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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
   FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 or (  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-10694   VISX, INCORPORATED (Exact name of registrant as specified in its charter)
   Delaware

    
    06-1161793(State or other Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)3400 Central Expressway, Santa Clara, California
    
    95051-0703(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code):(408) 733-2020 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No
(  ) Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No
(  ) Total number of shares of common stock outstanding as of October 22, 2004:
49,609,981 Page 1




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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 September 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Interim Statement of Operations for the Three Months Ended September 30, 2004 and 2003 and for the Nine Months Ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Interim Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Interim Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsOverview
    
    
    12Results of Operations
    
    
    14Liquidity and Capital Resources
    
    
    18Critical Accounting Policies, Estimates and Judgments
    
    
    19Risk Factors
    
    
    21Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4.Controls and Procedures
    
    
    27PART II OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    28Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    28Item 5.Other Information
    
    
    29Item 6.Exhibits and Reports on Form 8-K
    
    
    29SIGNATURES
    
    
    30EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
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PART I. FINANCIAL INFORMATION 
 Item 1. Unaudited Condensed Consolidated Interim Financial Statements VISX, INCORPORATED AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
(In thousands, except share and per share amounts) September 30,
    
    December 31,2004
    
    2003(unaudited)
    
    (unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    10,113
    
    
    $
    24,895Short-term investments
    
    
    110,933
    
    
    
    61,181Accounts receivable, net of allowance for
doubtful accounts of $3,845 and $4,195,
respectively
    
    
    28,986
    
    
    
    27,432Inventories
    
    
    17,149
    
    
    
    11,219Deferred tax assets and prepaid expenses
    
    
    25,894
    
    
    
    20,477Total current assets
    
    
    193,075
    
    
    
    145,204Property and Equipment, net
    
    
    4,078
    
    
    
    3,851Long-Term Deferred Tax and Other Assets
    
    
    13,168
    
    
    
    14,908$
    210,321
    
    
    $
    163,963LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    4,957
    
    
    $
    3,442Accrued liabilities and other current liabilities
    
    
    38,583
    
    
    
    34,722Total current liabilities
    
    
    43,540
    
    
    
    38,164Stockholders Equity:Common stock: $.01 par value, 180,000,000 shares
authorized; 64,990,089 shares issued at
September 30, 2004 and December 31, 2003,
respectively
    
    
    650
    
    
    
    650Additional paid-in capital
    
    
    199,584
    
    
    
    201,108Treasury stock, at cost 15,411,259 and
16,295,297 shares, at September 30, 2004 and
December 31, 2003, respectively
    
    
    (248,042
    )
    
    
    (258,218
    )Accumulated other comprehensive income
    
    
    79
    
    
    
    341Retained earnings
    
    
    214,510
    
    
    
    181,918Total stockholders equity
    
    
    166,781
    
    
    
    125,799Total liabilities and stockholders equity
    
    $
    210,321
    
    
    $
    163,963
 The accompanying notes are an integral part of these condensed
consolidated interim financial statements. Page 3




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VISX, INCORPORATED AND
SUBSIDIARIES 
 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues:License and other revenues
    
    $
    27,169
    
    
    $
    23,494
    
    
    $
    89,887
    
    
    $
    63,235System revenues
    
    
    6,480
    
    
    
    11,136
    
    
    
    19,859
    
    
    
    28,743Service and parts revenues
    
    
    5,022
    
    
    
    4,638
    
    
    
    15,706
    
    
    
    13,709Total revenues
    
    
    38,671
    
    
    
    39,268
    
    
    
    125,452
    
    
    
    105,687Costs and Expenses:Cost of license and other revenues
    
    
    763
    
    
    
    1,009
    
    
    
    2,607
    
    
    
    2,548Cost of system revenues
    
    
    4,808
    
    
    
    11,752
    
    
    
    16,913
    
    
    
    27,316Cost of service and parts revenues
    
    
    3,710
    
    
    
    3,574
    
    
    
    11,336
    
    
    
    10,685Selling, general and administrative
    
    
    9,268
    
    
    
    10,538
    
    
    
    29,500
    
    
    
    30,846Research, development and regulatory
    
    
    5,766
    
    
    
    4,814
    
    
    
    16,261
    
    
    
    13,649Total costs and expenses
    
    
    24,315
    
    
    
    31,687
    
    
    
    76,617
    
    
    
    85,044Income From Operations
    
    
    14,356
    
    
    
    7,581
    
    
    
    48,835
    
    
    
    20,643Interest and other income
    
    
    607
    
    
    
    369
    
    
    
    1,393
    
    
    
    3,130Income Before Provision For Income Taxes
    
    
    14,963
    
    
    
    7,950
    
    
    
    50,228
    
    
    
    23,773Provision for income taxes
    
    
    (3,671
    )
    
    
    (3,085
    )
    
    
    (17,636
    )
    
    
    (9,334
    )Net Income
    
    $
    11,292
    
    
    $
    4,865
    
    
    $
    32,592
    
    
    $
    14,439Earnings Per ShareBasic
    
    $
    0.23
    
    
    $
    0.10
    
    
    $
    0.66
    
    
    $
    0.29Diluted
    
    $
    0.22
    
    
    $
    0.10
    
    
    $
    0.64
    
    
    $
    0.28Shares Used For Earnings Per ShareBasic
    
    
    49,525
    
    
    
    48,065
    
    
    
    49,066
    
    
    
    49,816Diluted
    
    
    50,971
    
    
    
    50,132
    
    
    
    50,739
    
    
    
    50,995
 The accompanying notes are an integral part of these condensed consolidated
interim financial statements. Page 4




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VISX, INCORPORATED AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Nine months endedSeptember 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    32,592
    
    
    $
    14,439Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    6,752
    
    
    
    6,296Tax benefit from exercise of stock options
    
    
    7,500
    
    
    
    Provision for doubtful accounts receivable
    
    
    146
    
    
    
    2,044Increase (decrease) in cash flows from changes in
operating assets and liabilities:Accounts receivable
    
    
    (1,707
    )
    
    
    (2,200
    )Inventories
    
    
    (14,474
    )
    
    
    (5,792
    )Deferred tax assets and prepaid expenses
    
    
    (2,839
    )
    
    
    5,088Long-term deferred tax and other assets
    
    
    2,380
    
    
    
    2,505Accounts payable
    
    
    1,515
    
    
    
    (337
    )Accrued liabilities and other current liabilities
    
    
    3,848
    
    
    
    (6,900
    )Net cash provided by operating activities
    
    
    35,713
    
    
    
    15,143Cash flows from investing activities:Capital expenditures
    
    
    (1,664
    )
    
    
    (1,349
    )Cash paid for acquisition of patents and technology assets
    
    
    
    
    
    
    (5,900
    )Purchase of available for sale securities
    
    
    (85,782
    )
    
    
    (45,853
    )Proceeds from maturities of available for sale securities
    
    
    35,793
    
    
    
    86,800Net cash provided by (used in) investing activities
    
    
    (51,653
    )
    
    
    33,698Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    17,547
    
    
    
    2,535Repurchases of common stock
    
    
    (16,395
    )
    
    
    (63,000
    )Net cash provided by (used in) financing activities
    
    
    1,152
    
    
    
    (60,465
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    6
    
    
    
    27Net decrease in cash and cash equivalents
    
    
    (14,782
    )
    
    
    (11,597
    )Cash and cash equivalents, beginning of period
    
    
    24,895
    
    
    
    37,687Cash and cash equivalents, end of period
    
    $
    10,113
    
    
    $
    26,090Supplemental Cash Flow Information:Cash paid for income taxes:
    
    $
    12,795
    
    
    $
    2,238Non-cash investing activities:Inventory transferred to deferred costs under operating leases
    
    $
    8,534
    
    
    $
    5,454
 The accompanying notes are an integral part of these condensed consolidated
interim financial statements. Page 5




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VISX, INCORPORATED AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 September 30, 2004
 (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 generally accepted accounting principles in the
United States. Please read our 2003 Annual Report on Form 10-K to gain a more
complete understanding of these interim financial statements. The results of
operations for the three and nine months ended September 30, 2004 are not
necessarily indicative of the results for the entire year or any other period. We included in these interim financial statements all adjustments (consisting
primarily of normal recurring adjustments) that in our opinion are necessary to
present fairly our results for the interim periods. 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 Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net Income
    
    $
    11,292
    
    
    $
    4,865
    
    
    $
    32,592
    
    
    $
    14,439Basic Earnings Per ShareIncome available to common stockholders
    
    $
    11,292
    
    
    $
    4,865
    
    
    $
    32,592
    
    
    $
    14,439Weighted average common shares outstanding
    
    
    49,525
    
    
    
    48,065
    
    
    
    49,066
    
    
    
    49,816Basic Earnings Per Share
    
    $
    0.23
    
    
    $
    0.10
    
    
    $
    0.66
    
    
    $
    0.29Diluted Earnings Per ShareIncome available to common stockholders
    
    $
    11,292
    
    
    $
    4,865
    
    
    $
    32,592
    
    
    $
    14,439Weighted average common shares outstanding
    
    
    49,525
    
    
    
    48,065
    
    
    
    49,066
    
    
    
    49,816Dilutive potential common shares from stock options
    
    
    1,446
    
    
    
    2,067
    
    
    
    1,673
    
    
    
    1,179Weighted average common shares and dilutive potential common shares
    
    
    50,971
    
    
    
    50,132
    
    
    
    50,739
    
    
    
    50,995Diluted Earnings Per Share
    
    $
    0.22
    
    
    $
    0.10
    
    
    $
    0.64
    
    
    $
    0.28
 Options to purchase 2,138,000 and 1,996,000 shares with a weighted average
exercise price of $33.92 and $34.97 during the three month periods ended
September 30, 2004 and 2003, 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. Options to purchase 2,092,000 and 4,795,000 shares with a weighted average
exercise price of $34.27 and $24.46 during the nine month periods ended
September 30, 2004 and 2003, respectively, were Page 6




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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. Stock-Based Employee CompensationWe 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 Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net Income
    
    As Reported
    
    $
    11,292
    
    
    $
    4,865
    
    
    $
    32,592
    
    
    $
    14,439Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects
    
    
    
    
    (2,109
    )
    
    
    (1,906
    )
    
    
    (6,340
    )
    
    
    (6,071
    )Net Income
    
    Pro Forma
    
    $
    9,183
    
    
    $
    2,959
    
    
    $
    26,252
    
    
    $
    8,368Basic Earnings Per Share
    
    As Reported
    
    $
    0.23
    
    
    $
    0.10
    
    
    $
    0.66
    
    
    $
    0.29Pro Forma
    
    
    0.19
    
    
    
    0.06
    
    
    
    0.54
    
    
    
    0.17Diluted Earnings Per Share
    
    As Reported
    
    $
    0.22
    
    
    $
    0.10
    
    
    $
    0.64
    
    
    $
    0.28Pro Forma
    
    
    0.18
    
    
    
    0.06
    
    
    
    0.52
    
    
    
    0.17
 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: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Expected life of options (in years)
    
    
    5.58
    
    
    
    4.78
    
    
    
    5.27
    
    
    
    4.35Expected life of ESPP rights (in years)
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25Volatility for options
    
    
    69
    %
    
    
    74
    %
    
    
    71
    %
    
    
    75
    %Volatility for ESPP rights
    
    
    58
    %
    
    
    60
    %
    
    
    59
    %
    
    
    60
    %Risk free interest rate for options
    
    
    3.45
    %
    
    
    2.32
    %
    
    
    2.99
    %
    
    
    2.46
    %Risk free interest rate for ESPP rights
    
    
    1.91
    %
    
    
    1.63
    %
    
    
    1.72
    %
    
    
    1.61
    %Dividend
yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
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The weighted average fair value of options granted under our stock option plans
during the three and nine month periods ended September 30, 2004 was $13.17 and
$12.30, respectively. The weighted average fair value per share of options
granted under the ESPP during the three and nine month periods ended September
30, 2004 was $5.13 and $4.69, respectively. The weighted average fair value of options granted under our stock option plans
during the three and nine month periods ended September 30, 2003 was $12.92 and
$6.34, respectively. The weighted average fair value per share of options
granted under the ESPP during the three and nine month periods ended September
30, 2003 was $3.88 and $3.63, respectively. These pro forma amounts may not be representative of the effects for future
years 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 CEO 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 16% and 15% of total revenues
for the three month periods ended September 30, 2004 and September 30, 2003
respectively, and 16% and 17% of total revenues for the nine month periods
ended September 30, 2004 and September 30, 2003 respectively. We did not
generate export revenues to any country that equaled or exceeded 10% of our
total revenues for the three and nine month periods ended September 30, 2004
and September 30, 2003. In the following table we have presented our export
revenues by geographic region (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Europe
    
    
    1,834
    
    
    
    2,258
    
    
    
    5,372
    
    
    
    5,738Americas (excluding the United States)
    
    
    1,006
    
    
    
    1,060
    
    
    
    2,784
    
    
    
    2,876Asia and Other
    
    
    3,391
    
    
    
    2,760
    
    
    
    11,849
    
    
    
    9,796$
    6,231
    
    
    $
    6,078
    
    
    $
    20,005
    
    
    $
    18,410
 Substantially all of our long-term assets are located in the United States. Major Customers.A significant portion of our revenues are derived from sales
to TLC Vision Corporation (TLC). Sales to TLC accounted for 15% and 17% of
total revenues for the three month periods ended September 30, 2004 and 2003,
respectively. For the nine month periods ended September 30, 2004 and 2003 TLC
accounted for 18% and 16% of total revenues, respectively. TLC accounted for
22% of our total receivables at both September 30, 2004 and December 31, 2003.
Additionally, Taiwan Hwa-In Corporation accounted for 13% of our total
receivables at September 30, 2004. Page 8




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3. Inventories Components of inventories are as follows (in thousands): September 30,
    
    December 31,2004
    
    2003(Unaudited)Raw materials and subassemblies
    
    $
    10,563
    
    
    $
    7,786Work-in-process
    
    
    2,810
    
    
    
    1,321Finished goods
    
    
    3,776
    
    
    
    2,112$
    17,149
    
    
    $
    11,219
 4. Comprehensive Income(unaudited, in thousands): We report components of comprehensive income in our annual consolidated
statements of stockholders equity. Components of comprehensive income
(unaudited, in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    11,292
    
    
    $
    4,865
    
    
    $
    32,592
    
    
    $
    14,439Other comprehensive income (net of related tax effects):Increase (decrease) in accumulated unrealized holding
gains on available-for-sale securities
    
    
    39
    
    
    
    (81
    )
    
    
    (237
    )
    
    
    (1,413
    )Change in accumulated foreign currency translation
adjustment
    
    
    (5
    )
    
    
    86
    
    
    
    (25
    )
    
    
    77Comprehensive income
    
    $
    11,326
    
    
    $
    4,870
    
    
    $
    32,330
    
    
    $
    13,103
 5. Warranty Obligations Warranty obligations are included in accrued liabilities. Changes in product
warranty obligations for the periods ended September 30, 2004 and 2003 are as
follows (unaudited, in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Balance as of the beginning of the period
    
    $
    1,376
    
    
    $
    1,663
    
    
    $
    1,779
    
    
    $
    1,963Expense accrued for new warranties
    
    
    159
    
    
    
    1,700
    
    
    
    487
    
    
    
    3,098Cost of services provided
    
    
    (423
    )
    
    
    (1,028
    )
    
    
    (1,154
    )
    
    
    (2,726
    )Balance as of the end of the period
    
    $
    1,112
    
    
    $
    2,335
    
    
    $
    1,112
    
    
    $
    2,335
 6. Patents and Technology Assets In April 2003, we acquired technology, including patents and other assets
associated with our WaveScan WaveFront® System (WaveScan System) from 20/10
Perfect Vision Optische Gerate GmbH. We paid $5.9 million for this technology,
which was previously licensed to us under an exclusive licensing Page 9




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agreement that is superseded by the acquisition. These assets are included in
other assets and are being amortized to cost of system revenues at the greater
of actual usage or the estimated useful life of five years. 7. Stockholders Equity On April 4, 2001, our Board of Directors authorized a new Stock Repurchase
Program under which up to 10 million shares of VISX common stock may be
repurchased. In accordance with this authorization and applicable securities
laws, we have repurchased 7.8 million shares cumulatively on the open market
through September 30, 2004 at a total cost of $106.8 million. Accordingly, 2.2
million shares remain available as of September 30, 2004 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. 8. Income Tax Provision Our effective tax rate in the third quarter of 2004 was 24.5% as compared to
38.8% in the third quarter of 2003. The decrease was primarily attributable to
the release of certain tax accruals due to differences between our original estimates of certain prior year income tax
expenses and revisions based on the elimination of contingencies
from prior year tax returns. This led to a benefit of approximately $2.2 million in the
three months ended September 30, 2004. 9. New Accounting Pronouncements In December 2003, the FASB revised Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
which it had originally issued in January 2003. As revised, FIN 46 requires
certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. As revised, application of
FIN 46 is required for interests in special-purpose entities for periods ending
after December 15, 2003. Application for all other types of entities covered by
FIN 46 is required in financial statements for periods ending after March 15,
2004. The adoption of FIN 46 as revised, did not have a material impact on our
financial position or results of operations. In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150 ( SFAS 150 ), Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS 150 requires that
certain financial instruments, which under previous guidance were accounted for
as equity, must now be accounted for as liabilities. The financial instruments
affected include mandatory redeemable stock, certain financial instruments that
require or may require the issuer to buy back some of its shares in exchange
for cash or other assets and certain obligations that can be settled with
shares of stock. SFAS 150 is effective for all financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003, although
certain aspects have been delayed pending further clarifications. The Company
currently does not have any financial instruments that are within the scope of
this statement. In November 2003, the EITF reached an interim consensus on Issue No. 03-01,
The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments to require additional disclosure requirements for securities
classified as available-for-sale or held-to-maturity for fiscal years ending
after December 15, 2003. In March 2004, the EITF reached a final consensus on
this Issue, to provide Page 10




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additional guidance which companies must follow in determining whether
investment securities have an impairment which should be considered
other-than-temporary. The guidance is applicable for reporting periods
beginning after June 15, 2004. The Company does not expect the adoption under
the final consensus to have a significant impact on the carrying value of its
investments. 10. Reclassifications Certain reclassifications were made to prior year financial data to conform
with current year presentation. 
 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 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
consumer acceptance of 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 plan to continue to generate cash from our
ongoing business in 2004; the possibility that we may repurchase shares of our
common stock through the remainder of 2004; our belief there will not be a
near-term change in our level of capital expenditures; 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 the balance of 2004 will to improve compared to
2003; our belief that operating expenses will increase compared to 2003; our
target of increasing operating margins to in excess of 35% of revenues; our
expectation that we will continue to generate cash from operations; our belief
that procedure growth was negatively impacted by the hurricanes that affected
the eastern United States in the third quarter; our belief that our license
revenue will improve for the balance of 2004 as compared to 2003; 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 system revenue for the remainder of 2004
will be less than the comparable period of 2003; our projection that research
and development expense in the fourth quarter of 2004 will be comparable to the
fourth quarter of 2003; our belief that operations will generate cash in 2004
at a level equal to or greater than in 2003; our belief that cash from
operations will exceed cash required to fund our working capital and capital
equipment needs during the coming twelve months; and our belief that the
estimates and judgments made regarding future events in connection with the
preparation of our financial statements are reasonable. The following
discussion and analysis should be read together with our Condensed Consolidated
Financial Statements and the Notes to those statements included elsewhere in
this Quarterly Report on Form 10-Q. This discussion contains forward-looking
statements based on our current expectations, assumptions, estimates and
projections about us and our industry. These forward-looking statements
include, but are not limited to, statements concerning risks and uncertainties.
The risks and uncertainties include the potential reduction in demand for our
equipment and upgrades, and the potential decline in demand for procedures
caused by the weakness in the economy, consumer confidence and stock markets in
the United States in recent years. Our actual results could differ materially
from those indicated in these forward-looking statements as a result of certain
factors, as more fully described in the Factors Affecting Future Operating
Results section of this Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Quarterly Report on
Form 10-Q. We undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future. Page 11




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Overview VISX, Incorporated (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 FDA approval 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:  
    
    Nearsightedness;  
    
    Farsightedness; and  
    
    Astigmatism. Our CustomVue procedure is also available for all of these refractive vision
disorders in most international markets. In May 2003, we obtained FDA approval
for our new CustomVue procedure for nearsightedness and astigmatism. 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 WaveScan System,
represents a new standard in laser vision correction. It enables doctors to
identify, measure, and correct imperfections in a patients eye much 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 1300 VISX STAR Systems in place worldwide. We also believe
we have approximately 60% market share for procedures performed in the United
States. According to MarketScope, we have held at least 60% market share since
1997. License revenues comprise the majority of our revenues and carry a gross profit
margin of approximately 97%. License revenues also generated approximately 90%
of our gross profit dollars in the three and nine month periods ended September
30, 2004. Such revenues are predominantly derived from license fees Page 12




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from our United States customers. License revenues grew 16% and 42% in the
three and nine month periods ended September 30, 2004 compared with the
corresponding periods in 2003. We evaluate this aspect of our business by
tracking the following:  
    
    The number of procedures sold;  
    
    Trends in procedure sales, including conversion rates from standard
to CustomVue procedures; and  
    
    Market share for VISX and its 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, and conversion to, our CustomVue procedure; (ii) enable VISX to maintain or
gain market share; and (iii) increase the laser vision correction market in
general. Progress on any one of these fronts offers the potential for growth in
our license revenue. We manage our expenses closely and plan to continue to generate cash from our
ongoing business operations in 2004. Historically, our primary non-operating
use of cash has been to repurchase shares of our common stock. We bought 0.8
million shares of stock in the first nine months of 2004 and may repurchase
additional shares through the remainder of 2004. We will also continue to
investigate areas where we can expand our business. This could result in using
cash for the acquisition of technology or a business. Our capital expenditures
have been in the range of $2.4 million to $4.0 million per year in the past
five years. We do not expect to exceed this level of expenditures in 2004. We
have no long term debt. Looking to the remainder of 2004, 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 2004
and beyond:  
    
    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, especially with regard to our
higher-priced CustomVue procedure. We expect that ongoing technical
advances, such as the CustomVue procedure, will enhance the quality of
patients vision and may also increase consumer acceptance of 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
systems. 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
stronger international market presence. As a result, the competition to
obtain procedure Page 13




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##### Table of Contents



market share is intense.  
    
    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 and 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 for the balance of 2004 will improve as
compared to 2003 as a result of various factors including higher CustomVue
adoption and improvements in the United States economy. For 2004, we anticipate
that operating expenses will increase compared to 2003 with a target of
increasing our operating margins to in excess of 35% of revenues. We expect to
continue to generate cash from operations. 
 Results of Operations Three Months Ended September 30,
    
    Nine Months Ended September 30,($ 000s)
    
    2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeLicense and other revenues
    
    $
    27,169
    
    
    $
    23,494
    
    
    
    16
    %
    
    $
    89,887
    
    
    $
    63,235
    
    
    
    42
    %Percent of total revenues
    
    
    70.3
    %
    
    
    59.8
    %
    
    
    
    
    
    
    71.7
    %
    
    
    59.8
    %System revenues
    
    
    6,480
    
    
    
    11,136
    
    
    
    (42
    )%
    
    
    19,859
    
    
    
    28,743
    
    
    
    (31
    )%Percent of total revenues
    
    
    16.7
    %
    
    
    28.4
    %
    
    
    
    
    
    
    15.8
    %
    
    
    27.2
    %Service and parts revenues
    
    
    5,022
    
    
    
    4,638
    
    
    
    8
    %
    
    
    15,706
    
    
    
    13,709
    
    
    
    15
    %Percent of total revenues
    
    
    13.0
    %
    
    
    11.8
    %
    
    
    
    
    
    
    12.5
    %
    
    
    13.0
    %Total revenues
    
    $
    38,671
    
    
    $
    39,268
    
    
    
    (2
    )%
    
    $
    125,452
    
    
    $
    105,687
    
    
    
    19
    %
 License and other revenues License and other revenues increased $3.7 million, to $27.2 million for the
three months ended September 30, 2004, from $23.5 million for the three months
ended September 30, 2003. The increase was primarily attributable to increased
adoption of our CustomVue procedure and 4% procedure growth in the United
States. We believe that procedure growth was negatively impacted by the
hurricanes that affected the Eastern United States in the third quarter of
2004. We introduced the CustomVue procedure in June 2003 in the United States
and sell the product for more than double the price of our standard procedure.
License and other revenues increased $26.7 million, to $89.9 million for the
nine months ended September 30, 2004, from $63.2 million for the nine months
ended September 30, 2003. The increase was primarily attributable to increased
adoption of our CustomVue procedure and procedure growth in the United States.
In the United States, CustomVue procedures represented approximately 35% of the
procedure orders in the nine month period ended September 30, 2004. We believe that our license and other revenues will improve for the balance of
2004 as compared to 2003. 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 Page 14




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##### Table of Contents



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 decreased by $4.6 million to $6.5 million for the three months
ended September 30, 2004 from $11.1 million for the three months ended
September 30, 2003. System revenues decreased by $8.8 million to $19.9 million
for the nine months ended September 30, 2004 from $28.7 million for the nine
months ended September 30, 2003. The decrease in both periods is primarily due
to fewer WaveScan System sales in 2004 as compared to 2003 as at least 80% of
our United States customers now have one or more WaveScan Systems. More VISX STAR Systems were shipped during the nine months ended September 30,
2004 as compared to the comparable period of 2003. However a greater number
were shipped under operating leases during the nine months ended September 30,
2004. Under operating leases revenue is generally recognized over the term of
the agreement. The market for laser systems remains competitive. Pricing pressures in 2004
have contributed to the decrease in system revenues as we experienced lower per
unit pricing on laser sales in the nine months ended September 30, 2004
compared with the comparable period of 2003. MarketScope estimates that VISX is
the leader in the worldwide market with approximately 30% of worldwide laser
placements. For these reasons, we believe that system revenue for the remainder of 2004
will be less than the comparable period in 2003. Service and parts revenues Service and parts revenues increased by $0.4 million to $5.0 million for the
three months ended September 30, 2004 from $4.6 million for the three months
ended September 30, 2003. Service and parts revenues increased by $2.0 million
to $15.7 million for the nine months ended September 30, 2004 from $13.7
million for the nine months ended September 30, 2003. Service and parts
revenues for the three and nine month periods ended September 30, 2004 were
higher than the comparable periods for 2003 primarily due to higher procedure
volumes and the resultant higher revenues derived from customers that purchased
service on a per procedure basis. Three Months Ended September 30,
    
    Nine Months Ended September 30,($ 000s)
    
    2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeCost of license and other revenues
    
    $
    763
    
    
    $
    1,009
    
    
    
    (24
    )%
    
    $
    2,607
    
    
    $
    2,548
    
    
    
    2
    %Percent of related revenues
    
    
    2.8
    %
    
    
    4.3
    %
    
    
    
    
    
    
    2.9
    %
    
    
    4.0
    %Cost of system revenues
    
    
    4,808
    
    
    
    11,752
    
    
    
    (59
    )%
    
    
    16,913
    
    
    
    27,316
    
    
    
    (38
    )%Percent of related revenues
    
    
    74.2
    %
    
    
    105.5
    %
    
    
    
    
    
    
    85.2
    %
    
    
    95.0
    %Cost of service and parts revenues
    
    
    3,710
    
    
    
    3,574
    
    
    
    4
    %
    
    
    11,336
    
    
    
    10,685
    
    
    
    6
    %Percent of related revenues
    
    
    73.9
    %
    
    
    77.1
    %
    
    
    
    
    
    
    72.2
    %
    
    
    77.9
    %Selling, general and administrative
    
    
    9,268
    
    
    
    10,538
    
    
    
    (12
    )%
    
    
    29,500
    
    
    
    30,846
    
    
    
    (4
    )%Percent of total revenues
    
    
    24.0
    %
    
    
    26.8
    %
    
    
    
    
    
    
    23.5
    %
    
    
    29.2
    %
 Page 15




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Three Months Ended September 30,
    
    Nine Months Ended September 30,($ 000s)
    
    2004
    
    2003
    
    Change
    
    2004
    
    2003
    
    ChangeResearch, develop. and regulatory
    
    
    5,766
    
    
    
    4,814
    
    
    
    20
    %
    
    
    16,261
    
    
    
    13,649
    
    
    
    19
    %Percent of total revenues
    
    
    14.9
    %
    
    
    12.3
    %
    
    
    
    
    
    
    13.0
    %
    
    
    12.9
    %
 Cost of license and other revenues Cost of license and other revenues decreased $0.2 million to $0.8 million for
the three months ended September 30, 2004 from $1.0 million for the three
months ended September 30, 2003. Cost of license and other revenues increased
$0.1 million, to $2.6 million for the nine months ended September 30, 2004,
from $2.5 million for the nine months ended September 30, 2004. The overall
increase in the gross profit percentage is due to lower costs associated with
the production of custom cards when compared to the related period in 2003. Cost of system revenues Cost of system revenues decreased $7.0 million to $4.8 million for the three
months ended September 30, 2004 from $11.8 million for the three months ended
September 30, 2003. Cost of system revenues decreased $10.4 million to $16.9
million for the nine months ended September 30, 2004 from $27.3 million for the
nine months ended September 30, 2003. The decreases in cost of system revenues
were due primarily to the decrease of revenues from the sales of lasers,
upgrades and WaveScan Systems. In addition, a greater number of systems were
shipped under operating leases during the three and nine months ended September
30, 2004 versus the comparable periods of 2003. Under operating leases, costs
are recognized in proportion to the revenues recognized over the term of the
agreement. Cost of system revenues in the first and second quarters of 2004
were overstated by $0.1 million and $0.3 million, respectively. The third
quarter includes a $0.4 million adjustment to correct these overstatements. The amount of
such charges were not material to our consolidated results of operations in the
three months ended March 31, 2004, June 30, 2004 and September 30, 2004 or the
nine months ended September 30, 2004. Cost of service and parts revenues Cost of service and parts revenues increased $0.1 million to $3.7 million for
the three months ended September 30, 2004 from $3.6 million for the three
months ended September 30, 2003. The overall gross profit margin increased to
26% in the three months ended September 30, 2004 compared to 23% in the
corresponding period of 2003 as labor costs are relatively fixed and parts
usage does not typically increase linearly with procedure volume. Costs of
service and parts revenues increased $0.6 million to $11.3 million for the nine
months ended September 30, 2004 from $10.7 million for the nine months ended
September 30, 2003. Cost of service and parts revenues increased due to a
larger installed base of products in the United States. Selling, general and administrative expenses Selling, general and administrative expenses decreased by $1.2 million to $9.3
million for the three months ended September 30, 2004 from $10.5 million for
the three months ended September 30, 2003. The change reflects primarily the
following items:  
    
    In the third quarter of 2003, DVI Inc. (DVI), which provided
equipment purchase financing to VISX customers, entered into Chapter 11
bankruptcy proceedings. Bad debt expense decreased by $1.8 million in
the third quarter of 2004 as compared to the third quarter of 2003
primarily due to the increase in reserves in 2003 to cover the entire
$2.3 million of accounts receivable then outstanding from DVI;  
    
    United States marketing costs decreased by $0.3 million primarily
due to a reduction in professional media costs in 2004 compared to
those incurred in 2003 associated with the launch of CustomVue in 2003; Page 16




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##### Table of Contents




    
    Increased selling, general and administrative costs primarily
attributable to higher personnel related costs of $0.6 million; and  
    
    Administrative expenses increased $0.3 million primarily due to the
costs of compliance with the provisions of the Sarbanes Oxley Act. Selling, general and administrative expenses decreased by $1.3 million to $29.5
million for the nine months ended September 30, 2004 from $30.8 million for the
nine months ended September 30, 2003. Decreased bad debt expenses and legal
expenses were offset by higher commission expenses due to higher revenues and
increased administrative spending to reflect the cost of compliance with the
provisions of the Sarbanes Oxley Act. For the remainder of 2004, our current plan for operations includes:  
    
    A net increase in legal expenses in 2004 since the fourth quarter
of 2003 benefited from the non-recurring receipt of insurance
reimbursements of legal expenses totaling approximately $3.1 million;
and  
    
    A modest decrease in selling general and administrative spending as
compared to the fourth quarter of 2003. Research and development and regulatory expenses Research and development and regulatory expenses increased by $1.0 million to
$5.8 million for the three months ended September 30, 2004 from $4.8 million
for the three months ended September 30, 2004. Research and development and
regulatory expenses increased by $2.7 million to $16.3 million for the nine
months ended September 30, 2004 from $13.6 million for the nine months ended
September 30, 2003. These increases relate primarily to our ongoing focus on
next generation technologies and developments for laser vision correction,
including:  
    
    System advancements;  
    
    New methods for correcting vision disorders including further
indications (such as hyperopia and high myopia) for our CustomVue
treatment; and  
    
    Continued research and clinical trials for treatment of presbyopia. We project that research and development expense in the fourth quarter of 2004
will be comparable to the level of expenditures in the fourth quarter of 2003. Interest and other income Interest and other income increased by $0.2 million to $0.6 million for the
three months ended September 30, 2004 from $0.4 million for the three months
ended September 30, 2003. Slightly higher yields on our portfolio balances
contributed to the increase in interest income compared to the third quarter of
2003. Interest income decreased by $1.7 million to $1.4 million for the nine
months ended September 30, 2004 from $3.1 million for the nine months ended
September 30, 2003. In 2003 we sold available-forsale securities to
repurchase shares of VISX stock. This led to a $1.2 million realized gain on
available for sale securities. The holding gains were previously recorded in
accumulated other comprehensive income, and were recognized in interest and
other income upon realization in 2003. Income tax provision Our effective tax rate in the third quarter of 2004 was 24.5% as compared to
38.8% in the third quarter of 2003. The decrease was primarily attributable to
the release of certain tax accruals due to differences between our original estimates of certain prior year income tax
expenses and revisions based on the elimination of contingencies
from prior year tax returns. Page 17




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This led to a benefit of approximately $2.2 million in the three
months ended September 30, 2004. 
 Liquidity and Capital Resources Cash, cash equivalents and short-term investments (cash) and working capital
were as follows (in thousands): September 30,
    
    December 31,2004
    
    2003Cash, cash equivalents and short-term investments
    
    $
    121,046
    
    
    $
    86,076Working capital
    
    
    149,535
    
    
    
    107,040Stockholders equity
    
    
    166,781
    
    
    
    125,799
 Our cash, cash equivalents and short-term investments consist principally of
money market funds and bonds issued by the United States government, government
sponsored enterprises 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 $121.0 million at
September 30, 2004, an increase of $35.0 million compared with December 31,
2003. It was impacted principally by:  
    
    Positive cash flow from operating activities of $35.7 million;  
    
    Proceeds from issuance of common stock related to employee
participation in employee stock programs generating $17.5 million;  
    
    Repurchases of 0.8 million shares of stock at a total
cost of $16.4 million; and  
    
    Capital expenditures of $1.7 million. Operating activities generated $35.7 million in cash in the nine months ended
September 30, 2004 up from $15.1 million provided in the nine months ended
September 30, 2003. In the first nine months of 2004, we:  
    
    Generated $47.0 million of cash from net operations plus non-cash
related expenses;  
    
    Increased Inventory by $14.5 million primarily to support the
increase in system sales and anticipated shipments of the Fourier
upgrade and Iris Registration, and;  
    
    Accrued and other current liabilities increased by $3.8 million due
primarily to the deferral of revenue associated with operating lease
arrangements. Net cash used in investing activities was $51.7 million in the nine months
ended September 30, 2004 down from $33.7 million net cash provided in the nine
months September 30, 2003. The principal movements in cash used in investing
activities in the first nine months of 2004 were due to the investments in, and
maturities of, short-term investments. Net cash provided by investing
activities in the first nine months of 2003 consisted primarily of the
investments in, and maturities of, short-term investments offset by a payment
of $5.9 million for acquired patents and technology from 20/10 Perfect Vision
Optische Gerate GmbH. Page 18




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Cash provided by financing activities was $1.2 million in the nine months ended
September 30, 2004 as compared to $60.5 million cash used in the nine months
ended September 30, 2003. This was primarily due to more cash being provided by
the exercise of options than used in the repurchase of shares in 2004 as
compared to 2003 when the reverse was true. 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
September 30, 2004, at a total cost of $106.8 million. Accordingly, 2.2 million
shares remain available as of September 30, 2004 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. As a result, we cannot
predict the number of shares that we may repurchase in the future. Purchases of short-term investments represent reinvestment into short-term
investments of the proceeds from short-term investments that matured and
investment of cash and cash equivalents. As of September 30, 2004, we did not
have any borrowings outstanding, nor any credit agreements. Our normal credit terms granted to customers are net 30 to net 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. We believe our operations will continue to generate cash in 2004 at a level
equal to or greater than in 2003. 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 $121.0 million in cash, cash equivalents and
short-term investments as of September 30, 2004 to provide for unforeseen
contingencies and to support strategic objectives including the development or
acquisition of new technologies and our Stock Repurchase Program. 
 Critical Accounting Policies We follow accounting principles generally accepted in the United States
(GAAP) in preparing our financial statements. As part of this process, 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 Page 19




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received. This is occasionally the case with customers who have recently set
themselves up in business and typically where the customer is thinly
capitalized. Accounts Receivable At the end of each accounting period, we estimate the reserve necessary for
accounts receivable 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 September
30, 2004 and December 31, 2003 as a percentage of gross accounts receivable was
11.7% and 13.3%, respectively. At September 30, 2004, 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 three and nine month periods ending September 30, 2004 and September 30,
2003 as a percentage of total revenues in those periods, were all less than
1.0%. To date, our estimates have been materially accurate. We do not expect
either our methodology or the accuracy of our estimates to change significantly
in the future unless there are any major changes in our business model, our
operating environment or the economy, or the ongoing development of our
technology. 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.
Currently we are not aware of any pending or threatened legal actions against
us that we believe could materially adversely affect our business, financial
condition or results of operations. However, 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. Page 20




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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 our results of operations
in any given period may not be a good indicator of our future performance. Market Acceptance.Our business depends upon broad market acceptance of laser
vision correction by both doctors and patients in the United States and key
international markets. Laser vision correction has penetrated 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.
Although we believe laser vision correction offers a more predictable outcome
and more precise results than other surgical methods used to correct refractive
disorders, it is not without risk. Potential complications and side effects
include: post-operative discomfort, corneal haze (an increase in the light
scattering properties of the cornea) during healing, glare/halos (undesirable
visual sensations produced by bright lights), decreases in contrast
sensitivity, temporary increases in intraocular pressure in reaction to
procedure medication, modest fluctuations in refractive capabilities during
healing, modest decrease in best corrected vision (i.e., with corrective
eyewear), unintended over- or under-corrections, regression of effect,
disorders of corneal healing, corneal scars, corneal ulcers, and induced
astigmatism (which may result in blurred or double vision and/or shadow
images). 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. Unfavorable Side Effects.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 VISX or any participant in the laser vision correction market, may have a
material adverse effect on our business, financial position, and results of
operations. Government Regulation.We are 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 FDA approval or
clearance for each medical device that we market. The FDA approval process is
typically lengthy and expensive, and approval is never certain. Products
distributed outside of the United States are also subject to government
regulation, which may be equally or more demanding. Our new products could take
a significantly longer time than we expect to gain regulatory approval and may
never gain approval. If a regulatory authority delays approval of a potentially Page 21




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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. 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 distribute. Regulatory authorities outside of the
United States may impose similar sanctions for noncompliance with applicable
regulatory requirements. Clinical Trials.The clinical trials required to obtain regulatory approvals
are complex and expensive and their outcomes are uncertain. We incur
substantial expense for, and devote significant time to, clinical trials 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. Competition.Intense competition in the laser vision correction industry could
result in the loss of customers, an inability to attract new customers, or a
decrease in prices for our products. 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 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 System. In addition, medical companies, academic and research
institutions and others could develop new therapies, including new medical
devices or surgical procedures, for the conditions targeted by VISX, which
therapies could be more medically effective and less expensive than laser
vision correction, and could potentially render laser vision correction
obsolete. Any such developments could have a material adverse effect on our
business, financial position and results of operations. Procedure Market Share. MarketScope estimated that as at June 30, 2004 we were
the leader in the United States procedures market with a market share of over
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. Page 22




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Economic Conditions.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. Significant Customers.A significant portion of our revenues is derived from
sales to TLC Vision Corporation (TLC). Sales to TLC accounted for 15% and 17%
of total revenues for the three month periods ended September 30, 2004 and
2003, respectively. For the nine month periods ended September 30, 2004 and
2003 TLC accounted for 18% and 16% of total revenues, respectively. TLC
accounted for 22% of our total receivables at both September 30, 2004 and
December 31, 2003. Additionally, Taiwan Hwa-In Corporation accounted for 13% of
our total receivables at September 30, 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. New Technologies.If we fail to keep pace with advances in our industry or
fail to develop new methods of vision correction, customers may not buy our
products and our revenue may decline. We must be able to manufacture and
effectively market those products and persuade a sufficient number of eye care
professionals to use the new products, 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. New Products May Not Be Commercially Viable.While we devote significant
resources to research and development, our research and development may not
lead to new products that achieve commercial success. The 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. Patents and Intellectual Property Disputes.Our business is dependent on the
enforceability and the validity of our United States and foreign patents. We
own over 200 United States and foreign patents and have 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 VISX asserted patent
infringement were found not to be infringing our patents) in Page 23




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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. Product Liability Claims.We have and may become subject to product liability
claims. We could be liable for injuries or damage resulting from use of the
VISX STAR System or WaveScan System. In addition, a claim that an injury
resulted from a defect in any VISX product, even if successfully defended,
could damage our reputation. Although we possess insurance customarily obtained
by businesses of our type (including insurance against product liability risks
associated with the testing, manufacturing, and marketing of our products),
product liability claims in excess of our insurance coverage could have a
material adverse effect on our business, financial position, and results of
operations. Litigation.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. Section 404 Compliance.We must comply with the rules promulgated under
Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404) by December 31,
2004. Rules describing the requirements for our auditors to be able to attest
to our compliance under Section 404 were adopted in June, 2004. Currently,
there is no precedent or proven method for compliance with Section 404, and our
management must exercise significant judgment in our effort to do so. As a
result of this uncertainty, we cannot be certain that we will comply with the
requirements of Section 404 in a timely manner. If we do not, public perception
of our internal controls could be damaged, causing our financial results to
suffer and our stock price to decline. International Operations.We face risks due to our reliance on sales in
international markets. Sales to customers outside the United States represented
16% of our total revenues for the three and nine months ended September 30,
2004 and 15% and 17% of our total revenues for the three and nine months ended
September 30, 2003. To date, all of our sales have been denominated in United
States dollars. Our international presence exposes us to risks including:  
    
    the need for export licenses;  
    
    unexpected regulatory requirements;  
    
    tariffs and other potential trade barriers and restrictions;  
    
    political, legal and economic instability in foreign markets;  
    
    longer accounts receivable cycles;  
    
    difficulties in managing operations across disparate geographic areas;  
    
    foreign currency fluctuations;  
    
    reduced or limited protection of our intellectual property rights in some countries; and  
    
    dependence on local distributors. If one or more of these risks materialize, our sales to international customers
may decrease and our costs may increase, which could negatively impact our
revenues and operating results. Page 24




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Distributors.Internationally, we sell our products through distributors. If
we fail to maintain our existing distribution channels or develop additional
channels in the future, our ability to sell products internationally could be
impaired and our business harmed. Third Party Financing Entities. 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 our 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. Fixed Short-Term Expenses.Because our expenses are relatively fixed in the
short term, our earnings will decline if we do not meet our projected sales.
Any shortfall in revenues below expectations would likely have an immediate
impact on our earnings per share, which could adversely affect the market price
of our common stock. Our operating expenses, which include sales and marketing,
research and development, and general and administrative expenses, are based on
our expectations of future revenues and are relatively fixed in the short term.
Accordingly, if revenues fall below expectations, we will not be able to reduce
our spending rapidly in response to such a shortfall. Acquisitions of Businesses or Technology.We have acquired technology assets
and may need to continue to do so to retain our competitive position within the
marketplace. If we acquire businesses, new products or technologies in the
future, we may be required to amortize significant amounts of identifiable
intangible assets and we may record significant amounts of goodwill that will
be subject to annual testing for impairment. If we consummate one or more
significant future acquisitions in which the consideration consists of stock or
other securities, our existing stockholders ownership could be significantly
diluted. If we were to proceed with one or more significant future acquisitions
in which the consideration included cash, we could be required to use a
substantial portion of our available cash. Additionally, such an acquisition
could have a substantial impact on our business, our financial position and our
results of operations. Taxes. 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. Although we believe we have adequate provisions
and accruals in our financial statements for tax liabilities, we cannot predict
the outcome of all past and future tax assessments. If any taxing authority
determines we owe amounts for taxes greater than we expect, our earnings may be
negatively affected. Key Personnel.The success of our business depends on the efforts and
abilities of our senior management and other key personnel. We do not have long
term employment agreements with any of our key personnel. The loss of any of
our executive officers or other key employees could result in significant
disruption to our ongoing operations and hurt our business. Additionally, our
inability to attract new senior executives and key personnel could
significantly impact our business results. Single Sources For Key Components.The manufacture of the VISX STAR 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 Page 25




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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 of our Stock Price.The market price of our common stock has
experienced fluctuations and is likely to fluctuate significantly in the
future. Our stock price can fluctuate for a number of reasons, including:  
    
    announcements about us or our competitors;  
    
    results or settlements of 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 VISX, 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. Proprietary Information and Inventions Agreements.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. Changes to the Accounting for Stock Options.The Financial Accounting Standards
Board has issued a draft Financial Accounting Standard which includes proposed
rule changes requiring expensing of stock options. Currently, we include such
expenses on a pro forma basis in the notes to our annual financial statements
in accordance with accounting principles generally accepted in the United
States but do not include stock option expense for employee options in our
reported financial statements. If accounting standards are changed to require
us to expense stock options, our reported earnings will decrease significantly
and our stock price could decline. Exercising of stock options.As of September 30, 2004, there were an aggregate
of 5,580,448 shares of our common stock issuable upon exercise of outstanding
vested stock options. If these stock options are exercised, the total number of
our traded shares will increase and this could adversely impact our earnings
per share. Antitakeover Provisions in Our Charter Documents.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. Page 26




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Item 3. Quantitative and Qualitative Disclosures about Market Risk There were no material changes during the nine months ended September 30, 2004
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. 
 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
September 30, 2004 that materially affected, or are reasonably likely to
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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings 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, 2003. During the quarter ended September 30,
2004, there were no material developments with respect to such previously
existing proceedings and no new material proceedings not previously disclosed. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities The following table contains information regarding repurchases of our common
stock during the quarter: Total Number of
    
    Maximum Number ofShares Purchased as
    
    Shares that May YetTotal Number of
    
    
    
    
    
    Part of Publicly
    
    Be Purchased UnderShares Purchased
    
    Average Price Per
    
    Announced Plans or
    
    the Plans orPeriod
    
    (1)
    
    Share
    
    Programs (2)
    
    ProgramsJuly 1 through July 31, 2004
    
    
    20,000
    
    
    $
    21.37
    
    
    
    20,000
    
    
    
    2,209,200August 1 through August 31,
2004
    
    
    40,000
    
    
    
    18.86
    
    
    
    40,000
    
    
    
    2,169,200September 1 through
September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,169,200Total
    
    
    60,000
    
    
    $
    19.70
    
    
    
    60,000
 (1) Shares have only been repurchased through publicly announced programs. All
repurchases were open-market purchases. (2) On April 4, 2001 our Board of Directors authorized the repurchase of up to
10 million shares of our common stock. We have repurchased 7.8 million shares
cumulatively through September 30, 2004 under the Board of Directors April
2001 authorization. Number of shares does not include an additional 3.5 million
shares of our common stock approved for repurchase by our Board of Directors on
May 28, 2003, all of which were repurchased during the quarter ended June 30,
2003. Unless terminated earlier by resolution of our Board of Directors, each share
repurchase program expires when we have repurchased all shares authorized for
repurchase thereunder. Page 28




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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 independent auditor. Non-audit services are
defined in the law as services other than those provided in connection with an
audit or a review of the financial statements of VISX. The non-audit services
approved by the Audit Committee in the 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 of KPMG LLP for the following non-audit service: tax
return preparation, non-audit accounting services, and tax matter consultations
concerning federal and state taxes. 
 Item 6. Exhibits and Reports on Form 8-K 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 b) Reports on Form 8-K. VISX filed reports on Form 8-K during the period covered by this report, as
follows:  (1)
    
    Report on 8-K filed on July 21, 2004 under Item 12 (Disclosure of
Results of Operations and Financial Condition) to reference and furnish
as an exhibit a press release dated July 21, 2004 announcing our VISXs
second quarter financial results. Page 29




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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)November 8, 2004
    
    /s/ Elizabeth H. Dávila
Elizabeth H. Dávila
Chairman of the Board and
Chief Executive OfficerNovember 8, 2004
    
    /s/ Derek A. Bertocci
Derek A. Bertocci
Senior Vice President and
Chief Financial Officer (principal
financial officer)November 8, 2004
    
    /s/ Martyn J. Webster
Martyn J. Webster
Controller (principal
accounting officer)
 Page 30




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Exhibit Index 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 31