**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

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**x**                              AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

**For the Fiscal Year EndedDecember 31, 2006**

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**or**

**o**                                 TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

**Commission File No.001-31257**

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**ADVANCED MEDICAL OPTICS, INC.**

(Exact name of Registrant as Specified in its Charter)

 

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| **Delaware**                                         |   | **33-0986820**                        |
|------------------------------------------------------|--------|---------------------------------------|
| (State of  Incorporation)                            |   | (I.R.S. Employer  Identification No.) |
|                                                 |   |                                  |
| **1700 E.  St. Andrew Place, Santa Ana, California** |   | **92705**                             |
| (Address of  principal executive offices)            |   | (Zip Code)                            |

 

**Registrant’s telephonenumber: (714) 247-8200**

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**Securities registeredpursuant to Section 12(b) of the Act:**

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| Title of each class              | ** ** | **Name of each exchange on which each class  registered** |
|----------------------------------|------------|-----------------------------------------------------------|
| Common Stock,  $0.01 par value   |       | New York Stock  Exchange                                  |
| Preferred Stock  Purchase Rights |       |                                                      |

 

**Securities registeredpursuant to Section 12(g) of the Act: None**

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

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

Note:  Checking the box above will not relieve anyregistrant required to file reports pursuant to Section 13 or 15 (d) of theExchange Act from their obligations under those Sections.

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days      Yes  x    No  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act (check one):

Large accelerated filer x            Acceleratedfiler  o            Non-acceleratedfiler  o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.  Yeso    No  x

The aggregate marketvalue of the registrant’s voting and non-voting common equity held bynon-affiliates is approximately $1.9 billion based upon the closing priceon the New York Stock Exchange as of June 30, 2006.

Common Stockoutstanding as of February 26, 2007:  59,691,248shares (including 1,397 shares held in treasury).

**DOCUMENTSINCORPORATED BY REFERENCE**

Part III incorporatescertain information by reference from the registrant’s proxy statement for the2007 annual meeting of stockholders, which proxy statement will be filed nolater than 120 days after the close of the registrant’s fiscal year endedDecember 31, 2006.

 

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**TABLEOF CONTENTS**
|                   | ** ** | ** **                                                                                                          | ** ** | ** ** | ** ** | **Page** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|
|              |       |                                                                                                                |       |       |
| ** PART  I** |       |                                                                                                                |       |       |
| Item  1.          |       | Business                                                                                                            |       | 1          |
| Item  1A.         |       | Risk  Factors                                                                                                       |       | 13         |
| Item 1B.          |       | Unresolved Staff  Comments                                                                                          |       | 25         |
| Item  2.          |       | Properties                                                                                                          |       | 26         |
| Item  3.          |       | Legal  Proceedings                                                                                                  |       | 26         |
| Item 4.           |       | Submission of  Matters to a Vote of Security Holders                                                                |       | 26         |
|              |       |                                                                                                                |       |       |
| **PART II**       |       |                                                                                                                |       |       |
|              |       |                                                                                                                |       |       |
| Item 5.           |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       | 26         |
| Item 6.           |       | Selected Financial  Data                                                                                            |       | 28         |
| Item 7.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 30         |
| Item 7A.     |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 43         |
| Item 8.           |       | Financial  Statements and Supplementary Data                                                                        |       | 47         |
| Item 9.           |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               |       | 89         |
| Item 9A.     |       | Controls and  Procedures                                                                                            |       | 89         |
| Item 9B.          |       | Other Information                                                                                                   |       | 89         |
|              |       |                                                                                                                |       |       |
| **PART III**      |       |                                                                                                                |       |       |
|              |       |                                                                                                                |       |       |
| Item 10.     |       | Directors,  Executive Officers and Corporate Governance                                                             |       | 90         |
| Item 11.     |       | Executive  Compensation                                                                                             |       | 90         |
| Item 12.     |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       | 90         |
| Item 13.     |       | Certain  Relationships and Related Transactions, and Director Independence                                          |       | 90         |
| Item 14.     |       | Principal  Accounting Fees and Services                                                                             |       | 90         |
|              |       |                                                                                                                |       |       |
| **PART IV**  |       |                                                                                                                |       |       |
|              |       |                                                                                                                |       |       |
| Item 15.     |       | Exhibits,  Financial Statement Schedules                                                                            |       | 91         |
|              |       |                                                                                                                |       |       |
| SIGNATURES        |       | S-1                                                                                                                 |
| INDEX OF EXHIBITS |       | S-3                                                                                                                 |
| SCHEDULE  II      |       | S-8                                                                                                                 |
| EXHIBITS          |       | (Attached to this  Report on Form 10-K)                                                                             |       |       |

 

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**PART I**

**Item 1.Business**

AMO was incorporated inDelaware in October 2001 as a subsidiary of Allergan, Inc. (Allergan). Allerganspun-off our company to its stockholders by way of a distribution of all of ourshares of common stock on June 29, 2002. As a result of our spin-off fromAllergan, we are an independent public company, and Allergan has no continuingstock ownership in us. Unless the context requires otherwise, references to “AMO,”the “Company,” “we,” “us” or “our” refer to Allergan’s optical medical devicebusiness for the periods prior to June 29, 2002 and to Advanced Medical Optics,Inc. and its subsidiaries for the periods on or after such date.

**Overview**

We are a global leader inthe development, manufacture and marketing of medical devices for the eye. Wehave three major product lines: cataract / implant, laser vision correction,and eye care. In the cataract / implant market, we focus on the four keyproducts required for cataract surgery — foldable intraocular lenses, or IOLs,implantation systems, phacoemulsification systems and viscoelastics. In thelaser vision correction market, we market laser systems, diagnostic devices,treatment cards and microkeratomes for use in laser eye surgery. Our eye careproduct line provides a full range of contact lens care products for use withmost types of contact lenses. These products include single-bottle,multi-purpose cleaning and disinfecting solutions, hydrogen peroxide-baseddisinfecting solutions, daily cleaners, enzymatic cleaners and contact lensrewetting drops.  Our products are soldin approximately 60 countries and we have direct operations in over 20countries.

In June 2004, wecompleted our acquisition of Pfizer Inc.’s surgical ophthalmic business, whichexpanded our viscoelastic and IOL product offerings, allowing us to offer amore comprehensive portfolio of products required to perform cataract surgery.We acquired the*Healon* family ofviscoelastic products and the*Tecnis*IOL brand. The addition of the*Healon*family, one of the leading viscoelastic brands, significantly expanded ourviscoelastic product line. The*Tecnis*IOL brand further strengthened our position in the ophthalmic surgery marketwith the*Tecnis* Multifocal IOLbrand further expanding our refractive IOL portfolio. We also acquired the*Baerveldt* glaucoma shunt, or drainagedevice, which provided an entry for us into the glaucoma market.

In May 2005, we acquiredVISX, Incorporated, the global leader in laser vision correction.  As a result of the VISX acquisition, we are aleader in the design and development of proprietary technologies and systemsfor laser vision correction of refractive vision disorders.  Our products include the *VISX S**TAR* ExcimerLaser System, which is a fully integrated ophthalmic medical device incorporatingan excimer laser and a computer driven workstation; the *VISX**WaveScan*System,which is a diagnostic device that uses laser beam technology to measurecomprehensive refractive errors of the eye and derive comprehensive refractiveinformation about a patient’s individual optical system; and *VISX*treatment cards, which provide theuser with specific access to proprietary software and are required to operatethe *VISX S**TAR*Excimer Laser System.

In January 2007, weentered into an agreement with IntraLase Corp., a leader in femtosecond lasersused in LASIK surgery, to acquire all fully diluted shares of the company forapproximately $808 million in cash. Under the terms of the definitive merger agreement, IntraLase stockholdersare expected to receive $25.00 in cash for every share of IntraLase commonstock they own.  We expect to completethe acquisition during the second quarter of 2007.  For a description of the risks related to thistransaction, see “Risks Relating to the Pending IntraLase Corp. Acquisition”beginning on page 24.

**Industry**

***Vision and Vision Impairment.***

·            *How Vision Works.* Vision is enabled by thecornea and the lens, which work together to focus light, and the iris, whichregulates the amount of light that passes through the cornea onto the retina.The retina contains light-sensitive receptors that transmit the image throughthe optic nerve to the brain.

·            *Cataracts.* Cataracts are an irreversibleprogressive ophthalmic condition in which the eye’s natural lens loses itsusual transparency and becomes clouded and opaque. This clouding obstructs thepassage of light to the retina and can eventually lead to blindness.

·            *Refractive Disorders.* Refractivedisorders, such as myopia, hyperopia, astigmatism and presbyopia, occur whenthe lens system is unable to properly focus images on the retina. For example,with myopia (nearsightedness), light rays focus in front of the retina becausethe curvature of the cornea is too steep. With hyperopia (farsightedness),light rays focus 

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                  behind theretina because the curvature of the cornea is too flat. Astigmatism makes itdifficult for a person to focus on any object because the otherwise uniformcurvature of the cornea or lens is somehow disrupted or becomes uneven.Presbyopia is the progressive loss of flexibility of the lens and its abilityto change shape to focus on near or far objects, and is presumably caused byaging of the eye’s lens and the muscles that control the shape of the lens.

*OphthalmicSurgical Products Market.* Ophthalmic surgical products generallyare designed to correct impaired vision through minimally invasive surgicalprocedures. As the eye ages, the prevalence of cataracts and refractivedisorders generally increases. We believe that an aging population,introduction of new technologies and increasing market acceptance presentopportunities for growth in the ophthalmic surgical market.

*CataractTreatment.*  The largestsegment of the ophthalmic surgical products market is the treatment ofcataracts. Cataract extraction followed by IOL implantation is one of the mostcommon surgical procedures performed in the United States and most otherdeveloped nations. As estimated by MarketScope, approximately 2.9 millioncataract procedures were performed in the United States and over 14.1 million cataractprocedures were performed worldwide in 2006. MarketScope estimates that the global cataract surgery market, whichincludes sales of IOLs, phacoemulsification equipment, viscoelastics and otherrelated products, was approximately $3.4 billion in 2006 and is projected togrow at a compound annual growth rate of approximately 10% from 2006 to 2011.The data in this report attributed to MarketScope is used with the permissionof MarketScope.

During cataract surgery,patients are often treated using phacoemulsification, a process that usesultrasound waves to break the natural lens into tiny fragments that can beremoved from the eye. Viscoelastics are used during cataract surgery to protectthe inner layer of the cornea, provide lubrication and maintain space in theanterior chamber of the eye and the capsular bag in the posterior chamber(which houses the lens), allowing the eye to maintain its shape.

The following table setsforth the estimated revenues for each component of the global cataract surgerymarket in its various components for the year 2006 according to MarketScope (inmillions):

| IOLs                                          |   | $   | 1,439  |   |
|-----------------------------------------------|--------|-----|--------|--------|
| Viscoelastics                                 |   | 515 |   |
| Phacoemulsification  machines and accessories |   | 604 |   |
| Other                                         |   | 870 |   |
| Total                                         |   | $   | 3,428  |   |

*RefractiveVision Correction.* Another segment of the ophthalmic surgicalmarket is the surgical treatment of refractive disorders.

*LASIK. *Themost common refractive surgery procedure is laser surgery, and the most commonsurgical technique for treating refractive disorders is laser assisted in-situkeratomileusis, or LASIK.  LASIK involvesthe use of an automated cutting device to cut a thin corneal flap, which isthen pulled back to expose the underlying tissue, which is treated using anexcimer laser to achieve vision correction. The most common cutting device iscalled a microkeratome.

As a result of the VISXacquisition, we are a leader in the design and development of proprietarytechnologies and systems for laser vision correction of refractive visiondisorders.  Laser vision correction (LVC)eliminates or reduces reliance on eyeglasses or contact lenses. It employs acomputerized laser that ablates, or removes, sub-micron layers of tissue fromthe cornea, reshaping the eye and thereby improving vision.

Standard LASIK wasintroduced in the mid 1990’s. In performing Standard LASIK, an ophthalmologistconducts a traditional eye examination to determine the prescription requiredto correct the patient’s vision.  Theprescription is then programmed into the laser system, which calculates theablation needed to make a precise corneal correction to treat nearsightedness,farsightedness, and astigmatism.  UnlikeCustom LASIK (see below), Standard LASIK cannot correct higher order aberrations.

The most advanced methodof performing laser vision correction is Custom LASIK.  Custom LASIK employs a diagnostic evaluationof the eye that measures refractive errors in the patient’s vision moreprecisely than previously available technology. The diagnostic device obtains comprehensive information about theimperfections, or refractive errors, of each patient’s vision.  Refractive errors are displayed by thediagnostic device in the form of an aberration map that offers a unique patternfor each patient’s eye, similar to a fingerprint. The map displays informationabout refractive errors that result in nearsightedness, 

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farsightedness, and astigmatism, as well asinformation about higher order aberrations that were not previously measurableby any other instrument.  The informationfrom the diagnostic device is used to generate a personalized treatment planthat is digitally transferred to the laser system. The ablation derived fromthis information is therefore customized to the individual’s eye.

Laser vision correctioncan also be performed by photorefractive keratectomy (“PRK”).  PRK does not require the use of amicrokeratome, and the epithelial layer (or outer layer) of the cornea isremoved before ablation.  Patients mayexperience discomfort for approximately 24 hours and blurred vision forapproximately 48 to 72 hours after the procedure.  Drops to promote corneal healing andalleviate discomfort may be prescribed. Although most patients experience significant improvement in uncorrectedvision (vision without the aid of eyeglasses or contact lenses) within a fewdays of the procedure, unlike LASIK it generally takes several months for thefinal correction to stabilize and for the full benefit of the procedure to berealized.

*IOLs. *Surgical implantation ofIOLs also may be used to treat patients with refractive disorders. Phakic IOLscan be implanted in front or in back of the iris and work in conjunction withthe patient’s natural lens to treat refractive disorders. Multifocal IOLsaddress near, intermediate and distance vision and are approved fornon-cataract procedures outside of the United States.  Other procedures, such as replacing thepatient’s natural lens with an accommodating IOL for refractive visioncorrection, are also being developed.

*EyeCare Market.* As the use of contact lenses has becomeincreasingly popular, the demand for disinfecting solutions, daily cleaners,enzymatic cleaners and contact lens rewetting drops has increased.  We believe that the contact lens marketgrowth is driven by technological advancements in lens materials and designsand broader adoption among younger wearers. In response to increasing popularity of more frequently replaceablelenses and consumer interest in more convenient lens care regimens, we believethe contact lens care market continues to evolve towards greater use ofsingle-bottle, multi-purpose solutions and away from hydrogen peroxide-basedsolutions.  This evolution has had anunfavorable impact on the global hydrogen peroxide market, which isconcentrated in Japan and parts of Europe.

Overall, we believe thatstrong demographic trends, new lens materials and specialty lenses are fuelingglobal increases in the number of contact lens wearers, especially in China andother Asia Pacific countries.  We believethat this is contributing to overall growth in multi-purpose solutions.  The exception to this positive dynamic is inJapan, where a higher than average percent of the market has moved to dailydisposable contact lenses that use cleaning solutions only occasionally or notat all.

Finally, the eye caremarket includes artificial tear and contact lens rewetter products designed torelieve dryness associated with contact lens wear, environmental conditions anddry eye disease.  We believe the globalmarket for artificial tear products exceeds $400 million per year.

**OurProducts**

***Cataract / Implant Business***

*CataractSurgery*

We focus on the four keydevices for the cataract surgery market:

·                  *Foldable IOLs —* Foldable IOLs areartificial lenses used to replace the human lens.

·                  *Implantation systems —* Implantationsystems are designed and used specifically to implant IOLs during cataractsurgery.

·                  *Phacoemulsification systems —*Phacoemulsification systems use ultrasound during small incision cataractsurgery to break apart and remove the cloudy human lens prior to itsreplacement with an IOL.

·                  *Viscoelastics —* Viscoelastics provide abarrier of protection for the cornea during phacoemulsification and maintainthe shape of the eye during IOL insertion.

*Intraocular Lenses.*As a leading provider of IOLs, we offer surgeons a choice of high quality,innovative foldable IOLs in both acrylic and silicone, together with ourproprietary implantation systems, for use in minimally invasive cataractsurgical procedures. We offer a selection of IOLs in both silicone and acrylicmaterials, and we offer both monofocal and multifocal designs. Sales of ourIOLs represented approximately 29%, 28% and 32% of our net sales in 2006, 2005and 2004, respectively. Our IOLs primarily include:

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*Monofocal Lenses*

·                  *Tecnis —* a foldable IOL with an asphericsurface and the only IOL to receive FDA approval for claims of improvedfunctional vision, which results in quicker recognition of objects inlower-light conditions.  The *Tecnis* lens was the first aspheric lens designated as a *“*new technology intraocular lens*”*bythe U.S. Center for Medicare and Medicaid Services (CMS).  With this designation, ambulatory surgerycenters can receive $50 in additional reimbursement when implanting the *Tecnis*IOL.* *The *Tecnis* lens is available in silicone and acrylic.

·                  *Sensar* — an acrylic monofocal IOL, withthe patented*OptiEdge* design,intended to reduce post-surgical posterior capsular opacification, in order tolessen the need for subsequent corrective laser procedures, and to reduce the potentialfor unwanted glare and reflections following implantation.

·                  *ClariFlex —* a silicone monofocal IOL, alsowith the*OptiEdge* design.

*Multifocal and Refractive Lenses*

·                  *ReZoom* — an acrylic multifocal IOL with optical zones thatprovide near, intermediate and distance vision, reducing that patient’sdependence on eyeglasses. This lens received approval from CMS to allowpatients in the U.S. to pay the difference between the $150 reimbursement ratefor IOLs and the amount that is charged. The*ReZoom* IOL is alsoapproved in Europe for the treatment of presbyopia.

·                  *Tecnis Multifocal*— a silicone multifocalIOL with a diffractive, aspheric lens surface is approved in Europe fortreatment of presbyopia.

·                  *Verisyse*— a phakic IOL that works inconjunction with the human lens to treat high myopia.

*ImplantationSystems.* As a companion to our foldable IOLs, we marketinsertion systems for each of our foldable IOL models. The*Unfolder,* our proprietary series ofimplantation systems, which includes the*Emerald*,*SilverT* and*Silver* implantation systems, is used forinsertion of our foldable IOLs. These systems assist the surgeon in achievingcontrolled release of the intraocular lens into the capsular bag through asmall incision in the eye.

*PhacoemulsificationSystems.* We are a leading provider of phacoemulsificationsystems, and have a range of systems to meet market needs. Phacoemulsificationsystems use disposable or reusable packs that are necessary to operate theequipment. The majority of our phacoemulsification product sales are from salesof these packs and related accessories. Sales of our phacoemulsificationproducts represented approximately 9% of our net sales in 2006 and 2005 and 10%of our net sales in 2004.

We currently market thefollowing phacoemulsification systems:

·                  *Sovereign* — our premierphacoemulsification system is designed to reduce procedure times and providethe surgeon with increased control. The*Sovereign* system is available with our proprietary *Occlusion**Mode*and*WhiteStar* technology, whichcreates less heat and turbulence in the ocular environment, giving rise to theterm “cold phaco” and enabling better patient outcomes. Our*WhiteStar* technology also permits thesystem to offer bimanual, micro-incision phaco, a procedure which gives surgeonsmore operating flexibility over traditional techniques.

·                  *Sovereign Compact -*is a mid-sized phacoemulsification system designed to meet surgeons’needs for an advanced phacoemulsification system, with the similarfunctionality of the*Sovereign*system, in a smaller, more portable size. The*Sovereign Compact* system is also available with *OcclusionMode* and*WhiteStar*technology.

·                  *Diplomax II*— is a small-sizedphacoemulsification system designed for surgeons who need a less expensive andmore portable machine.  These systems do not include*WhiteStar*technology, but do employ*Occlusion Mode*technology*.*

*Viscoelastics.*We are a leading provider of viscoelastic products with the *Healon* family of viscoelastics. Thedifferent characteristics associated with each*Healon* product,*Healon,Healon GV* and*Healon5,*provide surgeons with a range of viscoelastic choices that combine thefamiliarity of the*Healon* linewith advanced technologies to satisfy different surgical needs.*Healon* was the first viscoelasticintroduced into the ophthalmic surgical product market and is known for itspurity and ease of use.*Healon GV*is of a greater viscosity than the original*Healon* solution. * Healon5* is the first viscoadaptiveagent to exhibit properties of both cohesive and dispersive viscoelastics andhas the highest viscosity.  Sales of ourviscoelastic products represented approximately 12%, 14% and 10% of our netsales in 2006, 2005 and 2004, respectively.

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*Other Cataract Surgical Related Products.*In addition to our IOLs, phacoemulsification equipment and viscoelastics, wealso provide several ancillary products related to the cataract surgery market,including:

·                  *Irrigating Solutions.* We offer irrigatingsolutions for use in cataract surgery to help maintain space in the eye and toaid in removing residual tissue during phacoemulsification. Irrigatingsolutions are balanced saline solutions that are compatible with the naturalfluid of the anterior segment of the eye.

·                  *Custom Eye Trays.* We work with partners inour local markets to offer custom eye trays to our customers. These custom eyetrays typically consist of all of the ancillary items that a surgeon needs touse in a single cataract surgery, such as surgical knives, drapes, gloves andgowns. Our partners typically handle assembly, distribution and billing for theproduct and in most cases we receive a fee per tray from our partners.

·                  *Capsular Tension Rings.* In the UnitedStates, we sell the*StabilEyes*capsular tension ring, which is inserted into the capsular bag during cataractsurgery and functions to stabilize the capsular bag during placement of an IOL.We also market and distribute the*Inject-o-Ring* capsular tension ring in Europe.  We distribute these products underarrangements with Ophtec B.V. in the United States and Corneal in Europe,respectively.

*OtherSurgical Products*

*GlaucomaImplant.* The*Baerveldt*glaucoma implant is indicated for use in patients with medically uncontrollableglaucoma and a poor surgical prognosis due to severe preexisting conditions.This can include: neovascular glaucoma, aphakic/pseudophakic glaucoma, failedconventional surgery, congenital glaucoma, and secondary glaucoma due touveitis or epithelial down growth.*Baerveldt*glaucoma implants are available in three models, all of which feature a largersurface area plate than competing single-quadrant devices.

***Laser Vision Correction Business***

Ourlaser vision correction products include the following:

·                  *VISX STAR Excimer Laser System* — The *VISX STAR* System is a fully integratedophthalmic medical device incorporating an excimer laser and a computer-drivenworkstation.

·                  *VISX WaveScan System* — The *WaveScan* System is a diagnostic devicethat uses laser beam technology to measure comprehensive refractive errors ofthe eye and complex mathematical algorithms to derive comprehensive refractiveinformation about the patient’s individual optical system.

·                  *VISX Treatment Cards* — Our proprietarytreatment cards control the use of the *VISXSTAR* System.

·                  *Microkeratomes*— Surgeons usemicrokeratomes in LASIK procedures to cut a flap of corneal tissue beforetreatment with an excimer laser.

*VISXSTAR Excimer Laser System*. The laser ablations produced bythe *VISX STAR* System are theproduct of a variable diameter excimer laser beam scanning system.  Seven beams that range in size from 0.65 to6.5 millimeters are homogenized as they converge, scan, and rotate to produce asmooth ablation area on the eye.  The *VISX STAR* System centers on the eye andtracks eye movements in three dimensions during the procedure. Our IrisRegistration technology is the first fully automated method of aligning andregistering wavefront corrections for *CustomVue*treatment.  Iris Registration is designedto replace the current means of registration, which involves manual marking ofthe eye to assess rotational movement.

The *VISX STAR* System performs Standard LASIK, *CustomVue* laser vision correction, andPRK.  It also performs specializedprocedures known as Custom-CAP, which treats patients who previously had LVCsurgery resulting in symptomatic decentered ablations (a condition that affectsfewer than 4,000 patients per year) and PhotoTherapeutic Keratectomy, or PTK,which treats corneas that are scarred or have irregularities from priorinfection, trauma or underlying corneal disease.

*VISXWaveScan System*.  The *WaveScan* system displays refractiveinformation about the patient’s individual optical system in the form of anaberration map.  This unique map, similarto a fingerprint for each patient’s eye, offers objective information aboutrefractive errors associated with nearsightedness, farsightedness andastigmatism, as well as information about higher order aberrations that werepreviously unmeasurable by any other instrument.

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*VISXTreatment Cards*. Each treatment card provides the user withspecific access to proprietary software and is required to operate the *VISX STAR* System. Because treatment cardsare required to perform procedures, there is a strong correlation betweentreatment card sales and the number of procedures performed on *VISX STAR* Systems.  Types of VISX treatment cards include: *VisionKey* Cards for performing standardLASIK procedures, which in the United States carries a license fee for eachprocedure that is purchased; *CustomVue*Cards for performing Custom LASIK, which carry a worldwide license fee for eachprocedure that is purchased; Custom-CAP Cards for performing laser visioncorrection with a previously decentered ablation, which carry a worldwidelicense fee for each procedure that is purchased; and the PTK Card, which isoffered to physicians at a nominal charge to treat certain types of cornealpathologies.  Sales of our treatmentcards and associated procedure fees represented approximately 15%, 8% and 0% ofour net sales in 2006, 2005 and 2004, respectively.

*Microkeratomes*.  In the refractive surgery market, we are aworldwide distributor of the *Amadeus II*microkeratome system and *SurePass*microkeratome blades.

***Eye Care Product Line***

In the eye care market,we focus on creating products that make contact lenses more comfortable,simplify contact lens care and promote ocular health. Our eye care businessdevelops, manufactures and markets a full range of contact lens care productsfor use with most types of contact lenses. Our comprehensive product offeringincludes single-bottle multi-purpose cleaning and disinfecting solutions andhydrogen peroxide-based disinfecting solutions to destroy harmfulmicroorganisms in and on the surface of contact lenses; daily cleaners toremove undesirable film and deposits from contact lenses; enzymatic cleaners toremove protein deposits from contact lenses; and lens rewetting drops toprovide added wearing comfort.

*Multi-PurposeSolutions.* We market our*Complete* brand single-bottle multi-purpose solutions, a convenient,one bottle chemical disinfecting system for soft contact lenses, on a worldwidebasis.*Complete MoisturePLUS* isthe first single-bottle, multi-purpose solution with dual demulcents to helpprevent contact lens dryness and discomfort and promote ocular health. Sales ofour multi-purpose solutions represented approximately 14.8%, 17% and 21% of ournet sales in 2006, 2005 and 2004, respectively. We also offer*Complete Blink-N-Clean,* a uniquein-the-eye lens cleaning solution.

*HydrogenPeroxide-Based Solutions.* We offer products that use hydrogenperoxide-based disinfection systems. Our leading hydrogen peroxide brands arethe*Oxysept 1 Step, Ultracare, Consept 1Step and Consept F* solutions*.*Sales of our hydrogen peroxide-based solutions represented approximately 6%, 9%,and 14% of our net sales in 2006, 2005 and 2004, respectively.

*LensRewetting Solutions.* We believe that dryness and discomfortare the reasons most often cited for discontinuing contact lens wear. We haveintroduced contact lens rewetting drops designed to provide prolongedlubrication and improved protection against dryness. Our products in thiscategory include*Complete* and*blink* rewetting solutions.

**Researchand Development**

Our long-term success isdependent on the introduction of new and innovative products in both theophthalmic surgical and eye care businesses. Our research and developmentstrategy is to develop proprietary products for vision correction that are safeand effective and address unmet needs. As we implement this strategy, we will seekto develop new products with measurable benefits such as increased practitionerproductivity, better patient outcomes and reduced costs to health care payorsand providers.

Researchand development activities for our cataract / implant business are focusedon expanding our product portfolio.  Wehave focused on six areas of opportunity to provide superior outcomes:

·                  *Small incision surgery —* work with avariety of advanced lens materials to enable small incision surgery whichresults in less induced astigmatism, rapid stabilization of the wound andfaster visual rehabilitation.

·                  *Advances in phacoemulsification —*technology providing surgeons with high levels of cutting efficiency but withless heat and turbulence directed into the ocular environment enablingpotential for more effective and safer cataract extraction procedures.

·                  *Restoring accommodation following cataract surgery —*following cataract surgery, the eye loses its ability to accommodate, or shiftits field of focus.  Through thedevelopment of multifocal and accommodating IOLs, we can provide for the fullrange of vision following cataract surgery.

·                  *Improving quality of vision* — advancementsin optics and optical surface designs.

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·                  *Reducing posterior capsular opacification, or PCO,following cataract surgery —* PCO is a clouding of the posteriorportion of the capsular bag that occurs in some patients following cataractsurgery. Currently, treatment of moderate to severe PCO typically requires alaser procedure.

·                  *Greater ease of use for practitioners —*development of intraocular lens designs and advanced insertion devices, whichallow for easier handling in the operating room and greater surgeon control.

In the area of laservision correction, our research and development efforts are focused onadvancements in LASIK and adjunctive technologies.  Current projects include expanded treatmentapplications for custom wavefront guided LASIK, including wavefront guidedtreatment of presbyopia.  Further newproduct development includes advances in ablation technology, accuracy andreliability in wavefront capture and intraoperative monitoring.

Our research anddevelopment efforts in the eye care business are aimed at developingproprietary systems that are effective and more convenient for customers to use,which we believe will result in longer, more comfortable lens wear and a higherrate of compliance with recommended lens care procedures. Our efforts includeseeking formulations that provide prolonged lubrication, improved ocular healthand protection against dryness, and enhanced cleaning and disinfection withoutirritation. Our research and development efforts have resulted in the continueddevelopment of our flagship*Complete*brand multi-purpose solution and*blink*rewetter solutions, with further advancements currently in development.  We are also working to developover-the-counter artificial tear products.

We plan to supplement ourresearch and development activities with a commitment to identifying andobtaining new technologies through in-licensing, technological collaborationsand joint ventures, including the establishment of research relationships withacademic institutions and individual researchers.

We spent approximately $66.1 million in 2006, $61.6 million in 2005 and$45.6 million in 2004 on research and development. Total research anddevelopment expense in 2005 was $552.4 million, including a non-cash in-processresearch and development charge of $490.8 million, and in 2004 was $73.7million, including a non-cash in-process research and development charge of$28.1 million. Research and development spending represented 6.6%, 6.7%, and6.1% of total net sales in 2006, 2005, and 2004, respectively. We believe thatthe continuing introduction of new products supplied by our research and developmentefforts and in-licensing opportunities are critical to our success. There are,however, inherent uncertainties associated with the research and developmentefforts and the regulatory process and we cannot assure you that any of ourresearch projects will result in new products that we can commercialize.

**Customers,Sales and Marketing**

*Customers.*Our primary customers for our cataract / implant and laser vision correctionproducts include surgeons who perform eye surgeries, hospitals and ambulatorysurgical centers. The primary customers for our eye care products includeoptometrists, opticians, ophthalmologists, retailers and clinics that selldirectly to consumers. These retailers include mass merchandisers such asWal-Mart, drug store chains such as Walgreen, hospitals, commercial opticalchains and food stores. During 2006, 2005 and 2004, no customer accounted forover 10% of our net sales.

*Salesand Marketing.* Our sales efforts and promotional activitieswith respect to our cataract / implant and laser vision correction products areprimarily aimed at eye care professionals such as ophthalmologists who use ourproducts. Similarly, our sales and promotional efforts in contact lens care areprimarily directed towards optometrists, opticians, optical shops,ophthalmologists and consumers. We often provide samples of our eye careproducts to practitioners to distribute to their patients to encourage trialuse of our solutions. In addition, we advertise in professional journals andhave a direct mail program of descriptive product literature and scientificinformation that we provide to specialists in the eye care field. We have alsodeveloped training modules and seminars to update physicians regarding evolvingtechnology. A number of our marketing programs include peer-to-peer marketingwith practitioners educating other practitioners about the benefits of ourproducts.

Recognizing theimportance of our sales force’s expertise, we invest significant time andexpense to provide training in such areas as product features and benefits.Training for our ophthalmic surgical products sales force focuses on providingsales personnel with technical knowledge regarding the scope andcharacteristics of the products they are selling and developing skills inpresenting and demonstrating those products. In addition to providing productknowledge for communication to eye care practitioners, our eye care productssales force focuses on developing the necessary skills to sell to buyers formass merchandisers and large drug store chains. This sales force also seeks todevelop relationships with eye care professionals who may purchase our productsand recommend them to their patients.

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Each of our products ismarketed under its brand name and our corporate name. We have a worldwidemarketing organization which helps us to set overall marketing direction,promote consistent global brand positioning and allocate marketing resources toproducts and regions offering the greatest return. In order to remain sensitiveto cultural differences and varying health care systems throughout the world,tactical execution of marketing programs and all sales activities are carriedout at the regional level.

We also use third-partydistributors for the distribution of our products in smaller geographicmarkets. No individual agent or distributor accounted for more than 10% of ournet sales for the years ended December 31, 2006, 2005 and 2004.

Traditionally, we haverealized a seasonal trend in our sales, with the smallest portion of ourcataract / implant business sales being realized in the first quarter and withsales gradually increasing from the second to fourth quarter. This has beendriven predominantly by seasonality in the sales of capital equipment whencustomers increase spending as they reach their year end and are able to spendthe remainder of their annual budgeted amounts. In the laser vision correctionbusiness, the seasonal trend favors the highest portion of sales in the firstquarter.

**Manufacturing,Operations and Facilities**

We manufacture eye careproducts at our facilities in Hangzhou, China, and Madrid, Spain, and wemanufacture surgical products at our facilities in Santa Clara, California,Añasco, Puerto Rico, Groningen, Netherlands and Uppsala, Sweden.

In November 2003, we enteredinto an agreement with Nicholas Piramal India Limited for the supply ofneutralizing tablets primarily used with our hydrogen-peroxide lens careproducts and unit dose solutions. Nicholas Piramal is a sole-source supplier ofthese products. If supply of these products were interrupted, we cannot assureyou that we would be able to obtain replacement products, and our eye careproduct sales may be negatively impacted in a material manner.

We have historicallyoutsourced the manufacture of our phacoemulsification equipment to thirdparties, and we depend on single and limited sources for several keycomponents.  Our*Sovereign* system is manufactured by CarlZeiss Ophthalmic Systems, the manufacturing and supply arrangement for whichwill terminate at the end of May 2007. Our*Sovereign Compact*system is manufactured by Sanmina-SCI under a manufacturing and supplyagreement, which terminates in December 2007. If Sanmina-SCI were to ceasemanufacturing for any reason, we cannot assure you that we would be able toreplace them on terms favorable to us, or at all.

The manufacture of *VISX STAR* Systems and *WaveScan* Systems is a complex operationinvolving numerous procedures, and the completed systems must pass a series ofquality control and reliability tests before shipment. We buy from variousindependent suppliers many components that are either standard or built to ourproprietary specifications, and which are then assembled at our Californiafacility. We also contract with third parties for the manufacture or assemblyof certain components. We depend on single and limited sources for several keycomponents.  Please see our risk factorsfor discussion of the risks related to our reliance on single and limitedsource vendors.

**GovernmentalRegulation**

*UnitedStates.* Our products and operations are subject to extensiveand rigorous regulation by the FDA. The FDA regulates the research, testing,manufacturing, safety, labeling, storage, recordkeeping, promotion,distribution and production of medical devices in the United States to providereasonable assurance that medical products distributed domestically are safeand effective for their intended uses. The Federal Trade Commission alsoregulates the advertising of our products.

Under the Federal Food,Drug, and Cosmetic Act, medical devices are classified into one of threeclasses — Class I, Class II or Class III — depending on the degree of riskassociated with each medical device and the extent of control needed to providereasonable assurances with respect to safety and effectiveness. Our currentproducts are Class I, II and III medical devices, with most being classified asClass II devices and our IOLs being classified as Class III devices in theUnited States, subject to certain exceptions.

Class I devices are thosefor which safety and effectiveness can be reasonably assured by adherence to aset of guidelines, which include compliance with the applicable portions of theFDA’s Quality System Regulation, facility registration and product listing,reporting of adverse medical events, and appropriate, truthful andnon-misleading labeling, advertising, and promotional materials, referred to asthe general controls. Some Class I, also called Class I reserved, devices alsorequire premarket clearance by the FDA through the 510(k) premarketnotification process described below. Many Class I products are exempt from thepremarket notification requirements.

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Class II devices arethose which are subject to the general controls and may require adherence tocertain performance standards or other special controls (as specified by theFDA) and clearance by the FDA: Premarket review and clearance by the FDA forthese devices is accomplished through the 510(k) premarket notificationprocedure. For most Class II devices, the manufacturer must submit to the FDA apremarket notification, demonstrating that the device is “substantiallyequivalent” to a legally marketed device.

If the FDA agrees thatthe device is substantially equivalent, it will grant clearance to commerciallymarket the device. By regulation, the FDA is required to complete its review ofa 510(k) within 90 days of submission of the notification. As a practicalmatter, clearance often takes longer. The FDA may require further information,including clinical data, to make a determination regarding substantialequivalence. If the FDA determines that the device, or its intended use, is not“substantially equivalent,” the FDA will place the device, or the particularuse of the device, into Class III, and the device sponsor must then fulfillmuch more rigorous premarketing requirements, known as premarket approval.

A Class III product is aproduct that has a new intended use or uses advanced technology that is notsubstantially equivalent to a use or technology with respect to a legallymarketed device, or for which there is not sufficient information to establishperformance standards or special controls to provide reasonable assurance ofthe device’s safety and effectiveness and the product is represented to be foruse in supporting or sustaining human life or for a use that is of substantialimportance in preventing impairment of human health or presents a potentialunreasonable risk of illness or injury. The safety and effectiveness of ClassIII devices cannot be reasonably assured solely by the general controls and theother requirements described above. Therefore, these devices almost alwaysrequire formal clinical studies to demonstrate safety and effectiveness.

FDA approval of apremarket approval application is required before marketing a Class IIIproduct. The premarket approval application process is much more demanding thanthe 510(k) premarket notification process. A premarket approval application,which is intended to provide reasonable assurance that the device is safe andeffective, must be supported by extensive data, including data from preclinicalstudies and human clinical trials and existing research material, and mustcontain a full description of the device and its components, a full descriptionof the methods, facilities and controls used for manufacturing, and proposedlabeling. Following receipt of a premarket approval application, once the FDAdetermines that the application is sufficiently complete to permit asubstantive review, the FDA will accept the application for review. The FDA, bystatute and by regulation, has 180 days to review a filed premarket approvalapplication, although the review of an application more often occurs over asignificantly longer period of time.  Amaximum time of 360 days is allowed to respond to deficiencies.

In approving a premarketapproval application or clearing a 510(k) notification, the FDA may alsorequire some form of postmarket surveillance, whereby the manufacturer followscertain patient groups for a number of years and makes periodic reports to theFDA on the clinical status of those patients when necessary to protect thepublic health or to provide additional safety and effectiveness data for thedevice.

When FDA approval of adevice requires human clinical trials, and if the clinical trial presents a “significantrisk” (as defined by the FDA) to human health, the device sponsor is requiredto file an investigational device exemption, or IDE, application with the FDAand obtain investigational device exemption approval prior to commencing thehuman clinical trial. If the clinical trial is considered a “nonsignificantrisk,” investigational device exemption submission to the FDA is not required.Instead, only approval from the Institutional Review Board overseeing theclinical trial is required, although the study is still subject to FDAoversight under other provisions of the IDE regulation. Human clinical studiesare generally required in connection with approval of Class III devices and toa much lesser extent for Class I and II devices. Clinical trials conductedabroad for FDA approval must comply with both local regulations and FDAguidance.

*Continuing Food and Drug Administration Regulation.*After the FDA permits a device to enter commercial distribution, numerousregulatory requirements apply. These include:

·                  theregistration and listing regulation, which requires manufacturers to registerall manufacturing facilities and list all medical devices placed intocommercial distribution;

·                  theQuality System Regulation, which requires manufacturers to follow elaboratedesign, testing, control, documentation and other quality assurance proceduresduring the manufacturing process;

·                  labelingregulations;

·                  theFDA’s general prohibition against promoting products for unapproved or “off-label”uses; and the Medical Device Reporting regulation, which requires thatmanufacturers report to the FDA if their device may have caused or contributedto a death or serious injury or malfunctioned in a way that would likely causeor contribute to a death or serious injury if it were to reoccur;

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·                  MedicalDevice Reporting and recall requirements;

·                  Devicetracking requirements; and

·                  Postmarket surveillance requirements.

Failure to comply withthe applicable U.S. medical device regulatory requirements could result in,among other things, warning letters, fines, injunctions, civil penalties,repairs, replacements, refunds, recalls or seizures of products, total orpartial suspension of production, the FDA’s refusal to grant future premarketclearances or approvals, withdrawals or suspensions of current productapplications, and criminal prosecution.

*GovernmentalReimbursement.* In the United States, a significant percentageof the patients who receive our IOLs are covered by the federal Medicareprogram. When a cataract extraction with IOL implantation is performed in anambulatory surgical center, Medicare provides the ambulatory surgical centerwith a fixed facility fee that includes a recommended $150 allowance to coverthe cost of the IOL. After the Centers for Medicare and Medicaid Services (CMS)(formerly the Health Care Financing Administration), awarded “new technologyintraocular lens” status to our***Tecnis*IOL in 2006, the reimbursement rate for *Tecnis*IOLs implanted in ambulatorysurgical centers increased an additional $50 until February 2011. When theprocedure is performed in a hospital outpatient department, the hospital’sreimbursement is based on a prospective payment that includes payment for theIOL.  The allowance is the same for allIOLs.

At the end of 2003,Congress enacted the Medicare Prescription Drug Improvement and ModernizationAct of 2003. Among other things, this 1egislation requires CMS to establish anew Medicare payment system for services performed in ambulatory surgicalcenters. This new payment system is expected to be effective January 1, 2008.At this time, it is not possible to determine how this new payment system couldaffect our revenues or financial condition.

In addition, ifimplemented, price controls or other cost-containment measures could materiallyand adversely affect our revenues and financial condition.

We cannot predict thelikelihood or pace of any other significant legislative or regulatory action inthese areas, nor can we predict whether or in what form health care legislationbeing formulated by various governments will be passed. Medicare reimbursementrates are subject to change at any time. We also cannot predict with precisionwhat effect such governmental measures would have if they were ultimatelyenacted into law. In general, however, we believe that legislative andregulatory initiatives will likely continue, and the adoption of new payment orcoverage policies can have some impact on our business.

*InternationalRegulation.* Internationally, the regulation of medicaldevices is also complex. In Europe, our products are subject to extensiveregulatory requirements. The regulatory regime in the European Union formedical devices became mandatory in June 1998. It requires that medical devicesmay only be placed on the market if they do not compromise safety and healthwhen properly installed, maintained and used in accordance with their intendedpurpose. National laws conforming to the European Union’s legislation regulateour IOLs and eye care products under the medical devices regulatory system,rather than the more variable national requirements under which they wereformerly regulated. The European Union medical device laws requiremanufacturers to declare that their products conform to the essentialregulatory requirements after which the products may be placed on the marketbearing the CE marking. The manufacturers’ quality systems for products in allbut the lowest risk classification are also subject to certification and auditby an independent notified body. In Europe, particular emphasis is being placedon more sophisticated and faster procedures for the reporting of adverse eventsto the competent authorities.

In Japan, premarketapproval and clinical studies are required, as is governmental pricing approvalfor medical devices. Clinical studies are subject to a stringent “Good ClinicalPractices” standard. Approval time frames from the Japanese Ministry, Health,Labor and Welfare (MHLW) vary from simple notifications to review periods ofone or more years, depending on the complexity and risk level of the device. Inaddition, importation into Japan of medical devices is subject to “Good ImportPractices” regulations. As with any highly regulated market, significantchanges in the regulatory environment could adversely affect future sales.

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In many of the otherforeign countries in which we market our products, we may be subject toregulations affecting, among other things:

·                  productstandards;

·                  packagingrequirements;

·                  labelingrequirements;

·                  qualitysystem requirements;

·                  importrestrictions;

·                  tariffregulations;

·                  duties;and

·                  taxrequirements.

Many of the regulationsapplicable to our devices and products in these countries are similar to thoseof the FDA. In many countries, the national health or social securityorganizations require our products to be qualified before they can be marketedwith the benefit of reimbursement eligibility.

*Fraudand Abuse.* We are subject to various federal and state lawspertaining to health care fraud and abuse, including anti-kickback laws,physician self-referral laws, and false claims laws. Violations of these lawsare punishable by criminal and/or civil sanctions, including, in someinstances, imprisonment and exclusion from participation in federal and statehealth care programs, including Medicare, Medicaid, Veterans Administration(VA) health programs and TRICARE. Although we believe that our operations arein material compliance with such laws, we can give no assurances as these lawsare far-reaching and their interpretation is subject to change.  As a result, we could be required to alterone or more of our practices to remain in compliance with these laws. Theoccurrence of one or more violations of these laws could result in a materialadverse effect on our financial condition and results of operations.

*Anti-KickbackLaws.* Our operations are subject to federal and stateanti-kickback laws. Provisions of the Social Security Act, commonly known asthe “Anti-Kickback Law,” prohibit entities, such as our company, from knowinglyand willfully offering, paying, soliciting or receiving any form ofremuneration in return for, or to induce:

·                  thereferral of persons eligible for benefits under a federal health care program,including Medicare, Medicaid, the VA health programs and TRICARE, or a statehealth program; or

·                  therecommendation, purchase, lease or order of items or services that are covered,in whole or in part, by a federal health care program or state health programs.

The Anti-Kickback Law maybe violated when even one purpose, as opposed to a primary or sole purpose, ofa payment is to induce referrals or other business. Federal regulations createa small number of “safe harbors.” Practices which meet all the criteria of anapplicable safe harbor will not be deemed to violate the statute; practicesthat do not satisfy all elements of a safe harbor do not necessarily violatethe statute, although such practices may be subject to scrutiny by enforcementagencies.

Violation of the Anti-KickbackLaw is a felony, punishable by substantial fines and (for individuals)imprisonment. In addition, the Department of Health and Human Services mayimpose civil penalties and exclude violators from participation in federal orstate health care programs (including Medicare, Medicaid, VA health programs,and TRICARE); if a manufacturer is excluded, its products are not eligible forreimbursement by these programs. Many states have adopted similar anti-kickbacklaws, which vary in scope and may extend to payments intended to induce therecommendation, purchase, or order of products reimbursed by private payors aswell as federal or state health care programs.

**EmployeeRelations**

At December 31, 2006, weemployed approximately 3,800 persons throughout the world, includingapproximately 1,000 in the United States. None of our U.S.-based employees arerepresented by unions. We consider our relations with our employees to be, ingeneral, very good.

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**GlobalSales**

Net sales in the UnitedStates were approximately $415.3 million, $302.5 million and $186.9 million forthe years ended December 31, 2006, 2005 and 2004, respectively. Ourinternational sales represented approximately $582.2 million, $618.2 millionand $555.2 million for the years ended December 31, 2006, 2005 and 2004,respectively, or 58%, 67%, and 75% of total sales, respectively. Sales in Japanwere approximately $138.7 million, $174.3 million and $191.5 million for theyears ended December 31, 2006, 2005 and 2004, respectively. Our products aresold in over 60 countries. Sales are attributed to the country where thecustomer resides. Marketing activities are coordinated on a worldwide basis,and resident management teams provide leadership and infrastructure forintroduction of new products in the local markets. For additional informationrelating to our geographic operating segments, see Note 14 of Notes toConsolidated Financial Statements.

**RawMaterials**

We use a diverse andbroad range of raw materials in the design, development and manufacture of ourproducts. While we do fabricate or formulate some of our materials at ourmanufacturing facilities, we purchase most of the materials and components usedin manufacturing our products from external suppliers. In addition, we purchasesome supplies from single sources for reasons of quality assurance, sole sourceavailability, cost effectiveness or constraints resulting from regulatoryrequirements. Several of our materials are sole sourced, including the sourceof hyaluronic acid used in manufacturing our*Healon* family of products. However, we work closely with oursuppliers to assure continuity of supply while maintaining high quality andreliability. Where we buy a material from one source and other sources areavailable, alternative supplier options are generally considered andidentified, although we do not typically pursue regulatory qualification ofalternative sources due to the strength of our existing supplier relationshipsand the time and expense associated with the regulatory process. A change insuppliers could require significant effort or investment by us in circumstanceswhere the items supplied are integral to the performance of our products orincorporate unique technology.

**EnvironmentalMatters**

Our facilities andoperations are subject to federal, state and local environmental andoccupational health and safety requirements of the United States and foreigncountries, including those relating to discharges of substances to the air,water and land, the handling, storage and disposal of hazardous materials andwastes and the cleanup of properties affected by pollutants. We believe we arecurrently in material compliance with such requirements and do not currentlyanticipate any material adverse effect on our business or financial conditionas a result of our efforts to comply with such requirements.

In the future, federal,state or local governments in the United States or foreign countries couldenact new or more stringent laws or issue new or more stringent regulationsconcerning environmental and worker health and safety matters that could affectour operations. Also, in the future, contamination may be found to exist at ourcurrent or former facilities or off-site locations where we have sent wastes.We could be held liable for such newly-discovered contamination which couldhave a material adverse effect on our business or financial condition. Inaddition, changes in environmental and worker health and safety requirementscould have a material effect on our business or financial condition.

**Competition**

The markets for ourproducts are intensely competitive and are subject to significant technologicalchange. Companies within the cataract / implant and laser vision correctionmarkets compete on technological leadership and innovation, quality andefficacy of products, relationships with eye care professionals and health careproviders, breadth and depth of product offering and pricing. We believe wehave the second largest cataract / implant business on a global basis behindAlcon, Inc., a subsidiary of Nestle S.A. Other competitors in the cataract /implant business include Bausch & Lomb, Staar Surgical, Eyeonics, Hoya,Santen, Zeiss-Meditec and Corneal. We believe we have the world’s largest laservision correction business.  Othercompetitors include Alcon, Bausch & Lomb, Zeiss-Meditec, Moria andNidek.  We believe our competitiveposition is enhanced by our global distribution network, our focus ontechnology and customer relationships and product quality. Our ability tocompete against larger companies may be impeded by having fewer resources todevote to research and development, sales and marketing.

Companies within the eyecare market compete primarily on recommendations from eye care professionals,customer brand loyalty, product quality and pricing. We believe we have one ofthe top three largest contact lens care businesses on a global basis along withAlcon and Bausch & Lomb. Other competitors include CIBA Vision Corporation,a unit of Novartis, and, within the Japan region, Rohto and Menicon.  Our competitive position in the eye carebusiness is enhanced by our strong presence outside the United States and ourknowledge of these foreign markets, as well as technological advancement. Ourlarger competitors have more resources to devote to advertising and promotion,and this may negatively impact our competitive position.

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Our competitors maydevelop technologies and products that are more effective or less costly thanany of our current or future products or that could render our productsobsolete or noncompetitive. Some of these competitors have substantially moreresources and marketing capabilities than we do. Among other things, theseconsolidated companies can spread their research and development costs overmuch broader revenue bases than we can and can influence customer anddistributor buying decisions. Our inability to produce and develop productsthat compete effectively against those of our competitors could result in amaterial reduction in sales.

**Patents,Trademarks and Other Intellectual Property**

Patents and otherproprietary rights are important to the success of our business. We likewiseutilize trade secrets, know-how, continuing technological innovations and licensingopportunities to develop and maintain our competitive position. We protect ourproprietary rights through a variety of methods, including confidentialityagreements and proprietary information agreements with vendors, employees,consultants and others who have access to our proprietary information.

We have rights to over 1,270 granted and issuedpatents and over 1,000 pending patent applications relating to aspects of thetechnology incorporated in many of our products. The scope and duration of ourproprietary protection varies throughout the world by jurisdiction and byindividual product. In particular, patents for individual products extend forvarying periods of time according to the date a patent application is filed,the date a patent is granted and the term of patent protection available in thejurisdiction granting the patent. Our proprietary protection often affords usthe opportunity to enhance our position in the marketplace by precluding ourcompetitors from using or otherwise exploiting our technology.

We believe trademarkprotection is particularly important to the maintenance of the recognized brandnames under which we market our products. The scope and duration of ourtrademark protection varies throughout the world, with some countriesprotecting trademarks only as long as the mark is used, and others requiringregistration of the mark and the payment of registration fees. We own or haverights to material trademarks or trade names that we use in conjunction withthe sale of our products, which include, among others,*Advanced Medical Optics**®* *, Amadeus**TM, AMO**®,  Baerveldt**®, blink**TM,Blink-n-Clean**®,ClariFlex**®,Complete**®* ,*CompleteMoisturePLUS**TM,Complete Revitalize**® ,Consept**®, Consept 1 Step**TM, Custom Vue**® ,  Healon**®, Healon5**®, Healon GV**®, OptiEdge**TM, Oxysept**®, Oxysept 1Step**TM,ReZoom**®* *, Sensar**®, Sovereign**®, SovereignCompact**TM ,,Stabileyes**®,Star S4 IR**TM, Tecnis**®, TheUnfolder**®,UltraCare**®,Ultrazyme**®,Verisyse**TM,VISX**®,WaveScan**®,*and*WhiteStar**®*. Generally, ourproducts are marketed under one of these trademarks or brand names.  *Amadeus*is a trademark of SIS Ltd.

We are also a party toseveral license agreements relating to various aspects of our products;however, we do not believe the loss of any one license would materially affectour business.

We believe that ourpatents, trademarks and other proprietary rights are important to thedevelopment and conduct of our business and the marketing of our products. As aresult, we aggressively protect our intellectual property. However, we do notbelieve that any one of our patents or trademarks is currently of materialimportance in relation to our overall sales.

**InformationAvailable on our Website**

Our Internet address iswww.amo-inc.com. We make available on our website, free of charge, our filingsmade with the SEC electronically, including those on Form 10-K, Form 10-Q, andForm 8-K, and any amendments to those filings. Copies are available as soon asreasonably practicable after we have filed or furnished these documents to theSEC (www.sec.gov). Our Code of Ethics, which applies to all employees, isavailable on our website. Our Code of Ethics is also available in print to anystockholder who requests it from our Investor Relations department, (714)247-8348. Any changes to the Code of Ethics or waivers granted to our chiefexecutive officer, chief financial officer or controller by our board ofdirectors will be publicized on our website***.***

**Item1A. Risk Factors**

You should carefullyconsider the following risks and other information. These risks anduncertainties are not the only ones we face. Others that we do not know aboutnow, or that we do not now think are important, may also impair our business.The risks described in this section could cause our actual results to differmaterially from those anticipated.

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**RisksRelating to Our Business**

***We may not successfully make or integrate acquisitions orenter into strategic alliances.***

As part of our businessstrategy, we intend to pursue selected acquisitions and strategic alliances andpartnerships. We compete with other ophthalmic surgical products and eye carecompanies, among others, for these opportunities and we cannot assure you thatwe will be able to effect strategic alliances, partnerships or acquisitions oncommercially reasonable terms or at all. Even if we do enter into thesetransactions, we may experience:

·                  delaysin realizing the benefits we anticipate, or we may not realize the benefits weanticipate at all;

·                  difficultiesin integrating any acquired companies and products into our existing business;

·                  attritionof key personnel from acquired businesses;

·                  costsor charges;

·                  difficultiesor delays in obtaining regulatory approvals;

·                  highercosts of integration than we anticipated; or

·                  unforeseenoperating difficulties that require significant financial and managerialresources that would otherwise be available for the ongoing development orexpansion of our existing operations.

Consummating thesetransactions could also result in the incurrence of additional debt and relatedinterest expense, as well as unforeseen contingent liabilities, all of which couldhave a material adverse effect on our business, financial condition and resultsof operations. We may also issue additional equity in connection with thesetransactions, which would dilute our existing stockholders.

***We conduct a significant amount of our sales and operationsoutside of the United States, which subjects us to additional business risksthat may cause our profitability to decline.***

Because we manufactureand sell a significant portion of our products in a number of foreigncountries, our business is subject to risks associated with doing businessinternationally. In particular, our products are sold in over 60 countries, andmost of our manufacturing facilities are located outside the continental UnitedStates, in Añasco, Puerto Rico; Madrid, Spain; Hangzhou, China, Uppsala, Swedenand Groningen, Netherlands.  In 2006, onan historical basis, we derived approximately $582.2 million, or 58%, of ournet sales, from sales of our products outside of the United States, including14% of our net sales in Japan. We intend to continue to pursue growthopportunities in sales internationally, which could expose us to greater risksassociated with international sales and operations. Our internationaloperations are, and will continue to be, subject to a number of risks andpotential costs, including:

·                  unexpectedchanges in foreign regulatory requirements;

·                  differinglocal product preferences and product requirements;

·                  fluctuationsin foreign currency exchange rates;

·                  politicaland economic instability;

·                  culturaldifferences;

·                  changesin foreign medical reimbursement and coverage policies and programs;

·                  diminishedprotection of intellectual property in some countries outside of the UnitedStates;

·                  tradeprotection measures and import or export licensing requirements;

·                  difficultyin staffing and managing foreign operations;

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·                  differinglabor regulations; and

·                  potentiallynegative consequences from changes in tax laws.

Any of these factors may,individually or as a group, have a material adverse effect on our business andresults of operations.

As we expand our existinginternational operations, we may encounter new risks. For example, as we focuson building our international sales and distribution networks in new geographicregions, we must continue to develop relationships with qualified localdistributors and trading companies. If we are not successful in developingthese relationships, we may not be able to grow sales in these geographicregions. These or other similar risks could adversely affect our revenue andprofitability.

***We are exposed to foreign currency risks from ourinternational operations that could adversely affect our financial results.***

A significant portion ofour sales and operating costs are, and from time to time, a portion of ourindebtedness may be, denominated in foreign currencies. We are thereforeexposed to fluctuations in the exchange rates between the U.S. dollar and thecurrencies in which our foreign operations receive revenues and pay expenses,including debt service. Our consolidated financial results are denominated inU.S. dollars and therefore, during times of a strengthening U.S. dollar, ourreported international sales and earnings will be reduced because the localcurrency will translate into fewer U.S. dollars. In addition, the assets andliabilities of our non-U.S. subsidiaries are translated into U.S. dollars atthe exchange rates in effect at the balance sheet date. Revenues and expensesare translated into U.S. dollars at the weighted average exchange rate for theperiod. Translation adjustments arising from the use of differing exchangerates from period to period are included in “Accumulated other comprehensiveincome (loss)” in “Stockholders’ equity.” Gains and losses resulting fromforeign currency fluctuations and remeasurements relating to foreign operationsdeemed to be operating in U.S. dollar functional currency are included in “Other,net” in our consolidated statements of operations. Accordingly, changes incurrency exchange rates will cause our net earnings and stockholders’ equity tofluctuate.  We use hedging methods on aregular basis to manage the foreign exchange risk.  This has historically been accomplishedthrough the use of options and forward contracts.

***If we do not introduce new commercially successful productsin a timely manner, our products may become obsolete over time, customers maynot buy our products and our revenue and profitability may decline.***

Demand for our productsmay change in ways we may not anticipate because of:

·                  evolvingcustomer needs;

·                  theintroduction of new products and technologies;

·                  evolvingsurgical practices; and

·                  evolvingindustry standards.

Without the timelyintroduction of new commercially successful products and enhancements, ourproducts may become obsolete over time, in which case our sales and operatingresults would suffer. The success of our new product offerings will depend onseveral factors, including our ability to:

·                  properlyidentify and anticipate customer needs;

·                  commercializenew products in a cost-effective and timely manner;

·                  manufactureand deliver products in sufficient volumes on time;

·                  obtainregulatory approval for such new products;

·                  differentiateour offerings from competitors’ offerings;

·                  achievepositive clinical outcomes;

·                  satisfythe increased demands by health care payors, providers and patients forlower-cost procedures;

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·                  innovateand develop new materials, product designs and surgical techniques; and

·                  provideadequate medical and/or consumer education relating to new products and attractkey surgeons to advocate these new products.

Moreover, innovationsgenerally will require a substantial investment in research and developmentbefore we can determine the commercial viability of these innovations and we maynot have the financial resources necessary to fund these innovations. Inaddition, even if we are able to successfully develop enhancements or newgenerations of our products, these enhancements or new generations of productsmay not produce revenue in excess of the costs of development and they may bequickly rendered obsolete by changing customer preferences or the introductionby our competitors of products embodying new technologies or features.

***We rely on certain suppliers and manufacturers for raw materialsand other products and are vulnerable to fluctuations in the availability andprice of such products and services.***

We purchase certain rawmaterials and other products from third-party suppliers and vendors, sometimesfrom limited sources. Our suppliers and vendors may not provide the rawmaterials or other products needed by us in the quantities requested, in atimely manner, or at a price we are willing to pay. In the event any of ourthird-party suppliers or vendors were to become unable or unwilling to continueto provide important raw materials and third-party products in the requiredvolumes and quality levels or in a timely manner, or if regulations affectingraw materials such as animal-based products were to change, we would berequired to identify and obtain acceptable replacement supply sources. We maynot be able to obtain alternative suppliers and vendors on a timely basis, orat all, which could result in lost sales because of our inability tomanufacture products containing such raw materials or deliver products we sellfrom certain suppliers. In addition, we also rely on certain manufacturers forsome of our products. We have historically outsourced the manufacture of ourphacoemulsification equipment to third parties. If we were unable to renew ourthird-party manufacturing agreements, or if the manufacturers were to ceasemanufacturing any of these products for us for any reason, we may not be ableto find alternative manufacturers on terms favorable to us, in a timely manner,or at all. If any of these events should occur, our business, financialcondition and results of operations could be materially adversely affected.

***We face intense competition, and our failure to competeeffectively could have a material adverse effect on our profitability andresults of operations.***

We face intensecompetition in the markets for our ophthalmic surgical and eye care productsand these markets are subject to rapid and significant technological change. Wehave numerous competitors in the United States and abroad, including, amongothers, large companies such as Alcon, Inc., a publicly traded subsidiary ofNestle S.A.; Bausch & Lomb; CIBA Vision Corporation, a unit of Novartis,among others. Many of our competitors have substantially more resources and agreater marketing scale than we do. We may not be able to sustain our currentlevels of profitability and growth as competitive pressures, including pricingpressure from competitors, increase. In addition, if we are unable to developand produce or market our products to effectively compete against ourcompetitors, our operating results will materially suffer. We also competeagainst a large number of providers of alternative vision correction solutions,some of which may have greater financial resources than us. New or differentmethods of vision correction are continually being introduced. Any of thesecompetitive pressures could result in decreased demand for our products.

Because of our leadingmarket position in the laser vision correction business, all of our competitorstarget our market share in order to grow their own revenues. We can give noassurance that we will be able to maintain or grow our existing market shareand it may, in fact, be required to incur considerable expenditures in order tomaintain or increase that market share. Should our procedure market sharedecline, it could have a material adverse effect on our business, financialposition, and results of operations.

***Trends in the contact lens care market may negatively impactour eye care business.***

Our eye care business isimpacted by trends in the contact lens care market such as more simplifieddisinfection systems and technological and medical advances in surgicaltechniques for the correction of vision impairment. Less expensive one-bottlechemical disinfection systems have gained popularity among soft contact lenswearers instead of peroxide-based lens care products. Also, the growing use andacceptance of daily, frequent replacement and extended wear contact lenses andlaser correction procedures, along with the other factors above, could have theeffect of continuing to reduce demand for lens care products generally. Ourmarketing and sales plans may not be appropriate or sufficient to mitigate theeffect of these trends on our eye care business and, as a result, our eye carebusiness may suffer.

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***If we are unable to protect our intellectual propertyrights, our business and prospects may be harmed.***

Our ability to competeeffectively is dependent upon our ability to protect and preserve theproprietary aspects of the designs, processes, technologies and materials ownedby, used by or licensed to us. We have numerous U.S. patents and correspondingforeign patents that are expected to expire by their own terms at various datesand have additional patent applications pending that may not result in issuedpatents. Our failure to secure these patents may limit our ability to protectthe intellectual property rights that these applications were intended tocover. Although we have attempted to protect our proprietary property,technologies and processes both in the United States and in foreign countriesthrough a combination of patent law, trade secrets and non-disclosureagreements, these may be insufficient. Competitors may be able to design aroundour patents to compete effectively with our products. We also may not be ableto prevent third parties from using our technology without our authorization,breaching any non-disclosure agreements with us, or independently developingtechnology that is similar to ours. The use of our technology or similartechnology by others could reduce or eliminate any competitive advantage wehave developed, cause us to lose sales or otherwise harm our business. If itbecame necessary for us to resort to litigation to protect these rights, anyproceedings could be costly and we may not prevail. Further, we may not be ableto obtain patents or other protections on our future innovations. In addition,because of the differences in foreign patent and other laws concerningproprietary rights, our products may not receive the same degree of protectionin foreign countries as they would in the United States. We cannot assure youthat:

·                  pendingpatent applications will result in issued patents;

·                  patentsissued to or licensed by us will not be challenged by third parties; or

·                  ourpatents will be found to be valid or sufficiently broad to protect ourtechnology or provide us with a competitive advantage.

***We may be subject to intellectual property litigation andinfringement claims, which could cause us to incur significant expenses orprevent us from selling our products.***

There is a substantialamount of litigation over patent and other intellectual property rights in theophthalmic industry. The fact that we have patents issued to us for ourproducts does not mean that we will always be able to successfully defend ourpatents and proprietary rights against challenges or claims of infringement byour competitors. A successful claim of patent or other intellectual propertyinfringement or misappropriation against us could adversely affect our growthand profitability, in some cases materially. We cannot assure you that ourproducts do not and will not infringe issued patents or other intellectualproperty rights of third parties. From time to time, in the ordinary course ofbusiness, we receive notices from third parties alleging infringement ormisappropriation of the patent, trademark and other intellectual propertyrights of third parties by us or our consumers in connection with the use ofour products. We may be unaware of intellectual property rights of others thatmay cover some of our technology. If someone claims that our products infringetheir intellectual property rights, whether or not such claims are meritorious,any resulting litigation could be costly and time consuming and would divertthe attention of our management and personnel from other business issues. Thecomplexity of the technology involved and the uncertainty of intellectualproperty litigation increase these risks. Claims of intellectual propertyinfringement also might require us to enter into costly royalty or licenseagreements (if available on acceptable terms or at all). We also may be subjectto significant damages or an injunction preventing us from manufacturing,selling or using some or some aspect of our products. We may also need toredesign some of our products or processes to avoid future infringementliability. Any of these adverse consequences could have a material adverseeffect on our business and profitability.

***Our manufacturing capacity may not be adequate to meet thedemands of our business.***

If our sales increasesubstantially, we may need to increase our production capacity.  Any prolonged disruption in the operation ofour manufacturing facilities or those of our third-party manufacturers couldmaterially harm our business.  We cannotassure you that if we choose to scale-up our manufacturing operations, we willbe able to obtain regulatory approvals in a timely fashion, which could affectour ability to meet product demand or result in additional costs.

***We could experience losses due to product liability claims,product recalls or corrections.***

We have in the past been,and continue to be, subject to product liability claims. In connection with ourspin-off from Allergan, we assumed the defense of any litigation involvingclaims related to our business and agreed to indemnify Allergan for all relatedlosses, costs and expenses. As part of our risk management policy, we haveobtained third-party product liability insurance coverage. Product liabilityclaims against us may exceed the coverage limits of our insurance policies orcause us to record a self-insured loss. A product liability claim in excess ofapplicable insurance could have a material adverse effect on our 

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business, financial condition and results ofoperations. Even if any product liability loss is covered by an insurancepolicy, these policies have substantial retentions or deductibles that providethat we will not receive insurance proceeds until the losses incurred exceedthe amount of those retentions or deductibles. To the extent that any lossesare below these retentions or deductibles, we will be responsible for payingthese losses. The payment of retentions or deductibles for a significant amountof claims could have a material adverse effect on our business, financialcondition and results of operations.

In addition, we aresubject to medical device reporting regulations that require us to report tothe FDA or similar governmental authorities in other countries if our productscause or contribute to a death or serious injury or malfunction in a way thatwould be reasonably likely to contribute to death or serious injury if themalfunction were to recur. The FDA and similar governmental authorities inother countries have the authority to require the recall of our products in theevent of material deficiencies or defects in design or manufacturing. Agovernment mandated or voluntary recall by us could occur as a result ofmanufacturing errors or design defects, including defects in labeling. We haveundertaken voluntary recalls of our products in the past.

Any product liabilityclaim or recall would divert managerial and financial resources and could harmour reputation with customers. We cannot assure you that we will not haveproduct liability claims or recalls in the future or that such claims orrecalls would not have a material adverse effect on our business.

In November 2006, wecommenced a voluntary recall of eye care solutions, which resulted in amaterial decrease in eye care sales and increased costs associated with therecall and the necessary corrective measures, including temporary shutdown ofproduction lines in China.  We cannotassure you that we have fully anticipated the impact of this recall on our eyecare business or that we will be able to regain our market position,particularly in Asia. We also cannot assure you that we will be able to addressall associated manufacturing issues on a timely basis.

***If we fail to maintain our relationships with health careproviders, customers may not buy our products and our revenue and profitabilitymay decline.***

We market our products tonumerous health care providers, including eye care professionals, hospitals,ambulatory surgical centers, corporate optometry chains and group purchasingorganizations. We have developed and strive to maintain close relationshipswith members of each of these groups who assist in product research anddevelopment and advise us on how to satisfy the full range of surgeon andpatient needs. We rely on these groups to recommend our products to theirpatients and to other members of their organizations. The failure of ourexisting products and any new products we may introduce to retain the supportof these various groups could have a material adverse effect on our business,financial condition and results of operations.

***We generally do not have long-term contracts with ourcustomers.***

We generally do not enterinto long-term contracts with our customers. As a result, we are exposed tovolatility in the market for our products and loss of our customers. As aresult, we may not be able to maintain our level of profitability. If we areunable to market our products on terms we find acceptable, our financialcondition and results of operations could suffer materially.

***Our business issubject to extensive government regulation.***

Our products andoperations are subject to extensive regulation in the United States by the FDAand various other federal and state regulatory agencies, including with respectto regulatory clearance or approval of our products, clinical and pre-clinicaltesting, product marketing, sales and distributions, adverse event reporting,prohibitions on fraud and abuse, submission of false claims, kickbacks andrebates, and relationships with physicians and other referral sources.Additionally, in many foreign countries in which we market our products, we aresubject to similar regulations.

Before a new medicaldevice or new use of, or claim for, or modification to an existing product canbe marketed in the United States, a company may have to apply for and receiveeither 510(k) clearance or premarket approval. Either process can be expensive,lengthy and unpredictable. Also, the identification or increased frequency ofsafety or efficacy concerns could result in product recall or withdrawal orrevocation of our FDA clearance or premarket approval. Compliance with theseregulations is expensive and time-consuming. We, our subcontractors, and thirdparty manufacturers are subject to periodic and unannounced inspections by FDAand governmental authorities to assess compliance. If we fail to comply, theFDA and state or other regulatory agencies have broad enforcement powers, includingany of the following sanctions:

·                  warningletters, fines, injunctions, consent decrees, civil penalties and exclusionfrom participation in federal and state health care programs;

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·                  repair,replacement, recall or seizure of our products;

·                  operatingrestrictions, partial suspension or total shutdown of production;

·                  refusingour requests for 510(k) clearance or premarket approval of new products, newintended uses or modifications to existing products;

·                  withdrawing510(k) clearance or premarket approvals that have already been granted; and

·                  criminalprosecution and penalties.

Product sales,introductions or modifications may be delayed or canceled as a result of U.S.or foreign regulatory processes, which could cause our sales to decline.Failure to obtain regulatory clearance or approvals of new products or productmodifications we develop, any limitations imposed by regulatory agencies on newproduct uses or the costs of obtaining regulatory clearance or approvals couldhave a material adverse effect on our business, financial condition and resultsof operations.

We, our subcontractors,and third-party manufacturers are also subject to similar state requirementsand licenses. We, our subcontractors, and third-party manufacturers must complywith extensive recordkeeping and reporting requirements and must make availableour manufacturing facilities and records for unannounced and periodicinspections by governmental agencies, including FDA, state authorities andcomparable agencies in other countries.

Health care initiativesand other cost-containment pressures could cause us to sell our products atlower prices, resulting in less revenue to us. In the United States, asignificant percentage of the patients who receive our intraocular lenses arecovered by the federal Medicare program. Changes in coverage or coding policiesor reductions in Medicare reimbursement rates and the implementation of otherprice controls could adversely affect our revenues and financial condition. Inaddition, changes in existing regulatory requirements or adoption of newrequirements could hurt our business, financial condition and results ofoperations.

***The clinical trial process required to obtain regulatoryapprovals is costly and uncertain, and could result in delays in new productintroductions or even an inability to release a product.***

The clinical trialsrequired to obtain regulatory approvals for our products are complex andexpensive and their outcomes are uncertain. We incur substantial expense for,and devote significant time to, clinical trials but cannot be certain that thetrials will ever result in the commercial sale of a product. We may suffersignificant setbacks in clinical trials, even after earlier clinical trialsshowed promising results. Any of our products may produce undesirable sideeffects that could cause us or regulatory authorities to interrupt, delay orhalt clinical trials of a product candidate. We, the FDA, or another regulatoryauthority may suspend or terminate clinical trials at any time if they or webelieve the trial participants face unacceptable health risks.

***Our business is subject to environmental regulations.***

Our facilities andoperations are subject to federal, state and local environmental andoccupational health and safety requirements of the United States and foreigncountries, including those relating to discharges of substances to the air,water and land, the handling, storage and disposal of hazardous materials andwastes and the cleanup of properties affected by pollutants.  Failure to maintain compliance with theseregulations could have a material adverse effect on our business or financialcondition.

In the future, federal,state or local governments in the United States or foreign countries couldenact new or more stringent laws or issue new or more stringent regulationsconcerning environmental and worker health and safety matters that could affectour operations.  Also, in the future,contamination may be found to exist at our current or former facilities oroff-site locations where we have sent wastes. We could be held liable for such newly discovered contamination whichcould have a material adverse effect on our business or financial condition. Inaddition, changes in environmental and worker health and safety requirementscould have a material adverse effect on our business or financial condition.

***If we fail to attract, hire and retain qualified personnel,we may not be able to design, develop, market or sell our products orsuccessfully manage our business.***

Our ability to attractnew customers, retain existing customers and pursue our strategic objectivesdepends on the continued services of our current management, sales, productdevelopment and technical personnel and our ability to identify, attract, trainand retain similar personnel. Competition for top management personnel isintense and we may not be able to recruit and retain the personnel we need. Theloss of any one of our management personnel, or our inability to identify,attract, retain and integrate 

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additional qualified management personnel, could makeit difficult for us to manage our business successfully and pursue ourstrategic objectives. Similarly, competition for skilled sales, productdevelopment and technical personnel is intense and we may not be able torecruit and retain the personnel we need. The loss of services of a number ofkey sales, product development and technical personnel, or our inability tohire new personnel with the requisite skills, could restrict our ability todevelop new products or enhance existing products in a timely manner, sellproducts to our customers or manage our business effectively.

We may not be able tohire or retain qualified personnel if we are unable to offer competitivesalaries and benefits. If our stock does not perform well, we may have toincrease our salaries and benefits, which would increase our expenses andreduce our profitability.

***We may be required to satisfy certain indemnificationobligations to Allergan, and we may not be able to collect on indemnificationrights from Allergan.***

Under the terms of ourcontribution and distribution agreement with Allergan, we and Allergan haveeach agreed to indemnify each other from and after our spin-off with respect tothe debt, liabilities and obligations retained by our respective companies.These indemnification obligations could be significant. The ability to satisfythese indemnities, if called upon to do so, will depend upon the futurefinancial strength of each of our respective companies. We cannot determine whetherwe will have to indemnify Allergan for any substantial obligations, and we maynot have control over the settlement of certain claims and lawsuits that mayrequire partial indemnification by us. We also cannot assure you that, ifAllergan is required to indemnify us for any substantial obligations, Allerganwill have the ability to satisfy those obligations.

***We may be responsible for federal income tax liabilitiesthat relate to the distribution of our common stock by Allergan.***

Allergan has received aruling from the Internal Revenue Service to the effect that the spin-offqualified as a tax-free transaction. If either us or Allergan breachrepresentations to each other or to the Internal Revenue Service, or if we orAllergan take or fail to take, as the case may be, actions that result in thespin-off failing to meet the requirements of a tax-free spin-off pursuant toSection 355 of the Internal Revenue Code, the party in breach will indemnifythe other party for any and all resulting taxes. If we were required to pay anyof the potential taxes described above, the payment would have a materialadverse effect on our financial position.

***If laser vision correction is not broadly accepted by bothdoctors and patients, our business, financial position and results ofoperations would be materially and adversely impacted.***

Our business depends uponbroad market acceptance of laser vision correction by both doctors and patientsin the United States and key international markets. Our profitability andgrowth will be largely dependent on increasing levels of market acceptance andprocedure growth, especially with regard to our higher-priced *CustomVue*TM procedure. Potentialcomplications and side effects of laser vision correction include:post-operative discomfort, corneal haze (an increase in the light scatteringproperties of the cornea) during healing, glare/halos (undesirable visualsensations produced by bright lights), decreases in contrast sensitivity,temporary increases in intraocular pressure in reaction to proceduremedication, modest fluctuations in refractive capabilities during healing,modest decrease in best corrected vision (i.e., with corrective eyewear),unintended over- or under-corrections, regression of effect, disorders ofcorneal healing, corneal scars, corneal ulcers, and induced astigmatism (whichmay result in blurred or double vision and/or shadow images). Some consumersmay choose not to undergo laser vision correction because of thesecomplications or more general concerns relating to its safety and efficacy or aresistance to surgery in general. Alternatively, some consumers may elect todelay undergoing laser vision correction surgery because they believe improvedtechnology or methods of treatment will be available in the near future. Shouldeither the ophthalmic community or the general population turn away from laservision correction as an alternative to existing methods of treating refractivevision disorders, or if future technologies replaced laser vision correction,these developments could delay or prevent market acceptance of laser visioncorrection, which could have a material adverse effect on our business,financial position and results of operations.

***The possibility of long-term side effects and adversepublicity regarding laser correction surgery could seriously harm our business.***

Laser vision correctionis a relatively new procedure. Consequently, there is no long-term follow-updata beyond ten years that might reveal additional complications or unknownside effects. * *Any future reported side effects,other adverse events or unfavorable publicity involving patient outcomesresulting from the use of laser vision correction systems manufactured by us orany participant in the laser vision correction market, may have a materialadverse effect on our business, financial position, and results of operations.

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***General economic conditions could have a negative impact onour business, financial position, and results of operations.***

Because laser visioncorrection is not subject to reimbursement from third-party payors such asinsurance companies or government programs, the cost of laser vision correctionis typically borne by individuals directly. Accordingly, weak or uncertaineconomic conditions may cause individuals to be less willing to incur theprocedure cost associated with laser vision correction as was evidenced by VISX’sdecline in revenues from 2002 compared to 2001 and from 2001 compared to 2000.A decline in economic conditions, especially in the United States, could resultin a decline in the number of laser vision correction procedures performed andcould have a material adverse effect on our business, financial position, andresults of operations.

***While we devote significant resources to research anddevelopment, our research and development may not lead to new products thatachieve commercial success.***

Our research anddevelopment process is expensive, prolonged, and entails considerableuncertainty. Because of the complexities and uncertainties associated withophthalmic research and development, products we are currently developing maynot complete the development process or obtain the regulatory approvalsrequired to market such products successfully. The products currently in our development pipeline may not be approvedby regulatory entities and may not be commercially successful, and our current andplanned products could be surpassed by more effective or advanced products.

***Any failure by third party financing entities to satisfytheir obligations to us would negatively impact our financial condition.***

We have relationshipswith third party financing entities that purchase our products directly andsubsequently lease and/or sell these products to end-user customers, or providefinancing directly to customers who purchase products directly from us. Shouldany third party financing entity or entities fail or refuse to pay us in atimely manner or at all, it could negatively affect our cash flows and couldhave a material adverse effect on our business, financial position and resultsof operations.

***If any of ouremployees, consultants or others breach their proprietary informationagreements, our competitive position could be harmed.***

We protect ourproprietary technology, in part, through proprietary information and inventionsagreements with employees, consultants and other parties. These agreements withemployees and consultants generally contain standard provisions requiring thoseindividuals to assign to us, without additional consideration, inventionsconceived or reduced to practice by them while employed or retained by us,subject to customary exceptions. If any of our employees, consultants or othersbreach these agreements our competitors may learn of our trade secrets.

**RisksRelating to Our Indebtedness and Our Common Stock**

***We have a significant amount ofdebt. Our substantial indebtedness could adversely affect our business,financial condition and results of operations and our ability to meet ourpayment obligations under our debt.***

We have a significantamount of debt and substantial debt service requirements. As of December 31,2006, we had $851.1 million of outstanding debt. Approximately $8.4 million ofour revolving credit facility was reserved to support letters of credit issuedon our behalf and $291.6 million, exclusive of letters of credit, was availablefor future borrowings. In addition, we anticipate funding up to $900 million ofnew debt in connection with our proposed acquisition of IntraLase Corp. See “RisksRelating to the Pending IntraLase Corp. Acquisition” beginning on page 24.

Thislevel of debt could have significant consequences on our future operations,including:

·                                          makingit more difficult for us to meet our payment and other obligations under ouroutstanding debt;

·                                          resultingin an event of default if we fail to comply with the financial and otherrestrictive covenants contained in our debt agreements, which event of defaultcould result in all of our debt becoming immediately due and payable;

·                                          reducingthe availability of our cash flow to fund working capital, capitalexpenditures, acquisitions and other general corporate purposes, and limitingour ability to obtain additional financing for these purposes;

·                                          subjectingus to the risk of increased sensitivity to interest rate increases on ourindebtedness with variable interest rates, including borrowings under oursenior credit facility;

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·                                          limitingour flexibility in planning for, or reacting to, and increasing ourvulnerability to, changes in our business, the industry in which we operate andthe general economy; and

·                                          placingus at a competitive disadvantage compared to our competitors that have lessdebt or are less leveraged.

Any of the above-listedfactors could have an adverse effect on our business, financial condition andresults of operations and our ability to meet our payment obligations under thenotes and our other debt.

***To service our indebtedness, we will require a significantamount of cash. Our ability to generate cash flow depends on many factorsbeyond our control.***

Our ability to meet ourpayment and other obligations under our debt depends on our ability to generatesignificant cash flow in the future. This, to some extent, is subject togeneral economic, financial, competitive, legislative and regulatory factors aswell as other factors that are beyond our control. We cannot assure holdersthat our business will generate cash flow from operations, or that futureborrowings will be available to us under our senior credit facility orotherwise, in an amount sufficient to enable us to meet our payment obligationsunder our debt and to fund other liquidity needs. We made an irrevocableelection to satisfy in cash our conversion obligation with respect to theprincipal amount of any of our 2.50% convertible senior subordinated notes due2024 (the “Existing 2.50% Convertible Notes”) converted after December 15, 2004,with any remaining amount of the conversion obligation to be satisfied inshares of our common stock, in each case, calculated as set forth in theindenture governing the Existing 2.50% Convertible Notes. In addition, becausewe made this election, the indenture provides that we must satisfy in cash ourobligations to repurchase any Existing 2.50% Convertible Notes that holders putto us on January 15, 2010, July 15, 2014 and July 15, 2019.

If the Existing 2.50%Convertible Notes become convertible pursuant to their terms and the holderselect to convert or if holders elect to put their notes to us on the specifiedrepurchase dates, we may not have sufficient cash to satisfy our obligations.In addition, our 1.375% and 3.25% convertible senior subordinated notes due2025 and 2026, respectively, contain similar provisions.  We may be unable to repurchase the notes forcash when required by the holders, including following a fundamental change, orto pay the portion of the conversion value upon conversion of any notes by theholders. Our repurchase of any such notes may be prohibited by our other debtinstruments, which could cause defaults and cross-defaults under our other debtagreements. If we are not able to generate sufficient cash flow to service ourdebt obligations, we may need to refinance or restructure our, sell assets,reduce or delay capital investments, or seek to raise additional capital. If weare unable to implement one or more of these alternatives, we may not be ableto meet our payment obligations under the notes and our other debt.

***A significant amount of our debt agreements contain covenantrestrictions that may limit our ability to operate our business.***

Theagreements governing our senior credit facility contain covenant restrictionsthat limit our ability to operate our business, including restrictions on ourability to:

·                                          incuradditional debt or issue guarantees;

·                                          createliens;

·                                          makecertain investments;

·                                          enterinto transactions with our affiliates;

·                                          sellcertain assets;

·                                          redeemcapital stock or make other restricted payments;

·                                          declareor pay dividends or make other distributions to stockholders; and

·                                          consolidate,merge or transfer all or substantially all of our assets and the assets of oursubsidiaries on a consolidated basis.

Our senior creditfacility requires us to maintain specific leverage, fixed charge coverage andinterest coverage ratios. Our ability to comply with these covenants isdependent on our future performance, which will be subject to many factors,some of which are beyond our control, including prevailing economic conditions.Our failure to comply with these obligations would 

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prevent us from borrowing additional money under thefacility and could result in a default under it. If a default occurs under anyof our senior indebtedness, the relevant lenders could elect to declare theindebtedness, together with accrued interest and other fees, to be immediatelydue and payable and proceed against substantially all of our assets, which willserve as collateral securing the indebtedness. Moreover, if the lenders under afacility or other agreement in default were to accelerate the indebtednessoutstanding under that facility, it could result in a default under otherindebtedness. If all or any part of our indebtedness were to be accelerated, wemay not have or be able to obtain sufficient funds to repay it. In addition, wemay incur other indebtedness in the future that may contain financial or othercovenants that are more restrictive than those contained in our currentindentures.

As a result of thesecovenants, our ability to respond to changes in business and economicconditions and to obtain additional financing, if needed, may be significantlyrestricted, and we may be prevented from engaging in transactions that mightotherwise be beneficial to us. In addition, our failure to comply with thesecovenants could result in a default under our debt, which could permit theholders to accelerate such debt. If any of our debt is accelerated, we may nothave sufficient funds available to repay such debt.  As of December 31, 2006, we were incompliance with our financial and other covenants.

***Despite our and our subsidiaries’ current levels ofindebtedness, we may incur substantially more debt, which could furtherexacerbate the risks associated with our substantial indebtedness.***

Although certain of ourdebt agreements contain restrictions on the incurrence of additionalindebtedness, these restrictions are subject to a number of qualifications andexceptions, and the indebtedness incurred in compliance with these restrictionscould be substantial. Also, these restrictions do not prevent us from incurringobligations that do not constitute “indebtedness” as defined in the relevantagreement. If new debt is added to our current debt levels, the related risksthat we now face could intensify.

***Our stock price may fluctuate as a result of a variety offactors, many of which are beyond our control. These factors include:***

·                                          quarterlyvariations in our operating results;

·                                          operatingresults that vary from the expectations of management, securities analysts andinvestors;

·                                          changesin expectations as to our future financial performance;

·                                          announcementsof innovations, new products, strategic developments, significant contracts,acquisitions and other material events by us or our competitors;

·                                          theoperating and securities price performance of other companies that investorsbelieve are comparable to us;

·                                          futuresales of our equity or equity-related securities;

·                                          changesin general conditions in our industry and in the economy, the financial marketsand the domestic or international political situation;

·                                          developmentsor disputes (including lawsuits) concerning proprietary rights;

·                                          developmentsin the insurance market, which may limit the amount of insurance coverageavailable to us;

·                                          departuresof key personnel; and

·                                          regulatoryconsiderations.

In addition, in recentyears, the stock market in general has experienced extreme price and volumefluctuations. This volatility has had a significant effect on the market priceof securities issued by many companies for reasons often unrelated to theiroperating performance. These broad market fluctuations may adversely affect ourstock price, regardless of our operating results.

***Our stockholder rights plan, amended and restatedcertificate of incorporation and bylaws, as well as provisions of Delaware law,could make it difficult for a third party to acquire our company.***

We have a stockholderrights plan that may have the effect of discouraging unsolicited takeoverproposals. The rights issued under the stockholder rights plan would causesubstantial dilution to a person or group that attempts to acquire us on termsnot 

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approved in advance by our board of directors. Inaddition, Delaware corporate law and our amended and restated certificate ofincorporation and bylaws contain provisions that could delay, deter or preventa change in control of our company or our management. These provisions couldalso discourage proxy contests and make it more difficult for our stockholdersto elect directors and take other corporate actions without the concurrence ofour management or board of directors. These provisions:

·                                          authorizeour board of directors to issue “blank check” preferred stock, which ispreferred stock that can be created and issued by our board of directors,without stockholder approval, with rights senior to those of common stock;

·                                          providefor a staggered board of directors and three-year terms for directors, so thatno more than one-third of our directors could be replaced at any annualmeeting;

·                                          providethat directors may be removed only for cause;

·                                          providethat stockholder action may be taken only at a special or regular meeting andnot by written consent;

·                                          providefor super-majority voting requirements for some provisions of our charter; and

·                                          establishadvance notice requirements for submitting nominations for election to theboard of directors and for proposing matters that can be acted upon bystockholders at a meeting.

We are also subject toanti-takeover provisions under Delaware law, which could also delay or preventa change of control. Together, these provisions of our amended and restatedcertificate of incorporation and bylaws, Delaware law and our stockholderrights plan may discourage transactions that otherwise could provide for thepayment of a premium over prevailing market prices of our common stock and,possibly, the notes, and also could limit the price that investors are willingto pay in the future for shares of our common stock and the notes.

***Risks Relating to the Pending IntraLase Corp. Acquisition***

***Even though we and IntraLase have obtained the regulatoryapprovals required to complete the merger, governmental authorities could stillseek to block or challenge the merger.***

The merger is subject toreview by the Antitrust Division of the Department of Justice and the FTC underthe Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). Under theHSR Act, we and IntraLase are required to make pre-merger notification filingsand to await the expiration or early termination of the statutory waitingperiod prior to completing the merger. The merger is also subject to review bycertain other governmental authorities under the antitrust laws of variousother jurisdictions where IntraLase conducts business. We have made allrequired regulatory filings, the applicable waiting periods have expired and wehave therefore obtained all regulatory clearances, consents and approvalsrequired to complete the merger with the exception of one review pending inGermany.  However, after the statutorywaiting periods have expired, and even after completion of the merger,governmental authorities could seek to block or challenge the merger as they deemnecessary or desirable in the public interest. In addition, in somejurisdictions, a competitor, customer or other third party could initiate aprivate action under the antitrust laws challenging or seeking to enjoin themerger, before or after it is completed. We, IntraLase or the combined company may not prevail, or may incursignificant costs, in defending or settling any action under the antitrustlaws.

***We will have more indebtedness after the acquisition ofIntraLase, which could adversely affect our cash flows and business.***

In order to complete theacquisition, we anticipate arranging for and funding up to $900 million of newfinancing. Proceeds from the financing will be used to fund the cashconsideration paid to IntraLase stockholders. Our debt outstanding as of December 31, 2006 was $851.1 million.  As a result of the increase in debt, demandson our cash resources may increase after the completion of the acquisition. Theincreased levels of debt could, among other things:

·                                          requireus to dedicate a substantial portion of our cash flow from operations topayments on our debt, thereby reducing funds available for working capital,capital expenditures, acquisitions and other purposes;

·                                          increaseour vulnerability to, and limit our flexibility in planning for, adverseeconomic and industry conditions;

·                                          affectour credit rating;

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·                                          limitour ability to obtain additional financing to fund future working capital,capital expenditures, additional acquisitions and other general corporaterequirements;

·                                          createcompetitive disadvantages compared to other companies with less indebtedness;and

·                                          limitour ability to apply proceeds from an offering or asset sale to purposes otherthan the repayment of debt.

***Although we expect that the acquisition will result inbenefits to the combined company, the combined company may not realize thosebenefits because of integration and other challenges.***

Our ability to realizethe anticipated benefits of the acquisition will depend, in part, on ourability to integrate the business of IntraLase with our business. Thecombination of two independent companies is a complex, costly andtime-consuming process. This process may disrupt the business of either or bothof the companies, and may not result in the full benefits expected by us. Thedifficulties of combining the operations of the companies include, amongothers:

·                                          coordinatingmarketing functions;

·                                          unanticipatedissues in integrating information, communications and other systems;

·                                          unanticipatedincompatibility of purchasing, logistics, marketing and administration methods;

·                                          retainingkey employees;

·                                          consolidatingcorporate and administrative infrastructures;

·                                          thediversion of management’s attention from ongoing business concerns; and

·                                          coordinatinggeographically separate organizations.

We cannot assure you that the combination of IntraLasewith us will result in the realization of the full benefits anticipated fromthe acquisition.

***If the proposed acquisition of IntraLase is not completed,we will have incurred substantial costs that may adversely affect our financialresults and operations and the market price of our common stock.***

We have incurred and willincur substantial costs in connection with the proposed acquisition ofIntraLase. These costs are primarily associated with the fees of attorneys, accountantsand our financial advisors. In addition, we have diverted significantmanagement resources in an effort to complete the acquisition and we aresubject to restrictions contained in the definitive agreement on the conduct ofour business. If the acquisition is not completed, we will have incurredsignificant costs, including the diversion of management resources, for whichwe will have received little or no benefit. Also, if the acquisition is notcompleted under certain circumstances specified in the definitive agreement, wemay be required to pay IntraLase expenses in the amount of $7 million.

In addition, if theacquisition is not completed, we may experience negative reactions from thefinancial markets and our collaborative partners, customers and employees. Eachof these factors may adversely affect the trading price of our common stock andour financial results and operations.

**Item1B. Unresolved Staff Comments**

Wehave no unresolved written comments from the Commission.

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**Item2. Properties**

Our principal executive offices and research facilities are located inSanta Ana, California, in a facility subleased by us through July 2015.  We also have an administrative, research anddevelopment and manufacturing facility in Santa Clara, California, the leasefor which expires in May 2008. * *We conduct our global operations infacilities that we own or lease. Material facilities include administrativefacilities in Australia, Canada, France, Germany, Hong Kong, Ireland, Italy,Spain and the United Kingdom. We also have two facilities in Japan, one usedfor administration and research and development and the other used forwarehousing. We lease all of these facilities. In addition, we operate fivemanufacturing facilities: one in Añasco, Puerto Rico, where we lease the landand the facility, one in Madrid, Spain, where we own the land and the facility,one in Hangzhou, China, where we own the facility but lease the land, one inUppsala, Sweden, where we own the land and the facility, and one in Groningen, Netherlands,where we own the land and the facility. We believe these facilities areadequate for the current needs of our business.

**Item3. Legal Proceedings**

On January 4, 2005, Dr.James Nielsen filed a complaint against us and Allergan, Inc. in the U.S.District Court of the Northern District of Texas, Dallas Division, forinfringement of U.S. Patent No. 5,158,572. Dr. Nielsen alleges that our*Array* multifocal intraocular lensinfringes the patent. He is seeking damages and a permanent injunction.  The trial in this matter was scheduled tobegin on November 6, 2006, but this date has been vacated.  A new trial date has not yet been scheduled.

We do not believe, based on current knowledge, that the foregoing legalproceeding is likely to have a material adverse effect on our financialposition, results of operations or cash flows. However, we may incursubstantial expenses in defending against third party claims.  In the event of a determination adverse to usor our subsidiaries, we may incur substantial monetary liability, and berequired to change our business practices. Either of these could have a material adverse effect on our financialposition, results of operations or cash flows.

While we are involvedfrom time to time in litigation arising in the ordinary course of business,including product liability claims, we are not currently aware of any otheractions against us or Allergan relating to the optical medical device businessthat we believe would have a material adverse effect on our business, financialcondition, results of operations or cash flows. We may be subject to futurelitigation and infringement claims, which could cause us to incur significantexpenses or prevent us from selling our products. We operate in an industrysusceptible to significant product liability claims. Product liability claimsmay be asserted against us in the future arising out of events not known to usat the present time. Under the terms of the contribution and distributionagreement effecting our spin-off, Allergan agreed to assume responsibility for,and to indemnify us against, all current and future litigation relating to itsretained businesses and we agreed to assume responsibility for, and toindemnify Allergan against, all current and future litigation related to theoptical medical device business.

**Item4. Submission of Matters to a Vote of Security Holders**

We did not submit anymatter during the fourth quarter of the fiscal year covered by this report to avote of security holders, through the solicitation of proxies or otherwise.

**PART II**

**Item5. Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities**

*Dividends.*We have never declared or paid any cash dividends on our common stock or any ofour securities. We do not expect to pay cash dividends on our capital stock inthe foreseeable future. We intend to retain our future earnings to continue tofund the development and growth of our business as well as repay long-termdebt. In addition, our amended and restated senior credit facility prohibits usfrom paying cash dividends.

*MarketInformation.* The following table shows the quarterly pricerange of our common stock during the periods listed.

|                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| **Calendar Quarter** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** |
| First                     |       | $        | 41.11      |     | $          | 47.23 |   | $ | 35.91 |   | $ | 44.53 |   |
| Second                    |       | 43.97    |       | 50.70    |       | 35.00 |   | 40.90 |   |
| Third                     |       | 38.75    |       | 52.04    |       | 37.25 |   | 43.30 |   |
| Fourth                    |       | 34.77    |       | 41.94    |       | 32.04 |   | 44.00 |   |
|                           |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

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Our common stock islisted on the New York Stock Exchange and is traded under the symbol “EYE.” Theclosing price of our common stock was $38.94 on February 26, 2007.

The approximate number ofstockholders of record was 4,600 as of February 26, 2007.

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**Item 6.Selected Financial Data**

The following table sets forth selected financial dataas of and for each of the years in the five-year period ended December 31,2006, which has been derived from our audited consolidated financialstatements.

The selected financial data may not be indicative ofthe results of operations or financial position that we would have obtained ifwe had been an independent company during the pre-spin-off period of 2002presented.

No earnings per sharedata is presented for the year ended December 31, 2002 as our earnings were apart of Allergan’s earnings through the close of business on June 28, 2002.

 
| ** **                                                             | ** ** | **For the Year Ended December 31,**       | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006(c)**                                                        | ** ** | **2005(b)** | ** ** | **2004(a)** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                             | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statement  of Operations:**                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net sales                                                              |       | $                                                                  | 997,496    |   | $ | 920,673 |   | $ | 742,099 |   | $ | 601,453 |   | $ | 538,087 |   |
| Cost of sales                                                          |       | 379,325                                                            |       | 353,325 |   | 306,164 |   | 227,811 |   | 204,338 |   |
|                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Gross profit                                                           |       | 618,171                                                            |       | 567,348 |   | 435,935 |   | 373,642 |   | 333,749 |   |
|                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Selling, general  and administrative                                   |       | 404,802                                                            |       | 396,599 |   | 329,197 |   | 276,695 |   | 235,977 |   |
| Research and  development                                              |       | 66,099                                                             |       | 61,646 |   | 45,616 |   | 37,413 |   | 29,917 |   |
| In-process  research and development                                   |       | —                                                             |       | 490,750 |   | 28,100 |   | — |   | — |   |
| Business  repositioning                                                |       | 46,417                                                             |       | 29,680 |   | — |   | — |   | — |   |
| Net gain on  legal contingencies                                       |       | (96,896                                                            | )          | — |   | — |   | — |   | — |   |
|                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Operating income  (loss)                                               |       | 197,749                                                            |       | (411,327 | ) | 33,022 |   | 59,534 |   | 67,855 |   |
| Interest expense                                                       |       | 30,272                                                             |       | 29,332 |   | 26,933 |   | 24,224 |   | 13,764 |   |
| Loss on  investments, net                                              |       | —                                                             |       | — |   | — |   | — |   | 3,935 |   |
| Unrealized loss  (gain) on derivative instruments                      |       | 1,290                                                              |       | (2,563 | ) | 403 |   | 246 |   | 3,199 |   |
| Loss due to  early retirement of Convertible Senior Subordinated Notes |       | 18,783                                                             |       | 1,885 |   | 116,282 |   | — |   | — |   |
| Other, net                                                             |       | 2,588                                                              |       | 316 |   | 10,620 |   | 17,802 |   | 2,385 |   |
|                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Earnings (loss)  before income taxes                                   |       | 144,816                                                            |       | (440,297 | ) | (121,216 | ) | 17,262 |   | 44,572 |   |
| Provision for  income taxes                                            |       | 65,345                                                             |       | 12,900 |   | 8,154 |   | 6,905 |   | 18,662 |   |
|                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                   |       | $                                                                  | 79,471     |   | $ | (453,197 | ) | $ | (129,370 | ) | $ | 10,357 |   | $ | 25,910 |   |
| Basic earnings  (loss) per share                                       |       | $                                                                  | 1.25       |   | $ | (8.28 | ) | $ | (3.89 | ) | $ | 0.36 |   | — |   |
| Diluted earnings (loss)  per share                                     |       | $                                                                  | 1.21       |   | $ | (8.28 | ) | $ | (3.89 | ) | $ | 0.35 |   | — |   |

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(a)             Includesresults of the acquired Pfizer Inc. Surgical Ophthalmic Business since June 26,2004 (date of acquisition).

(b)            Includesresults of the acquired VISX business since May 27, 2005 (date of acquisition).

(c)             In2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”)No. 123R, “Share-Based Payment.”

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| ** **                                                        | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                        | ** ** | **(in thousands)**               | ** ** |
| **Balance  Sheet Data:**                                          |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and  equivalents                                             |       | $                                     | 34,522     |   | $ | 40,826 |   | $ | 49,455 |   | $ | 46,104 |   | $ | 80,578 |   |
| Current assets                                                    |       | 478,143                               |       | 479,005 |   | 376,825 |   | 252,492 |   | 274,494 |   |
| Total assets                                                      |       | 2,013,897                             |       | 1,980,722 |   | 1,076,534 |   | 461,345 |   | 463,206 |   |
| Current liabilities                                               |       | 217,453                               |       | 260,116 |   | 193,923 |   | 115,301 |   | 108,204 |   |
| Long term debt,  net of current portion and short-term borrowings |       | 851,105                               |       | 500,000 |   | 550,643 |   | 233,611 |   | 277,559 |   |
|                                                                   |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

*The following discussion and analysis presents the factorsthat had a material effect on AMO’s results of operations and cash flows duringeach of the three years in the period ended December 31, 2006, and the Company’sfinancial position at that date. Except for the historical informationcontained herein, the following discussion contains forward-looking statementsthat involve risk and uncertainties. Our actual results may differsignificantly from the results discussed in the forward-looking statements.Factors that might cause such differences include, but are not limited to,those discussed in the section entitled “Risk Factors.” This discussion andanalysis should be read in conjunction with the historical consolidatedfinancial statements of AMO and related notes thereto included elsewhere inthis Form 10-K.*

**Overview**

We are a global leader in the development, manufactureand marketing of medical devices for the eye. Effective January 1, 2006,our reportable segments are represented by our three business units:cataract/implant, laser vision correction (LVC) and eye care. Previously, ourreportable segments were based on geographic regions which comprised the Americas,which included North and South America, Europe/Africa/Middle East, Japan andAsia Pacific, which excluded Japan and included New Zealand and Australia.Sales and operating results for 2005 and 2004 have been conformed to reflectthe change in presentation of reportable segments. Our cataract/implantbusiness focuses on the four key products required for cataract surgery —foldable intraocular lenses, or IOLs, implantation systems, phacoemulsificationsystems and viscoelastics. Our LVC business markets laser systems, diagnosticdevices, treatment cards and microkeratomes for use in laser eye surgery. Oureye care business provides a full range of contact lens care products for usewith most types of contact lenses. These products include single-bottle,multi-purpose cleaning and disinfecting solutions, hydrogen peroxide-baseddisinfecting solutions, daily cleaners, enzymatic cleaners and contact lensrewetting drops.

We have operationsin approximately 20 countries and sell our products in approximately 60countries in the following four regions:

·   Americas (North and South America); 

·   Europe, Africa and Middle East; 

·   Japan; and 

·   Asia Pacific (excluding Japan, but includingAustralia and New Zealand). 

*Eye Care Recall*

In November 2006, we announced the anticipatedfinancial impact associated with the voluntary recall of certain eye careproduct lots and the related manufacturing capacity constraints caused by aproduction-line issue at our manufacturing plant in China.  The recall negatively impacted sales in thefourth quarter of 2006 due to sales returns of $9.5 million.  We also estimated approximately $15.0 millionin lost sales in 2006 as a result of the recall.  The total of $24.5 million was slightlyhigher than our original estimate due to higher returns.  We incurred approximately $15.4 million inrecall-related costs, of which approximately $9.5 million was recorded in cost of goods sold and $5.9million was recorded in selling, general and administrative expenses.  In 2007, we expect to lose approximately $20million to $25 million in sales and incur about $20 million to $25 million incosts.  The costs are due to start-uprelated expenses and unabsorbed overhead as production ramps up in the firstand second quarters of 2007 and to spending on marketing programs to re-launchproducts and recapture market share.

We commenced the voluntary recall as a result of aproduction-line issue at our manufacturing plant in China, which could affectthe sterility of the product.  This issuewas limited to two of the four production lines in the China facility.  In all, we recalled 2.9 million units, mostfrom Asia Pacific, with about 360,000 units retrieved from Japan and the U.S.  In addition, we destroyed about 5 millionunits that were still in our control.

To correct the sterility issue, we temporarily closedthe China plant to conduct a special cleaning and sanitization, and complete analready-planned expansion.  We beganproduction on two of the plant’s four lines in January 2007 and expect thethird also to be operational in the first quarter of 2007.  We have commenced product shipments to Japandistribution centers, and are scheduled to begin shipping to the Asia Pacificmarkets before the end of the first quarter of 2007.  The remaining line has been completelyreplaced and is being expanded to provide automated packaging capabilities thatare expected to provide greater flexibility. As per our original schedule, the fourth line is expected to beoperational in the late May/early June 2007 timeframe.  Our Spain facility supplies the Americas andEuropean markets so there have been no supply disruptions to these regions as aresult of the recall.

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*ProductRationalization and Repositioning Plan*

On October31, 2005, our Board of Directors approved a product rationalization andrepositioning plan covering the discontinuation of non-strategic cataractsurgical and eye care products and the elimination or redeployment of resourcesthat support these product lines. The plan also included organizational changesand potential reductions in force in manufacturing, sales and marketingassociated with these product lines, as well as organizational changes inresearch and development and other corporate functions designed to align theorganization with our strategy and strategic business unit organization.

The planfurther called for increasing our investment in key growth opportunities,specifically our refractive implant product line and international laser visioncorrection business, and accelerating the implementation of productivityinitiatives.

In 2006, we incurred $62.7million of pre-tax charges, which included $16.3 million for inventory,manufacturing related and other charges included in cost of sales and $46.4million included in operating expenses for severance, relocation and otherone-time termination benefits of $13.7 million, productivity and brandrepositioning costs of $37.6 million, offset by net asset disposal gains of$2.8 million and a net credit from settlement of contractual obligations of$2.1 million.  In 2005, we incurred $42.3million in pre-tax charges which included $12.6 million for inventory relatedcharges included in cost of sales and $29.7 million included in operatingexpenses for severance, relocation and other one-time termination benefits of$14.0 million, asset write-downs of $9.2 million, contractual obligations of$2.7 million and accelerated productivity and brand repositioning costs of $3.8million.  We do not expect to incuradditional charges associated with this plan. The cumulativecharges incurred of $105.0 million were within the range previously announced.

*PendingAcquisition of IntraLase Corp.*

On January 5, 2007, we entered into an agreement withIntraLase Corp. (IntraLase) to acquire IntraLase for approximately $808 millionin cash.  IntraLase manufacturesfemtosecond laser systems utilized in LASIK surgery.  Under terms of the agreement, approved by theboards of directors of both companies, after they received fairness opinionsfrom their respective financial advisors, we will pay $25 in cash per share ofIntraLase stock and the individually determined cash value per share ofoutstanding stock options.  We havearranged committed financing from a consortium of banks to complete thetransaction.  We expect the transactionto be completed early in the second quarter of 2007. The transaction is subjectto IntraLase stockholder approval as well as regulatory approvals and othercustomary closing conditions.  For adescription of the risks related to this transaction, see “Risks Relating tothe Pending IntraLase Corp. Acquisition” beginning on page 24.

*Acquisitionof VISX, Incorporated*

On May 27, 2005, pursuant to the Agreement and Plan ofMerger (Merger Agreement), dated as of November 9, 2004, as amended, by andamong Advanced Medical Optics, Inc. (AMO), Vault Merger Corporation, a whollyowned subsidiary of AMO, and VISX, Incorporated (VISX), we completed ouracquisition of VISX, for total consideration of approximately $1.38 billion,consisting of approximately 27.8 million shares of AMO common stock, the fairvalue of VISX stock options converted to AMO stock options and approximately$176.2 million in cash (VISX Acquisition). *VISX*products include the *VISX STAR*Excimer Laser System, the *VISX WaveScan*System and *VISX* treatment cards.

The VISX Acquisition has been accounted for as apurchase business combination. Under the purchase method of accounting, theassets acquired and liabilities assumed were recorded at the date of acquisitionat their respective fair values. Our reported financial position and results ofoperations after May 27, 2005 include VISX and the impact of purchaseaccounting.  Purchase accounting appliedto the VISX Acquisition resulted in a non-cash in-process research anddevelopment charge of $488.5 million in the year ended December 31, 2005.

*Acquisitionof Pfizer Inc. Surgical Ophthalmic Business*

On June 26, 2004, we completed the acquisition of thePfizer Inc. surgical ophthalmic business for $450 million in cash (PfizerAcquisition). We acquired ophthalmic surgical products and certainmanufacturing and research and development facilities located in Uppsala,Sweden, Groningen, Netherlands and Bangalore, India. The products acquiredinclude the *Healon*line of viscoelasticproducts used in ocular surgery, the *Tecnis*intraocular lenses and the *Baerveldt*glaucomashunt.

The Pfizer Acquisition has been accounted for as apurchase business combination. Our reported financial position and results ofoperations after June 26, 2004 include Pfizer and the impact of purchaseaccounting.  Purchase accounting appliedto the Pfizer Acquisition resulted in charges in the year ended December 31,2004, including an in-process research and development charge of $28.1 millionand incremental cost of sales of $28.1 million from the sale of acquiredinventory adjusted to fair value. 

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During 2004, we also incurred otheracquisition-related charges totaling approximately $11.6 million as weintegrated the Pfizer surgical ophthalmic business and eliminated duplicativefunctions.

**Separation from Allergan**

Allergan spun-off its existing optical medical devicebusiness by contributing all of the assets related to the two business linesthat comprise the optical medical device business to us and distributing all ofour outstanding shares of common stock to its stockholders. We had no materialassets, liabilities or activities as a separate corporate entity until Allergan’scontribution to us of the optical medical device business. The contribution ofassets and distribution to Allergan stockholders was completed on June 29,2002. As a result of the spin-off, we are an independent public company andAllergan no longer maintains any stock ownership in us.

Prior to the spin-off, we entered into severalagreements with Allergan in connection with, among other things, transitionalservices, employee matters, manufacturing and tax sharing.

Under the manufacturing agreement, which ended onJune 29, 2005, Allergan manufactured certain of our eye care products and *VITRAX* viscoelastics from the date of thespin-off. We purchased these products from Allergan at a price equal toAllergan’s fully allocated costs plus 10%. During 2005 and 2004, we purchased$41.9 million and $89.3 million, respectively, of product from Allergan. On anannual basis, a pricing “true up” calculation was performed during the firstcalendar quarter after the end of each year. This “true up” calculation wasbased on the actual volume of products shipped by Allergan to us during the precedingyear versus the forecasted volume submitted by us that was used to calculatethe invoiced prices. During the year, we periodically reviewed the volume ofpurchases and accrued for estimated shortfalls, if any. In October 2005, wereceived $0.8 million from Allergan for the final “true up” calculation for thelast six months of the agreement. In March 2005, we made a payment of $0.2million to Allergan based upon the “true up” calculation for the year endedDecember 31, 2004. These payments have been recorded as anincrease/decrease to cost of sales in the accompanying consolidated statementsof operations.

The tax sharing agreement governs Allergan’s and ourrespective rights, responsibilities and obligations with respect to taxes forany tax period ending before, on or after the spin-off. Generally, Allergan isliable for all pre-spin-off taxes except for pre-spin-off taxes attributable toour business for 2002. In addition, the tax sharing agreement provides thatAllergan is liable for taxes that are incurred as a result of restructuringactivities undertaken to effectuate the spin-off. During 2005, we realizedfinal adjustments to accrued, pre-spin-off taxes attributable to our businessand payable to Allergan pursuant to this agreement. These adjustments includeda $1.4 million benefit from the resolution of a discrete item in the thirdquarter of 2005, which was recorded in the income tax provision.

**CriticalAccounting Policies and Estimates**

*RevenueRecognition and Accounts Receivable*

Revenue is realized or realizable and earned whenpersuasive evidence of an arrangement exists, delivery has occurred, the priceto the buyer is fixed or determinable and collectibility is reasonably assured.We record revenue from product sales when title and risk of ownership have beentransferred to the customer, which is typically upon delivery to the customer,with the exception of intraocular lenses distributed on a consignment basis,which is upon notification of implantation in a patient. We recognize proceduralrevenues and revenues from the sale of treatment cards to direct customers whenwe ship the treatment cards as we have no continuing obligations or involvementsubsequent to shipment.

Some customers finance the purchase or rental of theirVISX equipment directly from us over periods ranging from one to three years.These financing agreements are classified as either rental or operating leasesor sales type leases as prescribed by Statement of Financial AccountingStandards No. 13, “Accounting for Leases.” Under sales type leases, systemrevenues are recognized based on the net present value of the expected cashflow after installation to direct customers in the United States and Japan orafter shipment to international distributors. Under rental or operating leasearrangements, rental revenue is recognized over the term of the agreement.

We generally permit returns of product if such productis returned in a timely matter, in good condition, and through the normalchannels of distribution. However, we do not accept returns of treatment cardsand we do not provide rights of return or exchange, price protection or stockrotation rights to any of our VISX product distributors. Return policies incertain international markets can be more stringent and are based on the termsof contractual agreements with the customers. Allowances for returns areprovided for based upon an analysis of our historical patterns of returnsmatched against the sales from which they originated. To date, historicalproduct returns have been within our estimates.

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When we recognize revenue from the sale of ourproducts, certain allowances known and estimable at time of sale are recordedas a reduction to sales. These items include cash discounts, allowances andrebates. These items are reflected as a reduction to accounts receivable to theextent the customer will or is expected to reduce its payment on the relatedinvoice amounts. In addition, certain items such as rebates provided tocustomers that meet certain buying targets are paid to the customer subsequentto customer payment. Thus, such amounts are recorded as accrued liabilities.These provisions are estimated based on historical payment experience,historical relationship to revenues and estimated customer inventory levels. Ifthe historical data and inventory estimates used to calculate these provisionsdo not properly reflect future activity, our financial position, results ofoperations and cash flows could be impacted. To date, historical salesallowances have been within our estimates.

The allowance for doubtful accounts is determined byanalyzing specific customer accounts and assessing the risk of uncollectibilitybased on insolvency, disputes or other collection issues. In addition, weroutinely analyze the different aging categories and establish allowances basedon the length of time receivables are past due.

*Inventories*

Inventories are valued at the lower of first-in,first-out cost or market. On a regular basis, we evaluate inventorybalances for excess quantities and obsolescence by analyzing estimated demand,inventory on hand, sales levels and other information. Based on theseevaluations, inventory balances are reduced, if necessary.

*Goodwilland Long-Lived Assets*

On January 1, 2002, we adopted Statement ofFinancial Accounting Standards No. 142, “Goodwill and Other IntangibleAssets”, whereby goodwill is no longer amortized, but instead is subject to aperiodic impairment review performed during the second quarter of each fiscalyear.  In a business combination, goodwillis allocated to our various reporting units based on relative fair value of theassets acquired and liabilities assumed. We review the recoverability ofgoodwill by comparing each unit’s fair value to the net book value of itsassets. If the book value of the reporting unit’s assets exceeds its fairvalue, the goodwill is written down to its implied fair value.

Additionally, we review the carrying amount ofgoodwill whenever events and circumstances indicate that the carrying amount ofgoodwill may not be recoverable. Impairment indicators include, among otherconditions, cash flow deficits, historic or anticipated declines in revenue oroperating profit and adverse legal or regulatory developments. If it isdetermined such indicators are present and the review indicates goodwill willnot be fully recoverable, based upon discounted estimated cash flows, thecarrying value is reduced to implied fair value.

In the second quarters of 2006, 2005 and 2004, weperformed the annual impairment tests of goodwill and non-amortizableintangible assets, and no impairment was indicated based on these tests.  Effective January 1, 2006, our operatingsegments consist of three businesses: Cataract/Implant, Laser Vision Correctionand Eye Care.  Accordingly, the annualimpairment review in the second quarter of 2006 was based on reporting unitsthat are aligned with the current operating segments.

In accordance with Statement of Financial AccountingStandards No. 144 “Accounting for the Impairment or Disposal of Long-livedAssets”, we assess potential impairment to our long-lived assets when events orchanges in circumstances indicate that the carrying amount of an asset may notbe fully recoverable. If required, an impairment loss is recognized as thedifference between the carrying value and the fair value of the assets.

*IncomeTaxes*

We account for income taxes under the asset andliability method, whereby deferred tax assets and liabilities are recognizedfor the future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date. We evaluate the need to establish avaluation allowance for deferred tax assets based upon the amount of existingtemporary differences, the period in which they are expected to be recoveredand expected levels of taxable income. A valuation allowance to reduce deferredtax assets is established when it is “more likely than not” that some or all ofthe deferred tax assets will not be realized.

We record a liability for potential tax assessmentsbased on our estimate of the potential exposure.  New laws and new interpretations of laws andrulings by tax authorities may affect the liability for potential taxassessments.  Due to the subjectivity andcomplex nature of the underlying issues, actual payments or assessments maydiffer from estimates.  To the extent ourestimates differ from actual payments or assessments, income tax expense isadjusted.  Our income tax returns inseveral locations 

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are being examined by the local taxationauthorities.  Management believes thatadequate amounts of tax and related interest, if any, have been provided forany adjustments that may result from these examinations.

*Stock-BasedCompensation*

Effective January 1, 2006, we began accounting forstock options and employee stock purchase plan (ESPP) shares under theprovisions of Statement of Financial Accounting Standards No. 123R, “Share-BasedPayment” (SFAS 123R). SFAS 123R requires entities to recognize the cost ofemployee services received in exchange for awards of equity instruments basedon the grant-date fair value of those awards. The fair value of stock optionsand ESPP purchase rights are estimated using a Black-Scholes option valuationmodel. This model requires the input of subjective assumptions, includingexpected stock price volatility, estimated life and estimated forfeitures ofeach award. The fair value of equity-based awards is amortized over the vestingperiod of the award, and we have elected to use the straight-line method. Wemake quarterly assessments of the adequacy of the tax credit pool to determineif there are any deficiencies which require recognition in the consolidated statementof operations. Prior to the implementation of SFAS 123R, we accounted for stockoptions and ESPP shares under the provisions of Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” and made pro formadisclosures as required by SFAS No. 148, “Accounting For Stock-BasedCompensation — Transition and Disclosure,” which amended SFAS No. 123, “AccountingFor Stock-Based Compensation.” Pro forma net loss and pro forma net loss pershare disclosed in the footnotes to the consolidated financial statements wereestimated using a Black-Scholes option valuation model. The fair value ofrestricted stock and restricted stock units was calculated based upon the fairmarket value of our common stock at the date of grant.

We also have an annual performance stock incentiveprogram which provides the opportunity for certain executives to earn long-termincentive compensation awards based upon specified market performance measures.Awards are to be settled in a number of restricted stock shares or units equalto the value of the award amount divided by the fair market value of our commonstock on the date the performance criteria is deemed to have been met. The fairvalue of the awards on the grant date is estimated using a lattice-basedvaluation model. The associated expense, if any, is recognized on astraight-line basis over the period which starts from the date the annualprogram is approved by the Board of Directors through the end of the expectedvesting period of the restricted stock awards.

*AcquiredIn-Process Research and Development*

Costs to acquire in-process research and development(IPR&D) projects and technologies which have no alternative future use andwhich have not reached technological feasibility at the date of acquisition areexpensed as incurred. The fair value of IPR&D projects and technologies isestimated based upon management’s assumptions such as projected regulatoryapproval dates, estimated future revenues and cost of goods sold of theproducts under development and expected sales and marketing costs. The majorrisks and uncertainties associated with the timely and successful completion ofthese projects consist of the ability to confirm the safety and efficacy of thetechnology based on the data from clinical trials and obtaining necessaryregulatory approvals. In addition, no assurance can be given that theunderlying assumptions used to forecast the cash flows or the timely andsuccessful completion of such projects will materialize, as estimated. Forthese reasons, among others, actual results may vary from the estimatedresults.

**Comparing Fiscal Years Ended December31, 2006, 2005 and 2004**

The following table presents net sales andoperating income by operating segment for 2006, 2005 and 2004, respectively:
| ** **                | ** ** | **Net Sales** | ** ** | **Operating Income** | ** ** |
|---------------------------|------------|--------------------|------------|---------------------------|------------|
| **(In thousands)**   | ** ** | **2006**           | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cataract/Implant          |       | $                  | 519,025    |                      | $          | 497,191 |   | $ | 413,422 |   | $ | 266,729 |   | $ | 212,879 |   | $ | 122,267 |   |
| Laser Vision  Correction  |       | 216,876            |       | 122,615                   |       | — |   | 130,848 |   | 66,375 |   | — |   |
| Eye Care                  |       | 261,595            |       | 300,867                   |       | 328,677 |   | 104,187 |   | 106,023 |   | 130,008 |   |
|                      |       |               |       |                      |       |   |   |   |   |   |   |   |   |
| Total operating  segments |       | $                  | 997,496    |                      | $          | 920,673 |   | $ | 742,099 |   | $ | 501,764 |   | $ | 385,277 |   | $ | 252,275 |   |

 

Net sales for 2006 increased by $76.8 million, or8.3%, to $997.5 million in 2006 from $920.7 million in 2005. The increase in2006 was primarily the result of full year sales of products acquired in theVISX Acquisition in May 2005, subsequent international expansion of our LVCbusiness, as well as increased sales of technologically advanced products due tocontinued market acceptance of the products offset by the negative impact ofthe eye care recall and our business rationalization efforts. The unfavorableimpact from foreign currency fluctuations on net sales was $2.2 million in2006. Our net sales and earnings in future periods may be negatively impactedduring times of a strengthening U.S. dollar.

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Net sales from our cataract/implant segment increasedby 4.4% in 2006 compared with 2005. This increase was driven largely byincreased sales of our branded promoted products, including the *Tecnis* and *ReZoom* intraocular lenses and increased sales ofphacoemulsification products.  Net saleswere negatively impacted by decreased sales of non-promoted older-technologyintraocular lenses and non-promoted viscoelastics. We believe that global salesof cataract/implant products will continue to grow due to increased sales ofthe *Tecnis* and *ReZoom* intraocular lenses. We expect thegrowth to be partially offset by decreased sales of our older intraocularlenses as we continue our strategy of promoting our higher-technologyintraocular lenses, *Tecnis* and *ReZoom*.

Net sales from our LVC segment increased 76.9% in 2006compared with 2005, reflecting the full year benefit of the May 2005 VISXacquisition, growth in *CustomVue*procedures and strong international system sales.  Net sales of acquired VISX productsapproximated $206.2 million in 2006 compared with approximately $111.1 millionin 2005.

Net sales from our eye care segment decreased by 13.1%in 2006 compared with 2005 primarily due to the impact of the recall, decreasedsales of hydrogen peroxide-based products, principally in Europe and Japan,where the migration to single-bottle cleaning regimens continues, and decreasedsales of multipurpose solutions in Japan due to an increase in the market fordaily disposable lenses.  As previouslydiscussed, sales in 2006 were negatively impacted by the recall.

As part of our product rationalization andrepositioning plan to maximize our competitive advantage as the globalrefractive leader and improve the global penetration of our core cataract,refractive and eye care brands, we have discontinued a variety of non-strategiccataract surgical and eye care products that lack critical revenue mass, haveexperienced steadily declining sales trends and/or have generated relativelyunattractive margins. We expect the growth of our promoted products to offsetthe revenue decline related to these discontinued products.

The net unfavorable impact on net sales from foreigncurrency fluctuations in all geographic regions was $2.2 million in 2006. Ournet sales and earnings in future periods may be negatively impacted duringtimes of a strengthening U.S. dollar. Net sales in the Americas include thefavorable impact of foreign currency fluctuations of $2.7 million in 2006primarily due to currencies in Canada and Latin America. Net sales inEurope/Africa/Middle East include the favorable impact of foreign currencyfluctuations of $3.2 million primarily due to changes in the U.S. dollar versusthe euro in 2006. Net sales in Japan include the unfavorable impact of foreigncurrency fluctuations of $7.7 million resulting from changes in the U.S.dollar versus the Japanese yen in 2006. Net sales in Asia Pacific include theunfavorable impact of foreign currency fluctuations of $0.4 million in 2006.

Net sales in the U.S. represented 41.6%, 32.9%, and25.2% of total net sales in 2006, 2005 and 2004, respectively. Additionally,sales in Japan represented 13.9%, 18.9%, and 25.8% of total net sales in 2006,2005 and 2004, respectively. No other country, or any single customer,generated over 10% of total net sales in any of these years.

Net sales for 2005 increased by $178.6 million, or24.1%, to $920.7 million in 2005 from $742.1 million in 2004. The increase in2005 was primarily the result of sales of products acquired in the VISXAcquisition in May 2005 and the full year impact of the purchase of the Pfizerophthalmic surgical business in June 2004, as well as increased sales oftechnologically advanced products due to continued market acceptance. Net salesof acquired *VISX* products,included in the LVC segment, approximated $111.1 million in 2005. Net sales ofacquired Pfizer ophthalmic surgical products, included in the cataract/implantsegment, were $168.4 million in 2005 and $75.8 million in 2004. These increaseswere partially offset by declines in our older non-promoted and discontinuedproducts and eye care sales in Japan and Europe.

Net sales from our cataract/implant segment increasedby 20.2% in 2005 compared with 2004. This increase was driven largely by netsales of acquired Pfizer ophthalmic surgical products described above andincreased sales of our branded promoted products, including the *Healon* family of viscoelastics, *Tecnis* and *ReZoom* intraocular lenses, and increased sales of *Sensar* intraocular lenses andphacoemulsification products. Net sales were negatively impacted by decreasedsales of non-promoted older-technology intraocular lenses and non-promotedviscoelastics.

Net sales from our LVC segment in 2005 primarilycomprised products from the VISX acquisition. Microkeratomes comprised theremaining portion of LVC net sales in 2005. Sales of microkeratomes wereincluded in the cataract/implant segment in 2004 and were not significant.

Net sales from our eye care segment decreased by 8.5%in 2005 compared with 2004 primarily due to decreased sales of hydrogenperoxide-based products, principally in Europe and Japan, where the migrationto single-bottle cleaning regimens 

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continued, and decreased sales of multipurposesolutions in Japan due to an increase in the market for daily disposablelenses. The favorable impact from foreign currency fluctuations during thefirst nine months of 2005 were offset by a negative impact in the fourthquarter of 2005.

The netunfavorable impact on net sales from foreign currency fluctuations in allgeographic regions was $0.2 million in 2005. The favorable impact from foreigncurrency fluctuations during the first nine months of 2005 were offset by anegative impact in the fourth quarter of 2005. Net sales in the Americas include the favorable impact of foreign currencyfluctuations of $2.3 million in 2005 primarily due to currencies in Canada and Latin America. Netsales in Europe/Africa/Middle East include the unfavorable impact of foreigncurrency fluctuations of $1.0 million primarily due to the strengthening of theU.S. dollar versus the euro in 2005. Net sales in Japan include the unfavorableimpact of foreign currency fluctuations of $3.2 million resulting from thestrengthening of the U.S. dollar versus the Japanese yen in 2005. Net sales inAsia Pacific include the favorable impact of foreign currency fluctuations of$1.7 million in 2005.

*Income and expenses.* The following table sets forth certainstatement of operations items as a percentage of net sales:
| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                              |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                                          |       | 38.0                                       |       | 38.4 |   | 41.3 |   |
| Gross margin                                                           |       | 62.0                                       |       | 61.6 |   | 58.7 |   |
| Other operating  costs and expenses:                                   |       |                                       |       |   |   |   |   |
| Selling, general and administrative                                    |       | 40.6                                       |       | 43.1 |   | 44.4 |   |
| Research and development                                               |       | 6.6                                        |       | 6.7 |   | 6.1 |   |
| In-process research and development                                    |       | —                                     |       | 53.3 |   | 3.8 |   |
| Business repositioning                                                 |       | 4.7                                        |       | 3.2 |   | — |   |
| Net gain on legal contingencies                                        |       | (9.7                                       | )          | — |   | — |   |
| Operating income  (loss)                                               |       | 19.8                                       |       | (44.7 | ) | 4.4 |   |
| Interest expense                                                       |       | 3.0                                        |       | 3.2 |   | 3.6 |   |
| Unrealized loss  (gain) on derivative instruments                      |       | 0.1                                        |       | (0.3 | ) | — |   |
| Loss due to  early retirement of convertible senior subordinated notes |       | 1.9                                        |       | 0.2 |   | 15.7 |   |
| Other  non-operating expense, net                                      |       | 0.3                                        |       | — |   | 1.4 |   |
| Earnings (loss)  before income taxes                                   |       | 14.5                                       | %          | (47.8 | )% | (16.3 | )% |
| Net earnings (loss)                                                    |       | 8.0                                        | %          | (49.2 | )% | (17.4 | )% |

 

*Gross margin.* Our gross margin percentage increased asa percentage of net sales by 0.4 percentage points to 62.0% in 2006 from 61.6%in 2005.  The increase in gross marginwas largely driven by sales growth in the higher margin *Healon*family of viscoelastics and salesof acquired *VISX* products.  Gross profit for 2006 included a charge of$16.3 million, or a 1.6 percentage point impact on gross margin, for inventoryprovisions associated with our product rationalization and businessrepositioning plan. The eye care recall also had a negative impact of $19.0million from sales returns, inventory provisions and other charges, or a 1.9percentage point impact on gross margin. Our gross margin percentage increased as a percent of net sales by 2.9percentage points to 61.6% in 2005 from 58.7% in 2004. Gross profit for 2005included a charge of $12.6 million, or a 1.4 percentage point impact on grossmargin, for inventory provisions associated with our product rationalizationand business repositioning plan.

*Selling, general and administrative.* Selling, general and administrativeexpenses as a percentage of net sales was 40.6% in 2006, compared to 43.1% in2005. Selling, general and administrative expenses in 2006 includeapproximately $1.8 million in acquisition and integration-related charges,amortization expense of $40.0 million related to acquired intangible assets and$5.9 million related to the eye care recall. Selling, general andadministrative expenses in 2006 also include a $1.5 million charge associatedwith the termination of a distributor agreement in India that we had with ourformer parent, Allergan. Stock-based compensation expense under SFAS 123Rincluded in selling, general and administrative expenses was $14.8 million in2006. Selling, general and administrative expenses decreased as a percent ofnet sales by 1.3 percentage points to 43.1% in 2005 from 44.4% in 2004.Selling, general and administrative expenses in 2005 include approximately$14.6 million in acquisition and integration-related charges and amortizationexpense of $26.7 million related to acquired intangible assets. Selling,general and administrative expenses in 2005 also include an $8.6 million chargeassociated with the termination of a distributor agreement in India that we hadwith our former parent, Allergan.  Inaddition, selling, general and administrative expenses in 2005 were impacted byselling costs associated with acquired *VISX*products of $16.2 million.

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*Research and development.*Research and development expenditures asa percentage of net sales in 2006 remained relatively constant as compared to2005 and as a percentage of net sales increased slightly in 2005 as compared to2004. Our research and development strategy is to develop proprietary productsfor vision correction that are safe and effective and address unmet needs. Weare currently focusing on new advancements that build on our *Tecnis, Healon*and *Sovereign* technologies, corneal andlens-based solutions to presbyopia and dry eye products.

*In-process research and development*. In 2005, we incurred an in-process research and development (IPR&D)charge of $488.5 million related to the VISX Acquisition.  This charge represented the estimated fair valueof projects that, as of the acquisition date, had not reached technologicalfeasibility and had no alternative future use. The Company recorded $449.2million of this amount in the second quarter of 2005 and $39.3 million in thethird quarter of 2005. The additional charge in the third quarter of 2005resulted primarily from the completion of the IPR&D valuation. The fairvalue assigned to IPR&D comprised the following projects: High Myopia for *CustomVue* - $14.7 million, Excimer LaserImprovements - $56.2 million and Presbyopia - $417.6 million.  The fair value of these projects wasdetermined by performing a discounted cash flow analysis using the “income”approach.  Net cash flows attributable tothese projects were discounted to their present values at a rate commensuratewith the perceived risk, which for these projects ranged from 19.0 to 21.0percent.  High myopia for *CustomVue* was forecasted to be approvedfor sale in the U.S. in late 2005.  FDAapproval was received in September 2005. A procedure to treat presbyopia is forecasted to be approved for sale inthe U.S. in mid-2007.  Management’s bestestimate of additional research and development expenses needed prior toexpected FDA approval for these procedures ranges from $4 million to $6million.  Additional research anddevelopment expenses in the range of $8 million to $10 million representmanagement’s best estimate as to the additional R&D expenses to bringexcimer laser system improvements to market. Forecasted discounted cash flowsfor each product once launched include estimates for normal sustainingengineering and maintenance R&D. These projects are currently on track for the expected approvaldates.  However, the major risks anduncertainties associated with the timely and successful completion of theseprojects consist of the ability to confirm the safety and efficacy of thetechnology based on the data from clinical trials and obtaining the necessaryapprovals. We can provide no assurance that the approvals will be received onthis schedule or at all.

*Business repositioning costs.*  On October 31, 2005, our Board of Directorsapproved a product rationalization and repositioning plan covering thediscontinuation of non-strategic cataract surgical and eye care products andthe elimination or redeployment of resources that support these product lines.The plan also includes organizational changes and potential reductions in forcein manufacturing, sales and marketing associated with these product lines, aswell as organizational changes in research and development and other corporatefunctions designed to align the organization with our strategy and strategicbusiness unit organization. The plan further calls for increasing ourinvestment in key growth opportunities, specifically our refractive implantproduct line and international laser vision correction business, andaccelerating the implementation of productivity initiatives.  In 2006, we incurred $62.7 million of pre-taxcharges, which included $16.3 million for inventory, manufacturing related andother charges included in cost of sales and $46.4 million included in operatingexpenses for severance, relocation and other one-time termination benefits of$13.7 million, productivity and brand repositioning costs of $37.6 million,offset by net asset disposal gains of $2.8 million and a net credit fromsettlement of contractual obligations of $2.1 million.  We incurred $42.3 million in pre-tax chargesduring the fourth quarter of 2005 which included $12.6 million for inventory,manufacturing related and other charges included in cost of sales and $29.7million included in operating expenses for severance, relocation and otherone-time termination benefits of $14.0 million, asset write-downs of $9.2million, contractual obligations of $2.7 million and accelerated productivityand brand repositioning costs of $3.8 million. The cumulative chargesincurred of $105.0 million were within the range previously announced. We do not expect to incur additional chargesassociated with this plan.

*Net gain on legal contingencies.* We recognized a net gain on legal contingencies of $96.9 million in2006, primarily from settlement of pending patent litigation, net of costsincurred. On July 7, 2006, we entered into a settlement agreement with Alcon,Inc., Alcon Laboratories, Inc., and Alcon Manufacturing Ltd. (collectively, “Alcon”)regarding all pending patent litigation between us and Alcon. The settlementrequired Alcon to pay us a lump-sum payment of $121 million which was receivedin July 2006 and was accounted for in the third quarter.  The parties agreed to dismiss all pendingpatent litigation in Delaware and Texas, agreed not to sue each other regardingthe patents at issue in those cases, and cross-licensed patents coveringexisting features of commercially available phacoemulsification products.

*Operating**income*. Operating income (loss) was $197.7million, $(411.3) million and $33.0 million in 2006, 2005 and 2004,respectively. Operating income as a percentage of net sales, or operatingmargin, was 19.8% in the year ended December 31, 2006. Our 2006 operatingincome was impacted by a $96.9 million net gain related to the settlement oflegal matters discussed above, an aggregate $66.0 million in net chargesassociated with rationalization and repositioning initiatives, acquisitions,integrations, and termination of a distributor contract.  Operating income was impacted by a $19.2million charge for stock-based compensation expense under SFAS 123R. Operatingincome was also negatively impacted by $24.9 million related to the eye carerecall. The $411.3 million operating loss in 2005 reflected the impact of$536.9 million in charges related primarily to acquisitions, recapitalizations,and product rationalizations and repositioning actions.

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Operating income from our Cataract/Implant businessincreased by $53.9 million in the year ended December 31, 2006, due to theincrease in net sales and favorable mix of higher margin products discussedabove, along with the favorable impact of cost containment measures taken inconnection with our business repositioning plan. Operating income from our LVCbusiness increased by $64.5 million in the year ended December 31, 2006, due tosales of products acquired from VISX in May 2005. Operating income from our EyeCare business decreased by $1.8 million in the year ended December 31, 2006,primarily due to the recall and continued softness in the market for hydrogenperoxide based products, partially offset by lower selling and promotionalcosts attributable to discontinued products and cost savings from businessrepositioning actions.

Operating income from our cataract/implant segmentincreased by $90.6 million in 2005 compared with 2004 due to the increase innet sales and favorable mix of higher margin products discussed above, along withthe favorable impact of cost containment measures taken in connection with ourbusiness repositioning plan. Operating income from our cataract/implant segmentfor 2004 included a charge of $28.1 million for manufacturing profitcapitalized in inventory and expensed related to the Pfizer Acquisition.Operating income from our LVC business of $66.4 million resulted from theimpact of products acquired from VISX in May 2005. Operating income from oureye care segment decreased by $24.0 million in 2005 compared with 2004primarily due to the unfavorable impact from continued softness in the marketfor hydrogen peroxide based products, primarily in Japan.

*Non-**operating**expense*. Interest expense was $30.3 million,$29.3 million and $26.9 million in 2006, 2005 and 2004, respectively. Interestexpense in 2006 includes a pro-rata write-off of debt issuance costs of $3.3million primarily associated with the termination of the term loan. Interestexpense in 2005 includes a pro-rata write-off of debt issuance costs of $5.8million primarily associated with the termination of the term loan, partiallyoffset by the recognition of a realized gain on interest rate swaps of $0.8million. We anticipate interest expense to increase in 2007 relative to 2006due to the anticipated additional debt in connection with the pendingacquisition of IntraLase and a full year of interest on our 3.25% notes.

We recorded an unrealized loss (gain) on derivativeinstruments of $1.3 million, $(2.6) million and $0.4 million in 2006, 2005 and2004, respectively. We record as “unrealized loss (gain) on derivativeinstruments” the mark to market adjustments on the outstanding foreign currencyoptions and forward contracts which we entered into to reduce the volatility ofexpected earnings in currencies other than the U.S. dollar.

During the year ended December 31, 2006, we enteredinto an accelerated share repurchase arrangement with a third party to use theproceeds from the issuance of the 3.25% Notes to purchase $500.0 million of AMOcommon stock at a volume weighted price per share over the term of theagreement.  During 2006, the third partyhad delivered to us in the aggregate, 10.5 million shares of AMO commonstock.  The impact of the shares repurchasedunder this arrangement in 2006 reduced stockholders’ equity by $500.0 million,which included $0.1 million for the par value of Common Stock, additionalpaid-in capital of $247.2 million and accumulated deficit of $252.7million.  Repurchased shares were retiredupon delivery to us.  In addition, during2006, we repurchased $148.9 million of aggregate principal amount ofconvertible senior subordinates notes ($103.9 million of the principal amountof the 2.5% notes and $45.0 million of the principal amount of the 1.375% notes)utilizing borrowings under our senior credit facility.  We incurred a loss on debt extinguishment of$18.8 million, and wrote off debt issuance costs of $3.3 million in 2006 inconjunction with the note repurchases.

In 2005, the loss due to exchange of the 3 1⁄2% convertible senior subordinated notes due 2023 of$1.9 million is comprised of a non-cash charge of $1.7 million and a cashcharge of $0.2 million. In the second quarter of 2005, we exchanged160,695 shares of common stock for $3.0 million aggregate principal amount ofthe 3 1⁄2% convertible senior subordinated notesin a privately negotiated transaction. As a result, a non-cash charge ofapproximately $0.5 million representing the fair value of shares issued as apremium was recorded. In the fourth quarter of 2005, we exchanged 291,760shares of common stock and approximately $0.4 million in cash for $5.6 millionaggregate principal amount of the 3 1⁄2% convertible senior subordinated notes in privately negotiatedtransactions. A non-cash charge of approximately $1.2 million and a cash chargeof $0.2 million representing the fair value of shares issued as a premium wererecorded.

In 2004, the loss due to exchange of the 3 1⁄2%convertible senior subordinated notes of $116.3 million is comprised of anon-cash charge of $111.7 million and a cash charge of $4.6 million.  In the second quarter of 2004, we exchangedapproximately 5.8 million shares of common stock and $4.6 million of cash forapproximately $108.6 million in aggregate principal amount of these notes.  Because these notes we not convertible into equityat such time, a non-cash charge of $107.2 million and a cash charge of $4.6million was recorded.  The $107.2 millionnon-cash charge was comprised of a charge of $89.1 million representing thedifference between the fair market value of 5.3 million shares of common stockissued in exchange for the notes and the principal amount of notes exchangedand a charge of $18.1 million representing the fair market value of 0.5 millionshares of common stock issued as a premium. The $4.6 million cash charge represented cash issued as a premium.  In the remainder of 2004, we exchangedapproximately 1.2 million shares of common stock for approximately $22.8million in aggregate principal amount of these notes.  As a result, a non-cash charge of $4.5million representing the fair value of shares issued as a premium was recorded.

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Other net non-operating expense was $2.6 million for2006. Other non-operating expense of $0.3 million for 2005.  Other non-operating expense of $10.6 millionfor 2004 included $10.8 million paid for the repurchase of the 9 1⁄4% senior subordinated notes and early debtextinguishment costs and fees of $0.1 million aggregating $10.9 millionpartially offset by foreign exchange gains and interest income.

*Income taxes*. In 2006, we recorded a provision for income taxes of $65.3 million onpre-tax income of $144.8 million.  Thepre-tax income in 2006 included a net gain on legal contingencies of $96.9million, for which we recorded income tax expense of $39.9 million, and chargesof $18.8 million associated with the repurchase of convertible notes, whichresulted in the recognition of partial deferred tax benefit of $3.9million.  Additionally, we recorded adeferred tax benefit of $6.3 million from stock-based compensation of $19.2million under SFAS 123R.  We haveprovided a tax provision at 41.5% on the remaining pre-tax income.  The increase in the tax rate on remainingpre-tax income is due to the impact of the recall, repositioning and therelated impact on realization of foreign tax credits.  Income taxes are provided on taxable incomeat the statutory rates applicable to such income and we have provided for U.S.federal income taxes and anticipated foreign withholding taxes on theundistributed earnings of non-U.S. subsidiaries.

In 2005, we recorded a provision for income taxes of$12.9 million on a pre-tax loss of $440.3 million. The pre-tax loss in 2005included an in-process research and development charge of $490.8 million, anon-cash charge of $1.7 million and a cash charge of $0.2 million related tothe exchange of the 3 1⁄2% convertible senior subordinated notes and a charge of$8.6 million associated with the termination of a distribution agreement inIndia with Allergan, for which no tax benefit was provided on these items. Wehave provided a tax provision at 33% on the remaining income, which waspartially offset by tax benefits from the American Jobs Creation Act of 2004and final adjustments with Allergan, which are discussed below.

The American Jobs Creation Act of 2004 was signed intolaw in October 2004, which allowed companies to elect to repatriate cash intothe United States in 2005 at a special, temporary effective tax rate of 5.25percent. Based on our evaluation of the amount of foreign earnings that we haveelected to treat under this special provision, the income tax benefit of therepatriation was $5.7 million in 2005.

The lower tax rate in 2005 reflected continuingimplementation of our long-term tax strategies, as well as final adjustments ofpreviously accrued pre-spin-off taxes attributable to our business in 2002 andpayable to Allergan pursuant to a pre-spin tax sharing agreement. Theseadjustments included a $1.4 million benefit from the resolution of a discreteitem in the third quarter of 2005, which was recorded in the income taxprovision.

We believe our future effective income tax rate mayvary depending on our mix of domestic and international taxable income or lossand the various tax and treasury methodologies we implement, including ourpolicy regarding repatriation of future accumulated foreign earnings.

In 2004, we recorded a provision for income taxes of$8.2 million even though we had a pre-tax loss of $121.2 million. We recordedsuch provision as no tax benefit has been recognized for the IPR&D chargeof $28.1 million nor for the aggregate charge of $116.3 million related to theexchange of the 3 1⁄2% convertible senior subordinated notes.We provided a tax provision at 35% on the remaining income in 2004.  The lower tax rate in 2004 reflectedcontinuing implementation of our long-term tax strategies.

*Net earnings (loss).*Net earnings (loss) was $79.5 million,$(453.2) million and $(129.4) million in 2006, 2005 and 2004, respectively. Netearnings in 2006 was primarily due to the full year of operating resultsattributable to the VISX acquisition, the net gain on legal contingencies, partiallyoffset by business repositioning costs, stock-based compensation expense underSFAS 123R and net charges incurred for the early retirement of convertiblesenior subordinated debt.  The net lossin 2005 included an aggregate after-tax charge of $536.9 million, primarily dueto the VISX Acquisition, business repositioning costs, integration relatedcosts, and termination of a distributor agreement in India, write-off of debtissuance costs and exchange of the 3 1⁄2% convertible senior subordinatednotes, partially offset by tax benefits from the American Jobs Creation Act of2004 and final adjustments with Allergan.

The net loss in 2004 included an aggregate after-taxcharge of $175.5 million related to the following: the manufacturing profitcapitalized in inventory and expensed related to the Pfizer Acquisition; thecharge to terminate a distributor contract 

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following the decision to move to a direct sales modelin Belgium as a result of the Pfizer Acquisition and severance paid toemployees considered redundant upon completion of the Pfizer Acquisition; thein-process research and development charge related to the Pfizer Acquisition;the pro-rata write-off of debt issuance costs and write-off of original issue discountnet of a net realized gain on interest rate swaps; and the charges related tothe repurchase of the 9 1⁄4%  senior subordinated notes and the exchange ofthe 3 1⁄2%convertible senior subordinated notes.

**Liquidityand Capital Resources**

We assess our liquidity by our ability to generatecash to fund operations. Significant factors in the management of liquidityare: funds generated by operations; levels of accounts receivable, inventories,accounts payable and capital expenditures; adequate lines of credit; andfinancial flexibility to attract long-term capital on satisfactory terms. As ofDecember 31, 2006, we had cash and equivalents of $34.5 million.

Historically, we have generated cash from operationsin excess of working capital requirements, and we expect to do so in thefuture. Net cash provided by operating activities in 2006 was $224.8 millioncompared to $20.8 million in 2005 and $39.7 million in 2004.  Operating cash flow improved in 2006 comparedto 2005 largely as a result of settlement of legal contingencies, the non-cashimpact of stock-based compensation, depreciation and amortization and loss onexchange of convertible notes.  Otherimprovements included timing of collections on trade receivables and paymentsfor interest on outstanding debt and income taxes, as well as the favorableimpact of the VISX acquisition. These improvements were partially offset by anincrease in cash payments to finalize business repositioning actions in 2006and recall costs.  Operating cash flowdecreased in 2005 compared to 2004 due to increases in cash paid for incometaxes, timing of accounts payable payments and inventory buildup, partiallyoffset by the favorable impact of the VISX acquisition and timing of accountsreceivable collections.  The inventorybuildup was due in part to “bridging” stock related to the recent transfer ofeye care manufacturing from Allergan and the increases in the size and scope ofour global manufacturing network.

Net cash used in investing activities was $40.4million, $79.9 million, and $482.2 million in 2006, 2005 and 2004,respectively.  The majority of 2006capital expenditures were for the Uppsala, Sweden manufacturing facility toseparate the facility from existing Pfizer operations and related upgrades, andfor upgrades to our eye care product manufacturing facility in Madrid, Spain.The 2005 capital expenditures are primarily comprised of expenditures toupgrade our viscoelastics manufacturing facility in Uppsala, Sweden.  The 2005 amount includes $36.9 million netcash paid primarily for the acquisition of VISX.  The 2004 capital expenditures are primarilycomprised of expansion of our manufacturing facilities in preparation for thetransition away from the Allergan manufacturing agreement, expenditures at theacquired manufacturing facilities and construction of research and developmentfacilities at our leased headquarters. The 2004 amount also includes the $456.7million Pfizer Acquisition purchase price, which was financed with a portion ofthe proceeds from the issuance of $350.0 million of 2 1⁄2% convertiblesenior subordinated notes and a $250.0 million term loan. Expenditures forproperty, plant and equipment totaled $29.0 million, $23.1 million, and $17.5million in 2006, 2005, and 2004, respectively. Expenditures for demonstration (demo) and bundled equipment, primarilyphacoemulsification and microkeratome surgical equipment, were $10.8 million,$11.1 million, and $6.8 million in 2006, 2005, and 2004, respectively. We maintaindemo and bundled equipment to facilitate future sales of similar equipment andrelated products to our customers. Expenditures for capitalized internal-usesoftware were $3.2 million, $8.8 million, and $2.4 million in 2006, 2005, and2004, respectively. The 2005 software expenditures were due to acquisitionrelated integrations and improvements to support common global technologyplatforms. We capitalize internal-use software costs after technicalfeasibility has been established. In 2007, we expect to invest approximately $50.0million to $60.0 million in property, plant and equipment, demo and bundledequipment, and capitalized software as part of the overall expansion of ourbusiness.

Net cash used in financing activities was $189.8million in 2006, which primarily comprised $227.7 million of debt repaymentsand financing related costs of $11.1 million, offset by $42.2 million from thesale of stock to employees and $6.7 million of excess tax benefits.  Proceeds of $500.0 million from the issuanceof the 3.25% convertible senior subordinated notes were used to repurchase 10.5million shares of AMO common stock.

Net cash provided by financing activities was $54.0million in 2005, which comprised $150.0 million of proceeds from the issuanceof the 1.375% convertible senior subordinated notes, $60.0 million ofborrowings primarily under the senior revolving credit facility, $45.8 millionof proceeds from the sale of stock to employees and $0.8 million proceedsreceived after settling an interest rate swap agreement, reduced by $194.2million of debt repayments and $8.4 million of financing related costs.

Net cash provided by financing activities was $442.2million in 2004, which primarily comprised $350.0 million of proceeds from theissuance of the 2 1⁄2% convertible senior subordinated notesand a $250.0 million term loan, partially offset by repayment of debt of $149.2million and financing related costs of $16.6 million.

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At December 31, 2006, approximately $8.4 million ofthe revolving credit facility was reserved to support letters of credit issuedon our behalf for normal operating purposes and we had approximately $291.6million undrawn and available revolving loan commitments.

At December 31, 2005, we had $10.0 million ofborrowings outstanding under a short-term loan from Bank of Ireland to oursubsidiary, AMO Ireland. This loan was supported by a $10.0 million letter ofcredit and was paid in its entirety on February 21, 2006 and is no longeravailable for borrowing.

Our senior credit facility provides that we willmaintain certain financial and operating covenants which include, among otherprovisions, maintaining specific leverage and coverage ratios. Certaincovenants under the senior credit facility may limit the incurrence ofadditional indebtedness. The senior credit facility prohibits dividendpayments. We were in compliance with these covenants at December 31,2006.  Our senior credit facility is collateralizedby a first priority perfected lien on, and pledge of, all of the combinedcompany’s present and future property and assets (subject to certainexclusions), 100% of the stock of the domestic subsidiaries, 66% of the stockof the foreign subsidiaries and all present and future intercompany debts.

Our cash position includes amounts denominated inforeign currencies, and the repatriation of those cash balances from some ofour non-U.S. subsidiaries may result in additional tax costs. However, thesecash balances are generally available without legal restriction to fundordinary business operations.

We believe that the net cash provided by our operatingactivities, supplemented as necessary with borrowings available under ourrevolving credit facility and existing cash and equivalents, will providesufficient resources to fund the expected 2007 capital expenditures, and tomeet our working capital requirements, debt service and other cash needs overthe next year.

We are partially dependent upon the reimbursementpolicies of government and private health insurance companies. Government andprivate sector initiatives to limit the growth of health care costs, includingprice regulation and competitive pricing, are continuing in many countrieswhere we do business. As a result of these changes, the marketplace has placedincreased emphasis on the delivery of more cost-effective medical therapies.While we have been unaware of significant price resistance resulting from thetrend toward cost containment, changes in reimbursement policies and otherreimbursement methodologies and payment levels could have an adverse effect onour pricing flexibility.

Additionally, the current trend among U.S. hospitalsand other customers of medical device manufacturers is to consolidate intolarger purchasing groups to enhance purchasing power. The enhanced purchasingpower of these larger customers may also increase the pressure on productpricing, although we are unable to estimate the potential impact at this time.

*Inflation.* Although at reduced levels in recentyears, inflation may cause upward pressure on the cost of goods and servicesused by us. The competitive and regulatory environments in many marketssubstantially limit our ability to fully recover these higher costs throughincreased selling prices. We continually seek to mitigate the adverse effectsof inflation through cost containment and improved productivity andmanufacturing processes.

*Foreign currency fluctuations.* Approximately 58%, 67%, and 75% of ourrevenues in the years ended December 31, 2006, 2005 and 2004, respectively,were derived from operations outside the United States, and a significantportion of our cost structure is denominated in currencies other than the U.S.dollar, primarily the Japanese yen and the euro. Therefore, we are subject tofluctuations in sales and earnings reported in U.S. dollars as a result ofchanging currency exchange rates.

*Contractualobligations*. Thefollowing represents a list of our material contractual obligations andcommitments as of December 31, 2006: 
| ** **                                                                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                          | ** ** | **Less Than  1 Year**           | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than  5 Years** | ** ** | **Total** | ** ** |
| ** **                                                                          | ** ** | **(in millions)**                    | ** ** |
| Long-term debt,  principal amount                                                   |       | $                                         | —     |   | $ | — |   | $ | — |   | $ | 851.1 |   | $ | 851.1 |   |
| Cash commitments  for interest payments                                             |       | 23.8                                      |       | 47.7 |   | 47.7 |   | 333.6 |   | 452.8 |   |
| Operating lease  obligations                                                        |       | 16.1                                      |       | 17.0 |   | 8.2 |   | 21.8 |   | 63.1 |   |
| IT services                                                                         |       | 3.6                                       |       | — |   | — |   | — |   | 3.6 |   |
| Other purchase  obligations, primarily purchases of inventory and capital equipment |       | 62.0                                      |       | 4.6 |   | — |   | — |   | 66.6 |   |
|                                                                                     |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

* *

*Off-balance sheet arrangements.* We had no off-balance sheet arrangements at December 31, 2006.

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**NewAccounting Standards**

In May 2005, the FASB issued Statement of FinancialAccounting Standards (SFAS) No. 154, “Accounting Changes and ErrorCorrections, a replacement of APB Opinion No. 20 and FASB StatementNo. 3.” SFAS No. 154 requires retrospective application to priorperiods’ financial statements for changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. SFAS No. 154 also requires that retrospectiveapplication of a change in accounting principle be limited to the directeffects of the change. Indirect effects of a change in accounting principle,such as a change in non-discretionary profit-sharing payments resulting from anaccounting change, should be recognized in the period of the accounting change.SFAS No. 154 also requires that a change in depreciation, amortization, ordepletion method for long-lived, non-financial assets be accounted for as achange in accounting estimate effected by a change in accounting principle.SFAS 154 is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. The adoption of SFAS 154did not have a material impact on our consolidated financial position, resultsof operations or cash flows.

In June 2006, the Emerging Issues Task Force (“EITF”)issued EITF 06-3, “How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That is,Gross versus Net Presentation)” to clarify diversity in practice on thepresentation of different types of taxes in the financial statements. The TaskForce concluded that, for taxes within the scope of the issue, a company mayadopt a policy of presenting taxes either gross within revenue or net. That is,it may include charges to customers for taxes within revenues and the chargefor the taxes from the taxing authority within cost of sales, or,alternatively, it may net the charge to the customer and the charge from thetaxing authority. If taxes subject to EITF 06-3 are significant, a company isrequired to disclose its accounting policy for presenting taxes and the amountsof such taxes that are recognized on a gross basis. The guidance in thisconsensus is effective for the first interim reporting period beginning afterDecember 15, 2006 (the first quarter of our fiscal year 2007). We do not expectthe adoption of EITF 06-3 will have a material impact on our results ofoperations, financial position or cash flow.

In July 2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement 109” (“FIN 48”).and is effective for fiscal years beginning afterDecember 15, 2006.  FIN 48 clarifies theaccounting for uncertainties in income taxes recognized in accordance with SFASNo. 109, “Accounting for Income Taxes” by prescribing guidance for therecognition, derecognition and measurement in financial statements of incometax positions taken in previously filed tax returns or tax positions expectedto be taken in tax returns, including a decision whether to file or not to filein a particular jurisdiction.  FIN 48requires that any liability created for unrecognized tax benefits bedisclosed.  The application of FIN 48 mayalso affect the tax bases of assets and liabilities and therefore may change orcreate deferred tax liabilities or assets. The Company will be required to adopt FIN 48 as of January 1, 2007.  If there are changes in the net assets of theCompany as a result of the application of FIN 48, the cumulative effects, ifany, will be recorded as an adjustment to retained earnings.  We are currently evaluating the impact of adoptionof FIN 48 and have not yet determined the effect on our earnings or financialposition.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurement.” SFAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. This Statement does notrequire any new fair value measurements. SFAS No. 157 is effective forfiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years. We are currently assessing the impact of SFAS No. 157on our financial statements.

In September 2006, the SEC issued Staff AccountingBulletin (“SAB”) No. 108, “Considering the Effects of Prior YearMisstatements when Qualifying Misstatements in Current Year FinancialStatements,” which provides interpretive guidance on the consideration of theeffects of prior year misstatements in quantifying current year misstatementsfor the purpose of a materiality assessment. The adoption of SAB No. 108 in 2006 did not have a material impact onour consolidated financial position, results of operations or cash flows.

In September 2006, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 158, “Employer’s Accounting for DefinedBenefit Pension and Other Postretirement Plans—an amendment of FASB StatementsNo. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer torecognize in its statement of financial position an asset for a plan’soverfunded status or a liability for a plan’s underfunded status, measure aplan’s assets and its obligations that determine its funded status as of theend of the employer’s fiscal year, and recognize changes in the funded statusof a defined benefit postretirement plan in the year in which the changesoccur. Those changes will be reported in comprehensive income and as a separatecomponent of stockholders’ equity. We adopted SFAS No. 158 in the fourthquarter of fiscal 2006.  The impact ofthe adoption of this new accounting standard is disclosed in Note 10 to theconsolidated financial statements.  Theeffect on the balance sheet as of December 31, 2006 from the adoption of SFASNo. 158 was based on the funded status of the defined benefit plans as ofSeptember 30, 2006, the measurement date of the plans’ assets andobligations.  We will be required tochange the measurement date to December 31 in fiscal year 2008.

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**Item 7A.Quantitative and Qualitative Disclosures About Market Risk**

We routinely monitor the risks associated withfluctuations in currency exchange rates and interest rates. We address theserisks through controlled risk management that may include the use of derivativefinancial instruments to economically hedge or reduce these exposures. We donot expect to enter into financial instruments for trading or speculativepurposes.

Given the inherent limitations of forecasting and theanticipatory nature of the exposures intended to be hedged, there can be noassurance that such programs will offset more than a portion of the adversefinancial impact resulting from unfavorable movements in either interest orforeign exchange rates. In addition, the timing of the accounting forrecognition of gains and losses related to mark-to-market instruments for anygiven period may not coincide with the timing of gains and losses related to theunderlying economic exposures and, therefore, may adversely affect ouroperating results and financial position.

To ensure the adequacy and effectiveness of ourinterest rate and foreign exchange hedge positions, we continually monitor,from an accounting and economic perspective, our interest rate swap positionsand foreign exchange forward and option positions, when applicable, both on astand-alone basis and in conjunction with our underlying interest rate andforeign currency exposures.

*Interest rate risk.* At December 31, 2006, our debtcomprises domestic borrowings of $851.1 million of fixed rate debt.

In July 2004, we entered into an interest rate swapagreement, which effectively converted the interest rate on $125.0 million ofterm loan borrowings from a floating rate to a fixed rate. This interest rateswap qualified as a cash flow hedge and would have matured in July 2006. InApril 2005, we terminated the interest rate swap.  Upon termination, we received approximately$0.8 million and included the related gain of approximately $0.5 million, whichincludes the accrued but unpaid net amount between us and the swapcounterparty, as a component of accumulated other comprehensive income in thesecond quarter of 2005. As a result of the repayment of the term loan in July2005, the gain on the interest rate swap of $0.8 million was fully recognizedas a reduction to the interest expense in the third quarter of 2005.

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The tables below present information about our debtobligations and interest rate derivatives for the years ended December 31,2006 and 2005:

**December 31,2006**
| ** **                      | ** ** | **Maturing in**                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **2007**                                                      | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair Market  Value** | ** ** |
| ** **                      | ** ** | **(in thousands, except interest rates)** | ** ** |
| **LIABILITIES**                 | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Debt  Obligations:**          | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed Rate                      |       | $                                                             | —     |       | $          | —     |       | $ | — |   | $ | — |   | $ | — |   | $ | 246,105 |   | $ | 246,105 |   | $ | 238,722 |   |
| Weighted Average  Interest Rate |       | —                                                        |       | —     |       | —     |       | — |   | — |   | 2.50 | % | 2.50 | % |   |   |
| Fixed Rate                      |       | $                                                             | —     |       | $          | —     |       | $ | — |   | $ | — |   | $ | — |   | $ | 105,000 |   | $ | 105,000 |   | $ | 99,554 |   |
| Weighted Average  Interest Rate |       | —                                                        |       | —     |       | —     |       | — |   | — |   | 1.375 | % | 1.375 | % |   |   |
| Fixed Rate                      |       | $                                                             | —     |       | $          | —     |       | $ | — |   | $ | — |   | $ | — |   | $ | 500,000 |   | $ | 500,000 |   | $ | 455,950 |   |
| Weighted Average  Interest Rate |       | —                                                        |       | —     |       | —     |       | — |   | — |   | 3.25 | % | 3.25 | % |   |   |
| Total Debt  Obligations         |       | $                                                             | —     |       | $          | —     |       | $ | — |   | $ | — |   | $ | — |   | $ | 851,105 |   | $ | 851,105 |   | $ | 794,226 |   |
| Weighted Average  Interest Rate |       | —                                                        |       | —     |       | —     |       | — |   | — |   | 2.80 | % | 2.80 | % |   |   |

** **

**December 31,2005**
| ** **                      | ** ** | **Maturing in**                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **2006**                                                      | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair Market  Value** | ** ** |
| ** **                      | ** ** | **(in thousands, except interest rates)** | ** ** |
| **LIABILITIES**                 | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Debt  Obligations:**          | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed Rate                      |       | $                                                             | —     |       | $          | —     |       | $ | — |   | $ | — |   | $ | — |   | $ | 350,000 |   | $ | 350,000 |   | $ | 376,705 |   |
| Weighted Average  Interest Rate |       | —                                                        |       | —     |       | —     |       | — |   | — |   | 2.50 | % | 2.50 | % |   |   |
| Fixed Rate                      |       | $                                                             | —     |       | $          | —     |       | $ | — |   | $ | — |   | $ | — |   | $ | 150,000 |   | $ | 150,000 |   | $ | 150,948 |   |
| Weighted Average  Interest Rate |       | —                                                        |       | —     |       | —     |       | — |   | — |   | 1.375 | % | 1.375 | % |   |   |
| Variable Rate                   |       | $                                                             | 10,000     |       | $          | —     |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 10,000 |   | $ | 10,000 |   |
| Weighted Average  Interest Rate |       | 4.61                                                          | %          | —     |       | —     |       | — |   | — |   | — |   | 4.61 | % |   |   |
| Variable Rate                   |       | $                                                             | 50,000     |       | $          | —     |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 50,000 |   | $ | 50,000 |   |
| Weighted Average  Interest Rate |       | 6.22                                                          | %          | —     |       | —     |       | — |   | — |   | — |   | 6.22 | % |   |   |
| Total Debt  Obligations         |       | $                                                             | 60,000     |       | $          | —     |       | $ | — |   | $ | — |   | $ | — |   | $ | 500,000 |   | $ | 560,000 |   | $ | 587,653 |   |
| Weighted Average  Interest Rate |       | 5.95                                                          | %          | —     |       | —     |       | — |   | — |   | 2.16 | % | 2.57 | % |   |   |

*Foreign currency risk. *Overall, we are a net recipient ofcurrencies other than the U.S. dollar and, as such, we benefit from a weakerdollar and are adversely affected by a stronger dollar relative to majorcurrencies worldwide. Accordingly, changes in exchange rates, and in particulara strengthening of the U.S. dollar, may negatively affect our consolidated netsales and gross profit as expressed in U.S. dollars.

We may enter into foreign exchange option and forwardcontracts to reduce earnings and cash flow volatility associated with foreignexchange rate changes to allow management to focus its attention on its corebusiness operations. Accordingly, we enter into contracts which change in valueas foreign exchange rates change to economically offset the effect of changesin value of foreign currency assets and liabilities, commitments andanticipated foreign currency denominated sales and operating expenses. We enterinto foreign exchange option and forward contracts in amounts between minimumand maximum anticipated foreign exchange exposures, generally for periods notto exceed one year. We do not enter into foreign exchange option and forwardcontracts for trading purpose.

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We use foreign currency option contracts, whichprovide for the sale of foreign currencies to offset foreign currency exposuresexpected to arise in the normal course of our business. While these instrumentsare subject to fluctuations in value, such fluctuations are anticipated tooffset changes in the value of the underlying exposures. The principalcurrencies subject to this process are the Japanese yen and the euro. Theforeign exchange forward contracts are entered into to protect the value offoreign currency denominated monetary assets and liabilities and the changes inthe fair value of the foreign currency forward contracts were economicallydesigned to offset the changes in the revaluation of the foreign currencydenominated monetary assets and liabilities. These forward contracts aredenominated in currencies which represent material exposures. The changes inthe fair value of foreign currency option and forward contracts are recordedthrough earnings as “Unrealized loss (gain) on derivative instruments” whileany realized gains or losses on expired contracts are recorded through earningsas “Other, net” in the accompanying consolidated statements of operations. Anypremium cost of purchased foreign exchange option contracts are recorded in “Othercurrent assets” and amortized over the life of the options.

At December 31,2006, there are no outstanding interest rate swaps.

The following tablesprovide information about our foreign currency derivative financial instrumentsoutstanding as of December 31, 2006 and 2005. The information is providedin U.S. dollar amounts, as presented in our consolidated financial statements.
| ** **                                        | ** ** | **December 31, 2006** | ** ** | **December 31, 2005**             | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **Notional  Amount**            | ** ** | **Average  Contract  or Strike  Rate** | ** ** | **Notional  Amount** | ** ** | **Average  Contract  or Strike  Rate** | ** ** |
| ** **                                        | ** ** | **(in $ millions)**   | ** ** | ** **                                  | ** ** | **(in $ millions)** | ** ** | ** ** | ** ** |
|                                              | ** ** | ** **                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Foreign  currency forward contracts:**          | ** ** | ** **                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Receive  US$/Pay Foreign Currency:**            | ** ** | ** **                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Swedish Krona                                     |       | $                               | 8.8        |                                        | 6.85       |   | $ | 31.5 |   | 7.94 |   |
| U.K. Pound                                        |       | —                          |       | —                                      |       | 5.2 |   | 1.72 |   |
| Canadian Dollar                                   |       | 9.5                             |       | 1.16                                        |       | — |   | — |   |
| Australia Dollar                                  |       | 7.1                             |       | 1.27                                        |       | — |   | — |   |
| Swiss Franc                                       |       | —                          |       | —                                      |       | 1.5 |   | 1.31 |   |
| Japanese Yen                                      |       | 7.1                             |       | 118.8                                       |       | — |   | — |   |
| **Pay  US$/Receive Foreign Currency:**            | ** ** | ** **                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Japanese Yen                                      |       | —                          |       | —                                      |       | 3.0 |   | 117.45 |   |
| Euro                                              |       | —                          |       | —                                      |       | 5.9 |   | 1.19 |   |
| Swiss Franc                                       |       | 3.7                             |       | 1.22                                        |       | — |   | — |   |
| Canadian Dollar                                   |       | —                          |       | —                                      |       | 3.4 |   | 1.17 |   |
| Australia Dollar                                  |       | —                          |       | —                                      |       | 2.9 |   | 0.73 |   |
|                                              |       |                            |       |                                        |       |   |   |   |   |
| **Total  Notional**                               | ** ** | **$**                           | **36.2**   | ** **                                  | ** ** | ** ** | **$** | **53.4** | ** ** | ** ** | ** ** |
| **Estimated  Fair Value**                         | ** ** | **$**                           | **—** | ** **                                  | ** ** | ** ** | **$** | **—** | ** ** | ** ** | ** ** |
|                                              |       |                            |       |                                        |       |   |   |   |   |
| ** Foreign currency purchased put options:** | ** ** | ** **                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Japanese Yen                                      |       | $                               | 72.0       |                                        | 118.00     |   | $ | 66.2 |   | 117.83 |   |
| Euro                                              |       | 50.8                            |       | 1.24                                        |       | 40.2 |   | 1.18 |   |
| **Foreign  currency sold call options:**          | ** ** | ** **                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Japanese Yen                                      |       | 81.3                            |       | 104.50                                      |       | 60.0 |   | 106.60 |   |
| Euro                                              |       | 53.1                            |       | 1.29                                        |       | 43.0 |   | 1.26 |   |
|                                              |       |                            |       |                                        |       |   |   |   |   |
| **Total  Notional**                               | ** ** | **$**                           | **257.2**  | ** **                                  | ** ** | ** ** | **$** | **209.4** | ** ** | ** ** | ** ** |
| **Estimated Fair Value**                          | ** ** | **$**                           | **(0.6**   | **)**                                       | ** ** | ** ** | **$** | **1.1** | ** ** | ** ** | ** ** |

45

----

 

The notional principalamount provides one measure of the transaction volume outstanding as of the endof the period, and does not represent the amount of our exposure to marketloss. The estimate of fair value is based on applicable and commonly usedprevailing financial market information as of December 31, 2006 and 2005.The amounts ultimately realized upon settlement of these financial instruments,together with the gains and losses on the underlying exposures, will depend onactual market conditions during the remaining life of the instruments.

The impact of foreign exchange risk managementtransactions on income was a net realized gain (loss) of $2.3 million, $(2.0)million and $(1.9) million in 2006, 2005 and 2004, respectively, which arerecorded in “Other, net” on the accompanying consolidated statements ofoperations.

46

----

** **

**Item 8:Financial Statements and Supplementary Data**

**Index toFinancial Statements**

 
|                                                                                                                                                               | ** ** | **Page No.** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
|                                                                                                                                                          |       |              |
| Consolidated  Balance Sheets at December 31, 2006 and December 31, 2005                                                                                       |       | 48                |
|                                                                                                                                                          |       |              |
| Consolidated Statements of  Operations for Each of the Years in the Three-Year Period Ended December 31,  2006                                                |       | 49                |
|                                                                                                                                                          |       |              |
| Consolidated Statements of  Stockholders’ Equity and Comprehensive Income (Loss) for Each of the Years in  the Three-Year Period Ended December 31, 2006 |       | 50                |
|                                                                                                                                                          |       |              |
| Consolidated Statements of  Cash Flows for Each of the Years in the Three-Year Period Ended December 31,  2006                                                |       | 51                |
|                                                                                                                                                          |       |              |
| Notes to  Consolidated Financial Statements                                                                                                                   |       | 52                |
|                                                                                                                                                          |       |              |
| Report of  Independent Registered Public Accounting Firm                                                                                                      |       | 88                |

 

47

----

 

**ADVANCED MEDICAL OPTICS, INC.**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                             | ** ** | **As of December 31,**                     | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2006**                                                  | ** ** | **2005** | ** ** |
| ** **                                                                                             | ** ** | **(In thousands, except share data)** | ** ** |
| **ASSETS**                                                                                             |       |                                                      |       |   |   |
| Current assets                                                                                         |       |                                                      |       |   |   |
| Cash and  equivalents                                                                                  |       | $                                                         | 34,522     |   | $ | 40,826 |   |
| Trade  receivables, net                                                                                |       | 232,408                                                   |       | 238,761 |   |
| Inventories                                                                                            |       | 127,532                                                   |       | 104,820 |   |
| Deferred income  taxes                                                                                 |       | 41,698                                                    |       | 66,476 |   |
| Income tax  receivable                                                                                 |       | 15,045                                                    |       | — |   |
| Other current  assets                                                                                  |       | 26,938                                                    |       | 28,122 |   |
| Total current  assets                                                                                  |       | 478,143                                                   |       | 479,005 |   |
| Property, plant and  equipment, net                                                                    |       | 132,756                                                   |       | 115,725 |   |
| Deferred income taxes                                                                                  |       | 13,260                                                    |       | 12,626 |   |
| Other assets                                                                                           |       | 69,365                                                    |       | 52,473 |   |
| Intangible assets, net                                                                                 |       | 471,664                                                   |       | 495,609 |   |
| Goodwill                                                                                               |       | 848,709                                                   |       | 825,284 |   |
| Total assets                                                                                           |       | $                                                         | 2,013,897  |   | $ | 1,980,722 |   |
|                                                                                                   |       |                                                      |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                         |       |                                                      |       |   |   |
| Current liabilities                                                                                    |       |                                                      |       |   |   |
| Current portion  of long-term debt and short-term borrowings                                           |       | $                                                         | —     |   | $ | 60,000 |   |
| Accounts payable                                                                                       |       | 53,897                                                    |       | 64,045 |   |
| Accrued  compensation                                                                                  |       | 41,896                                                    |       | 43,406 |   |
| Other accrued  expenses                                                                                |       | 120,384                                                   |       | 90,666 |   |
| Income taxes                                                                                           |       | —                                                    |       | 1,434 |   |
| Deferred income  taxes                                                                                 |       | 1,276                                                     |       | 565 |   |
| Total current  liabilities                                                                             |       | 217,453                                                   |       | 260,116 |   |
| Long-term debt, net of  current portion                                                                |       | 851,105                                                   |       | 500,000 |   |
| Deferred income taxes                                                                                  |       | 185,844                                                   |       | 182,179 |   |
| Other liabilities                                                                                      |       | 43,504                                                    |       | 28,365 |   |
| Commitments and  contingencies                                                                         |       |                                                      |       |   |   |
| Stockholders’ equity                                                                              |       |                                                      |       |   |   |
| Preferred stock,  $.01 par value; 5,000,000 shares authorized, none issued                             |       | —                                                    |       | — |   |
| Common stock,  $.01 par value; 240,000,000 shares authorized; 59,512,106 and 67,832,010  shares issued |       | 595                                                       |       | 678 |   |
| Additional  paid-in capital                                                                            |       | 1,409,475                                                 |       | 1,586,864 |   |
| Accumulated  deficit                                                                                   |       | (730,800                                                  | )          | (557,586 | ) |
| Accumulated  other comprehensive income (loss)                                                         |       | 36,745                                                    |       | (19,870 | ) |
| Less treasury  stock, at cost (1,397 and 1,397 shares)                                                 |       | (24                                                       | )          | (24 | ) |
| Total  stockholders’ equity                                                                       |       | 715,991                                                   |       | 1,010,062 |   |
| Total liabilities and  stockholders’ equity                                                       |       | $                                                         | 2,013,897  |   | $ | 1,980,722 |   |

 

See accompanying notes toconsolidated financial statements.

48

----

 

**ADVANCED MEDICAL OPTICS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                                      | ** ** | **Year Ended December 31,**                         | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                      | ** ** | **(In thousands, except per share data)** | ** ** |
| Net sales                                                                       |       | $                                                                  | 997,496    |   | $ | 920,673 |   | $ | 742,099 |   |
| Cost of sales                                                                   |       | 379,325                                                            |       | 353,325 |   | 306,164 |   |
| Gross profit                                                                    |       | 618,171                                                            |       | 567,348 |   | 435,935 |   |
| Selling, general and  administrative                                            |       | 404,802                                                            |       | 396,599 |   | 329,197 |   |
| Research and  development                                                       |       | 66,099                                                             |       | 61,646 |   | 45,616 |   |
| In-process research and  development                                            |       | —                                                             |       | 490,750 |   | 28,100 |   |
| Business repositioning                                                          |       | 46,417                                                             |       | 29,680 |   | — |   |
| Net gain on legal  contingencies                                                |       | (96,896                                                            | )          | — |   | — |   |
| Operating income (loss)                                                         |       | 197,749                                                            |       | (411,327 | ) | 33,022 |   |
| Non-operating expense  (income):                                                |       |                                                               |       |   |   |   |   |
| Interest expense                                                                |       | 30,272                                                             |       | 29,332 |   | 26,933 |   |
| Unrealized loss  (gain) on derivative instruments                               |       | 1,290                                                              |       | (2,563 | ) | 403 |   |
| Loss due to  early retirement of Convertible Senior Subordinated Notes (note 6) |       | 18,783                                                             |       | 1,885 |   | 116,282 |   |
| Other, net                                                                      |       | 2,588                                                              |       | 316 |   | 10,620 |   |
|                                                                            |       | 52,933                                                             |       | 28,970 |   | 154,238 |   |
| Earnings (loss) before  income taxes                                            |       | 144,816                                                            |       | (440,297 | ) | (121,216 | ) |
| Provision for income  taxes                                                     |       | 65,345                                                             |       | 12,900 |   | 8,154 |   |
| Net earnings (loss)                                                             |       | $                                                                  | 79,471     |   | $ | (453,197 | ) | $ | (129,370 | ) |
| Net earnings (loss) per  share:                                                 |       |                                                               |       |   |   |   |   |
| Basic                                                                           |       | $                                                                  | 1.25       |   | $ | (8.28 | ) | $ | (3.89 | ) |
| Diluted                                                                         |       | $                                                                  | 1.21       |   | $ | (8.28 | ) | $ | (3.89 | ) |
| Weighted average number  of shares outstanding:                                 |       |                                                               |       |   |   |   |   |
| Basic                                                                           |       | 63,383                                                             |       | 54,764 |   | 33,284 |   |
| Diluted                                                                         |       | 65,571                                                             |       | 54,764 |   | 33,284 |   |

 

See accompanying notes toconsolidated financial statements.

49

----

**ADVANCED MEDICAL OPTICS, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME (LOSS)**
| ** **                                                                                                                 | ** ** | ** **         | ** ** | ** **         | ** ** | ** **          | ** ** | **Retained**     | ** ** | **Accumulated**   | ** ** | ** **             | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|------------------|------------|-------------------|------------|------------------------|------------|------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                                                 | ** ** | ** **         | ** ** | **Additional**     | ** ** | ** **          | ** ** | **Earnings**     | ** ** | **Other**         | ** ** | ** **             | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                                                                                                 | ** ** | **Common Stock**   | ** ** | **Paid-In**        | ** ** | **Unearned**        | ** ** | **(Accumulated** | ** ** | **Comprehensive** | ** ** | **Treasury Stock**     | ** ** | ** ** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                                                                 | ** ** | **Shares**         | ** ** | **Par Value** | ** ** | **In Capital** | ** ** | **Compensation** | ** ** | **Deficit)**      | ** ** | **Income (Loss)** | ** ** | **Shares** | ** ** | **Amount**        | ** ** | **Total**  | ** ** | **Income (Loss)** | ** ** |
| ** **                                                                                                                 | ** ** | **(in thousands)** | ** ** | ** **         |
| **Balance at December 31, 2003**                                                                                           |       | 29,379             |       | $                  | 294        |                | $          | 54,128           |       | $                 | (64        | )                      | $          | 24,981     |       | $                 | 13,868     |       | (1         | ) | $ | (15 | ) | $ | 93,192 |   |   |   |
| ** **                                                                                                                 |       |               |       |               |       |                |       |             |       |              |       |                   |       |       |       |              |       |       |       |   |   |
| Comprehensive loss                                                                                                         |       |               |       |               |       |                |       |             |       |              |       |                   |       |       |       |              |       |       |       |   |   |
| Net  loss                                                                                                                  |       |               |       |               |       |                |       |             |       | (129,370          | )          |                   |       |       |       |              |       | (129,370   | )          | $ | (129,370 | ) |
| Foreign  currency translation adjustments                                                                                  |       |               |       |               |       |                |       |             |       |              |       | 55,799                 |       |       |       |              |       | 55,799     |       | 55,799 |   |
| Unrealized  gain on derivative instrument qualifying as cash flow hedge, net of $112 of  tax                               |       |               |       |               |       |                |       |             |       |              |       | 207                    |       |       |       |              |       | 207        |       | 207 |   |
| Total  comprehensive loss                                                                                                  |       |               |       |               |       |                |       |             |       |              |       |                   |       |       |       |              |       |       |       | $ | (73,364 | ) |
| Issuance of common stock  in connection with convertible note exchanges                                                    |       | 7,021              |       | 70                 |       | 243,881             |       |             |       |              |       |                   |       |       |       |              |       | 243,951    |       |   |   |
| Issuance of common stock  under stock option plan                                                                          |       | 490                |       | 5                  |       | 4,934               |       |             |       |              |       |                   |       |       |       |              |       | 4,939      |       |   |   |
| Issuance of common stock  under stock purchase plans                                                                       |       | 171                |       | 2                  |       | 3,051               |       |             |       |              |       |                   |       |       |       |              |       | 3,053      |       |   |   |
| Issuance of restricted  stock                                                                                              |       | 8                  |       |               |       | 265                 |       | (265             | )          |              |       |                   |       |       |       |              |       | —     |       |   |   |
| Expense of compensation  plan                                                                                              |       |               |       |               |       |                |       | 219              |       |              |       |                   |       |       |       |              |       | 219        |       |   |   |
| Tax benefits from  employee stock plans                                                                                    |       |               |       |               |       | 4,288               |       |             |       |              |       |                   |       |       |       |              |       | 4,288      |       |   |   |
| Purchase of treasury  stock, at cost                                                                                       |       |               |       |               |       |                |       |             |       |              |       |                   |       |       |       | (8                | )          | (8         | )          |   |   |
|                                                                                                                       |       |               |       |               |       |                |       |             |       |              |       |                   |       |       |       |              |       |       |       |   |   |
| **Balance at December 31, 2004**                                                                                           |       | 37,069             |       | $                  | 371        |                | $          | 310,547          |       | $                 | (110       | )                      | $          | (104,389   | )          | $                 | 69,874     |       | (1         | ) | $ | (23 | ) | $ | 276,270 |   |   |   |
| Comprehensive loss                                                                                                         |       |               |       |               |       |                |       |             |       |              |       |                   |       |       |       |              |       |       |       |   |   |
| Net  loss                                                                                                                  |       |               |       |               |       |                |       |             |       | (453,197          | )          |                   |       |       |       |              |       | (453,197   | )          | $ | (453,197 | ) |
| Foreign  currency translation adjustments                                                                                  |       |               |       |               |       |                |       |             |       |              |       | (89,537                | )          |       |       |              |       | (89,537    | )          | (89,537 | ) |
| Reclassification  adjustment for realized gain on derivative instrument qualifying as cash flow  hedge, net of $112 of tax |       |               |       |               |       |                |       |             |       |              |       | (207                   | )          |       |       |              |       | (207       | )          | (207 | ) |
| Total  comprehensive loss                                                                                                  |       |               |       |               |       |                |       |             |       |              |       |                   |       |       |       |              |       |       |       | $ | (542,941 | ) |
| Issuance of common stock  in connection with convertible note exchanges                                                    |       | 453                |       | 4                  |       | 10,126              |       |             |       |              |       |                   |       |       |       |              |       | 10,130     |       |   |   |
| Issuance of common stock  under stock option plan                                                                          |       | 2,305              |       | 23                 |       | 41,388              |       |             |       |              |       |                   |       |       |       |              |       | 41,411     |       |   |   |
| Issuance of common stock  under stock purchase plans                                                                       |       | 144                |       | 1                  |       | 4,429               |       |             |       |              |       |                   |       |       |       |              |       | 4,430      |       |   |   |
| Issuance of restricted  stock                                                                                              |       | 74                 |       | 1                  |       | 4,008               |       | (4,008           | )          |              |       |                   |       |       |       |              |       | 1          |       |   |   |
| Cancellation of  restricted stock                                                                                          |       |               |       |               |       | (49                 | )          | 49               |       |              |       |                   |       |       |       |              |       | —     |       |   |   |
| Issuance of common stock  under VISX acquisition                                                                           |       | 27,787             |       | 278                |       | 1,202,907           |       |             |       |              |       |                   |       |       |       |              |       | 1,203,185  |       |   |   |
| Expense of compensation  plan                                                                                              |       |               |       |               |       |                |       | 1,245            |       |              |       |                   |       |       |       |              |       | 1,245      |       |   |   |
| Tax benefits from  employee stock plans                                                                                    |       |               |       |               |       | 16,332              |       |             |       |              |       |                   |       |       |       |              |       | 16,332     |       |   |   |
| Transfer of restricted  stock to treasury stock                                                                            |       |               |       |               |       |                |       |             |       |              |       |                   |       |       |       | (1                | )          | (1         | )          |   |   |
|                                                                                                                       |       |               |       |               |       |                |       |             |       |              |       |                   |       |       |       |              |       |       |       |   |   |
| **Balance at December 31, 2005**                                                                                           |       | 67,832             |       | $                  | 678        |                | $          | 1,589,688        |       | $                 | (2,824     | )                      | $          | (557,586   | )          | $                 | (19,870    | )          | (1         | ) | $ | (24 | ) | $ | 1,010,062 |   |   |   |
| Comprehensive income                                                                                                       |       |               |       |               |       |                |       |             |       |              |       |                   |       |       |       |              |       |       |       |   |   |
| Net  earnings                                                                                                              |       |               |       |               |       |                |       |             |       | 79,471            |       |                   |       |       |       |              |       | 79,471     |       | $ | 79,471 |   |
| Foreign  currency translation adjustments                                                                                  |       |               |       |               |       |                |       |             |       |              |       | 58,036                 |       |       |       |              |       | 58,036     |       | 58,036 |   |
| Total  comprehensive income                                                                                                |       |               |       |               |       |                |       |             |       |              |       |                   |       |       |       |              |       |       |       | $ | 137,507 |   |
| Adjustment for initial  adoption of FAS 158, net of taxes                                                                  |       |               |       |               |       |                |       |             |       |              |       | (1,421                 | )          |       |       |              |       | (1,421     | )          |   |   |
| Issuance of common stock  under stock option plan                                                                          |       | 1,799              |       | 18                 |       | 37,276              |       |             |       |              |       |                   |       |       |       |              |       | 37,294     |       |   |   |
| Issuance of common stock  under stock purchase plans                                                                       |       | 154                |       | 2                  |       | 4,927               |       |             |       |              |       |                   |       |       |       |              |       | 4,929      |       |   |   |
| Issuance of restricted  stock                                                                                              |       | 225                |       | 2                  |       | (2                  | )          |             |       |              |       |                   |       |       |       |              |       | —     |       |   |   |
| Cancellation of  restricted stock                                                                                          |       | (7                 | )          | —             |       |                |       |             |       |              |       |                   |       |       |       |              |       | —     |       |   |   |
| Stock repurchase                                                                                                           |       | (10,491            | )          | (105               | )          | (247,210            | )          |             |       | (252,685          | )          |                   |       |       |       |              |       | (500,000   | )          |   |   |
| Reclassification of  unearned compensation balance                                                                         |       |               |       |               |       | (2,824              | )          | 2,824            |       |              |       |                   |       |       |       |              |       | —     |       |   |   |
| Tax benefits from  employee stock plans                                                                                    |       |               |       |               |       | 8,386               |       |             |       |              |       |                   |       |       |       |              |       | 8,386      |       |   |   |
| Stock-based compensation  expense                                                                                          |       |               |       |               |       | 19,234              |       |             |       |              |       |                   |       |       |       |              |       | 19,234     |       |   |   |
|                                                                                                                       |       |               |       |               |       |                |       |             |       |              |       |                   |       |       |       |              |       |       |       |   |   |
| **Balance at December 31, 2006**                                                                                           |       | 59,512             |       | $                  | 595        |                | $          | 1,409,475        |       | $                 | —     |                   | $          | (730,800   | )          | $                 | 36,745     |       | (1         | ) | $ | (24 | ) | $ | 715,991 |   |   |   |

 

See accompanying notes toconsolidated financial statements.

50

----

 

**ADVANCED MEDICAL OPTICS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)**                    | ** ** |
| **Cash flows provided by  operating activities**                                            |       |                                       |       |   |   |   |   |
| Net earnings (loss):                                                                        |       | $                                          | 79,471     |   | $ | (453,197 | ) | $ | (129,370 | ) |
| Adjustments to  reconcile net earnings (loss) to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Amortization and  write-off of original issue discount and debt issuance costs              |       | 7,051                                      |       | 9,284 |   | 11,028 |   |
| Amortization and  write-off of net realized gain on interest rate swaps                     |       | —                                     |       | (773 | ) | (3,466 | ) |
| Depreciation and  amortization                                                              |       | 70,598                                     |       | 51,588 |   | 23,616 |   |
| Deferred income  taxes                                                                      |       | 29,985                                     |       | (5,104 | ) | (16,737 | ) |
| Tax benefit from  issuance of stock under stock plans                                       |       | —                                     |       | — |   | 4,288 |   |
| In-process  research and development                                                        |       | —                                     |       | 490,750 |   | 28,100 |   |
| Loss on exchange  of convertible senior subordinated notes                                  |       | 18,783                                     |       | 1,670 |   | 111,702 |   |
| Loss on  investments and assets                                                             |       | 2,204                                      |       | 13,165 |   | 1,047 |   |
| Unrealized loss  (gain) on derivatives                                                      |       | 1,290                                      |       | (2,563 | ) | 403 |   |
| Stock based  compensation expense                                                           |       | 19,234                                     |       | 1,245 |   | 219 |   |
| Changes in  assets and liabilities, net of effect of acquisition:                           |       |                                       |       |   |   |   |   |
| Trade  receivables                                                                          |       | 13,918                                     |       | (27,780 | ) | (48,459 | ) |
| Inventories                                                                                 |       | (20,378                                    | )          | (14,720 | ) | 13,198 |   |
| Other current  assets                                                                       |       | (6,190                                     | )          | (7,170 | ) | (1,514 | ) |
| Accounts payable                                                                            |       | (11,823                                    | )          | (27,328 | ) | 39,759 |   |
| Accrued expenses  and other liabilities                                                     |       | 27,647                                     |       | 6,684 |   | 7,294 |   |
| Income taxes                                                                                |       | (6,880                                     | )          | (16,802 | ) | 5,775 |   |
| Other  non-current assets                                                                   |       | (116                                       | )          | 1,887 |   | (7,215 | ) |
| Net cash  provided by operating activities                                                  |       | 224,794                                    |       | 20,836 |   | 39,668 |   |
|                                                                                        |       |                                       |       |   |   |   |   |
| **Cash flows from investing  activities**                                                   |       |                                       |       |   |   |   |   |
| Acquisition of  business, net of cash acquired                                              |       | —                                     |       | (36,867 | ) | (456,709 | ) |
| Additions to property,  plant and equipment                                                 |       | (29,023                                    | )          | (23,097 | ) | (17,492 | ) |
| Proceeds from sale of  property, plant and equipment                                        |       | 2,609                                      |       | 48 |   | 1,172 |   |
| Additions to  capitalized internal-use software                                             |       | (3,191                                     | )          | (8,816 | ) | (2,415 | ) |
| Additions to  demonstration and bundled equipment                                           |       | (10,756                                    | )          | (11,135 | ) | (6,778 | ) |
| Net cash used in  investing activities                                                      |       | (40,361                                    | )          | (79,867 | ) | (482,222 | ) |
|                                                                                        |       |                                       |       |   |   |   |   |
| **Cash flows from financing  activities**                                                   |       |                                       |       |   |   |   |   |
| Short-term borrowings  (repayments), net                                                    |       | (60,000                                    | )          | 60,000 |   | — |   |
| Repayment of long-term  debt                                                                |       | (167,678                                   | )          | (194,166 | ) | (149,243 | ) |
| Financing related costs                                                                     |       | (11,063                                    | )          | (8,459 | ) | (16,553 | ) |
| Proceeds from issuance  of long-term debt                                                   |       | 500,000                                    |       | 150,000 |   | 600,000 |   |
| Proceeds from issuance  of common stock                                                     |       | 42,223                                     |       | 45,841 |   | 7,992 |   |
| Repurchase and  retirement of common stock                                                  |       | (500,000                                   | )          | — |   | — |   |
| Excess tax benefits  from stock-based compensation                                          |       | 6,718                                      |       | — |   | — |   |
| Other                                                                                       |       | —                                     |       | 773 |   | (8 | ) |
| Net cash (used  in) provided by financing activities                                        |       | (189,800                                   | )          | 53,989 |   | 442,188 |   |
|                                                                                        |       |                                       |       |   |   |   |   |
| Effect of exchange  rates on cash and equivalents                                           |       | (937                                       | )          | (3,587 | ) | 3,717 |   |
| Net (decrease) increase  in cash and equivalents                                            |       | (6,304                                     | )          | (8,629 | ) | 3,351 |   |
| Cash and equivalents at  beginning of year                                                  |       | 40,826                                     |       | 49,455 |   | 46,104 |   |
| Cash and equivalents at  end of year                                                        |       | $                                          | 34,522     |   | $ | 40,826 |   | $ | 49,455 |   |
|                                                                                        |       |                                       |       |   |   |   |   |
| **Supplemental disclosure of cash  flow information**                                       |       |                                       |       |   |   |   |   |
| Cash paid during the  year for:                                                             |       |                                       |       |   |   |   |   |
| Interest                                                                                    |       | $                                          | 14,781     |   | $ | 22,005 |   | $ | 21,472 |   |
| Income taxes                                                                                |       | 25,675                                     |       | 34,805 |   | 14,225 |   |
|                                                                                        |       |                                       |       |   |   |   |   |
| Supplemental non-cash  investing and financing activities:                                  |       |                                       |       |   |   |   |   |
| Exchange of  convertible notes into common stock                                            |       | $                                          | —     |   | $ | 8,600 |   | $ | 131,400 |   |
| Acquisition of  VISX, Incorporated (Note 3)                                                 |       | —                                     |       | 1,203,185 |   | — |   |

 

See accompanying notes to consolidated financialstatements.

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**ADVANCED MEDICAL OPTICS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**December 31, 2006, 2005 and 2004**

**Note 1:Description of Business**

Advanced Medical Optics, Inc. (AMO or the Company)develops, manufactures and markets medical devices for the eyes.  Effective January 1, 2006, the Company’sreportable segments are represented by three business units: cataract/implant,laser vision correction (LVC) and eye care. Previously, the Company’s reportable segments were based on geographicregions which comprised the Americas, which included North and South America,Europe/Africa/Middle East, Japan and Asia Pacific, which excluded Japan andincluded New Zealand and Australia.  Thecataract/implant business focuses on the four key products required forcataract surgery — foldable intraocular lenses, or IOL’s, implantation systems,phacoemulsification systems and viscoelastics. The LVC business markets laser systems, diagnostic devices, treatmentcards and microkeratomes for use in laser eye surgery.  The eye care business provides a full rangeof contact lens care products for use with most types of contact lenses.  These products include single-bottle,multi-purpose cleaning and disinfecting solutions, hydrogen peroxide-baseddisinfecting solutions, daily cleaners, enzymatic cleaners, contact lensrewetting drops, and in Europe and Asia, contact lenses.  The Company sells its products inapproximately 60 countries and has direct operations in approximately 20countries.

**Note 2:Summary of Significant Accounting Policies**

This summary of significant accounting policies ispresented to assist the reader in understanding and evaluating the consolidatedfinancial statements. These policies are in conformity with accountingprinciples generally accepted in the United States of America and have beenapplied consistently in all material respects. The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements, thereported amounts of revenues and expenses during the reporting period, andrelated disclosures. Actual results could differ from those estimates.

***Basis of Presentation***

The consolidated financial statements include theaccounts of AMO and all of its subsidiaries. All significant transactions amongthe consolidated entities have been eliminated from the consolidated financialstatements.

***Foreign Currency Translation***

The financial position and results of operations ofAMO’s foreign operations are generally determined using local currency as thefunctional currency. Assets and liabilities of these operations are translatedat the exchange rate in effect at each year-end. Income statement amounts aretranslated at the average rate of exchange prevailing during the year.Translation adjustments arising from the use of differing exchange rates fromperiod to period are included in accumulated other comprehensive income (loss)in stockholders’ equity. Gains and losses resulting from foreign currencytransactions and remeasurements relating to foreign operations deemed to beoperating in U.S. dollar functional currency are included in “Other, net” inthe accompanying consolidated statements of operations.

***Cash and Equivalents***

The Company considers cash and equivalents to includecash in banks, money market mutual funds and time deposits with financialinstitutions with original maturities of 90 days or less.

***Investments***

The Company has non-marketable equity investments inconjunction with its various collaboration arrangements. The non-marketableequity investments are recorded at cost and are evaluated periodically forother than temporary declines in fair value. The Company uses the followingcriteria to determine if such a decline should be considered other thantemporary:

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•                     the duration and extent to which themarket value has been less than cost;

•                     the financial condition and near-termprospects of the investee;

•                     the reasons for the decline in marketvalue;

•                     the investee’s performance againstproduct development milestones; and

•                     the Company’s ability and intent to holdthe investment for a period of time sufficient to allow for any anticipatedrecovery in market value.

If it is determined that a decline of any investmentis other than temporary, then the carrying value would be written down to fairvalue, and the write-down would be included in earnings as a loss.

***Inventories***

Inventories are valued at the lower of first-in,first-out cost or market. On a regular basis, the Company evaluates itsinventory balances for excess quantities and obsolescence by analyzing demand,inventory on hand, sales levels and other information. Based on theseevaluations, inventory balances are written down, if necessary.

***Property, Plant and Equipment***

Property, plant and equipment are stated at cost.Additions, major renewals and improvements are capitalized, while maintenanceand repairs are expensed. For financial reporting purposes, depreciation isgenerally provided on the straight-line method over the useful lives of therelated assets, which are 20 to 40 years for buildings and improvements andfrom 3 to 15 years for machinery and equipment. Leasehold improvements areamortized over the life of the related facility lease or the asset, whicheveris shorter. Accelerated depreciation methods are generally used for income taxpurposes.

***Goodwill and Long-Lived Assets***

Goodwill represents the excess of acquisition costsover the fair value of net assets of purchased businesses. Intangible assetsinclude licensing agreements, customer relationships and technology rights,which are amortized utilizing a straight-line method over their estimateduseful lives ranging from 3 to 19 years, and non-amortizable trademarks.

The Company has adopted Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142),whereby goodwill and non-amortizable intangible assets are no longer amortized,but instead is subject to a periodic impairment review performed during thesecond quarter of each fiscal year. In a business combination, goodwill isallocated to the Company’s various reporting units, which are the same as theCompany’s reportable operating segments, based on relative fair value of theassets acquired and liabilities assumed. The Company reviews the recoverabilityof its goodwill and non-amortizable intangible assets on an annual basis by comparingeach unit’s fair value to the net book value of its assets. If the book valueof the reporting unit’s assets exceeds its fair value, the goodwill is writtendown to its implied fair value.  In thesecond quarters of 2006, 2005 and 2004, the Company performed its annualimpairment tests of its goodwill and non-amortizable intangible assets, and noimpairment was indicated based on these tests.

Additionally, the Company reviews the carrying amountof goodwill whenever events and circumstances indicate that the carrying amountof goodwill may not be recoverable. Impairment indicators include, among otherconditions, cash flow deficits, historic or anticipated declines in revenue oroperating profit and adverse legal or regulatory developments. If it is determinedsuch indicators are present and the review indicates goodwill will not be fullyrecoverable, based upon discounted estimated cash flows, the carrying value isreduced to implied fair value.

In accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-lived Assets” (SFAS 144), the Company assessespotential impairment to its long-lived assets when events or changes incircumstances indicate that the carrying amount of an asset may not be fullyrecoverable. If required, an impairment loss is recognized as the differencebetween the carrying value and the fair value of the assets.

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***Capitalized Software***

The Company capitalizes certain internal-use computersoftware costs after technological feasibility has been established. Thesecapitalized costs are amortized utilizing the straight-line method over theirestimated economic life not to exceed three years.

***Demonstration (Demo) and Bundled Equipment***

In the normal course of business, the Companymaintains demo and bundled equipment, primarily phacoemulsification andmicrokeratome surgical equipment, for the purpose and intent of selling similarequipment or related products to the customer in the future. Demo and bundledequipment are not held for sale and are recorded as other non-current assets.The assets are amortized utilizing the straight-line method over theirestimated economic life not to exceed three years.

***Revenue Recognition and Accounts Receivable***

Revenue is realized or realizable and earned whenpersuasive evidence of an arrangement exists, delivery has occurred, the priceto the buyer is fixed or determinable and collectibility is reasonably assured.The Company records revenue from product sales when title and risk of ownershiphave been transferred to the customer, which is typically upon delivery to thecustomer, with the exception of intraocular lenses distributed on a consignmentbasis, which is upon notification of implantation in a patient. The Companyrecognizes license fees and revenues from the sale of treatment cards to directcustomers when it ships the treatment cards as it has no continuing obligationsor involvement subsequent to shipment.

Some customers finance the purchase or rental of theirVISX equipment directly from the Company over periods ranging from one to threeyears. These financing agreements are classified as either rental or operatingleases or sales type leases as prescribed by SFAS No. 13, “Accounting forLeases.”  Under sales type leases,equipment revenues are recognized based on the net present value of theexpected cash flow after installation to direct customers in the United Statesand Japan or after shipment to international distributors. Under rental oroperating lease arrangements, rental revenue is recognized over the term of theagreement.

The Company generally permits returns of product ifsuch product is returned in a timely matter, in good condition, and through thenormal channels of distribution. However, the Company does not accept returnsof treatment cards and does not provide rights of return or exchange, priceprotection or stock rotation rights to any VISX product distributors. Returnpolicies in certain international markets can be more stringent and are basedon the terms of contractual agreements with the customers. Allowances forreturns are provided for based upon an analysis of the Company’s historicalpatterns of returns matched against the sales from which they originated. Todate, historical product returns have been within the Company’s estimates.

When the Company recognizes revenue from the sale ofproducts, certain allowances known and estimable at time of sale are recordedas a reduction to sales. These items include cash discounts, allowances andrebates. These items are reflected as a reduction to accounts receivable to theextent the customer will or is expected to reduce its payment on the relatedinvoice amounts. In addition, certain items such as rebates provided tocustomers that meet certain buying targets are paid to the customer subsequentto customer payment. Thus, such amounts are recorded as accrued liabilities.These provisions are estimated based on historical payment experience,historical relationship to revenues and estimated customer inventory levels. Todate, historical sales allowances have been within the Company’s estimates.

The allowance for doubtful accounts is determined byanalyzing specific customer accounts and assessing the risk of uncollectibilitybased on insolvency, disputes or other collection issues.  In addition, the Company routinely analyzesthe different aging categories and establishes allowances based on the lengthof time receivables are past due (based on contractual terms).  A write-off will occur if the settlement ofthe account receivable is less than the carrying amount or the Companydetermines the balance will not be collected.

***Concentration of Credit Risk***

Financial instruments that potentially subject theCompany to credit risk principally consist of trade receivables. Wholesaledistributors, major retail chains, and managed care organizations account for asubstantial portion of trade receivables. This risk is limited due to the largenumber of customers comprising the Company’s customer base, and theirgeographic dispersion. Ongoing credit evaluations of customers’ financialcondition are performed and, generally, no collateral is required. The Companymaintains reserves for potential credit losses and such losses, in theaggregate, have not exceeded management’s expectations.

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***Income Taxes***

The Company records income taxes under the asset andliability method, whereby deferred tax assets and liabilities are recognizedfor the future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities and theirrespective tax bases, and for operating loss and tax credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date. Management evaluates the need to establish avaluation allowance for deferred tax assets based upon the amount of existingtemporary differences, the period in which they are expected to be recoveredand expected levels of taxable income. A valuation allowance to reduce deferredtax assets is established when it is “more likely than not” that some or all ofthe deferred tax assets will not be realized.

In preparing its consolidated financial statements,the Company is required to estimate its income taxes in each jurisdiction inwhich it operates. This process involves estimating the current liability aswell as assessing temporary differences resulting from differing treatment ofitems for tax and financial accounting purposes. Significant managementjudgment is required in determining the provision for income taxes and deferredtax assets and liabilities.

***Stock Based Compensation***

Prior to January 1, 2006, the Company’s stock-basedcompensation plans were accounted for under the recognition and measurementprovisions of Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (APB 25) and the disclosure only provisions ofStatement of Financial Accounting Standards No. 123 (SFAS123). Accordingly, no compensation expense was recorded for stock optionsgranted with exercise prices greater than or equal to the fair value of theunderlying common stock at the option grant date. The fair value, as determinedon the date of grant, of restricted stock awards was recognized as compensationexpense ratably over the respective vesting period. Additionally, the ESPPqualified as a non-compensatory plan under APB 25; therefore, no compensationcost was recorded in relation to the discount offered to employees forpurchases made under the ESPP.

On January 1, 2006, the Company adopted the fair valuerecognition provisions of SFAS 123R, requiring recognition of expensesequivalent to the fair value of stock-based compensation awards. TheCompany has elected to use the modified prospective application transitionmethod as permitted by SFAS 123R and therefore has not restated the financialresults reported in prior periods. Under this transition method,stock-based compensation expense for the year ended December 31, 2006 includescompensation expense for all stock-based compensation awards granted prior to,but not yet vested as of January 1, 2006, based on the grant-date fair valueestimated in accordance with the original provisions of SFAS 123, as adjustedfor estimated forfeitures. Compensation expense for all stock-basedcompensation awards granted subsequent to January 1, 2006 is based on the grant-datefair value estimated in accordance with the provisions of SFAS 123R. Inaddition, the Company’s unearned compensation balance at January 1, 2006 wasreclassified to additional paid-in capital upon the adoption of SFAS 123R.

Additionally, under SFAS 123R, the ESPP is considereda compensatory plan and requires recognition of compensation expense forpurchases of common stock made under the ESPP. The Company recognizescompensation expense for stock option and ESPP awards on a straight-line basisover the vesting period. Compensation expense related to the restricted stockand restricted stock units is recognized over the requisite service periods ofthe awards, consistent with the Company’s practices under SFAS 123 prior toJanuary 1, 2006.

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***Research and Development***

Research and development costs are charged to expensewhen incurred.

***Acquired In-Process Research and Development***

Costs to acquire in-process research and development(IPR&D) projects and technologies which have no alternative future use andwhich have not reached technological feasibility at the date of acquisition areexpensed as incurred (see Note 3).

***Comprehensive Income (Loss)***

Comprehensive income (loss) encompasses all changes inequity other than those with stockholders and consists of net earnings (loss),foreign currency translation adjustments, unrealized gains/losses on derivativeinstruments and pension obligations, if applicable.

The components ofaccumulated other comprehensive income (loss) were as follows:
| ** **                       | ** ** | ** **      | ** ** | ** **                           | ** ** | ** **                      | ** ** | ** **                 | ** ** |
|----------------------------------|------------|-----------------|------------|--------------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **Foreign**     | ** ** | **Change in net**          | ** ** | ** **                      | ** ** | **Total accumulated** | ** ** |
| ** **                       | ** ** | **currency**    | ** ** | **unrealized holding**          | ** ** | **Unrecognized losses**    | ** ** | **other**                  | ** ** |
| ** **                       | ** ** | **translation** | ** ** | **gains / losses on** | ** ** | **and prior service** | ** ** | **comprehensive**          | ** ** |
| **(in millions)**           | ** ** | **adjustment**  | ** ** | **derivatives**                      | ** ** | **cost, net**              | ** ** | **income (loss)**     | ** ** |
| Balance as of December  31, 2003 |       | $               | 13,868     |                                 | $          | —                          |       | $                          | —     |   | $ | 13,868 |   |
| Net change during the  year      |       | 55,799          |       | 207                                  |       | —                          |       | 56,006                     |       |
|                             |       |            |       |                                 |       |                            |       |                       |       |
| Balance as of December  31, 2004 |       | 69,667          |       | 207                                  |       | —                          |       | 69,874                     |       |
| Net change during the  year      |       | (89,537         | )          | (207                                 | )          | —                          |       | (89,744                    | )          |
|                             |       |            |       |                                 |       |                            |       |                       |       |
| Balance as of December  31, 2005 |       | (19,870         | )          | —                               |       | —                          |       | (19,870                    | )          |
| Net change during the  year      |       | 58,036          |       | —                               |       | —                          |       | 58,036                     |       |
| Adoption of SFAS No.  158        |       | —          |       | —                               |       | (1,421                          | )          | (1,421                     | )          |
| Balance as of December  31, 2006 |       | $               | 38,166     |                                 | $          | —                          |       | $                          | (1,421     | ) | $ | 36,745 |   |

 

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***Recently Adopted and Issued Accounting Standards***

In May 2005, the FASB issued Statement of FinancialAccounting Standards No. 154, “Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS No.154).  SFAS No. 154 requiresretrospective application to prior periods’ financial statements for changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFASNo. 154 also requires that retrospective application of a change inaccounting principle be limited to the direct effects of the change. Indirecteffects of a change in accounting principle, such as a change innon-discretionary profit-sharing payments resulting from an accounting change,should be recognized in the period of the accounting change. SFAS No. 154also requires that a change in depreciation, amortization, or depletion methodfor long-lived, non-financial assets be accounted for as a change in accountingestimate effected by a change in accounting principle. SFAS No. 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. The adoption of SFAS 154 by the Companydid not have a material impact on its consolidated financial position, resultsof operations or cash flows.

In June 2006, the Emerging Issues Task Force (“EITF”)issued EITF 06-3, “How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That is,Gross versus Net Presentation)” to clarify diversity in practice on thepresentation of different types of taxes in the financial statements. The TaskForce concluded that, for taxes within the scope of the issue, a company mayadopt a policy of presenting taxes either gross within revenue or net. That is,it may include charges to customers for taxes within revenues and the chargefor the taxes from the taxing authority within cost of sales, or,alternatively, it may net the charge to the customer and the charge from thetaxing authority. If taxes subject to EITF 06-3 are significant, a company isrequired to disclose its accounting policy for presenting taxes and the amountsof such taxes that are recognized on a gross basis. The guidance in thisconsensus is effective for the first interim reporting period beginning afterDecember 15, 2006 (the first quarter of our fiscal year 2007). The Company doesnot expect the adoption of EITF 06-3 to have a material impact on its resultsof operations, financial position or cash flow.

In July 2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement 109” (“FIN 48”).and is effective for fiscal years beginning afterDecember 15, 2006.  FIN 48 clarifies theaccounting for uncertainties in income taxes recognized in accordance with SFASNo. 109, “Accounting for Income Taxes” by prescribing guidance for therecognition, derecognition and measurement in financial statements of incometax positions taken in previously filed tax returns or tax positions expectedto be taken in tax returns, including a decision whether to file or not to filein a particular jurisdiction.  FIN 48requires that any liability created for unrecognized tax benefits bedisclosed.  The application of FIN 48 mayalso affect the tax bases of assets and liabilities and therefore may change orcreate deferred tax liabilities or assets. The Company will be required to adopt FIN 48 as of January 1, 2007.  If there are changes in the net assets of theCompany as a result of the application of FIN 48, the cumulative effects, ifany, will be recorded as an adjustment to retained earnings.  The Company is currently evaluating theimpact of its adoption of FIN 48 and has not yet determined the effect on itsearnings or financial position.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurement.” SFAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements. This Statement does notrequire any new fair value measurements. SFAS No. 157 is effective forfiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years. The Company is currently assessing the impact of SFASNo. 157 on its financial statements.

In September 2006, the SEC issued Staff AccountingBulletin (“SAB”) No. 108, “Considering the Effects of Prior YearMisstatements when Qualifying Misstatements in Current Year FinancialStatements,” which provides interpretive guidance on the consideration of theeffects of prior year misstatements in quantifying current year misstatementsfor the purpose of a materiality assessment. SAB No. 108 is effective forcompanies with fiscal years ending after November 15, 2006 and is requiredto be adopted by the Company in its fiscal year ending December 30,2006.  The adoption of SAB No. 108did not have a material impact on the Company’s financial statements.

In September 2006, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 158, “Employer’s Accounting for DefinedBenefit Pension and Other Postretirement Plans—an amendment of FASB StatementsNo. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer torecognize in its statement of financial position an asset for a plan’soverfunded status or a liability for a plan’s underfunded status, measure aplan’s assets and its obligations that determine its funded status as of theend of the employer’s fiscal year, and recognize changes in the funded statusof a defined benefit postretirement plan in the year in which the changesoccur. Those changes will be reported in comprehensive income and as a separatecomponent of stockholders’ equity. We adopted SFAS No. 158 in the fourthquarter of fiscal 2006.  The impact ofthe adoption of this new accounting standard is disclosed in Note 10 to theconsolidated financial statements.  Theeffect on the balance sheet as of December 31, 2006 from the adoption of SFASNo. 158 was based on the funded status of the defined benefit plans as ofSeptember 30, 2006, the measurement date of the plans’ assets andobligations.   The Company will berequired to change the measurement date to December 31 in fiscal year 2008.

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**Note 3: Acquisitions**

*VISX,Incorporated (VISX)*

On May 27, 2005, pursuant to the Agreement andPlan of Merger (Merger Agreement), dated as of November 9, 2004, asamended, by and among AMO, Vault Merger Corporation, a wholly owned subsidiaryof AMO, and VISX, AMO completed its acquisition of VISX, for totalconsideration of approximately $1.38 billion, consisting of approximately27.8 million shares of AMO common stock, the fair value of VISX stockoptions converted to AMO stock options and approximately $176.2 million in cash(VISX Acquisition). VISX products include the *VISXSTAR*Excimer Laser System, the *VISXWaveScan*System and *VISX*treatment cards. As a result of the VISX Acquisition, the Company became theleader in the design and development of proprietary technologies and systemsfor laser vision correction of refractive vision disorders.  The VISX Acquisition has been accounted foras a purchase business combination. The results of operations of the VISXAcquisition have been included in the accompanying consolidated statements ofoperations from the date of the VISX Acquisition.

The total cost of the VISX Acquisition is as follows(in thousands):

| Cash consideration to VISX  stockholders              |   | $         | 176,167   |   |
|-------------------------------------------------------|--------|-----------|-----------|--------|
| Fair value of AMO  shares issued to VISX stockholders |   | 1,136,605 |      |
| Fair value of vested  VISX stock options              |   | 66,580    |      |
| Direct transaction fees  and expenses                 |   | 15,765    |      |
| Cash and cash  equivalents acquired                   |   | (156,765  | )         |
| Total purchase price                                  |   | $         | 1,238,352 |   |

The above purchase price has been allocated based onthe fair values of assets acquired and liabilities assumed and has beenallocated as follows (in thousands):

| Inventories                                                                 |   | $        | 11,918    |   |
|-----------------------------------------------------------------------------|--------|----------|-----------|--------|
| Accounts receivable,  net                                                   |   | 39,353   |      |
| Other current assets                                                        |   | 22,129   |      |
| Property, plant and  equipment                                              |   | 3,350    |      |
| Other non-current  assets                                                   |   | 8,038    |      |
| Intangible assets                                                           |   | 402,300  |      |
| In-process research and  development                                        |   | 488,500  |      |
| Goodwill                                                                    |   | 479,016  |      |
| Accounts payable                                                            |   | (16,032  | )         |
| Other current liabilities                                                   |   | (43,957  | )         |
| Non-current deferred  tax liability, primarily related to intangible assets |   | (156,263 | )         |
| Net assets acquired                                                         |   | $        | 1,238,352 |   |

Of the $402.3 million of acquired intangible assets,$239.5 million was assigned to developed technology rights that have aweighted-average useful life of approximately 10.1 years, $22.4 million wasassigned to customer relationships with a useful life of 5 years and $140.4million was assigned to the VISX trade name with an indefinite useful life.  The amounts assigned to intangible assetswere based on management’s estimate of the fair value.

Identification and allocation of value to theidentified intangible assets was based on the provisions of SFAS No. 141, “BusinessCombinations,” (SFAS No. 141). The fair value of the identified intangibleassets was estimated by performing a discounted cash flow analysis using the “income”approach. This method includes a forecast of direct revenues and costsassociated with the respective intangible assets and charges for economicreturns on tangible and intangible assets utilized in cash flow generation. Netcash flows attributable to the identified intangible assets are discounted totheir present value at a rate commensurate with the perceived risk. Theprojected cash flow assumptions considered contractual relationships, customerattrition, eventual development of new technologies and market competition.

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The estimates ofexpected useful lives are based on guidance from SFAS No. 141 and take intoconsideration the effects of competition, regulatory changes and possibleobsolescence. The useful lives of technology rights are based on the number ofyears in which net cash flows have been projected. The useful lives of customerrelationships was estimated based upon the length of the contracts currently inplace, probability based estimates of contract renewals in the future andnatural growth and diversification of other potential customers, which wereconsidered insignificant. Management considers the VISX trade name to be theleading name in excimer laser vision correction procedures. VISX’s estimatedmarket share of 60 percent demonstrates its commercial success.  Management intends to maintain and continueto market existing and new products under the VISX trade name. As managementintends to continue to use the VISX trade name indefinitely, an indefinite lifewas assigned.

Assumptions used in forecasting cash flows for each ofthe identified intangible assets included consideration of the following: 

·                  VISX historical operating margins 

·                  Number of procedures and devices VISX has developedand had approved by the FDA 

·                  VISX market share 

·                  Contractual and non-contractual relationships withlarge groups of surgeons and 

·                  Patents and exclusive licenses held. 

A history of operatingmargins and profitability, a strong scientific, service and manufacturingemployee base and a leading presence in the excimer laser market were among thefactors that contributed to a purchase price resulting in the recognition ofgoodwill. The acquired goodwill, which is not deductible for tax purposes, hasbeen allocated to the LVC segment.

*In-process research and development(IPR&D)*

Approximately $488.5million of the purchase price represents the estimated fair value of projectsthat, as of the VISX Acquisition date, had not reached technologicalfeasibility and had no alternative future use. The Company recorded $449.2million of this amount in the second quarter of 2005 and $39.3 million in thethird quarter of 2005. The additional charge in the third quarter of 2005resulted primarily from the completion of the IPR&D valuation. The fairvalue assigned to IPR&D comprised the following projects (in thousands):

|                             | ** ** | **Value of** | ** ** |
|-----------------------------|------------|-------------------|------------|
| ** **                  | ** ** | **IPR&D**     | ** ** |
| ** **                  | ** ** | **Acquired**      | ** ** |
| *High Myopia for CustomVue* |       | $                 | 14,700     |   |
| Excimer Laser  Improvements |       | 56,200            |       |
| Presbyopia                  |       | 417,600           |       |
| Total                       |       | $                 | 488,500    |   |

The fair value of these projects was determined byperforming a discounted cash flow analysis using the “income” approach. Netcash flows attributable to these projects were discounted to their presentvalues at a rate commensurate with the perceived risk, which for these projectsranged from 19.0 to 21.0 percent. The following assumptions underlie the fairvalue as of the VISX Acquisition date:

•                    A high myopia procedure for *CustomVue* was forecasted to be approvedfor sale in the U.S. in late 2005. A procedure to treat presbyopia isforecasted to be approved for sale in the U.S. in mid-2007.  Additional research and development expenses willbe incurred prior to expected FDA approval for these procedures. Forecasteddiscounted cash flows for each product once launched include estimates fornormal sustaining engineering and maintenance R&D;

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•                    Additional research and development expenses will beincurred to bring excimer laser system improvements to market. Like the otherIPR&D projects, maintenance R&D and sustaining engineering costs wereallocated to the forecasted cash flows once commercialized;

•                    Revenue that is reasonably likely toresult from the approved and unapproved potential uses of identifiableintangible assets that includes the estimated number of units to be sold,estimated selling prices, estimated market penetration and estimated marketshare and year-over-year growth rates over the product cycles. These estimateswere based on management’s consideration of life cycles for similar productsVISX has previously launched, the competitive landscape, and previous successin working with the FDA; and

•                    The cost structure was assumed to besimilar to that for existing products.

The major risks and uncertainties associated with thetimely and successful completion of these projects consist of the ability toconfirm the safety and efficacy of the technology based on the data fromclinical trials and obtaining necessary regulatory approvals. In addition, noassurance can be given that the underlying assumptions used to forecast thecash flows or the timely and successful completion of such projects willmaterialize, as estimated. For these reasons, among others, actual results mayvary significantly from the estimated results.

In September 2005, high myopia *CustomVue* was approved by FDA.

*PfizerInc. Surgical Ophthalmic Business*

On June 26, 2004, pursuant to a stock and assetpurchase agreement dated as of April 21, 2004, the Company completed thepurchase of Pfizer Inc.’s surgical ophthalmic business for $450.0 million incash (Pfizer Acquisition). Pfizer’s surgical ophthalmic business manufacturedand marketed surgical devices for the eyes. The Company acquired ophthalmicsurgical products and certain manufacturing and research and developmentfacilities located in Uppsala, Sweden, Groningen, Netherlands and Bangalore,India. The products acquired include the *Healon*line of viscoelastic products used in ocular surgery, the *CeeOn* and *Tecnis*intraocular lenses and the*Baerveldt* glaucoma shunt. The Pfizer Acquisition has been accountedfor as a purchase business combination.

The following unauditedpro forma information assumes the VISX Acquisition and the Pfizer Acquisitionoccurred on January 1, 2004. These unaudited pro forma results have beenprepared for informational purposes only and do not purport to represent whatthe results of operations would have been had the VISX Acquisition and thePfizer Acquisition occurred as of the date indicated, nor of future results ofoperations. The unaudited pro forma results for years ended December 31,2005 and 2004 are as follows (in thousands, except per share data):
| ** **          | ** ** | **Year Ended  December 31, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|---------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| Net sales           |       | $                                                | 1,000,842  |                                             | $          | 982,834 |   |
| Net earnings        |       | 37,377                                           | (1)        | 70,603                                           | (2)        |
| Earnings per share: |       |                                             |       |                                             |       |
| Basic (3)           |       | $                                                | 0.57       |                                             | $          | 1.09 |   |
| Diluted (4)         |       | $                                                | 0.54       |                                             | $          | 1.04 |   |

----

(1)                   The unaudited pro forma information forthe year ended December 31, 2005 excludes the following non-recurringcharges related to the VISX Acquisition: a $488.5 million in-process researchand development charge and a $2.0 million charge for the amortization andwrite-off of debt issuance costs. The unaudited pro forma information alsoreflects an $11.7 million increase in amortization related to management’sestimate of the fair value of intangible assets acquired as the result of theVISX Acquisition and a $4.7 million increase in interest expense resulting fromadditional borrowings incurred to fund the cash portion of the VISX Acquisitionand related costs and amortization of deferred financing costs. Approximately$11.0 million of merger charges incurred by VISX are not excluded from the unauditedpro forma information for the year ended December 31, 2005.

(2)                   The unaudited pro forma information forthe year ended December 31, 2004 excludes the following non-recurringcharges related to the Pfizer Acquisition: incremental cost of sales of $28.1million from the sale of acquired inventory adjusted to fair value, a $28.1million in-process research and development charge, a charge of $6.5 millionfor the write-off of debt issuance costs, one-time commitment fee and originalissue discount, net of the recognition of realized gains

 

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oninterest rate swaps; and early debt extinguishment costs of $127.2 million. Theunaudited pro forma information also reflects a $2.3 million decrease indepreciation and amortization related to the fair value of property, plant andequipment and identifiable intangible assets acquired in the Pfizer Acquisitionand a $4.1 million increase in interest expense resulting from therecapitalization to fund the Pfizer Acquisition.

Theunaudited pro forma information for the year ended December 31, 2004 alsoincludes a $28.2 million increase in amortization related to management’sestimate of the fair value of intangible assets acquired as the result of theVISX Acquisition and an $11.4 million increase in interest expense resultingfrom additional borrowings incurred to fund the cash portion of the VISXAcquisition and related costs and amortization of deferred financing costs.

(3)                   The weighted average number of sharesoutstanding used for the computation of basic earnings per share for the yearended December 31, 2005 reflects the issuance of 27.8 million sharesof AMO’s common stock to VISX stockholders less the 16.6 million weightedaverage shares related to the VISX Acquisition already included in basic sharesoutstanding.

Theweighted average number of shares outstanding used for the computation of basicearnings per share for the year ended December 31, 2004 reflects theissuance of 7.0 million shares of AMO’s common stock in the privateexchanges of the 31⁄2% Convertible Senior Subordinated Notes less the3.6 million weighted average shares related to the private exchangesalready included in basic shares outstanding. The weighted average number ofshares outstanding used for the computation of basic earnings per share for theyear ended December 31, 2004 also includes the 27.8 million sharesissued to VISX stockholders as the result of the VISX Acquisition.

(4)                   The weighted average number of sharesoutstanding used for the computation of diluted earnings per share for the yearended December 31, 2005 includes the aggregate dilutive effect ofapproximately 3.3 million shares for stock options and awards, theremaining 31⁄2% Convertible Senior Subordinated Notes and VISX options exchangedfor AMO stock options

Theweighted average number of shares outstanding used for the computation ofdiluted earnings per share for the year ended December 31, 2004 includes theaggregate dilutive effect of approximately 3.6 million shares for stockoptions and awards, the remaining 31⁄2% Convertible Senior Subordinated Notes andVISX options exchanged for AMO stock options.

**Note4:  Product Rationalization and BusinessRepositioning**

On October 31, 2005, theCompany’s Board of Directors approved a product rationalization andrepositioning plan covering the discontinuation of non-strategic cataractsurgical and eye care products and the elimination or redeployment of resourcesthat support these product lines. The plan also included organizational changesand potential reductions in force in manufacturing, sales and marketingassociated with these product lines, as well as organizational changes inresearch and development and other corporate functions designed to align theorganization with our strategy and strategic business unit organization.

The plan further called forincreasing the Company’s investment in key growth opportunities, specificallythe Company’s refractive implant product line and international laser visioncorrection business, and accelerating the implementation of productivity initiatives.Following an analysis of its IOL manufacturing capabilities in the secondquarter of 2006, the Company has decided to consolidate certain operations. Inaddition, the Company expanded the scope of its eye care rationalizationinitiatives in order to maximize manufacturing capacity and seize growthopportunities.  Total cumulative chargesof $105.0 million have been incurred through December 31, 2006.

For the year ended December31, 2006, the Company incurred $62.7 million of pre-tax charges, which included$16.3 million for inventory, manufacturing related and other charges includedin cost of sales and $46.4 million included in operating expenses. Chargesincluded in operating expenses comprised productivity and brand repositioningcosts of $37.6 million and  severance,relocation and other one-time termination benefits of $13.7 million, offset bynet asset disposal gains of $2.8 million and a net credit from settlement ofcontractual obligations of $2.1 million.

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The Company incurred $42.3million in pre-tax charges during the fourth quarter of 2005 which included$12.6 million for inventory, manufacturing related and other charges includedin cost of sales and $29.7 million included in operating expenses forseverance, relocation and other one-timer termination benefits of $14.0million, asset write-downs of $9.2 million, contractual obligations of $2.7million and accelerated productivity and brand repositioning costs of $3.8million.

Business repositioningcharges and related activity in the accrual balances during the year endedDecember 31, 2006 were as follows (in thousands):
| **Business Repositioning Costs Reported In:** | ** ** | **Balance at  December 31,  2005** | ** ** | **Costs  Incurred** | ** ** | **Cash  Payments** | ** ** | **Non-Cash  Adjustments** | ** ** | **Balance at  December 31,  2006** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------|------------|--------------------|------------|---------------------------|------------|----------------------------------------------|------------|
| ** **                                                        | ** ** | ** **                                   | ** ** | ** **          | ** ** | ** **         | ** ** | ** **                | ** ** | ** **                                   | ** ** |
| Cost of sales —                                              | ** ** | ** **                                   | ** ** | ** **          | ** ** | ** **         | ** ** | ** **                | ** ** | ** **                                   | ** ** |
| Inventory,  manufacturing and other charges                       |       | $                                            | —     |                | $          | 16,244             |       | $                         | —     |                                         | $          | (16,244 | ) | $ | — |   |
| Operating Expenses —                                         |       |                                         |       |                |       |               |       |                      |       |                                         |       |
| Severance, relocation  and related costs                          |       | 8,779                                        |       | 13,700              |       | (11,080            | )          | —                    |       | 11,399                                       |       |
| Net gain on asset  disposals                                      |       | —                                       |       | (2,777              | )          | —             |       | 2,777                     |       | —                                       |       |
| Contractual obligations                                           |       | 2,641                                        |       | (2,106              | )          | (287               | )          | —                    |       | 248                                          |       |
| Productivity  initiatives and brand repositioning costs           |       | 883                                          |       | 37,600              |       | (37,295            | )          | —                    |       | 1,188                                        |       |
|                                                              |       | 12,303                                       |       | 46,417              |       | (48,662            | )          | 2,777                     |       | 12,835                                       |       |
|                                                              |       | $                                            | 12,303     |                | $          | 62,661             |       | $                         | (48,662    | )                                            | $          | (13,467 | ) | $ | 12,835 |   |

The Company incurred $42.3million in pre-tax charges during the fourth quarter of 2005 as follows (inthousands);
| **Business Repositioning Costs Reported In:** | ** ** | **Costs  Incurred** | ** ** | **Cash  Payments** | ** ** | **Non-Cash  Adjustments** | ** ** | **Balance at  December 31,  2005** | ** ** |
|-------------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|---------------------------|------------|----------------------------------------------|------------|
| Cost of sales —                                              |       |                |       |               |       |                      |       |                                         |       |
| Inventory,  manufacturing and other charges                       |       | $                   | 12,585     |               | $          | —                    |       | $                                            | (12,585    | ) | $ | — |   |
| Operating Expenses —                                         |       |                |       |               |       |                      |       |                                         |       |
| Severance,  relocation and related costs                          |       | 14,020              |       | (5,241             | )          | —                    |       | 8,779                                        |       |
| Asset write-downs                                                 |       | 9,172               |       | —             |       | (9,172                    | )          | —                                       |       |
| Contractual obligations                                           |       | 2,641               |       | —             |       | —                    |       | 2,641                                        |       |
| Productivity  initiatives and brand repositioning costs           |       | 3,847               |       | (2,964             | )          | —                    |       | 883                                          |       |
|                                                              |       | 29,680              |       | (8,205             | )          | (9172                     | )          | 12,303                                       |       |
|                                                              |       | $                   | 42,265     |               | $          | (8,205                    | )          | $                                            | (21,757    | ) | $ | 12,303 |   |

Productivity initiatives andbrand repositioning costs resulted from the Company’s investment in key growthopportunities, specifically the Company’s refractive implant product line,international laser vision correction business and expanded eye carerationalization, and the implementation of productivity improvements inmanufacturing operations, distribution, customer service and corporatefunctions. Severance, relocation and related costs were incurred for worldwideworkforce reductions due to the Company’s discontinuation of certain non-coreproducts and infrastructure and process improvements associated with theCompany’s productivity initiatives. The majority of these costs occurred in theUnited States, Japan and Europe. Net asset gains resulted from disposals oflong-lived assets from certain discontinued non-core products and relocation ofcertain facilities, offset by asset write-downs which resulted from theimpairment and disposal of long-lived assets from the reduction in expectedfuture cash flows. The fair values of impaired assets were based on probabilityweighted expected cash flows as determined in accordance with SFAS 144.  The net credit from contractual obligationsprimarily resulted from the settlement with a vendor during the third quarterof 2006.

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**Note 5:Composition of Certain Financial Statement Captions**
| ** **                                                                                                 | ** ** | **December 31,**   | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                 | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                                                                 | ** ** | **(in thousands)** | ** ** |
| Trade receivables, net                                                                                     |       |                    |       |   |   |
| Trade  receivables                                                                                         |       | $                       | 244,725    |   | $ | 247,849 |   |
| Less allowance  for doubtful accounts                                                                      |       | 12,317                  |       | 9,088 |   |
|                                                                                                       |       |                    |       |   |   |
|                                                                                                       |       | $                       | 232,408    |   | $ | 238,761 |   |
|                                                                                                       |       |                    |       |   |   |
| Inventories                                                                                                |       |                    |       |   |   |
| Finished  products, including consignment inventory of $13,958 and $11,890 in 2006 and  2005, respectively |       | $                       | 83,358     |   | $ | 66,492 |   |
| Work in process                                                                                            |       | 13,538                  |       | 13,148 |   |
| Raw materials                                                                                              |       | 30,636                  |       | 25,180 |   |
|                                                                                                       |       |                    |       |   |   |
|                                                                                                       |       | $                       | 127,532    |   | $ | 104,820 |   |
|                                                                                                       |       |                    |       |   |   |
| Property, plant and  equipment, net                                                                        |       |                    |       |   |   |
| Land                                                                                                       |       | $                       | 9,566      |   | $ | 8,987 |   |
| Buildings and  leasehold improvements                                                                      |       | 93,575                  |       | 79,502 |   |
| Machinery,  equipment and furniture                                                                        |       | 115,447                 |       | 94,819 |   |
|                                                                                                       |       |                    |       |   |   |
|                                                                                                       |       | 218,588                 |       | 183,308 |   |
| Less accumulated  depreciation and amortization                                                            |       | 85,832                  |       | 67,583 |   |
|                                                                                                       |       |                    |       |   |   |
|                                                                                                       |       | $                       | 132,756    |   | $ | 115,725 |   |

***Intangible assets, net***
| ** **                      | ** ** | ** **                    | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------|------------|-------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **(In thousands)**         | ** ** | **Useful  Life (Years)** | ** ** | **Gross  Amount**               | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Amortizing  Intangible Assets:  |       |                          |       |                            |       |                            |       |   |   |   |   |
| Licensing                       |       | 3 -  5                        |       | $                               | 4,590      |                            | $          | (4,243 | ) | $ | 4,590 |   | $ | (4,113 | ) |
| Technology  rights              |       | 8 -  19                       |       | 364,219                         |       | (61,997                         | )          | 348,379 |   | (26,128 | ) |
| Trademarks                      |       | 13.5                          |       | 16,933                          |       | (3,545                          | )          | 14,689 |   | (1,995 | ) |
| Customer  relationships         |       | 5                             |       | 22,400                          |       | (7,093                          | )          | 22,400 |   | (2,613 | ) |
|                            |       |                          |       | 408,142                         |       | (76,878                         | )          | 390,058 |   | (34,849 | ) |
| Nonamortizing  Tradename (VISX) |       | Indefinite                    |       | 140,400                         |       | —                          |       | 140,400 |   | — |   |
|                            |       |                          |       | $                               | 548,542    |                            | $          | (76,878 | ) | $ | 530,458 |   | $ | (34,849 | ) |

The intangible assets balance increased due to theimpact of foreign currency fluctuation. Amortization expense was $40.0 million,$26.9 million and $5.6 million in 2006, 2005 and 2004, respectively, and isrecorded in selling, general and administrative in the accompanyingconsolidated statements of operations. Amortization expense is expected to be$39.0 million in 2007 and 2008, $38.8 million in 2009, $36.2 million in 2010,$34.3 million in 2011 and $143.9 million thereafter. Actual amortizationexpense may vary due to the impact of foreign currency fluctuations.

***Goodwill***
| ** **              | ** ** | **December 31**    | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **              | ** ** | **(In thousands)** | ** ** |
| Goodwill                |       |                    |       |                  |       |
| Eye Care                |       | $                       | 28,540     |                  | $          | 28,817 |   |
| Cataract/Implant        |       | 349,347                 |       | 317,451               |       |
| Laser Vision Correction |       | 470,822                 |       | 479,016               |       |
|                    |       | $                       | 848,709    |                  | $          | 825,284 |   |

 

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Effective January 1, 2006,the Company’s reportable segments are represented by three business units:Cataract/Implant, Laser Vision Correction and Eye Care (See Note 14, “BusinessSegment Information”). The change in goodwill during the year ended December31, 2006 is due to an adjustment of Laser Vision Correction goodwill of $7.4million as a result of excess tax benefits from the exercise of converted VISXstock options that were fully vested at the acquisition date and the impact offoreign currency fluctuations on the Eye Care and Cataract/Implantsegments.  The Company performed itsannual impairment test of goodwill during the second quarter of 2006 anddetermined there was no impairment.

**Note 6:Debt**
| **(In thousands)**                                       | ** ** | **Average Rate  of Interest** | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                          |       |                                    |       |                        |       |                        |       |
| Convertible  Senior Subordinated Notes due 2024               |       | 2.50                                    | %          | $                           | 246,105    |                        | $          | 350,000 |   |
| Convertible  Senior Subordinated Notes due 2025               |       | 1.375                                   | %          | 105,000                     |       | 150,000                     |       |
| Convertible  Senior Subordinated Notes due 2026               |       | 3.25                                    | %          | 500,000                     |       | —                      |       |
| Short term borrowings                                         |       | 5.95                                    | %          | —                      |       | 60,000                      |       |
|                                                          |       |                                    |       |                        |       |                        |       |
|                                                          |       |                                    |       | 851,105                     |       | 560,000                     |       |
| Less current  maturities                                      |       |                                    |       | —                      |       | 60,000                      |       |
|                                                          |       |                                    |       |                        |       |                        |       |
| Total debt, net of current portion and short term  borrowings |       |                                    |       | $                           | 851,105    |                        | $          | 500,000 |   |

***Senior Credit Facility***

On June 25, 2004, the Company amended and restated itssenior credit facility to provide a $250.0 million term loan and a $100.0million revolving credit facility. The amended and restated senior creditfacility matures on June 25, 2009. In January 2005, the Company entered into anamendment to the senior credit facility to provide for an increase of $100.0million in the revolving loan commitments and an additional $100.0 million interm loan commitments. On May 27, 2005, the Company and certain of itssubsidiaries, as guarantors thereunder, entered into an amendment to providefor an additional increase of $100.0 million in the revolving loan commitmentsunder the senior credit facility, which amounts were made available to AMO tofinance, in part, AMO’s acquisition of VISX, and are available for workingcapital and other general corporate purposes subject to satisfaction of certainconditions.  This amendment also providesfor termination of $100.0 million of existing term loan commitment. Theamendment increased the revolving loan commitments to $300.0 million. Thematurity of the senior credit facility on June 25, 2009 remains unchanged.

During the second quarter of 2005, the Company paidapproximately $44.5 million of the term loan. On June 30, 2005, the Companypaid approximately $0.4 million of the term loan. On July 21, 2005, the Companyrepaid the balance of its term loan, including approximately $149.1 million ofprincipal and approximately $1.2 million of accrued interest, using the netproceeds from the 1.375% convertible senior subordinated notes (see below) andexisting cash. As a result of the repayment of the term loan, the Company wroteoff remaining debt issuance costs of approximately $3.8 million in the thirdquarter of 2005.

On May 27, 2005, the Company borrowedapproximately $200.0 million under the senior revolving credit facility to fundthe cash portion of the VISX Acquisition. In June 2005, the Company repaidapproximately $123.0 million of revolver borrowings with acquired VISX cash.

During 2006, the Company repurchased $148.9 million ofaggregate principal amount of convertible senior subordinated notes ($103.9million of the principal amount of the 2.5% Notes and $45.0 million of theprincipal amount of the 1.375% Notes) utilizing borrowings under its seniorcredit facility. The Company incurred a loss on debt extinguishment of $18.8million, and wrote off debt issuance costs of $3.3 million in 2006 inconjunction with the note repurchases.

At December 31, 2006, approximately $8.4 million ofthe senior revolving credit facility was reserved to support letters of crediton the Company’s behalf for normal operating purposes and the Company hasapproximately $291.6 million undrawn and available of revolving loancommitments. At December 31, 2005, the Company had $50.0 million borrowingsoutstanding under the revolving credit facility. Approximately $18.7 million ofthe revolving credit facility was reserved to support letters of credit issuedon the Company’s behalf for normal operating purposes. At December 31, 2005,the Company had $10.0 million of borrowings outstanding under a short-term loanfrom Bank of Ireland to an AMO subsidiary, AMO Ireland. This loan was supportedby a $10.0 million letter of credit which was part of the $18.7 million ofletters of credit noted above. This loan was paid in its entirety on February21, 2006 and is no longer available for borrowing.

Borrowings under the revolving credit facility, ifany, bear interest at current market rates plus a margin based upon the Company’sratio of debt to EBITDA, as defined. The incremental interest margin onborrowings under the revolving credit facility decreases as the Company’s ratioof debt to EBITDA decreases to specified levels. Under the senior creditfacility,

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certain transactions may trigger mandatory prepaymentof borrowings, if any. Such transactions may include equity or debt offerings,certain asset sales and extraordinary receipts. The Company pays a quarterlyfee (1.95% per annum at December 31, 2006) on the average balance ofoutstanding letters of credit and a quarterly commitment fee (0.375% per annumat December 31, 2006) on the average unused portion of the revolving creditfacility. The senior credit facility provides that the Company will maintaincertain financial and operating covenants which include, among otherprovisions, maintaining specific leverage and coverage ratios. Certaincovenants under the senior credit facility may limit the incurrence ofadditional indebtedness. The senior credit facility prohibits dividendpayments.  The Company was in compliancewith these covenants at December 31, 2006. The senior credit facility is secured by a first priority perfected lienon, and pledge of, all of the combined company’s present and future propertyand assets (subject to certain exclusions), 100% of the stock of the domesticsubsidiaries, 66% of the stock of foreign subsidiaries and all present andfuture intercompany debts.

***3.25%Convertible Senior Subordinated Notes Due 2026 (3.25% Notes)***

In June 2006, the Company completed a privateplacement of $500 million aggregate principal amount of its 3.25% Notes dueAugust 1, 2026.  Interest on the 3.25%Notes is payable on February 1 and August 1 of each year, commencing onFebruary 1, 2007.  The 3.25% Notes areconvertible into 16.7771 shares of the Company’s common stock for each $1,000principal amount of the 3.25% Notes (which represents an initial conversion priceof approximately $59.61 per share), subject to adjustment. The 3.25% Notes maybe converted, at the option of the holders, into cash or under certaincircumstances, cash and shares of the Company’s common stock at any time on orprior to the trading day preceding July 1, 2014, only under the followingcircumstances:

·                  duringthe five business days after any five consecutive trading-day period in whichthe trading price per $1,000 principal amount of the 3.25% Notes for each dayof such measurement period was less than 98% of the conversion value.  This conversion feature represents anembedded derivative.  However, based onthe de minimis value associated with this feature, no value was assigned atissuance and at December 31, 2006;

·                  duringany fiscal quarter subsequent to September 29, 2006, if the closing sale priceof the Company’s common stock measured over a specified number of trading daysis above 130% of the conversion  then ineffect;

·                  ifa fundamental change occurs; or

·                  uponthe occurrence of specified corporate transactions.

On and after July1, 2014, to (and including) the trading day preceding the maturity date,subject to prior redemption or repurchase, the 3.25% Notes will be convertibleinto cash and, if applicable, shares of the Company’s common stock regardlessof the foregoing circumstances.

The Company mayredeem some or all of the 3.25% Notes for cash, on or after August 4, 2014, fora price equal to 100% of the principal amount plus accrued and unpaid interest,including contingent interest, if any, to, but excluding the redemption date.

The 3.25% Notescontain put options, which may require the Company to repurchase in cash all ora portion of the 3.25% Notes on August 1, 2014, August 1, 2017, and August 1,2021 at a repurchase price equal to 100% of the principal amount plus accruedand unpaid interest, including contingent interest, if any, to, but excludingthe repurchase date.

Beginning with thesix-month interest period commencing August 1, 2014, the Company will paycontingent interest during any six-month interest period if the trading priceof the 3.25% Notes for each of the five trading days ending on the secondtrading day immediately preceding the first day of the applicable six-monthinterest period equals or exceeds 120% of the principal amount of the 3.25%Notes.  The contingent interest payablewill equal 0.25% of the average trading price of $1,000 principal amount of the3.25% Notes during the five trading days immediately preceding the first day ofthe applicable six-month interest period. This contingent interest payment feature represents an embeddedderivative.  However, based on the deminimis value associated with this feature, no value has been assigned atissuance and at December 31, 2006.

On or prior toAugust 1, 2014, upon the occurrence of a fundamental change, under certaincircumstances, the Company will provide for a make whole amount by increasing,for the time period described herein, the conversion rate by a number ofadditional shares for any conversion of the 3.25% Notes in connection with suchfundamental change transactions.  Theamount of additional shares will be determined based on the price paid pershare of the Company’s common stock in the

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transaction constituting a fundamental change and the effectivedate of such transaction. This make whole premium feature represents anembedded derivative.  However, based onthe de minimis value associated with this feature, no value has been assignedat issuance and at December 31, 2006.

***31⁄2% Convertible Senior Subordinated Notes Due 2023 (31⁄2%Notes)***

On June 24, 2003, the Company issued $140.0 million of31⁄2% Notes due April 15, 2023. Interest on the 31⁄2% Notes was payable onApril 15 and October 15 of each year, commencing on October 15, 2003. The 31⁄2%Notes were convertible into 48.69 shares of AMO’s common stock for each $1,000principal amount of 31⁄2% Notes (conversion price of $20.54 per share), subjectto adjustment.

In the quarter ended June 25, 2004, the Companyexchanged approximately 5.8 million shares of common stock and approximately$4.6 million in cash for approximately $108.6 million in aggregate principalamount of 31⁄2% Notes in privately negotiated transactions with a limited numberof holders (Private Exchanges). The Private Exchanges resulted in an aggregateincrease of $216.4 million to common stock and additional paid-in capital.Because the 31⁄2% Notes were not convertible into equity at the time of thePrivate Exchanges, a non-cash charge of approximately $107.2 million and a cashcharge of approximately $4.6 million were recorded. The $107.2 million non-cashcharge was comprised of a charge of $89.1 million representing the differencebetween the fair value of 5.3 million shares of common stock issued in exchangefor the notes and the principal amount of notes exchanged and a charge of $18.1million representing the fair value of 0.5 million shares of common stockissued as a premium. The $4.6 million cash charge represented cash issued as apremium. The Company also recorded a charge of approximately $3.2 million forthe write-off of the pro-rata portion of capitalized debt related costs.  During the remainder of 2004, the Companyexchanged approximately 1.2 million shares of common stock for approximately$22.8 million in aggregate principal amount of 31⁄2% Notes. These exchangesresulted in an increase of $27.6 million to common stock and additional paid-incapital. A non-cash charge of $4.5 million representing the fair value ofshares issued as a premium was recorded.

In the second quarter of 2005, the Company exchanged160,695 shares of common stock for $3.0 million aggregate principal amount ofthe 31⁄2% Notes in a privately negotiated transaction. The exchange resulted inan increase of $3.5 million to common stock and paid-in capital. A non-cashcharge of $0.5 million representing the fair value of shares issued as apremium was recorded. In the fourth quarter of 2005, the Company exchanged291,760 shares of common stock and approximately $0.4 million in cash for $5.6million aggregate principal amount of the 31⁄2% Notes in privately negotiatedtransactions. The exchange resulted in an aggregate increase of $6.6 million tocommon stock and paid-in capital. A non-cash charge of $1.2 million and a cashcharge of $0.2 million representing the fair value of shares issued as apremium were recorded. As a result of the exchanges noted above, all of the 31⁄2% Noteswere retired in 2005.

***21⁄2% Convertible Senior Subordinated Notes Due 2024 (21⁄2%Notes)***

On June 22, 2004, the Company issued $350.0 million of21⁄2% Notes due July 15, 2024. Interest on the 21⁄2% Notes is payable onJanuary 15 and July 15 of each year, commencing on January 15, 2005. The 21⁄2%Notes are convertible into 19.9045 shares of AMO’s common stock for each $1,000principal amount of 21⁄2% Notes (conversion price of approximately $50.24 pershare), subject to adjustment. The 21⁄2% Notes may be converted, at the option ofthe holders, on or prior to the final maturity date under certaincircumstances, including:

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•                    during any fiscal quarter commencingafter September 24, 2004, if the closing sale price per share of AMO’s commonstock exceeds 130% of the conversion price for at least 20 trading days in the30 consecutive trading day period ending on the last trading day of the precedingfiscal quarter;

•                    during the five business days after anyfive consecutive trading day period in which the trading price of the 21⁄2% Notesfor each day was less than 95% of the conversion value of the 21⁄2% Notes;provided that holders may not convert their 21⁄2% Notes in reliance on thisprovision after July 15, 2019, if on any trading day during such trading periodthe closing sale price per share of AMO’s common stock was between 100% and130% of the then current conversion price. This conversion tenure represents anembedded derivative. However, based on the de minimis value associated withthis feature, no value was assigned at issuance and at December 31, 2006 and2005;

•                    upon the occurrence of specified ratingsevents with respect to the 21⁄2% Notes. This conversion feature represents anembedded derivative. However, based on the de minimis value associated withthis feature, no value has been assigned at issuance and at December 31, 2006and 2005;

•                    if the 21⁄2% Notes have been called forredemption;

•                    if a fundamental change occurs; or

•                    upon the occurrence of specifiedcorporate events.

Upon conversion, the Company has the right to deliver,in lieu of shares of common stock, cash or a combination of cash and shares ofcommon stock.

The Company may redeem some or all of the 21⁄2% Notesfor cash, on or after January 20, 2010, for a price equal to 100% of theprincipal amount plus accrued and unpaid interest, including contingentinterest, if any, to but excluding the redemption date.

The 21⁄2% Notes contain put options, which may requirethe Company to repurchase all or a portion of the 21⁄2% Notes on January 15,2010, July 15, 2014, and July 15, 2019 at a repurchase price of 100% of theprincipal amount plus accrued and unpaid interest, including contingent interest(as described below), if any, to but excluding the repurchase date. The Companymay choose to pay the repurchase price in cash, shares of common stock or acombination of cash and shares of common stock.

Under the indenture for the 21⁄2% Notes, the Company mayirrevocably elect to satisfy in cash the conversion obligation with respect tothe principal amount of the 21⁄2% Notes and the Company made such election priorto December 31, 2004. As such, any future dilutive effect of the 21⁄2% Notes willbe calculated under the net share settlement method. As a result of thiselection, the Company also is required to satisfy in cash its obligations torepurchase any 21⁄2% Notes that holders may put to the Company onJanuary 15, 2010, July 15, 2014 and July 15, 2019.

Beginning with the six-month interest periodcommencing January 15, 2010, holders of the 21⁄2% Notes will receive contingentinterest payments during any six-month interest period if the trading price ofthe 21⁄2% Notes for each of the five trading days ending on the second tradingday immediately preceding the first day of the applicable six-month interestperiod equals or exceeds 120% of the principal amount of the 21⁄2% Notes. Thecontingent interest payable will equal 0.25% of the average trading price of $1,000principal amount of 21⁄2% Notes during the five trading days immediatelypreceding the first day of the applicable six-month interest period. Thiscontingent interest payment feature represents an embedded derivative. However,based on the de minimis value associated with this feature, no value has beenassigned at issuance and at December 31, 2006 and 2005.

On or prior to January 15, 2010, upon the occurrenceof a fundamental change, under certain circumstances, the Company will pay amake whole premium on 21⁄2% Notes converted in connection with, or tendered forrepurchase upon, the fundamental change. The make whole premium will bepayable, in the same form of consideration into which the Company’s commonstock has been exchanged or converted, on the repurchase date for the 21⁄2% Notesafter the fundamental change, both for 21⁄2% Notes tendered for repurchase andfor 21⁄2% Notes converted in connection with the fundamental change. The amountof the make whole premium, if any, will be based on the Company’s stock priceon the effective date of the fundamental change. This make whole premiumfeature represents an embedded derivative. However, based on the de minimisvalue associated with this feature, no value has been assigned at issuance andat December 31, 2006 and 2005.

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The Company utilizes a convertible bond pricing modeland a probability weighted valuation model, as applicable, to determine thefair values of the embedded derivatives noted above.

The proceeds from the June 2004 term loan and aportion of the net proceeds from the 21⁄2% Notes aggregating $450.0 million wereused to fund the Pfizer Acquisition. In addition, approximately $80.8 millionof the net proceeds from the 21⁄2% Notes were used to consummate the June 2004tender offer to purchase the remaining $70.0 million aggregate outstandingprincipal amount of the Company’s 91⁄4% senior subordinated notes and pay therelated premium and consent fees. As a result of the purchase of the 91⁄4% seniorsubordinated notes, the Company recorded a charge of approximately $10.8million for the premium and consent fees paid and a net gain of $0.7 millionfor the write-off of capitalized debt related costs and recognition of therealized gain on interest rate swaps.

***1.375% Convertible Senior Subordinated Notes Due 2025 (1.375%Notes)***

On July 18, 2005, the Company issued $150.0million of 1.375% Notes due July 1, 2025. Interest on the 1.375% Notes ispayable on January 1 and July 1 of each year, commencing on January 1,2006. The 1.375% Notes are convertible into 21.0084 shares of AMO’s commonstock for each $1,000 principal amount of the 1.375% Notes (conversion price ofapproximately $47.60 per share), subject to adjustment. The 1.375% Notes may beconverted, at the option of the holders, into cash or under certaincircumstances, cash and shares of AMO’s common stock at any time on or prior tothe trading day preceding June 1, 2011, subject to prior redemption orrepurchase only during the specified periods under the following circumstances:

•                    during the five business days after anyfive consecutive trading day period in which the trading price per $1,000principal amount of the 1.375% Notes for each day of such measurement periodwas less than 103% of the conversion value, which equals the product of theclosing sales price of AMO’s common stock and the conversion rate then ineffect. This conversion feature represents an embedded derivative. Since thisfeature has no measurable impact on the fair value of the 1.375% Notes and noseparate trading market exists for this derivative, the value of the embeddedderivative was determined to be de minimis. Accordingly, no value has beenassigned at issuance and at December 31, 2006 and 2005;

•                    if a fundamental change occurs; or

•                    upon the occurrence of specifiedcorporate events.

On and after June 1, 2011, to (and including) thetrading day preceding the maturity date, subject to prior redemption orrepurchase, the 1.375% Notes will be convertible into cash and, if applicable,shares of AMO’s common stock regardless of the foregoing circumstances.

With respect to each $1,000 principal amount of the 1.375%Notes surrendered for conversion, the Company will deliver the conversion valueto holders as follows: (1) an amount in cash (the “principal return”) equal tothe lesser of (a) the aggregate conversion value of the 1.375% Notes to beconverted and (b) $1,000, and (2) if the aggregate conversion value of the 1.375%Notes to be converted is greater than the principal return, an amount in sharesequal to such aggregate conversion value, less the principal return.

The Company may redeem some or all of the 1.375% Notesfor cash, on or after July 6, 2011, for a price equal to 100% of theprincipal amount plus accrued and unpaid interest, including contingentinterest (as described below), if any, to but excluding the redemption date.

The 1.375% Notes contain put options, which mayrequire the Company to repurchase in cash all or a portion of the 1.375% Noteson July 1, 2011, July 1, 2016, and July 1, 2021 at arepurchase price equal to 100% of the principal amount plus accrued and unpaidinterest, including contingent interest (as described below), if any, to butexcluding the repurchase date.

Beginning with the six-month interest periodcommencing July 1, 2011, holders of the 1.375% Notes will receivecontingent interest payments during any six-month interest period if thetrading price of the 1.375% Notes for each of the five trading days ending onthe second trading day immediately preceding the first day of the applicablesix-month interest period equals or exceeds 120% of the principal amount of the1.375% Notes. The contingent interest payable will equal 0.25% of the averagetrading price of $1,000 principal amount of the 1.375% Notes during the fivetrading days immediately preceding the first day of the applicable six-monthinterest period. This contingent interest payment feature represents anembedded derivative. Since this feature has no measurable impact on the fairvalue of the 1.375% Notes and no separate trading market exists for thisderivative, the value of the embedded derivative was determined to be deminimis. Accordingly, no value was assigned at issuance and at December 31,2006 and 2005.

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On or prior to July 1, 2011, upon the occurrenceof a fundamental change, under certain circumstances, the Company will providefor a make whole amount by increasing, for the time period described herein,the conversion rate by a number of additional shares for any conversion of the 1.375%Notes in connection with such fundamental change transactions. The amount ofadditional shares will be determined based on the price paid per share of AMO’scommon stock in the transaction constituting a fundamental change and theeffective date of such transaction. This make whole premium feature representsan embedded derivative. Since this feature has no measurable impact on the fairvalue of the 1.375% Notes and no separate trading market exists for thisderivative, the value of the embedded derivative was determined to be deminimis. Accordingly, no value has been assigned at issuance and at December31, 2006 and 2005.

As of December 31, 2006, the aggregate maturities oftotal long-term debt of $851.1 million are due after 2011.

**Note 7: Financial Instruments**

In the normal course of business, the Company’soperations are exposed to risks associated with fluctuations in interest ratesand foreign currency exchange rates. The Company addresses these risks throughcontrolled risk management that may include the use of derivative financialinstruments to economically hedge or reduce these exposures. The Company doesnot enter into financial instruments for trading or speculative purposes.

The Company enters into derivative financialinstruments with major financial institutions that have at least an “A” orequivalent credit rating. The Company has not experienced any losses on itsderivative financial instruments to date due to credit risk and managementbelieves that such risk is remote.

***Interest Rate Risk Management***

At December 31, 2006, the Company’s debt is comprisedprimarily of domestic borrowings of $851.1 million fixed rate debt.

In July 2004, the Company entered into an interestrate swap agreement, which effectively converted the interest rate on $125.0million of term loan borrowings from a floating rate to a fixed rate. Thisinterest rate swap qualified as a cash flow hedge and would have matured inJuly 2006. In April 2005, the Company terminated the interest rate swap.  Upon termination, the Company receivedapproximately $0.8 million and included the related net gain of approximately$0.5 million, which includes the accrued but unpaid net amount between theCompany and the swap counterparty, as a component of accumulated othercomprehensive income in the second quarter of 2005. As a result of therepayment of the term loan in July 2005, the gain on the interest rate swap of$0.8 million was fully recognized as a reduction to the interest expense in thethird quarter of 2005. At December 31, 2006, there are no outstandinginterest rate swaps.

***Foreign Exchange Risk Management***

The Company enters into foreign exchange option andforward contracts to reduce earnings and cash flow volatility associated withforeign exchange rate changes to allow management to focus its attention on itscore business operations. Accordingly, the Company enters into contracts whichchange in value as foreign exchange rates change to economically offset

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the effect of changes in value of foreign currencyassets and liabilities, commitments and anticipated foreign currencydenominated sales and operating expenses. The Company enters into foreignexchange option and forward contracts in amounts between minimum and maximumanticipated foreign exchange exposures, generally for periods not to exceed oneyear. These derivative instruments are not designated as accounting hedges.

The Company uses foreign currency option contracts,which provide for the sale of foreign currencies to offset foreign currencyexposures expected to arise in the normal course of the Company’s business.While these instruments are subject to fluctuations in value, such fluctuationsare anticipated to offset changes in the value of the underlying exposures. Theprincipal currencies subject to this process are the Japanese yen and the euro.The foreign exchange forward contracts are entered into to protect the value offoreign currency denominated monetary assets and liabilities and the changes inthe fair value of the foreign currency forward contracts were economicallydesigned to offset the changes in the revaluation of the foreign currencydenominated monetary assets and liabilities. These forward contracts aredenominated in currencies which represent material exposures. The changes inthe fair value of foreign currency option and forward contracts are recordedthrough earnings as “Unrealized loss (gain) loss on derivative instruments”while any realized gains or losses on expired contracts are recorded throughearnings as “Other, net” in the accompanying consolidated statements ofoperations. Any premium cost of purchased foreign exchange option contracts arerecorded in “Other current assets” and amortized over the life of the options.

The following tableprovides information about our foreign currency derivative financialinstruments outstanding as of December 31, 2006 and 2005, respectively.The information is provided in U.S. dollar amounts, as presented in ourconsolidated financial statements.
| ** **                                        | ** ** | **December 31, 2006** | ** ** | **December 31, 2005**                 | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|-------------------------------------------------|------------|
| ** **                                        | ** ** | **Notional  Amount**            | ** ** | **Average Contract  or Strike  Rate** | ** ** | **Notional  Amount** | ** ** | **Average Contract  or Strike  Rate** | ** ** |
| ** **                                        | ** ** | **(in $ millions)**   | ** ** | ** **                                      | ** ** | **(in $ millions)** | ** ** | ** ** | ** ** |
| **Foreign  currency forward contracts:**          | ** ** | ** **                      | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Receive  US$/Pay Foreign Currency:**            | ** ** | ** **                      | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Swedish Krona                                     |       | $                               | 8.8        |                                            | 6.85       |   | $ | 31.5 |   | 7.94 |   |
| U.K. Pound                                        |       | —                          |       | —                                          |       | 5.2 |   | 1.72 |   |
| Canadian Dollar                                   |       | 9.5                             |       | 1.16                                            |       | — |   | — |   |
| Australia Dollar                                  |       | 7.1                             |       | 1.27                                            |       | — |   | — |   |
| Swiss Franc                                       |       | —                          |       | —                                          |       | 1.5 |   | 1.31 |   |
| Japanese Yen                                      |       | 7.1                             |       | 118.8                                           |       | — |   | — |   |
| **Pay  US$/Receive Foreign Currency:**            | ** ** | ** **                      | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Japanese Yen                                      |       | —                          |       | —                                          |       | 3.0 |   | 117.45 |   |
| Euro                                              |       | —                          |       | —                                          |       | 5.9 |   | 1.19 |   |
| Swiss Franc                                       |       | 3.7                             |       | 1.22                                            |       | — |   | — |   |
| Canadian Dollar                                   |       | —                          |       | —                                          |       | 3.4 |   | 1.17 |   |
| Australia Dollar                                  |       | —                          |       | —                                          |       | 2.9 |   | 0.73 |   |
|                                              |       |                            |       |                                            |       |   |   |   |   |
| **Total  Notional**                               | ** ** | **$**                           | **36.2**   | ** **                                      | ** ** | ** ** | **$** | **53.4** | ** ** | ** ** | ** ** |
| **Estimated  Fair Value**                         | ** ** | **$**                           | **—** | ** **                                      | ** ** | ** ** | **$** | **—** | ** ** | ** ** | ** ** |
|                                              |       |                            |       |                                            |       |   |   |   |   |
| ** Foreign currency purchased put options:** | ** ** | ** **                      | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Japanese Yen                                      |       | $                               | 72.0       |                                            | 118.00     |   | $ | 66.2 |   | 117.83 |   |
| Euro                                              |       | 50.8                            |       | 1.24                                            |       | 40.2 |   | 1.18 |   |
| **Foreign  currency sold call options:**          | ** ** | ** **                      | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Japanese Yen                                      |       | 81.3                            |       | 104.50                                          |       | 60.0 |   | 106.60 |   |
| Euro                                              |       | 53.1                            |       | 1.29                                            |       | 43.0 |   | 1.26 |   |
|                                              |       |                            |       |                                            |       |   |   |   |   |
| **Total  Notional**                               | ** ** | **$**                           | **257.2**  | ** **                                      | ** ** | ** ** | **$** | **209.4** | ** ** | ** ** | ** ** |
| **Estimated Fair Value**                          | ** ** | **$**                           | **(0.6**   | **)**                                           | ** ** | ** ** | **$** | **1.1** | ** ** | ** ** | ** ** |

 

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The notional principal amount provides one measure ofthe transaction volume outstanding as of the end of the period, and does notrepresent the amount of the Company’s exposure to market loss. The estimate offair value is based on applicable and commonly used prevailing financial marketinformation as of December 31, 2006 and 2005, respectively. The amountsultimately realized upon settlement of these financial instruments, togetherwith the gains and losses on the underlying exposures, will depend on actualmarket conditions during the remaining life of the instruments.

The impact of foreign exchange risk managementtransactions on income was a net realized gain (loss) of $2.3 million, $(2.0)million and $(1.9) million in 2006, 2005 and 2004, respectively, which arerecorded in “Other, net” in the accompanying consolidated statements ofoperations.

***Fair Value of Financial Instruments***

At December 31, 2006 and 2005, the Company’s financialinstruments included cash and equivalents, trade receivables, accounts payableand borrowings. The carrying amount of cash and equivalents, trade receivablesand accounts payable approximates fair value due to the short-term maturitiesof these instruments. The fair value of long-term debt was estimated based onquoted market prices at year-end.

The carrying amount andestimated fair value of the Company’s financial instruments at December 31 wereas follows (in thousands): 

|                                                              | ** ** | **2006**             | ** ** | **2005**            | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|---------------------|------------|
| ** **                                                   | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Current portion of  long-term debt and short-term borrowings |       | $                    | —     |                | $          | — |   | $ | 60,000 |   | $ | 60,000 |   |
| Long-term debt                                               |       | 851,105              |       | 794,226             |       | 500,000 |   | 527,653 |   |
|                                                              |            |                      |            |                     |            |  |  |  |  |  |  |  |  |

**Note 8: Related Party Transactions**

Prior to June 29, 2002, the Company entered intoseveral agreements with Allergan in connection with, among other things,transitional services, employee matters, manufacturing and tax sharing. Theseagreements generally required the Company to indefinitely indemnify Allerganfrom liabilities related to the business contributed to AMO.

The transitional services agreement set forth chargesgenerally intended to allow Allergan to fully recover the allocated costs ofproviding certain services, plus all out-of-pocket expenses, except that AMOpaid to Allergan a commission related to AMO products that were sold byAllergan during the transition period. The Company recovered costs fromAllergan in a similar manner for services provided by AMO. All transitionalservices under the transitional services agreement have terminated.

Under the manufacturing agreement, which ended on June29, 2005, Allergan manufactured certain eye care products and *VITRAX* viscoelastics from the date of theJune 29, 2002 spin-off. The Company purchased these products from Allergan at aprice equal to Allergan’s fully allocated costs plus 10%. During 2005 and 2004,the Company purchased $41.9 million and $89.3 million, respectively, of productfrom Allergan. On an annual basis, a pricing “true up” calculation wasperformed during the first calendar quarter. This “true up” calculation wasbased upon the actual volume of products shipped by Allergan to AMO during thepreceding year versus the forecasted volume submitted by AMO that was used tocalculate the invoiced prices. During the year, the Company periodically reviewedthe volume of purchases and accrued for estimated shortfalls, if any. TheCompany received $0.8 million from Allergan in October 2005 as the final “true-up”amount for the six months ended June 29, 2005.

The following tablesummarizes the charges from Allergan for the above-mentioned transitionalservices for 2005 and 2004 (in thousands):

|                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Selling, general and administrative expenses, net of $921 and $1,165  charged to Allergan |       | $        | —     |     | $          | (198 | ) |
|                                                                                      |       |     |       |     |       |
| Research and development                                                                  |       | —   |       | 185      |       |
|                                                                                      |       |     |       |     |       |
| Manufacturing “true up” payment (receipt), net                                  |       | (637     | )          | 233      |       |
|                                                                                           |            |          |            |          |            |  |  |

 

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As of December 31, 2006, an interest-free relocationloan of $0.5 million, collateralized by real property, was outstanding from thechief executive officer. The principal amount of the loan is payable upon theearlier to occur of (a) 60 days following the chief executive officer’stermination of employment; (b) the date of the sale or other transfer of theproperty or (c) July 3, 2007. This relocation loan is evidenced by a promissorynote dated July 3, 2002, prior to the adoption of the Sarbanes-Oxley Act of2002.

**Note 9:Income Taxes**

The Company’s incomebefore provision for income taxes was generated from the United States andinternational operations as follows: 
| ** **                            | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                            | ** ** | **(in thousands)**                    | ** ** |
| Earnings (loss) before  income taxes: |       |                                       |       |   |   |   |   |
| U.S.                                  |       | $                                          | 87,803     |   | $ | (497,583 | ) | $ | (105,537 | ) |
| Foreign                               |       | 57,013                                     |       | 57,286 |   | (15,679 | ) |
| Earnings (loss) before income taxes   |       | $                                          | 144,816    |   | $ | (440,297 | ) | $ | (121,216 | ) |

 

The Company’s provisionfor income taxes consists of the following:
| ** **                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                  | ** ** | **(in thousands)**                    | ** ** |
| Income tax expense:         |       |                                       |       |   |   |   |   |
| Current                     |       |                                       |       |   |   |   |   |
| U.S. federal                |       | $                                          | 25,413     |   | $ | 130 |   | $ | 8,780 |   |
| Foreign                     |       | 8,723                                      |       | 17,846 |   | 15,739 |   |
| U.S. state and  Puerto Rico |       | 1,224                                      |       | 28 |   | 372 |   |
| Total current               |       | 35,360                                     |       | 18,004 |   | 24,891 |   |
|                        |       |                                       |       |   |   |   |   |
| Deferred:                   |       |                                       |       |   |   |   |   |
| U.S. federal                |       | 25,646                                     |       | (903 | ) | (13,286 | ) |
| Foreign                     |       | 1,201                                      |       | (3,062 | ) | (2,665 | ) |
| U.S. state and  Puerto Rico |       | 3,138                                      |       | (1,139 | ) | (786 | ) |
| Total deferred              |       | 29,985                                     |       | (5,104 | ) | (16,737 | ) |
| Total                       |       | $                                          | 65,345     |   | $ | 12,900 |   | $ | 8,154 |   |

 

The reconciliations of the U.S. federal statutory taxrate to the Company’s effective tax rate are as follows:
| ** **                                                                                                | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Statutory rate of tax  expense                                                                            |       | 35.0                                       | %          | (35.0 | )% | (35.0 | )% |
| State taxes, net  of U.S. tax benefit                                                                     |       | 1.6                                        |       | (0.3 | ) | (1.5 | ) |
| In-process  research and development charges                                                              |       | —                                     |       | 39.0 |   | 8.1 |   |
| Convertible note  exchanges                                                                               |       | 1.9                                        |       | 0.1 |   | 31.2 |   |
| Other permanent  items                                                                                    |       | (0.8                                       | )          | (2.4 | ) | 1.5 |   |
| Foreign income,  including U.S. tax effect of foreign earnings and dividends, net of foreign  tax credits |       | 6.3                                        |       | 2.1 |   | — |   |
| Net change in  valuation allowance                                                                        |       | 0.6                                        |       | (0.4 | ) | 1.5 |   |
| Other                                                                                                     |       | 0.5                                        |       | (0.3 | ) | 0.9 |   |
| Effective tax rate                                                                                        |       | 45.1                                       | %          | 2.8 | % | 6.7 | % |

 

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Temporary differences andcarryforwards, which give rise to a significant portion of deferred tax assetsand liabilities at December 31, 2006 and 2005, were as follows: 
| ** **                                                      | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**               | ** ** |
| Deferred tax assets                                             |       |                                  |       |   |   |
| Net operating  loss carryforwards                               |       | $                                     | 4,013      |   | $ | 23,265 |   |
| Reserves and  accrued expenses                                  |       | 3,685                                 |       | 6,854 |   |
| Capitalized  expenses                                           |       | 1,937                                 |       | 204 |   |
| Intercompany  profit in inventory                               |       | 7,029                                 |       | 12,281 |   |
| Net benefit on  foreign earnings, including foreign tax credits |       | 11,984                                |       | 26,220 |   |
| Federal and  State tax credits                                  |       | 3,142                                 |       | 3,691 |   |
| Inventory  reserves and variances                               |       | 5,726                                 |       | 4,932 |   |
| Fixed assets,  net of accumulated depreciation                  |       | 644                                   |       | — |   |
| All other                                                       |       | 4,698                                 |       | 5,123 |   |
|                                                            |       | 42,858                                |       | 82,570 |   |
| Less: valuation  allowance                                      |       | (8,645                                | )          | (7,913 | ) |
| Total deferred tax  asset                                       |       | 34,213                                |       | 74,657 |   |
| Deferred tax  liabilities                                       |       |                                  |       |   |   |
| Capitalized  intangible assets                                  |       | 164,054                               |       | 175,420 |   |
| Fixed assets,  net of accumulated depreciation                  |       | —                                |       | 1,104 |   |
| All other                                                       |       | 2,321                                 |       | 1,775 |   |
| Total deferred tax  liabilities                                 |       | 166,375                               |       | 178,299 |   |
| Net deferred tax liability                                      |       | $                                     | (132,162   | ) | $ | (103,642 | ) |

Deferred taxes have been provided for U.S. federal andstate income taxes and anticipated foreign withholding taxes on undistributedearnings of non-U.S. subsidiaries.

During 2006, the Company utilized approximately $50.0million and $8.2 million of federal and various state tax net operating losses,respectively. As of December 31, 2006, the Company has approximately $13.2million of various foreign net operating losses available for carryforward thatwill begin to expire in 2013 if not utilized.

In addition, as of December 31, 2006, the Company hasapproximately $19.1 million of foreign tax credit carryforwards that will beginto expire in 2014. Based on the Company’s position that all foreign earningswill be taxed in the U.S. and the projected future earnings of the Company’sforeign subsidiaries, management believes it is “more likely than not” that theCompany will realize the benefit of these foreign tax credits.

As of December 31, 2006, the Company has approximately$1.2 million in federal research and development credits which will begin toexpire in 2020. In addition, at December 31, 2006, the Company hasapproximately $1.9 million in various state credits which do not expire.

In 2006, a valuation allowance has been provided oncertain foreign tax loss carryforwards ($3.9 million), certain foreign deferredtax assets ($1.5 million) and certain U.S. long-term deferred tax assets ($3.2million) as ultimate utilization is less than more likely than not. In 2005, avaluation allowance had been provided on certain foreign tax loss carryforwards($5.6 million) and certain U.S. long-term deferred tax assets ($2.3 million) asultimate utilization is less than more likely than not.

The Company evaluates the realizability of itsdeferred tax assets by assessing its valuation allowance and by adjusting theamount of such allowance, if necessary. At December 31, 2006 managementbelieves that it is “more likely than not” that it will realize the benefit ofits deferred tax assets. The factors used to assess the likelihood ofrealization are the Company’s forecast of future taxable income and availabletax planning strategies that could be implemented to realize the net deferredtax assets. Failure to achieve forecasted taxable income in the applicabletaxing jurisdictions could affect the ultimate realization of deferred taxassets and could result in an increase in the Company’s effective tax rate onfuture earnings.

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The American Jobs Creation Act of 2004 (the “Act”),signed into law in October 2004, allowed companies to elect to repatriate cashinto the United States in 2005 at a special, temporary effective tax rate of5.25 percent. On December 6, 2005, the Board of Directors approved management’splan for reinvestment and repatriation of specific foreign earnings under theAct. The Company repatriated $48.6 million under the provisions of the Act. Sincethe Company provides taxes currently on foreign earnings, the election of thisprovision enabled the Company to realize a tax benefit of $5.7 million in thefourth quarter of 2005.

During 2005, the Company realized final adjustments toaccrued, pre-spin-off taxes attributable to its business and payable toAllergan pursuant to a tax sharing agreement. These adjustments included a $1.4million benefit from the resolution of a discrete item in the third quarter,which was recorded in the income tax provision.

The Company records a liability for potential taxassessments based on its estimate of the potential exposure. New laws and newinterpretations of laws and rulings by tax authorities may affect the liabilityfor potential tax assessments. Due to the subjectivity and complex nature ofthe underlying issues, actual payments or assessments may differ fromestimates. To the extent the Company’s estimates differ from actual payments orassessments, income tax expense is adjusted. The Company’s income tax returnsin several locations are being examined by the local taxation authorities. Managementbelieves that adequate amounts of tax and related interest, if any, have beenprovided for any adjustments that may result from these examinations.

**Note 10: Employee Retirement andOther Benefit Plans**

***Pension and Postretirement Benefit Plans***

The Company sponsors defined benefit pension plans inJapan and in certain European countries.

Components of net periodic benefit cost under theJapan and European pension plans in 2006, 2005 and 2004 were as follows (inthousands):

|                                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                        |       | $        | 2,304      |     | $          | 1,822    |       | $ | 1,815 |   |
| Interest cost                       |       | 557      |       | 471      |       | 467      |       |
| Expected return on plan  assets     |       | (225     | )          | (207     | )          | (197     | )          |
| Amortization of  transition amount  |       | —   |       | —   |       | 2        |       |
| Amortization of prior  service cost |       | 55       |       | 63       |       | 63       |       |
| Recognized net  actuarial loss      |       | 43       |       | —   |       | 36       |       |
| Recognized curtailment  gain        |       | (530     | )          | —   |       | —   |       |
| Recognized settlement  gain         |       | (13      | )          | —   |       | —   |       |
| Net periodic benefit cost           |       | $        | 2,191      |     | $          | 2,149    |       | $ | 2,186 |   |

 

The weighted-averageassumptions used to determine net periodic benefit costs were as follows:

|                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate:                   |       |     |       |     |       |     |       |
| Japan                            |       | 2.00     | %          | 2.00     | %          | 1.80     | %          |
| European plans                   |       | 4.25     | %          | 5.25     | %          | 5.50     | %          |
| Expected return on plan  assets: |       |     |       |     |       |     |       |
| Japan                            |       | 2.30     | %          | 2.50     | %          | 3.00     | %          |
| European plans  (unfunded plans) |       | N/A      |       | N/A      |       | N/A      |       |
| Rate of compensation  increase:  |       |     |       |     |       |     |       |
| Japan                            |       | 3.00     | %          | 3.00     | %          | 3.00     | %          |
| European plans                   |       | 3.50     | %          | 3.00     | %          | 3.30     | %          |

 

As discussed in Note 2,the Company adopted SFAS No. 158 as of December 31, 2006. SFAS No. 158 requiresthat the Company recognize on a prospective basis the funded status of itsdefined benefit pension plans on the consolidated balance sheet and recognizeas a component of accumulated other comprehensive income (loss), net of tax,the gains or losses and prior service costs or credits that arise during theperiod but are not recognized as components of net periodic benefit cost. Theimpact of the adoption of the new accounting standard in 2006 was notsignificant.

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Components of the changein benefit obligation, change in plan assets and funded status for the Company’sdefined benefit pension plans for December 31, 2006, and 2005 were as follows(in thousands):

|                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Change in  benefit obligation:                  |       |     |       |     |       |
| Benefit  obligation, beginning of period        |       | $        | 18,608     |     | $          | 16,170 |   |
| Service cost                                    |       | 2,304    |       | 1,822    |       |
| Interest cost                                   |       | 557      |       | 471      |       |
| Plan  curtailments                              |       | (1,004   | )          | —   |       |
| Plan settlement                                 |       | (2,830   | )          | —   |       |
| Actuarial loss                                  |       | 1,278    |       | 2,665    |       |
| Benefits paid                                   |       | (44      | )          | (166     | )          |
| Impact of  foreign currency translation         |       | 961      |       | (2,354   | )          |
|                                            |       |     |       |     |       |
| Benefit obligation, end  of period              |       | $        | 19,830     |     | $          | 18,608 |   |
|                                            |       |     |       |     |       |
| Change in plan assets:                          |       |     |       |     |       |
| Fair value of  plan assets, beginning of period |       | $        | 9,819      |     | $          | 8,041 |   |
| Actual return on  plan assets                   |       | 1,023    |       | 1,348    |       |
| Company  contribution                           |       | 1,777    |       | 1,848    |       |
| Plan Settlement                                 |       | (2,830   | )          | —   |       |
| Benefits paid                                   |       | (44      | )          | (166     | )          |
| Impact of  foreign currency translation         |       | (106     | )          | (1,252   | )          |
|                                            |       |     |       |     |       |
| Fair value of plan  assets, end of period       |       | $        | 9,639      |     | $          | 9,819 |   |
|                                            |       |     |       |     |       |
| Funded status of plans                          |       | (10,191  | )          | (8,789   | )          |
| Unrecognized net  actuarial loss                |       | —   |       | 1,799    |       |
| Unrecognized  prior service cost                |       | —   |       | 340      |       |
| Fourth quarter  contributions                   |       | (559     | )          | 517      |       |
|                                            |       |     |       |     |       |
| Accrued benefit cost                            |       | $        | (10,750    | )        | $          | (6,133 | ) |

 

The funded status of thepension benefits presented was measured as of September 30. The Company adoptedthis measurement date to conform to its internal cost management systems.Assumptions used in determining benefit obligations are as follows:

|                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Discount rate:                  |       |     |       |     |       |
| Japan                           |       | 2.20     | %          | 2.00     | %          |
| European plans                  |       | 4.50     | %          | 4.25     | %          |
| Rate of compensation  increase: |       |     |       |     |       |
| Japan                           |       | 3.00     | %          | 3.00     | %          |
| European plans                  |       | 3.50     | %          | 3.50     | %          |

 

The accumulated benefit obligation for the definedbenefit plans was $13.1 million and $12.8 million at December 31, 2006 and2005, respectively.

There are no assets in the European plans. The Japanpension plan asset allocation as of the measurement date (September 30) and thetarget asset allocation, presented as a percentage of total Japan pension planassets, were as follows:

|                   | ** ** | **2006** | ** ** | **2005** | ** ** | **Target  Allocation** | ** ** |
|-------------------|------------|----------|------------|----------|------------|------------------------|------------|
| Equity securities |       | 56.7     | %          | 51.4     | %          | 45-55                  | %          |
| Debt securities   |       | 36.5     | %          | 42.5     | %          | 45-55                  | %          |
| Cash              |       | 2.0      | %          | 0.0      | %          | 0                      | %          |
| Other             |       | 4.8      | %          | 6.1      | %          | 5-10                   | %          |
| Total             |       | 100.0    | %          | 100.0    | %          |                   |       |

 

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As ofSeptember 30, 2006, the Japan plan assets are invested using a passiveinvestment strategy. Asset allocations and investment performance is reviewedby the Benefits Committee with a view to ensuring that sufficient liquiditywill be available to meet expected cash flow requirements. The expectedlong-term rate of return on plan assets assumption is based on numerous factorsincluding historical rates of return, long-term inflation assumptions, currentand future financial market conditions and expected asset allocation.

The Company expects to contribute $1.0 million to itsdefined benefit plans in 2007.

The following estimated future benefit payments areexpected to be paid in the years indicated (in thousands):

| Year      | ** ** | **Amount** | ** ** |
|-----------|------------|------------|------------|
| 2007      |       | $          | 261        |   |
| 2008      |       | 276        |       |
| 2009      |       | 374        |       |
| 2010      |       | 296        |       |
| 2011      |       | 349        |       |
| 2012-2015 |       | 3,648      |       |
|           |            |            |            |  |

***Savings and Investment Plan***

AMO employees in the U.S. and Puerto Rico are eligibleto participate in the Advanced Medical Optics, Inc. 401(k) Plan (the Plan).Under the Plan, participants’ contributions, up to 8% of compensation, qualifyfor a 50% Company match. Participants are immediately vested in theircontributions and are 100% vested in Company contributions after three years ofservice. The Company also provides an annual profit sharing contribution.Participants vest ratably over five years in the Company’s profit sharingcontributions. The Company contributed $9.1 million, $6.7 million and $5.4million in 2006, 2005 and 2004, respectively, to the Plan.

**Note 11: Common Stock**

The Company has an incentive compensation plan thatprovides for the granting of stock options, restricted stock, restricted stockunit and other stock-based incentive awards to directors, employees andconsultants. Options granted to employees become exercisable 25% per yearbeginning twelve months after the date of grant and have a ten year term. A totalof 5,000,000 shares of common stock have been authorized for issuance under theincentive compensation plan.

On June 24, 2002, the Company adopted a stockholders’rights plan to protect stockholders’ rights in the event of a proposed oractual acquisition of 15% or more of the outstanding shares of the Company’scommon stock. As part of this plan, each share of the Company’s common stockcarries a right to purchase one one-hundredth (1/100th)of a share of Series A Junior Participating Preferred Stock, par value $0.01per share, subject to adjustment, which becomes exercisable only upon theoccurrence of certain events. The rights are subject to redemption at theoption of the Board of Directors at a price of $0.01 per right until theoccurrence of certain events. The rights expire on June 24, 2012, unlessearlier redeemed or exchanged by the Company.

In addition, the Company entered into an acceleratedshare repurchase arrangement with a third party to use the proceeds from theissuance of the 3.25% Notes to purchase $500.0 million of AMO common stock at avolume weighted price per share over the term of the agreement. During 2006,the third party had delivered to the Company in the aggregate, 10.5million shares of AMO common stock. The impact of the shares receivedunder this arrangement in 2006 reduced stockholders’ equity by $500.0 million,which included $0.1 million for the par value of Common Stock, additionalpaid-in capital of $247.2 million and accumulated deficit of $252.7 million.Repurchased shares were retired upon delivery to the Company.

***Stock-Based Compensation***

AMO has an Incentive Compensation Plan (ICP) thatprovides for the granting of stock options, restricted stock and restrictedstock units to directors, employees and consultants. The Company has twoEmployee Stock Purchase Plans (ESPP) for United States and internationalemployees, respectively, which allow employees to purchase AMO common stock. Atotal of 5 million shares of common stock have been authorized for issuanceunder the ICP. Effective January 1, 2006, the Company adopted Statement ofFinancial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R) asdiscussed below.

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*Stock-Based Compensation Expense*

Total stock-basedcompensation expense included in the consolidated statements of operations forthe year ended December 31, 2006 is as follows (in thousands):

|                                     | ** ** | **Year Ended  December 31, 2006** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | ** **                                       | ** ** |
| Cost of sales                       |       | $                                                | 2,251      |   |
| Operating Expenses -                |       |                                             |       |
| Research and development            |       | 2,152                                            |       |
| Selling, general and administrative |       | 14,831                                           |       |
|                                |       | 16,983                                           |       |
| Pre-tax expense                     |       | 19,234                                           |       |
| Income tax benefit                  |       | (6,323                                           | )          |
| Net  of tax expense                 |       | $                                                | 12,911     |   |

 

At December 31,2006, total pre-tax compensation costs related to unvested stock-based awards grantedto employees and directors under the Company’s ICP and ESPP which are not yetrecognized were approximately $28.8 million, net of estimated forfeitures.These costs are expected to be recognized over a weighted-average period of2.75 years.

Net cash proceedsfrom the exercise of stock options were approximately $37.3 million for theyear ended December 31, 2006. In accordance with SFAS 123R, the cash flowsresulting from excess tax benefits (tax benefits related to the excess ofproceeds from employee exercises of stock options over the stock-basedcompensation cost recognized for those options) are classified as financingcash flows in the Company’s consolidated statement of cash flows. Duringthe year ended December 31, 2006, the Company recorded $6.7 million of excesstax benefits as a financing cash inflow. The Company issues new shares tosatisfy option exercises.

*Determining Fair Value*

Valuation Method -The Company estimates the fair value of stock options granted and ESPP purchaserights using the Black-Scholes option-pricing model and a single option awardapproach.

Expected Term -The expected term represents the period the Company’s stock-based awards areexpected to be outstanding and was determined based on historical experiencewith similar awards, giving consideration to the contractual terms of thestock-based awards, vesting schedules and expectations of future employeebehavior as influenced by changes to the terms of its stock-based awards.

ExpectedVolatility*-*The computation ofexpected volatility is based on a combination of historical and market-basedimplied volatility.  Implied volatility is based on publicly tradedoptions of the Company’s common stock with a term of one year or greater.

Risk-Free InterestRate - The risk-free interest rate used in the Black-Scholes valuation methodis based on the implied yield currently available on U.S. Treasury securitieswith an equivalent remaining term.

Expected Dividend- No dividends are expected to be paid.

EstimatedForfeitures - When estimating forfeitures, the Company considers voluntarytermination behavior as well as analysis of actual option forfeitures.

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Thefair value of the Company’s stock-based compensation granted to employees forthe year ended December 31, 2006 was estimated using the followingweighted-average assumptions:

|                         | ** ** | **Stock  Options** | ** ** | **Employee  Stock  Purchase  Plans** | ** ** |
|-------------------------|------------|--------------------|------------|--------------------------------------|------------|
| Expected life in years  |       | 6.1                |       | 0.5                                  |       |
| Expected volatility     |       | 29                 | %          | 27                                   | %          |
| Risk-free interest rate |       | 5                  | %          | 5                                    | %          |
| Expected  dividends     |       | —             |       | —                               |       |

The weighted average fair value of options grantedunder the ICP was $17.68 for the year ended December 31, 2006. Under the ESPP,the weighted average fair value of grants was $9.56 for the year ended December31, 2006.

*Stock Options*

Stock optionsgranted to employees are generally exercisable at a price equal to the fairmarket value of the common stock on the date of the grant and vest at a rate of25% per year beginning twelve months after the date of grant. Grants underthese plans expire ten years from the date of grant.

Thefollowing is a summary of stock option activity (in thousands, except per shareamounts):
| ** **                                       | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term in Years** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at December 31, 2005                 |       | 8,858                      |       | $                                          | 22.79      |                                                                   |       |                                |       |   |
| Granted                                          |       | 679                        |       | 45.31                                      |       |                                                                   |       |                                |       |
| Exercised                                        |       | (1,799                     | )          | 20.73                                      |       |                                                                   |       |                                |       |
| Forfeitures and cancellations                    |       | (96                        | )          | 33.16                                      |       |                                                                   |       |                                |       |
| Expirations                                      |       | (14                        | )          | 23.25                                      |       |                                                                   |       |                                |       |
| Outstanding at December 31, 2006                 |       | 7,628                      |       | $                                          | 25.16      |                                                                   | 6.28       |                                | $          | 76,743 |   |
| Vested and expected to vest at December 31, 2006 |       | 7,519                      |       | $                                          | 24.97      |                                                                   | 6.29       |                                | $          | 76,913 |   |
| Exercisable  at December 31, 2006                |       | 5,348                      |       | $                                          | 19.81      |                                                                   | 5.46       |                                | $          | 82,293 |   |

 

The aggregateintrinsic value in the table above represents the difference between theexercise price of the underlying awards and the quoted price of the Company’scommon stock for the options that were in-the-money at December 31,2006. During the year ended December 31, 2006, the aggregate intrinsicvalue of options exercised under the Company’s stock option plans was $43.1million determined as of the date of option exercise.

The following table summarizes information regardingoptions outstanding and options exercisable at December 31, 2006:
| ** **                              | ** ** | **Outstanding**             | ** ** | **Exercisable**                                        | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number of  Options** | ** ** | **Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $5.00—$9.99                        |       | 1,865,604                   |       | 4.89                                                   |       | $ | 8.71 |   | 1,865,604 |   | $ | 8.71 |   |
| $10.00—$17.99                      |       | 1,271,618                   |       | 5.00                                                   |       | 13.81 |   | 1,120,026 |   | 13.81 |   |
| $18.00—$27.99                      |       | 700,251                     |       | 4.48                                                   |       | 24.69 |   | 694,251 |   | 24.70 |   |
| $28.00—$33.99                      |       | 1,561,816                   |       | 1.93                                                   |       | 32.65 |   | 1,058,424 |   | 32.15 |   |
| $34.00—$50.99                      |       | 2,228,510                   |       | 8.28                                                   |       | 40.28 |   | 609,774 |   | 37.84 |   |
|                                         |            |                             |            |                                                        |            |  |  |  |  |  |  |  |  |

 

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* *

*Employee Stock Purchase Plans*

Under the ESPP,eligible employees may authorize payroll deductions of up to 10% of theirregular base salary to purchase shares at the lower of 85% of the closing priceof the Company’s common stock on the first or last day of the six-monthpurchase period. In the second quarter of 2006, 78,000 shares of commonstock were issued under the ESPP in the aggregate amount of $2.4 million and72,637 shares of common stock were issued under the ESPP in the aggregateamount of $2.5 million as of the most recent purchase period ended on October 31,2006. As of December 31, 2006 employee withholdings under the ESPP aggregated$0.6 million.

*Restricted Stock*

Restricted stockawards are granted at a price equal to the fair market value of the commonstock on the date of the grant, subject to forfeiture if employment terminatesprior to the release of restrictions, which is generally three years from thedate of grant. During this restriction period, ownership of the sharescannot be transferred. Restricted stock has the same cash dividend andvoting rights as other common stock and is considered to be currently issuedand outstanding. The cost of the awards, determined to be the fair marketvalue of the shares at the date of grant, is expensed ratably over the periodthe restrictions lapse.

Thefollowing table summarizes the restricted stock award activity for the yearended December 31, 2006 (in thousands, except per share amounts):

|                                       | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|---------------------------------------|------------|----------------------------|------------|---------------------------------------------------------|------------|
| Nonvested  stock at December 31, 2005 |       | 101                        |       | $                                                       | 38.79      |   |
| Granted                               |       | 286                        |       | 45.30                                                   |       |
| Vested                                |       | (36                        | )          | 38.23                                                   |       |
| Forfeited                             |       | (13                        | )          | 42.57                                                   |       |
| Nonvested stock at December 31, 2006  |       | 338                        |       | $                                                       | 44.19      |   |

 

*Performance-Based Awards*

In February 2006,the Company’s Board of Directors approved a 2006 performance award programunder the Company’s incentive compensation plan (the 2006 Program), whichprovides the opportunity for certain executives to earn long-term incentivecompensation awards based upon specified measures. The potential maximum aggregateaward value for the 2006 program was $2.7 million. The award determination wasbased upon the Total Shareholder Return (TSR) (the increase or decrease in theCompany’s common stock price) over a two-year period beginning January 1, 2005compared to a peer group composed of various entities within the bio-technologyand medical device industries. Awards would have been determined to be earnedif the Company’s TSR was in excess of the 50th percentile of the peer group.When the TSR equals the 75th percentile of the peer group, the maximum amountwould have been earned. Awards were to be settled in a number of restrictedstock shares or units equal to the value of the award amount divided by thefair market value of the Company’s common stock on the date the performancecriteria is deemed to have been met. The restricted stock shares or units willhave the same terms and conditions as other restricted shares or units issuedunder the Company’s ICP. The estimated fair value of the 2006 Program was $0.8million on the grant date using a lattice-based valuation model.   Since the specified measures were notachieved, no awards of stock or units were granted and no compensation expensewas recognized in 2006.

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*Pro-forma Disclosures under SFAS 123 for Periods Prior toFiscal 2006*

Thefollowing table illustrates the effect on net loss and net loss per share as ifthe Company had applied the fair value recognition provisions of SFAS 123 tostock-based compensation during the years ended December 31, 2005 and 2004 (inthousands, except per share amounts):  

|                                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net loss:                                                                              |       |     |       |     |       |
| As reported:                                                                           |       | $        | (453,197   | )        | $          | (129,370 | ) |
| Stock-based  compensation expense included in reported net earnings , net of tax       |       | 834      |       | 99       |       |
| Stock-based  compensation expense determined under fair value based method, net of tax |       | (11,800  | )          | (7,117   | )          |
| Pro forma net  loss                                                                    |       | $        | (464,163   | )        | $          | (136,388 | ) |
| Loss per share:                                                                        |       |     |       |     |       |
| As reported:                                                                           |       |     |       |     |       |
| Basic                                                                                  |       | $        | (8.28      | )        | $          | (3.89 | ) |
| Diluted                                                                                |       | $        | (8.28      | )        | $          | (3.89 | ) |
| Pro forma:                                                                             |       |     |       |     |       |
| Basic                                                                                  |       | $        | (8.48      | )        | $          | (4.10 | ) |
| Diluted                                                                                |       | $        | (8.48      | )        | $          | (4.10 | ) |

For the purpose of theweighted-average estimated fair value calculations, the fair value of theCompany’s stock-based compensation granted to employees for the years endedDecember 31, 2005 and 2004 was estimated using the following weighted-averageassumptions:

|                           | ** ** | **Stock Options** | ** ** | **ESPP** | ** ** |
|---------------------------|------------|------------------------|------------|----------|------------|
| ** **                | ** ** | **2005**               | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected life (in  years) |       | 5.0                    |       | 4.9      |       | 0.5 |   | 0.5 |   |
| Expected volatility       |       | 36.0                   | %          | 42.3     | %          | 35.3 | % | 37.3 | % |
| Risk-free interest rate   |       | 3.8                    | %          | 3.8      | %          | 3.9 | % | 1.2 | % |
| Expected dividends        |       | —                 |       | —   |       | — |   | — |   |

The weighted average fair value of options grantedunder the ICP was $14.52 and $14.05 for the years ended December 31, 2005and 2004, respectively. Under the ESPP, the weighted average fair value ofgrants was $9.09 and $6.35 for the years ended December 31, 2005 and 2004,respectively.

**Note****12: Earnings Per Share**

Basic earnings per share is calculated by dividing netearnings by the weighted average number of common shares outstanding during theperiod. Diluted earnings per share is calculated by adjusting net earnings andthe weighted average outstanding shares, assuming the conversion of allpotentially dilutive convertible securities, stock options and stock purchaseplan awards.

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The table below presentsthe computation of basic and diluted earnings (loss) per share for the yearsended December 31, 2006, 2005 and 2004:
| ** **                             | ** ** | **2006**                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                             | ** ** | **(in thousands, except  per share amounts)** | ** ** |
| Basic and diluted net  earnings (loss) |       | $                                                                 | 79,471     |     | $          | (453,197 | )          | $ | (129,370 | ) |
|                                   |       |                                                              |       |     |       |     |       |
| Basic common shares  outstanding       |       | 63,383                                                            |       | 54,764   |       | 33,284   |       |
| Effect of dilutive  securities:        |       |                                                              |       |     |       |     |       |
| Stock options  and awards              |       | 2,188                                                             |       | —   |       | —   |       |
|                                   |       |                                                              |       |     |       |     |       |
| Diluted common shares  outstanding     |       | 65,571                                                            |       | 54,764   |       | 33,284   |       |
|                                   |       |                                                              |       |     |       |     |       |
| Basic earnings (loss)  per share       |       | $                                                                 | 1.25       |     | $          | (8.28    | )          | $ | (3.89 | ) |
|                                   |       |                                                              |       |     |       |     |       |
| Diluted earnings (loss) per share      |       | $                                                                 | 1.21       |     | $          | (8.28    | )          | $ | (3.89 | ) |

 

For2006, options to purchase 284,000 shares of common stock were excluded as theeffect would be anti-dilutive. For 2005, the dilutive effect of stock optionsand stock purchase plan awards of approximately 2,674,000 shares and thedilutive effect of the 3 1⁄2% Notes of approximately 290,000 shares havebeen excluded from the computation of diluted loss per share as the effect wouldbe anti-dilutive. For 2004, the dilutive effect of stock options and stockpurchase plan awards of approximately 2,125,000 shares and the dilutive effectof the 3 1⁄2% Notes of approximately 3,559,000 shares have been excludedfrom the computation of diluted loss per share as the effect would beanti-dilutive.

The Company will settle in cash the principal amountof the 3.25% Notes, 2 1⁄2% Notes and the 1.375% Notes.  In addition, there were no potentiallydiluted common shares associated with the 3.25% Notes, 2 1⁄2% Notes and the1.375% Notes as the Company’s year end stock price was less than the conversionprices of the notes.

**Note 13:Commitments and Contingencies**

The Company leases certain facilities, officeequipment and automobiles and provides for payment of taxes, insurance andother charges on certain of these leases. Rental expense was $17.6 million,$17.8 million, and $20.4 million in 2006, 2005 and 2004, respectively.

Future minimum rental payments under non-cancelableoperating lease commitments with a term of more than one year as of December31, 2006, are as follows: $16.1 million in 2007; $10.9 million in 2008; $6.1million in 2009; $4.3 million in 2010; $3.9 million in 2011 and $21.8 millionthereafter.

In August 2002, the Company entered into aninformation technology services outsourcing agreement expiring in November2007. Future annual payments under this agreement are $3.6 million in 2007.

The Company recognized a net gain on legalcontingencies of $96.9 million in 2006, primarily from settlement of pendingpatent litigation, net of costs incurred. On July 7, 2006, the Company enteredinto a settlement agreement with Alcon, Inc., Alcon Laboratories, Inc., andAlcon Manufacturing Ltd. (collectively, “Alcon”) regarding all pending patentlitigation between AMO and Alcon. The settlement required Alcon to pay AMO alump-sum payment of $121 million which was received in July 2006 and wasaccounted for in the third quarter.  Theparties agreed to dismiss all pending patent litigation in Delaware and Texas,agreed not to sue each other regarding the patents at issue in those cases, andcross-licensed patents covering existing features of commercially availablephacoemulsification products.

On January 4, 2005, Dr. James Nielsen fileda complaint against the Company and Allergan, Inc. in the U.S. District Courtof the Northern District of Texas, Dallas Division, for infringement of U.S.Patent No. 5,158,572. Dr. Nielsen alleges that the Company’s *Array*multifocal intraocular lensinfringes the patent. He is seeking damages and a permanent injunction.  The trial in this matter was scheduled tobegin on November 6, 2006, but this date has been vacated.  A new trial date has not yet been scheduled.

The Company does not believe, based on currentknowledge, that the foregoing legal proceeding is likely to have a materialadverse effect on its financial position, results of operations or cash flows.However, the Company may incur substantial expenses in defending against thirdparty claims. In the event of a determination adverse to the Company or its

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subsidiaries,the Company may incur substantial monetary liability, and be required to changeits business practices. Either of these could have a material adverse effect onthe Company’s financial position, results of operations or cash flows.

While the Company is involved from time to time inlitigation arising in the ordinary course of business, including productliability claims, the Company is not currently aware of any other actionsagainst AMO or Allergan relating to the optical medical device business thatthe Company believes would have a material adverse effect on the Company’sbusiness, financial condition, results of operations or cash flows. The Companymay be subject to future litigation and infringement claims, which could causethe Company to incur significant expenses or prevent the Company from sellingits products. The Company operates in an industry susceptible to significantproduct liability claims. Product liability claims may be asserted against AMOin the future arising out of events not known to the Company at the presenttime. Under the terms of the contribution and distribution agreement effectingthe spin-off, Allergan agreed to assume responsibility for, and to indemnifyAMO against, all current and future litigation relating to its retainedbusinesses and the Company agreed to assume responsibility for, and toindemnify Allergan against, all current and future litigation related to theoptical medical device business.

**Note 14:Business Segment Information**

The operating segments are segments for which separatefinancial information is available and upon which operating results areevaluated on a timely basis to assess performance and to allocate resources.

Through 2005, the Company’s reportable segments werebased on geographic regions which comprised the Americas, which included Northand South America, Europe/Africa/Middle East, Japan and Asia Pacific, whichexcluded Japan and included New Zealand and Australia. Effective January 1,2006, the Company’s has reorganized its reportable segments to reflect the wayit manages its business, represented by its three business units:Cataract/Implant, Laser Vision Correction and Eye Care. Sales and operatingresults for the prior period have been conformed to reflect the current periodpresentation of reportable segments. The cataract/implant segment markets fourkey products required for cataract surgery — foldable intraocular lenses, orIOLs, implantation systems, phacoemulsification systems and viscoelastics. Thelaser vision correction segment markets laser systems, diagnostic devices,treatment cards and microkeratomes for use in laser eye surgery. Sales ofmicrokeratomes were included in the cataract/implant segment in 2004 and werenot significant. The eye care segment provides a full range of contact lenscare products for use with most types of contact lenses. These products includesingle-bottle, multi-purpose cleaning and disinfecting solutions, hydrogenperoxide-based disinfecting solutions, daily cleaners, enzymatic cleaners,contact lens rewetting drops and, in Europe and Asia, contact lenses.

The Company evaluates segment performance based onoperating income (loss) excluding certain costs such as business repositioningcosts, non-recurring acquisition related costs and stock-based compensationexpense. Research and development costs, manufacturing operations and relatedvariances, inventory provision/repricing costs and supply chain costs aremanaged on a global basis and are considered corporate costs. The Companypresents the measure which management believes is determined in accordance withthe measurement principles consistent with those used in measuring thecorresponding amounts in the consolidated financial statements. Because operatingsegments are generally defined by the products they manufacture and sell, theydo not make sales to each other. Depreciation and amortization, excludingamortization of intangible assets, related to the manufacturing of goods isincluded in operating income. The Company does not discretely allocate assetsto its operating segments, nor does the Company’s chief operating decisionmaker evaluate operating segments using discrete asset information.

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| ** **                           | ** ** | **Net Sales** | ** ** | **Operating Income** | ** ** |
|--------------------------------------|------------|--------------------|------------|---------------------------|------------|
| **(In thousands)**              | ** ** | **2006**           | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating  segments:                 |       |               |       |                      |       |   |   |   |   |   |   |   |   |
|                                 |       |               |       |                      |       |   |   |   |   |   |   |   |   |
| Cataract/Implant                     |       | $                  | 519,025    |                      | $          | 497,191 |   | $ | 413,422 |   | $ | 266,729 |   | $ | 212,879 |   | $ | 122,267 |   |
|                                 |       |               |       |                      |       |   |   |   |   |   |   |   |   |
| Laser Vision Correction              |       | 216,876            |       | 122,615                   |       | — |   | 130,848 |   | 66,375 |   | — |   |
|                                 |       |               |       |                      |       |   |   |   |   |   |   |   |   |
| Eye Care                             |       | 261,595            |       | 300,867                   |       | 328,677 |   | 104,187 |   | 106,023 |   | 130,008 |   |
|                                 |       |               |       |                      |       |   |   |   |   |   |   |   |   |
| Total segments                       |       | 997,496            |       | 920,673                   |       | 742,099 |   | 501,764 |   | 385,277 |   | 252,275 |   |
|                                 |       |               |       |                      |       |   |   |   |   |   |   |   |   |
| Manufacturing  operations            |       | —             |       | —                    |       | — |   | (24,061 | ) | (17,291 | ) | (20,105 | ) |
|                                 |       |               |       |                      |       |   |   |   |   |   |   |   |   |
| Research and  development            |       | —             |       | —                    |       | — |   | (66,099 | ) | (61,646 | ) | (45,616 | ) |
|                                 |       |               |       |                      |       |   |   |   |   |   |   |   |   |
| In-process  research and development |       | —             |       | —                    |       | — |   | — |   | (490,750 | ) | (28,100 | ) |
|                                 |       |               |       |                      |       |   |   |   |   |   |   |   |   |
| Business  repositioning              |       | —             |       | —                    |       | — |   | (62,661 | ) | (42,265 | ) | — |   |
|                                 |       |               |       |                      |       |   |   |   |   |   |   |   |   |
| Global supply  chain                 |       | —             |       | —                    |       | — |   | (61,330 | ) | (48,118 | ) | (37,758 | ) |
|                                 |       |               |       |                      |       |   |   |   |   |   |   |   |   |
| General  corporate                   |       | —             |       | —                    |       | — |   | (89,864 | ) | (136,534 | ) | (87,674 | ) |
|                                 |       |               |       |                      |       |   |   |   |   |   |   |   |   |
| Total                                |       | $                  | 997,496    |                      | $          | 920,673 |   | $ | 742,099 |   | $ | 197,749 |   | $ | (411,327 | ) | $ | 33,022 |   |

 

Depreciation andamortization expense by segment comprised the following (in thousands):
| ** **                | ** ** | **Depreciation and Amortization** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| **(In thousands)**   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cataract/Implant          |       | $                                           | 6,431      |   | $ | 7,457 |   | $ | 5,270 |   |
|                      |       |                                        |       |   |   |   |   |
| Laser Vision  Correction  |       | 4,908                                       |       | 2,971 |   | — |   |
|                      |       |                                        |       |   |   |   |   |
| Eye Care                  |       | 128                                         |       | 218 |   | 255 |   |
|                      |       |                                        |       |   |   |   |   |
| Total segments            |       | 11,467                                      |       | 10,646 |   | 5,525 |   |
|                      |       |                                        |       |   |   |   |   |
| Manufacturing  operations |       | 23,916                                      |       | 20,717 |   | 13,544 |   |
|                      |       |                                        |       |   |   |   |   |
| General  corporate        |       | 35,215                                      |       | 20,225 |   | 4,547 |   |
|                      |       |                                        |       |   |   |   |   |
| Total                     |       | $                                           | 70,598     |   | $ | 51,588 |   | $ | 23,616 |   |

 

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**GeographicArea Information**
| ** **                              | ** ** | **Net Sales** | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| **(In thousands)**                 | ** ** | **2006**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States:                          |       |               |       |   |   |   |   |
| Cataract/Implant                        |       | $                  | 172,157    |   | $ | 148,563 |   | $ | 134,247 |   |
| Laser Vision Correction                 |       | 167,228            |       | 97,524 |   | — |   |
| Eye Care                                |       | 75,877             |       | 56,403 |   | 52,635 |   |
| Total United States                     |       | 415,262            |       | 302,490 |   | 186,882 |   |
|                                    |       |               |       |   |   |   |   |
| Americas,  excluding United States:     |       |               |       |   |   |   |   |
| Cataract/Implant                        |       | 34,882             |       | 26,643 |   | 20,139 |   |
| Laser Vision Correction                 |       | 9,419              |       | 4,062 |   | — |   |
| Eye Care                                |       | 12,268             |       | 10,904 |   | 10,562 |   |
| Total Americas, excluding United States |       | 56,569             |       | 41,609 |   | 30,701 |   |
|                                    |       |               |       |   |   |   |   |
| Europe/Africa/Middle  East:             |       |               |       |   |   |   |   |
| Cataract/Implant                        |       | 189,845            |       | 193,204 |   | 152,917 |   |
| Laser Vision Correction                 |       | 17,125             |       | 9,465 |   | — |   |
| Eye Care                                |       | 82,234             |       | 95,926 |   | 103,806 |   |
| Total Europe/Africa/Middle East         |       | 289,204            |       | 298,595 |   | 263,723 |   |
|                                    |       |               |       |   |   |   |   |
| Japan:                                  |       |               |       |   |   |   |   |
| Cataract/Implant                        |       | 71,271             |       | 75,095 |   | 62,856 |   |
| Laser Vision Correction                 |       | 4,667              |       | 2,599 |   | — |   |
| Eye Care                                |       | 62,722             |       | 96,595 |   | 128,679 |   |
| Total Japan                             |       | 138,660            |       | 174,289 |   | 191,535 |   |
|                                    |       |               |       |   |   |   |   |
| Asia Pacific:                           |       |               |       |   |   |   |   |
| Cataract/Implant                        |       | 50,870             |       | 53,686 |   | 36,263 |   |
| Laser Vision Correction                 |       | 18,437             |       | 8,965 |   | — |   |
| Eye Care                                |       | 28,494             |       | 41,039 |   | 32,995 |   |
| Total Asia Pacific                      |       | 97,801             |       | 103,690 |   | 69,258 |   |
| Total                                   |       | $                  | 997,496    |   | $ | 920,673 |   | $ | 742,099 |   |

 

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The United Statesinformation is presented separately as it is the Company’s headquarterscountry, and U.S. sales represented 41.6%, 32.9% and 25.2% of total net salesfor the years ended December 31, 2006, 2005 and 2004, respectively.Additionally, sales in Japan represented 13.9%, 18.9% and 25.8% of total netsales for the years ended December 31, 2006, 2005 and 2004, respectively.No other country, or single customer, generated over 10% of total net sales inthe periods presented.
| ** **                  | ** ** | **Property, Plant and Equipment** | ** ** | **Other Long-Lived Assets** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|---------------------------------------|------------|
| **(In thousands)**     | ** ** | **2006**                                         | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States               |       | $                                                | 25,168     |                                  | $          | 27,759 |   | $ | 23,885 |   | $ | 50,570 |   | $ | 36,131 |   | $ | 27,901 |   |
| Americas,  excluding United |       | 564                                              |       | 629                                   |       | 120 |   | 2,303 |   | 2,144 |   | 1,817 |   |
| Europe/Africa/Middle  East  |       | 88,549                                           |       | 66,017                                |       | 72,130 |   | 8,105 |   | 5,980 |   | 4,220 |   |
| Japan                       |       | 832                                              |       | 1,132                                 |       | 1,965 |   | 2,942 |   | 3,785 |   | 4,618 |   |
| Asia Pacific                |       | 17,643                                           |       | 20,188                                |       | 20,539 |   | 5,445 |   | 4,433 |   | 3,269 |   |
|                        |       |                                             |       |                                  |       |   |   |   |   |   |   |   |   |
| Total                       |       | $                                                | 132,756    |                                  | $          | 115,725 |   | $ | 118,639 |   | $ | 69,365 |   | $ | 52,473 |   | $ | 41,825 |   |

 

**Note 15:Quarterly Results (Unaudited)**
| ** **                         | ** ** | **First  Quarter(c)**                                              | ** ** | **Second  Quarter(d)** | ** ** | **Third  Quarter(e)** | ** ** | **Fourth  Quarter(f)** | ** ** | **Total Year** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------------------|------------|---------------------|------------|
| ** **                         | ** ** | **(in thousands, except per share data)** | ** ** |
| **2006  (a)**                      |       |                                                               |       |                   |       |                  |       |                   |       |                |       |
| Net sales                          |       | $                                                                  | 238,228    |                   | $          | 257,041               |       | $                      | 258,602    |                | $          | 243,625 |   | $ | 997,496 |   |
| Gross profit                       |       | 151,393                                                            |       | 164,668                |       | 163,128               |       | 138,982                |       | 618,171             |       |
| Net earnings  (loss)               |       | 2,629                                                              |       | (2,703                 | )          | 87,154                |       | (7,609                 | )          | 79,471              |       |
| Basic earnings  (loss) per share   |       | 0.04                                                               |       | (0.04                  | )          | 1.47                  |       | (0.13                  | )          | 1.25                |       |
| Diluted earnings  (loss) per share |       | 0.04                                                               |       | (0.04                  | )          | 1.42                  |       | (0.13                  | )          | 1.21                |       |
| **2005  (b)**                      |       |                                                               |       |                   |       |                  |       |                   |       |                |       |
| Net sales                          |       | $                                                                  | 192,519    |                   | $          | 227,092               |       | $                      | 248,233    |                | $          | 252,829 |   | $ | 920,673 |   |
| Gross profit                       |       | 122,080                                                            |       | 139,614                |       | 160,781               |       | 144,873                |       | 567,348             |       |
| Net earnings (loss)                |       | 13,826                                                             |       | (438,115               | )          | (31,215               | )          | 2,307                  |       | (453,197            | )          |
| Basic earnings  (loss) per share   |       | 0.37                                                               |       | (9.53                  | )          | (0.47                 | )          | 0.03                   |       | (8.28               | )          |
| Diluted earnings (loss)  per share |       | 0.35                                                               |       | (9.53                  | )          | (0.47                 | )          | 0.03                   |       | (8.28               | )          |

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(a)                   Fiscal quartersin 2006 ended on March 31, June 30, September 29 and December 31.

(b)                  Fiscal quarters in 2005 endedon March 25, June 24, September 30 and December 31.

(c)                   Includes charges of $35.2million recorded during the first quarter of fiscal 2006, which comprised $3.2million for inventory provisions and other manufacturing charges associatedwith discontinued products, $29.3 million related to its current businessrepositioning initiatives, $2.3 million in other write-offs and $0.4 million inan unrealized loss on derivative instruments.

(d)                  Includes charges of $52.7million recorded during the second quarter of fiscal 2006, which comprised$18.2 million related to the company’s note repurchases, $17.7 million relatedto current business repositioning initiatives, $14.3 million for inventoryprovisions, manufacturing and distribution charges related to discontinuedproducts and other charges, and $2.5 million in an unrealized loss onderivative instruments.  Includes a$451.5 million in-process research and development charge, debtrecapitalization related costs of $2.4 million and $4.7 million in chargesassociated with recent acquisitions and integrations in the second quarter offiscal 2005.

(e)                   Includes a pre-tax net gainof $102.9 million related to the settlement of legal matters in the third quarterof fiscal 2006. The third-quarter results in fiscal 2006 also included pre-taxnet charges of $4.0 million associated with recently completed businessrationalization and repositioning initiatives, $3.9 million associated withnote repurchases and $2.3 million in an unrealized gain on derivativeinstruments.  Includes a $39.3 millionin-process research and development charge, debt recapitalization relatedcharges of $3.8 million, an $8.6 million charge for the termination of adistributor agreement and $9.7 million in charges associated with recentacquisitions and integrations in the third quarter of fiscal 2005 and a $1.4million benefit from the resolution of a discrete item as the result of finaladjustments to accrued, pre-spin-off taxes attributable to the Company’sbusiness and payable to Allergan pursuant to a pre-spin tax sharing agreement.

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(f)                     As a result of the eye carerecall in the fourth quarter of fiscal 2006, eye care sales includedapproximately $9.5 million in returns.Gross profit was impacted by$19.0 million in returns and costs.  Inaddition, the Company incurred the final $1.2 million in charges associatedwith business repositioning initiatives in the fourth quarter of fiscal 2006.  Includes $42.3 million in charges associatedwith product rationalization and repositioning initiatives, debtrecapitalization related costs of $1.4 million, $4.0 million in chargesassociated with recent acquisitions and integrations and a tax benefit of $5.7million for repatriation of foreign earnings in the fourth quarter of fiscal2005.

**Note16:  Pending Acquisition of IntraLase**

On January 5, 2007, AMO entered into an agreement withIntraLase Corp. (IntraLase) to acquire IntraLase for approximately $808 millionin cash.  IntraLase manufactures femtosecondlaser systems utilized in LASIK surgery. Under terms of the agreement, approved by the boards of directors ofboth companies, following the receipt of fairness opinions from theirrespective financial advisors, AMO will pay $25 in cash per share of IntraLasestock and the individually determined cash value per share of outstanding stockoptions. AMO has arranged committed financing from a consortium of banks tocomplete the transaction. AMO expects the transaction to be completed early inthe second quarter of 2007. The transaction is subject to IntraLase stockholderapproval as well as regulatory approvals and other customary closingconditions.

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**Report ofIndependent Registered Public Accounting Firm**

To theBoard of Directors and Stockholders of Advanced Medical Optics, Inc:

We have completed integrated audits of AdvancedMedical Optics, Inc.’s 2006, 2005, and 2004 consolidated financial statementsand of its internal control over financial reporting as of December 31, 2006 inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Our opinions, based onour audits, are presented below.

Consolidated financial statements and financial statementschedule

In our opinion, theconsolidated financial statements listed in the index appearing underItem 15(a) (1)  present fairly, in all material respects, the financialposition of Advanced Medical Optics, Inc. and its subsidiaries at December 31,2006 and December 31, 2005, and the results of their operations and their cashflows for each of the three years in the period ended December 31, 2006 inconformity with accounting principles generally accepted in the United Statesof America.  In addition, in our opinion, the financial statement schedule listed inthe index appearing under Item 15(a) (2)presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the related consolidatedfinancial statements.  Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management.  Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits.  We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit of financial statements includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financialstatements, the Company adopted Statement of Financial Accounting Standards No.123(R), “Share-Based Payment” as of January 1, 2006 and changed the manner inwhich it accounts for share-based compensation in fiscal 2006.

Internal controlover financial reporting

Also, in our opinion,management’s assessment, included in Management’s Report on Internal Controlover Financial Reporting appearing under Item 9A, that the Company maintainedeffective internal control over financial reporting as of December 31, 2006 basedon criteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), is fairly stated, in allmaterial respects, based on those criteria. Furthermore, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2006, based on criteria established in *Internal Control - Integrated Framework* issued by theCOSO.  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress opinions on management’s assessment and on the effectiveness ofthe Company’s internal control over financial reporting based on our audit. Weconducted our audit of internal control over financial reporting in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  An audit of internalcontrol over financial reporting includes obtaining an understanding ofinternal control over financial reporting, evaluating management’s assessment,testing and evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we consider necessary in thecircumstances.  We believe that our auditprovides a reasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company;(ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

87

----

 

Because of its inherentlimitations, internal control over financial reporting may not prevent or detectmisstatements.  Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLPOrange County, CaliforniaFebruary 28, 2007

88

----

 

**Item9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

None.

**Item9A. Controls and Procedures**

Evaluation of Disclosure Controls and Procedures

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our principal executive officer andprincipal financial officer, of the effectiveness of the design and operationof our disclosure controls and procedures. Based on this evaluation, ourprincipal executive officer and principal financial officer concluded that ourdisclosure controls and procedures (as defined in Rule 13a-15(e) and Rule15d-15(e) under the Securities Exchange Act of 1934) are effective.

Changes in InternalControl over Financial Reporting

Our management evaluatedour internal control over financial reporting and there have been no changesduring the fiscal quarter ended December 31, 2006 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

Management’s Report on Internal Control over FinancialReporting

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Our internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate. Our management assessed theeffectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2006. In making this assessment, it used the criteria set forth bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control - Integrated Framework*.Based on our assessment, we have concluded that, as of December 31, 2006, theCompany’s internal control over financial reporting is effective based on thosecriteria.

AMO’s independentregistered public accounting firm has issued an attestation report on ourassessment of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006. This report begins onpage 87.

**Item 9B.Other Information**

None.

89

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**PARTIII**

**Item10. Directors, Executive Officers and Corporate Governance**

Information required bythis item, including that required pursuant to Item 401 of Regulation S-K, isincluded under the headings “Election of Directors” and “Executive Officers” inour proxy statement for the 2007 annual meeting of stockholders (the “ProxyStatement”), which will be filed no later than 120 days after the close of ourfiscal year ended December 31, 2006 and which is incorporated herein byreference.

The information requiredby Item 405 of Regulation S-K is included in the Proxy Statement under thesection entitled “Section 16(a) Beneficial Ownership Reporting Compliance” andis incorporated herein by reference. The information required by pertinentprovisions of Items 406 and 407 of Regulation S-K is included in the ProxyStatement under the section entitled “Corporate Governance” and is incorporatedherein by this reference.

**Item 11. Executive Compensation**

The information requiredby Item 402 and by pertinent provisions of Item 407 of Regulation S-K isincluded in the Proxy Statement under the sections entitled “Election ofDirectors,” “Executive Officers,” and “Corporate Governance,” and isincorporated herein by this reference.

**Item 12. Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters**

The information requiredby Items 201(d) and 403 of Regulation S-K is included in the Proxy Statementunder the sections entitled “Executive Officers” and “Ownership of Our Stock,”and is incorporated herein by this reference.

**Item 13. Certain Relationships and Related Transactions, and Director Independence**

The information requiredby Items 404 and 407(a) of Regulation S-K is included in the Proxy Statementunder the section entitled “Corporate Governance” and is incorporated herein bythis reference.

**Item 14. Principal Accounting Fees and Services**

The section entitled “IndependentRegistered Public Accounting Firm” in the Proxy Statement is incorporatedherein by reference.

90

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**PARTIV**

**Item 15.Exhibits, Financial Statement Schedules**

(a)                                  Indexto Financial Statements  
|                                                                                                                                                               | ** ** | **Page No.** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
|                                                                                                                                                          |       |         |
| 1.     Financial Statements included in Part II  of this report:                                                                          |       |         |
|                                                                                                                                                          |       |         |
| Consolidated  Balance Sheets at December 31, 2006 and December 31, 2005                                                                                       |       | 48           |
|                                                                                                                                                          |       |         |
| Consolidated  Statements of Operations for Each of the Years in the Three-Year  Period Ended December 31, 2006                                                |       | 49           |
|                                                                                                                                                          |       |         |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income  (Loss) for Each of the Years in the Three-Year Period Ended December 31, 2006 |       | 50           |
|                                                                                                                                                          |       |         |
| Consolidated  Statements of Cash Flows for Each of the Years in the Three-Year  Period Ended December 31, 2006                                                |       | 51           |
|                                                                                                                                                          |       |         |
| Notes to Consolidated Financial Statements                                                                                                                    |       | 52-87        |
|                                                                                                                                                          |       |         |
| Report of Independent Registered Public Accounting  Firm                                                                                                      |       | 88           |

** **
|                                                                                                          | ** ** | **Page No.** |
|----------------------------------------------------------------------------------------------------------|------------|--------------|
| 2.     Schedules Supporting the Consolidated  Financial Statements:                  |       |         |
|                                                                                                     |       |         |
| Schedule numbered  in accordance with Rule 5-04 of Regulation S-X: II Valuation and Qualifying  Accounts |       | S-8          |

 

All other schedules havebeen omitted for the reason that the required information is presented infinancial statements or notes thereto, the amounts involved are not significantor the schedules are not applicable.

(b)                                 Item601 Exhibits

Reference is made to the Index of Exhibits beginningat page S-3 of this report.

(c)                                  OtherFinancial Statements

There are no financial statements required to be filedby Regulation S-X which are excluded from this report by Rule 14 a-3(b)(1).

91

----

**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
| Date: February 28,  2007 | ADVANCED MEDICAL OPTICS, INC. |
|--------------------------|-------------------------------|
|                     |                          |   |
|                     |                          |   |
|                     |                          |   |
|                     | By                            | /s/ JAMES. V. MAZZO |
|                     |                          | James V. Mazzo |
|                     |                          | Chairman of the Board, President and Chief Executive  Officer |

We, the undersigneddirectors and officers of Advanced Medical Optics, Inc., hereby severallyconstitute James V. Mazzo and Aimee S. Weisner, and each of them singly, ourtrue and lawful attorneys with full power to them and each of them to sign forus, in our names in the capacities indicated below, any and all amendments tothis Annual Report on Form 10-K filed with the Securities and ExchangeCommission.

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the date indicated.
|  Date: February 28, 2007 | By     | /s/ JAMES. V. MAZZO                                             |
|-------------------------------|--------|-----------------------------------------------------------------|
|                          |   | James V. Mazzo                                                  |
|                          |   | Chairman of the Board, President and Chief Executive  Officer   |
|                          |   | (Principal Executive Officer)                                   |
|                          |   |                                                            |
|                          |   |                                                            |
| Date: February 28,  2007      | By     | /s/ RICHARD A. MEIER                                            |
|                          |   | Richard A. Meier                                                |
|                          |   | Chief Operating Officer and Chief Financial Officer             |
|                          |   | (Principal Financial Officer)                                   |
|                          |   |                                                            |
|                          |   |                                                            |
| Date: February 28,  2007      | By     | /s/ ROBERT F. GALLAGHER                                         |
|                          |   | Robert F. Gallagher                                             |
|                          |   | Senior Vice President. Chief Accounting Officer and  Controller |
|                          |   | (Principal Accounting Officer)                                  |
|                          |   |                                                            |
|                          |   |                                                            |
| Date: February 26,  2007      | By     | /s/ CHRISTOPHER G. CHAVEZ                                       |
|                          |   | Christopher G. Chavez, Director                                 |
|                          |   |                                                            |
|                          |   |                                                            |
| Date: February 28,  2007      | By     | /s/ ELIZABETH H. DÁVILA                                    |
|                          |   | Elizabeth H. Dávila, Director                              |
|                          |   |                                                            |
|                          |   |                                                            |

 

 

S-1

----

 
| Date: February 26, 2007  | By     | /s/ WILLIAM J. LINK, PH.D.           |
|--------------------------|--------|--------------------------------------|
|                     |   | William J. Link, Ph.D., Director     |
|                     |   |                                 |
|                     |   |                                 |
| Date: February 27,  2007 | By     | /s/ MICHAEL A. MUSSALLEM             |
|                     |   | Michael A. Mussallem, Director       |
|                     |   |                                 |
|                     |   |                                 |
| Date: February 28,  2007 | By     | /s/ DEBORAH J. NEFF                  |
|                     |   | Deborah J. Neff, Director            |
|                     |   |                                 |
|                     |   |                                 |
| Date: February 28,  2007 | By     | /s/ JAMES O. ROLLANS                 |
|                     |   | James O. Rollans, Presiding Director |

 

S-2

----

**Exhibitsand Financial Statement Schedules**

**(a) Exhibits**
| Exhibit No. | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1 (a)     |       | Amended and Restated Certificate of Incorporation  (incorporated by reference to Exhibit 3.1 of Amendment No. 2 to Registration  Statement on Form 10 (“Form 10”) filed on May 6, 2002).                                                                                                                                                                                                                                                                                                                      |
| 3.1 (b)     |       | Amendment to Amended  and Restated Certificate of Incorporation (incorporated by reference to  Exhibit 3.1 of Quarterly Report on Form 10-Q filed on August 3, 2005).                                                                                                                                                                                                                                                                                                                                                        |
| 3.2         |       | Amended and Restated Bylaws  (incorporated by reference to Exhibit 3.2 of Amendment No. 2 to Form 10 filed  on May 6, 2002).                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1         |       | Specimen Common Stock  Certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 2 to  Form 10 filed on May 6, 2002).                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.2         |       | Rights Agreement, dated  as of June 24, 2002, by and between Advanced Medical Optics, Inc. and Mellon  Investor Services, as Rights Agent, which includes the form of Certification  of Designations of the Series A Junior Participating Preferred Stock of  Advanced Medical Optics, Inc. as Exhibit A, the form of Right Certificate as  Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C  (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed  on June 25, 2002). |
| 4.3         |       | Indenture, dated as of  June 22, 2004, between Advanced Medical Optics, Inc. and U.S. Bank National  Association, as Trustee (incorporated by reference to Exhibit 4.1 of Current  Report on Form 8-K filed on June 23, 2004).                                                                                                                                                                                                                                                                                          |
| 4.4         |       | Registration Rights  Agreement, dated as of June 22, 2004, among Advanced Medical Optics, Inc. and  Lehman Brothers Inc., Banc of America Securities LLC and Morgan Stanley &  Co. Incorporated, as Initial Purchasers (incorporated by reference to Exhibit  4.2 of Current Report on Form 8-K filed on June 23, 2004).                                                                                                                                                                                                 |
| 4.5         |       | Indenture, dated as of  July 18, 2005, between Advanced Medical Optics, Inc. and U.S. Bank National  Association, as Trustee (incorporated by reference to Exhibit 4.1 of Current  Report on Form 8-K filed on July 19, 2005).                                                                                                                                                                                                                                                                                     |
| 4.6         |       | Registration Rights  Agreement, dated as of July 18, 2005, between Advanced Medical Optics, Inc.  and Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc. and  UBS Securities LLC, as the Initial Purchasers (incorporated by reference to  Exhibit 4.2 of Current Report on Form 8-K filed on July 19, 2005).                                                                                                                                                                                           |
| 4.7         |       | Indenture, dated as of  June 13, 2006, between Advanced Medical Optics, Inc. and U.S. Bank National  Association, as Trustee (incorporated by reference to Exhibit 10.1 of Current  Report on Form 8-K filed on June 13, 2006).                                                                                                                                                                                                                                                                                              |
| 4.8         |       | Registration Rights  Agreement dated as of June 13, 2006, among Advanced Medical Optics, Inc.,  Goldman Sachs & Co., Banc of America Securities, UBS Securities LLC, PNC  Capital Markets LLC, and Citigroup Global Markets Inc. (incorporated by reference  to Exhibit 10.2 of Current Report on Form 8-K filed on June 13, 2006).                                                                                                                                                                                      |
| 4.9         |       | First Supplemental  Indenture, dated as of August 15 2006, between Advanced medical Optics, Inc.  and U.S. Bank national Association, as Trustee (incorporated by reference to  Exhibit 4.9 to Form S-3, Automatic Shelf Registration, filed on August  18, 2006).                                                                                                                                                                                                                                                           |

 

S-3

----

 

 
| 10.1     |   | Contribution and  Distribution Agreement, dated as of June 24, 2002, by and between Allergan,  Inc. and Advanced Medical Optics, Inc. (incorporated by reference to Exhibit  10.1 of Form S-4 Registration Statement filed on August 8, 2002). |
|----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2     |   | Employee Matters  Agreement, dated as of June 24, 2002, by and between Allergan, Inc. and  Advanced Medical Optics, Inc. (incorporated by reference to Exhibit 10.3 of  Form S-4 Registration Statement filed on August 8, 2002).              |
| 10.3     |   | Tax Sharing Agreement,  dated as of June 24, 2002, by and between Allergan, Inc. and Advanced Medical  Optics, Inc. (incorporated by reference to Exhibit 10.4 of Form S-4 Registration  Statement filed on August 8, 2002).                   |
| 10.4     |   | Employment Agreement,  dated as of January 18, 2002, by and between Advanced Medical Optics, Inc.  and James Mazzo (incorporated by reference to Exhibit 10.8 of Form 10).*                                                                    |
| 10.5 (a) |   | Form of Employment  Agreement between Advanced Medical Optics, Inc. and those parties identified  on Exhibit 10.5(b) (incorporated by reference to Exhibit 10.9(a) of Form  10).*                                                              |
| 10.5 (b) |   | Updated Schedule of  parties to the Employment Agreement filed as Exhibit 10.5(a) (incorporated by  reference to Exhibit 10.6(b) of Annual Report on Form 10-K filed on March 2,  2005).*                                                      |
| 10.5 (c) |   | Employment Agreement,  dated as of June 28, 2002, by and between Advanced Medical Optics, Inc. and  Holger Heidrich (incorporated by reference to Exhibit 10.20 of Form S-4  Registration Statement filed on August 8, 2002).*                 |
| 10.6     |   | Form of Indemnity  Agreement (incorporated by reference to Exhibit 10.7 of Form S-4 Registration  Statement filed on August 8, 2002).*                                                                                                         |
| 10.7 (a) |   | Form of Change in  Control Agreement between Advanced Medical Optics, Inc. and those parties  identified on Exhibit 10.7(b) (incorporated by reference to Exhibit 10.7 of  Current Report on Form 8-K filed on May 18, 2005).*            |
| 10.7 (b) |   | Schedule of executive  officers party to the Change in Control Agreement filed as Exhibit 10.7(a).*                                                                                                                                            |
| 10.8 (a) |   | Advanced Medical  Optics, Inc. 2002 Bonus Plan (incorporated by reference to Exhibit 10.8 of  Form S-4 Registration Statement filed on August 8, 2002).*                                                                                       |
| 10.8 (b) |   | First Amendment to  Advanced Medical Optics, Inc. 2002 Bonus Plan (incorporated by reference to  Exhibit 10.1 of Quarterly Report on Form 10-Q filed on November 8,  2002).*                                                                   |
| 10.8 (c) |   | 2006 Performance  Objective under the Advanced Medical Optics, Inc. 2002 Bonus Plan  (incorporated by reference to Exhibit 10.8(e) of Annual Report on Form 10-K  filed on March 14, 2006).*                                                   |
| 10.8 (d) |   | 2007 Performance  Objective under the Advanced Medical Optics, Inc. 2002 Bonus Plan.*                                                                                                                                                          |
| 10.9 (a) |   | Advanced Medical  Optics, Inc. 401(k) Plan (incorporated by reference to Exhibit 10.1 of Form  S-8 Registration Statement filed on June 21, 2002).*                                                                                            |
| 10.9 (b) |   | First Amendment to  Advanced Medical Optics, Inc. 401(k) Plan (incorporated by reference to  Exhibit 10.10(b) of Annual Report on Form 10-K filed on March 14, 2003).*                                                                         |
| 10.9 (c) |   | Second Amendment to  Advanced Medical Optics, Inc. 401(k) Plan (incorporated by reference to  Exhibit 10.3 of Quarterly Report on Form 10-Q filed on November 6, 2003)*                                                                        |
| 10.9 (d) |   | Third Amendment to  Advanced Medical Optics, Inc. 401(k) Plan (incorporated by reference to Exhibit  10.9(d) of Annual Report on Form 10-K filed on March 14, 2006).*                                                                          |
| 10.9 (e) |   | Fourth Amendment to  Advanced Medical Optics, Inc. 401(k) Plan.*                                                                                                                                                                               |

 

S-4

----

 

 
| 10.10 (a) |   | Amended and Restated  Advanced Medical Optics, Inc. 2002 Incentive Compensation Plan (incorporated  by reference to Exhibit A to Proxy Statement for the 2004 Annual Meeting of  Stockholders filed on April 15, 2004).*                         |
|-----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10 (b) |   | First Amendment to  Advanced Medical Optics, Inc. 2002 Incentive Compensation Plan, as amended  and restated (incorporated by reference to Exhibit 10.1 to Current Report on  Form 8-K filed on November 23, 2004).*                             |
| 10.11 (a) |   | Advanced Medical  Optics, Inc. 2005 Incentive Compensation Plan (incorporated by reference to  Exhibit 99.10 of Form S-8 Registration Statement filed on May 27,  2005).*                                                                   |
| 10.11 (b) |   | Form of Nonqualified  Stock Option Grant Terms and Conditions under Advanced Medical Optics, Inc.  2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.2  of Current Report on Form 8-K filed on May 18, 2005).*      |
| 10.11 (c) |   | Form of Employee  Restricted Unit Grant Terms and Conditions under Advanced Medical Optics,  Inc. 2005 Incentive Compensation Plan (incorporated by reference to Exhibit  10.3 of Current Report on Form 8-K filed on May 18, 2005).*       |
| 10.11 (d) |   | Form of Employee  Restricted Stock Grant Terms and Conditions under Advanced Medical Optics,  Inc. 2005 Incentive Compensation Plan (incorporated by reference to Exhibit  10.4 of Current Report on Form 8-K filed on May 18, 2005).* |
| 10.11 (e) |   | Form of Nonemployee  Director Restricted Stock Grant Agreement under Advanced Medical Optics, Inc.  2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10.5  of Current Report on Form 8-K filed on May 18, 2005).*     |
| 10.11 (f) |   | Form of Performance  Award Agreement under Advanced Medical Optics, Inc. 2005 Incentive  Compensation Plan (incorporated by reference to Exhibit 10.6 of Current  Report on Form 8-K filed on May 18, 2005).*                               |
| 10.12 (a) |   | Advanced Medical  Optics, Inc. 2002 Employee Stock Purchase Plan (incorporated by reference to  Exhibit 10.3 of Form S-8 Registration Statement filed on June 21, 2002).*                                                                        |
| 10.12 (b) |   | First Amendment to  Advanced Medical Optics, Inc. 2002 Employee Stock Purchase Plan (incorporated  by reference to Exhibit 10.1 of Quarterly Report on Form 10-Q filed on  November 2, 2004).*                                                   |
| 10.12 (c) |   | Amended and Restated  Advanced Medical Optics, Inc. 2002 Employee Stock Purchase Plan (incorporated  by reference to Exhibit 99.8 of Form S-8 Registration Statement filed  on May 27, 2005).*                                              |
| 10.13 (a) |   | Advanced Medical  Optics, Inc. International Stock Purchase Plan (incorporated by reference to  Exhibit 10.4 of Form S-8 Registration Statement filed on June 21, 2002).*                                                                        |
| 10.13 (b) |   | First Amendment to  Advanced Medical Optics, Inc. 2002 International Stock Purchase Plan  (incorporated by reference to Exhibit 10.2 of Quarterly Report on Form 10-Q  filed on November 2, 2004).*                                              |
| 10.13 (c) |   | Amended and Restated  Advanced Medical Optics, Inc. 2002 International Stock Purchase Plan  (incorporated by reference to Exhibit 99.9 of Form S-8 Registration  Statement filed on May 27, 2005).*                                         |
| 10.14 (a) |   | Advanced Medical  Optics, Inc. Executive Deferred Compensation Plan (incorporated by reference  to Exhibit 10.5 of Form S-8 Registration Statement filed on June 21, 2002).*                                                                     |
| 10.14 (b) |   | First Amendment to  Advanced Medical Optics, Inc. Executive Deferred Compensation Plan  (incorporated by reference to Exhibit 10.4 of Quarterly Report on Form 10-Q  filed on November 6, 2003).*                                                |

 

S-5

----

 

 
| 10.15     |   | Advanced Medical  Optics, Inc. 2005 Executive Deferred Compensation Plan (incorporated by  reference to Exhibit 10.15 of Annual Report on Form 10-K filed on March  2, 2005).*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.16     |   | Consent to Sublease and  Second Amendment to Lease, dated as of May 24, 2002, by and among Andrew  Place Two LLC, as landlord, Ingram Micro, Inc., as tenant and Advanced  Medical Optics, Inc., as subtenant (incorporated by reference to Exhibit 10.5  of Quarterly Report on Form 10-Q filed on June 24, 2002).                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.17     |   | Sublease Agreement,  dated as of May 24, 2002, by and between Advanced Medical Optics, Inc. and  Ingram Micro, Inc. for the premises located at 1700 East St. Andrew Place,  Santa Ana, California 92705 (incorporated by reference to Exhibit 10.6 of  Quarterly Report on Form 10-Q filed on June 24, 2002).                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.18     |   | Information Technology  Services Agreement, dated August 23, 2002, by and between Advanced Medical  Optics, Inc. and Siemens Business Services, Inc. (incorporated by reference  to Exhibit 10.2 of Quarterly Report on Form 10-Q filed on November 8, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.19 (a) |   | Second Amended and  Restated Credit Agreement dated as of June 25, 2004, among Advanced Medical  Optics, Inc., as the Borrower, certain of its subsidiaries, as the  Guarantors, Lehman Commercial Paper Inc., as Syndication Agent, General  Electric Capital Corporation and Bank One, NA, as Co-Documentation Agents,  Bank of America, N.A., as Administrative Agent, Swing Line Lender, Foreign  Currency Fronting Lender and L/C Issuer, and the other lenders party thereto,  and Banc of America Securities LLC and Lehman Brothers Inc., as Joint Lead  Arrangers and Joint Book Runners (incorporated by reference to Exhibit 10.3  of Quarterly Report on Form 10-Q filed on August 3, 2004). |
| 10.19 (b) |   | First Amendment to  Second Amended and Restated Credit Agreement, dated as of January 7, 2005,  among Advanced Medical Optics, Inc., certain of its subsidiaries, as  Guarantors, Morgan Stanley Senior Funding, Inc., as Syndication Agent,  JPMorgan Chase Bank, N.A., US Bank and Union Bank of California, N.A., as  Co-Documentation Agents, Bank of America, N.A., as Administrative Agent,  Swing Line Lender, Foreign Currency Fronting Lender and L/C Issuer, and the  other lenders party thereto (incorporated by reference to Exhibit 99.1 of  Current Report on Form 8-K filed on January 13, 2005).                                                                                        |
| 10.19 (c) |   | Second Amendment to  Second Amended and Restated Credit Agreement, dated as of May 27, 2005,  among Advanced Medical Optics, Inc., the Guarantors party thereto, Morgan  Stanley Senior Funding, Inc., as Syndication Agent, and Bank of America,  N.A., as Administrative Agent, and the lenders party thereto (incorporated by  reference to Exhibit 99.1 of Current Report on Form 8-K filed on  May 31, 2005).                                                                                                                                                                                                                                                                             |
| 10.19 (d) |   | Third Amendment to  Second Amended and Restated Credit Agreement, dated as of June 5, 2006, among  Advanced Medical Optics, Inc., the certain of its subsidiaries as the  Guarantors, the Lenders (as defined in the Second Amended and Restated Credit  Agreement dated as of June 25, 2004 and filed as Exhibit 10.3 to the  Quarterly Report on Form 10-Q filed on August 3, 2004), and Bank of America,  N.A., as Administrative Agent on behalf of itself and the Lenders  (incorporated by reference to Exhibit 10.2 of Quarterly Report on Form 10-Q  filed on August 9, 2006).                                                                                                                   |
| 10.20     |   | Manufacturing and Supply  Agreement, dated November 10, 2003, by and between Advanced Medical Optics,  Inc. and Nicholas Piramal India Limited (confidential portions have been  omitted and filed separately with the Commission) (incorporated by reference  to Exhibit 10.28 of Annual Report on Form 10-K filed on March 12, 2004).                                                                                                                                                                                                                                                                                                                                                             |
| 10.21     |   | Stock and Asset  Purchase Agreement, dated as of April 21, 2004, by and between Pfizer Inc.  and Advanced Medical Optics, Inc. (incorporated by reference to Exhibit 10.1  of Quarterly Report on Form 10-Q filed on May 3, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.22 (a) |   | Agreement and Plan of  Merger, dated as of November 9, 2004, by and among Advanced Medical Optics,  Inc., Vault Merger Corporation, and VISX, Incorporated (“VISX Merger  Agreement”) (incorporated by reference to Exhibit 2.1 of Current Report on  Form 8-K filed on November 10, 2004).                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.22 (b) |   | Amendment No. 1, dated  as of December 3, 2004, by and among Advanced Medical Optics, Inc., Vault  Merger Corporation, and VISX, Incorporated), to amend the VISX Merger  Agreement (incorporated by reference to Exhibit 2.2 of Form S-4  Registration Statement filed on December 6, 2004).                                                                                                                                                                                                                                                                                                                                                                                                            |

 

S-6

----

 

 
| 10.22 (c) |   | Amendment No. 2, dated  as of March 17, 2005, by and among Advanced Medical Optics, Inc., Vault  Merger Corporation, and VISX, Incorporated, to amend the VISX Merger  Agreement, as amended (incorporated by reference to Exhibit 2.1 of Current  Report on Form 8-K filed on March 22, 2005).                                                 |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23     |   | VISX, Incorporated 2001  Nonstatutory Stock Option Plan (incorporated by reference to Exhibit 99.2 of  Form S-8 Registration Statement filed on May 27, 2005).*                                                                                                                                                                       |
| 10.24     |   | VISX, Incorporated 2000  Stock Plan (incorporated by reference to Exhibit 99.4 of Form S-8  Registration Statement filed on May 27, 2005).*                                                                                                                                                                                      |
| 10.25     |   | VISX, Incorporated 1995  Director Option and Stock Deferral Plan (incorporated by reference to  Exhibit 99.5 of Form S-8 Registration Statement filed on  May 27, 2005).*                                                                                                                                                        |
| 10.26     |   | VISX, Incorporated 1995  Stock Plan (incorporated by reference to Exhibit 99.6 of Form S-8  Registration Statement filed on May 27, 2005).*                                                                                                                                                                                           |
| 10.27     |   | Lease dated July 16,  1992 between VISX, Incorporated and Sobrato Interests, a California limited  partnership, as amended on October 2, 1992, March 8, 1996 and March 29, 2002  (incorporated by reference to Exhibit 10.7 of VISX, Incorporated’s  Current Report on Form 8-K filed on November 18, 2004).                     |
| 10.28     |   | Lease Agreement dated  February 9, 2007, between Advanced Medical Optics, Inc. and TriNet Milpitas  Associates, LLC for the premises located at 510 Cottonwood Drive, Milpitas,  California.                                                                                                                                                    |
| 10.29     |   | Confidential Settlement  Agreement, dated as of June 30, 2006, between Advanced Medical Optics, Inc.  and Alcon, Inc., Alcon Laboratories, Inc. and Alcon Manufacturing Ltd.  (incorporated by reference to Exhibit 10.1 of Quarterly Report on Form 10-Q  filed on August 9, 2006).                                                            |
| 10.30     |   | Master Confirmation  between Advanced Medical Optics, Inc. and Goldman, Sachs & Co. dated as  of June 7, 2006 (confidential portions have been omitted and filed separately  with the Commission) (incorporated by reference to Exhibit 10.3 of Quarterly  Report on Form 10-Q filed on August 9, 2006).                                    |
| 10.31     |   | Supplemental  Confirmation between Advanced Medical Optics, Inc. and Goldman, Sachs &  Co. dated as of June 7, 2006 (confidential portions have been omitted and filed  separately with the Commission) (incorporated by reference to Exhibit 10.4 of  Quarterly Report on Form 10-Q filed on August 9, 2006).                              |
| 10.32     |   | Agreement and Plan of  Merger, dated as of January 5, 2007, by and among Advanced Medical Optics,  Inc., Ironman Merger Corporation, a wholly owned subsidiary of Advanced  Medical Optics, Inc., and IntraLase Corp. (incorporated by reference to  Exhibit 2.1 of Current Report on Form 8-K filed on January 10, 2007).                      |
| 10.33     |   | Bank Facilities  commitment Letter, dated January 5, 2007, from UBS Loan Finance LLC, UBS  Securities LLC, Bank of America, N.A., Banc of America Securities LLC and  Goldman Sachs Credit Partners L.P. to Advanced Medical Optic, Inc.  (incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed  on January 10, 2007). |
| 21.1      |   | Subsidiaries of the  Registrant.                                                                                                                                                                                                                                                                                                                |
| 23.1      |   | Consent of Independent  Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                      |
| 24.1      |   | Power of Attorney  (included as part of the signature page).                                                                                                                                                                                                                                                                                    |
| 31.1      |   | Certification of James  V. Mazzo pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                     |
| 31.2      |   | Certification of  Richard A. Meier pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                   |
| 32.1      |   | Certification of James  V. Mazzo and Richard A. Meier pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                               |

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*                    Managementcontract or compensatory plan or arrangement.

S-7

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**SCHEDULEII**

 

**ADVANCEDMEDICAL OPTICS, INC.**

**VALUATIONAND QUALIFYING ACCOUNTS**

**YEARSENDED DECEMBER 31, 2006, 2005, AND 2004**

**(INMILLIONS)**

| Allowance             | ** ** | **Balance**      | ** ** | ** **       | ** ** | ** **        | ** ** | **Balance**      | ** ** |
|-----------------------|------------|------------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| **For Doubtful** | ** ** | **Beginning**    | ** ** | ** **       | ** ** | ** **        | ** ** | **at End**  | ** ** |
| **Accounts**          | ** ** | **of Year** | ** ** | **Additions(a)** | ** ** | **Deductions(b)** | ** ** | **of Year** | ** ** |
| 2006                  |       | $                | 9.1        |             | $          | 3.6               |       | $                | (0.4       | ) | $ | 12.3 |   |
| 2005                  |       | 7.4              |       | 2.6              |       | (0.9              | )          | 9.1              |       |
| 2004                  |       | 8.6              |       | 2.3              |       | (3.5              | )          | 7.4              |       |
|                       |            |                  |            |                  |            |                   |            |                  |            |  |  |  |  |

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(a)             Includes$2.0 million additions from VISX Acquisition and $0.6 million charged toearnings in 2005.

(b)            Accountswritten off.

S-8

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