##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

| |     |                                                                                        
| | --- | ---------------------------------------------------------------------------------------
| | [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

or

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

For the transition period from  _________  to  _________

Commission File Number 1-10694



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VISX, INCORPORATED

(Exact name of registrant as specified in its charter)




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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 06-1161793                       
|                                                               |  |                                  
|(State or other Jurisdiction of
Incorporation or Organization) |  | (IRS Employer
Identification No.)

|                                                 |  |           
|------------------------------------------------ |  | ----------
|3400 Central Expressway, Santa Clara, California |  | 95051-0703
|                                                 |  |           
|(Address of principal executive offices)         |  | (Zip Code)

(Registrants telephone number, including area code):(408) 733-2020

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past
90 days.   Yes  [X]   No  [   ]

Total number of shares of common stock outstanding as of July 24, 2002:
53,359,507





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##### Table of Contents



VISX, INCORPORATED
TABLE OF CONTENTS

|           |  |                                                                                       |  |                                                                                                                                                               |    |      |    | 
|---------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                       |  |                                                                                                                                                               |    | Page
|           |  |                                                                                       |  |                                                                                                                                                               |    |     
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  |                                                                                                                                                               |    |     
|Item 1.    |  | Condensed Consolidated Interim Financial Statements                                   |  |                                                                                                                                                               |    |     
|           |  |                                                                                       |  | Condensed Consolidated Interim Balance Sheets as
of June 30, 2002 and December 31, 2001                                                                       |    |      | 3  | 
|           |  |                                                                                       |  | Condensed Consolidated Interim Statements of Operations for
the Three Months Ended June 30, 2002 and 2001 and for the
Six Months Ended June 30, 2002 and 2001 |    |      | 4  | 
|           |  |                                                                                       |  | Condensed Consolidated Interim Statements of Cash Flows for
the Six Months Ended June 30, 2002 and 2001                                                       |    |      | 5  | 
|           |  |                                                                                       |  | Notes to Condensed Consolidated Interim Financial Statements                                                                                                  |    |      | 6  | 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |  |                                                                                                                                                               |    |     
|           |  |                                                                                       |  | Overview                                                                                                                                                      |    |      | 11 | 
|           |  |                                                                                       |  | Results of Operations                                                                                                                                         |    |      | 11 | 
|           |  |                                                                                       |  | Liquidity and Capital Resources                                                                                                                               |    |      | 13 | 
|Item 3.    |  | Quantitative and Qualitative Disclosure about Market Risk                             |  |                                                                                                                                                               | 17 |     
|PART II.   |  | OTHER INFORMATION                                                                     |  |                                                                                                                                                               |    |     
|Item 1.    |  | Legal Proceedings                                                                     |  |                                                                                                                                                               | 17 |     
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                                                               | 18 |     
|SIGNATURES |  |                                                                                       |  |                                                                                                                                                               | 20 |     

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TABLE OF CONTENTS



|                              |                                                                                               |                                                              |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Condensed Consolidated Interim Financial Statements                                  
|                              |                                                                                               | CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|Part II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 99.1                 



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Condensed Consolidated Interim Financial Statements




VISX, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
(In thousands, except share and per share amounts)

ASSETS

|                                        |                                                                                                |                            |                           |          |             |         |              |          |         |         | 
|--------------------------------------- | ---------------------------------------------------------------------------------------------- | -------------------------- | ------------------------- | -------- | ----------- | ------- | ------------ | -------- | ------- | ------- | 
|                                        |                                                                                                |                            |                           |          | June 30,    |         | December 31,
|                                        |                                                                                                |                            |                           |          | 2002        |         | 2001        
|                                        |                                                                                                |                            |                           |          |             |         |             
|                                        |                                                                                                |                            |                           |          | (unaudited) |         |              |          |        
|Current Assets:                         |                                                                                                |                            |                           |          |             |         |              |         
|                                        | Cash and cash equivalents                                                                      |                            | $                         | 23,718   |             |         | $            | 15,349   |        
|                                        | Short-term investments                                                                         |                            |                           | 104,450  |             |         |              | 108,458  |        
|                                        | Accounts receivable, net of allowance
for doubtful accounts of $4,491 and
$4,567, respectively |                            |                           | 25,940   |             |         |              | 32,490   |        
|                                        | Inventories                                                                                    |                            |                           | 13,466   |             |         |              | 14,071   |        
|                                        | Deferred tax assets and prepaid expenses                                                       |                            |                           | 26,135   |             |         |              | 33,214   |        
|                                        |                                                                                                |                            |                           |          |             |         |              |         
|                                        |                                                                                                |                            | Total current assets      |          |             | 193,709 |              |          |         | 203,582 | 
|Property and Equipment, net             |                                                                                                |                            | 5,559                     |          |             |         | 4,152        |         
|Long-Term Deferred Tax and Other Assets |                                                                                                |                            | 10,767                    |          |             |         | 12,191       |         
|                                        |                                                                                                |                            |                           |          |             |         |              |         
|                                        |                                                                                                | $                          | 210,035                   |          |             | $       | 219,925      |         
|                                        |                                                                                                |                            |                           |          |             |         |              |         
|LIABILITIES AND STOCKHOLDERS EQUITY    |                                                                                                |                            |                           |          |             |         |              |         
|Current Liabilities:                    |                                                                                                |                            |                           |          |             |         |              |         
|                                        | Accounts payable                                                                               |                            | $                         | 4,947    |             |         | $            | 3,270    |        
|                                        | Accrued liabilities                                                                            |                            |                           | 36,700   |             |         |              | 40,377   |        
|                                        |                                                                                                |                            |                           |          |             |         |              |         
|                                        |                                                                                                |                            | Total current liabilities |          |             | 41,647  |              |          |         | 43,647  | 
|                                        |                                                                                                |                            |                           |          |             |         |              |         
|Stockholders Equity:                   |                                                                                                |                            |                           |          |             |         |              |         
|                                        | Common stock: $.01 par value,
180,000,000 shares authorized;
64,990,089 shares issued          |                            |                           | 650      |             |         |              | 650      |        
|                                        | Additional paid-in capital                                                                     |                            |                           | 201,237  |             |         |              | 208,130  |        
|                                        | Treasury stock, at cost 11,357,182 and
10,436,238 shares, respectively                         |                            |                           | (190,809 | )           |         |              | (178,347 | )      
|                                        | Accumulated comprehensive income                                                               |                            |                           | 1,566    |             |         |              | 2,520    |        
|                                        | Retained earnings                                                                              |                            |                           | 155,744  |             |         |              | 143,325  |        
|                                        |                                                                                                |                            |                           |          |             |         |              |         
|                                        |                                                                                                | Total stockholders equity |                           |          | 168,388     |         |              |          | 176,278 |        
|                                        |                                                                                                |                            |                           |          |             |         |              |         
|                                        |                                                                                                | $                          | 210,035                   |          |             | $       | 219,925      |         
|                                        |                                                                                                |                            |                           |          |             |         |              |         

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

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VISX, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

|                                                |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |         |        | 
|----------------------------------------------- | ------------------------------------------- | ------------------------ | ----- | ------------------ | ------ | ---------------- | ------- | ----------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------- | ------ | 
|                                                |                                             |                          |       | Three months ended |        | Six months ended
|                                                |                                             |                          |       | June 30,           |        | June 30,        
|                                                |                                             |                          |       |                    |        |                 
|                                                |                                             |                          |       | 2002               |        | 2001             |         | 2002        |        | 2001
|                                                |                                             |                          |       |                    |        |                  |         |             |        |     
|                                                |                                             |                          |       |                    |        |                  |         | (unaudited) |        |      |        |       
|Revenues:                                       |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|                                                | System revenues                             |                          | $     | 12,804             |        |                  | $       | 17,239      |        |      | $      | 22,719 |        |   | $      | 34,335  |       
|                                                | License, service and other revenues         |                          |       | 23,835             |        |                  |         | 31,022      |        |      |        | 50,505 |        |   |        | 64,391  |       
|                                                |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|                                                |                                             | Total revenues           |       |                    | 36,639 |                  |         |             | 48,261 |      |        |        | 73,224 |   |        |         | 98,726 | 
|                                                |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|Costs and Expenses:                             |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|                                                | Cost of system revenues                     |                          |       | 7,176              |        |                  |         | 11,325      |        |      |        | 15,338 |        |   |        | 24,303  |       
|                                                | Cost of license, service and other revenues |                          |       | 4,809              |        |                  |         | 4,484       |        |      |        | 9,251  |        |   |        | 9,334   |       
|                                                | Selling, general, and administrative        |                          |       | 11,661             |        |                  |         | 10,488      |        |      |        | 22,179 |        |   |        | 21,157  |       
|                                                | Research, development and regulatory        |                          |       | 4,779              |        |                  |         | 4,592       |        |      |        | 9,024  |        |   |        | 9,142   |       
|                                                |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|                                                |                                             | Total costs and expenses |       |                    | 28,425 |                  |         |             | 30,889 |      |        |        | 55,792 |   |        |         | 63,936 | 
|                                                |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|Income From Operations                          |                                             |                          | 8,214 |                    |        |                  | 17,372  |             |        |      | 17,432 |        |        |   | 34,790 |        
|                                                | Interest and other income                   |                          |       | 1,561              |        |                  |         | 2,759       |        |      |        | 3,092  |        |   |        | 6,201   |       
|                                                | Litigation settlement                       |                          |       |                   |        |                  |         | (37,821     | )      |      |        |       |        |   |        | (37,821 | )     
|                                                |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|Income (Loss) Before Provision For Income Taxes |                                             |                          | 9,775 |                    |        |                  | (17,690 | )           |        |      | 20,524 |        |        |   | 3,170  |        
|                                                | Provision for income taxes                  |                          |       | (3,859             | )      |                  |         | 6,988       |        |      |        | (8,105 | )      |   |        | (1,252  | )     
|                                                |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|Net Income (Loss)                               |                                             | $                        | 5,916 |                    |        | $                | (10,702 | )           |        | $    | 12,419 |        |        | $ | 1,918  |        
|                                                |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|Earnings (Loss) Per Share                       |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|                                                | Basic                                       |                          | $     | 0.11               |        |                  | $       | (0.19       | )      |      | $      | 0.23   |        |   | $      | 0.03    |       
|                                                |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|                                                | Diluted                                     |                          | $     | 0.11               |        |                  | $       | (0.19       | )      |      | $      | 0.23   |        |   | $      | 0.03    |       
|                                                |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|Shares Used For Earnings Per Share              |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|                                                | Basic                                       |                          |       | 53,889             |        |                  |         | 56,536      |        |      |        | 54,197 |        |   |        | 58,021  |       
|                                                |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        
|                                                | Diluted                                     |                          |       | 54,809             |        |                  |         | 56,536      |        |      |        | 55,191 |        |   |        | 59,735  |       
|                                                |                                             |                          |       |                    |        |                  |         |             |        |      |        |        |        |   |        |        

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

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VISX, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(In thousands)

|                                               |                                                                                   |                                              |                                          |         |                  |        |        |         |         |        |  
|---------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------- | ------- | ---------------- | ------ | ------ | ------- | ------- | ------ | -
|                                               |                                                                                   |                                              |                                          |         | Six months ended
|                                               |                                                                                   |                                              |                                          |         | June 30,        
|                                               |                                                                                   |                                              |                                          |         |                 
|                                               |                                                                                   |                                              |                                          |         | 2002             |        | 2001  
|                                               |                                                                                   |                                              |                                          |         |                  |        |       
|                                               |                                                                                   |                                              |                                          |         | (unaudited)     
|Cash flows from operating activities:          |                                                                                   |                                              |                                          |         |                  |        |        |        
|                                               | Net income                                                                        |                                              | $                                        | 12,419  |                  |        | $      | 1,918   |        
|                                               | Adjustments to reconcile net income to net cash
provided by operating activities: |                                              |                                          |         |                  |        |        |         |        
|                                               |                                                                                   | Depreciation and amortization                |                                          |         | 1,690            |        |        |         | 1,996   |       
|                                               |                                                                                   | Provision for doubtful accounts receivable   |                                          |         | 569              |        |        |         | 897     |       
|                                               |                                                                                   | Changes in operating assets and liabilities: |                                          |         |                  |        |        |         |         |       
|                                               |                                                                                   |                                              | Accounts receivable                      |         |                  | 5,981  |        |         |         | (9,059 | )
|                                               |                                                                                   |                                              | Inventories                              |         |                  | (994   | )      |         |         | (2,887 | )
|                                               |                                                                                   |                                              | Deferred tax assets and prepaid expenses |         |                  | 7,079  |        |         |         | (683   | )
|                                               |                                                                                   |                                              | Long-term deferred tax and other assets  |         |                  | 1,424  |        |         |         | (107   | )
|                                               |                                                                                   |                                              | Accounts payable                         |         |                  | 1,677  |        |         |         | (3,290 | )
|                                               |                                                                                   |                                              | Accrued liabilities                      |         |                  | (3,677 | )      |         |         | 27,979 |  
|                                               |                                                                                   |                                              |                                          |         |                  |        |        |        
|                                               |                                                                                   | Net cash provided by operating activities    |                                          |         | 26,168           |        |        |         | 16,764  |       
|                                               |                                                                                   |                                              |                                          |         |                  |        |        |        
|Cash flows from investing activities:          |                                                                                   |                                              |                                          |         |                  |        |        |        
|                                               | Capital expenditures, net                                                         |                                              |                                          | (1,498  | )                |        |        | (895    | )      
|                                               | Purchase of short-term investments                                                |                                              |                                          | (33,398 | )                |        |        | (23,368 | )      
|                                               | Proceeds from maturities of short-term investments                                |                                              |                                          | 36,432  |                  |        |        | 95,471  |        
|                                               |                                                                                   |                                              |                                          |         |                  |        |        |        
|                                               |                                                                                   | Net cash provided by investing activities    |                                          |         | 1,536            |        |        |         | 71,208  |       
|                                               |                                                                                   |                                              |                                          |         |                  |        |        |        
|Cash flows from financing activities:          |                                                                                   |                                              |                                          |         |                  |        |        |        
|                                               | Exercise of stock options                                                         |                                              |                                          | 4,352   |                  |        |        | 4,413   |        
|                                               | Repurchase of common stock                                                        |                                              |                                          | (23,707 | )                |        |        | (89,408 | )      
|                                               |                                                                                   |                                              |                                          |         |                  |        |        |        
|                                               |                                                                                   | Net cash used in financing activities        |                                          |         | (19,355          | )      |        |         | (84,995 | )     
|                                               |                                                                                   |                                              |                                          |         |                  |        |        |        
|Effect of exchange rate changes on cash        |                                                                                   |                                              | 20                                       |         |                  |        | 169    |        
|                                               |                                                                                   |                                              |                                          |         |                  |        |        |        
|Net increase in cash and cash equivalents      |                                                                                   |                                              | 8,369                                    |         |                  |        | 3,146  |        
|Cash and cash equivalents, beginning of period |                                                                                   |                                              | 15,349                                   |         |                  |        | 19,686 |        
|                                               |                                                                                   |                                              |                                          |         |                  |        |        |        
|Cash and cash equivalents, end of period       |                                                                                   | $                                            | 23,718                                   |         |                  | $      | 22,832 |        
|                                               |                                                                                   |                                              |                                          |         |                  |        |        |        
|Non-Cash Investing Activities:                 |                                                                                   |                                              |                                          |         |                  |        |        |        
|                                               | Inventory transferred to property and equipment
under operating leases            |                                              | $                                        | 1,599   |                  |        | $      |        |        
|                                               |                                                                                   |                                              |                                          |         |                  |        |        |        

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

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VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)

1. Basis of Presentation:

We prepared our Condensed Consolidated Interim Financial Statements in
conformity with Securities and Exchange Commission rules and regulations.
Accordingly, we condensed or omitted certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles. Please read our 2001 Annual
Report on Form 10-K to gain a more complete understanding of these interim
financial statements.

We included in these interim financial statements all adjustments
(consisting primarily only of normal recurring adjustments) necessary to
present fairly our results for the interim period. Our interim financial
statements have not been audited.

2. Earnings (Loss) Per Share:

Basic earnings per share (EPS) equals net income (loss) divided by the
weighted average number of common shares outstanding. Diluted EPS equals net
income (loss) divided by the weighted average number of common shares
outstanding plus dilutive potential common shares calculated in accordance with
the treasury stock method. The calculation of diluted net loss per share
excludes potential common shares if the effect is antidilutive. All amounts in
the following table are in thousands, except per share data.

|                                  |                                                                     |   |                    |        |                  |   |         |         |      |   |        |        |  |   |       |        | 
|--------------------------------- | ------------------------------------------------------------------- | - | ------------------ | ------ | ---------------- | - | ------- | ------- | ---- | - | ------ | ------ |  | - | ----- | ------ | 
|                                  |                                                                     |   | Three Months Ended |        | Six Months Ended
|                                  |                                                                     |   | June 30,           |        | June 30,        
|                                  |                                                                     |   |                    |        |                 
|                                  |                                                                     |   | 2002               |        | 2001             |   | 2002    |         | 2001
|                                  |                                                                     |   |                    |        |                  |   |         |         |     
|NET INCOME (LOSS)                 |                                                                     | $ | 5,916              |        |                  | $ | (10,702 | )       |      | $ | 12,419 |        |  | $ | 1,918 |       
|                                  |                                                                     |   |                    |        |                  |   |         |         |      |   |        |        |  |   |       |       
|BASIC EARNINGS (LOSS) PER SHARE   |                                                                     |   |                    |        |                  |   |         |         |      |   |        |        |  |   |       |       
|                                  | Income (Loss) available to common shareholders                      |   | $                  | 5,916  |                  |   | $       | (10,702 | )    |   | $      | 12,419 |  |   | $     | 1,918  | 
|                                  | Weighted average common shares outstanding                          |   |                    | 53,889 |                  |   |         | 56,536  |      |   |        | 54,197 |  |   |       | 58,021 | 
|                                  |                                                                     |   |                    |        |                  |   |         |         |      |   |        |        |  |   |       |       
|                                  | Basic Earnings (Loss) Per Share                                     |   | $                  | 0.11   |                  |   | $       | (0.19   | )    |   | $      | 0.23   |  |   | $     | 0.03   | 
|                                  |                                                                     |   |                    |        |                  |   |         |         |      |   |        |        |  |   |       |       
|DILUTED EARNINGS (LOSS) PER SHARE |                                                                     |   |                    |        |                  |   |         |         |      |   |        |        |  |   |       |       
|                                  | Income (Loss) available to common shareholders                      |   | $                  | 5,916  |                  |   | $       | (10,702 | )    |   | $      | 12,419 |  |   | $     | 1,918  | 
|                                  |                                                                     |   |                    |        |                  |   |         |         |      |   |        |        |  |   |       |       
|                                  | Weighted average common shares outstanding                          |   |                    | 53,889 |                  |   |         | 56,536  |      |   |        | 54,197 |  |   |       | 58,021 | 
|                                  | Dilutive potential common shares from stock options                 |   |                    | 920    |                  |   |         |        |      |   |        | 994    |  |   |       | 1,714  | 
|                                  |                                                                     |   |                    |        |                  |   |         |         |      |   |        |        |  |   |       |       
|                                  | Weighted average common shares and dilutive potential common shares |   |                    | 54,809 |                  |   |         | 56,536  |      |   |        | 55,191 |  |   |       | 59,735 | 
|                                  |                                                                     |   |                    |        |                  |   |         |         |      |   |        |        |  |   |       |       
|                                  | Diluted Earnings (Loss) Per Share                                   |   | $                  | 0.11   |                  |   | $       | (0.19   | )    |   | $      | 0.23   |  |   | $     | 0.03   | 
|                                  |                                                                     |   |                    |        |                  |   |         |         |      |   |        |        |  |   |       |       

At June 30, 2002
and 2001, options for the purchase of 6,058,000 and 4,033,000,
respectively, were exercisable at weighted average purchase price per
share of $14.99 and $15.25, respectively, and were excluded from
the computation of diluted EPS because exercise prices for these options were
greater than the average market price of the VISXs common stock during
these periods.

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3. Inventories(in thousands):

|                                |       |   |          |        |              |   |       |        | 
|------------------------------- | ----- | - | -------- | ------ | ------------ | - | ----- | ------ | 
|                                |       |   | June 30, |        | December 31,
|                                |       |   | 2002     |        | 2001        
|                                |       |   |          |        |             
|Raw materials and subassemblies |       | $ | 7,751    |        |              | $ | 8,901 |       
|Work in process                 |       |   | 1,419    |        |              |   | 1,491 |       
|Finished goods                  |       |   | 4,296    |        |              |   | 3,679 |       
|                                |       |   |          |        |              |   |       |       
|                                | Total |   | $        | 13,466 |              |   | $     | 14,071 | 
|                                |       |   |          |        |              |   |       |       

4. Comprehensive Income (Loss)(in thousands):

|                            |                                                                              |   |                    |     |                  |   |         |      |      |   |        |      |   |   |       |     | 
|--------------------------- | ---------------------------------------------------------------------------- | - | ------------------ | --- | ---------------- | - | ------- | ---- | ---- | - | ------ | ---- | - | - | ----- | --- | 
|                            |                                                                              |   | Three Months Ended |     | Six Months Ended
|                            |                                                                              |   | June 30,           |     | June 30,        
|                            |                                                                              |   |                    |     |                 
|                            |                                                                              |   | 2002               |     | 2001             |   | 2002    |      | 2001
|                            |                                                                              |   |                    |     |                  |   |         |      |     
|NET INCOME (LOSS)           |                                                                              | $ | 5,916              |     |                  | $ | (10,702 | )    |      | $ | 12,419 |      |   | $ | 1,918 |    
|OTHER COMPREHENSIVE INCOME  |                                                                              |   |                    |     |                  |   |         |      |      |   |        |      |   |   |       |    
|                            | Change in unrealized holding gains (losses) on
available-for-sale securities |   |                    | 261 |                  |   |         | (287 | )    |   |        | (974 | ) |   |       | 872 | 
|                            | Change in accumulated foreign currency translation adjustment                |   |                    | 11  |                  |   |         | 43   |      |   |        | 20   |   |   |       | 169 | 
|                            |                                                                              |   |                    |     |                  |   |         |      |      |   |        |      |   |   |       |    
|COMPREHENSIVE INCOME (LOSS) |                                                                              | $ | 6,188              |     |                  | $ | (10,946 | )    |      | $ | 11,465 |      |   | $ | 2,959 |    
|                            |                                                                              |   |                    |     |                  |   |         |      |      |   |        |      |   |   |       |    

5. Share Repurchase Program

On April 4, 2001 our Board of Directors authorized a new Stock Repurchase
Program under which up to 10 million shares of VISX common stock may be
repurchased. In accordance with the April 4, 2001 authorization and applicable
securities laws, through purchases on the open market we repurchased 1,581,000
shares during the first half of 2002 and have repurchased 4,683,400 shares
cumulatively through June 30, 2002 at a total cost of $23.7 million and $71.4
million, respectively. Accordingly, 5.3 million shares remain available as of
June 30, 2002 for repurchase under the Board of Directors April 2001
authorization.

6. Significant Customer and Commitments

In May 2002, Laser Vision Centers, Inc. and TLC Laser Eye Centers, Inc.
announced their business combination was consummated and became effective. The
entitys new name is TLC Vision Corporation (TLC). The combined company,
TLC, accounted for 15% and 19% of total revenues in the second quarter of 2002
and 2001, respectively, and 15% and 20% of total revenues in the first half of
2002 and 2001, respectively.

In May 2002, VISX announced that it has signed a Letter of Intent with
Tracey Technologies, LLC (Tracey) for exclusive worldwide rights to Traceys
ray tracing technology for use in customized laser vision correction
treatments. Additionally, VISX announced that it has entered into an exclusive
worldwide license agreement for a portfolio of patents held by Luis Ruiz, MD,
relating to the treatment of presbyopia with multifocal ablations. During the
second quarter VISX made payments of $650,000 related to these
agreements of which $150,000 was expensed in connection with research
and development activities and the balance was capitalized as a
prepaid asset. If
a final agreement is concluded with Tracey and clinical and regulatory

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milestones specified in both agreements are achieved, VISX would be
committed to make additional payments in the range of $3 million to
$7 million in connection with provisions contained in these two
agreements. VISX could be obligated for additional payments
for royalty in the future based on future sales of the associated products.

7. Related Parties

In August 2001 we signed a one-year research and development agreement
with Medjet Inc. (Medjet) under which we provide funding to Medjet to pursue
new ophthalmic technologies and products. In addition, we signed an agreement
with Medjet that provides us with a one-year option, for which we paid $0.5
million, to acquire all outstanding Medjet common stock in a merger transaction
for $2.00 per share in cash. The closing of the potential merger is subject to
Medjets shareholder approval and is subject to other customary conditions to
closing. At the same time, we paid $1.3 million to purchase from a third party
all outstanding shares of Medjets Series B Convertible Preferred Stock, which
are entitled to votes equivalent to 1,040,000 shares of Medjet common stock and
vote together with Medjets common stock. These shares owned by VISX represent
21% of Medjets voting stock. In connection with these agreements, we also
entered into a voting agreement with Dr. Eugene Gordon, founder of Medjet,
under which Dr. Gordon has agreed to vote all of his shares of common stock in
favor of the merger, and has agreed to sell all of his stock to VISX in the
event that VISX offers to complete the merger. Dr. Gordon currently holds
1,596,787 shares, representing 32% of Medjets voting stock.
Additionally, VISX acquired warrants from Medjet to purchase
1,320,000 shares of
Medjet common stock exercisable at $0.75 per share. VISX also
acquired warrants from a third party to purchase 1,365,000 shares of
Medjet common stock exercisable at $3.50 per share. The warrants
expire during the second half of 2004. Under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, the warrants are treated as derivatives
and measured at fair value. At each balance sheet date, the warrants
are remeasured at fair value and all gains and losses are recorded in
the statements of operations. Lastly, we now
have one of seven seats on Medjets Board of Directors. We account for this
investment under the equity method prescribed by Accounting Principles Board
No. 18, The Equity Method of Accounting for Investments in Common Stock.

Under our R&D agreement with Medjet, we paid approximately $1.8 million to
Medjet to fund research and development work they performed during the first
half of 2002 and anticipate continuing this funding level through August 2002.
We expense payments made to Medjet as research, development and regulatory
expense in our financial statements. To exercise our option to acquire Medjet,
we would have to pay approximately $9 million based on the $2.00 per share
purchase price and the number of shares of Medjet common stock, options and
warrants outstanding at June 30, 2002.

8. New Accounting Pronouncements

On June 29, 2001, the Financial Accounting Standard Board (FASB)
approved for issuance Statement of Financial Accounting Standards No. 141,
Business Combinations (SFAS 141), and Statement of Financial Accounting
Standards No. 142, Goodwill and Intangible Assets (SFAS 142). Major
provisions of these statements are as follows:



| | (i)   |  | All business combinations initiated after June 30, 2001 must
use the purchase method of accounting;                                                                                                                                                                                                                                 
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | The pooling of interests method of accounting is prohibited
except for transactions initiated before July 1, 2001;                                                                                                                                                                                                                  
|
| | (iii) |  | Intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual or
other legal rights or are separable from the acquired entity and can
be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability;
|
| | (iv)  |  | Goodwill and intangible assets with indefinite lives are not
amortized but are tested for impairment annually using a fair value
approach, except in certain circumstances, and whenever there is an
impairment indicator;                                                                                                          

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| | (v)    |  | Other intangible assets will continue to be valued and
amortized over their estimated lives;                       
| | ------ |  | -------------------------------------------------------------------------------------------------------------------
|
| | (vi)   |  | In-process research and development will continue to be
written off immediately;                                   
|
| | (vii)  |  | All acquired goodwill must be assigned to reporting units
for purposes of impairment testing and segment reporting;
|
| | (viii) |  | Effective January 1, 2002, existing goodwill will no longer be
subject to amortization.                            

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

In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). An impairment loss must be recognized if the net book
value of long-lived assets exceeds:



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

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

In July 2001, the FASB Emerging Issues Task Force (EITF) reached final
consensus on EITF No. 00-25, Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendors Products (EITF 00-25). EITF
00-25 generally requires that consideration, including equity instruments,
given to a customer be classified in a vendors financial statements not as an
expense, but as a reduction to revenue up to the amount of cumulative revenue
recognized or to be recognized. In November 2001, the EITF reached consensus on
EITF No. 01-09, Accounting for Consideration Given by a Vendor to a Customer
or Reseller of the Vendors Products (EITF 01-09). EITF 01-09 clarifies and
modifies certain items discussed in EITF 00-25. We adopted these new standards
on January 1, 2002. In accordance with the transition guidance in EITF 00-25,
adoption required the reclassification of financial statements for prior
periods presented for comparative purposes.

In accordance with EITF 00-25 and EITF 01-09, we have reclassified
consideration provided to customers in our statements of operations. This
consideration was previously reported as selling, general, and administrative
expense. This consideration is reported as a reduction to license, service and
other revenue. The amounts reclassified for the first, second, third and fourth
quarters of 2001 are $1,111,000, $1,121,000, $1,508,000 and $810,000,
respectively. These reclassifications do not change the amount of

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net income reported for each period, however revenue and expense are
reduced in equal and offsetting amounts in each period.

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

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

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Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations

This Report contains forward-looking statements about expected system
sales and rentals, laser upgrade revenue and costs, license revenue, and R&D
expenditures for the remainder of 2002. These statements are subject to risks
and uncertainties that may cause actual results to differ significantly. The
risks and uncertainties include the potential reduction in demand for VISX
equipment and upgrades, and the potential decline in demand for procedures
caused by the continued weakness in the economy, consumer confidence and stock
markets in the United States. These forward-looking statements are estimates
reflecting the best judgment of the senior management of VISX, and they involve
a number of risks and uncertainties that could cause actual results to differ
materially from those suggested by the forward-looking statements.
Forward-looking statements should therefore be considered in light of various
important factors, including those set forth in our 2001 annual report on Form
10-K under the caption Risk Factors beginning on page 26, Legal Proceedings
beginning on page 8, and elsewhere in that report. Moreover, we caution you not
to place undue reliance on these forward-looking statements, which speak only
as of the date they were made. We do not undertake any obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.

The laser vision correction industry is evolving rapidly. Economic,
market, and technology changes frequently affect VISX and could harm our
business in the future. If any of the risks referred to above were to
materialize, orders and revenues for VISX Systems and VisionKey cards could
fluctuate or decline. Accordingly, our past results may not be useful in
predicting our future results.

Overview

We develop products and procedures to improve peoples eyesight using
lasers. Our principal product, the VISX STAR Excimer Laser System (VISX
System), is designed to correct the shape of a persons eyes to reduce or
eliminate the need for eyeglasses or contact lenses. The Food and Drug
Administration (FDA) has approved the VISX® System for use in the treatment
of most types of refractive vision disorders including nearsightedness,
farsightedness, and astigmatism. The FDA has approved, under a humanitarian
device exemption, the use of VISXs Custom-Contoured Ablation Pattern (C-CAP
) method to customize laser vision correction treatments to correct
decentered ablations resulting from a previous treatment on any brand of laser.
The FDA has also approved our WaveScan Wavefront System (WaveScan System),
which provides a complete refractive analysis of the eyes entire optical
system. In the future, we anticipate that doctors will be able to use this
analysis to enhance treatments with the VISX System. We sell
VisionKey® cards
to control the use of the VISX System and to collect license fees for the use
of our patents.

Results of Operations

|                                  |                           |      |                             |      |                           |        |        |      |   |      |     |        |  |   |        |      |   |   |        |      |   |  |     |    | 
|--------------------------------- | ------------------------- | ---- | --------------------------- | ---- | ------------------------- | ------ | ------ | ---- | - | ---- | --- | ------ |  | - | ------ | ---- | - | - | ------ | ---- | - |  | --- | -- | 
|                                  |                           |      | Three Months Ended June 30, |      | Six Months Ended June 30,
|                                  |                           |      |                             |      |                          
|REVENUES (000's)                  |                           | 2002 |                             | 2001 |                           | Change |        | 2002 |   | 2001 |     | Change
|                                  |                           |      |                             |      |                           |        |        |      |   |      |     |       
|System revenues                   |                           | $    | 12,804                      |      |                           | $      | 17,239 |      |   |      | (26 | )%     |  | $ | 22,719 |      |   | $ | 34,335 |      |   |  | (34 | )%
|                                  | Percent of total revenues |      |                             | 34.9 | %                         |        |        | 35.7 | % |      |     |        |  |   |        | 31.0 | % |   |        | 34.8 | % |  |     |    | 
|License, service & other revenues |                           |      | 23,835                      |      |                           |        | 31,022 |      |   |      | (23 | )%     |  |   | 50,505 |      |   |   | 64,391 |      |   |  | (22 | )%
|                                  | Percent of total revenues |      |                             | 65.1 | %                         |        |        | 64.3 | % |      |     |        |  |   |        | 69.0 | % |   |        | 65.2 | % |  |     |    | 
|Total                             |                           | $    | 36,639                      |      |                           | $      | 48,261 |      |   |      | (24 | )%     |  | $ | 73,224 |      |   | $ | 98,726 |      |   |  | (26 | )%

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System revenues

System revenues decreased $4.4 million, to $12.8 million for the three
months ended June 30, 2002 from $17.2 million for the three months ended June
30, 2001. System revenues decreased $11.6 million, to $22.7 million for the six
months ended June 30, 2002 from $34.3 million for the six months ended June 30,
2001. Sales of laser systems declined $4.4 million and $9.2 million in the
second quarter and first half of 2002, respectively, from the comparable
periods of the prior year. We believe the decline, mainly in the U.S., was due
primarily to the economic slowdown in the United States. Aggressive tactics by
competitors also affected our sales. Our average selling price for laser
systems was lower than in the prior year due to the factors discussed above.
Upgrade revenue declined $0.4 million and $3.5 million in the second quarter
and first half of 2002, respectively, from the comparable periods of the prior
year. The decline in upgrade revenue was due to the fact that approximately
75% of our lasers in active use in the U.S. have already been upgraded.
Accordingly, we anticipate that revenue from laser upgrades will decline
significantly in coming quarters and that upgrade revenue will be lower for the
full year 2002 than in 2001. WaveScan system sales increased $0.4 million and
$1.1 million in the second quarter and first half of 2002, respectively, over
the comparable periods of the prior year as we continued to extend our rollout
of this new product.

License, service & other revenues

License, service and other revenue decreased $7.2 million, to $23.8
million for the three months ended June 30, 2002 from $31.0 million for the
three months ended June 30, 2001. License, service and other revenue decreased
$13.9 million to $50.5 million for the six months ended June 30, 2002 from
$64.4 million for the six months ended June 30, 2001. The decreases were
attributable primarily to customers in the U.S. purchasing
VisionKey® cards for
fewer procedures in the first half of 2002 than in the comparable period of
2001. The decision to have laser vision correction surgery is influenced by
many factors including consumers perception of and confidence in the health of
the economy. We believe the weak economy, declines in consumer confidence, and
the extended stock market declines in the United States were the principal
reasons why our U.S. procedure volume, and the U.S. laser vision correction
market as a whole, were lower in the first half of 2002 than in the same period
of 2001. At present, it is hard to predict when the economy, consumer
confidence and stock markets in the U.S. will rebound and provide renewed
support for the U.S. laser vision correction market.

|                                            |  |                           |        |                             |      |                           |        |      |      |      |     |        |  |   |        |  |      |   |        |  |      |   |     |    |  | 
|------------------------------------------- |  | ------------------------- | ------ | --------------------------- | ---- | ------------------------- | ------ | ---- | ---- | ---- | --- | ------ |  | - | ------ |  | ---- | - | ------ |  | ---- | - | --- | -- |  | 
|                                            |  |                           |        | Three Months Ended June 30, |      | Six Months Ended June 30,
|                                            |  |                           |        |                             |      |                          
|COSTS & EXPENSES (000's)                    |  | 2002                      |        | 2001                        |      | Change                    |        | 2002 |      | 2001 |     | Change
|                                            |  |                           |        |                             |      |                           |        |      |      |      |     |       
|Cost of system revenues                     |  | $                         | 7,176  |                             |      | $                         | 11,325 |      |      |      | (37 | )%     |  | $ | 15,338 |  |      | $ | 24,303 |  |      |   | (37 | )%
|                                            |  | Percent of total revenues |        |                             | 19.6 | %                         |        |      | 23.5 | %    |     |        |  |   |        |  | 20.9 | % |        |  | 24.6 | % |     |    |  | 
|Cost of license, service, and
other revenue |  | $                         | 4,809  |                             |      | $                         | 4,484  |      |      |      | 7   | %      |  | $ | 9,251  |  |      | $ | 9,334  |  |      |   | 1   | % 
|                                            |  | Percent of total revenues |        |                             | 13.1 | %                         |        |      | 9.3  | %    |     |        |  |   |        |  | 12.6 | % |        |  | 9.5  | % |     |    |  | 
|Marketing, genl and admin                  |  |                           | 11,661 |                             |      |                           | 10,488 |      |      |      | 11  | %      |  |   | 22,179 |  |      |   | 21,157 |  |      |   | 5   | % 
|                                            |  | Percent of total revenues |        |                             | 31.8 | %                         |        |      | 21.7 | %    |     |        |  |   |        |  | 30.3 | % |        |  | 21.4 | % |     |    |  | 
|R&D and regulatory                          |  |                           | 4,779  |                             |      |                           | 4,592  |      |      |      | 4   | %      |  |   | 9,024  |  |      |   | 9,142  |  |      |   | (1  | )%
|                                            |  | Percent of total revenues |        |                             | 13.1 | %                         |        |      | 9.5  | %    |     |        |  |   |        |  | 12.3 | % |        |  | 9.3  | % |     |    |  | 

Cost of system revenues

Cost of system
revenues decreased $4.2 million to $7.2 million for the
three months ended June 30, 2002 from $11.3 million for the three months ended
June 30, 2001. Cost of system revenues decreased $9.0 million to $15.3 million
for the six months ended June 30, 2002 from $24.3 million for

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the six months ended June 30, 2001. These declines were due primarily to
lower cost related to reduced laser upgrade revenue. The gross profit margin
on laser upgrade revenue was higher in 2002 than in 2001. We anticipate that
laser upgrade revenue and the gross profit margin on this revenue will decline
throughout the remainder of 2002. Lower laser upgrade sales also contributed
to the decline in related costs.

Cost of license, service and other revenues

Cost of revenues
increased $0.3 million to $4.8 million for the three
months ended June 30, 2002 from $4.5 million for the three months ended June
30, 2001. Cost of revenues decreased $0.1 million to $9.2 million for the six
months ended June 30, 2002 from $9.3 million for the six months ended June 30,
2001. The increase was due to higher costs for service.

Selling, general, and administrative expenses

Selling, general, and administrative expenses increased $1.2 million to
$11.7 million for the three months ended June 30, 2002 from $10.5 million for
the three months ended June 30, 2001. Selling, general, and administrative
expenses increased $1.0 million to $22.2 million for the six months ended June
30, 2002 from $21.2 million for the six months ended June 30, 2001. These
increases were due to additional sales programs and marketing activities
associated with major industry trade shows during the second quarter plus other
additional general expenses. Legal expenses in the second quarter and first
half of 2002 were lower than in the comparable periods of the prior year as the
result of a $1.5 million insurance reimbursement received during the second
quarter of 2002. Excluding this reimbursement, legal expenses increased in
2002 over 2001.

Research, development and regulatory expenses

Research, development and regulatory expenses increased $0.2 million, to
$4.8 million for the three months ended June 30, 2002 from $4.6 million for the
three months ended June 30, 2001. Research, development and regulatory expenses
decreased $0.1 million to $9.0 million for the six months ended June 30, 2002
from $9.1 million for the three months ended June 30, 2001. We anticipate that
our research, development and regulatory expenses will total approximately $18
to $19 million for 2002.

Interest and other income

Our average balance of cash invested in interest bearing securities was
lowered in 2002 from 2001 due to cash used to repurchase our stock.
Additionally, our average yields on our portfolio of cash and investments was
lower in 2002 compared to 2001. Accordingly, interest income declined in 2002
from 2001.

Liquidity and Capital Resources

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

|                                                  |  |               |         |                   |  |   |         | 
|------------------------------------------------- |  | ------------- | ------- | ----------------- |  | - | ------- | 
|                                                  |  | (000's)      
|                                                  |  | June 30, 2002 |         | December 31, 2001
|                                                  |  |               |         |                  
|Cash, cash equivalents and short-term investments |  | $             | 128,168 |                   |  | $ | 123,807 | 
|Working capital                                   |  |               | 152,062 |                   |  |   | 159,935 | 

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Cash, cash equivalents and short-term investments (cash) increased by
$4.4 million in the first six months of 2002 due mainly to $26.2 million cash
provided by operations offset by $23.7 million paid to repurchase 1.6 million
shares of VISX stock on the open market.

Operating activities provided $26.2 million of cash in the first half of
2002, up from $16.8 million provided by operations in the same period of 2001.
The following factors that impact cash flow from operations changed between the
first six months of 2002 and 2001.



| |  |  | Net income increased $10.5 million due mainly to the
non-recurring 2001 litigation settlement of $37.8 million, pre-tax,
offset by lower sales in 2002.                                                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Accrued liabilities decreased by $3.7 million in the first
six months of 2002 compared to a $28.0 million increase in the same
period of 2001. The significant increase in accrued liabilities in
2001 related to the litigation settlement of $37.8 million, pre-tax.
|
| |  |  | Deferred tax assets and prepaid expenses decreased by $7.1
million in 2002 as a result of a decrease in prepaid taxes carried
forward from 2001.                                                                                                                      
|
| |  |  | Accounts receivable declined by $6.0 million in 2002 due to
lower revenues whereas accounts receivable increased by $9.1 million
in 2001.                                                                                                                             
|
| |  |  | Long-term deferred tax and other assets declined by $1.4
million due to reductions in the long-term portion of receivables
outstanding with customers from equipment financing.                                                                                       
|
| |  |  | Inventory declined in the first six months of 2002.
Excluding the $1.6 million reclassification of inventory to property
and equipment, the inventory balance increased by $1.0 million in
the first six months of 2002.                                              

On April 4, 2001 our Board of Directors authorized a Stock Repurchase
Program under which up to 10 million shares of VISX common stock may be
repurchased. Before repurchasing shares we consider a number of factors
including market conditions, the market price of the stock, and the number of
shares needed for employee benefit plans. As a result, we cannot predict the
number of shares that we may repurchase in the future. In accordance with the
April 4, 2001 authorization and applicable securities laws, through purchases
on the open market, we repurchased 1,581,000 shares during the first half of
2002 and have repurchased 4,683,400 shares cumulatively through June 30, 2002
at a total cost of $23.7 million and $71.4 million, respectively. Accordingly,
5.3 million shares remain available as of June 30, 2002 for repurchase under
the Board of Directors April 2001 authorization.

Purchases of short-term investments represent reinvestment into short-term
investments of the proceeds from short-term investments that matured and
investment of cash and cash equivalents. As of June 30, 2002, we did not have
any borrowings outstanding nor any credit agreements.

Our normal credit terms granted to customers are net 30 to 60 days. In an
effort to promote the growth of the laser vision correction industry and the
use of VISX® Systems, in certain markets we provide long-term financing to
customers for their purchase of VISX® Systems. We consider a number of factors
including industry practice, competition and our evaluation of customers
credit worthiness in determining when to offer such financing. We believe that
our operations will provide sufficient cash flow to meet our working capital
and capital equipment needs during the next twelve months. In addition, we have
$128.2 million of cash, cash equivalents and short-term investments as of June
30, 2002 to provide for unforeseen contingencies and to support strategic
objectives including the development or acquisition of new technologies and our
Stock Repurchase Program.

In August 2001 we signed a one-year research and development agreement
with Medjet Inc. (Medjet) under which we provide funding to Medjet to pursue
new ophthalmic technologies and products. In addition, we signed an agreement
with Medjet that provides us with a one-year option, for

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which we paid $0.5 million, to acquire all outstanding Medjet common stock
in a merger transaction for $2.00 per share in cash. The closing of the
potential merger is subject to Medjets shareholder approval and is subject to
other customary conditions to closing. At the same time, we paid $1.3 million
to purchase from a third party all outstanding shares of Medjets Series B
Convertible Preferred Stock, which are entitled to votes equivalent to
1,040,000 shares of Medjet common stock and vote together with Medjets common
stock. These shares owned by VISX represent 21% of Medjets voting stock. In
connection with these agreements, we also entered into a voting agreement with
Dr. Eugene Gordon, founder of Medjet, under which Dr. Gordon has agreed to vote
all of his shares of common stock in favor of the merger, and has agreed to
sell all of his stock to VISX in the event that VISX offers to complete the
merger. Dr. Gordon currently holds 1,596,787 shares, representing 32% of
Medjets voting stock.
Additionally, VISX acquired warrants from Medjet to purchase
1,320,000 shares of
Medjet common stock exercisable at $0.75 per share. VISX also
acquired warrants from a third party to purchase 1,365,000 shares of
Medjet common stock exercisable at $3.50 per share. The warrants
expire during the second half of 2004. Under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, the warrants are treated as derivatives
and measured at fair value. At each balance sheet date, the warrants
are remeasured at fair value and all gains and losses are recorded in
the statements of operations. Lastly, we now have one of seven seats on Medjets Board
of Directors. We account for this investment under the equity method prescribed
by Accounting Principles Board No. 18, The Equity Method of Accounting for
Investments in Common Stock.

Under our R&D agreement with Medjet, we paid approximately $1.8 million to
Medjet to fund research and development work they performed during the first
half of 2002 and anticipate continuing this funding level through August 2002.
We expense payments made to Medjet as research, development and regulatory
expense in our financial statements. To exercise our option to acquire Medjet,
we would have to pay approximately $9 million based on the $2.00 per share
purchase price and the number of shares of Medjet common stock, options and
warrants outstanding at June 30, 2002.

In May 2002, VISX announced that it has signed a Letter of Intent with
Tracey Technologies, LLC for exclusive worldwide rights to Traceys ray tracing
technology for use in customized laser vision correction treatments.
Additionally, VISX announced that it has entered into an exclusive worldwide
license agreement for a portfolio of patents held by Luis Ruiz, MD, relating to
the treatment of presbyopia with multifocal ablations. During the second
quarter VISX made payments of $650,000 related to these agreements of
which $150,000 was expensed in connection with research and
development activities and the balance was capitalized as a prepaid
asset. If a final
agreement is concluded with Tracey and clinical and regulatory milestones
specified in both agreements are achieved, VISX would be committed to make
additional payments in the range of $3 million to $7 million in
connection with provisions contained in these two agreements. VISX could be obligated for
additional payments for royalty in the future based on future sales of
the associated products.

Critical Accounting Policies

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

Revenue Recognition

Our revenue is comprised of the following: sale and rental of system
equipment and upgrades, service revenue, and license fees and related procedure
revenue (procedure revenue). We recognize revenue in accordance with SEC
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101). Under this standard, revenue is generally recognized when the
following four criteria are met:



| | (1) |  | Persuasive evidence of an arrangement exists;
| | --- |  | ---------------------------------------------

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| | (2)                                                                                               |  | Delivery has occurred or services have been rendered;
| | ------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------
|
| | (3)                                                                                               |  | Our selling price is fixed or determinable; and      
|
| | (4)                                                                                               |  | Collectibility is reasonably assured.                
|
| | All of our sales are documented by contract or purchase orders specifying
sales prices and terms.

Within the U.S. we directly handle the sale and installation of our
systems and recognize revenue on these products after we have completed
installation of systems at a customers site. At this point we accrue an
estimate of the cost of warranty service to be provided in the future. Outside
the U.S. our standard terms are FOB VISX and we sell exclusively through
independent, third party distributors who are generally responsible for all
marketing, sales, installation, training and warranty labor coverage for our
products. Accordingly, we recognize sales revenue when we ship systems for
customers outside the U.S. and accrue an estimate of the cost of parts that we
are obligated to provide under warranty. Sales revenue includes
revenue recognized under sales type lease agreements. Under rental or operating lease
agreements for systems, rental revenue is recognized in accordance with, and
over the term of the agreement. For customers who purchase service contracts,
we recognize service revenue over the term of the contract. For customers
without service contracts, we recognize service revenue when we provide
service. We record spare parts revenue upon shipment of the parts. We recognize
license revenue when we ship VisionKey® cards in the U.S. and when we receive
payments from third party licensees.

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

Accounts Receivable

Customers are evaluated for credit worthiness and we recognize revenue
when collectibility is reasonably assured. After a receivable is recorded, we
estimate the reserves necessary for receivables that will ultimately not be
collectible from customers. To develop this estimate we review all receivables
and identify those accounts with problems. For these problem accounts, we
estimate individual, specific reserves based on our analysis of the payment
history, operations and finances of each account. For all other accounts, we
review historical bad debt trends, general and industry specific economic
trends, customer concentrations, and current payment patterns to estimate the
reserve necessary to provide for payment defaults that cannot be specifically
identified but can be expected with reasonable probability to occur in the
future. We face two particular challenges in estimating these reserves:
concentration of credit with certain large customers and the potential for
significant change in the overall health of the national economies in the
markets we serve. Unexpected deterioration in the health of either a large
customer or a national economy could lead to a material adverse impact on the
collectibility of our accounts receivable and our future operating results.

Inventories

Inventories consist of purchased parts, subassemblies and finished systems
and are stated at the lower of cost or market, using the first-in, first-out
method. We regularly review our inventory on hand plus on order and compare
this to our estimate of demand over the following 12 months. Based on this
analysis, we reduce our inventory valuation for excess and obsolete
items. Changes in
competition, the economy, and technology can lead to variation in demand for
our products. If the change in demand is significant, we may need to
further reduce the inventory valuation. All inventory write-

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downs result in a new cost basis and are charged to cost of revenues, accordingly any inventory
write-down would impact our reported cost of revenues.

Legal Contingencies

We are involved in a variety of legal proceedings including those
concerning intellectual property rights, claims that we violated antirust laws,
and class actions filed under federal securities laws. In cases brought against
us we must assess the probability of an adverse decision. If we believe it
probable that we will lose in our defense and we can reasonably estimate the
loss, we must accrue an estimate of the potential loss. Currently we do not
believe it is probable that we will lose cases currently pending and,
accordingly, have not accrued any reserves for legal settlements. However, the
results of these complex legal proceedings are very difficult to predict with
certainty. In addition, because a number of the proceedings have issues in
common, an adverse determination in one proceeding could lead to adverse
determinations in one or more of the other pending proceedings. Adverse
determinations in any of these proceedings could limit our ability to collect
equipment and use fees in certain markets, could give rise to significant
monetary damages, could prevent us from manufacturing and selling our laser
system, and therefore could have a material adverse effect on our business,
financial position and results of operations.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

There were no material changes during the six months ended June 30, 2002
to our exposure to market risk for changes in interest rates and foreign
currency exchange rates.




Part II. OTHER INFORMATION




Item 1. Legal Proceedings

Overview

VISX is involved in a variety of legal proceedings that affect its
business. These include proceedings relating to patents and intellectual
property rights, proceedings relating to claims that VISXs activities have
violated antitrust laws, class actions filed under federal securities laws and
other litigation proceedings. For a complete description of legal proceedings,
see VISXs annual report on Form 10-K for the year ended December 31, 2001.
During the quarter ended June 30, 2002, there were no material developments
with respect to such previously existing proceedings and no new material
proceedings not previously disclosed, except as follows.

Patent Litigation: WaveLight

In March 2002, VISX filed a lawsuit in Duesselfdorf, Germany against
WaveLight Laser Technologie AG and its senior manager, Max Reindl, alleging
infringement of VISXs German Patent No. P3481164.8. The first court hearing
in this matter took place on June 6, 2002. At the hearing, the court set the
following schedule: Defendants answer must be filed by August 26, 2002; VISX
may reply to that answer on December 2, 2002 and the final hearing in the
matter will take place on January 14, 2003.

Patent Litigation: Nidek

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In August 2000, Nidek filed an action in the Tokyo District Court in Japan
against VISXs Japanese subsidiary and others alleging infringement of Nideks
Japanese Patent No. 2,809,959 (the 959 patent). VISX thereafter initiated
two proceedings in the Japanese Patent Office (JPO) challenging the validity
of the 959 patent. In November 2001 and January 2002, the Tokyo District
Court and JPO, respectively, held that the 959 patent is invalid. Nidek
appealed both of these decisions to the Tokyo High Court and stated that it may
attempt to amend the claims of the 959 patent. On June 19, 2002, the JPO in
the second proceeding issued a Notice of Reasons for Invalidation of the 959
patent based on additional grounds. Nidek has the right to file an Argument to
rebut these additional grounds for invalidity and to file a Request for
Correction of the patent claims found invalid by the JPO. A final decision by
the JPO in the second proceeding is expected after the Tokyo High Court rules
on Nideks appeal of the JPO decision of invalidation in the first proceeding.

Antitrust Class Actions And Litigation Involving Pillar Point Partners

In April 1998, Marks v. Summit Technology, Inc., et al., was filed by
plaintiff in the State of Florida, on behalf of a purported class of patients
in several states, alleging violations of the Florida antitrust and unfair
competition laws. On March 20, 2002, pursuant to the parties stipulation,
this action was dismissed with prejudice.

In June 1998, VISX, VISX Partner, Inc., Summit Technology, Inc. (now
Summit Autonomous Inc.) and Summit Partner, Inc. (the parties), entered into
a Settlement and Dissolution Agreement which dissolved Pillar Point Partners.
The Dissolution Agreement provided that Pillar Point would remain in existence
thereafter for the sole purpose of winding up its affairs and defending or
settling litigation in which it was a party. In August 2002, the parties and
Pillar Point Partners entered into a Confirmation Agreement providing that
Pillar Point had wound up its affairs, that all litigation to which it was a
party had been terminated and that Pillar Point no longer existed for any
purpose.

Securities Class Action

In August 2002, the United States Court of Appeals for the Ninth Circuit
affirmed the district courts dismissal of the securities fraud class action
against VISX and the individual defendants in the case captioned in re VISX
Inc. Securities Litigation(No. C-00-0649-CRB). The plaintiffs in these
actions purported to represent a class of all persons who purchased VISXs
common stock between March 1, 1999 and February 22, 2000. The complaint alleged
that the defendants made misleading statements in violation of the federal
securities laws, including Section 10(b) of the Securities Exchange Act of
1934.




Item 5. Other Information

In accord with Section 10A(i)(2) of the Securities Exchange Act
of 1934, as added by Section 202 of the Sarbanes-Oxley Act of
2002, VISX is responsible for listing the non-audit services approved
in the second quarter by VISXs Audit Committee (the
Committee) to be performed
by KPMG, VISXs external auditor. Non-audit services are
defined in the law as services other than those provided in
connection with an audit or a review of the financial statements of
VISX. The non-audit services approved by the Audit Committee in the
second quarter are each considered by VISX to be audit-related
services which are closely related to the financial audit process.
Each of the services has been approved in accord with a pre-approval
from the Committees Chairman pursuant to delegated authority by the
Committee.

During the quarterly
period covered by this filing, the Committee approved additional engagements of KPMG for the following
non-audit service: tax matter consultations concerning federal and
state taxes.




Item 6. Exhibits and Reports on Form 8-K



|a) |  | Exhibits.                                                                                     
|-- |  | ----------------------------------------------------------------------------------------------
|  
|   |  | 99.1 Certification of Chief Executive Officer and Chief Financial
 Officer                    
|  
|b) |  | Reports on Form 8-K.                                                                          
|  
|   |  | VISX filed a report on Form 8-K during or after the period covered by
this report, as follows:

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|(1) |  | Report on Form 8-K filed on June 7, 2002 under Item 4 (Change in
Registrants Certifying Accountant) covering VISXs dismissal of Arthur
Andersen LLP as its independent accountants and engagement of KPMG LLP
as its new independent accountants. Attached as an exhibit to the Form
8-K was a letter from Arthur Andersen LLP to the Securities & Exchange
Commission.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

| |                               
| | ------------------------------
| | VISX,
Incorporated(Registrant)

|                        |  |                                                                                                                        
|----------------------- |  | -----------------------------------------------------------------------------------------------------------------------
|August 12, 2002

(Date) |  | /s/Elizabeth H. Dávila
Elizabeth H. Davila
Chairman of the Board and
Chief Executive Officer                           
|                       
|August 12, 2002
(Date)  |  | /s/Timothy R. Maier
Timothy R. Maier
Executive Vice President and
Chief Financial Officer (principal
financial officer)
|                       
|August 12, 2002
(Date)  |  | /s/Derek A. Bertocci
Derek A. Bertocci
Vice President, Controller (principal
accounting officer)                       

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EXHIBIT INDEX

|            |  |                                                                     
|----------- |  | --------------------------------------------------------------------
|Exhibit No. |  | Description                                                         
|            |  |                                                                     
|99.1        |  | Certification of Chief Executive Officer and Chief Financial Officer