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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
 
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 or o
    
    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   VISX, INCORPORATED (Exact name of registrant as specified in its charter)
 
 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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o Total number of shares of common stock outstanding as of April 22, 2005: 50,103,985.   Page 1 of 36




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VISX, INCORPORATED
TABLE OF CONTENTS  
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Unaudited Condensed Consolidated Interim Financial StatementsCondensed Consolidated Interim Balance Sheets as of March 31, 2005 and December 31, 2004
    
    3Condensed Consolidated Interim Statements of Operations for the Three Months Ended March 31, 2005 and 2004
    
    4Condensed Consolidated Interim Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004
    
    5Notes to Condensed Consolidated Interim Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsOverview
    
    13Results of Operations
    
    16Liquidity and Capital Resources
    
    20Critical Accounting Policies, Estimates and Judgments
    
    22Risk Factors
    
    23Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    31Item 4.
    
    Controls and Procedures
    
    32PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    33Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    34Item 5.
    
    Other Information
    
    34Item 6.
    
    Exhibits and Reports on Form 8-K
    
    34SIGNATURES
    
    35EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
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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) March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)
    
    
    (unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    17,353
    
    
    $
    14,536Short-term investments
    
    
    143,084
    
    
    
    123,872Accounts receivable, net of allowance for
doubtful accounts of $1,902 and $3,895
respectively
    
    
    34,965
    
    
    
    31,584Inventories
    
    
    13,211
    
    
    
    14,255Deferred tax assets and prepaid expenses
    
    
    21,568
    
    
    
    22,219Total current assets
    
    
    230,181
    
    
    
    206,466Property and Equipment, net
    
    
    3,784
    
    
    
    3,990Long-Term Deferred Tax and Other Assets
    
    
    11,733
    
    
    
    12,367Total Assets
    
    $
    245,698
    
    
    $
    222,823LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    6,537
    
    
    $
    3,588Accrued liabilities and other current liabilities
    
    
    44,277
    
    
    
    40,579Total current liabilities
    
    
    50,814
    
    
    
    44,167Stockholders Equity:Common stock: $.01 par value, 180,000,000
shares authorized; 64,990,089 shares issued at
March 31, 2005 and December 31, 2004,
respectively
    
    
    650
    
    
    
    650Additional paid-in capital
    
    
    199,951
    
    
    
    200,209Treasury stock, at cost 14,936,136 and
15,066,708 shares, at March 31, 2005 and
December 31, 2004 respectively
    
    
    (240,395
    )
    
    
    (242,496
    )Accumulated other comprehensive loss
    
    
    (361
    )
    
    
    (67
    )Retained earnings
    
    
    235,039
    
    
    
    220,360Total stockholders equity
    
    
    194,884
    
    
    
    178,656Total Liabilities and Stockholders Equity
    
    $
    245,698
    
    
    $
    222,823
 The accompanying notes are an integral part of these condensed consolidated interim financial
statements. Page 3 of 36




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VISX, INCORPORATED AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) Three months endedMarch 31,2005
    
    
    2004(unaudited)Revenues:License and other revenues
    
    $
    37,647
    
    
    $
    32,487System revenues
    
    
    7,668
    
    
    
    6,076Service and parts revenues
    
    
    6,024
    
    
    
    5,242Total revenues
    
    
    51,339
    
    
    
    43,805Costs and Expenses:Cost of license and other revenues
    
    
    1,123
    
    
    
    980Cost of system revenues
    
    
    7,154
    
    
    
    5,291Cost of service and parts revenues
    
    
    4,262
    
    
    
    3,598Selling, general and administrative
    
    
    10,510
    
    
    
    9,757Research, development and regulatory
    
    
    5,172
    
    
    
    5,044Total costs and expenses
    
    
    28,221
    
    
    
    24,670Income From Operations
    
    
    23,118
    
    
    
    19,135Interest and other income
    
    
    890
    
    
    
    328Income Before Provision For Income Taxes
    
    
    24,008
    
    
    
    19,463Provision for income taxes
    
    
    9,329
    
    
    
    7,707Net Income
    
    $
    14,679
    
    
    $
    11,756Earnings Per Share:Basic
    
    $
    0.29
    
    
    $
    0.24Diluted
    
    $
    0.28
    
    
    $
    0.23Shares Used For Earnings Per Share:Basic
    
    
    50,007
    
    
    
    48,672Diluted
    
    
    51,749
    
    
    
    50,433
 The accompanying notes are an integral part of these condensed consolidated interim financial
statements. Page 4 of 36




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VISX, INCORPORATED AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(In thousands) Three months ended March 31,2005
    
    
    2004(unaudited)Cash flows from operating activities:Net income
    
    $
    14,679
    
    
    $
    11,756Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    4,033
    
    
    
    2,186Provision for doubtful accounts receivable
    
    
    234
    
    
    
    85Increase (decrease) in cash flows from changes in
operating assets and liabilities:Accounts receivable
    
    
    (3,620
    )
    
    
    (293
    )Inventories
    
    
    (1,575
    )
    
    
    (1,319
    )Deferred tax assets and prepaid expenses
    
    
    (111
    )
    
    
    4,272Long-term deferred tax and other assets
    
    
    493
    
    
    
    985Accounts payable
    
    
    2,949
    
    
    
    162Accrued liabilities and other current liabilities
    
    
    3,691
    
    
    
    2,945Net cash provided by operating activities
    
    
    20,773
    
    
    
    20,779Cash flows from investing activities:Capital expenditures
    
    
    (313
    )
    
    
    (540
    )Purchases of available for sale securities
    
    
    (24,650
    )
    
    
    (18,094
    )Proceeds from maturities of available for sale securities
    
    
    5,181
    
    
    
    2,705Net cash used in investing activities
    
    
    (19,782
    )
    
    
    (15,929
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    1,843
    
    
    
    2,476Repurchases of common stock
    
    
    
    
    
    
    (8,118
    )Net cash provided by (used in) financing activities
    
    
    1,843
    
    
    
    (5,642
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (17
    )
    
    
    8Net increase (decrease) in cash and cash equivalents
    
    
    2,817
    
    
    
    (784
    )Cash and cash equivalents, beginning of period
    
    
    14,536
    
    
    
    24,895Cash and cash equivalents, end of period
    
    $
    17,353
    
    
    $
    24,111Supplemental Cash Flow Information:Cash paid for income taxes
    
    $
    1,637
    
    
    $
    959Non-cash investing activities:Inventory transferred to deferred costs under operating leases
    
    $
    2,612
    
    
    $
    1,203
 The accompanying notes are an integral part of these condensed consolidated interim financial
statements. Page 5 of 36




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VISX, INCORPORATED AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
 1. Significant Accounting Policies 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 accounting principles generally accepted in the United
States. Please read our 2004 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) that in our opinion are necessary to present fairly our results for
the interim period. Our interim financial statements have not been audited. Earnings Per Share. Basic earnings per share (EPS) equals net income divided by the weighted
average number of common shares outstanding. Diluted EPS equals net income divided by the weighted
average number of common shares outstanding plus dilutive potential common shares calculated in
accordance with the treasury stock method. All amounts in the following table are in thousands,
except per share data, and are unaudited. Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    14,679
    
    
    $
    11,756Basic earnings per shareNet income
    
    $
    14,679
    
    
    $
    11,756Weighted average common shares outstanding
    
    
    50,007
    
    
    
    48,672Basic Earnings Per Share
    
    $
    0.29
    
    
    $
    0.24Diluted earnings per shareNet income
    
    $
    14,679
    
    
    $
    11,756Weighted average common shares outstanding
    
    
    50,007
    
    
    
    48,672Dilutive potential common shares from stock options
    
    
    1,742
    
    
    
    1,761Weighted average common shares and dilutive
potential common shares
    
    
    51,749
    
    
    
    50,433Diluted Earnings Per Share
    
    $
    0.28
    
    
    $
    0.23
 Options to purchase 1,622,258 and 2,172,000 shares with a weighted average exercise price of
$37.37 and $33.80, during the three-month periods ended March 31, 2005 and 2004, respectively, were
excluded from the computation of diluted EPS because the options exercise prices were greater than
the average market price of our common stock during these periods and would have been
anti-dilutive. Page 6 of 36




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Stock-Based Employee Compensation.We account for stock-based employee compensation arrangements
using the intrinsic value method in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and Financial Accounting
Standards Board (FASB) Interpretation No. 44 (FIN 44), Accounting for Certain Transactions
Involving Stock Compensation  an Interpretation of APB No. 25 and comply with the disclosure
provisions of Statement of Financial Accounting Standards No. 148, Accounting For Stock-Based
Compensation  Transition and Disclosure (SFAS 148). In accordance with APB 25 and FIN 44, we
record no stock-based employee compensation cost in our net income because (1) all options granted
under our stock option plans have an exercise price equal to the market value of the underlying
common stock on the date of grant and (2) stock purchased through our Employee Stock Purchase Plan
is priced at 85% of the fair market value of the stock on the first day of a two-year offering
period or as of the end of each six month purchase segment of a two year offering period, whichever
is lower. The following table illustrates the effect on net income and earnings per share if we had
applied the fair value recognition provisions of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123), to stock-based employee compensation
(unaudited, in thousands, except per share data). Three Months EndedMarch 31,2005
    
    
    2004Net Income
    
    As Reported
    
    $
    14,679
    
    
    $
    11,756Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects
    
    
    
    
    
    
    (1,437
    )
    
    
    (1,947
    )Net Income
    
    Pro Forma
    
    $
    13,242
    
    
    $
    9,809Basic Earnings Per Share
    
    As Reported
    
    $
    0.29
    
    
    $
    0.24Pro Forma
    
    
    0.26
    
    
    
    0.20Diluted Earnings Per Share
    
    As Reported
    
    $
    0.28
    
    
    $
    0.23Pro Forma
    
    
    0.26
    
    
    
    0.20
 For purposes of computing pro forma net income, we estimate the fair value of each option
grant and employee stock purchase plan purchase right on the date of grant using the Black-Scholes
option pricing model. The assumptions used to value the option grants and purchase rights are
stated as follows: Options granted inthe three months endedMarch 31,2005
    
    
    2004Expected life of options (in years)
    
    
    
    
    
    
    5.36Expected life of ESPP rights (in years)
    
    
    1.25
    
    
    
    1.25Volatility for options
    
    
    
    
    
    
    72
    %Volatility for ESPP rights
    
    
    54
    %
    
    
    59
    %Risk free interest rate for options
    
    
    
    
    
    
    2.86
    %Risk free interest rate for ESPP rights
    
    
    2.61
    %
    
    
    1.71
    %Dividend yield
    
    
    
    
    
    
    0.0
    %
 Under the terms of the merger agreement with Advanced Medical Optics, Inc. (AMO), we are
precluded from granting stock options to our employees or to other parties. Accordingly, there
were no options granted under our stock option plans during the three month period ended March 31,
2005. The weighted average fair value of options granted under our stock option plans during the
three month Page 7 of 36




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period ended March 31, 2004 was $12.34. The weighted average fair value per share of options
granted under the ESPP during the three month periods ended March 31, 2005 and 2004 was $9.31 and
$4.30, respectively. These pro forma amounts may not be representative of the effects on net income in future years
following our adoption of Statement of Financial Accounting Standards No. 123(R), Share Based
Payment (SFAS No. 123(R)) as options vest over several years and additional awards are generally
made each year. 2. Segment Reporting Segments.Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information, (SFAS No. 131) established standards for reporting
information about operating segments in financial statements. Operating segments are defined as
components of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or chief operating decision making
group, in deciding how to allocate resources and in assessing performance. Our Chief Executive
Officer is our chief operating decision maker. Our business is focused on one operating segment,
products and procedures to improve peoples vision with laser vision correction. All of our
revenues and profits are generated through the sale, licensing, and service of products for this
one segment. Export Revenues.Export revenues accounted for 17% and 14% of total revenues for the three month
periods ended March 31, 2005 and 2004 respectively. We did not generate export revenues to any
country that equaled or exceeded 10% of our total revenues for either of the three month periods
ended March 31, 2005 and 2004. In the following table we have presented our export revenues by
geographic region (in thousands): Three months endedMarch 31,2005
    
    
    2004(Unaudited)Europe
    
    $
    2,119
    
    
    $
    1,980Americas (excluding the United States)
    
    
    827
    
    
    
    895Asia and Other
    
    
    5,975
    
    
    
    3,140$
    8,921
    
    
    $
    6,015
 Substantially all of our long-term assets are located in the United States. Major Customers.A significant portion of our revenues is derived from sales to TLC Vision
Corporation (TLC). Sales to TLC and its operating subsidiaries accounted for 16% and 20% of
total revenues in the first quarter of 2005 and 2004, respectively. TLC accounted for 23% and 21%
of our total receivables at March 31, 2005 and December 31, 2004, respectively. Additionally,
Taiwan Hwa-In Corporation, one of our Asian distributors, accounted for 10% and 12% of our total
receivables at March 31, 2005 and December 31, 2004, respectively. Page 8 of 36




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3. Inventories Components of inventories are as follows (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)Raw materials and subassemblies
    
    $
    8,786
    
    
    $
    9,113Work-in-process
    
    
    2,281
    
    
    
    2,723Finished goods
    
    
    2,144
    
    
    
    2,419$
    13,211
    
    
    $
    14,255
 4. Comprehensive Income We report components of comprehensive income in our annual consolidated statements of stockholders
equity. Components of comprehensive income (unaudited, in thousands): Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    14,679
    
    
    $
    11,756Other comprehensive income (net of tax effects)
Increase (decrease) in accumulated unrealized
holding gains on available-for-sale
securities
    
    
    (257
    )
    
    
    58Change in accumulated foreign currency
translation adjustment
    
    
    (37
    )
    
    
    11Comprehensive income
    
    $
    14,385
    
    
    $
    11,825
 5. Warranty Obligations Changes in product warranty obligations for the periods ended March 31, 2005 and 2004 are as
follows (unaudited, in thousands): Three Months EndedMarch 31,2005
    
    
    2004Balance as of the beginning of the period
    
    $
    1,136
    
    
    $
    1,779Expense accrued (recoveries recognized)
    
    
    454
    
    
    
    (14
    )Cost of services provided
    
    
    (550
    )
    
    
    (419
    )Balance as of the end of the period
    
    $
    1,040
    
    
    $
    1,346
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6. Stockholders Equity 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. In accordance with this authorization and
applicable securities laws, we have repurchased 7.8 million shares on the open market cumulatively
through March 31, 2005, at a total cost of $106.8 million. Accordingly, 2.2 million shares remain
available as of March 31, 2005 for repurchase under the Board of Directors April 2001
authorization. On May 28, 2003, the Board of Directors authorized the repurchase of an additional
3.5 million shares of VISX stock at a total cost of $63.0 million, all of which were purchased
during the quarter ended June 30, 2003. 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. Under the terms of the merger agreement with AMO, we are precluded from
repurchasing any of our outstanding common stock on the open market. Accordingly, we did not
repurchase any of our common stock in the three month period ended March 31, 2005. 7. New Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123(R). This standard requires expensing of stock
options and other share-based payments and supercedes the FASBs earlier rule (the original SFAS
123) that allowed companies to choose between expensing stock options or showing pro forma
disclosure only. We currently show the pro forma disclosures in Note 1 to these condensed
consolidated interim financial statements. In April 2005, the SEC approved a new rule to delay the
effective date of SFAS 123(R) to annual periods that commence after June 15, 2005. We will be
required to implement the new pronouncement and begin recording share-based expense at the
beginning of the first quarter of fiscal 2006. Although we have not yet determined whether the
adoption of the SFAS 123(R) will result in amounts that are similar to the current pro forma
disclosures under SFAS 123, we expect the adoption of SFAS 123(R) to have a significant adverse
impact on our consolidated operating results. 8. Litigation On or about November 12, 2004, two putative class action lawsuits were filed in the Superior Court
of the State of California, County of Santa Clara, against VISX and the VISX Board of Directors.
The cases were captioned William Kinchy vs. VISX, Incorporated, et al., Case No. 104CV030447 and
Douglas Shearer vs. VISX, Incorporated, et al., Case No. 104CV030452. On January 27, 2005, the
court ordered the two cases consolidated under the Kinchy case. On January 28, 2005, William Kinchy
filed an amended complaint that alleges, among other things, that the VISX Board of Directors and
certain executive officers breached their fiduciary duties of loyalty and due care by approving the
merger agreement with AMO and the merger contemplated by the merger agreement without undertaking
sufficient efforts to obtain the best offer possible for stockholders. The complaint further
alleges that the consideration to be paid in the merger is unfair and inadequate, and that the
defendants breached their fiduciary duties of care, loyalty and candor to VISXs public
stockholders in connection with the merger. The complaint seeks an injunction prohibiting VISX from
consummating the merger and rights of rescission against the merger and any of the terms of the
merger agreement, as well as attorneys fees and costs. On March 14, 2005, we reached an agreement in principle with plaintiffs counsel pursuant to which
plaintiff will release the defendants, as well as AMO and certain VISX agents and affiliates, from
all claims that have been brought or could have been brought under state or federal law arising out
of or relating to the merger. The settlement agreement remains subject to approval by the Superior
Court of the State of California for the County of Santa Clara, which is not expected to be
obtained prior to the completion of the merger. Under the agreement in principle, we agreed to
make certain additional Page 10 of 36




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disclosures that have been included in the joint proxy statement/prospectus. In addition, we have
agreed that we will not oppose a fee application by plaintiffs counsel of up to $500,000. As of
March 31, 2005 we have recorded all costs that we expect to incur in connection with the proposed
settlement. The settlement does not contemplate any changes to the merger agreement or the merger. In or about October 2001, we terminated a Development and Supply Agreement with Aculight
Corporation (the Agreement). The Agreement requires that before any party may commence
litigation for any controversy or claim arising under the Agreement, such claim must first be
submitted to nonbinding mediation. Aculight has corresponded with us concerning a claim that it is
owed approximately $1.9 million in cancellation fees by virtue of our termination of the Agreement.
We deny that any amounts are owed because Aculight was in breach of certain obligations under the
Agreement at the time of termination; Aculight contends that it did not breach any such
obligations. Aculight demanded mediation of this dispute pursuant to the Agreement, and in January
2005, we scheduled mediation before Judicial Arbitration and Mediation Services (JAMS) for March
25, 2005. This mediation is currently ongoing with no agreement having yet been reached. While it
is not feasible to predict or determine with certainty the final outcome of the mediation, or any
lawsuit filed by Aculight if the parties dispute is not resolved by mediation, we believe any such
lawsuit would be without merit, and that the mediation or lawsuit would not be likely to give rise
to any liability that would materially affect our financial condition or results of operations. We are involved in various other legal proceedings and disputes that arise in the normal course of
business. These matters include product liability actions, contract disputes and other matters.
Based on currently available information, we believe we have meritorious defenses to these actions
and that resolution of these cases is not likely to have a material adverse effect on our
business, financial position or future results of operations. Page 11 of 36




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations This Report contains forward-looking statements including, but not limited to: our belief that we
will begin shipment of Iris Registration in the second quarter of 2005; our belief that our
CustomVue procedure represents a new standard in laser vision correction; our belief that ongoing
technical advances (including our CustomVue procedure) have the potential to improve a persons
vision beyond that which can be obtained with contact lenses or glasses and may increase market
acceptance of and demand for laser vision correction surgery; our belief that we have the largest
installed base of laser vision correction systems in place worldwide and that we have approximately
60% market share for procedures performed in the United States; our belief that acceleration of the
markets acceptance of, and conversion to, our CustomVue procedure, or an increase in the laser
vision correction market in general, or our ability to maintain or gain market share, offers the
potential for growth in our license revenue; our plan to continue to generate cash from our ongoing
business in 2005; our belief that we will continue to investigate areas where we can expand our
presence in the refractive surgery market; our belief there will not be a near-term change in our
level of capital expenditures; our belief that increased acceptance of laser vision correction by
both doctors and patients is essential for our continued growth; our belief that ongoing technical
advances will increase the demand for laser vision correction surgery; our belief that approvals
for additional types and ranges of refractive disorders from the FDA will expand the potential for
growth in procedures, CustomVue adoption and license revenue; our belief that a decline in economic
conditions in the United States could result in a decline in the number of laser vision correction
procedures performed; our belief that our revenue and profit for 2005 will improve compared to
2004; our belief that operating expenses for 2005 will increase compared to 2004; our target of
increasing operating margins to in excess of 40% of revenues; our expectation that we will continue
to generate cash from operations; our belief that adoption of our CustomVue procedure in the United
States increased due to ongoing improved market acceptance of CustomVue and because of recently
obtained FDA approvals for certain CustomVue procedures; our belief that procedure growth resulted
from improved consumer confidence and increased interest in laser vision correction surgery; our
belief that license and other revenues will be lower during the remainder of 2005 as compared to
the first quarter of 2005; our belief that our license revenue will continue to improve in 2005 as
compared to 2004; our belief that the lack of long-term follow-up studies, media coverage of
selected unfavorable outcomes, and economic uncertainties may impact interest in laser vision
correction; our belief that there will be no significant growth in laser system revenues in 2005
and that the sale of WaveScan Systems will be less than in 2004; our belief that service revenues
will be lower during the remainder of 2005 as compared to the first quarter of 2005; our belief
that our gross margins on license and other revenues will be approximately the same in 2005; our
belief that operations will generate cash in 2005 at a level equal to or greater than in 2004; our
belief that cash from operations will exceed cash required to fund our working capital and capital
equipment needs during the coming twelve months; our belief that the estimates and judgments made
regarding future events in connection with the preparation of our financial statements are
reasonable; our belief that we do not expect either our methodology or the accuracy of our
estimates with regard to our inventory to change significantly in the future; and our belief that
the planned merger with AMO will be consummated and our expectation that it will close in the
second quarter of 2005; however these outcomes cannot be predicted with certainty. Forward-looking
statements are estimates reflecting the best judgment of our senior management, 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. Please see the section of this Report entitled Risk
Factors for a more thorough description of the risks that our business faces. 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
forward-looking statements to reflect events or circumstances after the date of this Report or to
reflect the occurrence of unanticipated events. Page 12 of 36




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On November 9, 2004, VISX, Incorporated (VISX) entered into a definitive merger agreement with
Advanced Medical Optics, Inc. (AMO). On May 26, 2005, the stockholders of VISX and AMO are
scheduled to vote on the proposed merger. Our stockholders are expected to receive 0.552 of a share
of AMO common stock and $3.50 in cash for each share of VISX common stock they own at the
completion of the merger, but this mixture of AMO common stock and cash is subject to adjustment as
more fully described below. Each of our stockholders would receive cash for any fractional share of
AMO common stock that the stockholder would otherwise be entitled to receive in the merger after
aggregating all fractional shares to be received by the stockholder. Nonetheless, we continue to
manage our business separately and our discussions in this Management Discussion and Analysis of
Financial Condition and Results of Operations are presented for VISX as a stand-alone entity. The merger is expected to qualify as a reorganization under the Internal Revenue Code of 1986, as
amended. If neither our nor AMOs counsel is able to render an opinion at the completion of the
merger that the merger qualifies as a reorganization (based on the mix of cash and stock
consideration described above) within the meaning of Section 368(a) of the Internal Revenue Code,
then the amount of the cash merger consideration will be reduced and the amount of the stock merger
consideration will be increased, in each case to the minimum extent necessary to enable either
counsel to render this opinion at the completion of the merger. Based on the number of shares of
our common stock outstanding on November 8, 2004, this would occur if the trading price of AMO
common stock on the closing date is below approximately $25.37. In the event of any such adjustment, the overall economic value of the merger consideration
issuable and payable for each share of our common stock in the merger as of the closing date will
still be calculated based on the trading price of AMO common stock at the closing and therefore
will not change. In other words, if an adjustment is made to the mix of cash and stock
consideration, the total value of the stock consideration and the cash consideration after any
adjustment will still be calculated on the closing date and will be equal to the total value of the
stock consideration and the cash consideration prior to the adjustment, but the specific amounts of
stock and cash consideration would change. AMO and VISX will not know, however, whether any such
adjustment is necessary until immediately prior to the completion of the merger. Subject to
stockholder approvals, which we and AMO are in the process of seeking, and other customary closing
conditions, we expect the transaction to close in the second quarter of 2005. We believe the
planned merger will be consummated, however the outcome cannot be predicted with certainty. In connection with the proposed merger, AMO has filed a registration statement with the SEC. The
definitive joint proxy statement/prospectus included therein was mailed to all holders of our stock
on or about April 27, 2005 and contains important information about VISX, AMO and the proposed
merger, risks relating to the merger and the combined company, and related matters. We urge all of
our stockholders to read the definitive joint proxy statement/prospectus prior to their vote
scheduled on May 26, 2005. 
 Overview VISX a Delaware corporation organized in 1988, is a worldwide leader in the design and development
of proprietary technologies and systems for laser vision correction. Our primary operations are in
Santa Clara, CA. Our products require approval by the Food and Drug Administration (FDA) in the United States and
comparable regulatory agency approvals in other countries. Our approvals in the United States and
key markets worldwide for laser vision correction cover most types of refractive vision disorders
including: Page 13 of 36




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
    Nearsightedness;
    Farsightedness; and
    Astigmatism. In certain key international markets, our CustomVue procedure is also approved for all of these
refractive vision disorders. We obtained FDA approval for our CustomVue procedure for
nearsightedness and astigmatism in May 2003 and for CustomVue farsightedness and astigmatism in
December 2004. In March 2005, we obtained FDA approval for our CustomVue procedure for mixed
astigmatism and for our Iris Registration technology upgrade (Iris Registration). Iris
Registration is the first fully automated method of aligning and registering wavefront corrections
for CustomVue procedure and is designed to replace the current means of registration, which
involves manual marking of the eye to assess rotational movement. We expect to begin shipment in
the United States of Iris Registration in the second quarter of 2005. We sell products worldwide and generate the majority of our revenues and cash through license fees
charged for the performance of laser vision correction procedures using the VISX STAR  Excimer
Laser System (VISX STAR System). The license fee charged for a particular procedure depends on
whether the procedure is performed in the United States or internationally, and the type of
procedure involved. In the United States, we charge a license fee for our standard procedure and a
license fee for our CustomVue procedure that is more than twice the amount charged for our standard
procedure. Additionally, we charge a standard price of $10 per procedure for treatment cards.
Internationally, for our standard procedure we charge a small price per procedure for the treatment
card. For our CustomVue procedure we charge a significantly higher price per procedure. We believe our CustomVue procedure, which requires use of a VISX Wavescan Wavefront ® System
(WaveScan System), represents a new standard in laser vision correction. It enables doctors to
identify, measure, and correct imperfections in a patients eye more precisely than ever before,
thus creating the potential for patients to experience better vision than is possible with glasses
or contact lenses. We believe we have the largest installed base of laser vision correction systems, with over 1400
VISX STAR Systems in place worldwide. Market Scope, a refractive surgery market research group,
estimated in their most recent report (December 2004) that VISX is the leader in the worldwide
market with approximately 30% of worldwide laser placements and that we had approximately 60%
market share for procedures performed in the United States in 2004 and have held at least this
share since 1997. Licensing revenues for procedures comprise the majority of our revenue and profit and are
predominantly derived from license fees from our United States customers. This has been especially
true in recent years as the laser vision correction market has matured and the demand for new
hardware systems and upgrades to those systems has declined. Licensing revenues grew 16% in the
three month period ended March 31, 2005 compared with the corresponding period in 2004 and
generated approximately 97% gross margin on each procedure sale and greater than 90% of our total
gross profit. We evaluate this aspect of our business by tracking the following:  
    Trends in procedures sales; and
    Market share for ourselves and our competitors. Any increase in license fee revenue that results from either an increase in the amount charged for
a particular procedure or from an increase in overall procedure volume directly impacts our net
income. As a result, our management team is focused on activities that will (i) accelerate the
markets acceptance of, Page 14 of 36




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and conversion to, our CustomVue procedure; (ii) increase the laser vision correction market in
general, and (iii) enable us to maintain or gain market share. Progress on any one of these fronts
offers the potential for growth in our license revenue. Collectibility of receivables is the most significant estimate related to the recognition of our
revenues. We evaluate our customers for credit worthiness and only recognize revenue if we believe
that we have reasonable assurance that amounts will be collectible. Where we are unable to assess
credit worthiness at the time of original shipment we defer recognition of the related revenues
until collectibility is assured. We manage our expenses closely and plan to continue to generate cash from our ongoing business
operations in 2005. Historically, our primary non-operating use of cash has been to repurchase
shares of our common stock. We will also continue to investigate areas where we can expand our
presence in the refractive surgery market. This could result in using cash for the acquisition of
technology or a company, however, under the terms of the merger agreement with AMO, we are
precluded from acquiring a company or authorizing capital expenditures in excess of certain levels.
Our capital expenditures have been in the range of $2.2 million to $2.8 million per year in the
past five years. We do not expect a near-term change in this level of expenditures. At the
conclusion of the merger, certain one time expenses will be incurred that are described in the
joint registration statement filed by AMO. We have no long term debt. Looking to the remainder of 2005, our business is highly leveraged on procedure volume and the
conversion to CustomVue procedures. A number of factors, the most material of which are set forth
below, could impact our success in 2005 and beyond. Progress on any of these fronts offers the
potential for growth in our license revenue:  
    Demand for our CustomVue procedure. Our CustomVue procedure generates more
than double the revenue of our standard procedure and any increase in the conversion to
CustomVue directly improves our profits. Clinical data shows that our CustomVue procedure
produces superior vision quality compared to standard LASIK eye surgery and results in
greater patient satisfaction with night vision.
    Market acceptance of laser vision correction. Increased acceptance of laser
vision correction by both doctors and patients in the United States and key international
markets is essential for our continued growth. Laser vision correction has penetrated
approximately 6% of the eligible United States population, and our profitability and
continued growth will be largely dependent on increasing levels of market acceptance and
procedure growth. We believe ongoing technical advances, such as our Iris Registration
technology, the WaveScan Fourier algorithm, and CustomVue procedure, that enhance the
quality of patients vision will increase the demand for laser vision correction surgery.
    Our ability to obtain additional FDA approvals. We continue to expand the list
of FDA approved indications that can be treated by our products. As we receive approvals
for additional types and ranges of refractive disorders from the FDA, the pool of eligible
laser vision correction candidates increases, thereby expanding the potential for growth
in procedures, CustomVue adoption and license revenue.
    Our competition. Competition in the laser vision correction market is intense
which creates pricing pressure on our products. Additionally, most of our competitors have
greater resources and a broader market presence. As a result, the competition to obtain
procedure market share is intense. Page 15 of 36




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
    The United States economy. We have always charged a license fee for procedures
sold in the United States. Therefore, it remains our most significant market for license
revenue. As such, economic conditions in the United States impact our license revenue
more than global economic conditions. Industry analysts have tracked procedure volume in
the United States against economic indicators such as consumer confidence. They have noted
a correlation between consumer confidence and the number of laser vision correction
procedures performed per quarter. A decline in economic conditions in the United States
could result in a decline in the number of laser vision correction procedures performed. We believe our revenue and profit in 2005 will improve compared to 2004 as a result of various
factors, including higher CustomVue adoption and growth in the laser vision correction market in
the United States. For 2005, we anticipate that operating expenses will increase compared to 2004
with a target of increasing our operating margins to in excess of 40% of revenues. We expect to
continue to generate cash from operations. 
 Results of Operations Three Months Ended March 31,($000s)
    
    2005
    
    
    2004
    
    
    ChangeLicense and other revenues
    
    $
    37,647
    
    
    $
    32,487
    
    
    
    16
    %Percent of total revenues
    
    
    73.3
    %
    
    
    74.2
    %System revenues
    
    
    7,668
    
    
    
    6,076
    
    
    
    26
    %Percent of total revenues
    
    
    15.0
    %
    
    
    13.9
    %Service and parts revenues
    
    
    6,024
    
    
    
    5,242
    
    
    
    15
    %Percent of total revenues
    
    
    11.7
    %
    
    
    11.9
    %Total revenues
    
    $
    51,339
    
    
    $
    43,805
    
    
    
    17
    %
 License and Other Revenues License and other revenues relates to:  
    License fees charged on a per procedure basis for access to the proprietary software
contained in the VISX STAR System that enables the user to perform procedures covered by
our patents;
    The selling price for the physical card used to deliver access to the proprietary
software contained in the VISX STAR System; and
    Other fees from third parties who have licensed our technology. License and other revenues increased 16%, or $5.2 million, in the first quarter of 2005 compared
with 2004, reflecting increased conversion by our United States customers from our standard
procedure to our CustomVue procedure, as well as growth of our procedure volume in the United
States. We believe adoption of our CustomVue procedure in the United States increased in the first
quarter of 2005 due to ongoing improved market acceptance of CustomVue and because of an increase
in the number of patients eligible for CustomVue due to FDA approval for CustomVue hyperopia in the
fourth quarter of 2004. Our standard procedure price has remained the same since prior to 2002. We
believe the increase in procedure volume was due to improved consumer economic conditions and
improvements in our Page 16 of 36




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technology. Historically, procedure volume has been highest in the first quarter, therefore we
expect license and other revenues to be lower during the remainder of 2005. We believe that our license and other revenues will improve in 2005 as compared to 2004 based on
the following projected factors:  
    Increases in demand for CustomVue procedures;
    FDA approval of new CustomVue procedures; and
    Growth in the United States laser vision correction market. The decision to have laser vision correction surgery is influenced by many factors. The procedure
is elective and generally not covered by medical insurance; therefore it competes with many types
of purchases for consumers discretionary spending. Perceptions about safety and effectiveness of
the procedure are additional considerations. The lack of long-term follow-up studies of the
procedure combined with media coverage of selected unfavorable outcomes may contribute to
uncertainty and delay by some potential consumers. Economic uncertainties may also impact the
interest in laser vision correction. As such, we cannot accurately predict when, or to what extent
changes in the economy and technology will impact our license and other revenues. System Revenues System revenues comprise sales and leases of the following equipment:  
    VISX STAR Systems;
    WaveScan Systems; and
    Upgrades System revenues increased by $1.6 million due to an increase in the number of VISX STAR Systems
shipped and also due to increased recognition of revenue from systems shipped in 2004 under
operating lease arrangements. Under operating lease arrangements revenue is generally recognized
over the term of the agreement. WaveScan System sales in the first quarter of 2005 decreased as
compared to 2004 as at least 80% of our United States customers had one or more WaveScan Systems by
the end of 2004. The market for laser systems remains competitive. To respond to aggressive promotional offers by
our competitors we earned lower average revenue per system on laser sales in the first quarter of
2005 as compared to 2004. In the remainder of 2005, we believe there will be no significant growth in revenues from laser
system revenues and that the sale of WaveScan Systems will be less than in 2004, since most of our
customers have already purchased a WaveScan System. We expect to begin shipments of Iris
Registration late in the second quarter of 2005 and expect an increase in upgrade revenue as
compared to 2004. Service and parts revenues Service revenues relate to the provision of repair and maintenance services under various types of
arrangements. Spare parts revenues arise from the shipment of parts to customers. Service and parts revenues increased 15%, or $0.8 million, in the first quarter of 2005 compared
with 2004 primarily due to the increase in procedure volumes and the resultant higher revenues
derived from customers who purchased service on a per procedure basis and additional service
contracts from WaveScan systems coming off of warranty coverage. Per procedure service contracts
allow customers to Page 17 of 36




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pay a fixed, predetermined fee for ongoing maintenance services. This fixed fee is negotiated in
advance of the commencement of the service contract. Whenever the customer purchases a procedure,
in addition to the charges for the physical card and license fees, a service fee is also charged
for ongoing maintenance. Pricing of per procedure service contracts was unchanged in the first
quarter of 2005 compared with 2004. We consider each successive 30 day period after contract
initiation as a service period. The start date for per procedure service contracts vary by
customers across the month. As an approximation based on our knowledge of our customers business,
half of the per procedure service contracts have a start date in the first half of the month and
half in the second half of the month. We recognize half of the per procedure service revenue in the
month the treatment cards for the procedures are shipped and the other half in the subsequent
month. Service revenues from per procedure service contracts are generally lower than those from
fixed annual service contracts. Historically, procedure volume has been highest in the first
quarter, therefore we expect service revenues to be lower in the remaining quarters of 2005. Three Months Ended March 31,($000s)
    
    2005
    
    
    2004
    
    
    ChangeCost of license and other revenues
    
    
    1,123
    
    
    
    980
    
    
    
    15
    %Percent of related revenues
    
    
    3.0
    %
    
    
    3.0
    %Cost of system revenues
    
    
    7,154
    
    
    
    5,291
    
    
    
    35
    %Percent of related revenues
    
    
    93.3
    %
    
    
    87.1
    %Cost of service and parts revenues
    
    
    4,262
    
    
    
    3,598
    
    
    
    18
    %Percent of related revenues
    
    
    70.8
    %
    
    
    68.6
    %Selling, general and administrative
    
    
    10,510
    
    
    
    9,757
    
    
    
    8
    %Percent of total revenues
    
    
    20.5
    %
    
    
    22.3
    %Research, develop. and regulatory
    
    
    5,172
    
    
    
    5,044
    
    
    
    3
    %Percent of total revenues
    
    
    10.1
    %
    
    
    11.5
    %
 Cost of license and other revenues Cost of license and other revenues increased in the first quarter of 2005 from the comparable
period of the prior year due to the corresponding increase in license and other revenues. We
anticipate that our margins will be approximately the same for the remainder of 2005. Cost of system revenues Cost of system revenues increased approximately $1.9 million, in the first quarter of 2005 from the
comparable period of the prior year. Sales of VISX Star Systems increased and the overall gross
profit margin decreased as the competitive pricing pressure for excimer lasers reduced the average
system selling price with no corresponding reduction in average system cost. Our gross profit
margin on system revenues decreased in 2005 from 2004 primarily due to increased warranty expense. Cost of service and parts revenues Cost of service and parts revenues increased approximately $0.7 million in the first quarter of
2005 from the comparable period of the prior year. The increase was due to a larger installed base
of products in the United States. The gross margin on these revenues was relatively consistent year
over year. Page 18 of 36




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Selling, General and Administrative Expenses Selling, general and administrative expenses increased by approximately $0.8 million to $10.5
million in the first quarter of 2005 compared with the corresponding period of 2004. The change
reflects primarily the following items:  
    Legal expenses increased $0.7 million primarily due to the fees incurred in the first
quarter of 2005 for the pending merger with AMO;
    Marketing costs increased $0.6 million primarily due to continued training and promotion
of our CustomVue procedure and promotion of Iris Registration; and
    Lower incentive compensation of $0.6 million. Research and Development and Regulatory Expenses Our research and development and regulatory expenses increased by approximately $0.1 million in the
first quarter of 2005 compared to the corresponding period of 2004. We continue to focus on next
generation technologies and developments for laser vision correction, including:  
    System advancements;
    New methods for correcting vision disorders including new CustomVue correction
procedures (such as hyperopia and high myopia); and
    Continued research and clinical trials for treatment of presbyopia. Interest and Other Income Interest income increased in the first quarter of 2005 from the comparable period of 2004 as a
result of:  
    Higher average cash balances due to continued operating profitability; and
    Higher average yields on our portfolio of cash and investments compared to the first
quarter of 2004 due to market increases in interest rates. Income Tax Provision Our effective tax rate of 38.9% in the first quarter of 2005 was slightly lower than our effective
tax rate of 39.6% in 2004. The tax rate was lower in 2005 due primarily to the following items:  
    Certain tax matters were concluded that enabled us to ensure that previously estimated
tax reserves were no longer required; and
    No tax benefit was recorded for the approximately $650,000 in merger-related expenses. Page 19 of 36




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Liquidity and Capital Resources Cash, cash equivalents and short-term investments (cash) and working capital were as follows (in
thousands): March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)Cash, cash equivalents and short-term investments
    
    $
    160,437
    
    
    $
    138,408Working capital
    
    
    179,367
    
    
    
    162,299Stockholders equity
    
    
    194,884
    
    
    
    178,656
 Our cash, cash equivalents, and short-term investments consist principally of money market funds,
and bonds issued by the United States government, United States government agencies, federal
government sponsored enterprises, state and local government agencies, and corporations. All of our
short-term investments are classified as available-for-sale under the provisions of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The securities are carried at fair market value with the unrealized gains and losses,
net of tax, included in accumulated other comprehensive income, which is reflected as a separate
component of stockholders equity. Gains and losses are recognized when realized in the
consolidated statements of operations. Cash, cash equivalents and short-term investments were $160.4 million at March 31, 2005, an
increase of $22.0 million compared with December 31, 2004. This was impacted principally by:  
    Positive cash flow from operating activities of $20.8 million; and
    Proceeds from issuance of common stock related to employee participation in employee
stock programs generating $1.8 million. Operating activities generated $20.8 million in cash in the first quarters of 2005 and 2004. In
the first quarter of 2005, we:  
    Generated $18.9 million of cash from net income plus non-cash related expenses;
    Used cash to increase inventory by $1.6 million primarily to support the increase in
sales of systems under rental or operating leases. The costs of systems shipped to
customers under rental or operating agreements are transferred from inventory to prepaid
expenses and long term other assets. This transfer is reflected in the supplemental cash
flow information section of our consolidated statements of cash flows;
    Used cash to fund an increase in accounts receivable of $3.6 million due primarily to
higher sales levels in the first quarter of 2005;
    Increased accrued and other current liabilities by $3.7 million due primarily to
increased deferred revenue associated with operating and rental lease arrangements; and
    Increased accounts payable by $2.9 million due to timing of cash payments to our
suppliers. Page 20 of 36




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Net cash used by investing activities was $19.8 million in the first quarter of 2005, up from $15.9
million used in the corresponding period of 2004. The principal movements in cash used in
investing activities were due to the investment in, and maturity of, short-term investments. Cash provided by financing activities was $1.8 million in the first quarter of 2005, compared to
$5.6 million used in the corresponding period of 2004. Cash received upon the issuance of stock
under employee stock programs were $1.8 million and $2.5 million in the first quarter of 2005 and
2004, respectively. Cash used to repurchase common stock was zero in the first quarter of 2005,
compared to $8.1 million used in 2004. 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. In accordance with this authorization and
applicable securities laws, we have repurchased 7.8 million shares on the open market cumulatively
through March 31, 2005, at a total cost of $106.8 million. Accordingly, 2.2 million shares remain
available as of March 31, 2005 for repurchase under the Board of Directors April 2001
authorization. On May 28, 2003, the Board of Directors authorized the repurchase of an additional
3.5 million shares of VISX stock at a total cost of $63.0 million, all of which were purchased
during the quarter ended June 30, 2003. 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. Under the terms of the merger agreement with AMO, we are precluded from
repurchasing any of our outstanding common stock on the open market. Accordingly, we did not
repurchase any of our common stock in the three month period ended March 31, 2005. 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 March 31, 2005, we did not have any borrowings outstanding, nor any credit agreements. Our standard credit terms granted to customers are net 30 to 60 days. In an effort to promote the
growth of the laser vision correction industry and the use of VISX STAR Systems and WaveScan
Systems, we provide long-term financing to customers for their purchase of our equipment in certain
markets. We consider a number of factors including industry practice, competition, and our
evaluation of customers credit worthiness in determining when to offer such financing. DVI, which
provided equipment purchase financing to our customers, entered into Chapter 11 bankruptcy
proceedings in August 2003, and as a result, we recorded bad debt expense in 2003 to increase our
reserve for doubtful accounts to cover any remaining exposure on the $2.3 million of accounts
receivables then outstanding from DVI. This amount was written off against the reserve in the
first quarter of 2005. We believe our operations will generate cash in 2005 at a level equal to or greater than in 2004.
We believe this will exceed cash required to fund our working capital and capital equipment needs
during the coming twelve months. In addition, we have $160.4 million in cash, cash equivalents, and
short-term investments as of March 31, 2005 to provide for unforeseen contingencies. In May 2002, we 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. We also
signed an agreement with Tracey Technologies, LLC for rights to Traceys ray tracing technology for
use in customized laser vision correction treatments. If clinical and regulatory milestones
specified in both agreements are achieved, we will be committed to make additional payments of
approximately $2.0 million in the aggregate in connection with these two agreements. If in the
future either of these technologies are used in the performance of procedures using our
equipment, we would be obligated to pay per procedure royalties. Page 21 of 36




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Critical Accounting Policies, Estimates and Judgments We follow accounting principles generally accepted in the United States (GAAP) in preparing
our financial statements. As part of this work, we must make many estimates and judgments about
future events. These affect the value of the assets and liabilities, contingent assets and
liabilities, and revenues and expenses reported 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 could require us to record adjustments to expenses or revenues material to our financial
position and results of operations in future periods. We believe our most critical accounting
policies, estimates and judgments include the following: Revenue Recognition We are required to ensure that collectibility is reasonably assured before we recognize revenue.
Accordingly, we evaluate our customers for credit worthiness and only recognize revenue if we
believe that we have reasonable assurance that amounts will be collected. Where we are unable to
assess with reasonable assurance that amounts will be collected, we defer revenue recognition until
the payments are received. This typically occurs when the customer is thinly capitalized and is
occasionally the case with customers who have recently set themselves up in business. Accounts Receivable At the end of each accounting period, we estimate the reserve necessary for accounts receivables
that will ultimately not be collected 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. Our allowance for doubtful accounts at March 31, 2005 and December 31, 2004 as a
percentage of gross accounts receivable was 5.2% and 11.0%, respectively. At March 31, 2005, a
one-percentage point deviation in our allowance for doubtful accounts as a percentage of accounts
receivable would have resulted in an increase or decrease in expense of approximately $0.4 million. Inventories Adjustments to the carrying value of inventory for excess and obsolete items are based, in part, on
our estimate of demand over the following 6 months. This estimate, though based on our historical
experience and consideration of other relevant factors, such as the current economic climate, is
subject to some uncertainty. Amounts charged to income for excess and obsolete inventory for the
quarters ending March 31, 2005 and 2004, respectively as a percentage of total revenues in those
periods, were all less than 1%. To date, our estimates have been materially accurate and subject
to any major changes in our business model, our operating environment or the economy, and taking
consideration of the ongoing Page 22 of 36




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development of our technology, we do not expect either our methodology or the accuracy of our
estimates to change significantly in the future. Legal Contingencies At the end of each accounting period, we review all outstanding legal matters. If we believe it is
probable that we will incur a loss as a result of the resolution of a legal matter and we can
reasonably estimate the amount of the loss, we accrue our best estimate of the potential loss. It
is very difficult to predict the future results of complex legal matters, although historically,
the amounts we have paid out have been materially similar to the amounts that we have accrued. New
developments in legal matters can cause changes in previous estimates and result in significant
changes in loss accruals. Current litigation is discussed in Note 8 to these condensed consolidated
interim financial statements. We could, in the future, be subject to litigation claims that could
cause us to incur significant expenses and put our business, financial position, and results of
operations at material risk. Accounting for Taxes We are subject to various federal, state and local taxes, including income, sales, payroll,
unemployment, property, franchise, capital and use taxes on our operations, payroll, assets and
services. In preparing our consolidated financial statements, we are required to estimate our tax
expense in each of the jurisdictions in which we operate. These estimates cover current tax assets
and liabilities together with temporary differences resulting from differing treatment of items,
such as deferred revenue, for tax and accounting purposes. These temporary differences result in
deferred tax assets and liabilities, which are included within our consolidated balance sheets. In
estimating our tax exposure we are required to make certain estimates and judgments based on our
evaluation of tax law and the facts and circumstances relating to our business. These positions may
not always be accepted by all of the tax authorities in each of the jurisdictions in which we
operate. As a result, our tax liabilities may differ from our estimates based on audits by tax
authorities. Our tax expense could increase if tax incentives are not renewed upon expiration, tax
rates applicable to us are increased, authorities challenge our tax strategies, or our tax
strategies are impacted by new laws or rulings. 
 Risk Factors This report contains forward-looking statements that involve risk and uncertainty. The factors set
forth below, which are not the only risks we face, may cause our actual results to vary from those
contemplated by forward-looking statements set forth in this report and should be considered
carefully in addition to the other information presented in this report. If any of the following
risks actually occur, our business, results of operations or cash flows could be adversely
affected. Our results of operations have varied widely in the past and could continue to vary
significantly. In addition, our actual results may differ significantly from the results
contemplated by the forward-looking statements. Accordingly, we believe that our results of
operations in any given period may not be a good indicator of our future performance. Our business and stock price may be adversely affected if the merger with AMO is not completed. On November 9, 2004, we entered into an agreement to combine our business with AMO. The
announcement of the planned merger could have an adverse effect on our revenues in the near-term if
customers delay, defer, or cancel purchases pending resolution of the planned merger with AMO. To
the extent our announcement of the merger creates uncertainty among persons and organizations Page 23 of 36




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contemplating purchases of products or services such that several large customers, or a significant
group of small customers, delays purchase decisions pending resolution of the planned merger, this
could have an adverse effect on our results of operations and quarterly revenues could be
substantially below the expectations of market analysts and could cause a reduction in stock price. In addition, if the merger is not completed, we could be subject to a number of risks that may
adversely affect our business and stock price, including: we would not realize the benefits we
expect to receive by being part of a combined company with AMO, as well as the potentially enhanced
financial and competitive position we believe would result from being part of the combined company;
the diversion of managements attention from our day-to-day business and the unavoidable disruption
to our employees and our relationships with customers which, in turn, may detract from our ability
to grow revenues and minimize costs and lead to a loss of market position that we could be unable
to regain; the market price of our shares of common stock may decline to the extent the current
market price of those shares reflects a market assumption that the merger will be completed; under
certain circumstances we could be required to pay AMO a $45 million termination fee; and we must
pay the costs related to the merger, such as legal and accounting fees and a portion of the
investment banking fees. In connection with the proposed merger, AMO has filed a registration statement with the SEC. The
definitive joint proxy statement/prospectus included therein was mailed to all holders of our stock
on or about April 27, 2005 and contains important information about VISX, AMO and the proposed
merger, risks relating to the merger and the combined company, and related matters. We urge all of
our stockholders to read the definitive joint proxy statement/prospectus prior to their vote
scheduled on May 26, 2005. If laser vision correction is not broadly accepted by both doctors and patients, our business,
financial position and results of operations would be materially and adversely impacted. Our business depends upon broad market acceptance of laser vision correction by both doctors and
patients in the United States and key international markets. Laser vision correction has penetrated
approximately 6% of the eligible United States population, and our profitability and growth will be
largely dependent on increasing levels of market acceptance and procedure growth, especially with
regard to our higher-priced CustomVue procedure. Potential complications and side effects of laser
vision correction include: post-operative discomfort, corneal haze (an increase in the light
scattering properties of the cornea) during healing, glare/halos (undesirable visual sensations
produced by bright lights), decreases in contrast sensitivity, temporary increases in intraocular
pressure in reaction to procedure medication, modest fluctuations in refractive capabilities during
healing, modest decrease in best corrected vision (i.e., with corrective eyewear), unintended over-
or under-corrections, regression of effect, disorders of corneal healing, corneal scars, corneal
ulcers, and induced astigmatism (which may result in blurred or double vision and/or shadow
images). Some consumers may choose not to undergo laser vision correction because of these
complications or more general concerns relating to its safety and efficacy or a resistance to
surgery in general. Alternatively, some consumers may elect to delay undergoing laser vision
correction surgery because they believe improved technology or methods of treatment will be
available in the near future. Should either the ophthalmic community or the general population turn
away from laser vision correction as an alternative to existing methods of treating refractive
vision disorders, or if future technologies replaced laser vision correction, these developments
could delay or prevent market acceptance of laser vision correction, which would have a material
adverse effect on our business, financial position and results of operations. Page 24 of 36




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The possibility of long-term side effects and adverse publicity regarding laser correction surgery
could seriously harm our business. Laser vision correction is a relatively new procedure. Consequently, there is no long-term
follow-up data beyond ten years that might reveal additional complications or unknown side effects.
Any future reported side effects, other adverse events or unfavorable publicity involving patient
outcomes resulting from the use of laser vision correction systems manufactured by us or any
participant in the laser vision correction market, may have a material adverse effect on our
business, financial position, and results of operations. The market in which we operate is subject to extensive government regulation, which increases our
costs and could prevent us from selling our products. Government regulation includes inspection of and controls over research and development, testing,
manufacturing, safety and environmental controls, efficacy, labeling, advertising, promotion,
pricing, record keeping, the sale and distribution of pharmaceutical products and samples and
electronic records and electronic signatures. In the United States, we must obtain approval or
clearance from the United Stated Food and Drug Administration, or FDA, for each medical device that
we market. The FDA approval process is typically lengthy and expensive, and approval is never
certain. Products distributed outside of the United States are also subject to government
regulation, which may be equally or more demanding. Our new products could take a significantly
longer time than expected to gain regulatory approval and may never gain approval. If a regulatory
authority delays approval of a potentially significant product, our market value and operating
results may decline. Even if the FDA or another regulatory agency approves a product, the approval
may limit the indicated uses for a product, may otherwise limit our ability to promote, sell and
distribute a product or may require post-marketing studies. If we are unable to obtain regulatory
approval of our products, we will not be able to market these products, which would result in a
decrease in our sales. Currently, we are actively pursuing approval for a number of our products
from regulatory authorities in a number of countries, including, among others, the United States,
countries in the European Union and Japan. Continued growth in our sales and profits will depend,
in part, on the timely and successful introduction and marketing of some or all of these products. Additionally, noncompliance with applicable United States regulatory requirements can result in
fines, injunctions, penalties, mandatory recalls or seizures, suspensions of production, denial or
withdrawal of pre-marketing approvals, recommendations by the FDA against governmental contracts
and criminal prosecution. The FDA also has authority to request repair, replacement, or the refund
of the cost of any device we manufacture or distributes. Regulatory authorities outside of the
United States may impose similar sanctions for noncompliance with applicable regulatory
requirements. The clinical trial process required to obtain regulatory approvals are costly and uncertain, and
could result in delays in new product introductions or even an inability to release a product. The clinical trials required to obtain regulatory approvals for our products are complex and
expensive and their outcomes are uncertain. We incur substantial expense for, and devote
significant time to, clinical trials but cannot be certain that the trials will ever result in the
commercial sale of a product. We may suffer significant setbacks in clinical trials, even after
earlier clinical trials showed promising results. Any of our products may produce undesirable side
effects that could cause us or regulatory authorities to interrupt, delay or halt clinical trials
of a product candidate. We, the FDA, or another regulatory authority may suspend or terminate
clinical trials at any time if they or we believe the trial participants face unacceptable health
risks. Page 25 of 36




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Intense competition in the laser vision correction industry could result in the loss of customers,
an inability to attract new customers, a decline in the price we charge for our products and
procedures or a decline in our market share. The medical device and ophthalmic laser industries are subject to intense competition and
technological change. Not only does laser vision correction compete with more traditional vision
correction options such as eyeglasses and contact lenses, it also competes with other technologies
and surgical techniques such as intraocular lenses and surgery using different types of lasers. In
addition, the market for laser vision correction systems has become increasingly competitive in
recent years as a result of FDA approval of several laser systems. The VISX STAR Excimer Laser
System competes with products marketed or under development by other laser and medical equipment
manufacturers, many of which have greater financial and other resources. Competitors may offer
laser systems at a lower price, may price their laser systems as part of a bundle of products or
services, may lower the prices they charge for procedures, may develop procedures that involve a
lower per procedure cost, or may offer products perceived as preferable to the VISX STAR Excimer
Laser System. In addition, medical companies, academic and research institutions and others could
develop new therapies, including new medical devices or surgical procedures, for the conditions
targeted by us, which therapies could be more medically effective and less expensive than laser
vision correction, and could potentially render laser vision correction obsolete. Any such
developments could result in reductions in the quantity or average prices of products sold by us
and which could have a material adverse effect on our business, financial position and results of
operations. Additionally, Market Scope estimated that as at December 31, 2004 we were the leader in the United
States procedures market with a market share of approximately 60%. Because of this position, all of
our competitors target us and our market share in order to grow their own revenues. We can give no
assurance that we will be able to maintain or grow our existing market share and we may, in fact,
be required to incur considerable expenditures in order to maintain or increase that market share.
Should our procedure market share decline, it could have a material adverse effect on our business,
financial position, and results of operations as well as the market price of our common stock. General economic conditions could have a negative impact on our business, financial position, and
results of operations. Because laser vision correction is not subject to reimbursement from third-party payors such as
insurance companies or government programs, the cost of laser vision correction is typically borne
by individuals directly. Accordingly, weak or uncertain economic conditions may cause individuals
to be less willing to incur the procedure cost associated with laser vision correction as was
evidenced by our decline in revenues from 2002 compared to 2001 and from 2001 compared to 2000. A
decline in economic conditions, especially in the United States, could result in a decline in the
number of laser vision correction procedures performed and could have a material adverse effect on
our business, financial position, and results of operations. We rely upon a small number of customers for a significant portion of our revenues, which makes our
financial position and operating results vulnerable to the loss of one of more of these customers. A significant portion of our revenues is derived from sales to TLC Vision Corporation, or TLC.
Sales to TLC accounted for 16% and 20% of our total revenues for the three months ended March 31,
2005 and 2004 respectively. TLC accounted for 23% and 21% of our total receivables at March 31,
2005 and December 31, 2004. Additionally, Taiwan Hwa-In Corporation accounted for 10% and 12% of
our total Page 26 of 36




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receivables at March 31, 2005 and December 31, 2004. Should we lose a significant customer or if
anticipated sales to a significant customer do not materialize, our business, financial position
and results of operations may suffer. In addition, should a significant customer become unable to
pay balances owed, we would have to increase our charges for bad debt expense, which could have a
material adverse effect on our business, financial position and results of operations. If we fail to keep pace with advances in our industry or fail to develop new methods of vision
correction, customers may not buy our products and our revenue may decline. We must be able to manufacture and effectively market our products and persuade a sufficient number
of eye care professionals to use our new products, as well as new methods of vision correction that
we introduce, such as our CustomVue procedure. Sales of our existing products may decline rapidly
if a new product is introduced by one of our competitors or if we announce a new product that, in
either case, represents a substantial improvement over our existing products. A decrease in
procedure volume may also occur if consumers elect to delay undergoing laser vision correction
surgery because they believe improved technology or methods of treatment will be available in the
near future. While we devote significant resources to research and development, our research and development may
not lead to new products that achieve commercial success. Our research and development process is expensive, prolonged, and entails considerable uncertainty.
Development of a new medical device, from discovery through testing and registration to initial
product launch, typically takes between three and seven years. Each of these periods varies
considerably from product to product and country to country. Because of the complexities and
uncertainties associated with ophthalmic research and development, products we are currently
developing may not complete the development process or obtain the regulatory approvals required to
market such products successfully. The products currently in our development pipeline may not be
approved by regulatory entities and may not be commercially successful, and our current and planned
products could be surpassed by more effective or advanced products. Our business is dependent on the enforceability and the validity of our United States and foreign
patents; any unfavorable determinations with respect to these patents could negatively impact our
financial condition and harm our business. We own over 200 United States and foreign patents and have more than 200 patent applications
pending. In the past, our patents have been challenged on several fronts and we have asserted our
patents against competitors. Generally, these proceedings centered on whether infringement of the
patents had occurred, and on the validity or enforceability of the patents. While all of our
historical proceedings have now been resolved, we may assert our patents against competitors in the
future. If our patents were found to be invalid or unenforceable (or in the event that parties
against whom we asserted patent infringement were found not to be infringing our patents) in any
future proceedings, our ability to collect license fees from the parties to the litigation or from
other sellers or users of laser vision correction equipment in the United States could suffer and
our revenues could decline. In addition, other companies own United States and foreign patents
covering methods and apparatus for performing corneal surgery with ultraviolet lasers. If we were
accused of infringing such competitors patents and found to have infringed such patents, we could
be subject to significant monetary liability and enjoined from distributing our products. Any one
of these results could harm our business. Page 27 of 36




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An unfavorable outcome in a product liability lawsuit could have a material adverse effect on our
business, financial position, and results of operations. We have in the past, and may again in the future, become subject to product liability claims. We
could be liable for injuries or damage resulting from use of the VISX STAR Excimer Laser System or
WaveScan System. In addition, a claim that an injury resulted from a defect in any of our products,
even if successfully defended, could damage our reputation. Product liability claims in excess of
our insurance coverage against product liability risks associated with the testing, manufacturing,
and marketing of its products could have a material adverse effect on our business, financial
position, and results of operations. If we become involved in litigation, unexpected costs and diversion of managements resources could
result. In the past, we have been involved in a number of legal proceedings, some of which have resulted in
significant legal expenses and settlement costs. In the future, we may become involved in
additional legal proceedings that, regardless of their outcome or validity, could lead to
additional expenses being incurred and diversion of our managements resources. Our reliance on sales in international markets could negatively impact our revenues and operating
results. Sales to customers outside the United States represented 17% and 14% of our total revenues during
the three months ended March 31, 2005 and 2004, respectively. To date, all of our sales have been
denominated in United States dollars. Our international presence exposes it to risks, including:  
    the need for export licenses in many countries;
    unexpected regulatory requirements;
    tariffs and other potential trade barriers and restrictions;
    political, legal and economic instability in foreign markets such as South Korea;
    longer accounts receivable cycles in all international markets;
    difficulties in managing operations across disparate geographic areas;
    foreign currency fluctuations;
    reduced or limited protection of our intellectual property rights in some countries
such as Taiwan; and
    dependence on local distributors. We are particularly susceptible to these risks in South Korea, Taiwan and Canada. If one or more of
these risks materialize, our sales to international customers may decrease and our costs may
increase, which could negatively impact our revenues and operating results. Page 28 of 36




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An unfavorable outcome in the securities class action lawsuit pending against us and certain of our
directors and executive officers could impact our ability to complete the merger with AMO, or
alternatively, could result in our stockholders having rights of rescission against the merger. On or about November 12, 2004, two putative class action lawsuits were filed in the Superior Court
of the State of California, County of Santa Clara, against us and our board of directors. The cases
were captioned William Kinchy vs. VISX, Incorporated, et al., Case No. 104CV030447 and Douglas
Shearer vs. VISX, Incorporated, et al., Case No. 104CV030452 and subsequently consolidated under
the Kinchy case. The Kinchy amended complaint seeks an injunction prohibiting us from consummating
the merger with AMO and rights of rescission against the merger and any of the terms of the merger
agreement, as well as attorneys fees and costs. On March 14, 2005, VISX reached an agreement in principle with plaintiffs counsel pursuant to
which plaintiff will release the defendants, as well as AMO and certain VISX agents and affiliates,
from all claims that have been brought or could have been brought under state or federal law
arising out of or relating to the merger. The settlement agreement remains subject to approval by
the Superior Court of the State of California for the County of Santa Clara, which is not expected
to be obtained prior to the completion of the merger. Under the agreement in principle, VISX agreed
to make certain additional disclosures that have been included in the joint proxy
statement/prospectus. In addition, VISX has agreed that it will not oppose a fee application by
plaintiffs counsel of up to $500,000. The settlement does not contemplate any changes to the
merger agreement or the merger. If the injunction sought is granted, we might not be able to complete the merger in a timely
manner, or at all. If the injunction sought is not granted but this matter has not been resolved
prior to the completion of the merger, the lawsuit could result in our stockholders having
rescission rights against the merger. Any failure by third party financing entities to satisfy their obligations to us would negatively
impact our financial condition. We have relationships with third party financing entities that purchase our products directly and
subsequently lease and/or sell these products to our end-user customers, or provide financing
directly to customers who purchase products directly from us. Should any third party financing
entity or entities fail or refuse to pay us in a timely manner or at all, it could negatively
affect our cash flows and could have a material adverse effect on our business, financial position
and results of operations. In fact, DVI, which provided equipment purchase financing to our
customers, entered into Chapter 11 bankruptcy proceedings in August 2003, and as a result, we
recorded bad debt expense to increase our reserve for doubtful accounts to cover any remaining
exposure on the $2.3 million of accounts receivables then outstanding from DVI. This amount was
written off against the reserve in the first quarter of 2005. Because our expenses are relatively fixed in the short term, our earnings will decline if it does
not meet our projected sales. Our operating expenses, which include sales and marketing, research and development, and general
and administrative expenses, are based on our expectations of future revenues and are relatively
fixed in the short term. If revenues fall below expectations, we will not be able to reduce our
spending rapidly in response to such a shortfall. Accordingly, any shortfall in revenues below
expectations would likely have an immediate impact on our earnings per share, which could adversely
affect the market price of our common stock. Page 29 of 36




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Adverse tax assessments could have a negative impact on our earnings. We operate throughout the United States and, consequently, are subject to various federal, state
and local taxes, including sales, income, payroll, unemployment, property, franchise, capital and
use tax on our operations, payroll, assets and services. We have made provisions and accruals in
our financial statements for tax liabilities, but we cannot predict the outcome of all past and
future tax assessments. If any taxing authority determines we owe amounts for taxes greater than
expected, our earnings may be negatively affected. If any of our single source suppliers were to cease providing components, our business, financial
position, and results of operations, could be materially adversely affected. The manufacture of the VISX STAR Excimer Laser System and WaveScan System is a complex operation
involving numerous procedures. We depend on single and limited sources for several key components.
If any of these suppliers were to cease providing components, we would be required to locate and
contract with a substitute supplier. We could have difficulty identifying a substitute supplier in
a timely manner or on commercially reasonable terms. If the production of our products, parts and
services were interrupted or could not continue in a cost-effective or timely manner, our business,
financial position, and results of operations, could be materially adversely affected. Volatility in our stock price may discourage investment in our common stock. The market price of our common stock has experienced fluctuations and is likely to fluctuate
significantly in the future. Our stock price can fluctuate for a number of reasons, including:  
    announcements about us or our competitors;
    results or settlements of litigation;
    quarterly variations in operating results;
    the introduction or abandonment of new technologies or products;
    changes in product pricing policies by us or our competitors;
    changes in earnings estimates by analysts or changes in accounting policies; and
    economic changes and political uncertainties. In addition, stock markets have experienced significant price and volume volatility in recent
years. This volatility has had a substantial effect on the market prices of securities of many
public companies for reasons frequently unrelated or disproportionate to the operating performance
of the specific companies. In addition, the securities of many medical device companies, including
ours, have historically been subject to extensive price and volume fluctuations that may affect the
market price of their common stock. If these broad market fluctuations continue, they may adversely
affect the market price of our common stock. Page 30 of 36




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If any of our employees, consultants or others breach their proprietary information agreements, our
competitive position could be harmed. We protect our proprietary technology, in part, through proprietary information and inventions
agreements with employees, consultants and other parties. These agreements with employees and
consultants generally contain standard provisions requiring those individuals to assign to us,
without additional consideration, inventions conceived or reduced to practice by them while
employed or retained by us, subject to customary exceptions. If any of our employees, consultants
or others breach these agreements our competitors may learn of our trade secrets. Recent changes in the accounting treatment of stock options could have a negative impact on our
financial statements and cause its stock price to decline. In December, 2004, the FASB issued SFAS No. 123(R). This standard requires expensing of stock
options and other share-based payments and supercedes the FASBs earlier rule (the original SFAS
123) that had allowed companies to choose between expensing stock options or showing pro forma
disclosure only. We currently show the pro forma disclosures in Note 1 to these condensed
consolidated interim financial statements. In April 2005, the SEC approved a new rule to delay the
effective date of SFAS 123(R) to annual periods that commence after June 15, 2005. We will be
required to implement the new pronouncement and begin recording share-based expense at the
beginning of the first quarter of fiscal 2006. Although we have not yet determined whether the
adoption of the SFAS 123(R) will result in amounts that are similar to the current pro forma
disclosures under SFAS 123, we expect the adoption of SFAS No. 123(R) to have a significant adverse
impact on our consolidated operating results. The anti-takeover provisions in our charter documents could delay or prevent a takeover attempt or
make an investment in our common stock less appealing to future investors. In 2000, we adopted a stockholder rights plan. The presence of this plan could make it more
difficult for a third party to engage in a takeover attempt, even a takeover attempt in which the
potential purchaser offers to pay a per share price greater than the current market price for our
common stock. In addition, the presence of the plan could delay or impede the removal of incumbent
directors. These provisions may also impact the amount of interest investors have in our business. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk There were no material changes during the three months ended March 31, 2005 in our exposure to
market risk for changes in interest rates and foreign currency exchange rates. Our exposure to market risk for changes in interest rates relates primarily to our investment
portfolio. We do not use derivative financial instruments and our investment portfolio to manage
our interest rate risk, foreign currency risk or for any other purpose. We invest in high-credit
quality issuers and, by policy, limit the amount of credit exposure to any one issuer. As stated in
our policy, we ensure the safety and preservation of our invested principal funds by limiting
default risk, market risk and reinvestment risk. We mitigate default risk by investing in safe and
high-credit quality securities and by constantly positioning our portfolio to respond appropriately
to a significant reduction in a credit rating of any investment issuer, guarantor or depository.
The portfolio includes only marketable securities with active secondary or resale markets to ensure
portfolio liquidity. Page 31 of 36




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Item 4. Controls and Procedures VISX management, including the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report (the
Evaluation Date). Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, the controls and procedures are effective in
ensuring that all material information required to be filed in this quarterly report has been made
known to them in a timely fashion. There have been no significant changes in internal controls over financial reporting (as defined in
Rule 13a-15(f)) during the three months ended March 31, 2005 that materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting. Page 32 of 36




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Overview From time to time, we have been involved in a variety of legal proceedings. For a complete
description of legal proceedings, see our annual report on Form 10-K for the year ended December
31, 2004. During the quarter ended March 31, 2005, there were no material developments with respect
to such previously existing proceedings and no new material proceedings not previously disclosed,
except as follows: On or about November 12, 2004, two putative class action lawsuits were filed in the Superior Court
of the State of California, County of Santa Clara, against VISX and the VISX Board of Directors.
The cases were captioned William Kinchy vs. VISX, Incorporated, et al., Case No. 104CV030447 and
Douglas Shearer vs. VISX, Incorporated, et al., Case No. 104CV030452. On January 27, 2005, the
court ordered the two cases consolidated under the Kinchy case. On January 28, 2005, William Kinchy
filed an amended complaint that alleges, among other things, that the VISX Board of Directors and
certain executive officers breached their fiduciary duties of loyalty and due care by approving the
merger agreement with AMO and the merger contemplated by the merger agreement without undertaking
sufficient efforts to obtain the best offer possible for stockholders. The complaint further
alleges that the consideration to be paid in the merger is unfair and inadequate, and that the
defendants breached their fiduciary duties of care, loyalty and candor to VISXs public
stockholders in connection with the merger. The complaint seeks an injunction prohibiting VISX from
consummating the merger and rights of rescission against the merger and any of the terms of the
merger agreement, as well as attorneys fees and costs. On March 14, 2005, we reached an agreement in principle with plaintiffs counsel pursuant to which
plaintiff will release the defendants, as well as AMO and certain VISX agents and affiliates, from
all claims that have been brought or could have been brought under state or federal law arising out
of or relating to the merger. The settlement agreement remains subject to approval by the Superior
Court of the State of California for the County of Santa Clara, which is not expected to be
obtained prior to the completion of the merger. Under the agreement in principle, we agreed to
make certain additional disclosures that have been included in the joint proxy
statement/prospectus. In addition, we have agreed that we will not oppose a fee application by
plaintiffs counsel of up to $500,000. The settlement does not contemplate any changes to the
merger agreement or the merger. In or about October 2001, we terminated a Development and Supply Agreement with Aculight
Corporation (the Agreement). The Agreement requires that before any party may commence
litigation for any controversy or claim arising under the Agreement, such claim must first be
submitted to nonbinding mediation. Aculight has corresponded with us concerning a claim that it is
owed approximately $1.9 million in cancellation fees by virtue of our termination of the Agreement.
We deny that any amounts are owed because Aculight was in breach of certain obligations under the
Agreement at the time of termination; Aculight contends that it did not breach any such
obligations. Aculight demanded mediation of this dispute pursuant to the Agreement, and in January
2005, we scheduled mediation before Judicial Arbitration and Mediation Services (JAMS) for March
25, 2005. This mediation is currently ongoing with no agreement having yet been reached. While it
is not feasible to predict or determine with certainty the final outcome of the mediation, or any
lawsuit filed by Aculight if the parties dispute is not resolved by mediation, we believe any such
lawsuit would be without merit, and that the mediation or lawsuit would not be likely to give rise
to any liability that would materially affect our financial condition or results of operations. Page 33 of 36




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Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities There were no repurchases of our common stock during the quarter ended March 31, 2005. 
 Item 5. Other Information In accordance 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 disclosing the non-audit services
approved by VISX s Audit Committee to be performed by KPMG LLP, VISX s registered independent
public accounting firm. 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 first quarter are considered by VISX to be
audit-related services that closely relate to the financial audit process. Each of the services has
been approved in accordance with a pre-approval from the Audit Committees Chairman pursuant to
delegated authority by the Audit Committee. During the quarterly period covered by this filing, the Committee approved additional engagements
and products of KPMG LLP for the following non-audit services and products: tax return preparation,
online accounting support tool, and tax matter consultations concerning federal and state taxes. 
 Item 6. Exhibits a) Exhibits. 31.1 Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Page 34 of 36




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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) May 6, 2005
    
    
    
    /s/ Elizabeth H. DávilaElizabeth H. DávilaChairman of the Board andChief Executive OfficerMay 6, 2005
    
    
    
    /s/ Derek A. BertocciDerek A. BertocciSenior Vice President andChief Financial Officer (principalfinancial officer)May 6, 2005
    
    
    
    /s/ Martyn J. WebsterMartyn J. WebsterController (principalaccounting officer)
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INDEX TO EXHIBITS Number
    
    Description31.1
    
    Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 Page 36 of 36