed.

We may in the future need to assert claims of infringement against third parties to protect our intellectual property.
Regardless of the final outcome, any litigation to enforce our intellectual property rights in patents, copyrights, or trademarks could be highly unpredictable and result in substantial costs and diversion of resources, which could have a material
adverse effect on our business, financial condition and results of operations. In the event of an adverse judgment, a court could hold that some or all of our asserted intellectual property rights are not infringed, or are invalid or unenforceable,
and could award attorneys fees to the other party. In addition, the laws of other countries in which our product offering is or may be sold may not protect our product offering and intellectual property to the same extent as U.S. laws, if at
all. We also may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries. Despite our efforts to safeguard our unpatented and unregistered intellectual property rights, we may not be successful in
doing so, or the steps taken by us in this regard may not be adequate to detect or deter misappropriation of our technology or to prevent an unauthorized third party from copying or otherwise obtaining and using our products, technology or other
information that we regard as proprietary. Our inability to adequately protect our intellectual property could allow our competitors and others to produce products based on our patented or proprietary technology and other intellectual property
rights, which could substantially impair our ability to compete.

We may become subject to claims of infringement or misappropriation of the
intellectual property rights of others, which could prohibit us from selling our product offering, require us to obtain licenses from third parties, require us to develop non-infringing alternatives and/or subject us to substantial monetary damages
and injunctive relief.

Third parties could assert infringement or misappropriation claims against us with respect to our current or
future product offerings, whether or not such claims are valid. We cannot be certain that we have not infringed the intellectual property rights of such third parties or others. Any infringement or misappropriation claim could result in significant
costs, substantial damages and our inability to manufacture, market or sell our existing or future product offerings that are found to infringe. If a court determined, or if we independently discovered, that our product offering violated third-party
proprietary rights, there can be no assurance that we would be able to re-engineer our product offering to avoid those rights or obtain a license under those rights on commercially reasonable terms, if at all. As a result, we could be prohibited
from selling products that are found to infringe. Even if obtaining a license were feasible, it may be costly and time-consuming. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and/or our customers from
making, using, selling, offering to sell or importing our product offering, or could enter orders mandating that we undertake certain remedial activities. A court also could order us to pay compensatory damages for such infringement, plus
prejudgment interest, and could in addition treble the compensatory damages and award attorneys fees. These damages could be substantial and could harm our reputation, business, financial condition and results of operations. We have been
involved in litigation with Escalon Medical Corp. concerning a license agreement with Escalon under which we license certain intellectual property. The litigation arose as a result of Escalons attempt to terminate the license agreement based
on alleged underpayment of royalties (see Part I, Item 3, Legal Proceedings). We believe that Escalon will persist in its attempts to terminate the license agreement, and intend to defend against such efforts vigorously. Termination of the
Escalon license agreement could have a material adverse effect on our business, financial condition and results of operations.

We depend on certain
single-source suppliers and manufacturers for key components of our laser, and the loss of any of these suppliers or manufacturers, or their inability to supply us with an adequate supply of materials, could harm our business.

We rely upon certain suppliers and contract manufacturers to supply key parts for our laser on a sole or limited source basis. Our arrangements with these
key suppliers and manufacturers are not on a contractual basis and can be terminated by either party without advance notice. If any of these suppliers and manufacturers were to fail to supply our needs on a timely basis or cease providing us these
key components, we would be required to locate and contract with substitute suppliers. We could have difficulty identifying a substitute supplier in a timely manner or on commercially reasonable terms. If this were to occur, we may not be able to
meet our sales goals or continue manufacturing lasers, either of which would have a material adverse effect on our business, financial condition and results of operations.

Our failure to manage our rapid growth may strain the capabilities of our managers, operations and facilities.

We are growing rapidly. In 2005 we sold or leased 156 lasers and sold approximately 338,000 per procedures fees inclusive of a disposable patient interface. In 2004 we sold or leased 111 lasers and sold
approximately 192,000 per



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procedure fees inclusive of a disposable patient interface; and in 2003, we sold or leased 67 lasers and sold approximately 84,000 per procedure fees
inclusive of a disposable patient interface. This growth has resulted in, and continued growth will create in the future, additional capacity requirements, new and increased responsibilities for our management team and may create pressures on our
operating and financial systems.

Our expected growth will require us to hire, train and manage additional qualified personnel sufficiently
in advance to be in a position to meet the requirements of such growth. Continued growth will also require us to improve existing, and implement new operating, financial and management information controls, reporting systems and procedures, and
effectively manage multiple relationships with our customers, suppliers and other third parties. In addition, our anticipated growth may strain the ability of our suppliers to deliver an increasingly large supply of components in accordance with
agreed-upon specifications on a timely basis. Additional growth may also prevent us from being able to respond to new opportunities and challenges quickly.

If we are unable to effectively manage our expected growth, this could have a material adverse effect on our business, financial condition and results of operations.

We plan to expand further into markets outside the United States, which subjects us to additional business and regulatory risks.

Our international sales commenced in 2003 and represented 42% of our total revenues 2005 and 29% of our total revenues in 2004. We intend to derive an
increasing portion of our total revenues from sales of our product offering in foreign countries. We plan to focus most of our efforts on the Asia-Pacific region, Europe, South America and the Middle East.

Conducting business internationally subjects us to a number of risks and uncertainties. In addition to being subject to political and economic
instability in foreign markets, we require export licenses and are subject to tariffs and other trade barriers and overlapping tax structures. In addition, we must comply with foreign regulatory requirements. In creating and building our
infrastructure internationally, we must also educate LASIK surgeons and optometrists about our product offering and attract and maintain relationships with third-party distributors. If we are unable to do any of this successfully, we may not be able
to grow our international presence, and this could have an adverse effect on our business, financial condition and results of operations.

Our success
is tied to a single product offering.

We have a single product offering used primarily in LASIK surgery. As a result, our success is
tied to the success of this product offering since we are not currently able to derive revenues from alternate product offerings. If for any reason we are unable to continue to manufacture or sell our product offering or if production of our product
offering were interrupted or could not continue in a cost-effective or timely manner, whether due to regulatory sanctions, manufacturing constraints, product defects or recalls, obsolescence of our technology, increased competition, intellectual
property concerns or otherwise, our business would be materially harmed.

All of our operations are conducted at a single location. Any disruption at
our existing or at a new facility could increase our expenses.

All of our operations are currently and will continue to be conducted at
a single location. We take precautions to safeguard our existing facility, including insurance, health and safety protocols and off-site storage of computer data. However, a natural disaster, such as an earthquake or fire could cause substantial
delays in our operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur additional expenses. The insurance we maintain against fires and other natural disasters and the property and business interruption insurance
we maintain may not be adequate to cover our losses in any particular case.

A loss of key executives or failure to attract qualified personnel could
limit our growth and adversely affect our business.

Our future success depends in part on the continued service of key personnel. We do
not have employment agreements with any of our employees other than with our Chief Executive Officer; our Executive Vice President, Chief Operating Officer; our Senior Vice President and General Counsel; and our Vice President, Human Resources; and
we do not have key person insurance on any of our executives. The loss of any one or more key managers could place a significant strain on our remaining management team and we may have difficulty replacing any of these individuals. Furthermore, our
future growth will depend in part upon our ability to identify, hire and retain additional key personnel, including qualified management, research and other highly skilled technical personnel.



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Our new products or applications may not be commercially viable.

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

If we choose to acquire new or complementary businesses, products or technologies instead of developing them ourselves, we may be unable to complete
those acquisitions or to successfully integrate them in a cost-effective and non-disruptive manner.

While we have not made any
acquisitions in the past and do not have current commitments to do so, we may in the future choose to acquire businesses, products or technologies to retain our competitive position within the marketplace or to expand into new markets. We cannot
assure you, however, that we would be able to successfully complete any acquisition we choose to pursue, or that we would be able to successfully integrate any acquired business, product or technology in a cost-effective and non-disruptive manner.
If we were unable to integrate any acquired businesses, products or technologies effectively, our business would likely suffer.

We have a history of
net losses and may not maintain profitability.

Although we were profitable in 2005, we have incurred significant operating losses in
each previous full year since our inception in 1997. We incurred net losses applicable to common stockholders of $10.2 million in 2004 and $12.0 million in 2003. As of December 31, 2005, we had an accumulated deficit of approximately $53.9
million. In order to maintain profitability, we will need to continue to increase our revenues from sales of our product offering, and we will also need to continue to derive an increasing percentage of our total revenues from sales of our per
procedure fee inclusive of a disposable patient interface, which generate a higher gross margin than sales and leases of our IntraLase® FS laser. Even if we do maintain profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis due to, among
other things, competitive pressures and regulatory compliance, in which case the price of our common stock may decline.

Changes to our accounting for
stock options will adversely affect our earnings and may adversely affect stock price.

We currently are not required to record
stock-based compensation charges if an employees stock option exercise price equals or exceeds the fair value of our common stock at the date of grant. However, in December 2004 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 123 (Revised 2004) that will require us to expense the fair value of stock options granted. If we were to change our accounting policy in accordance with the existing SFAS No. 123, Accounting
for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure and retroactively restate all prior periods as if we had adopted SFAS 123 for all periods presented, our income from operations
would have decreased by approximately $8.3 million in 2005 and our loss from operations would have increased by approximately $509,000 and $168,000 in 2004 and 2003, respectively. The adoption of SFAS No. 123 (Revised 2004) requires that the
estimated fair value from all stock-based compensation transactions be recognized in our financial statements in 2006. We believe the adoption of SFAS No. 123 (Revised 2004) will result in total stock-based compensation of approximately $6.5
million, the majority of which will arise from the implementation of SFAS 123 (Revised 2004), as compared to $2.1 million of stock-based compensation recognized in 2005. However, actual results may vary depending upon 2006 stock option grants and
stock compensation programs.

We may incur increased costs as a result of recently enacted and proposed changes in laws and regulations.

Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of
2002 and rules proposed by the Securities and Exchange Commission and by the Nasdaq Stock Market, have resulted in and are expected to continue to result in increased costs to us as a public company.



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##### Table of Contents

The new rules could make it more difficult or more costly for us to obtain certain types of insurance, including directors and officers liability
insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the
additional costs we may incur or the timing of such costs. Additionally, unearned deferred stock compensation for non-employees is periodically remeasured through the vesting date under current and future accounting rules. This periodic
remeasurement could have a significant impact on our results of operations.

Item 1B Unresolved Staff Comments

Not applicable.

Item 2Properties

We lease 128,670 square feet of office and manufacturing space for our corporate,
research and development and manufacturing headquarters in Irvine, California, under a lease for a period of ten years and four months that began May 1, 2005. We believe the new facility will be adequate to meet our current requirements.

Item 3Legal Proceedings

On June 10, 2004, we received notice from Escalon Medical Corp. of its
intent to terminate our license agreement unless we paid additional royalties and expenses which Escalon claimed were owed under its interpretation of the parties license agreement. Escalon sought payment of approximately $645,000 through
March 31, 2004 and additional unspecified amounts for future periods. We disputed Escalons contract interpretation. On June 21, 2004, we filed a complaint against Escalon for declaratory and injunctive relief in the United States
District Court for the Central District of California to clarify our obligations and prevent Escalon from terminating the license agreement (the First California Action).

On March 1, 2005, the court in the First California Action entered a summary judgment order, ruling on the majority of issues in the case. The court
ruled in our favor on some issues and in Escalons favor on others. On April 1, 2005 Escalon again attempted to terminate the license agreement. On April 25, 2005 the court found the purported termination to be ineffective. On
May 5, 2005, the court entered a final judgment in the First California Action, in effect adopting its prior summary judgment rulings. This ended the First California Action. Of the approximately $645,000 demanded by Escalon through
March 31, 2004, approximately $229,000 was found to be due under the courts rulings in the First California Action. We have timely paid this amount. We do not believe that the judgment in the First California Action will have a material
adverse effect on our business, financial condition and results of operations. The decision in the First California Action, if upheld, represents an increase in royalties payable to Escalon of approximately 0.2% of revenues, and a concomitant 0.2%
reduction in gross margins and operating profits. These effects are reflected in our reported financial results for 2005. We have appealed certain aspects of the courts judgment in the First California Action to the United States Court of
Appeals for the Ninth Circuit.

The First California Action did not resolve all of the parties disputes, and Escalon continued to
contend in written notices to us that our royalty payments were inadequate. On May 9, 2005, we commenced a new lawsuit against Escalon in the United States District Court for the Central District of California to clarify the open issues (the
Second California Action). One week later, Escalon commenced a new lawsuit against us in the Delaware Chancery Court, alleging, among other things, breach of the license agreement and breach of fiduciary duty (the Delaware
Action). Escalon moved to dismiss the Second California Action, and we moved to dismiss or stay the later filed Delaware Action.

On
January 11, 2006, the Second California action was dismissed without prejudice. In its decision, the court explained that it was exercising its discretion to abstain from hearing the case because of the pending Ninth Circuit appeal, as well as
the similar issues presented in the Delaware Action. By prior agreement of the parties, this triggered the briefing schedule on our motion to dismiss or stay the Delaware Action, and on January 31, 2006 we filed our opening brief in support of
the motion. On February 21, 2006, Escalon filed an amended complaint in the Delaware Action in lieu of responding to our opening brief. On the same day, it sent a new default notice to us, alleging breach of the license agreement (see below).

One of the issues now in dispute is valuation of our accounts receivable for royalty calculation purposes. The court in the First
California Action found that creation of an account receivable on our books constituted non-cash other property received, but expressly left open the value of such property for royalty calculation purposes. On April 22, 2005,
Escalon, purporting to act in its capacity as a Company shareholder, sent us an inspection demand under section 220 of the Delaware



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##### Table of Contents

corporation law (the First 220 Demand), seeking, among other things, detailed records concerning our accounts receivable. We rejected
Escalons First Section 220 Demand as having an improper purpose under Delaware law. On July 18, 2005, Escalon Holdings, Inc., apparently a wholly-owned subsidiary of Escalon, also purporting to act as a Company shareholder, sent us a
new section 220 demand (the Second 220 Demand) with language copied verbatim from the First 220 Demand. We rejected the Second 220 Demand on the same basis as the first. Under Delaware law, a shareholder may bring an action to enforce a
section 220 demand if its statutory demand upon the corporation has been rejected.

On September 2, 2005, Escalon and Escalon
Holdings, Inc. commenced an action against us in the Delaware Chancery Court under section 220 of the Delaware Corporation Law (the 220 Action). In the 220 Action, Escalon seeks to inspect our records described in the Section 220
Demands. The crux of Escalons position appears to be that the amount of royalties which Escalon receives under its contract with us is less than what it believes it would receive if receivables were valued under the contract the same way they
are valued on our financial statements, and that therefore we are purportedly overstating the value of receivables on our financial statements to the detriment of shareholders. The question of the proper valuation of receivables under the contract
is already the subject of pending litigation between us and Escalon. We do not believe that a disruptive inspection of our proprietary business records would have a bearing on the resolution of this contract dispute. We contend that the 220 Action
is an Escalon litigation tactic intended to benefit Escalon in its capacity as a litigant by allowing it to circumvent existing contractual limitations on its inspection rights. We believe this is an improper basis for a demand under section 220 of
the Delaware corporation statute, and are defending against the 220 Action vigorously.

On February 21, 2006, we received a written
notice from Escalon asserting that we were in default under the license agreement by reason of alleged improper valuation of accounts receivable in our royalty payments as well as our alleged refusal to permit Escalon to audit our books and records
(the Default Notice). The Default Notice threatened termination of the license agreement if the accounts receivable deductions taken against royalty payments for each of the first three quarters of 2005 were not paid within fifteen days
of the date of the letter. The Default Notice also threatened termination if Escalon was not satisfied with respect to the resolution of its audit rights within sixty days of the date of the letter.

On February 24, 2006, the parties agreed to submit their disputes to mediation, in Delaware, under Court of Chancery Rule 174, and to stay all
litigation pending the outcome of the mediation. In addition, Escalon has agreed that its Termination Notice is suspended pending the outcome of the mediation and that, should the mediation be unsuccessful, we will be afforded the full fifteen and
sixty day response periods set forth in the Notice, which periods would commence one day after the mediation is declared unsuccessful. We have also agreed that the time period for responding to Escalons amended complaint in the Delaware Action
will be tolled on the same basis.

If we are unable to successfully mediate our disputes, we believe Escalon will persist in attempting to
terminate the license agreement. Termination of the Escalon license agreement could have a material adverse effect on our business, financial condition and results of operations.

On May 24, 2005, Ari Weitzner M.D., P.C., a Brooklyn ophthalmologist, commenced a lawsuit against us in the United States District Court for the
Eastern District of New York, purportedly as a class action, alleging that we violated the Telephone Consumer Protection Act (TCPA) by sending unsolicited fax advertisements in violation of the TCPA. The complaint seeks statutory damages, costs and
attorneys fees. The TCPA provides for statutory damages of $500 per violation ($1,500 if knowing and willful). We intend to contest the Weitzner action vigorously.

On August 23, 2004, the United States Patent and Trademark Office (PTO) granted a request for re-examination with respect to U.S. Patent RE 37,585, one of the four U.S. patents licensed to us by the University of
Michigan, which means that the PTO found that the request raised a new issue of patentability with regard to some of the claims. Re-examination may result in the scope of protection and rights provided by the patent license being lost or narrowed.
The irrevocable license we acquired and the payment we made pursuant to the July 15, 2004 license agreement will not be affected by the granting of re-examination, regardless of the outcome. Although we believe that the intellectual property
covered by the patent subject to the re-examination is important to our business, if this patent is invalidated there will be no effect on our ability to sell our products. However, invalidation or narrowing of this patent might allow others to
market competitive products that would otherwise have infringed the patent.

We are also currently involved in other litigation incidental
to our business. In the opinion of management, the ultimate resolution of such litigation will not likely have a significant effect on our financial statements.



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##### Table of Contents

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

No matters were submitted to a vote of our
stockholders during the quarter ended December 31, 2005.

PART II

Item 5Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock has been traded on the Nasdaq National Market under the symbol ILSE since October 7, 2004.

The following table shows the high and low closing prices of our common stock as reported on the Nasdaq National Market for the periods indicated:



|                      |  |      |       |     |   |      
|--------------------- |  | ---- | ----- | --- | - | -----
|Quarter Ended         |  | High |       | Low
|December 31, 2004 (1) |  | $    | 23.48 |     | $ | 13.00
|March 31, 2005        |  | $    | 23.95 |     | $ | 16.57
|June 30, 2005         |  | $    | 19.98 |     | $ | 14.82
|September 30, 2005    |  | $    | 21.90 |     | $ | 14.71
|December 31, 2005     |  | $    | 19.31 |     | $ | 12.54

---

|(1). | Beginning October 7, 2004, the date of our public offering.
|---- | -----------------------------------------------------------

As of February 24, 2006, there were 55 holders of record based on the records of our transfer agent.

We have never paid cash
dividends on our common stock. We currently anticipate that we will retain earnings, if any, to support operations and to finance the growth and development of our business and do not anticipate paying cash dividends in the foreseeable future.

(a) Recent Sales of Unregistered Securities

There were no sales of unregistered equity securities during 2005. For a listing of our sales of unregistered equity securities during 2004 see our Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2004.

(b) Use of Proceeds

The initial public offering of our common stock was effected through a Registration Statement on Form S-1 (File No. 333-116016) that was declared effective by the Securities and Exchange Commission on
October 6, 2004. On October 13, 2004, 7,295,447 shares of common stock were sold on our behalf and for our account at an initial public offering price of $13.00 per share, for an aggregate net offering price of $88.2 million. In addition,
336,314 shares of our common stock were sold for the account of the Regents of the University of Michigan and the Wolverine Venture Fund for an aggregate net offering price of $4.07 million. The managing underwriters for the offering were Banc of
America Securities LLC, Wachovia Capital Markets LLC, First Albany Capital Inc. and ThinkEquity Partners LLC. The amounts sold on October 13, 2004 included the exercise of the underwriters over-allotment option. The offering did not
terminate until the sale of all the registered securities set forth above to the underwriters. As of December 31, 2005, all of the remaining net proceeds from this offering were invested in short-term, high-grade interest-bearing marketable
securities, certificates of deposit or direct or guaranteed obligations of the U.S. government.

(c) Issuer Purchases of Equity
Securities

We did not purchase company shares during any of the three months ended December 31, 2005.



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##### Table of Contents

Securities Authorized For Issuance under Equity Compensation Plans

Our stockholders have previously approved all stock option plans under which our Common Stock is reserved for issuance. The following table provides
summary information as of December 31, 2005, for all of our stock option and stock purchase plans:



|                                                      |  |                                                                                                       |  |                                                                              |      |                                                                                                                                             |          
|----------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------- | ---------
|                                                      |  | Number of Shares ofCommon Stock tobe Issued
uponExercise ofOutstandingOptions, Warrantsand Rights (1) |  | Weighted AverageExercise Price
ofOutstanding Options,Warrants and Rights (2) |      | Number of Shares ofCommon
StockRemaining Availablefor Future Issuanceunder our StockOption Plans(Excluding SharesReflected in Column 1) (3)
|Equity compensation plans approved by stockholders    |  | 5,504,615                                                                                             |  | $                                                                            | 7.73 |                                                                                                                                             | 2,871,496
|Employee stock purchase plan approved by stockholders |  |                                                                                                      |  |                                                                              |      |                                                                                                                                             | 617,910  
|Not approved by stockholders                          |  |                                                                                                      |  |                                                                              |     |                                                                                                                                             |         
|                                                      |  |                                                                                                       |  |                                                                              |      |                                                                                                                                             |          
|Total                                                 |  | 5,504,615                                                                                             |  | $                                                                            |      |                                                                                                                                             | 3,489,406
|                                                      |  |                                                                                                       |  |                                                                              |      |                                                                                                                                             |          

Item 6Selected Financial Data

The following statements of operations data and balance sheet data
for the five years ended December 31, 2005 were derived from our audited consolidated financial statements. The information set forth below is not necessarily indicative of the results to be expected for any future periods and should be read in
conjunction with the audited consolidated financial statements, related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K.



|                                                                         |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------------------------------------ |  | ----------------------------------------------- | ---------- | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                                         |  | Year Ended December 31,                         |           
|                                                                         |  | 2005                                            |            | 2004 |   |           | 2003 |  |   | 2002      |   |  | 2001 |          
|                                                                         |  | (in thousands, except share and per share data) |           
|Statements of Operations Data:                                           |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Revenues:                                                                |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Product revenues                                                         |  | $                                               | 94,433     |      | $ | 59,968    |      |  | $ | 25,429    |   |  | $    | 18,002    |   |  | $ | 1,326     |  
|Research contracts                                                       |  |                                                 |           |      |   |          |      |  |   |          |   |  |      | 100       |   |  |   | 445       |  
|                                                                         |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total revenues                                                           |  |                                                 | 94,433     |      |   | 59,968    |      |  |   | 25,429    |   |  |      | 18,102    |   |  |   | 1,771     |  
|Costs of goods sold                                                      |  |                                                 | 44,237     |      |   | 34,491    |      |  |   | 17,070    |   |  |      | 13,307    |   |  |   | 1,716     |  
|                                                                         |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Gross margin                                                             |  |                                                 | 50,196     |      |   | 25,477    |      |  |   | 8,359     |   |  |      | 4,795     |   |  |   | 55        |  
|                                                                         |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Operating expenses:                                                      |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Research and development                                                 |  |                                                 | 11,653     |      |   | 12,719    |      |  |   | 9,117     |   |  |      | 9,011     |   |  |   | 9,894     |  
|Selling, general and administrative                                      |  |                                                 | 31,612     |      |   | 23,352    |      |  |   | 11,212    |   |  |      | 7,971     |   |  |   | 6,239     |  
|                                                                         |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total operating expenses                                                 |  |                                                 | 43,265     |      |   | 36,071    |      |  |   | 20,329    |   |  |      | 16,982    |   |  |   | 16,133    |  
|                                                                         |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Income (loss) from operations                                            |  |                                                 | 6,931      |      |   | (10,594   | )    |  |   | (11,970   | ) |  |      | (12,187   | ) |  |   | (16,079   | )
|Interest and other income, net                                           |  |                                                 | 2,934      |      |   | 427       |      |  |   | 69        |   |  |      | 299       |   |  |   | 346       |  
|                                                                         |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Income (loss) before provision for income taxes                          |  |                                                 | 9,865      |      |   | (10,167   | )    |  |   | (11,901   | ) |  |      | (11,888   | ) |  |   | (15,733   | )
|Provision for income taxes                                               |  |                                                 | 341        |      |   | 30        |      |  |   | 23        |   |  |      | 24        |   |  |   | 1         |  
|                                                                         |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income (loss)                                                        |  |                                                 | 9,524      |      |   | (10,197   | )    |  |   | (11,924   | ) |  |      | (11,912   | ) |  |   | (15,734   | )
|Accretion of preferred stock                                             |  |                                                 |            |      |   | (45       | )    |  |   | (60       | ) |  |      | (57       | ) |  |   | (40       | )
|                                                                         |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income (loss) applicable to common stockholders                      |  | $                                               | 9,524      |      | $ | (10,242   | )    |  | $ | (11,984   | ) |  | $    | (11,969   | ) |  | $ | (15,774   | )
|                                                                         |  |                                                 |            |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net income (loss) per share applicable to common stockholdersbasic (1)  |  | $                                               | 0.35       |      | $ | (1.28     | )    |  | $ | (5.66     | ) |  | $    | (6.82     | ) |  | $ | (11.17    | )
|Net income (loss) per share applicable to common stockholdersdiluted(1) |  | $                                               | 0.31       |      | $ | (1.28     | )    |  | $ | (5.66     | ) |  | $    | (6.82     | ) |  | $ | (11.17    | )
|Weighted average shares outstandingbasic (1)                            |  |                                                 | 27,405,499 |      |   | 8,008,494 |      |  |   | 2,118,898 |   |  |      | 1,755,873 |   |  |   | 1,412,412 |  
|Weighted average shares outstandingdiluted(1)                           |  |                                                 | 31,136,538 |      |   | 8,008,494 |      |  |   | 2,118,898 |   |  |      | 1,755,873 |   |  |   | 1,412,412 |  



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|                                                 |  |                    |         |      |   |         |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------------------ |  | ------------------ | ------- | ---- | - | ------- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                 |  | As of December 31, |        
|                                                 |  | 2005               |         | 2004 |   | 2003    |  |   | 2002    |   |  | 2001 |        
|                                                 |  | (in thousands)     |        
|Balance Sheet Data:                              |  |                    |         |      |   |         |  |   |         |   |  |      |         |   |  |   |         |  
|Cash, cash equivalents and marketable securities |  | $                  | 90,199  |      | $ | 92,014  |  | $ | 11,893  |   |  | $    | 26,008  |   |  | $ | 9,203   |  
|Working capital                                  |  |                    | 59,926  |      |   | 95,022  |  |   | 14,791  |   |  |      | 29,722  |   |  |   | 11,581  |  
|Total assets                                     |  |                    | 139,628 |      |   | 118,212 |  |   | 29,957  |   |  |      | 37,301  |   |  |   | 19,005  |  
|Long-term debt, less current portion             |  |                    |        |      |   |        |  |   | 448     |   |  |      | 192     |   |  |   | 498     |  
|Redeemable convertible preferred stock           |  |                    |        |      |   |        |  |   | 73,261  |   |  |      | 73,201  |   |  |   | 43,268  |  
|Total stockholders equity (deficit)             |  |                    | 117,973 |      |   | 102,294 |  |   | (52,011 | ) |  |      | (40,371 | ) |  |   | (28,842 | )

---

|(1) | Please see note 1 of the notes to our financial statements included elsewhere in this Annual Report on Form 10-K for an explanation of the determination of the number of shares used
in computing per share data.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

You should read the following discussion of our financial condition and results of operations together with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain
forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements due to known and unknown risks, uncertainties and other factors, including those
risks discussed under Risk Factors and elsewhere in this Annual Report on Form 10-K.

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements as defined within the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by the use of words such as believe, expect, anticipate, intend, plan, estimate, project, or words of similar meaning,
or future or conditional verbs such as will, would, should, could, or may. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ
materially from those projected or implied. Those risks and uncertainties include, but are not limited to: the degree of continued acceptance of LASIK surgery; potential complications revealed by long term follow up; the extent of adoption of our
product offering by LASIK surgeons; general economic conditions; changes in federal tax laws governing the ability of potential LASIK patients to use pre-tax dollars to pay for LASIK surgery; the scope of government regulation applicable to our
products; patients willingness to pay for LASIK surgery; our ability to compete against our competitors; the effectiveness of our measures to ensure full payment of procedure fees; the occurrence and outcome of product liability suits against
us; our ability to adequately protect our intellectual property; whether we become subject to claims of infringement or misappropriation of the intellectual property rights of others; the continued availability of supplies from single-source
suppliers and manufacturers of our key laser components; the ability of our managers, operations and facilities to manage our growth; the success of our expansion into markets outside the United States; whether we lose any of our key executives or
fail to attract qualified personnel; or if our new products or applications fail to become commercially viable.

Overview

Background

We are a medical device company focused on
the design, development and marketing of an ultra-fast laser, related software and disposable devices for use in LASIK surgery. Our product offering is used primarily to create the corneal flap in the first step of LASIK surgery. IntraLase lasers
are also used in surgical approaches to the treatment of diseased corneas, and we continue to explore other potential ophthalmic applications. From our incorporation in late 1997 through late 2001, we devoted substantially all of our resources to
designing, developing, commercializing and marketing our IntraLase® FS laser, our IntraLASIK® software and our disposable patient interface. In late 2001, we introduced our product offering to the U.S. market, and we began expanding into key international markets in the second half of 2003. In the three months
ended December 31, 2005, we captured approximately 25% of the U.S. market for LASIK corneal flap creation.



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##### Table of Contents

Our quarterly laser sales or leases, cumulative lasers installed and approximate per-procedure patient
interface units in 2005, 2004 and 2003 were as follows:



|                                                                          |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |       
|------------------------------------------------------------------------- |  | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ------
|                                                                          |  | 2005   |  | 2004   |  | 2003  
|                                                                          |  | Q4     |  | Q3     |  | Q2     |  | Q1     |  | Q4     |  | Q3     |  | Q2     |  | Q1     |  | Q4     |  | Q3     |  | Q2     |  | Q1    
|Laser Sales/Leases Per Quarter                                            |  | 44     |  | 34     |  | 39     |  | 39     |  | 37     |  | 27     |  | 30     |  | 17     |  | 26     |  | 14     |  | 22     |  | 5     
|                                                                          |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |       
|Cumulative Lasers Installed (1)                                           |  | 371    |  | 327    |  | 293    |  | 254    |  | 217    |  | 180    |  | 153    |  | 123    |  | 106    |  | 80     |  | 66     |  | 44    
|                                                                          |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |       
|Total Per-procedure Fees, Inclusive of Disposable Patient Interface, Sold |  | 95,000 |  | 83,000 |  | 85,284 |  | 75,188 |  | 52,418 |  | 49,927 |  | 48,422 |  | 41,094 |  | 27,372 |  | 22,164 |  | 19,208 |  | 15,486
|                                                                          |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |        |  |       

---

|(1) | Installed base does not represent cumulative sales since an existing customer bought two new lasers in the first quarter of 2005 to retire original purchases.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

We were profitable in 2005 with net income of $9.5 million. We incurred net losses applicable to common stockholders of
approximately $10.2 million in 2004 and $12.0 million in 2003. As of December 31, 2005, we had an accumulated deficit of approximately $53.9 million.

Revenues

We generate revenues primarily from the sale or lease of our IntraLase® FS laser and the sale of our per procedure fees inclusive of a disposable patient
interface. We derive a smaller portion of our revenues from product maintenance.

The following table sets forth the sources and amounts of
our revenues for the periods indicated:



|                                                               |  |                         |  |         |            |       |         |         |   |            |  |         |  |   |           
|-------------------------------------------------------------- |  | ----------------------- |  | ------- | ---------- | ----- | ------- | ------- | - | ---------- |  | ------- |  | - | ----------
|                                                               |  | Year Ended December 31,
|                                                               |  | 2005                    |  | 2004    |            | 2003 
|                                                               |  | Units                   |  | Revenue |            | Units |         | Revenue |   | Units      |  | Revenue
|IntraLase® FS laser                                            |  | 156                     |  | $       | 46,812,834 |       | 111     |         | $ | 33,237,551 |  | 67      |  | $ | 14,777,010
|Per procedure fees inclusive of a disposable patient interface |  | 338,000                 |  |         | 39,908,016 |       | 191,861 |         |   | 22,256,211 |  | 84,230  |  |   | 9,115,731 
|Product maintenance                                            |  |                        |  |         | 7,711,985  |       |        |         |   | 4,474,512  |  |        |  |   | 1,536,723 
|                                                               |  |                         |  |         |            |       |         |         |   |            |  |         |  |   |           
|Total revenues                                                 |  |                         |  | $       | 94,432,835 |       |         |         | $ | 59,968,274 |  |         |  | $ | 25,429,464
|                                                               |  |                         |  |         |            |       |         |         |   |            |  |         |  |   |           

We target the most active LASIK surgery practices in the United States and in key international
markets to adopt our product offering in order to generate recurring business from our per procedure fees inclusive of a disposable patient interface. We expect that, even with increased sales and leases of our IntraLase® FS laser, repeat revenues from the higher gross margin per procedure fees will
continue to increase as a percentage of our total revenues, which will, in turn, drive higher overall gross margin.

Terms of Sale and Revenue
Recognition

Laser



| |  | Terms of sale. In the United States, we primarily sell our lasers to LASIK surgery practices. We also selectively enter into operating or sales-type leases. Leases have terms
of up to four years, commencing on installation and acceptance. Our terms of sale are typically on the basis of cash in advance, paid directly by our customers or on terms, typically net 30 days from acceptance, to fiscally sound third party
financing companies, institutions or well established corporate customers, or under sales-type leases over the term of the agreement. No customer accounted for more than 10% of revenue in 2005, 2004 or 2003.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In 2005, approximately 67% of our new domestic laser unit placements were sales or sales-type leases, representing 93% of our total domestic laser
revenues, and approximately 33% were operating leases, representing 7% of our total



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domestic laser revenues. In comparison, in 2004, 85% of our new domestic laser unit placements were sales, representing 96% of our total domestic laser
revenues, and 15% were operating leases, representing 4% of our total domestic laser revenues.

Outside the United States, we primarily sell
to our international distributors and, in selected countries, directly to LASIK surgery practices. Historically, payment terms have been cash in advance or irrevocable letters of credit; however, in the second quarter of 2005 we began selling to
selected and qualified distributors on credit terms.



| |  | Revenue recognition.For the lasers we sell directly, we recognize revenue when the equipment has been delivered, installed and accepted at the customer location. Revenues
from our leased lasers are classified as either operating leases or sales-type leases as prescribed by SFAS No. 13, Accounting for Leases. Revenues from lasers under operating leases are recognized as earned over the lease term,
commencing immediately after the laser is installed and accepted by the customer. Under sales-type lease agreements, laser revenues are recognized based on the net present value of the expected cash flow after installation. For laser sales to a
distributor, revenues are recognized when the laser is shipped and title has transferred to the distributor. For laser sales in the second quarter of 2005 that were sold prior to the availability of our 30 kilohertz (kHz) upgrade, the fair value of
the upgrade was deferred and revenue was subsequently recognized when the upgrade had been delivered, installed and accepted at the customer location. The 30 kHz upgrade is not required for laser functionality but does increase the speed of the
procedure.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Per procedure fee inclusive of a disposable patient interface



| |  | Terms of sale. Our customers order per procedure fees inclusive of a disposable patient interface directly from us as needed. In the United States, payment is typically due
30 days after shipment and the per procedure fee inclusive of a disposable patient interface is non-refundable. A small percentage of our U.S. customers have agreed to a minimum monthly purchase requirement for per procedure fees. International
customers, primarily distributors, have typically paid for their per procedure fees inclusive of a disposable patient interface with cash in advance or by irrevocable letter of credit; however, in the second quarter of 2005, we began selling to
selected and qualified distributors on credit terms.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Revenue recognition. Revenue from the sale of our per procedure fees inclusive of a disposable patient interface is recognized upon shipment, and when title has passed in
accordance with the sales terms. We do not allow customers to return product.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Product maintenance



| |  | Terms of sale. Our product offering includes maintenance. We provide product maintenance when we sell directly or lease to customers and our international distributors
provide maintenance for their territory sales outside the United States. Where we provide maintenance, maintenance agreements are renewable annually and are required at all times for the continued use of our laser and to receive on-going maintenance
and support. When we receive prepaid maintenance funds we amortize the deferred maintenance amounts over the maintenance period.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Revenue recognition. Revenue from product maintenance is recognized on a straight-line basis over the term of the maintenance period.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------

International Revenue Expansion

We introduced our
product offering in the United States in late 2001 and internationally in the second half of 2003. As of December 31, 2005, we had sold or leased 245 lasers in the United States and we had sold 128 internationally, primarily in the Asia-Pacific
region and Europe. In international markets, we mainly sell our product offering through local country third-party distributors. These distributors are responsible for sales, customer support and product maintenance, and as a result generally pay a
lower price for our product offering. As a result, the mix between direct sales in the United States and distributor sales internationally may create fluctuations in our revenues and gross margin.

Seasonality

Lasers.Sales and leases of our
lasers are seasonal. The second and fourth calendar quarters are typically stronger than the first and third calendar quarters. Two of the largest ophthalmology shows for refractive surgeons, the American Society of Cataract and Refractive Surgery,
or ASCRS, and the American Academy of Ophthalmology, or AAO, are generally held in the second and fourth quarters, leading prospective customers to delay purchases in the first and third quarters until they



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have an opportunity to attend the shows, visit with us and attend lectures and symposiums on our product offering. In addition, tax incentives typically help
to drive U.S. capital equipment spending higher in the fourth quarter. Sales and leases of our lasers in the third quarter are generally slower as surgeons in the United States and internationally typically take increased vacation time during the
summer.

Per procedure fees inclusive of a disposable patient interface.Sales of our per procedure fees inclusive of a disposable
patient interface are also seasonal. The first quarter typically shows an increase in volume in the United States. We believe this is because many potential LASIK patients in the United States access annual funding accounts established under
Internal Revenue Code Section 125 pre-tax medical savings plans, or cafeteria plans, to purchase LASIK surgery, as LASIK surgery is not generally paid for through insurance programs or government reimbursement. The second quarter typically is
lower than the seasonally highest first quarter. Generally, procedure volume is slowest during the third quarter, as surgeons in the United States and internationally typically take increased vacation time during the summer.

Results of Operations

The following table sets forth
our results of operations expressed as a percentage of total revenues for the periods indicated.



|                                                    |  |                         |   |  |       |    |  |       |   
|--------------------------------------------------- |  | ----------------------- | - |  | ----- | -- |  | ----- | --
|                                                    |  | Year Ended December 31, |  
|                                                    |  | 2005                    |   |  | 2004  |    |  | 2003  |   
|Total revenues                                      |  | 100.0                   | % |  | 100.0 | %  |  | 100.0 | % 
|Costs of goods sold                                 |  | 46.8                    |   |  | 57.5  |    |  | 67.1  |   
|                                                    |  |                         |   |  |       |    |  |       |   
|Gross margin                                        |  | 53.2                    |   |  | 42.5  |    |  | 32.9  |   
|Operating expenses:                                 |  |                         |   |  |       |    |  |       |   
|Research and development                            |  | 12.4                    |   |  | 21.2  |    |  | 35.9  |   
|Selling, general and administrative                 |  | 33.5                    |   |  | 39.0  |    |  | 44.1  |   
|                                                    |  |                         |   |  |       |    |  |       |   
|Total operating expenses                            |  | 45.9                    |   |  | 60.2  |    |  | 80.0  |   
|                                                    |  |                         |   |  |       |    |  |       |   
|Income (loss) from operations                       |  | 7.3                     |   |  | (17.7 | )  |  | (47.1 | ) 
|Interest and other income, net                      |  | 3.1                     |   |  | 0.7   |    |  | 0.3   |   
|                                                    |  |                         |   |  |       |    |  |       |   
|Income (loss) before provision for income taxes     |  | 10.4                    |   |  | (17.0 | )  |  | (46.8 | ) 
|Provision for income taxes                          |  | 0.3                     |   |  | 0.0   |    |  | 0.1   |   
|                                                    |  |                         |   |  |       |    |  |       |   
|Net income (loss)                                   |  | 10.1                    |   |  | (17.0 | )  |  | (46.9 | ) 
|Accretion of preferred stock                        |  | (0.0                    | ) |  | (0.1  | )  |  | (0.2  | ) 
|                                                    |  |                         |   |  |       |    |  |       |   
|Net income (loss) applicable to common stockholders |  | 10.1                    | % |  | (17.1 | )% |  | (47.1 | )%
|                                                    |  |                         |   |  |       |    |  |       |   

Comparison of the years ended December 31, 2005 and 2004

Revenues

Total revenues increased to $94.4 million in
2005 from $60.0 million in 2004. The increase was attributable to continued market acceptance of our product offering and our accelerated expansion into international markets, primarily in the Asia-Pacific region and Europe. During 2005, we sold or
leased 156 lasers and generated $42.8 million in revenues. Additionally, our 30 kHz upgrades resulted in the sale of 145 upgrades and generated $4.0 million in revenues, for total laser revenues of $46.8 million. In comparison, 2004, we sold or
leased 111 lasers and generated $33.2 million in revenues. The average selling price per laser sold or leased in 2005 decreased 8% as compared to 2004 primarily because U.S. operating leased units, which generate revenue typically over 39 months,
increased to 33% of all U.S. placements in the 2005 as compared to 15% of all U.S. placements in 2004.

In 2005, we sold approximately
338,000 per procedure fees inclusive of a disposable patient interface and generated $39.9 million in revenues. In comparison, during 2004, we sold approximately 192,000 per procedure fees inclusive of a disposable patient interface and
generated $22.3 million in revenues. We attribute the increase in sales of per procedure fees to an increased installed base of lasers, as we entered 2005 with approximately twice the installed base of lasers as compared to the same period in 2004.
We expect sales of our per procedure fees inclusive of a disposable patient interface to continue to increase as the installed base of lasers increases.

The increase in our installed base of lasers in the U.S. also led to an increase in our maintenance revenues to $7.7 million in 2005, as compared to $4.5 million in 2004. We expect our maintenance revenues to continue
to increase as the installed base of lasers in the U.S. increases.



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Gross Margin

Gross margin, as a percentage of total revenues, increased to 53% in 2005 from 42% in 2004. Costs of goods sold, as a percentage of total revenues, decreased primarily due to our per procedure fees inclusive of a patient interface, which
generate higher margins, increasing to 42% of total revenues in 2005 from 37% of total revenues in 2004. In addition, larger production runs and improvements in our manufacturing processes have contributed to cost savings for our laser and patient
interface.

We expect gross margins to continue to improve as the percentage of total revenues derived from per procedure fees inclusive of
a disposable patient interface continues to increase. Revenues derived from per procedure fees inclusive of a disposable patient interface in 2006 are expected to increase as a percentage of total revenues.

Research and Development

Research and development
expenses consist of costs of product research, product development, engineering, regulatory compliance and clinical support studies. Research and development expenses decreased by $1.1 million to $11.7 million in 2005 from $12.7 million in 2004.
This decrease resulted primarily from one-time expenses incurred in 2004 of $765,000 related to a technology license from the University of Michigan and $306,000 of expenses associated with their related sale of stock in our initial public offering
in 2004. In addition, decreased stock based compensation expense of $765,000, decreased clinical study and outside service expense of $112,000 and decreased legal expense of $109,000 offset a $1.0 million increase in personnel costs. The decrease in
stock based compensation resulted primarily from lower stock based compensation associated with options granted to non-employees subject to remeasurement (variable plan accounting treatment).

Although we expect research and development expenses to continue to decline as a percentage of our revenues we expect that the dollar amount of our
research and development expenses will continue to increase in future years as we continue to develop, enhance and commercialize new and existing products, product enhancements and applications. We also expect to incur increased expenses relating to
regulatory compliance associated with new and existing applications and products and for regulatory approval for expansion of our existing product offering into new markets outside of the United States. We also expect to incur increased expenses as
we continue to support clinical studies.

Selling, General and Administrative

Selling, general and administrative expenses consist of expenses associated with sales, marketing, field service and clinical applications that are not
otherwise direct costs of installing and supporting our product offering, finance, information technology and human resources. Selling, general and administrative expenses increased by $8.3 million to $31.6 million in 2005 from $23.4 million in
2004. The increase resulted from higher personnel costs in sales, marketing and general and administrative departments of $3.7 million; higher outside services, which primarily include consulting and legal fees, of $2.3 million; higher marketing,
advertising, promotion and event costs of $1.6 million; an increase in commissions paid to sales representatives on higher sales totaling $830,000; and an increase in facilities and depreciation expense of $1.3 million; offset by decreased stock
based compensation of $1.6 million.

We expect selling, general and administrative expenses, which are primarily driven by sales and
marketing expenses, to increase in the future as a result of continued growth in our sales and support infrastructure to support projected growth in revenues. In addition, we expect the increased costs of being a public company to continue in the
future.

Interest and other income (expense), net

Interest and other income (expense), net consists primarily of interest earned on investments in cash, cash equivalents and marketable securities offset by interest expense. Interest and other income (expense), net
increased by $2.5 million to $2.9 million of income in 2005 from $427,000 in 2004 due to the investment of the proceeds from our initial public offering in the fourth quarter of 2004 and the resulting increase in interest income from the investment.

Provision for income taxes

In 2005,
we recorded a 3.5 percent tax provision in the amount of $340,000. Our effective tax rate of 3.5 percent is primarily due to changes in the valuation allowance recorded against certain deferred tax assets primarily related to net operating loss
carryforwards.



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Stock-Based Compensation

Over the next several years, we will incur non-cash expenses for employee stock-based compensation, decreasing quarterly, for stock-based compensation for stock options determined to have been issued with exercise
prices less than estimated fair value. In addition, we expect to incur stock-based compensation expenses, primarily for options granted to non-employees, that may decrease or increase quarterly, depending upon future fluctuations in our stock price.
In December 2004, FASB issued SFAS No 123 (revised 2004) (SFAS 123R), Share-Based Payment. SFAS No. 123R will be effective for us beginning in first quarter of fiscal 2006. Management expects that we will use the modified
prospective application method. Under SFAS 123R, unearned deferred stock compensation for non-employees will continue to be periodically remeasured through the vesting date. This periodic remeasurement could have a significant impact on our results
of operations. See Critical Accounting PoliciesStock-Based Compensation. Management estimates that stock-based compensation expense in 2006 will be $6.5 million, the majority of which will arise from the adoption of SFAS
123R, as compared to approximately $2.1 million of stock-based compensation expense recognized in 2005. However, actual results may vary depending upon 2006 stock option grants and stock compensation programs.

On December 19, 2005, IntraLases Board of Directors approved the accelerated vesting of all unvested and out-of-the-money stock
options with an exercise price per share of $18.88 or higher. The accelerated vesting caused options previously awarded for the purchase of approximately 505,000 shares of IntraLase common stock, representing approximately 9% of total options
outstanding, to vest and become exercisable immediately, subject to continued restrictions on sale. Of the 505,000 options subject to accelerated vesting, approximately 250,000 are held by directors and executive officers. Under APB No. 25 and
FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, the acceleration of the vesting of these options did not result in a compensation charge because the exercise prices of the affected options
was greater than the closing price of our common stock on December 19, 2005.

The decision to accelerate the vesting of these options
was made primarily to reduce non-cash compensation expense that would have been recorded in IntraLases income statement in future periods upon the adoption of SFAS No. 123R (Share-Based Payment) beginning in January 2006. As a result of
this acceleration, we expect to reduce the stock option expense we would otherwise be required to record by approximately $4.6 million, which is included in the pro forma calculation of net income under SFAS No. 123 included in Footnote 1 to
the consolidated financial statements. Approximately $1.3 million of the $4.6 million would have related to 2006. The Board of Directors believes the accelerated vesting of these options to be in the best interest of our shareholders and employees.

Comparison of the years ended December 31, 2004 and December 31, 2003

Revenues

Total revenues increased to $60.0 million in 2004 from $25.4 million in 2003. The increase
was attributable to continued market acceptance of our product offering and our further expansion into international markets, primarily in the Asia-Pacific region, Europe and the Middle East, with the European increase due primarily to obtaining our
CE mark in the first quarter of 2004. During 2004, we sold or leased 111 lasers and generated $33.2 million in revenues. In comparison, during 2003, we sold or leased 67 lasers and generated $14.8 million in revenues. In 2004, 85% of our total new
laser sales or leases were sales, representing 96% of our total laser revenues, and 15% were operating leases, representing 4% of our total laser revenues. In comparison, in 2003, the first year in which we began leasing lasers on a direct basis,
52% of our total new unit placements were sales, representing 96% of our total laser revenues, and 48% were operating leases, representing 4% of our total revenues. The average selling price per laser sold or leased in 2004 increased 36 percent as
compared to 2003 primarily because we had 19 fewer leases, which generate revenue over 39 months, in 2004 as compared to 2003. The average selling price per laser excludes the deferral of the fair value of the maintenance agreement from laser
revenue, which is amortized over the twelve month warranty period as maintenance revenue, and is also effected by the mix of international distributor sales and domestic sales and the mix of laser leases versus laser sales in the U.S.

In 2004, we sold 191,861 per procedure fees inclusive of disposable patient interfaces and generated $22.3 million in revenues. In comparison,
during 2003, we sold 84,230 per procedure fees inclusive of disposable patient interfaces and generated $9.1 million in revenues. We attribute the increase in sales of per procedure fees inclusive of disposable patient interfaces to an
increased installed base of lasers, as we entered 2004 with approximately 2.5 times the installed base of lasers as compared to the same period in 2003. We expect sales of our per procedure fees inclusive of disposable patient interfaces to continue
to increase as the installed base of lasers increases.



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The increase in our installed base of lasers also led to an increase in our maintenance revenues to $4.5
million during 2004, as compared to $1.5 million during 2003. We expect our maintenance revenues to continue to increase as the installed base of lasers increases.

Gross Margin

Gross margin, as a percentage of total revenues, increased to 42% in 2004 from 33% in 2003. Costs of goods
sold, as a percentage of total revenues, decreased due to higher average selling prices for our laser, lower royalty expenses on our laser due to lower amortization costs for our licensing fees as compared to the royalties previously paid to the
University of Michigan, lower material costs and lower per unit labor and overhead costs for both our laser and our patient interface in 2004 as compared to the prior year period. Per unit material, labor and overhead costs were lower as the
increase in the number of lasers sold or leased and the increase in the number of per procedure fees inclusive of disposable patient interfaces sold resulted in volume discounts for material components and lower fixed overhead costs per unit.
Additionally, changes in our laser product reduced vendor material costs.

Research and Development

Research and development expenses increased by $3.6 million to $12.7 million in 2004 from $9.1 million in 2003. This increase resulted from increased
expenses for stock based compensation of $1.3 million, a $765,000 expensed portion of converting a royalty agreement to a full-paid royalty free technology license from the University of Michigan, $698,000 of higher personnel costs, $306,000 to
reimburse the selling stockholders for discounts and commissions to underwriters payable by the selling stockholders, $236,000 in increased depreciation expense on higher fixed assets, increased legal fees associated with our intellectual property
and licensing agreements of $175,000, increased expenses of $117,000 for regulatory and quality costs incurred in connection with obtaining our ISO EN 13485 certification and CE mark in the first quarter of 2004.

Selling, General and Administrative

Selling, general
and administrative expenses increased by $12.1 million to $23.4 million in 2004 from $11.2 million in 2003. The increase resulted from higher personnel costs in sales, marketing and general and administrative departments of $2.9 million; an increase
in stock based compensation of $2.7 million; an increase in travel, relocation and recruiting fees of $2.6 million; higher marketing, advertising, promotion and event costs of $1.1 million; increase in commissions paid to sales representatives on
higher sales totaling $791,000; higher personnel costs primarily for the addition of international sales and sales support personnel totaling $777,000; an increase in facilities expense of $629,000 and higher legal and accounting fees of $486,000.

Seasonality and Quarterly Results

Our
business is seasonal. Sales and leases of our lasers are typically stronger in the second and fourth quarters and sales of our higher gross margin per procedure fees inclusive of disposable patient interfaces are typically stronger in the first
quarter and slower in the third quarter. See OverviewSeasonality for a discussion of the reasons for the seasonality of our business.

The following table presents unaudited quarterly information for each quarter of fiscal years 2005 and 2004. This information has been derived from our unaudited financial statements prepared on the same basis as our
financial statements, which, in our opinion, reflects all adjustments, which include only normal recurring adjustments, necessary to present fairly the unaudited quarterly results when read in conjunction with our financial statements and related
notes included elsewhere in this Annual Report on Form 10-K. These historical operating results are not necessarily indicative of the results to be expected for any future period.



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|                                                |  |                                  |        |             |   |             |  |             |        |             |   |        |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|----------------------------------------------- |  | -------------------------------- | ------ | ----------- | - | ----------- |  | ----------- | ------ | ----------- | - | ------ | ----------- | - | ------ | ----------- |  | - | ----------- | - |  | - | ------ | - |  | - | ------ | -
|                                                |  | Quarter Ended                    |       
|                                                |  | Dec. 312005                      |        | Sep. 302005 |   | Jun. 302005 |  | Mar. 312005 |        | Dec. 312004 |   |        | Sep. 302004 |   |        | Jun. 302004 |  |   | Mar. 312004 |  
|                                                |  | (unaudited)                      |       
|                                                |  | (in thousands, except unit data) |       
|Statements of Operations Data:                  |  |                                  |        |             |   |             |  |             |        |             |   |        |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|New laser placement units                       |  |                                  | 44     |             |   | 34          |  |             | 39     |             |   | 39     |             |   | 37     |             |  |   | 27          |   |  |   | 30     |   |  |   | 17     |  
|Per-procedure patient interface units           |  |                                  | 95,000 |             |   | 83,000      |  |             | 85,284 |             |   | 75,188 |             |   | 52,418 |             |  |   | 49,927      |   |  |   | 48,422 |   |  |   | 41,094 |  
|Total revenues                                  |  | $                                | 27,361 |             | $ | 22,888      |  | $           | 23,003 |             | $ | 21,181 |             | $ | 19,163 |             |  | $ | 15,493      |   |  | $ | 15,827 |   |  | $ | 9,485  |  
|Costs of goods sold                             |  |                                  | 12,745 |             |   | 10,526      |  |             | 10,944 |             |   | 10,022 |             |   | 10,835 |             |  |   | 8,499       |   |  |   | 9,536  |   |  |   | 5,621  |  
|                                                |  |                                  |        |             |   |             |  |             |        |             |   |        |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|Gross margin                                    |  |                                  | 14,616 |             |   | 12,362      |  |             | 12,059 |             |   | 11,159 |             |   | 8,328  |             |  |   | 6,994       |   |  |   | 6,291  |   |  |   | 3,864  |  
|Operating expenses:                             |  |                                  |        |             |   |             |  |             |        |             |   |        |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|Research and development                        |  |                                  | 3,261  |             |   | 2,793       |  |             | 3,083  |             |   | 2,515  |             |   | 3,714  |             |  |   | 3,772       |   |  |   | 2,875  |   |  |   | 2,357  |  
|Selling, general and administrative             |  |                                  | 8,201  |             |   | 7,873       |  |             | 8,290  |             |   | 7,249  |             |   | 8,094  |             |  |   | 6,361       |   |  |   | 5,288  |   |  |   | 3,610  |  
|                                                |  |                                  |        |             |   |             |  |             |        |             |   |        |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|Total operating expenses                        |  |                                  | 11,462 |             |   | 10,666      |  |             | 11,373 |             |   | 9,764  |             |   | 11,808 |             |  |   | 10,133      |   |  |   | 8,163  |   |  |   | 5,967  |  
|                                                |  |                                  |        |             |   |             |  |             |        |             |   |        |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|Income (loss) from operations                   |  |                                  | 3,154  |             |   | 1,696       |  |             | 686    |             |   | 1,395  |             |   | (3,480 | )           |  |   | (3,139      | ) |  |   | (1,872 | ) |  |   | (2,103 | )
|Interest and other income (expense), net        |  |                                  | 830    |             |   | 771         |  |             | 664    |             |   | 668    |             |   | 389    |             |  |   | (2          | ) |  |   | 23     |   |  |   | 17     |  
|                                                |  |                                  |        |             |   |             |  |             |        |             |   |        |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|Income (loss) before provision for income taxes |  |                                  | 3,984  |             |   | 2,467       |  |             | 1,350  |             |   | 2,063  |             |   | (3,091 | )           |  |   | (3,141      | ) |  |   | (1,849 | ) |  |   | (2,086 | )
|Provision for income taxes                      |  |                                  | 155    |             |   | 77          |  |             | 40     |             |   | 67     |             |   | 8      |             |  |   | 7           |   |  |   | 7      |   |  |   | 8      |  
|                                                |  |                                  |        |             |   |             |  |             |        |             |   |        |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|Net income (loss)                               |  | $                                | 3,829  |             | $ | 2,390       |  | $           | 1,310  |             | $ | 1,996  |             | $ | (3,099 | )           |  | $ | (3,148      | ) |  | $ | (1,856 | ) |  | $ | (2,094 | )
|                                                |  |                                  |        |             |   |             |  |             |        |             |   |        |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  

Liquidity and Capital Resources

General

We require capital principally for operating our business, working capital and capital
expenditures for both the fixed assets used in our business and the revenue-generating assets under our operating leases. Our capital expenditures for fixed assets consist primarily of capitalization of our lasers for use in manufacturing and
developing our product offering, and information technology infrastructure and equipment used to support the growth of our business. Additionally, during the 2005 we paid approximately $3.6 million, which is included in our purchases of property,
plant and equipment in 2005, and $0.2 of related expenses for leasehold improvements and other expenditures related to our new rental facility in Irvine, California. Our capital expenditures for revenue-generating assets consist of the
capitalization of lasers under operating leases. Working capital is required principally to finance accounts receivable and inventory, as well as to enable us to provide long-term financing for customer laser purchases.

Our initial public offering, which was effective under applicable securities laws on October 6, 2004 and closed on October 13, 2004, resulted
in our receipt of net proceeds of $86.1 million from the sale of 7,295,447 shares of common stock, including the sale of 995,447 over-allotment shares. The proceeds were net of expenses of $2.2 million. The net proceeds of the offering were used, in
part, for the repayment of our bank debt in the amount of $1.3 million and the payment to the University of Michigan of $765,000. In addition, 22,191,333 shares of redeemable convertible preferred stock converted to 16,797,103 shares of common
stock.

We believe that our current cash and cash equivalents, together with our marketable securities and investments and cash expected to
be generated from sales of our product offering, will be sufficient to meet our projected operating requirements for at least the next 12 months. Our uses of cash included purchases of investment-grade securities, for which $79.0 million were held
at December 31, 2005 with diversification among issuers and maturities ranging from one to 24 months. We maintain our cash and cash equivalents, marketable securities and investments with two major financial institutions in the United States
and intend to hold our marketable securities and investments to maturity.

Net cash provided by operating activities increased to $8.2
million in 2005 from a $2.0 million use of cash in 2004. The increase of $10.2 million was primarily due to a $19.7 million increase caused by the improvement to net income in 2005 from a net loss in 2004, an increase in deferred rent and lease
incentives of $4.1 million, and an increase in depreciation and amortization of $2.2 million partially offset by a decrease in accounts payable and accrued expenses of $4.5 million, an increase in accounts receivable of $3.5 million, an increase in
other assets of $3.1 million, a decrease in stock-based compensation of $2.4 million and an increase in inventories of $1.9 million, as well as changes in other assets and liabilities. The decrease in accounts payable and accrued expenses was
primarily due to the timing of payments for purchases of inventory during the fourth quarter of 2005 as compared to the timing of payments for purchases of inventory during the fourth quarter of 2004 and the remaining initial public offering
expenses accrued but unpaid at December 31, 2004. However, the increase in cash used for inventory, accounts receivable and other assets, which included $1.8 million of net



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notes receivable associated with our sales-type leases, was due to our growing revenue, which resulted in higher balances in accounts receivable and
inventory at December 31, 2005 as compared to December 31, 2004. The increase in deferred rent and lease incentives was primarily due to a $3.3 million leasehold improvement allowance from the landlord of our new building.

Net cash used by investing activities decreased to $26.9 million in 2005 as compared to $66.8 in 2004. This decrease of $39.9 million was primarily due
to the initial investment of our initial public offering proceeds in marketable securities in 2004 offset partially by an increase in the purchase of property, plant and equipment of $7.9 million in 2005 that included approximately $3.6 million for
leasehold improvements and other expenditures related to our new rental facility in Irvine, California paid by us and the $3.3 million leasehold improvement allowance from the landlord of our new building.

Net cash flows provided by financing activities were $3.8 million in 2005 as compared $85.9 million in 2004. The decrease of $82.1 million is primarily
due to our initial public offering of common stock occurring in 2004. This decrease was offset by increases in net proceeds from the issuance of stock options under employee stock plans and the employee stock purchase plan of $2.5 million in
aggregate; the decrease net payment on long-term debt of $809,000 and notes receivable payments received of $700,000.

Accounts Receivable

Our accounts receivable days sales outstanding were 52 days at December 31, 2005; compared to 46 days at September 30, 2005;
50 days at June 30, 2005; 46 days at March 31, 2005; and 34 days at December 31, 2004. The increase in days sales outstanding during 2005 and at December 31, 2005 was due to our introduction of credit terms for select
international distributors in 2005 further described below and the increase in per procedure fees inclusive of a disposable patient interface, which generally have longer credit terms than lasers. Our laser sales in the U.S. are typically on the
basis of cash in advance paid directly by our customers or on terms, which are typically net 30, to fiscally sound third party financing companies, institutions or well established corporate customers. Our per procedure fees inclusive of a
disposable patient interface are typically sold for terms net 30 days from shipment. International customers, primarily distributors, have typically paid with cash in advance or by irrevocable letter of credit; however, in the second quarter of
2005, we began selling to selected and qualified distributors on credit terms.

We review our accounts receivable balances and customers
regularly to establish and maintain an appropriate allowance for doubtful accounts. We take into account the customers payment history, the number of days an account is overdue and any specific knowledge about an accounts financial
status. The reserve requirements are based on our review of every account and we place particular emphasis on analyzing each account with an accounts receivable balance more than 90 days old and on that accounts specific payment history and
financial risk. On that basis, the allowance for doubtful accounts as a percentage of gross accounts receivable was 1.9% and 2.1% at December 31, 2005 and December 31, 2004, respectively.

As we further extend terms to additional international distributors or increase their credit lines and per procedure fees inclusive of a disposable
patient interface increase as a percentage of revenues, we expect days sales outstanding to increase. Our per procedure fees inclusive of a disposable patient interface generally have payment terms of a longer duration on these revenues than we do
on our laser sales. However, our expectation is that days sales outstanding will remain in the range of 50 to 60 days in the short-term. As extensions of international credit and per procedure fees inclusive of a disposable patient interface
revenues increase, we will be exposed to an increased risk of not receiving payment on time for a portion of our sales. In addition, as the percentage of our revenues with longer credit terms increase, we will use more capital resources to fund the
increase in accounts receivable outstanding.

Debt

On August 4, 2005, we established a new revolving line of credit, which allows for maximum borrowing of $10.0 million, with a $1.5 million sub-limit to secure cash management services and a $1.0 million sub-limit
to secure letters of credit. The line of credit has a variable rate of interest equal to the banks prime rate (7.25% at December 31, 2005) and matures August 3, 2006. The line of credit did not have an outstanding balance at
December 31, 2005, and contains covenants for minimum quick ratio and profitability with which we were in compliance with at December 31, 2005.



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Contractual Obligations

The following summarizes our long-term contractual obligations as of December 31, 2005:



|                                                                  |  |                        |        |                  |   |             |  |             |       |              |   |       |  |   |      
|----------------------------------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ----------- |  | ----------- | ----- | ------------ | - | ----- |  | - | -----
|                                                                  |  | Payments due by period
|Contractual Obligations                                           |  | Total                  |        | Less than 1 year |   | 1 to 3years |  | 4 to 5years |       | After 5years
|                                                                  |  | (in thousands)        
|Operating leases (1)                                              |  |                        | 17,704 |                  |   | 1,490       |  |             | 3,170 |              |   | 3,471 |  |   | 9,573
|Royalty payments (2)                                              |  |                        | 688    |                  |   | 124         |  |             | 237   |              |   | 218   |  |   | 109  
|Letter of credit                                                  |  |                        | 50     |                  |   | 50          |  |             |       |              |   |       |  |   |      
|Employment agreement with Robert Palmisano, President and CEO (3) |  |                        | 148    |                  |   | 148         |  |             |       |              |   |       |  |   |      
|                                                                  |  |                        |        |                  |   |             |  |             |       |              |   |       |  |   |      
|Total                                                             |  | $                      | 18,590 |                  | $ | 1,812       |  | $           | 3,407 |              | $ | 3,689 |  | $ | 9,682
|                                                                  |  |                        |        |                  |   |             |  |             |       |              |   |       |  |   |      

---

|(1) | On January 31, 2005 we entered into a lease agreement for a larger facility in Irvine, California with approximately 128,670 square feet and completed the move during the third
quarter of 2005. The lease is for a period of ten years and four months beginning May 1, 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents minimum annual royalties under licensing agreements which continue until the soonest of the following: expiration of the patents or termination of the agreement in
accordance with its terms.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Expires in April of 2006. In February of 2006 we entered into a new agreement with Mr. Palmisano that will take effect when his current employment contract expires and is on
substantially the same terms as the 2003 contract.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet arrangements within the meaning of Item 303(a)(4)(ii) of Regulation S-K under the Securities Act of
1933.

Income Taxes

Realization of our
deferred tax assets is dependent upon the uncertainty of the timing and amount of our future earnings, if any. Accordingly, based upon available evidence and the criteria set forth in SFAS 109, Accounting for Income Taxes,we have established
full deferred tax asset valuation allowances as of December 31, 2005 and December 31, 2004 to reflect these uncertainties. Management will continue to assess the available evidence related to the realization of deferred tax assets and at
such time we determine that it is more likely than not that deferred taxes will be realized, a tax benefit will be realized and the valuation allowance will be released.

As of December 31, 2005, we had federal and state net operating loss carryforwards of approximately $55.0 million and $39.7 million, respectively, and research and development credit carryforwards of $1.6 million
and $2.2 million, respectively, which will expire on various dates beginning in 2007 through 2025.

Pursuant to Section 382 of the
Internal Revenue Code, use of our net operating loss and credit carryforwards may be limited if in the future we experience cumulative change in ownership of greater than 50% in a moving three-year period. Ownership changes would impact the
Companys ability to utilize net operating losses and credit carryforwards remaining at the ownership change date.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations during the periods presented, and
we do not anticipate that it will have a material effect in the future.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
On an on-going basis, we evaluate our estimates including those related to bad debts,



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inventories and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions.

While our significant accounting policies are more fully described in Note 1 to our financial statements appearing
elsewhere within this Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenues in
accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition. SAB 104 requires that four basic criteria must be met before revenues can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on
managements judgment regarding the fixed nature of the fee charged for products delivered and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future
transactions, revenues recognized for any reporting period could be adversely impacted.

For arrangements with multiple deliverables, we
allocate the total revenues to each deliverable based on its relative fair value in accordance with the provisions of Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables and recognize
revenues for each separate element as the above criteria are met.

Reserves for Doubtful Accounts, Billing Adjustments and Contractual Allowances

At the end of each fiscal quarter, we estimate the reserve necessary for doubtful accounts to ensure that we have established an
appropriate allowance for accounts receivable that may not ultimately be collectible. To develop this estimate we review all accounts and identify those with overdue balances, particularly those with balances 90 days, or more, overdue. For these
accounts we estimate individual specific reserves based on our analysis of the amount overdue, the customers payment history, operations and finances of each account. For all other accounts, we review historical bad debt trends, general and
industry-specific economic trends, and current payments along with the reasonable probability that payment will occur in the future. On that basis, the allowance for doubtful accounts as a percentage of gross accounts receivable was 1.9% and 2.1% at
December 31, 2005 and December 31, 2004, respectively. To date, our estimates of our doubtful accounts have been materially accurate. Subject to any major changes in our business model, our operating environment or the economy in general,
and taking into consideration our typical customer, we do not expect either our methodology or the accuracy of our estimates to change significantly in the future.

Inventories

Adjustments to the carrying value of inventory for excess and obsolete items are based, in part, on our
estimate of usage of component parts in the assembly of our lasers and the timing of design changes. This estimate, though based on our product design plans and other relevant factors, such as the current economic climate, is subject to some
uncertainty. Amounts charged to income for excess and obsolete inventories and as a percentage of total revenues, were $1.0 million or 1.1% of total revenues in 2005 as compared to $433,000 or 0.7% of total revenues in 2005. To date, our estimates
of excess and obsolete inventory have been materially accurate. Subject to any major changes in our business model, our operating environment or the economy in general, and taking into consideration the ongoing development of our technology we do
not expect either our methodology or the accuracy of our estimates to change significantly in the future.

Stock-Based Compensation

We account for employee and director stock options and restricted stock using the intrinsic-value method in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and have adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Stock options issued to non-employees, who are principally surgeons on our medical advisory board, are recorded at their fair value as determined in accordance with SFAS No. 123 and Emerging Issues Task Force (EITF)
No. 96-18,Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,and amortized on a declining basis over the service period.



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Stock compensation expense, which is a noncash charge, results from stock option grants made to employees
at exercise prices below the deemed fair value of the underlying common stock, and from stock option grants made to non-employees at the fair value of the option granted as determined using the Black-Scholes valuation model. Stock compensation
expense for grants made to employees below the fair value of the underlying common stock is amortized on a declining basis over the vesting period of the underlying option, generally four years. Unearned deferred compensation for non-employees is
periodically remeasured through the vesting date. We have recorded deferred stock-based compensation representing the difference between the option exercise price and the fair value of our common stock on the grant date for financial reporting
purposes. Prior to issuing our stock publicly, we determined the deemed fair value of our common stock based upon several factors, including operating performance, liquidation preferences of the preferred stock, an independent valuation analysis,
the market capitalization of peer companies and the expected valuation we would obtain in an initial public offering. Had different assumptions or criteria been used to determine the deemed fair value of our common stock, different amounts of
stock-based compensation could have been reported.

We recorded stock-based compensation expense of $2.1 million in 2005. From inception
through December 31, 2005, we recorded amortization of deferred stock compensation of $8.5 million. At December 31, 2005, we had a total of $2.2 million remaining to be amortized over the vesting period of the stock options, of which
$988,000 is subject to periodic remeasurement.

The amount of stock-based compensation expense to be recorded in future periods may
decrease if unvested options for which we have recorded deferred compensation are subsequently cancelled or expire or if the fair value of our stock decreases; or may increase if the fair market value of our stock increases or we make additional
grants of non-qualified stock options to members of our medical advisory board or other non-employee consultants.

Pro forma information
regarding net loss applicable to common stockholders and net loss per share applicable to common stockholders is required in order to show our net loss as if we had accounted for employee stock options under the fair value method of SFAS
No. 123, as amended by SFAS No. 148. This information is contained in Note 1 to our financial statements contained elsewhere within this Form 10-K. The fair values of options and shares issued pursuant to our option plan at each grant date
were estimated using the Black-Scholes option-pricing model.

We currently are not required to record stock-based compensation charges if
the employee stock option exercise price or restricted stock purchase price equals or exceeds the deemed fair value of our common stock at the date of grant. In December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share Based
Payment, which is a revision to SFAS 123 and supersedes APB 25 and SFAS 148. This statement requires that the estimated fair value resulting from all share-based payment transactions be recognized in the financial statements. If we had estimated
the fair value of the options or restricted stock on the date of grant in our financial statements, and then amortized this estimated fair value over the vesting period of the options or restricted stock, our net income (loss) would have been
adversely affected. See Note 1 to our financial statements contained elsewhere within this Form 10-K for a discussion of how our net income (loss) would have been adversely affected.

Accounting for Income Taxes

We account for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method, we determine deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of assets and income.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a full valuation allowance
on our net deferred tax assets as of December 31, 2005 and December 31, 2004, due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable future. These deferred tax assets primarily consist of net
operating loss carryforwards and research and development tax credits.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment.This statement replaces SFAS No. 123, Accounting
for Stock-Based Compensationand supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees.SFAS No. 123R addresses the accounting for share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of such equity instruments. SFAS
No. 123R eliminates the ability to account for share-based compensation transactions using the intrinsic value method under APB 25, Accounting for Stock Issued to Employees, and requires instead that such transactions be accounted for
using a fair-value-



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based method. SFAS No. 123R will be effective for us beginning in our first quarter of fiscal 2006. Management expects that we will use the modified
prospective application method. Under SFAS 123R, unearned deferred stock compensation for non-employees will continue to be periodically remeasured through the vesting date. This periodic remeasurement could have a significant impact on our results
of operations. We believe that the adoption of SFAS 123R will result in stock-based compensation in 2006 of approximately $6.5 million, the majority of which will arise from the adoption of SFAS 123R, as compared to approximately $2.1 million of
stock-based compensation recognized in 2005. However, actual results may vary depending upon 2006 stock option grants and stock compensation programs.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) to
be expensed as incurred and not included in overhead. Further, SFAS No. 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. The provisions of SFAS
No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Our current accounting policies are consistent with the accounting required by SFAS No. 151 and, as such, the adoption of this
statement will have no effect on our financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, which replaces APR Opinion No. 120, Accounting Changesand SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for accounting and reporting a
change in accounting principle, and applies to all voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the unusual instance it does not include specific transition provisions. Specifically, SFAS
No. 154 requires retrospective application to prior periods financial statements, unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the
effects of the change, the new accounting principle must be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and a corresponding adjustment must be made
to the opening balance of retained earnings for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of the change the new principle must be applied as if it were adopted
prospectively from the earliest date practicable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS No. 154 does not change the transition
provisions of any existing pronouncements. We have evaluated the impact of SFAS No. 154 and do not expect the adoption of this Statement to have a significant impact on our financial statements. We will apply SFAS No. 154 in future
periods, when applicable.

During 2005 the FASB issued Interpretation 47, Accounting for Conditional Asset Retirement Obligations,
which addresses certain aspects of SFAS No. 143, Accounting for Asset Retirement Obligations. FAS Interpretation 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FAS
Interpretation 47 had no impact on our financial statements.

Item 7AQuantitative and Qualitative Disclosures About Market Risk

The primary objective of our
investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing the risk of loss. Some of the securities in which we may invest in the future may be subject to market risk
for changes in interest rates. To mitigate this risk, we plan to maintain a portfolio of cash equivalents and short-term investments in a variety of marketable securities, which may include commercial paper, money market funds, government and
non-government debt securities. Currently, we are exposed to minimal market risks. We manage the sensitivity of our results of operations to these risks by maintaining a conservative portfolio, which is comprised solely of highly rated, short-term
investments. We do not hold or issue derivative, derivative commodity instruments or other financial instruments for trading purposes.

The
risk associated with fluctuating interest rates is limited to our investment portfolio and our borrowings. We do not believe that a 10% change in interest rates would have a significant effect on our results of operations or cash flows.

All of our sales since inception have been made in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate
fluctuations. We expect to continue to realize our sales in U.S. dollars, regardless of our intended expansion into international markets, although no assurances can be given. As we increase our international sales and support organization, we
anticipate some level of exposure to foreign currency risk as a result of compensating these employees in local currencies.



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Item 8Financial Statements and Supplementary Data

The financial statements required by this
Item 8 are set forth at the pages indicated at Item 15(a)(1).

The supplementary financial data required by this Item 8 are
located under the subheading Seasonality and Quarterly Results located under Part II, Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations.

Item 9Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9AControls and Procedures

We maintain disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and
procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives.

We carried out
an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of
December 31, 2005, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, and were operating at the
reasonable assurance level as of December 31, 2005.

There have been no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter and year ended December 31, 2005 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Managements Report on Internal Control Over Financial Reporting

Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial
Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and procedures that:



| |  |  | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transaction and dispositions of our assets;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Internal control over financial reporting cannot provide absolute assurance of achieving financial
reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal
control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control
over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is
responsible for establishing and maintaining adequate internal control over our financial reporting.



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Management has used the framework set forth in the report entitled Internal ControlIntegrated
Framework published by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission to evaluate the effectiveness of its internal control over financial reporting. Management has concluded that its internal control
over financial reporting was effective as of the end of the most recent fiscal year. Deloitte & Touche LLP has issued an attestation report (see below) on managements assessment of our internal control over financial reporting.

The foregoing has been approved by our management, including our Chief Executive Officer and Chief Financial Officer, who have been
involved with the assessment and analysis of our internal controls over financial reporting.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors and Shareholders

IntraLase Corp.:

We have audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting appearing
above, that IntraLase Corp. and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our
audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a
process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets
that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness
of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that the Company maintained effective internal control over financial reporting as of
December 31, 2005 is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005,
based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the accompanying consolidated balance sheets of IntraLase Corp. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, cash flows, and stockholders equity and
comprehensive income (loss) for each of the three years in the period ended December 31, 2005 of IntraLase Corp. and subsidiaries and our report dated March 1, 2006 expressed an unqualified opinion on those financial statements.

/s/DELOITTE & TOUCHE LLP

Costa Mesa, California

March 1, 2006



44



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##### Table of Contents

Item 9BOther Information

None.

PART III

Item 10Directors and Executive Officers of the Registrant

There is incorporated herein by reference
the information required by this Item in our definitive proxy statement for the 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended
December 31, 2005. See Part I, Item 1  Executive Officers of the Registrant for information regarding the executive officers of IntraLase Corp. or its operating subsidiary.

Item 11Executive Compensation

There is incorporated herein by reference the information required by
this Item in our definitive proxy statement for the 2005 Annual Meeting of Stockholders that will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 2005.

Item 12  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

There is incorporated herein by reference the information required by this Item in our definitive proxy statement for the 2005 Annual Meeting of Stockholders that will be filed with the Securities and Exchange Commission no later than 120
days after the close of the year ended December 31, 2005.

Item 13Certain Relationships and Related Transactions

There is incorporated herein by reference the
information required by this Item in our definitive proxy statement for the 2005 Annual Meeting of Stockholders that will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31,
2005.

Item 14Principal Accounting Fees and Services

There is incorporated herein by reference the
information required by this Item in our definitive proxy statement for the 2005 Annual Meeting of Stockholders that will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31,
2005.

PART IV

Item 15Exhibits, Financial Statement Schedules



|(a) | List of documents filed as part of this Form 10-K:
|--- | --------------------------------------------------



| | (1) | Financial Statements.
| | --- | ---------------------

See Index to
Financial Statements and Schedule on page F-1.



| | (2) | Financial Statement Schedules.
| | --- | ------------------------------

See
Index to Financial Statements and Schedule on page F-1.



45



---

##### Table of Contents

(3) Exhibits.

The following exhibits are filed (or incorporated by reference herein) as part of this Form 10-K:



|            |  |                                                                                                                                                                                                                                                                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                            
|3.1         |  | Seventh Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with
the Securities and Exchange Commission on July 13, 2004).                                                                                    
|            | 
|3.2         |  | Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and
Exchange Commission on July 13, 2004).                                                                                                           
|            | 
|4.1         |  | Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and
Exchange Commission on September 13, 2004).                                                                                                       
|            | 
|4.2         |  | Fourth Amended and Restated Registration Rights Agreement, dated May 17, 2002, among IntraLase Corp. and certain of its stockholders (incorporated by reference to Exhibit 4.2 to
IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).          
|            | 
|4.3         |  | Warrant to Purchase 31,300 Shares of Series E Preferred Stock issued on July 12, 2001 to Silicon Valley Bank (incorporated by reference to Exhibit 4.3 to IntraLases Registration
Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).                                  
|            | 
|4.4         |  | Warrant to Purchase 16,500 shares of Series G Preferred Stock issued on December 12, 2002 to Silicon Valley Bank (incorporated by reference to Exhibit 4.4 to IntraLases Registration
Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).                              
|            | 
|10.1        |  | Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.1 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and
Exchange Commission on May 28, 2004).                                                                                                       
|            | 
|10.2        |  | 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange
Commission on May 28, 2004).                                                                                                                    
|            | 
|10.3        |  | 2000 Executive Option Plan (incorporated by reference to Exhibit 10.3 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange
Commission on May 28, 2004).                                                                                                                   
|            | 
|10.4        |  | 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange
Commission on July 13, 2004).                                                                                                                   
|            | 
|10.5        |  | Form of Stock Option Agreement under Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.5 to IntraLases Registration Statement on Form S-1 (File No.
333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).                                                                  
|            | 
|10.6        |  | Form of Stock Option Agreement under 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed
with the Securities and Exchange Commission on May 28, 2004).                                                                               
|            | 
|10.7        |  | Form of Stock Option Agreement under 2000 Executive Option Plan (incorporated by reference to Exhibit 10.7 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as
filed with the Securities and Exchange Commission on May 28, 2004).                                                                              
|            | 
|10.8        |  | Form of Stock Option Agreement under 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.8 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed
with the Securities and Exchange Commission on July 13, 2004).                                                                              
|            | 
|10.9        |  | Form of Restricted Stock Purchase Agreement entered into on September 2000 and March 2002 between IntraLase Corp. and certain of its officers (incorporated by reference to Exhibit 10.9 to
IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).



46



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                          
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.10 |  | Form of Amendment to the Restricted Stock Purchase Agreement entered into on September 2000 and March 2002 between IntraLase Corp. and certain of its officers (incorporated by reference to
Exhibit 10.10 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).                                
|      | 
|10.11 |  | Patent License Agreement, dated December 31, 2001, between Agere Systems Guardian Corporation and IntraLase Corp. (incorporated by reference to Exhibit 10.11 to IntraLases Registration
Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).                                                                            
|      | 
|10.12 |  | License Agreement Michigan File 939 Technology, dated December 16, 1997, between the University of Michigan and IntraLase Corp. (incorporated by reference to Exhibit 10.12 to IntraLases
Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).                                                              
|      | 
|10.13 |  | License Agreement Michigan File 1387 Technology, dated August 10, 1998, between the University of Michigan and IntraLase Corp. (incorporated by reference to Exhibit 10.13 to IntraLases
Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).                                                                
|      | 
|10.14 |  | License Agreement Michigan File 1509 Technology, dated August 10, 1998, between the University of Michigan and IntraLase Corp. (incorporated by reference to Exhibit 10.14 to IntraLases
Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).                                                               
|      | 
|10.15 |  | Amendment to License Agreement Michigan File 1509 Technology dated February 17, 2003, between the University of Michigan and IntraLase Corp. (incorporated by reference to Exhibit 10.15 to
IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 24, 2004).                                               
|      | 
|10.16 |  | Amended and Restated License Agreement, dated October 17, 2000, between IntraLase Corp. and Escalon Medical Corp. (incorporated by reference to Exhibit 10.16 to IntraLases Registration
Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 24, 2004).                                                                          
|      | 
|10.17 |  | Amendment No. 1 to Amended and Restated License Agreement, dated May 17, 2001, between IntraLase Corp. and Escalon Medical Corp. (incorporated by reference to Exhibit 10.17 to
IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).                                                             
|      | 
|10.18 |  | License Agreement, dated March 16, 2000, between Shui Lai and IntraLase Corp. (incorporated by reference to Exhibit 10.18 to IntraLases Registration Statement on Form S-1 (File No.
333-116016) as filed with the Securities and Exchange Commission on August 24, 2004).                                                                                                              
|      | 
|10.19 |  | Separation and Consulting Agreement, dated February 13, 2003, between IntraLase Corp. and Randy Alexander (incorporated by reference to Exhibit 10.19 to IntraLases Registration
Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).                                                                                     
|      | 
|10.20 |  | Industrial Lease, dated September 7, 2000, between the Irvine Company and IntraLase Corp. (incorporated by reference to Exhibit 10.20 to IntraLases Registration Statement on Form S-1
(File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).                                                                                                    
|      | 
|10.21 |  | 2004 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.21 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and
Exchange Commission on August 3, 2004).                                                                                                                                                           
|      | 
|10.22 |  | Form of Indemnification Agreement between IntraLase and each of its officers and directors (incorporated by reference to Exhibit 10.22 to IntraLases Registration Statement on Form S-1
(File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).                                                                                                    
|      | 
|10.23 |  | Employment Agreement, dated April 10, 2003, between IntraLase and Robert Palmisano (incorporated by reference to Exhibit 10.23 to IntraLases Registration Statement on Form S-1 (File No.
333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).*                                                                                                          
|      | 
|10.24 |  | Form of Change in Control Agreement between IntraLase and each of Bernard Haffey, Charline Gauthier, Scott Scholler, Frank Jepson, Kevin Harley, Eric Weinberg, Tibor Juhasz and Ronald Kurtz
(incorporated by reference to Exhibit 10.24 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
|      | 
|10.25 |  | Change in Control Agreement, dated March 3, 2004, between IntraLase and Shelley Thunen (incorporated by reference to Exhibit 10.25 to IntraLases Registration Statement on Form S-1 (File
No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*                                                                                                       



47



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                  
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.26 |  | Change in Control Agreement, dated March 3, 2004, between IntraLase and Robert Palmisano (incorporated by reference to Exhibit 10.26 to IntraLases Registration Statement on Form
S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*                                                                                             
|      | 
|10.27 |  | The Executive Nonqualified Excess Plan Document (incorporated by reference to Exhibit 10.27 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the
Securities and Exchange Commission on May 28, 2004).*                                                                                                                                      
|      | 
|10.28 |  | The Executive Nonqualified Excess Plan Adoption Agreement (incorporated by reference to Exhibit 10.28 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed
with the Securities and Exchange Commission on May 28, 2004).*                                                                                                                            
|      | 
|10.29 |  | The Executive Nonqualified Excess Plan Trust Agreement (incorporated by reference to Exhibit 10.29 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with
the Securities and Exchange Commission on May 28, 2004).*                                                                                                                               
|      | 
|10.30 |  | Amended and Restated License and Settlement Agreement, Michigan Files 939, 1387, 1509 and 1662, dated July 15, 2004, between IntraLase and the Regents of the University of Michigan
(incorporated by reference to Exhibit 10.30 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 3, 2004).
|      | 
|10.31 |  | Employment Letter Agreement, dated July 13, 2004, between IntraLase and Franklin T. Jepson (incorporated by reference to Exhibit 10.31 to IntraLases Registration Statement on Form S-1
(File No. 333-116016) as filed with the Securities and Exchange Commission on August 3, 2004).*                                                                                         
|      | 
|10.32 |  | Third Amended and Restated Founders Agreement dated November 2002, between IntraLase and Ronald M. Kurtz and Jennifer Simpson, and Tibor Juhasz (incorporated by reference to Exhibit
10.32 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 3, 2004).                                    
|      | 
|10.33 |  | Employment Letter Agreement, dated July 14, 2004, between IntraLase and Kevin Harley (incorporated by reference to Exhibit 10.33 to IntraLases Registration Statement on Form S-1 (File
No. 333-116016) as filed with the Securities and Exchange Commission on August 24, 2004).*                                                                                              
|      | 
|10.34 |  | Employment Letter Agreement, dated May 14, 2003, between IntraLase and Charline Gauthier (incorporated by reference to Exhibit 10.34 to IntraLases Registration Statement on Form S-1
(File No. 333-116016) as filed with the Securities and Exchange Commission on September 13, 2004).*                                                                                       
|      | 
|10.35 |  | Employment Letter Agreement, dated December 23, 2004, between IntraLase and James Lightman. (incorporated by reference to Exhibit 10.35 to IntraLases 2004 Annual Report on Form 10-K
(File No. 000-50939) as filed with the Securities and Exchange Commission on March 29, 2005).*                                                                                            
|      | 
|10.36 |  | Change of Control Severance Agreement, dated February 14, 2005, between IntraLase Corp. and James Lightman. (incorporated by reference to Exhibit 10.36 to IntraLases 2004 Annual Report
on Form 10-K (File No. 000-50939) as filed with the Securities and Exchange Commission on March 29, 2005).*                                                                            
|      | 
|10.37 |  | Lease, dated January 31, 2005, between 9701 Jeronimo Holdings, LLC and IntraLase Corp. (incorporated by reference to Exhibit 10.37 to IntraLases 2004 Annual Report on Form 10-K (File
No. 000-50939) as filed with the Securities and Exchange Commission on March 29, 2005).                                                                                                  
|      | 
|14.1  |  | Code of Business and Ethical Conduct (incorporated by reference to Exhibit 14.1 to IntraLases Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and
Exchange Commission on July 13, 2004).                                                                                                                                                  
|      | 
|21.1  |  | Subsidiaries of the registrant.                                                                                                                                                                                                                                                                                                                                                  
|      | 
|23.1  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                        
|      | 
|24.1  |  | Power of Attorney (included in signature page).                                                                                                                                                                                                                                                                                                                                  
|      | 
|31.1  |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley
Act of 2002.                                                                                                                                                                      



48



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##### Table of Contents

|     |  |                                                                                                                                                                                                            
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.2 |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley
Act of 2002.
|     | 
|32.1 |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**                                                   
|     | 
|32.2 |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**                                                   

---

|* | Indicates Item 15(a)(3) exhibit (management contract or compensation plan or arrangement).
|- | ------------------------------------------------------------------------------------------

|** | In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act
of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



49



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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 on March 3, 2006.



IntraLase Corp.By:

/s/ Robert J. PalmisanoRobert J. Palmisano,President and Chief Executive Officer


POWER OF ATTORNEY

Each of the undersigned hereby constitutes and appoints Robert J. Palmisano and Shelley B. Thunen, or either of them, his/her true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution, to sign any or all amendments to the Form 10-K of IntraLase Corp. for the year ended December 31, 2005 and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his/her substitute or substitutes, may do or cause to be done by virtue hereof in any and all
capacities.

Pursuant to the requirements of the Securities 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 date indicated.



|                                                    |  |                                                                                                   |  |              
|--------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | -------------
|Signature                                           |  | Title                                                                                             |  | Date         
|/s/ Robert J. Palmisano Robert J. Palmisano         |  | President, Chief Executive Officer and Director (principal executive officer)                     |  | March 3, 2006
|                                                    |  |                                                                                                  
|/s/ Shelley B. Thunen Shelley B. Thunen             |  | Executive Vice President and Chief Financial Officer (principal financial and accounting officer) |  | March 3, 2006
|                                                    |  |                                                                                                  
|/s/ William J. Link, Ph.D. William J. Link, Ph.D.   |  | Director (Chairman of the Board of Directors)                                                     |  | March 3, 2006
|                                                    |  |                                                                                                  
|/s/ Frank M. Fischer Frank M. Fischer               |  | Director                                                                                          |  | March 3, 2006
|                                                    |  |                                                                                                  
|/s/ Jay T. Holmes Jay T. Holmes                     |  | Director                                                                                          |  | March 3, 2006
|                                                    |  |                                                                                                  
|/s/ Gilbert H. Kliman, M.D. Gilbert H. Kliman, M.D. |  | Director                                                                                          |  | March 3, 2006
|                                                    |  |                                                                                                  
|/s/ Mark Lortz Mark Lortz                           |  | Director                                                                                          |  | March 3, 2006
|                                                    |  |                                                                                                  
|/s/ Thomas S. Porter Thomas S. Porter               |  | Director                                                                                          |  | March 3, 2006



50



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##### Table of Contents

IntraLase Corp.

Index to Consolidated Financial Information



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Report of Independent Registered Public Accounting Firm                                              |  | F-2 
|Consolidated Balance SheetsDecember 31, 2005 and 2004                                               |  | F-3 
|Consolidated Statements of OperationsFor the years ended December 31, 2005, 2004 and 2003           |  | F-4 
|Consolidated Statements of Stockholders EquityFor the years ended December 31, 2005, 2004 and 2003 |  | F-5 
|Consolidated Statements of Cash FlowsFor the years ended December 31, 2005, 2004 and 2003           |  | F-6 
|Notes to Consolidated Financial Statements                                                           |  | F-8 
|Financial Statement Schedule  Valuation and Qualifying Accounts                                     |  | F-25



F-1



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of

IntraLase Corp.

Irvine, California

We have
audited the accompanying consolidated balance sheets of IntraLase Corp. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule
are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all material respects, the
financial position of IntraLase Corp. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2006 expressed an unqualified opinion on managements assessment of the effectiveness of the Companys internal
control over financial reporting and an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.

/s/DELOITTE & TOUCHE LLP

Costa Mesa, California

March 1, 2006



F-2



---

##### Table of Contents

INTRALASE CORP.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2005 AND 2004



|                                                                                                                                  |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                  |  | 2005 |             |   | 2004 |  
|Assets                                                                                                                            |  |      |             |   |      |   |             |  
|Current assets:                                                                                                                   |  |      |             |   |      |   |             |  
|Cash and cash equivalents                                                                                                         |  | $    | 11,198,665  |   |      | $ | 26,014,926  |  
|Marketable securities                                                                                                             |  |      | 35,000,000  |   |      |   | 66,000,000  |  
|Accounts receivableNet of allowance for doubtful accounts of $269,308 (2005) and $151,604 (2004)                                 |  |      | 13,575,776  |   |      |   | 7,186,163   |  
|Inventories                                                                                                                       |  |      | 13,471,961  |   |      |   | 8,901,684   |  
|Prepaid expenses and other current assets                                                                                         |  |      | 3,190,412   |   |      |   | 1,868,186   |  
|                                                                                                                                  |  |      |             |   |      |   |             |  
|Total current assets                                                                                                              |  |      | 76,436,814  |   |      |   | 109,970,959 |  
|                                                                                                                                  |  |      |             |   |      |   |             |  
|Marketable securities                                                                                                             |  |      | 44,000,000  |   |      |   |             |  
|Property, plant and equipmentNet                                                                                                 |  |      | 12,422,428  |   |      |   | 4,597,546   |  
|Equipment under operating leasesNet of accumulated depreciation of $1,155,270 (2005) and $682,889 (2004)                         |  |      | 3,681,099   |   |      |   | 2,224,785   |  
|Other assets                                                                                                                      |  |      | 3,087,216   |   |      |   | 1,418,774   |  
|                                                                                                                                  |  |      |             |   |      |   |             |  
|Total                                                                                                                             |  | $    | 139,627,557 |   |      | $ | 118,212,064 |  
|                                                                                                                                  |  |      |             |   |      |   |             |  
|Liabilities and Stockholders Equity                                                                                              |  |      |             |   |      |   |             |  
|Current liabilities:                                                                                                              |  |      |             |   |      |   |             |  
|Accounts payable                                                                                                                  |  | $    | 4,830,731   |   |      | $ | 5,685,565   |  
|Accrued expenses                                                                                                                  |  |      | 7,805,567   |   |      |   | 6,030,507   |  
|Deferred revenues                                                                                                                 |  |      | 3,874,335   |   |      |   | 3,232,272   |  
|                                                                                                                                  |  |      |             |   |      |   |             |  
|Total current liabilities                                                                                                         |  |      | 16,510,633  |   |      |   | 14,948,344  |  
|                                                                                                                                  |  |      |             |   |      |   |             |  
|Deferred rent and lease incentives                                                                                                |  |      | 3,964,894   |   |      |   |             |  
|Deferred revenues                                                                                                                 |  |      | 1,179,466   |   |      |   | 970,115     |  
|                                                                                                                                  |  |      |             |   |      |   |             |  
|Total liabilities                                                                                                                 |  |      | 21,654,993  |   |      |   | 15,918,459  |  
|Commitments and Contingencies (Notes 10 and 12)                                                                                   |  |      |             |   |      |   |             |  
|Stockholders Equity:                                                                                                             |  |      |             |   |      |   |             |  
|Preferred stock, $0.01 par value  10,000,000 shares issued and authorized and no shares outstanding in 2005 and 2004             |  |      |             |   |      |   |             |  
|Common stock, $0.01 par value45,000,000 shares authorized; 28,073,627 (2005) and 26,769,185 (2004) shares issued and
outstanding |  |      | 280,736     |   |      |   | 267,692     |  
|Additional paid-in capital                                                                                                        |  |      | 173,941,312 |   |      |   | 170,567,316 |  
|Deferred stock-based compensation                                                                                                 |  |      | (2,235,113  | ) |      |   | (4,302,631  | )
|Receivable from sale of stock to officers and employees                                                                           |  |      | (138,747    | ) |      |   | (838,690    | )
|Accumulated deficit                                                                                                               |  |      | (53,875,624 | ) |      |   | (63,400,082 | )
|                                                                                                                                  |  |      |             |   |      |   |             |  
|Total stockholders equity                                                                                                        |  |      | 117,972,564 |   |      |   | 102,293,605 |  
|                                                                                                                                  |  |      |             |   |      |   |             |  
|Total                                                                                                                             |  | $    | 139,627,557 |   |      | $ | 118,212,064 |  
|                                                                                                                                  |  |      |             |   |      |   |             |  

See accompanying notes to financial statements.



F-3



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##### Table of Contents

INTRALASE CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003



|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|--------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                      |  | 2005 |            |   | 2004 |   |             | 2003 | 
|Total revenues                                                        |  | $    | 94,432,835 |   |      | $ | 59,968,274  |      |  | $ | 25,429,464  |  
|Costs of goods sold(1)                                                |  |      | 44,237,314 |   |      |   | 34,491,140  |      |  |   | 17,070,126  |  
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Gross margin                                                          |  |      | 50,195,521 |   |      |   | 25,477,134  |      |  |   | 8,359,338   |  
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Operating expenses:                                                   |  |      |            |   |      |   |             |      |  |   |             |  
|Research and development(1)                                           |  |      | 11,652,675 |   |      |   | 12,718,418  |      |  |   | 9,117,013   |  
|Selling, general and administrative(1)                                |  |      | 31,611,517 |   |      |   | 23,352,288  |      |  |   | 11,213,055  |  
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Total operating expenses                                              |  |      | 43,264,192 |   |      |   | 36,070,706  |      |  |   | 20,330,068  |  
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Income (loss) from operations                                         |  |      | 6,931,329  |   |      |   | (10,593,572 | )    |  |   | (11,970,730 | )
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Interest and other income, Net                                        |  |      |            |   |      |   |             |      |  |   |             |  
|Interest expense                                                      |  |      | (348,614   | ) |      |   | (185,190    | )    |  |   | (180,211    | )
|Interest income                                                       |  |      | 3,090,329  |   |      |   | 575,900     |      |  |   | 232,858     |  
|Other income                                                          |  |      | 191,577    |   |      |   | 35,960      |      |  |   | 16,437      |  
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Total interest and other income, Net                                  |  |      | 2,933,292  |   |      |   | 426,670     |      |  |   | 69,084      |  
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Income (loss) before provision for income taxes                       |  |      | 9,864,621  |   |      |   | (10,166,902 | )    |  |   | (11,901,646 | )
|Provision for income taxes                                            |  |      | 340,163    |   |      |   | 30,000      |      |  |   | 22,660      |  
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Net income (loss)                                                     |  |      | 9,524,458  |   |      |   | (10,196,902 | )    |  |   | (11,924,306 | )
|Accretion of preferred stock                                          |  |      |            |   |      |   | (44,845     | )    |  |   | (59,792     | )
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Net income (loss) applicable to common stockholders                   |  | $    | 9,524,458  |   |      | $ | (10,241,747 | )    |  | $ | (11,984,098 | )
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Net income (loss) per share applicable to common stockholdersbasic   |  | $    | 0.35       |   |      | $ | (1.28       | )    |  | $ | (5.66       | )
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Net income (loss) per share applicable to common stockholdersdiluted |  | $    | 0.31       |   |      | $ | (1.28       | )    |  | $ | (5.66       | )
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Weighted average shares outstandingbasic                             |  |      | 27,405,499 |   |      |   | 8,008,494   |      |  |   | 2,118,898   |  
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Weighted average shares outstandingdiluted                           |  |      | 31,136,538 |   |      |   | 8,008,494   |      |  |   | 2,118,898   |  
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|(1)    Amounts include stock-based compensation expenses, as follows: |  |      |            |   |      |   |             |      |  |   |             |  
|                                                                      |  |      |           
|Costs of goods sold                                                   |  | $    | 104,516    |   |      | $ | 197,614     |      |  | $ | 8,597       |  
|Research and development                                              |  |      | 702,688    |   |      |   | 1,467,311   |      |  |   | 159,583     |  
|Selling, general and administrative                                   |  |      | 1,290,873  |   |      |   | 2,844,188   |      |  |   | 138,983     |  
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Total stock-based compensation expenses                               |  | $    | 2,098,077  |   |      | $ | 4,509,113   |      |  | $ | 307,163     |  
|                                                                      |  |      |            |   |      |   |             |      |  |   |             |  

See accompanying notes to financial statements



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##### Table of Contents

INTRALASE CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003



|                                                              |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   |             |  
|------------------------------------------------------------- |  | ------------ | - |  | ------------------------- | ------- | - | ------------------------------- | - | ----------- | --------------------------- |  | - | ------------------ | - |  | -------------------------------- | -------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                              |  | Common Stock |   |  | AdditionalPaid-In Capital |         |   | DeferredStock-BasedCompensation |   |             | Receivablefrom Saleof Stock |  |   | AccumulatedDeficit |   |  | NetStockholdersEquity (Deficit) |         
|                                                              |  | Shares       |   |  | Amount                    |         |   |                                 |   |             |                            
|BALANCEDecember 31, 2002                                     |  | 2,207,790    |   |  | $                         | 22,078  |   |                                 | $ | 1,941,701   |                             |  | $ | (305,859           | ) |  | $                                | (855,043 | ) |  | $ | (41,174,237 | ) |  | $ | (40,371,360 | )
|Stock option exercises                                        |  | 25,148       |   |  |                           | 251     |   |                                 |   | 37,189      |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   | 37,440      |  
|Deferred stock compensation related to stock option grants    |  |              |   |  |                           |         |   |                                 |   | 378,590     |                             |  |   | (378,590           | ) |  |                                  |          |   |  |   |             |   |  |   |             |  
|Stock-based compensation                                      |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   | 307,163            |   |  |                                  |          |   |  |   |             |   |  |   | 307,163     |  
|Accretion to redemption value                                 |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  |          |   |  |   | (59,792     | ) |  |   | (59,792     | )
|Net loss                                                      |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  |          |   |  |   | (11,924,306 | ) |  |   | (11,924,306 | )
|                                                              |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   |             |  
|BALANCEDecember 31, 2003                                     |  | 2,232,938    |   |  |                           | 22,329  |   |                                 |   | 2,357,480   |                             |  |   | (377,286           | ) |  |                                  | (855,043 | ) |  |   | (53,158,335 | ) |  |   | (52,010,855 | )
|                                                              |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   |             |  
|Stock option exercises                                        |  | 455,705      |   |  |                           | 4,557   |   |                                 |   | 675,321     |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   | 679,878     |  
|Deferred stock compensation related to stock option grants    |  |              |   |  |                           |         |   |                                 |   | 8,434,458   |                             |  |   | (8,434,458         | ) |  |                                  |          |   |  |   |             |   |  |   |             |  
|Stock-based compensation                                      |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   | 4,509,113          |   |  |                                  |          |   |  |   |             |   |  |   | 4,509,113   |  
|Accretion to redemption value                                 |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  |          |   |  |   | (44,845     | ) |  |   | (44,845     | )
|Conversion of preferred shares                                |  | 16,797,103   |   |  |                           | 167,971 |   |                                 |   | 73,137,561  |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   | 73,305,532  |  
|Issuance of common stock, net of issuance costs of $2,150,270 |  | 7,295,447    |   |  |                           | 72,954  |   |                                 |   | 85,978,730  |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   | 86,051,684  |  
|Repurchase of shares                                          |  | (12,008      | ) |  |                           | (119    | ) |                                 |   | (16,234     | )                           |  |   |                    |   |  |                                  | 16,353   |   |  |   |             |   |  |   |             |  
|Net loss                                                      |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  |          |   |  |   | (10,196,902 | ) |  |   | (10,196,902 | )
|                                                              |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   |             |  
|BALANCEDecember 31, 2004                                     |  | 26,769,185   |   |  |                           | 267,692 |   |                                 |   | 170,567,316 |                             |  |   | (4,302,631         | ) |  |                                  | (838,690 | ) |  |   | (63,400,082 | ) |  |   | 102,293,605 |  
|                                                              |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   |             |  
|Stock option exercises                                        |  | 1,172,240    |   |  |                           | 11,722  |   |                                 |   | 1,886,953   |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   | 1,898,675   |  
|Deferred stock compensation related to stock option grants    |  |              |   |  |                           |         |   |                                 |   | 30,559      |                             |  |   | (30,559            | ) |  |                                  |          |   |  |   |             |   |  |   |             |  
|Stock-based compensation                                      |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   | 2,098,077          |   |  |                                  |          |   |  |   |             |   |  |   | 2,098,077   |  
|Cashless exercise of warrant                                  |  | 28,584       |   |  |                           | 286     |   |                                 |   | (286        | )                           |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   |             |  
|Payments for 2004 IPO expenditures                            |  |              |   |  |                           |         |   |                                 |   | (17,798     | )                           |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   | (17,798     | )
|Proceeds from collection of receivable                        |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  | 699,943  |   |  |   |             |   |  |   | 699,943     |  
|Issuance of common stock under employee stock purchase plan   |  | 103,618      |   |  |                           | 1,036   |   |                                 |   | 1,233,503   |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   | 1,234,539   |  
|Tax benefit from exercise of stock options                    |  |              |   |  |                           |         |   |                                 |   | 241,065     |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   | 241,065     |  
|Net income                                                    |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  |          |   |  |   | 9,524,458   |   |  |   | 9,524,458   |  
|                                                              |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   |             |  
|BALANCEDecember 31, 2005                                     |  | 28,073,627   |   |  | $                         | 280,736 |   |                                 | $ | 173,941,312 |                             |  | $ | (2,235,113         | ) |  | $                                | (138,747 | ) |  | $ | (53,875,624 | ) |  | $ | 117,972,564 |  
|                                                              |  |              |   |  |                           |         |   |                                 |   |             |                             |  |   |                    |   |  |                                  |          |   |  |   |             |   |  |   |             |  

See accompanying notes to financial statements.



F-5



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##### Table of Contents

INTRALASE CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003



|                                                                                     |  |      |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                     |  | 2005 |             |   | 2004 |   |             | 2003 | 
|Cash flows from operating activities:                                                |  |      |             |   |      |   |             |      |  |   |             |  
|Net income (loss)                                                                    |  | $    | 9,524,458   |   |      | $ | (10,196,902 | )    |  | $ | (11,924,306 | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |      |             |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                                        |  |      | 4,571,546   |   |      |   | 2,395,263   |      |  |   | 1,909,837   |  
|Income tax benefit from exercise of stock options                                    |  |      | 241,065     |   |      |   |             |      |  |   |             |  
|Loss on disposition of property, plant and equipment                                 |  |      | 9,514       |   |      |   | 2,348       |      |  |   | 23,707      |  
|Provision for bad debt expense                                                       |  |      | 136,873     |   |      |   | 64,884      |      |  |   | 132,973     |  
|Amortization of debt discount                                                        |  |      |             |   |      |   | 2,755       |      |  |   | 91,062      |  
|Stock-based compensation                                                             |  |      | 2,098,077   |   |      |   | 4,509,113   |      |  |   | 307,163     |  
|Amortization of technology license                                                   |  |      | 288,912     |   |      |   | 118,528     |      |  |   |             |  
|Changes in operating assets and liabilities:                                         |  |      |             |   |      |   |             |      |  |   |             |  
|Accounts receivable                                                                  |  |      | (6,526,486  | ) |      |   | (3,037,759  | )    |  |   | (3,727,304  | )
|Grants receivable                                                                    |  |      |             |   |      |   |             |      |  |   | 100,000     |  
|Prepaid expenses and other current assets                                            |  |      | (2,972,327  | ) |      |   | (1,204,272  | )    |  |   | 30,049      |  
|Inventories                                                                          |  |      | (4,570,277  | ) |      |   | (2,634,711  | )    |  |   | 238,775     |  
|Other assets                                                                         |  |      | (307,253    | ) |      |   | (5,526      | )    |  |   | (23,916     | )
|Accounts payable                                                                     |  |      | (854,834    | ) |      |   | 2,261,342   |      |  |   | 2,281,750   |  
|Deferred rent                                                                        |  |      | 4,088,818   |   |      |   |             |      |  |   |             |  
|Accrued expenses                                                                     |  |      | 1,651,136   |   |      |   | 3,059,997   |      |  |   | 105,575     |  
|Deferred revenues                                                                    |  |      | 851,414     |   |      |   | 2,696,594   |      |  |   | 1,505,793   |  
|                                                                                     |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by (used in) operating activities                                  |  |      | 8,230,636   |   |      |   | (1,968,346  | )    |  |   | (8,948,842  | )
|                                                                                     |  |      |             |   |      |   |             |      |  |   |             |  
|Cash flows from investing activities:                                                |  |      |             |   |      |   |             |      |  |   |             |  
|Purchase of property, plant and equipment                                            |  |      | (11,185,137 | ) |      |   | (3,318,629  | )    |  |   | (1,834,556  | )
|Proceeds from sale of equipment                                                      |  |      |             |   |      |   |             |      |  |   | 9,316       |  
|Disposals (purchases) of equipment under operating leases                            |  |      | (2,677,119  | ) |      |   | 721,739     |      |  |   | (3,629,414  | )
|Purchase of technology license                                                       |  |      |             |   |      |   | (1,235,000  | )    |  |   |             |  
|Purchase of marketable securities                                                    |  |      | (75,892,500 | ) |      |   | (70,991,998 | )    |  |   | (3,488,946  | )
|Proceeds from maturities of marketable securities                                    |  |      | 62,892,500  |   |      |   | 7,981,163   |      |  |   | 2,486,365   |  
|                                                                                     |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash used in investing activities                                                |  |      | (26,862,256 | ) |      |   | (66,842,725 | )    |  |   | (6,457,235  | )
|                                                                                     |  |      |             |   |      |   |             |      |  |   |             |  
|Cash flows from financing activities:                                                |  |      |             |   |      |   |             |      |  |   |             |  
|Net proceeds from the exercise of stock options                                      |  |      | 1,898,675   |   |      |   | 679,878     |      |  |   | 37,440      |  
|Net proceeds from issuance of stock under the employee stock purchase plan           |  |      | 1,234,539   |   |      |   |             |      |  |   |             |  
|Net proceeds from collection of receivable  sale of stock to officers and employees |  |      | 699,943     |   |      |   |             |      |  |   |             |  
|Net proceeds from issuance of common stock                                           |  |      |             |   |      |   | 86,051,684  |      |  |   |             |  
|Payment for issuance costs associated with 2004 common stock offering                |  |      | (17,798     | ) |      |   |             |      |  |   |             |  
|Net proceeds from issuance of long-term debt                                         |  |      |             |   |      |   | 898,956     |      |  |   | 1,074,994   |  
|Payments on long-term debt                                                           |  |      |             |   |      |   | (1,708,236  | )    |  |   | (823,947    | )
|                                                                                     |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                                            |  |      | 3,815,359   |   |      |   | 85,922,282  |      |  |   | 288,487     |  
|                                                                                     |  |      |             |   |      |   |             |      |  |   |             |  



F-6



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##### Table of Contents

INTRALASE CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003



|                                                                                 |  |      |             |   |      |   |            |  |   |             |  
|-------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ---------- |  | - | ----------- | -
|                                                                                 |  | 2005 |             |   | 2004 |   | 2003       | 
|Net increase (decrease) in cash and cash equivalents                             |  | $    | (14,816,261 | ) |      | $ | 17,111,211 |  | $ | (15,117,590 | )
|Cash and cash equivalentsbeginning of year                                      |  |      | 26,014,926  |   |      |   | 8,903,715  |  |   | 24,021,305  |  
|                                                                                 |  |      |             |   |      |   |            |  |   |             |  
|Cash and cash equivalentsend of year                                            |  | $    | 11,198,665  |   |      | $ | 26,014,926 |  | $ | 8,903,715   |  
|                                                                                 |  |      |             |   |      |   |            |  |   |             |  
|Supplemental disclosures of cash flow informationcash paid during the year for: |  |      |             |   |      |   |            |  |   |             |  
|Interest                                                                         |  | $    | 348,614     |   |      | $ | 65,364     |  | $ | 51,576      |  
|                                                                                 |  |      |             |   |      |   |            |  |   |             |  
|Income taxes                                                                     |  | $    | 504,654     |   |      | $ | 22,660     |  | $ | 800         |  
|                                                                                 |  |      |             |   |      |   |            |  |   |             |  

SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:

In 2005, 2004 and 2003 the Company recorded accretion of $0, $44,845 and $59,792, respectively, to the redemption value of redeemable convertible
preferred stock.

See accompanying notes to financial statements.



F-7



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2005, 2004 and 2003

1. Organization and Summary of Significant Accounting Policies

IntraLase Corp. (the Company) was incorporated
on September 29, 1997 for the purpose of developing, marketing and selling surgical lasers for vision correction in physicians offices and eye centers in domestic and international markets.

Basis of PresentationThe accompanying financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America.

Basis of Consolidation-The accompanying consolidated financial statements include
the accounts of IntraLase Corp. and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation.

Cash and Cash EquivalentsThe Company considers all highly liquid investments with a maturity of three months or less from the purchase date to be cash equivalents. The Companys cash equivalents consist principally
of uninsured money market securities and commercial paper.

Marketable SecuritiesThe Company accounts for investments
in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Investments, consisting of short-term debt securities, have been classified as
held-to-maturity and are reported at amortized cost, which approximates fair value, in the accompanying balance sheets.

Concentration of Credit RisksThe Company is subject to concentration of credit risk, primarily from its cash and cash equivalents. At December 31, 2005, the Company managed credit risk through the purchase of
investment-grade securities (rated A1/P1 for money market instruments, A or better for debt) with diversification among issues and maturities. The Company primarily maintains its cash and cash equivalents and marketable securities with two major
financial institutions in the United States, and maintains small balances in two operational accounts outside the United States.

The
Companys customer base is concentrated in the surgical vision correction market. No single customer represents greater than 10 percent of revenues during the years ended December 31, 2005, 2004 and 2003. The Company is exposed to risks
associated with extending credit to its customers, primarily related to the sale of per procedure fees inclusive of disposable patient interfaces. Management believes that credit risks on trade accounts receivable are moderated by the geographical
diversity and number of the Companys customers. The Company performs on going credit evaluations of its customers financial condition and to date, credit losses have been within managements expectations.

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

InventoriesInventories, consisting principally of raw materials, work-in-process and completed units, are carried at the lower of cost or market. Cost is determined using standard costing, which
approximates the first-in, first-out method. The Company establishes a reserve for obsolete inventory based upon forecasted usage. Once established, the reserve is considered a permanent adjustment to the cost of the inventory.



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



Property, Plant and EquipmentThe Companys property, plant and equipment are
stated at cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets as follows:



|                                   |  |             
|---------------------------------- |  | ------------
|Office equipment                   |  | 5 years     
|Furniture and fixtures             |  | 5 years     
|Computer equipment and software    |  | 3 years     
|Production equipment               |  | 2 to 5 years
|Research and development equipment |  | 2 to 5 years
|Exhibits and displays              |  | 2 to 4 years

Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset
or the lease term. Maintenance and repairs are charged to operations when incurred.

Long-Lived AssetsThe Company
assesses potential impairments of its long-lived assets whenever events or changes in circumstances indicate that the assets carrying value may not be recoverable. An impairment loss would be recognized when the carrying amount of a long-lived
asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset (asset group). At December 31, 2005 and 2004 the Company determined that there were no indications of impairment.

Fair Value of Financial InstrumentsSFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires management to disclose the estimated fair value of certain assets and liabilities defined by
SFAS No. 107 as financial instruments. Financial instruments are generally defined by SFAS No. 107 as cash, evidence of ownership interest in an entity, or a contractual obligation that both conveys to one entity a right to receive cash or
other financial instruments from another entity and imposes on the other entity the obligation to deliver cash or other financial instruments to the first entity. At December 31, 2005 and 2004, management believes that the carrying amounts of
cash, short-term marketable securities, receivables and payables approximate fair value because of the short maturity of these financial instruments. The receivables associated with sales-type leases approximate fair value because the interest rate
used to discount the notes to their present value reflects current rates at December 31, 2005.

Accrued
WarrantyThe Company provides a limited warranty ranging from one to three years against manufacturers defects on its lasers sold or leased to customers. The Companys standard warranties require the Company to repair or
replace, at the Companys discretion, defective parts during such warranty period. In addition, the Company charges customers an annual maintenance fee for routine and periodic maintenance, which constitutes the majority of the Companys
activities related to direct customer support. Commencing in 2003 and in conjunction with establishing an annual maintenance program, the Company deferred the fair value of the maintenance agreement and amortized the deferred maintenance amount over
the twelve month service period, as the services and component parts associated with the one year warranty are essentially equivalent to the routine maintenance provided by the Company under its maintenance agreements. The Company accrues for its
product warranty liabilities based on estimates of costs not covered by the maintenance revenues, calculated using estimates of future uncovered costs, based on historical repair information for uncovered costs. Warranty liability activity for the
years ended December 31, was as follows:



|                                |  |      |           |   |      |   |          |      |  |   |          |  
|------------------------------- |  | ---- | --------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                |  | 2005 |           |   | 2004 |   |          | 2003 | 
|BalanceJanuary 1               |  | $    | 373,715   |   |      | $ | 84,967   |      |  | $ | 269,840  |  
|Warranty claims and expenses    |  |      | (830,914  | ) |      |   | (227,202 | )    |  |   | (220,635 | )
|Provisions for warranty expense |  |      | 1,060,253 |   |      |   | 515,950  |      |  |   | 35,762   |  
|                                |  |      |           |   |      |   |          |      |  |   |          |  
|BalanceDecember 31             |  | $    | 603,054   |   |      | $ | 373,715  |      |  | $ | 84,967   |  
|                                |  |      |           |   |      |   |          |      |  |   |          |  

Revenue Recognition In the normal course of business, the Company generates
revenue through the sale and rental of lasers, the sale of per procedure fees inclusive of a disposable patient interface and maintenance services. Revenue related to sales of the Companys products and services is recognized as follows:

Laser revenues: Revenues from the sale or lease of lasers are recognized at the time of sale or at the inception of
the lease, as appropriate. For laser sales that require the Company to install the product at the customer location, revenue is recognized when the equipment has been delivered, installed and accepted at the customer location. For laser sales to a
distributor whereby installation is the responsibility of the distributor, revenue is recognized when the laser is



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



shipped and title has transferred to the distributor. For laser sales in the second quarter of 2005 that were sold prior to the availability of the
Companys 30 kilohertz upgrade, the fair value of the upgrade was deferred and revenue was subsequently recognized when the upgrade had been delivered, installed and accepted at the customer location. The 30 kilohertz upgrade is not required
for laser functionality but does increase the speed of the procedure. The Company does not allow customers, including distributors, to return any products. Some customers finance the purchase or rental of the Companys lasers over periods up to
four years directly from us. See Note 5 to the consolidated financial statements for further discussion of the Companys long term financing arrangements. These financing agreements are classified as either operating leases or sales-type
leases as prescribed by SFAS No. 13, Accounting for Leases. Under sales-type lease agreements, under which ownership is transferred to the lessee at the end of the lease term, laser revenues are recognized based on the net present
value of the contractual lease payments upon installation and customer acceptance. Revenues from lasers under operating leases are recognized as earned over the lease term, commencing immediately after the laser is installed and accepted by the
customer.

Per Procedure Fees Inclusive of a Disposable Patient Interface revenues:Per procedure fees inclusive of a
disposable patient interface revenue is recognized upon shipment to the customer and when the title has passed in accordance with sales terms. The Company does not allow customers to return product.

Maintenance revenues:Maintenance revenues are derived primarily from maintenance services on the Companys laser systems sold
to customers in the United States. Prepaid maintenance expenses are deferred and recognized on a straight line basis over the term of the contracts, generally 12 months. A substantial portion of the Companys products are sold with one year of
maintenance services for which the Company defers an amount equal to its fair value. To the extent the Company determines revenues associated with a specific maintenance contract are not sufficient to recover the estimated costs to provide such
maintenance services, the Company accrues for such excess costs upon identification of the associated embedded loss. To date, these embedded losses have been insignificant.

Revenue Recognition under Bundled Arrangements: The Company sells most of its products and services under bundled contract
arrangements, which contain multiple deliverable elements. These contractual arrangements typically include the laser and maintenance for which the customer pays a single negotiated price for all elements with separate prices listed in the multiple
element customer contracts. Such separate prices may not always be representative of the fair values of those elements, because the prices of the different components of the arrangement may be modified through customer negotiations, although the
aggregate consideration may remain the same. Revenues under bundled arrangements are allocated based upon the residual method in accordance with Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. The Companys revenue allocation to the deliverables begins by allocating revenues to the maintenance service and 30 kilohertz upgrade, for the short period during which the 30 kilohertz upgrade was not available, and lastly
by allocating revenue to the laser. There is reliable third-party and entity-specific evidence of the fair value of the maintenance service and 30 kilohertz upgrade, and the residual method is used to allocate the arrangement consideration to the
delivered item (the laser). Fair value evidence for maintenance consists of amounts charged for annual renewals of maintenance agreements by the Company, which are required for the customer to continue using the laser, prices the Companys
third party distributors charge their customers and amounts charged for maintenance by excimer laser manufacturers, for which maintenance may be different than the maintenance on the Companys lasers. Fair value evidence for the 30 kilohertz
upgrade is the average upgrade price received from the Companys customers for previously installed lasers.

Revenues from product
sales are as follows for the year ended December 31:



|                                                    |  |      |            |      |   |            |  |   |           
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                    |  | 2005 |            | 2004 |   | 2003      
|Laser revenues                                      |  | $    | 46,812,834 |      | $ | 33,237,551 |  | $ | 14,777,010
|Per procedure disposable patient interface revenues |  |      | 39,908,016 |      |   | 22,256,211 |  |   | 9,115,731 
|Maintenance revenues                                |  |      | 7,711,985  |      |   | 4,474,512  |  |   | 1,536,723 
|                                                    |  |      |            |      |   |            |  |   |           
|                                                    |  | $    | 94,432,835 |      | $ | 59,968,274 |  | $ | 25,429,464
|                                                    |  |      |            |      |   |            |  |   |           

Major CustomersThe Companys largest customer accounted for approximately
seven percent of total revenues in 2005 and nine percent of total revenues both 2004 and 2003.

Research and
DevelopmentResearch and development expenses consist of costs incurred for proprietary and collaborative research and development and regulatory and compliance activities. Research and development costs are charged to operations as
incurred. The cost of equipment used in research and development activities, which has alternative uses, is capitalized and depreciated over the estimated useful lives of the equipment.



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



Software Development CostsThe Companys lasers incorporate software which is
incidental to the laser as a whole. Software development costs incurred prior to the establishment of technological feasibility are included in research and development expenses. The Company defines establishment of technological feasibility as the
completion of a final working model approved by the U.S. Food and Drug Administration, at which time the product can be sold to third parties. Therefore, all software development costs have been expensed.

Advertising CostsAdvertising costs are expensed as incurred and are included in selling, general and administrative expense. Total
advertising and promotional expenses were approximately $299,440, $196,443 and $37,508 for the years ended December 31, 2005, 2004 and 2003, respectively.

Stock-Based Compensation The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees.The Company accounts for stock-based awards to nonemployees using the fair value method in accordance with SFAS No. 123, Accounting for Stock-Based Compensation.

In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. SFAS No. 148 amends SFAS No. 123 to provide alternative methods for voluntary transition to SFAS No. 123s fair value method of accounting for stock-based employee compensation
(the fair value method). SFAS No. 148 also requires disclosure of the effects of an entitys accounting policy with respect to stock-based employee compensation on reported net income (loss) in annual financial statements. The
Company is required to follow the prescribed disclosure format and has provided the additional disclosures required by SFAS No. 148 for 2005, 2004 and 2003 below.

SFAS No. 123 requires the disclosure of pro forma net income (loss) had the Company adopted the fair value method in accounting for employee stock-based awards. Under SFAS No. 123, the fair value of stock-
based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly
differ from the Companys stock-option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Companys calculations
were made using the Black-Scholes option-pricing model with the following weighted-average assumptions:



|                         |  |           |   |  |           |   |  |           |  
|------------------------ |  | --------- | - |  | --------- | - |  | --------- | -
|                         |  | 2005      |   |  | 2004      |   |  | 2003      |  
|Expected life (1)        |  | 68 months |   |  | 60 months |   |  | 60 months |  
|Risk free rate of return |  | 4.1       | % |  | 3.3       | % |  | 2.5       | %
|Volatility (2)           |  | 56        | % |  | 46        | % |  | 0         | %
|Dividends                |  | none      |   |  | none      |   |  | none      |  

---

|(1). | Expected life of six months for employee stock purchase plan in 2004 and 2005
|---- | -----------------------------------------------------------------------------

|(2). | 88 to 89% volatility for grants from June 2004 through September 2004, 0% volatility for grants from January 2004 through May 2004.
|---- | -----------------------------------------------------------------------------------------------------------------------------------

On December 19, 2005, IntraLases Board of Directors approved the accelerated vesting of all unvested and out-of-the-money stock
options with an exercise price per share of $18.88 or higher. The accelerated vesting caused options previously awarded for the purchase of approximately 505,000 shares of IntraLase common stock, representing approximately 9% of total options
outstanding, to vest and become exercisable immediately, subject to continued restrictions on sale. Of the 505,000 options subject to accelerated vesting, approximately 250,000 are held by directors and executive officers. Under APB No. 25 and
FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, the acceleration of the vesting of these options did not result in a compensation charge because the exercise prices of the affected options
was greater than the closing price of the Companys common stock on December 19, 2005.



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



If the computed fair value of the awards had been amortized to expense over the vesting period of the
awards, net income (loss) would have been as follows:



|                                                                                                                |  |      |             |   |      |   |             |      |  |   |             |  
|--------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                                                |  | 2005 |             |   | 2004 |   |             | 2003 | 
|Net income (loss) applicable to common stockholders as reported                                                 |  | $    | 9,524,458   |   |      | $ | (10,241,747 | )    |  | $ | (11,984,098 | )
|Add: Stock-based employee compensation expense included in reported net income (loss)                           |  |      | 1,746,584   |   |      |   | 1,803,680   |      |  |   | 85,450      |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |  |      | (10,037,768 | ) |      |   | (2,312,278  | )    |  |   | (253,605    | )
|                                                                                                                |  |      |             |   |      |   |             |      |  |   |             |  
|Pro forma net income (loss) applicable to common stockholders                                                   |  | $    | 1,233,274   |   |      | $ | (10,750,345 | )    |  | $ | (12,152,253 | )
|                                                                                                                |  |      |             |   |      |   |             |      |  |   |             |  
|Pro forma net income (loss) per share applicable to common stockholdersbasic                                   |  | $    | 0.05        |   |      | $ | (1.34       | )    |  | $ | (5.74       | )
|                                                                                                                |  |      |             |   |      |   |             |      |  |   |             |  
|Pro forma net income (loss) per share applicable to common stockholdersdiluted                                 |  | $    | 0.04        |   |      | $ | (1.34       | )    |  | $ | (5.74       | )
|                                                                                                                |  |      |             |   |      |   |             |      |  |   |             |  

Income TaxesThe Company accounts for income taxes under the provisions of SFAS
No. 109, Accounting for Income Taxes. Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of
temporary differences in the financial reporting and tax bases of assets and liabilities. Evaluating the value of these assets is necessarily based on the Companys judgment. A valuation allowance has been recorded to reduce the deferred tax
assets to that portion which more likely than not will be realized.

Comprehensive Income (Loss)There was no
difference between comprehensive income (loss) and net income (loss) for the years ended December 31, 2005, 2004 and 2003.

Net
Income (Loss) Applicable to Common StockholdersNet loss applicable to common stockholders for 2004 and 2003 has been calculated by adding to the net loss the accretion to the redemption value of redeemable convertible preferred stock.

Net Income (Loss) per Share Applicable to Common Stockholders Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted-average number of shares of common stock outstanding for the period. Diluted net income (loss) per share is computed giving effect to all common stock, including options, warrants, common stock subject to
repurchase and redeemable convertible preferred stock, if dilutive.



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



A reconciliation of the numerator and denominator used in the calculation of basic and diluted net
loss per share follows:



|                                                                                                                               |  |                         |            |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ---------- | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                                                               |  | Year Ended December 31, |           
|                                                                                                                               |  | 2005                    |            | 2004 |   |             | 2003 | 
|Numerator:                                                                                                                     |  |                         |            |      |   |             |      |  |   |             |  
|Net income (loss) applicable to common stockholders                                                                            |  | $                       | 9,524,458  |      | $ | (10,241,747 | )    |  | $ | (11,984,098 | )
|                                                                                                                               |  |                         |            |      |   |             |      |  |   |             |  
|Denominator:                                                                                                                   |  |                         |            |      |   |             |      |  |   |             |  
|Basic net income (loss) per share  weighted average shares outstanding                                                        |  |                         | 27,405,499 |      |   | 8,024,790   |      |  |   | 2,220,416   |  
|Less: weighted-average shares subject to repurchase                                                                            |  |                         |            |      |   | (16,296     | )    |  |   | (101,518    | )
|                                                                                                                               |  |                         |            |      |   |             |      |  |   |             |  
|Total weighted-average number of shares used in computing net income (loss) per share applicable to common
stockholderbasic   |  |                         | 27,405,499 |      |   | 8,008,494   |      |  |   | 2,118,898   |  
|Effect of dilutive securities:                                                                                                 |  |                         |            |      |   |             |      |  |   |             |  
|Weighted average dilutive options outstanding                                                                                  |  |                         | 3,731,039  |      |   |             |      |  |   |             |  
|                                                                                                                               |  |                         |            |      |   |             |      |  |   |             |  
|Total weighted-average number of shares used in computing net income (loss) per share applicable to common
stockholderdiluted |  |                         | 31,136,538 |      |   | 8,008,494   |      |  |   | 2,118,898   |  
|                                                                                                                               |  |                         |            |      |   |             |      |  |   |             |  

The following outstanding options to purchase common stock, redeemable convertible preferred stock
and warrants were excluded from the computation of diluted net loss per share in 2004 and 2003 as they had an antidilutive effect:



|                                       |  |                         |  |           
|-------------------------------------- |  | ----------------------- |  | ----------
|                                       |  | Year Ended December 31,
|                                       |  | 2004                    |  | 2003      
|Options to purchase common stock       |  | 5,439,795               |  | 5,014,893 
|Redeemable convertible preferred stock |  |                         |  | 22,191,333
|Warrants                               |  | 39,514                  |  | 39,514    

Included in the calculation of net loss attributable to common stockholders is accretion to
redemption value of $44,845 and $59,792 for the years ended December 31, 2004, and 2003, respectively, related to the issuance of the Companys redeemable convertible preferred stock.

Initial Public Stock OfferingThe Companys initial public offering of its common stock, which was effective under applicable
securities laws on October 6, 2004 and closed on October 13, 2004, resulted in the sale of 7,295,447 shares of common stock, net proceeds of $86.1 million and the conversion of all outstanding preferred stock into 16,797,103 shares of
common stock.

Segment ReportingSFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, 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 group, in deciding how to allocate resources and in assessing performance. The Companys chief decision maker reviews the results of operations and requests for capital expenditures based on
one industry segment: producing and selling products and procedures to improve peoples vision through laser vision correction. The Companys entire revenue and profit stream is generated through this segment.



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



The following table summarizes revenues by geographic region:



|              |  |                         |            |      |   |            |  |   |           
|------------- |  | ----------------------- | ---------- | ---- | - | ---------- |  | - | ----------
|              |  | Year Ended December 31,
|              |  | 2005                    |            | 2004 |   | 2003      
|United States |  | $                       | 54,721,281 |      | $ | 42,832,917 |  | $ | 20,961,892
|Asia Pacific  |  |                         | 19,624,201 |      |   | 7,641,496  |  |   | 3,942,572 
|Europe        |  |                         | 17,099,226 |      |   | 8,703,180  |  |   |           
|Other         |  |                         | 2,988,127  |      |   | 790,681    |  |   | 525,000   
|              |  |                         |            |      |   |            |  |   |           
|              |  | $                       | 94,432,835 |      | $ | 59,968,274 |  | $ | 25,429,464
|              |  |                         |            |      |   |            |  |   |           

Substantially all of the Companys long-lived assets are located in the United States.

Use of Estimates in the Preparation of the Financial StatementsThe preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment.This statement replaces SFAS No. 123, Accounting for
Stock-Based Compensationand supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees.SFAS No. 123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services
in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions using the intrinsic value method under APB 25, Accounting for Stock Issued to Employees, and requires instead that such transactions be accounted for using a
fair-value-based method. The Company is currently evaluating SFAS No. 123R to determine which fair-value-based model and transitional provision it will follow upon adoption. SFAS No. 123R will be effective for the Company beginning in its
first quarter of fiscal 2006. Although the Company continues to evaluate the application of SFAS No. 123R, management expects the Company will use the modified prospective application method and estimates that such adoption will result in 2006
stock-based compensation of approximately $6.5 million, the majority of which will arise from the adoption of SFAS No. 123R, as compared to approximately $2.1 million of stock-based compensation recognized in 2005. However, actual results may
vary depending upon 2006 stock option grants and stock compensation programs.

In November 2004, the FASB issued SFAS No. 151,
Inventory Costs. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) to be expensed as incurred and not included in overhead. Further, Statement
No. 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Companys current accounting policies are consistent with the accounting required by SFAS No. 151 and, as such, the adoption of this statement will have no effect on its financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces APR Opinion No. 120,
Accounting Changesand SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for accounting and reporting a change in accounting principle, and applies to all
voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the unusual instance it does not include specific transition provisions. Specifically, SFAS No. 154 requires retrospective application to
prior periods financial statements, unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the effects of the change, the new accounting principle must
be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and a corresponding adjustment must be made to the opening balance of retained earnings for that
period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of the change the new principle must be applied as if it were adopted prospectively from the earliest date practicable. SFAS
No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS No. 154 does not change the transition provisions of any existing pronouncements. The Company has
evaluated the impact of SFAS No. 154 and does not expect the adoption of this Statement to have a significant impact on its financial statements. The Company will apply SFAS No. 154 in future periods, when applicable.



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



During 2005 the FASB issued Interpretation 47, Accounting for Conditional Asset Retirement
Obligations, which addresses certain aspects of SFAS No. 143, Accounting for Asset Retirement Obligations. FAS Interpretation 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of
FAS Interpretation 47 had no impact on the Companys financial statements.

2. Cash, Cash Equivalents and Marketable Securities

The Companys portfolio of cash, cash equivalents and marketable securities is made up of the following at December 31:



|                            |  |      |            |      |   |           
|--------------------------- |  | ---- | ---------- | ---- | - | ----------
|                            |  | 2005 |            | 2004
|Cash and money market funds |  | $    | 11,198,665 |      | $ | 4,074,091 
|Commercial paper            |  |      |            |      |   | 21,940,835
|Agency bonds  short term   |  |      | 35,000,000 |      |   | 66,000,000
|Agency bonds  long term    |  |      | 44,000,000 |      |   |           

At December 31, 2005, all of the Companys investments are classified as held-to-maturity
and are reported at amortized cost that approximates fair value as the Company has the positive intent and ability to hold these securities to maturity. As of December 31, 2005, the long term agency bonds had maturity dates within 24 months and
all other investments had maturities within 12 months. At December 31, 2004, all of the Companys investments had maturities within 90 days.

3. Inventories

Inventories are as follows at December 31:



|                |  |      |            |      |   |          
|--------------- |  | ---- | ---------- | ---- | - | ---------
|                |  | 2005 |            | 2004
|Raw materials   |  | $    | 3,973,984  |      | $ | 3,977,896
|Work-in-process |  |      | 6,275,690  |      |   | 3,303,745
|Finished goods  |  |      | 3,222,287  |      |   | 1,620,043
|                |  |      |            |      |   |          
|                |  | $    | 13,471,961 |      | $ | 8,901,684
|                |  |      |            |      |   |          

Amounts charged to expense for excess and obsolete inventories were $1.0 million, $433,000 and
$383,000 for 2005, 2004 and 2003, respectively.



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



4. Property, Plant and Equipment

Property, plant and equipment are as follows at December 31:



|                                   |  |      |            |   |      |   |            |  
|---------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                   |  | 2005 |            |   | 2004 |  
|Leasehold improvements             |  | $    | 6,286,297  |   |      | $ | 1,001,113  |  
|Office equipment                   |  |      | 668,376    |   |      |   | 380,962    |  
|Furniture and fixtures             |  |      | 1,052,738  |   |      |   | 399,903    |  
|Computer equipment and software    |  |      | 2,708,394  |   |      |   | 2,051,270  |  
|Production equipment               |  |      | 4,245,346  |   |      |   | 2,892,519  |  
|Research and development equipment |  |      | 4,475,634  |   |      |   | 3,495,896  |  
|Exhibits and displays              |  |      | 536,494    |   |      |   | 119,438    |  
|                                   |  |      |            |   |      |   |            |  
|                                   |  |      | 19,973,279 |   |      |   | 10,341,101 |  
|Less accumulated depreciation      |  |      | (7,550,851 | ) |      |   | (5,743,555 | )
|                                   |  |      |            |   |      |   |            |  
|Property and equipmentnet         |  | $    | 12,422,428 |   |      | $ | 4,597,546  |  
|                                   |  |      |            |   |      |   |            |  

5. Equipment Under Lease Arrangements

At December 31, 2005 and December 31, 2004 equipment under operating leases consisted of lasers leased to customers. The operating leases
typically have terms up to 48 months and are generally cancelable during the first three to six months, converting to a non-cancelable lease at the end of six months unless the customer provides a written notice of cancellation 30 days prior to the
cancellation date. To date only one operating lease has been canceled. The customer typically can purchase the leased equipment at any time during lease term for the difference between the purchase price and the underlying operating lease payments
made.

The Company provides long-term financing under sales-type lease arrangements for certain customers. The Company had approximately
$1.8 million and $0 of net receivables outstanding at December 31, 2005 and 2004, respectively, under sales-type lease arrangements. Approximately $1.4 million and $0 million of these balances were due to be paid after one year,
respectively, with the balance due within one year. The Company includes the portion of receivables and long-term notes due to be paid within one year in prepaid expenses and other current assets and the remaining balance in long term other assets
in the accompanying balance sheets. The Company records interest during the sales-type lease term using a market rate of interest.

Future
lease payments receivable under non-cancelable operating leases and sales-type leases as of December 31, 2005 are as follows:



|                                  |  |                  |           |                   |   |           |  
|--------------------------------- |  | ---------------- | --------- | ----------------- | - | --------- | -
|Years Ending December 31,         |  | Operating Leases |           | Sales-Type Leases |  
|2006                              |  | $                | 1,890,966 |                   | $ | 550,000   |  
|2007                              |  |                  | 1,134,194 |                   |   | 550,000   |  
|2008                              |  |                  | 728,125   |                   |   | 550,000   |  
|2009                              |  |                  | 60,055    |                   |   | 504,168   |  
|                                  |  |                  |           |                   |   |           |  
|                                  |  | $                | 3,813,340 |                   | $ | 2,154,168 |  
|                                  |  |                  |           |                   |   |           |  
|Less amount representing interest |  |                  |           |                   |   | (310,062  | )
|                                  |  |                  |           |                   |   |           |  
|                                  |  |                  |           |                   | $ | 1,844,106 |  
|                                  |  |                  |           |                   |   |           |  

6. Purchase of Technology

On July 15, 2004, the Company entered an agreement to acquire a fully-paid royalty-free irrevocable and worldwide license from the University of Michigan for the use of certain technology and to settle all past
contract disputes for aggregate consideration of $2,000,000. Upon closing this agreement on July 15, 2004 the Company recorded a charge of $765,000, which is included within research and development expenses in 2004 related to the settlement of
the contract disputes and capitalized $1,235,000, which is included at its amortized value within total long-term assets at December 31, 2005, associated with acquired licenses in accordance with the terms of the agreement.



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



7. Accrued Expenses

Accrued expenses consist of the following at December 31:



|                             |  |      |           |      |   |          
|---------------------------- |  | ---- | --------- | ---- | - | ---------
|                             |  | 2005 |           | 2004
|Customer deposits            |  | $    | 602,058   |      | $ | 489,102  
|Payroll and related accruals |  |      | 3,716,054 |      |   | 3,156,082
|Royalties                    |  |      | 1,183,399 |      |   | 891,153  
|Product warranties           |  |      | 603,054   |      |   | 373,715  
|Other                        |  |      | 1,701,002 |      |   | 1,120,455
|                             |  |      |           |      |   |          
|                             |  | $    | 7,805,567 |      | $ | 6,030,507
|                             |  |      |           |      |   |          

8. Redeemable Convertible Preferred Stock

Upon closing the Companys initial public offering on October 13, 2004, all shares of the outstanding redeemable convertible preferred stock
converted into 16,797,103 shares of common stock.

9. Stockholders Deficit

WarrantsDuring 2005 all outstanding warrants were exercised on a cashless basis and as of December 31, 2005 there were no
outstanding warrants.

Restricted Stock Purchase Agreements for Common Stock and Receivable from Sale of Stock to Officers and
EmployeesCertain common stock is issued pursuant to restricted stock purchase agreements. During the years ended December 31, 2002 and 2000, 544,745 and 433,278, respectively, shares of common stock were sold pursuant to
restricted stock purchase agreements. In both years, the restricted shares were issued upon the exercise of previously granted stock options (whose exercise price equaled fair market value on the date of grant). The restricted stock vests at the
same rate as the underlying exercised options. The Company financed the aggregate exercise price of the options by granting full recourse loans to employees. The loans bear interest at 6.22% annually and mature after five years. Interest receivable
related to these loans is included in other assets in the accompanying balance sheets.

Restricted shares are subject to the risk of
forfeiture, certain restrictions on transferability and to the Companys repurchase rights. The restrictions and repurchase options lapse 25%, each year over a four-year vesting period. The Company has a repurchase option, exercisable upon
discontinuance of the purchasers service with the Company, to repurchase the unvested shares at the original price paid by the purchaser. During 2005, repayments of $699,943 were made by employees. During 2004, unvested shares of 12,008 were
repurchased under this provision through reduction in a loan to an employee of $16,353, when the employees service with the Company ended. Holders of restricted stock have all rights of a stockholder.

Stock Option PlansThe Company has four stock option plans: (i) the 1997 Stock Option Plan under which nonstatutory or incentive
stock options to acquire share of the Companys stock may be granted to employees and non-employees of the Company, (ii) the 2000 Stock Incentive Plan provides for granting of options which vest over time, (iii) the 2000 Executive
Option Plan provides for the granting of options which vest after the earlier of seven years or upon the grantees achievement of present goals or milestones (performance-based stock awards) and (iv) the 2004 Stock Incentive Plan for
granting nonstatutory or incentive stock options, restricted stock, stock appreciation rights, performance shares and performance units to employees, directors and consultants. The plans permit the issuance of options for the purchase of up to
1,309,213 shares of common stock, 5,772,224 shares of common stock, 721,528 shares of common stock, and 3,607,640 shares of common stock respectively.

The plans are administered by the Board of Directors (the Administrator) and permit the issuance for purchase of the Companys common stock at exercise prices not less than fair market value of the
underlying shares on the date of grant. Options granted under the plans are exercisable over a period of time (generally not to exceed 10 years), designated by the Administrator and are subject to other terms and conditions, as determined by the
Administrator.



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



A summary of the Companys stock option activity follows as of December 31:



|                                               |  |                   |   |  |                               |       |                            |           |                               |   |     
|---------------------------------------------- |  | ----------------- | - |  | ----------------------------- | ----- | -------------------------- | --------- | ----------------------------- | - | ----
|                                               |  | SharesunderOption |   |  | Weighted-AverageExercisePrice |       | Exercisableat End ofPeriod |           | Weighted-AverageExercisePrice
|OutstandingDecember 31, 2002                  |  | 2,934,515         |   |  | $                             | 1.46  |                            | 816,286   |                               | $ | 1.19
|Granted (weighted-average fair value of $0.24) |  | 2,182,369         |   |  | $                             | 2.55  |                            |           |                               |   |     
|Forfeited                                      |  | (76,843           | ) |  | $                             | 2.05  |                            |           |                               |   |     
|Exercised                                      |  | (25,148           | ) |  | $                             | 1.49  |                            |           |                               |   |     
|                                               |  |                   |   |  |                               |       |                            |           |                               |   |     
|OutstandingDecember 31, 2003                  |  | 5,014,893         |   |  | $                             | 1.92  |                            | 1,605,654 |                               | $ | 1.38
|                                               |  |                   |   |  |                               |       |                            |           |                               |   |     
|Granted (weighted-average fair value of $5.04) |  | 1,318,693         |   |  | $                             | 9.67  |                            |           |                               |   |     
|Forfeited                                      |  | (438,086          | ) |  | $                             | 2.04  |                            |           |                               |   |     
|Exercised                                      |  | (455,705          | ) |  | $                             | 1.49  |                            |           |                               |   |     
|                                               |  |                   |   |  |                               |       |                            |           |                               |   |     
|OutstandingDecember 31, 2004                  |  | 5,439,795         |   |  | $                             | 3.83  |                            | 2,418,454 |                               | $ | 3.83
|                                               |  |                   |   |  |                               |       |                            |           |                               |   |     
|Granted (weighted-average fair value of $8.45) |  | 1,526,009         |   |  | $                             | 17.44 |                            |           |                               |   |     
|Forfeited                                      |  | (288,949          | ) |  | $                             | 10.46 |                            |           |                               |   |     
|Exercised                                      |  | (1,172,240        | ) |  | $                             | 1.62  |                            |           |                               |   |     
|                                               |  |                   |   |  |                               |       |                            |           |                               |   |     
|OutstandingDecember 31, 2005                  |  | 5,504,615         |   |  | $                             | 7.73  |                            | 3,089,334 |                               | $ | 6.35
|                                               |  |                   |   |  |                               |       |                            |           |                               |   |     

At December 31, 2005 there were 2,871,496 shares available for future grant under the plans.
Information regarding the weighted-average remaining contractual life and weighted-average exercise price of options outstanding and options exercisable at December 31, 2005 for each exercise price is as follows:



|                         |  |                                  |  |                                                    |  |                               |       |                                  |           |                               |   |      
|------------------------ |  | -------------------------------- |  | -------------------------------------------------- |  | ----------------------------- | ----- | -------------------------------- | --------- | ----------------------------- | - | -----
|                         |  | Options Outstanding              |  | Options Exercisable                               
|Range of Exercise Prices |  | NumberOutstandingAs of12/31/2005 |  | Weighted-AverageRemainingContractualLife(In Years) |  | Weighted-AverageExercisePrice |       | NumberExercisableAs of12/31/2005 |           | Weighted-AverageExercisePrice
|$0.14 - $1.44            |  | 576,351                          |  | 5.96                                               |  | $                             | 1.22  |                                  | 494,981   |                               | $ | 1.20 
|$1.80 - $2.48            |  | 406,441                          |  | 5.89                                               |  | $                             | 2.07  |                                  | 359,097   |                               | $ | 2.05 
|$2.54                    |  | 1,961,330                        |  | 7.32                                               |  | $                             | 2.54  |                                  | 1,262,840 |                               | $ | 2.54 
|$2.87 - $11.91           |  | 654,789                          |  | 8.27                                               |  | $                             | 5.37  |                                  | 261,443   |                               | $ | 5.07 
|$12.73 - $14.85          |  | 195,942                          |  | 8.63                                               |  | $                             | 12.75 |                                  | 87,512    |                               | $ | 12.77
|$15.40                   |  | 621,924                          |  | 9.32                                               |  | $                             | 15.40 |                                  | 0         |                               | $ | 0.00 
|$15.56 - $19.06          |  | 643,046                          |  | 9.46                                               |  | $                             | 17.13 |                                  | 214,869   |                               | $ | 18.63
|$19.68 - $19.93          |  | 116,352                          |  | 9.02                                               |  | $                             | 19.70 |                                  | 98,852    |                               | $ | 19.68
|$21.40                   |  | 229,740                          |  | 9.12                                               |  | $                             | 21.40 |                                  | 229,740   |                               | $ | 21.40
|$22.22                   |  | 98,700                           |  | 9.11                                               |  | $                             | 22.22 |                                  | 80,000    |                               | $ | 22.22
|                         |  |                                  |  |                                                    |  |                               |       |                                  |           |                               |   |      
|$0.14 - $22.22           |  | 5,504,615                        |  | 7.85                                               |  | $                             | 7.73  |                                  | 3,089,334 |                               | $ | 6.35 
|                         |  |                                  |  |                                                    |  |                               |       |                                  |           |                               |   |      

As disclosed in Note 1, the Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based awards to employees and SFAS No. 123 in accounting for its stock-based awards to nonemployees. Certain of the Companys performance-based and certain time-based stock-option awards do not meet the criteria
for fixed plan accounting and are accounted for under variable-plan accounting in accordance with SFAS No. 123 and Emerging Issues Task Force (EITF No. 96-18), Accounting for Equity Instruments That are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling Goods or Services. Under variable-plan accounting, the market value of the underlying common stock in excess of the stock-option exercise price is charged to income ratably over the period in which
management anticipates these awards will vest. The final market value of the performance-based awards is determined at the date the milestones are met. In addition, stock-based compensation for option grants to nonemployees, which related to 402,527
of the options outstanding at December 31, 2005, is recorded by using the Black-Scholes option-pricing model at the measurement date, using the following weighted average assumptions:



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



|                         |  |            |   |  |            |   |  |            |  
|------------------------ |  | ---------- | - |  | ---------- | - |  | ---------- | -
|                         |  | 2005       |   |  | 2004       |   |  | 2003       |  
|Expected life            |  | 120 months |   |  | 120 months |   |  | 120 months |  
|Risk-free rate of return |  | 4.05       | % |  | 3.12       | % |  | 2.53       | %
|Volatility(1)            |  | 56.45      | % |  | 85.18      | % |  | 99         | %
|Dividends                |  | none       |   |  | none       |   |  | None       |  

---

|(1) | Estimated using a peer company prior to initial public offering of stock in October 2004.
|--- | -----------------------------------------------------------------------------------------

Stock-based compensation related to nonemployees is amortized over the vesting period of the underlying option. Stock-based compensation expense of
$2,098,077, $4,509,113 and $307,163 was recognized in 2005, 2004 and 2003, respectively, associated with employee performance-based, employee time-based and nonemployee stock-option awards.

The following summarizes information about restricted common stock issued pursuant to restricted stock purchase agreements:



|                                                                    |  |                 |  
|------------------------------------------------------------------- |  | --------------- | -
|                                                                    |  | Numberof Shares |  
|Unvested common sharesDecember 31, 2002                            |  | 295,252         |  
|Shares vested                                                       |  | (193,734        | )
|                                                                    |  |                 |  
|Unvested common sharesDecember 31, 2003                            |  | 101,518         |  
|Shares repurchased pursuant to restricted stock purchase agreements |  | (12,008         | )
|Shares vested                                                       |  | (73,214         | )
|                                                                    |  |                 |  
|Unvested common sharesDecember 31, 2004                            |  | 16,296          |  
|Shares vested                                                       |  | (16,296         | )
|                                                                    |  |                 |  
|Unvested common sharesDecember 31, 2005                            |  | 0               |  
|                                                                    |  |                 |  

Changes in CapitalizationOn June 25, 2004, the Companys Board of
Directors approved the following:

Subject to stockholder approval and filing of a Certificate of Amendment to the Companys
Certificate of Incorporation, a 1-to-0.721528 reverse stock split of the Companys outstanding common stock. All share, per share and conversion amounts relating to common stock, mandatorily redeemable convertible preferred stock and stock
options included in the accompanying financial statements and footnotes have been restated to reflect the reverse stock split, which was consummated on July 12, 2004;

Upon the completion of the Companys initial public offering on October 13, 2004:

(i). an increase in the authorized number of common shares to 45,000,000 and the creation of preferred stock for which the Board of Directors may
designate the rights, preferences and privileges;

(ii). the creation of the 2004 Stock Incentive Plan with a reserve of 3,607,640 shares of
common stock; and

(iii). the creation of the Employee Stock Purchase Plan with a reserve of 721,528 shares of common stock. The purchase
price of the common stock under the Employee Stock Purchase Plan will be equal to 85% of the fair market value per share of common stock on either the start of the offering period or on the purchase date, whichever is less. The Employee Stock
Purchase Plan will be implemented by six month offering periods with purchase occurring each November 1 and May 1, provided that the first offering period commenced on October 6, 2004, the effective date of the Companys initial
public offering. The Employee Stock Purchase Plan permits eligible employees to purchase common stock through payroll deductions that may not exceed the lesser of 20% of any employees compensation, or $25,000 during any calendar year. In
addition, no employee may purchase more than 3,608 shares of common stock on any purchase date.



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



10. Lease Commitments

The Company leases its office space under an operating lease expiring August 31, 2015. Aggregate rent expense for the years ended December 31, 2005, 2004 and 2003 was $1,440,730, $679,391 and $556,134,
respectively. The lease is for a period of ten years and four months beginning May 1, 2005 and included landlord incentives that are being amortized to rent expense over the lease term.

Future lease payments under operating leases as of December 31, 2005 are as follows:



|                         |  |   |           
|------------------------ |  | - | ----------
|Years Ending December 31 |  |  
|2006                     |  | $ | 1,489,911 
|2007                     |  |   | 1,549,066 
|2008                     |  |   | 1,620,942 
|2009                     |  |   | 1,696,154 
|2010                     |  |   | 1,774,856 
|Thereafter               |  |   | 9,572,708 
|                         |  |   |           
|Total                    |  | $ | 17,703,637
|                         |  |   |           

Under the terms of the Companys current operating lease, the Company is required to pay
property taxes and common area maintenance costs to the lessor.

11. Debt

On August 4, 2005, the Company established a new revolving line of credit, which allows for maximum borrowing of $10.0 million, with a $1.5 million
sub-limit to secure cash management services and a $1.0 million sub-limit to secure letters of credit. The line of credit has a variable rate of interest equal to the banks prime rate (7.25% at December 31, 2005) and matures
August 3, 2006. The line of credit did not have an outstanding balance as of December 31, 2005, and contains covenants for minimum quick ratio and profitability with which the Company was in compliance with at December 31, 2005.

12. Commitments and Contingencies

Licensing AgreementsIn connection with various licensing agreements, the Company is obligated to pay license fees and aggregate royalties ranging from a minimum of 2.5% to a maximum of 5.0% of net sales of products
incorporating the licensed technology. The Company is also obligated to pay royalties of up to 15% of certain sublicensing revenues in the event the Company sublicenses in the future. The Company generally has the option to cancel these agreements
upon 90 days written notice. As of December 31, 2005 and 2004, royalties and license fees due under these licensing agreements were $1,183,399 and $891,153, respectively. The Company recorded royalty and license fee expense for the years
ended December 31, 2005, 2004 and 2003 of $3,388,601, $2,025,000 and $981,000, respectively, which is included in cost of sales.

In
1997, the Company entered into agreements requiring the payment of license fees and royalties to two stockholders, pursuant to licensing agreements entered into in exchange for common stock, annual license fees and royalties. The license agreements
expire upon the occurrence of certain events, as defined, or 10 years from the date of the license agreement. These agreements are generally cancelable at the Companys sole option upon 90 days written notice; however, the license cannot
be canceled by the licensors except in the event of default. On July 15, 2004, the Company entered an agreement to acquire a fully-paid royalty-free irrevocable and worldwide license from the University of Michigan for the use of certain
technology and to settle all past contract disputes for aggregate consideration of $2,000,000. Minimum license fee commitments under the remaining agreement are currently $15,000 per year, which are fully off-settable against unit royalties. License
fees may be credited against royalties to be paid to the licensors for the calendar year in which the license fees are paid. In addition, the Company is responsible for all patent maintenance costs.

The Company has entered into three other license agreements for the use of intellectual property in its products. These agreements contain provisions for
the payment of license fees and royalty payments. These agreements are generally cancelable at the Companys sole option upon 90 days written notice for one agreement and upon 60 days written notice for the other agreement; however,
the license cannot be canceled by the licensors except in the event of default. The Company pays license fees, subject to offset against unit royalties in the calendar quarter or year, as applicable, in which the license fees are paid. Minimum
license fees were $109,000 in 2005, 2004 and 2003.



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



Indemnities and GuaranteesDuring its normal course of business, the Company has
made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include (i) certain real estate leases, under which the Company may be required to indemnify property
owners for general liabilities; and (ii) certain agreements with the Companys officers; under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship; (iii) certain
agreements with its customers in which the Company provides intellectual property indemnities; and (iv) certain agreements with licensors, under which the Company indemnifies the party granting the license against claims, losses and expenses
arising out of the manufacture, use, sale or other disposition of the products the Company manufactures using the licensed technology or patents. The duration of these indemnities and guarantees varies and, in certain cases, is indefinite. The
majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to, nor does it expect to make
significant payments for these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying balance sheets.

Employment AgreementIn April of 2003, the Company entered into an employment agreement with the Chief Executive Officer of the Company that calls for minimum annual payments at a rate of $450,000
plus reimbursement for certain expenses. The employment agreement has a three year term. In February of 2006 the Company entered into a new employment agreement with the Chief Executive Officer of the Company, scheduled to take effect in April of
2006, upon expiration of the 2003 contract. The new employment agreement is on substantially the same terms as the 2003 contract and provides for minimum annual payments of $472,500 plus reimbursement for certain expenses.

Litigation On June 10, 2004, the Company received notice from Escalon Medical Corp. of its intent to terminate the
Companys license agreement unless the Company paid additional royalties and expenses which Escalon claimed were owed under its interpretation of the parties license agreement. Escalon sought payment of approximately $645,000 through
March 31, 2004 and additional unspecified amounts for future periods. The Company disputed Escalons contract interpretation. On June 21, 2004, the Company filed a complaint against Escalon for declaratory and injunctive relief in the
United States District Court for the Central District of California to clarify its obligations and prevent Escalon from terminating the license agreement (the First California Action).

On March 1, 2005, the court in the First California Action entered a summary judgment order, ruling on the majority of issues in the case. The court
ruled in the Companys favor on some issues and in Escalons favor on others. On April 1, 2005 Escalon again attempted to terminate the license agreement. On April 25, 2005 the court found the purported termination to be
ineffective. On May 5, 2005, the court entered a final judgment in the First California Action, in effect adopting its prior summary judgment rulings. This ended the First California Action. Of the approximately $645,000 demanded by Escalon
through March 31, 2004, approximately $229,000 was found to be due under the courts rulings in the First California Action. The Company has timely paid this amount. The Company does not believe that the judgment in the First California
Action will have a material adverse effect on its business, financial condition and results of operations. The decision in the First California Action, if upheld, represents an increase in royalties payable to Escalon of approximately 0.2% of
revenues, and a concomitant 0.2% reduction in gross margins and operating profits. These effects are reflected in the Companys reported financial results for 2005. The Company has appealed certain aspects of the courts judgment in the
First California Action to the United States Court of Appeals for the Ninth Circuit.

The First California Action did not resolve all of
the parties disputes, and Escalon continued to contend in written notices to the Company that the Companys royalty payments were inadequate. On May 9, 2005, the Company commenced a new lawsuit against Escalon in the United States
District Court for the Central District of California to clarify the open issues (the Second California Action). One week later, Escalon commenced a new lawsuit against the Company in the Delaware Chancery Court, alleging, among other
things, breach of the license agreement and breach of fiduciary duty (the Delaware Action). Escalon moved to dismiss the Second California Action, and the Company moved to dismiss or stay the later filed Delaware Action.

On January 11, 2006, the Second California action was dismissed without prejudice. In its decision, the court explained that it was exercising its
discretion to abstain from hearing the case because of the pending Ninth Circuit appeal, as well as the similar issues presented in the Delaware Action. By prior agreement of the parties, this triggered the briefing schedule on the Companys
motion to dismiss or stay the Delaware Action, and on January 31, 2006 the Company filed its opening brief in support of the motion. On February 21, 2006, Escalon filed an amended complaint in the Delaware Action in lieu of responding to
the Companys opening brief. On the same day, it sent a new default notice to the Company, alleging breach of the license agreement (see below).



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



One of the issues now in dispute is valuation of the Companys accounts receivable for royalty
calculation purposes. The court in the First California Action found that creation of an account receivable on the Companys books constituted non-cash other property received, but expressly left open the value of such property for
royalty calculation purposes. On April 22, 2005, Escalon, purporting to act in its capacity as a Company shareholder, sent the Company an inspection demand under section 220 of the Delaware corporation law (the First 220 Demand),
seeking, among other things, detailed records concerning the Companys accounts receivable. The Company rejected Escalons First Section 220 Demand as having an improper purpose under Delaware law. On July 18, 2005, Escalon
Holdings, Inc., apparently a wholly-owned subsidiary of Escalon, also purporting to act as a Company shareholder, sent the Company a new section 220 demand (the Second 220 Demand) with language copied verbatim from the First 220 Demand.
The Company rejected the Second 220 Demand on the same basis as the first. Under Delaware law, a shareholder may bring an action to enforce a section 220 demand if its statutory demand upon the corporation has been rejected.

On September 2, 2005, Escalon and Escalon Holdings, Inc. commenced an action against the Company in the Delaware Chancery Court under section 220 of
the Delaware Corporation Law (the 220 Action). In the 220 Action, Escalon seeks to inspect the Company records described in the Section 220 Demands. The crux of Escalons position appears to be that the amount of royalties
which Escalon receives under its contract with the Company is less than what it believes it would receive if receivables were valued under the contract the same way they are valued on the Companys financial statements, and that therefore the
Company is purportedly overstating the value of receivables on its financial statements to the detriment of shareholders. The question of the proper valuation of receivables under the contract is already the subject of pending litigation between the
Company and Escalon. The Company does not believe that a disruptive inspection of its proprietary business records would have a bearing on the resolution of this contract dispute. The Company contends that the 220 Action is an Escalon litigation
tactic intended to benefit Escalon in its capacity as a litigant by allowing it to circumvent existing contractual limitations on its inspection rights. The Company believes this is an improper basis for a demand under section 220 of the Delaware
corporation statute, and is defending the 220 Action vigorously.

On February 21, 2006, the Company received a written
notice from Escalon asserting that the Company was in default under the license agreement by reason of alleged improper valuation of accounts receivable in the Companys royalty payments as well as the Companys alleged refusal to permit
Escalon to audit the Companys books and records (the Default Notice). The Default Notice threatened termination of the license agreement if the accounts receivable deductions taken against royalty payments for each of the first
three quarters of 2005 were not paid within fifteen days of the date of the letter. The Default Notice also threatened termination if Escalon was not satisfied with respect to the resolution of its audit rights within sixty days of the date of the
letter.

On February 24, 2006, the parties agreed to submit their disputes to mediation, in Delaware, under Court of
Chancery Rule 174, and to stay all litigation pending the outcome of the mediation. In addition, Escalon has agreed that its Termination Notice is suspended pending the outcome of the mediation and that, should the mediation be unsuccessful, the
Company will be afforded the full fifteen and sixty day response periods set forth in the Notice, which periods would commence one day after the mediation is declared unsuccessful. The Company has also agreed that the time period for responding to
Escalons amended complaint in the Delaware Action will be tolled on the same basis.

If the Company is unable to successfully mediate
its disputes, the Company believes Escalon will persist in attempting to terminate the license agreement. Termination of the Escalon license agreement could have a material adverse effect on the Companys business, financial condition and
results of operations.

On May 24, 2005, Ari Weitzner M.D., P.C., a Brooklyn ophthalmologist, commenced a lawsuit against the Company
in the United States District Court for the Eastern District of New York, purportedly as a class action, alleging that the Company violated the Telephone Consumer Protection Act (TCPA) by sending unsolicited fax advertisements in violation of the
TCPA. The complaint seeks statutory damages, costs and attorneys fees. The TCPA provides for statutory damages of $500 per violation ($1,500 if knowing and willful). The Company intends to contest the Weitzner action vigorously.

On August 23, 2004, the United States Patent and Trademark Office (PTO) granted a request for re-examination with respect to U.S. Patent RE 37,585,
one of the four U.S. patents licensed to the Company by the University of Michigan, which means that the PTO found that the request raised a new issue of patentability with regard to some of the claims. Re-



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



examination may result in the scope of protection and rights provided by the patent license being lost or narrowed. The irrevocable license the Company
acquired and the payment the Company made pursuant to the July 15, 2004 license agreement will not be affected by the granting of re-examination, regardless of the outcome. Although the Company believes that the intellectual property covered by
the patent subject to the re-examination is important to its business, if this patent is invalidated there will be no effect on its ability to sell its products. However, invalidation or narrowing of this patent might allow others to market
competitive products that would otherwise have infringed the patent.

The Company is also currently involved in other litigation incidental
to its business. In the opinion of management, the ultimate resolution of such litigation will not likely have a significant effect on the Companys financial statements.

13. Income Taxes

A summary of the provision for income taxes for the year ended December 31 is
as follows:



|                    |  |      |          |   |      |   |            |      |  |   |            |  
|------------------- |  | ---- | -------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                    |  | 2005 |          |   | 2004 |   |            | 2003 | 
|Current:            |  |      |          |   |      |   |            |      |  |   |            |  
|Federal             |  | $    | 241,064  |   |      | $ |           |      |  | $ |           |  
|State               |  |      | 90,161   |   |      |   | 30,000     |      |  |   | 22,660     |  
|Foreign             |  |      | 8,938    |   |      |   |            |      |  |   |            |  
|                    |  |      |          |   |      |   |            |      |  |   |            |  
|Total Current       |  |      | 340,163  |   |      |   | 30,000     |      |  |   | 22,660     |  
|                    |  |      |          |   |      |   |            |      |  |   |            |  
|Deferred:           |  |      |          |   |      |   |            |      |  |   |            |  
|Federal             |  |      | (4,328   | ) |      |   | 3,149,634  |      |  |   | 2,949,189  |  
|State               |  |      | 641,089  |   |      |   | 1,237,668  |      |  |   | 1,013,700  |  
|Valuation allowance |  |      | (636,761 | ) |      |   | (4,387,302 | )    |  |   | (3,962,889 | )
|                    |  |      |          |   |      |   |            |      |  |   |            |  
|Total Deferred      |  |      |         |   |      |   |           |      |  |   |           |  
|                    |  |      |          |   |      |   |            |      |  |   |            |  
|Total Provision     |  | $    | 340,163  |   |      | $ | 30,000     |      |  | $ | 22,660     |  
|                    |  |      |          |   |      |   |            |      |  |   |            |  

A reconciliation of income tax expense to the amount of income tax expense that would result from
applying the federal statutory rate to loss before provision for income taxes is as follows:



|                                    |  |       |   |  |       |    |  |       |   
|----------------------------------- |  | ----- | - |  | ----- | -- |  | ----- | --
|                                    |  | 2005  |   |  | 2004  |    |  | 2003  |   
|Income taxes at U.S. statutory rate |  | 34.0  | % |  | (34.0 | )% |  | (34.0 | )%
|State taxesnet of federal benefit  |  | (2.9  | ) |  | (8.2  | )  |  | (5.4  | ) 
|Research and development credit     |  | (2.0  | ) |  | (3.9  | )  |  | (3.7  | ) 
|Meals and entertainment             |  | 1.0   |   |  | 1.1   |    |  | 0.3   |   
|Other                               |  | 0.3   |   |  |       |    |  |       |   
|Change in valuation allowance       |  | (27.0 | ) |  | 45.3  |    |  | 43.0  |   
|                                    |  |       |   |  |       |    |  |       |   
|Provision for income taxes          |  | 3.4   | % |  | 0.3   | %  |  | 0.2   | % 
|                                    |  |       |   |  |       |    |  |       |   



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##### Table of Contents

INTRALASE CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2005, 2004 and
2003



The components of the Companys net deferred income taxes are as follows:



|                                 |  |      |             |   |      |   |             |      |  |   |             |  
|-------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                 |  | 2005 |             |   | 2004 |   |             | 2003 | 
|Current:                         |  |      |             |   |      |   |             |      |  |   |             |  
|State income taxes               |  | $    | (176,420    | ) |      | $ | (148,072    | )    |  | $ | (51,413     | )
|Accrued vacation                 |  |      | 425,822     |   |      |   | 303,530     |      |  |   | 188,416     |  
|Inventory reserve                |  |      | 697,686     |   |      |   | 334,077     |      |  |   | 337,069     |  
|Accrued expenses                 |  |      | 109,566     |   |      |   | 367,111     |      |  |   | 192,451     |  
|Deferred revenue                 |  |      | 505,283     |   |      |   | 415,597     |      |  |   |             |  
|Deferred rent                    |  |      | 295,754     |   |      |   |             |      |  |   |             |  
|Other                            |  |      | 1,098,028   |   |      |   | 684,108     |      |  |   | 134,630     |  
|                                 |  |      |             |   |      |   |             |      |  |   |             |  
|                                 |  |      | 2,955,719   |   |      |   | 1,956,351   |      |  |   | 801,153     |  
|                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Long-term:                       |  |      |             |   |      |   |             |      |  |   |             |  
|State income taxes               |  |      | (2,021,012  | ) |      |   | (1,844,049  | )    |  |   | (1,522,396  | )
|Stock-based compensation         |  |      |             |   |      |   | 246,111     |      |  |   | 246,111     |  
|Property, plant and equipment    |  |      | 285,698     |   |      |   | (15,052     | )    |  |   | 89,114      |  
|Net operating loss               |  |      | 22,225,912  |   |      |   | 22,322,451  |      |  |   | 19,996,348  |  
|Research and development credits |  |      | 3,761,713   |   |      |   | 3,376,156   |      |  |   | 2,568,159   |  
|Other                            |  |      | 192,532     |   |      |   | 721,833     |      |  |   | 198,011     |  
|                                 |  |      |             |   |      |   |             |      |  |   |             |  
|                                 |  |      | 24,444,843  |   |      |   | 24,807,450  |      |  |   | 21,575,347  |  
|                                 |  |      |             |   |      |   |             |      |  |   |             |  
|Total deferred tax asset         |  |      | 27,400,562  |   |      |   | 26,763,801  |      |  |   | 22,376,500  |  
|Valuation allowance              |  |      | (27,400,562 | ) |      |   | (26,763,801 | )    |  |   | (22,376,500 | )
|                                 |  |      |             |   |      |   |             |      |  |   |             |  
|                                 |  | $    |            |   |      | $ |            |      |  | $ |            |  
|                                 |  |      |             |   |      |   |             |      |  |   |             |  

As of December 31, 2005, the Company had federal and state net operating loss carryforwards
of approximately $55.0 million and $39.7 million, respectively, and research and development credit carryforwards of $1.6 million and $2.2 million, respectively, which will expire on various dates beginning in 2007 through 2025.



F-24



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##### Table of Contents

Item 15  Schedule II

VALUATION AND QUALIFYING ACCOUNTS



|                                 |  |                               |            |                                      |   |            |  |   |                          |   |  |   |           
|-------------------------------- |  | ----------------------------- | ---------- | ------------------------------------ | - | ---------- |  | - | ------------------------ | - |  | - | ----------
|                                 |  | Balance at Beginningof Period |            | AdditionsCharged toCosts andExpenses |   | Deductions |  |   | Balance at End of
Period
|Allowance for doubtful accounts  |  |                               |            |                                      |   |            |  |   |                          |   |  |   |           
|Year ended December 31, 2003     |  | $                             | 141,753    |                                      | $ | 132,973    |  | $ | (155,946                 | ) |  | $ | 118,780   
|Year ended December 31, 2004     |  | $                             | 118,780    |                                      | $ | 64,884     |  | $ | (32,060                  | ) |  | $ | 151,604   
|Year ended December 31, 2005     |  | $                             | 151,604    |                                      | $ | 136,873    |  | $ | (19,169                  | ) |  | $ | 269,308   
|Deferred tax valuation allowance |  |                               |            |                                      |   |            |  |   |                          |   |  |   |           
|Year ended December 31, 2003     |  | $                             | 18,413,611 |                                      | $ | 3,962,889  |  | $ |                         |   |  | $ | 22,376,500
|Year ended December 31, 2004     |  | $                             | 22,376,500 |                                      | $ | 4,387,301  |  | $ |                         |   |  | $ | 26,763,801
|Year ended December 31, 2005     |  | $                             | 26,763,801 |                                      | $ | 636,761    |  | $ |                         |   |  | $ | 27,400,562



F-25