10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

xAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2006

or

oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 001-31257

ADVANCED MEDICAL OPTICS, INC.

(Exact name of Registrant as Specified in its Charter)

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

Registrant’s telephone number: (714) 247-8200

Securities registered pursuant to Section 12(b) of the Act:

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

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

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

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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  o

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

Large accelerated filer x            Accelerated filer  o            Non-accelerated filer  o

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference from the registrant’s proxy statement for the 2007 annual meeting of stockholders, which proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2006.

TABLE OF CONTENTS

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

(i)

PART I

Item 1. Business

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

Overview

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

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

In May 2005, we acquired VISX, Incorporated, the global leader in laser vision correction.  As a result of the VISX acquisition, we are a leader in the design and development of proprietary technologies and systems for laser vision correction of refractive vision disorders.  Our products include the VISX STAR Excimer Laser System, which is a fully integrated ophthalmic medical device incorporating an excimer laser and a computer driven workstation; the VISX WaveScan System, which is a diagnostic device that uses laser beam technology to measure comprehensive refractive errors of the eye and derive comprehensive refractive information about a patient’s individual optical system; and VISX treatment cards, which provide the user with specific access to proprietary software and are required to operate the VISX STAR Excimer Laser System.

In January 2007, we entered into an agreement with IntraLase Corp., a leader in femtosecond lasers used in LASIK surgery, to acquire all fully diluted shares of the company for approximately $808 million in cash.  Under the terms of the definitive merger agreement, IntraLase stockholders are expected to receive $25.00 in cash for every share of IntraLase common stock they own.  We expect to complete the acquisition during the second quarter of 2007.  For a description of the risks related to this transaction, see “Risks Relating to the Pending IntraLase Corp. Acquisition” beginning on page 24.

Industry

Vision and Vision Impairment.

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

·Cataracts. Cataracts are an irreversible progressive ophthalmic condition in which the eye’s natural lens loses its usual transparency and becomes clouded and opaque. This clouding obstructs the passage of light to the retina and can eventually lead to blindness.

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

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behind the retina because the curvature of the cornea is too flat. Astigmatism makes it difficult for a person to focus on any object because the otherwise uniform curvature of the cornea or lens is somehow disrupted or becomes uneven. Presbyopia is the progressive loss of flexibility of the lens and its ability to change shape to focus on near or far objects, and is presumably caused by aging of the eye’s lens and the muscles that control the shape of the lens.

Ophthalmic Surgical Products Market. Ophthalmic surgical products generally are designed to correct impaired vision through minimally invasive surgical procedures. As the eye ages, the prevalence of cataracts and refractive disorders generally increases. We believe that an aging population, introduction of new technologies and increasing market acceptance present opportunities for growth in the ophthalmic surgical market.

Cataract Treatment.  The largest segment of the ophthalmic surgical products market is the treatment of cataracts. Cataract extraction followed by IOL implantation is one of the most common surgical procedures performed in the United States and most other developed nations. As estimated by MarketScope, approximately 2.9 million cataract procedures were performed in the United States and over 14.1 million cataract procedures were performed worldwide in 2006.  MarketScope estimates that the global cataract surgery market, which includes sales of IOLs, phacoemulsification equipment, viscoelastics and other related products, was approximately $3.4 billion in 2006 and is projected to grow at a compound annual growth rate of approximately 10% from 2006 to 2011. The data in this report attributed to MarketScope is used with the permission of MarketScope.

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

The following table sets forth the estimated revenues for each component of the global cataract surgery market in its various components for the year 2006 according to MarketScope (in millions):

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

Refractive Vision Correction. Another segment of the ophthalmic surgical market is the surgical treatment of refractive disorders.

LASIK.  The most common refractive surgery procedure is laser surgery, and the most common surgical technique for treating refractive disorders is laser assisted in-situ keratomileusis, or LASIK.  LASIK involves the use of an automated cutting device to cut a thin corneal flap, which is then pulled back to expose the underlying tissue, which is treated using an excimer laser to achieve vision correction. The most common cutting device is called a microkeratome.

As a result of the VISX acquisition, we are a leader in the design and development of proprietary technologies and systems for laser vision correction of refractive vision disorders.  Laser vision correction (LVC) eliminates or reduces reliance on eyeglasses or contact lenses. It employs a computerized laser that ablates, or removes, sub-micron layers of tissue from the cornea, reshaping the eye and thereby improving vision.

Standard LASIK was introduced in the mid 1990’s. In performing Standard LASIK, an ophthalmologist conducts a traditional eye examination to determine the prescription required to correct the patient’s vision.  The prescription is then programmed into the laser system, which calculates the ablation needed to make a precise corneal correction to treat nearsightedness, farsightedness, and astigmatism.  Unlike Custom LASIK (see below), Standard LASIK cannot correct higher order aberrations.

The most advanced method of performing laser vision correction is Custom LASIK.  Custom LASIK employs a diagnostic evaluation of the eye that measures refractive errors in the patient’s vision more precisely than previously available technology.  The diagnostic device obtains comprehensive information about the imperfections, or refractive errors, of each patient’s vision.  Refractive errors are displayed by the diagnostic device in the form of an aberration map that offers a unique pattern for each patient’s eye, similar to a fingerprint. The map displays information about refractive errors that result in nearsightedness,

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

Laser vision correction can also be performed by photorefractive keratectomy (“PRK”).  PRK does not require the use of a microkeratome, and the epithelial layer (or outer layer) of the cornea is removed before ablation.  Patients may experience discomfort for approximately 24 hours and blurred vision for approximately 48 to 72 hours after the procedure.  Drops to promote corneal healing and alleviate discomfort may be prescribed.  Although most patients experience significant improvement in uncorrected vision (vision without the aid of eyeglasses or contact lenses) within a few days of the procedure, unlike LASIK it generally takes several months for the final correction to stabilize and for the full benefit of the procedure to be realized.

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

Eye Care Market. As the use of contact lenses has become increasingly popular, the demand for disinfecting solutions, daily cleaners, enzymatic cleaners and contact lens rewetting drops has increased.  We believe that the contact lens market growth is driven by technological advancements in lens materials and designs and broader adoption among younger wearers.  In response to increasing popularity of more frequently replaceable lenses and consumer interest in more convenient lens care regimens, we believe the contact lens care market continues to evolve towards greater use of single-bottle, multi-purpose solutions and away from hydrogen peroxide-based solutions.  This evolution has had an unfavorable impact on the global hydrogen peroxide market, which is concentrated in Japan and parts of Europe.

Overall, we believe that strong demographic trends, new lens materials and specialty lenses are fueling global increases in the number of contact lens wearers, especially in China and other Asia Pacific countries.  We believe that this is contributing to overall growth in multi-purpose solutions.  The exception to this positive dynamic is in Japan, where a higher than average percent of the market has moved to daily disposable contact lenses that use cleaning solutions only occasionally or not at all.

Finally, the eye care market includes artificial tear and contact lens rewetter products designed to relieve dryness associated with contact lens wear, environmental conditions and dry eye disease.  We believe the global market for artificial tear products exceeds $400 million per year.

Our Products

Cataract / Implant Business

Cataract Surgery

We focus on the four key devices for the cataract surgery market:

·Foldable IOLs — Foldable IOLs are artificial lenses used to replace the human lens.

·Implantation systems — Implantation systems are designed and used specifically to implant IOLs during cataract surgery.

·Phacoemulsification systems — Phacoemulsification systems use ultrasound during small incision cataract surgery to break apart and remove the cloudy human lens prior to its replacement with an IOL.

·Viscoelastics — Viscoelastics provide a barrier of protection for the cornea during phacoemulsification and maintain the shape of the eye during IOL insertion.

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

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Monofocal Lenses

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

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

·ClariFlex — a silicone monofocal IOL, also with the OptiEdge design.

Multifocal and Refractive Lenses

·ReZoom — an acrylic multifocal IOL with optical zones that provide near, intermediate and distance vision, reducing that patient’s dependence on eyeglasses. This lens received approval from CMS to allow patients in the U.S. to pay the difference between the $150 reimbursement rate for IOLs and the amount that is charged.  The ReZoom IOL is also approved in Europe for the treatment of presbyopia.

·Tecnis Multifocal — a silicone multifocal IOL with a diffractive, aspheric lens surface is approved in Europe for treatment of presbyopia.

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

Implantation Systems. As a companion to our foldable IOLs, we market insertion systems for each of our foldable IOL models. The Unfolder, our proprietary series of implantation systems, which includes the Emerald, SilverT and Silver implantation systems, is used for insertion of our foldable IOLs. These systems assist the surgeon in achieving controlled release of the intraocular lens into the capsular bag through a small incision in the eye.

Phacoemulsification Systems. We are a leading provider of phacoemulsification systems, and have a range of systems to meet market needs. Phacoemulsification systems use disposable or reusable packs that are necessary to operate the equipment. The majority of our phacoemulsification product sales are from sales of these packs and related accessories. Sales of our phacoemulsification products represented approximately 9% of our net sales in 2006 and 2005 and 10% of our net sales in 2004.

We currently market the following phacoemulsification systems:

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

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

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

Viscoelastics. We are a leading provider of viscoelastic products with the Healon family of viscoelastics. The different characteristics associated with each Healon product, Healon, Healon GV and Healon5, provide surgeons with a range of viscoelastic choices that combine the familiarity of the Healon line with advanced technologies to satisfy different surgical needs. Healon was the first viscoelastic introduced into the ophthalmic surgical product market and is known for its purity and ease of use. Healon GV is of a greater viscosity than the original Healon solution.  Healon5 is the first viscoadaptive agent to exhibit properties of both cohesive and dispersive viscoelastics and has the highest viscosity.  Sales of our viscoelastic products represented approximately 12%, 14% and 10% of our net sales in 2006, 2005 and 2004, respectively.

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

·Irrigating Solutions. We offer irrigating solutions for use in cataract surgery to help maintain space in the eye and to aid in removing residual tissue during phacoemulsification. Irrigating solutions are balanced saline solutions that are compatible with the natural fluid of the anterior segment of the eye.

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

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

Other Surgical Products

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

Laser Vision Correction Business

Our laser vision correction products include the following:

·VISX STAR Excimer Laser System — The VISX STAR System is a fully integrated ophthalmic medical device incorporating an excimer laser and a computer-driven workstation.

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

·VISX Treatment Cards — Our proprietary treatment cards control the use of the VISX STAR System.

·Microkeratomes — Surgeons use microkeratomes in LASIK procedures to cut a flap of corneal tissue before treatment with an excimer laser.

VISX STAR Excimer Laser System. The laser ablations produced by the VISX STAR System are the product of a variable diameter excimer laser beam scanning system.  Seven beams that range in size from 0.65 to 6.5 millimeters are homogenized as they converge, scan, and rotate to produce a smooth ablation area on the eye.  The VISX STAR System centers on the eye and tracks eye movements in three dimensions during the procedure. Our Iris Registration technology is the first fully automated method of aligning and registering wavefront corrections for CustomVue treatment.  Iris Registration is designed to replace the current means of registration, which involves manual marking of the eye to assess rotational movement.

The VISX STAR System performs Standard LASIK, CustomVue laser vision correction, and PRK.  It also performs specialized procedures known as Custom-CAP, which treats patients who previously had LVC surgery resulting in symptomatic decentered ablations (a condition that affects fewer than 4,000 patients per year) and PhotoTherapeutic Keratectomy, or PTK, which treats corneas that are scarred or have irregularities from prior infection, trauma or underlying corneal disease.

VISX WaveScan System.  The WaveScan system displays refractive information about the patient’s individual optical system in the form of an aberration map.  This unique map, similar to a fingerprint for each patient’s eye, offers objective information about refractive errors associated with nearsightedness, farsightedness and astigmatism, as well as information about higher order aberrations that were previously unmeasurable by any other instrument.

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VISX Treatment Cards. Each treatment card provides the user with specific access to proprietary software and is required to operate the VISX STAR System. Because treatment cards are required to perform procedures, there is a strong correlation between treatment card sales and the number of procedures performed on VISX STAR Systems.  Types of VISX treatment cards include: VisionKey Cards for performing standard LASIK procedures, which in the United States carries a license fee for each procedure that is purchased; CustomVue Cards for performing Custom LASIK, which carry a worldwide license fee for each procedure that is purchased; Custom-CAP Cards for performing laser vision correction with a previously decentered ablation, which carry a worldwide license fee for each procedure that is purchased; and the PTK Card, which is offered to physicians at a nominal charge to treat certain types of corneal pathologies.  Sales of our treatment cards and associated procedure fees represented approximately 15%, 8% and 0% of our net sales in 2006, 2005 and 2004, respectively.

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

Eye Care Product Line

In the eye care market, we focus on creating products that make contact lenses more comfortable, simplify contact lens care and promote ocular health. Our eye care business develops, manufactures and markets a full range of contact lens care products for use with most types of contact lenses. Our comprehensive product offering includes single-bottle multi-purpose cleaning and disinfecting solutions and hydrogen peroxide-based disinfecting solutions to destroy harmful microorganisms in and on the surface of contact lenses; daily cleaners to remove undesirable film and deposits from contact lenses; enzymatic cleaners to remove protein deposits from contact lenses; and lens rewetting drops to provide added wearing comfort.

Multi-Purpose Solutions. We market our Complete brand single-bottle multi-purpose solutions, a convenient, one bottle chemical disinfecting system for soft contact lenses, on a worldwide basis. Complete MoisturePLUS is the first single-bottle, multi-purpose solution with dual demulcents to help prevent contact lens dryness and discomfort and promote ocular health. Sales of our multi-purpose solutions represented approximately 14.8%, 17% and 21% of our net sales in 2006, 2005 and 2004, respectively. We also offer Complete Blink-N-Clean, a unique in-the-eye lens cleaning solution.

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

Lens Rewetting Solutions. We believe that dryness and discomfort are the reasons most often cited for discontinuing contact lens wear. We have introduced contact lens rewetting drops designed to provide prolonged lubrication and improved protection against dryness. Our products in this category include Complete and blink rewetting solutions.

Research and Development

Our long-term success is dependent on the introduction of new and innovative products in both the ophthalmic surgical and eye care businesses. Our research and development strategy is to develop proprietary products for vision correction that are safe and effective and address unmet needs. As we implement this strategy, we will seek to develop new products with measurable benefits such as increased practitioner productivity, better patient outcomes and reduced costs to health care payors and providers.

Research and development activities for our cataract / implant business are focused on expanding our product portfolio.  We have focused on six areas of opportunity to provide superior outcomes:

·Small incision surgery — work with a variety of advanced lens materials to enable small incision surgery which results in less induced astigmatism, rapid stabilization of the wound and faster visual rehabilitation.

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

·Restoring accommodation following cataract surgery — following cataract surgery, the eye loses its ability to accommodate, or shift its field of focus.  Through the development of multifocal and accommodating IOLs, we can provide for the full range of vision following cataract surgery.

·Improving quality of vision — advancements in optics and optical surface designs.

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

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

In the area of laser vision correction, our research and development efforts are focused on advancements in LASIK and adjunctive technologies.  Current projects include expanded treatment applications for custom wavefront guided LASIK, including wavefront guided treatment of presbyopia.  Further new product development includes advances in ablation technology, accuracy and reliability in wavefront capture and intraoperative monitoring.

Our research and development efforts in the eye care business are aimed at developing proprietary systems that are effective and more convenient for customers to use, which we believe will result in longer, more comfortable lens wear and a higher rate of compliance with recommended lens care procedures. Our efforts include seeking formulations that provide prolonged lubrication, improved ocular health and protection against dryness, and enhanced cleaning and disinfection without irritation. Our research and development efforts have resulted in the continued development of our flagship Complete brand multi-purpose solution and blink rewetter solutions, with further advancements currently in development.  We are also working to develop over-the-counter artificial tear products.

We plan to supplement our research and development activities with a commitment to identifying and obtaining new technologies through in-licensing, technological collaborations and joint ventures, including the establishment of research relationships with academic institutions and individual researchers.

We spent approximately $66.1 million in 2006, $61.6 million in 2005 and $45.6 million in 2004 on research and development. Total research and development expense in 2005 was $552.4 million, including a non-cash in-process research and development charge of $490.8 million, and in 2004 was $73.7 million, including a non-cash in-process research and development charge of $28.1 million. Research and development spending represented 6.6%, 6.7%, and 6.1% of total net sales in 2006, 2005, and 2004, respectively. We believe that the continuing introduction of new products supplied by our research and development efforts and in-licensing opportunities are critical to our success. There are, however, inherent uncertainties associated with the research and development efforts and the regulatory process and we cannot assure you that any of our research projects will result in new products that we can commercialize.

Customers, Sales and Marketing

Customers. Our primary customers for our cataract / implant and laser vision correction products include surgeons who perform eye surgeries, hospitals and ambulatory surgical centers. The primary customers for our eye care products include optometrists, opticians, ophthalmologists, retailers and clinics that sell directly to consumers. These retailers include mass merchandisers such as Wal-Mart, drug store chains such as Walgreen, hospitals, commercial optical chains and food stores. During 2006, 2005 and 2004, no customer accounted for over 10% of our net sales.

Sales and Marketing. Our sales efforts and promotional activities with respect to our cataract / implant and laser vision correction products are primarily aimed at eye care professionals such as ophthalmologists who use our products. Similarly, our sales and promotional efforts in contact lens care are primarily directed towards optometrists, opticians, optical shops, ophthalmologists and consumers. We often provide samples of our eye care products to practitioners to distribute to their patients to encourage trial use of our solutions. In addition, we advertise in professional journals and have a direct mail program of descriptive product literature and scientific information that we provide to specialists in the eye care field. We have also developed training modules and seminars to update physicians regarding evolving technology. A number of our marketing programs include peer-to-peer marketing with practitioners educating other practitioners about the benefits of our products.

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

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

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

Traditionally, we have realized a seasonal trend in our sales, with the smallest portion of our cataract / implant business sales being realized in the first quarter and with sales gradually increasing from the second to fourth quarter. This has been driven predominantly by seasonality in the sales of capital equipment when customers increase spending as they reach their year end and are able to spend the remainder of their annual budgeted amounts. In the laser vision correction business, the seasonal trend favors the highest portion of sales in the first quarter.

Manufacturing, Operations and Facilities

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

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

We have historically outsourced the manufacture of our phacoemulsification equipment to third parties, and we depend on single and limited sources for several key components.  Our Sovereign system is manufactured by Carl Zeiss Ophthalmic Systems, the manufacturing and supply arrangement for which will terminate at the end of May 2007.  Our Sovereign Compact system is manufactured by Sanmina-SCI under a manufacturing and supply agreement, which terminates in December 2007. If Sanmina-SCI were to cease manufacturing for any reason, we cannot assure you that we would be able to replace them on terms favorable to us, or at all.

The manufacture of VISX STAR Systems and WaveScan Systems is a complex operation involving numerous procedures, and the completed systems must pass a series of quality control and reliability tests before shipment. We buy from various independent suppliers many components that are either standard or built to our proprietary specifications, and which are then assembled at our California facility. We also contract with third parties for the manufacture or assembly of certain components. We depend on single and limited sources for several key components.  Please see our risk factors for discussion of the risks related to our reliance on single and limited source vendors.

Governmental Regulation

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

Under the Federal Food, Drug, and Cosmetic Act, medical devices are classified into one of three classes — Class I, Class II or Class III — depending on the degree of risk associated with each medical device and the extent of control needed to provide reasonable assurances with respect to safety and effectiveness. Our current products are Class I, II and III medical devices, with most being classified as Class II devices and our IOLs being classified as Class III devices in the United States, subject to certain exceptions.

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

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Class II devices are those which are subject to the general controls and may require adherence to certain performance standards or other special controls (as specified by the FDA) and clearance by the FDA: Premarket review and clearance by the FDA for these devices is accomplished through the 510(k) premarket notification procedure. For most Class II devices, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed device.

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

A Class III product is a product that has a new intended use or uses advanced technology that is not substantially equivalent to a use or technology with respect to a legally marketed device, or for which there is not sufficient information to establish performance standards or special controls to provide reasonable assurance of the device’s safety and effectiveness and the product is represented to be for use in supporting or sustaining human life or for a use that is of substantial importance in preventing impairment of human health or presents a potential unreasonable risk of illness or injury. The safety and effectiveness of Class III devices cannot be reasonably assured solely by the general controls and the other requirements described above. Therefore, these devices almost always require formal clinical studies to demonstrate safety and effectiveness.

FDA approval of a premarket approval application is required before marketing a Class III product. The premarket approval application process is much more demanding than the 510(k) premarket notification process. A premarket approval application, which is intended to provide reasonable assurance that the device is safe and effective, must be supported by extensive data, including data from preclinical studies and human clinical trials and existing research material, and must contain a full description of the device and its components, a full description of the methods, facilities and controls used for manufacturing, and proposed labeling. Following receipt of a premarket approval application, once the FDA determines that the application is sufficiently complete to permit a substantive review, the FDA will accept the application for review. The FDA, by statute and by regulation, has 180 days to review a filed premarket approval application, although the review of an application more often occurs over a significantly longer period of time.  A maximum time of 360 days is allowed to respond to deficiencies.

In approving a premarket approval application or clearing a 510(k) notification, the FDA may also require some form of postmarket surveillance, whereby the manufacturer follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional safety and effectiveness data for the device.

When FDA approval of a device requires human clinical trials, and if the clinical trial presents a “significant risk” (as defined by the FDA) to human health, the device sponsor is required to file an investigational device exemption, or IDE, application with the FDA and obtain investigational device exemption approval prior to commencing the human clinical trial. If the clinical trial is considered a “nonsignificant risk,” investigational device exemption submission to the FDA is not required. Instead, only approval from the Institutional Review Board overseeing the clinical trial is required, although the study is still subject to FDA oversight under other provisions of the IDE regulation. Human clinical studies are generally required in connection with approval of Class III devices and to a much lesser extent for Class I and II devices. Clinical trials conducted abroad for FDA approval must comply with both local regulations and FDA guidance.

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

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

·the Quality System Regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process;

·labeling regulations;

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

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·Medical Device Reporting and recall requirements;

·Device tracking requirements; and

·Post market surveillance requirements.

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

Governmental Reimbursement. In the United States, a significant percentage of the patients who receive our IOLs are covered by the federal Medicare program. When a cataract extraction with IOL implantation is performed in an ambulatory surgical center, Medicare provides the ambulatory surgical center with a fixed facility fee that includes a recommended $150 allowance to cover the cost of the IOL. After the Centers for Medicare and Medicaid Services (CMS) (formerly the Health Care Financing Administration), awarded “new technology intraocular lens” status to our Tecnis IOL in 2006, the reimbursement rate for Tecnis IOLs implanted in ambulatory surgical centers increased an additional $50 until February 2011. When the procedure is performed in a hospital outpatient department, the hospital’s reimbursement is based on a prospective payment that includes payment for the IOL.  The allowance is the same for all IOLs.

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

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

We cannot predict the likelihood or pace of any other significant legislative or regulatory action in these areas, nor can we predict whether or in what form health care legislation being formulated by various governments will be passed. Medicare reimbursement rates are subject to change at any time. We also cannot predict with precision what effect such governmental measures would have if they were ultimately enacted into law. In general, however, we believe that legislative and regulatory initiatives will likely continue, and the adoption of new payment or coverage policies can have some impact on our business.

International Regulation. Internationally, the regulation of medical devices is also complex. In Europe, our products are subject to extensive regulatory requirements. The regulatory regime in the European Union for medical devices became mandatory in June 1998. It requires that medical devices may only be placed on the market if they do not compromise safety and health when properly installed, maintained and used in accordance with their intended purpose. National laws conforming to the European Union’s legislation regulate our IOLs and eye care products under the medical devices regulatory system, rather than the more variable national requirements under which they were formerly regulated. The European Union medical device laws require manufacturers to declare that their products conform to the essential regulatory requirements after which the products may be placed on the market bearing the CE marking. The manufacturers’ quality systems for products in all but the lowest risk classification are also subject to certification and audit by an independent notified body. In Europe, particular emphasis is being placed on more sophisticated and faster procedures for the reporting of adverse events to the competent authorities.

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

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

·product standards;

·packaging requirements;

·labeling requirements;

·quality system requirements;

·import restrictions;

·tariff regulations;

·duties; and

·tax requirements.

Many of the regulations applicable to our devices and products in these countries are similar to those of the FDA. In many countries, the national health or social security organizations require our products to be qualified before they can be marketed with the benefit of reimbursement eligibility.

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

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

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

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

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

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

Employee Relations

At December 31, 2006, we employed approximately 3,800 persons throughout the world, including approximately 1,000 in the United States. None of our U.S.-based employees are represented by unions. We consider our relations with our employees to be, in general, very good.

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Global Sales

Net sales in the United States were approximately $415.3 million, $302.5 million and $186.9 million for the years ended December 31, 2006, 2005 and 2004, respectively. Our international sales represented approximately $582.2 million, $618.2 million and $555.2 million for the years ended December 31, 2006, 2005 and 2004, respectively, or 58%, 67%, and 75% of total sales, respectively. Sales in Japan were approximately $138.7 million, $174.3 million and $191.5 million for the years ended December 31, 2006, 2005 and 2004, respectively. Our products are sold in over 60 countries. Sales are attributed to the country where the customer resides. Marketing activities are coordinated on a worldwide basis, and resident management teams provide leadership and infrastructure for introduction of new products in the local markets. For additional information relating to our geographic operating segments, see Note 14 of Notes to Consolidated Financial Statements.

Raw Materials

We use a diverse and broad range of raw materials in the design, development and manufacture of our products. While we do fabricate or formulate some of our materials at our manufacturing facilities, we purchase most of the materials and components used in manufacturing our products from external suppliers. In addition, we purchase some supplies from single sources for reasons of quality assurance, sole source availability, cost effectiveness or constraints resulting from regulatory requirements. Several of our materials are sole sourced, including the source of hyaluronic acid used in manufacturing our Healon family of products. However, we work closely with our suppliers to assure continuity of supply while maintaining high quality and reliability. Where we buy a material from one source and other sources are available, alternative supplier options are generally considered and identified, although we do not typically pursue regulatory qualification of alternative sources due to the strength of our existing supplier relationships and the time and expense associated with the regulatory process. A change in suppliers could require significant effort or investment by us in circumstances where the items supplied are integral to the performance of our products or incorporate unique technology.

Environmental Matters

Our facilities and operations are subject to federal, state and local environmental and occupational health and safety requirements of the United States and foreign countries, including those relating to discharges of substances to the air, water and land, the handling, storage and disposal of hazardous materials and wastes and the cleanup of properties affected by pollutants. We believe we are currently in material compliance with such requirements and do not currently anticipate any material adverse effect on our business or financial condition as a result of our efforts to comply with such requirements.

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

Competition

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

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

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Our competitors may develop technologies and products that are more effective or less costly than any of our current or future products or that could render our products obsolete or noncompetitive. Some of these competitors have substantially more resources and marketing capabilities than we do. Among other things, these consolidated companies can spread their research and development costs over much broader revenue bases than we can and can influence customer and distributor buying decisions. Our inability to produce and develop products that compete effectively against those of our competitors could result in a material reduction in sales.

Patents, Trademarks and Other Intellectual Property

Patents and other proprietary rights are important to the success of our business. We likewise utilize trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. We protect our proprietary rights through a variety of methods, including confidentiality agreements and proprietary information agreements with vendors, employees, consultants and others who have access to our proprietary information.

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

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

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

We believe that our patents, trademarks and other proprietary rights are important to the development and conduct of our business and the marketing of our products. As a result, we aggressively protect our intellectual property. However, we do not believe that any one of our patents or trademarks is currently of material importance in relation to our overall sales.

Information Available on our Website

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

Item 1A. Risk Factors

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

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Risks Relating to Our Business

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

As part of our business strategy, we intend to pursue selected acquisitions and strategic alliances and partnerships. We compete with other ophthalmic surgical products and eye care companies, among others, for these opportunities and we cannot assure you that we will be able to effect strategic alliances, partnerships or acquisitions on commercially reasonable terms or at all. Even if we do enter into these transactions, we may experience:

·delays in realizing the benefits we anticipate, or we may not realize the benefits we anticipate at all;

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

·attrition of key personnel from acquired businesses;

·costs or charges;

·difficulties or delays in obtaining regulatory approvals;

·higher costs of integration than we anticipated; or

·unforeseen operating difficulties that require significant financial and managerial resources that would otherwise be available for the ongoing development or expansion of our existing operations.

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

We conduct a significant amount of our sales and operations outside of the United States, which subjects us to additional business risks that may cause our profitability to decline.

Because we manufacture and sell a significant portion of our products in a number of foreign countries, our business is subject to risks associated with doing business internationally. In particular, our products are sold in over 60 countries, and most of our manufacturing facilities are located outside the continental United States, in Añasco, Puerto Rico; Madrid, Spain; Hangzhou, China, Uppsala, Sweden and Groningen, Netherlands.  In 2006, on an historical basis, we derived approximately $582.2 million, or 58%, of our net sales, from sales of our products outside of the United States, including 14% of our net sales in Japan. We intend to continue to pursue growth opportunities in sales internationally, which could expose us to greater risks associated with international sales and operations. Our international operations are, and will continue to be, subject to a number of risks and potential costs, including:

·unexpected changes in foreign regulatory requirements;

·differing local product preferences and product requirements;

·fluctuations in foreign currency exchange rates;

·political and economic instability;

·cultural differences;

·changes in foreign medical reimbursement and coverage policies and programs;

·diminished protection of intellectual property in some countries outside of the United States;

·trade protection measures and import or export licensing requirements;

·difficulty in staffing and managing foreign operations;

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·differing labor regulations; and

·potentially negative consequences from changes in tax laws.

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

As we expand our existing international operations, we may encounter new risks. For example, as we focus on building our international sales and distribution networks in new geographic regions, we must continue to develop relationships with qualified local distributors and trading companies. If we are not successful in developing these relationships, we may not be able to grow sales in these geographic regions. These or other similar risks could adversely affect our revenue and profitability.

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

A significant portion of our sales and operating costs are, and from time to time, a portion of our indebtedness may be, denominated in foreign currencies. We are therefore exposed to fluctuations in the exchange rates between the U.S. dollar and the currencies in which our foreign operations receive revenues and pay expenses, including debt service. Our consolidated financial results are denominated in U.S. dollars and therefore, during times of a strengthening U.S. dollar, our reported international sales and earnings will be reduced because the local currency will translate into fewer U.S. dollars. In addition, the assets and liabilities of our non-U.S. subsidiaries are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated into U.S. dollars at the weighted average exchange rate for the period. Translation adjustments arising from the use of differing exchange rates from period to period are included in “Accumulated other comprehensive income (loss)” in “Stockholders’ equity.” Gains and losses resulting from foreign currency fluctuations and remeasurements relating to foreign operations deemed to be operating in U.S. dollar functional currency are included in “Other, net” in our consolidated statements of operations. Accordingly, changes in currency exchange rates will cause our net earnings and stockholders’ equity to fluctuate.  We use hedging methods on a regular basis to manage the foreign exchange risk.  This has historically been accomplished through the use of options and forward contracts.

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

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

·evolving customer needs;

·the introduction of new products and technologies;

·evolving surgical practices; and

·evolving industry standards.

Without the timely introduction of new commercially successful products and enhancements, our products may become obsolete over time, in which case our sales and operating results would suffer. The success of our new product offerings will depend on several factors, including our ability to:

·properly identify and anticipate customer needs;

·commercialize new products in a cost-effective and timely manner;

·manufacture and deliver products in sufficient volumes on time;

·obtain regulatory approval for such new products;

·differentiate our offerings from competitors’ offerings;

·achieve positive clinical outcomes;

·satisfy the increased demands by health care payors, providers and patients for lower-cost procedures;

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

·provide adequate medical and/or consumer education relating to new products and attract key surgeons to advocate these new products.

Moreover, innovations generally will require a substantial investment in research and development before we can determine the commercial viability of these innovations and we may not have the financial resources necessary to fund these innovations. In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not produce revenue in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features.

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

We purchase certain raw materials and other products from third-party suppliers and vendors, sometimes from limited sources. Our suppliers and vendors may not provide the raw materials or other products needed by us in the quantities requested, in a timely manner, or at a price we are willing to pay. In the event any of our third-party suppliers or vendors were to become unable or unwilling to continue to provide important raw materials and third-party products in the required volumes and quality levels or in a timely manner, or if regulations affecting raw materials such as animal-based products were to change, we would be required to identify and obtain acceptable replacement supply sources. We may not be able to obtain alternative suppliers and vendors on a timely basis, or at all, which could result in lost sales because of our inability to manufacture products containing such raw materials or deliver products we sell from certain suppliers. In addition, we also rely on certain manufacturers for some of our products. We have historically outsourced the manufacture of our phacoemulsification equipment to third parties. If we were unable to renew our third-party manufacturing agreements, or if the manufacturers were to cease manufacturing any of these products for us for any reason, we may not be able to find alternative manufacturers on terms favorable to us, in a timely manner, or at all. If any of these events should occur, our business, financial condition and results of operations could be materially adversely affected.

We face intense competition, and our failure to compete effectively could have a material adverse effect on our profitability and results of operations.

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

Because of our leading market position in the laser vision correction business, all of our competitors target 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 it 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.

Trends in the contact lens care market may negatively impact our eye care business.

Our eye care business is impacted by trends in the contact lens care market such as more simplified disinfection systems and technological and medical advances in surgical techniques for the correction of vision impairment. Less expensive one-bottle chemical disinfection systems have gained popularity among soft contact lens wearers instead of peroxide-based lens care products. Also, the growing use and acceptance of daily, frequent replacement and extended wear contact lenses and laser correction procedures, along with the other factors above, could have the effect of continuing to reduce demand for lens care products generally. Our marketing and sales plans may not be appropriate or sufficient to mitigate the effect of these trends on our eye care business and, as a result, our eye care business may suffer.

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

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

·pending patent applications will result in issued patents;

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

·our patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive advantage.

We may be subject to intellectual property litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling our products.

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

Our manufacturing capacity may not be adequate to meet the demands of our business.

If our sales increase substantially, we may need to increase our production capacity.  Any prolonged disruption in the operation of our manufacturing facilities or those of our third-party manufacturers could materially harm our business.  We cannot assure you that if we choose to scale-up our manufacturing operations, we will be able to obtain regulatory approvals in a timely fashion, which could affect our ability to meet product demand or result in additional costs.

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

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

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

In addition, we are subject to medical device reporting regulations that require us to report to the FDA or similar governmental authorities in other countries if our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur. The FDA and similar governmental authorities in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacturing. A government mandated or voluntary recall by us could occur as a result of manufacturing errors or design defects, including defects in labeling. We have undertaken voluntary recalls of our products in the past.

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

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

If we fail to maintain our relationships with health care providers, customers may not buy our products and our revenue and profitability may decline.

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

We generally do not have long-term contracts with our customers.

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

Our business is subject to extensive government regulation.

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

Before a new medical device or new use of, or claim for, or modification to an existing product can be marketed in the United States, a company may have to apply for and receive either 510(k) clearance or premarket approval. Either process can be expensive, lengthy and unpredictable. Also, the identification or increased frequency of safety or efficacy concerns could result in product recall or withdrawal or revocation of our FDA clearance or premarket approval. Compliance with these regulations is expensive and time-consuming. We, our subcontractors, and third party manufacturers are subject to periodic and unannounced inspections by FDA and governmental authorities to assess compliance. If we fail to comply, the FDA and state or other regulatory agencies have broad enforcement powers, including any of the following sanctions:

·warning letters, fines, injunctions, consent decrees, civil penalties and exclusion from participation in federal and state health care programs;

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

·operating restrictions, partial suspension or total shutdown of production;

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

·withdrawing 510(k) clearance or premarket approvals that have already been granted; and

·criminal prosecution and penalties.

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

We, our subcontractors, and third-party manufacturers are also subject to similar state requirements and licenses. We, our subcontractors, and third-party manufacturers must comply with extensive recordkeeping and reporting requirements and must make available our manufacturing facilities and records for unannounced and periodic inspections by governmental agencies, including FDA, state authorities and comparable agencies in other countries.

Health care initiatives and other cost-containment pressures could cause us to sell our products at lower prices, resulting in less revenue to us. In the United States, a significant percentage of the patients who receive our intraocular lenses are covered by the federal Medicare program. Changes in coverage or coding policies or reductions in Medicare reimbursement rates and the implementation of other price controls could adversely affect our revenues and financial condition. In addition, changes in existing regulatory requirements or adoption of new requirements could hurt our business, financial condition and results of operations.

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

The clinical trials required to obtain regulatory approvals for our products are complex and expensive and their outcomes are uncertain. We incur substantial expense for, and devote significant time to, clinical trials but cannot be certain that the trials will ever result in the commercial sale of a product. We may suffer significant setbacks in clinical trials, even after earlier clinical trials showed promising results. Any of our products may produce undesirable side effects that could cause us or regulatory authorities to interrupt, delay or halt clinical trials of a product candidate. We, the FDA, or another regulatory authority may suspend or terminate clinical trials at any time if they or we believe the trial participants face unacceptable health risks.

Our business is subject to environmental regulations.

Our facilities and operations are subject to federal, state and local environmental and occupational health and safety requirements of the United States and foreign countries, including those relating to discharges of substances to the air, water and land, the handling, storage and disposal of hazardous materials and wastes and the cleanup of properties affected by pollutants.  Failure to maintain compliance with these regulations could have a material adverse effect on our business or financial condition.

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

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

Our ability to attract new customers, retain existing customers and pursue our strategic objectives depends on the continued services of our current management, sales, product development and technical personnel and our ability to identify, attract, train and retain similar personnel. Competition for top management personnel is intense and we may not be able to recruit and retain the personnel we need. The loss of any one of our management personnel, or our inability to identify, attract, retain and integrate

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additional qualified management personnel, could make it difficult for us to manage our business successfully and pursue our strategic objectives. Similarly, competition for skilled sales, product development and technical personnel is intense and we may not be able to recruit and retain the personnel we need. The loss of services of a number of key sales, product development and technical personnel, or our inability to hire new personnel with the requisite skills, could restrict our ability to develop new products or enhance existing products in a timely manner, sell products to our customers or manage our business effectively.

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

We may be required to satisfy certain indemnification obligations to Allergan, and we may not be able to collect on indemnification rights from Allergan.

Under the terms of our contribution and distribution agreement with Allergan, we and Allergan have each agreed to indemnify each other from and after our spin-off with respect to the debt, liabilities and obligations retained by our respective companies. These indemnification obligations could be significant. The ability to satisfy these indemnities, if called upon to do so, will depend upon the future financial strength of each of our respective companies. We cannot determine whether we will have to indemnify Allergan for any substantial obligations, and we may not have control over the settlement of certain claims and lawsuits that may require partial indemnification by us. We also cannot assure you that, if Allergan is required to indemnify us for any substantial obligations, Allergan will have the ability to satisfy those obligations.

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

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

If laser vision correction is not broadly accepted by both doctors and patients, our business, financial position and results of operations would be materially and adversely impacted.

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

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

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

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

Because laser vision correction is not subject to reimbursement from third-party payors such as insurance companies or government programs, the cost of laser vision correction is typically borne by individuals directly. Accordingly, weak or uncertain economic conditions may cause individuals to be less willing to incur the procedure cost associated with laser vision correction as was evidenced by VISX’s 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.

While we devote significant resources to research and development, our research and development may not lead to new products that achieve commercial success.

Our research and development process is expensive, prolonged, and entails considerable uncertainty. 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.

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

We have relationships with third party financing entities that purchase our products directly and subsequently lease and/or sell these products to end-user customers, or provide financing directly to customers who purchase products directly from us. Should any third party financing entity or entities fail or refuse to pay us in a timely manner or at all, it could negatively affect our cash flows and could have a material adverse effect on our business, financial position and results of operations.

If any of our employees, consultants or others breach their proprietary information agreements, our competitive position could be harmed.

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

Risks Relating to Our Indebtedness and Our Common Stock

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

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

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

·making it more difficult for us to meet our payment and other obligations under our outstanding debt;

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

·reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;

·subjecting us to the risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including borrowings under our senior credit facility;

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

·placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.

Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under the notes and our other debt.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash flow depends on many factors beyond our control.

Our ability to meet our payment and other obligations under our debt depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure holders that our business will generate cash flow from operations, or that future borrowings will be available to us under our senior credit facility or otherwise, in an amount sufficient to enable us to meet our payment obligations under our debt and to fund other liquidity needs. We made an irrevocable election to satisfy in cash our conversion obligation with respect to the principal amount of any of our 2.50% convertible senior subordinated notes due 2024 (the “Existing 2.50% Convertible Notes”) converted after December 15, 2004, with any remaining amount of the conversion obligation to be satisfied in shares of our common stock, in each case, calculated as set forth in the indenture governing the Existing 2.50% Convertible Notes. In addition, because we made this election, the indenture provides that we must satisfy in cash our obligations to repurchase any Existing 2.50% Convertible Notes that holders put to us on January 15, 2010, July 15, 2014 and July 15, 2019.

If the Existing 2.50% Convertible Notes become convertible pursuant to their terms and the holders elect to convert or if holders elect to put their notes to us on the specified repurchase dates, we may not have sufficient cash to satisfy our obligations. In addition, our 1.375% and 3.25% convertible senior subordinated notes due 2025 and 2026, respectively, contain similar provisions.  We may be unable to repurchase the notes for cash when required by the holders, including following a fundamental change, or to pay the portion of the conversion value upon conversion of any notes by the holders. Our repurchase of any such notes may be prohibited by our other debt instruments, which could cause defaults and cross-defaults under our other debt agreements. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the notes and our other debt.

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

The agreements governing our senior credit facility contain covenant restrictions that limit our ability to operate our business, including restrictions on our ability to:

·incur additional debt or issue guarantees;

·create liens;

·make certain investments;

·enter into transactions with our affiliates;

·sell certain assets;

·redeem capital stock or make other restricted payments;

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

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

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

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prevent us from borrowing additional money under the facility and could result in a default under it. If a default occurs under any of our senior indebtedness, the relevant lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against substantially all of our assets, which will serve as collateral securing the indebtedness. Moreover, if the lenders under a facility or other agreement in default were to accelerate the indebtedness outstanding under that facility, it could result in a default under other indebtedness. If all or any part of our indebtedness were to be accelerated, we may not have or be able to obtain sufficient funds to repay it. In addition, we may incur other indebtedness in the future that may contain financial or other covenants that are more restrictive than those contained in our current indentures.

As a result of these covenants, our ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us. In addition, our failure to comply with these covenants could result in a default under our debt, which could permit the holders to accelerate such debt. If any of our debt is accelerated, we may not have sufficient funds available to repay such debt.  As of December 31, 2006, we were in compliance with our financial and other covenants.

Despite our and our subsidiaries’ current levels of indebtedness, we may incur substantially more debt, which could further exacerbate the risks associated with our substantial indebtedness.

Although certain of our debt agreements contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Also, these restrictions do not prevent us from incurring obligations that do not constitute “indebtedness” as defined in the relevant agreement. If new debt is added to our current debt levels, the related risks that we now face could intensify.

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

·quarterly variations in our operating results;

·operating results that vary from the expectations of management, securities analysts and investors;

·changes in expectations as to our future financial performance;

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

·the operating and securities price performance of other companies that investors believe are comparable to us;

·future sales of our equity or equity-related securities;

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

·developments or disputes (including lawsuits) concerning proprietary rights;

·developments in the insurance market, which may limit the amount of insurance coverage available to us;

·departures of key personnel; and

·regulatory considerations.

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

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

We have a stockholder rights plan that may have the effect of discouraging unsolicited takeover proposals. The rights issued under the stockholder rights plan would cause substantial dilution to a person or group that attempts to acquire us on terms not

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approved in advance by our board of directors. In addition, Delaware corporate law and our amended and restated certificate of incorporation and bylaws contain provisions that could delay, deter or prevent a change in control of our company or our management. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions without the concurrence of our management or board of directors. These provisions:

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

·provide for a staggered board of directors and three-year terms for directors, so that no more than one-third of our directors could be replaced at any annual meeting;

·provide that directors may be removed only for cause;

·provide that stockholder action may be taken only at a special or regular meeting and not by written consent;

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

·establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting.

We are also subject to anti-takeover provisions under Delaware law, which could also delay or prevent a change of control. Together, these provisions of our amended and restated certificate of incorporation and bylaws, Delaware law and our stockholder rights plan may discourage transactions that otherwise could provide for the payment of a premium over prevailing market prices of our common stock and, possibly, the notes, and also could limit the price that investors are willing to pay in the future for shares of our common stock and the notes.

Risks Relating to the Pending IntraLase Corp. Acquisition

Even though we and IntraLase have obtained the regulatory approvals required to complete the merger, governmental authorities could still seek to block or challenge the merger.

The merger is subject to review by the Antitrust Division of the Department of Justice and the FTC under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). Under the HSR Act, we and IntraLase are required to make pre-merger notification filings and to await the expiration or early termination of the statutory waiting period prior to completing the merger. The merger is also subject to review by certain other governmental authorities under the antitrust laws of various other jurisdictions where IntraLase conducts business. We have made all required regulatory filings, the applicable waiting periods have expired and we have therefore obtained all regulatory clearances, consents and approvals required to complete the merger with the exception of one review pending in Germany.  However, after the statutory waiting periods have expired, and even after completion of the merger, governmental authorities could seek to block or challenge the merger as they deem necessary or desirable in the public interest. In addition, in some jurisdictions, a competitor, customer or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin the merger, before or after it is completed.  We, IntraLase or the combined company may not prevail, or may incur significant costs, in defending or settling any action under the antitrust laws.

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

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

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

·increase our vulnerability to, and limit our flexibility in planning for, adverse economic and industry conditions;

·affect our credit rating;

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·limit our ability to obtain additional financing to fund future working capital, capital expenditures, additional acquisitions and other general corporate requirements;

·create competitive disadvantages compared to other companies with less indebtedness; and

·limit our ability to apply proceeds from an offering or asset sale to purposes other than the repayment of debt.

Although we expect that the acquisition will result in benefits to the combined company, the combined company may not realize those benefits because of integration and other challenges.

Our ability to realize the anticipated benefits of the acquisition will depend, in part, on our ability to integrate the business of IntraLase with our business. The combination of two independent companies is a complex, costly and time-consuming process. This process may disrupt the business of either or both of the companies, and may not result in the full benefits expected by us. The difficulties of combining the operations of the companies include, among others:

·coordinating marketing functions;

·unanticipated issues in integrating information, communications and other systems;

·unanticipated incompatibility of purchasing, logistics, marketing and administration methods;

·retaining key employees;

·consolidating corporate and administrative infrastructures;

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

·coordinating geographically separate organizations.

We cannot assure you that the combination of IntraLase with us will result in the realization of the full benefits anticipated from the acquisition.

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

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

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

Item 1B. Unresolved Staff Comments

We have no unresolved written comments from the Commission.

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Item 2. Properties

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

Item 3. Legal Proceedings

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

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

While we are involved from time to time in litigation arising in the ordinary course of business, including product liability claims, we are not currently aware of any other actions against us or Allergan relating to the optical medical device business that we believe would have a material adverse effect on our business, financial condition, results of operations or cash flows. We may be subject to future litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling our products. We operate in an industry susceptible to significant product liability claims. Product liability claims may be asserted against us in the future arising out of events not known to us at the present time. Under the terms of the contribution and distribution agreement effecting our spin-off, Allergan agreed to assume responsibility for, and to indemnify us against, all current and future litigation relating to its retained businesses and we agreed to assume responsibility for, and to indemnify Allergan against, all current and future litigation related to the optical medical device business.

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

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

PART II

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

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

Market Information. The following table shows the quarterly price range of our common stock during the periods listed.

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

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

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

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Item 6. Selected Financial Data

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

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

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

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

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

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

(c)In 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.”

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

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

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

Overview

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

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

·   Americas (North and South America);

·   Europe, Africa and Middle East;

·   Japan; and

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

Eye Care Recall

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

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

To correct the sterility issue, we temporarily closed the China plant to conduct a special cleaning and sanitization, and complete an already-planned expansion.  We began production on two of the plant’s four lines in January 2007 and expect the third also to be operational in the first quarter of 2007.  We have commenced product shipments to Japan distribution centers, and are scheduled to begin shipping to the Asia Pacific markets before the end of the first quarter of 2007.  The remaining line has been completely replaced and is being expanded to provide automated packaging capabilities that are expected to provide greater flexibility.  As per our original schedule, the fourth line is expected to be operational in the late May/early June 2007 timeframe.  Our Spain facility supplies the Americas and European markets so there have been no supply disruptions to these regions as a result of the recall.

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Product Rationalization and Repositioning Plan

On October 31, 2005, our Board of Directors approved a product rationalization and repositioning plan covering the discontinuation of non-strategic cataract surgical and eye care products and the elimination or redeployment of resources that support these product lines. The plan also included organizational changes and potential reductions in force in manufacturing, sales and marketing associated with these product lines, as well as organizational changes in research and development and other corporate functions designed to align the organization with our strategy and strategic business unit organization.

The plan further called for increasing our investment in key growth opportunities, specifically our refractive implant product line and international laser vision correction business, and accelerating the implementation of productivity initiatives.

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

Pending Acquisition of IntraLase Corp.

On January 5, 2007, we entered into an agreement with IntraLase Corp. (IntraLase) to acquire IntraLase for approximately $808 million in cash.  IntraLase manufactures femtosecond laser systems utilized in LASIK surgery.  Under terms of the agreement, approved by the boards of directors of both companies, after they received fairness opinions from their respective financial advisors, we will pay $25 in cash per share of IntraLase stock and the individually determined cash value per share of outstanding stock options.  We have arranged committed financing from a consortium of banks to complete the transaction.  We expect the transaction to be completed early in the second quarter of 2007. The transaction is subject to IntraLase stockholder approval as well as regulatory approvals and other customary closing conditions.  For a description of the risks related to this transaction, see “Risks Relating to the Pending IntraLase Corp. Acquisition” beginning on page 24.

Acquisition of VISX, Incorporated

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

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

Acquisition of Pfizer Inc. Surgical Ophthalmic Business

On June 26, 2004, we completed the acquisition of the Pfizer Inc. surgical ophthalmic business for $450 million in cash (Pfizer Acquisition). We acquired ophthalmic surgical products and certain manufacturing and research and development facilities located in Uppsala, Sweden, Groningen, Netherlands and Bangalore, India. The products acquired include the Healon line of viscoelastic products used in ocular surgery, the Tecnis intraocular lenses and the Baerveldt glaucoma shunt.

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

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During 2004, we also incurred other acquisition-related charges totaling approximately $11.6 million as we integrated the Pfizer surgical ophthalmic business and eliminated duplicative functions.

Separation from Allergan

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

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

Under the manufacturing agreement, which ended on June 29, 2005, Allergan manufactured certain of our eye care products and VITRAX viscoelastics from the date of the spin-off. We purchased these products from Allergan at a price equal to Allergan’s fully allocated costs plus 10%. During 2005 and 2004, we purchased $41.9 million and $89.3 million, respectively, of product from Allergan. On an annual basis, a pricing “true up” calculation was performed during the first calendar quarter after the end of each year. This “true up” calculation was based on the actual volume of products shipped by Allergan to us during the preceding year versus the forecasted volume submitted by us that was used to calculate the invoiced prices. During the year, we periodically reviewed the volume of purchases and accrued for estimated shortfalls, if any. In October 2005, we received $0.8 million from Allergan for the final “true up” calculation for the last six months of the agreement. In March 2005, we made a payment of $0.2 million to Allergan based upon the “true up” calculation for the year ended December 31, 2004. These payments have been recorded as an increase/decrease to cost of sales in the accompanying consolidated statements of operations.

The tax sharing agreement governs Allergan’s and our respective rights, responsibilities and obligations with respect to taxes for any tax period ending before, on or after the spin-off. Generally, Allergan is liable for all pre-spin-off taxes except for pre-spin-off taxes attributable to our business for 2002. In addition, the tax sharing agreement provides that Allergan is liable for taxes that are incurred as a result of restructuring activities undertaken to effectuate the spin-off. During 2005, we realized final adjustments to accrued, pre-spin-off taxes attributable to our business and payable to Allergan pursuant to this agreement. These adjustments included a $1.4 million benefit from the resolution of a discrete item in the third quarter of 2005, which was recorded in the income tax provision.

Critical Accounting Policies and Estimates

Revenue Recognition and Accounts Receivable

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

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

We generally permit returns of product if such product is returned in a timely matter, in good condition, and through the normal channels of distribution. However, we do not accept returns of treatment cards and we do not provide rights of return or exchange, price protection or stock rotation rights to any of our VISX product distributors. Return policies in certain international markets can be more stringent and are based on the terms of contractual agreements with the customers. Allowances for returns are provided for based upon an analysis of our historical patterns of returns matched against the sales from which they originated. To date, historical product returns have been within our estimates.

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

The allowance for doubtful accounts is determined by analyzing specific customer accounts and assessing the risk of uncollectibility based on insolvency, disputes or other collection issues. In addition, we routinely analyze the different aging categories and establish allowances based on the length of time receivables are past due.

Inventories

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

Goodwill and Long-Lived Assets

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

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

In the second quarters of 2006, 2005 and 2004, we performed the annual impairment tests of goodwill and non-amortizable intangible assets, and no impairment was indicated based on these tests.  Effective January 1, 2006, our operating segments consist of three businesses: Cataract/Implant, Laser Vision Correction and Eye Care.  Accordingly, the annual impairment review in the second quarter of 2006 was based on reporting units that are aligned with the current operating segments.

In accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-lived Assets”, we assess potential impairment to our long-lived assets when events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If required, an impairment loss is recognized as the difference between the carrying value and the fair value of the assets.

Income Taxes

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

We record a liability for potential tax assessments based on our estimate of the potential exposure.  New laws and new interpretations of laws and rulings by tax authorities may affect the liability for potential tax assessments.  Due to the subjectivity and complex nature of the underlying issues, actual payments or assessments may differ from estimates.  To the extent our estimates differ from actual payments or assessments, income tax expense is adjusted.  Our income tax returns in several locations

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

Stock-Based Compensation

Effective January 1, 2006, we began accounting for stock options and employee stock purchase plan (ESPP) shares under the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The fair value of stock options and ESPP purchase rights are estimated using a Black-Scholes option valuation model. This model requires the input of subjective assumptions, including expected stock price volatility, estimated life and estimated forfeitures of each award. The fair value of equity-based awards is amortized over the vesting period of the award, and we have elected to use the straight-line method. We make quarterly assessments of the adequacy of the tax credit pool to determine if there are any deficiencies which require recognition in the consolidated statement of operations. Prior to the implementation of SFAS 123R, we accounted for stock options and ESPP shares under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and made pro forma disclosures as required by SFAS No. 148, “Accounting For Stock-Based Compensation — Transition and Disclosure,” which amended SFAS No. 123, “Accounting For Stock-Based Compensation.” Pro forma net loss and pro forma net loss per share disclosed in the footnotes to the consolidated financial statements were estimated using a Black-Scholes option valuation model. The fair value of restricted stock and restricted stock units was calculated based upon the fair market value of our common stock at the date of grant.

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

Acquired In-Process Research and Development

Costs to acquire in-process research and development (IPR&D) projects and technologies which have no alternative future use and which have not reached technological feasibility at the date of acquisition are expensed as incurred. The fair value of IPR&D projects and technologies is estimated based upon management’s assumptions such as projected regulatory approval dates, estimated future revenues and cost of goods sold of the products under development and expected sales and marketing costs. The major risks and uncertainties associated with the timely and successful completion of these projects consist of the ability to confirm the safety and efficacy of the technology based on the data from clinical trials and obtaining necessary regulatory approvals. In addition, no assurance can be given that the underlying assumptions used to forecast the cash flows or the timely and successful completion of such projects will materialize, as estimated. For these reasons, among others, actual results may vary from the estimated results.

Comparing Fiscal Years Ended December 31, 2006, 2005 and 2004

The following table presents net sales and operating income by operating segment for 2006, 2005 and 2004, respectively:

	Net Sales						Operating Income
(In thousands)	2006		2005		2004		2006		2005		2004
Cataract/Implant	$	519,025	$	497,191	$	413,422	$	266,729	$	212,879	$	122,267
Laser Vision Correction	216,876		122,615		—		130,848		66,375		—
Eye Care	261,595		300,867		328,677		104,187		106,023		130,008
Total operating segments	$	997,496	$	920,673	$	742,099	$	501,764	$	385,277	$	252,275

Net sales for 2006 increased by $76.8 million, or 8.3%, to $997.5 million in 2006 from $920.7 million in 2005. The increase in 2006 was primarily the result of full year sales of products acquired in the VISX Acquisition in May 2005, subsequent international expansion of our LVC business, as well as increased sales of technologically advanced products due to continued market acceptance of the products offset by the negative impact of the eye care recall and our business rationalization efforts. The unfavorable impact from foreign currency fluctuations on net sales was $2.2 million in 2006. Our net sales and earnings in future periods may be negatively impacted during times of a strengthening U.S. dollar.

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

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

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

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

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

Net sales in the U.S. represented 41.6%, 32.9%, and 25.2% of total net sales in 2006, 2005 and 2004, respectively. Additionally, sales in Japan represented 13.9%, 18.9%, and 25.8% of total net sales in 2006, 2005 and 2004, respectively. No other country, or any single customer, generated over 10% of total net sales in any of these years.

Net sales for 2005 increased by $178.6 million, or 24.1%, to $920.7 million in 2005 from $742.1 million in 2004. The increase in 2005 was primarily the result of sales of products acquired in the VISX Acquisition in May 2005 and the full year impact of the purchase of the Pfizer ophthalmic surgical business in June 2004, as well as increased sales of technologically advanced products due to continued market acceptance. Net sales of acquired VISX products, included in the LVC segment, approximated $111.1 million in 2005. Net sales of acquired Pfizer ophthalmic surgical products, included in the cataract/implant segment, were $168.4 million in 2005 and $75.8 million in 2004. These increases were partially offset by declines in our older non-promoted and discontinued products and eye care sales in Japan and Europe.

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

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

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

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continued, and decreased sales of multipurpose solutions in Japan due to an increase in the market for daily disposable lenses. The favorable impact from foreign currency fluctuations during the first nine months of 2005 were offset by a negative impact in the fourth quarter of 2005.

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

Income and expenses. The following table sets forth certain statement of operations items as a percentage of net sales:

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

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

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

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Research and development. Research and development expenditures as a percentage of net sales in 2006 remained relatively constant as compared to 2005 and as a percentage of net sales increased slightly in 2005 as compared to 2004. Our research and development strategy is to develop proprietary products for vision correction that are safe and effective and address unmet needs. We are currently focusing on new advancements that build on our Tecnis, Healon and Sovereign technologies, corneal and lens-based solutions to presbyopia and dry eye products.

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

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

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

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

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Operating income from our Cataract/Implant business increased by $53.9 million in the year ended December 31, 2006, due to the increase in net sales and favorable mix of higher margin products discussed above, along with the favorable impact of cost containment measures taken in connection with our business repositioning plan. Operating income from our LVC business increased by $64.5 million in the year ended December 31, 2006, due to sales of products acquired from VISX in May 2005. Operating income from our Eye Care business decreased by $1.8 million in the year ended December 31, 2006, primarily due to the recall and continued softness in the market for hydrogen peroxide based products, partially offset by lower selling and promotional costs attributable to discontinued products and cost savings from business repositioning actions.

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

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

We recorded an unrealized loss (gain) on derivative instruments of $1.3 million, $(2.6) million and $0.4 million in 2006, 2005 and 2004, respectively. We record as “unrealized loss (gain) on derivative instruments” the mark to market adjustments on the outstanding foreign currency options and forward contracts which we entered into to reduce the volatility of expected earnings in currencies other than the U.S. dollar.

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

In 2005, the loss due to exchange of the 3½% convertible senior subordinated notes due 2023 of $1.9 million is comprised of a non-cash charge of $1.7 million and a cash charge of $0.2 million. In the second quarter of 2005, we exchanged 160,695 shares of common stock for $3.0 million aggregate principal amount of the 3½% convertible senior subordinated notes in a privately negotiated transaction. As a result, a non-cash charge of approximately $0.5 million representing the fair value of shares issued as a premium was recorded. In the fourth quarter of 2005, we exchanged 291,760 shares of common stock and approximately $0.4 million in cash for $5.6 million aggregate principal amount of the 3½% convertible senior subordinated notes in privately negotiated transactions. A non-cash charge of approximately $1.2 million and a cash charge of $0.2 million representing the fair value of shares issued as a premium were recorded.

In 2004, the loss due to exchange of the 3 ½% convertible senior subordinated notes of $116.3 million is comprised of a non-cash charge of $111.7 million and a cash charge of $4.6 million.  In the second quarter of 2004, we exchanged approximately 5.8 million shares of common stock and $4.6 million of cash for approximately $108.6 million in aggregate principal amount of these notes.  Because these notes we not convertible into equity at such time, a non-cash charge of $107.2 million and a cash charge of $4.6 million was recorded.  The $107.2 million non-cash charge was comprised of a charge of $89.1 million representing the difference between the fair market value of 5.3 million shares of common stock issued in exchange for the notes and the principal amount of notes exchanged and a charge of $18.1 million representing the fair market value of 0.5 million shares of common stock issued as a premium.  The $4.6 million cash charge represented cash issued as a premium.  In the remainder of 2004, we exchanged approximately 1.2 million shares of common stock for approximately $22.8 million in aggregate principal amount of these notes.  As a result, a non-cash charge of $4.5 million representing the fair value of shares issued as a premium was recorded.

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Other net non-operating expense was $2.6 million for 2006. Other non-operating expense of $0.3 million for 2005.  Other non-operating expense of $10.6 million for 2004 included $10.8 million paid for the repurchase of the 9¼% senior subordinated notes and early debt extinguishment costs and fees of $0.1 million aggregating $10.9 million partially offset by foreign exchange gains and interest income.

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

In 2005, we recorded a provision for income taxes of $12.9 million on a pre-tax loss of $440.3 million. The pre-tax loss in 2005 included an in-process research and development charge of $490.8 million, a non-cash charge of $1.7 million and a cash charge of $0.2 million related to the exchange of the 3 ½% convertible senior subordinated notes and a charge of $8.6 million associated with the termination of a distribution agreement in India with Allergan, for which no tax benefit was provided on these items. We have provided a tax provision at 33% on the remaining income, which was partially offset by tax benefits from the American Jobs Creation Act of 2004 and final adjustments with Allergan, which are discussed below.

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

The lower tax rate in 2005 reflected continuing implementation of our long-term tax strategies, as well as final adjustments of previously accrued pre-spin-off taxes attributable to our business in 2002 and payable to Allergan pursuant to a pre-spin tax sharing agreement. These adjustments included a $1.4 million benefit from the resolution of a discrete item in the third quarter of 2005, which was recorded in the income tax provision.

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

In 2004, we recorded a provision for income taxes of $8.2 million even though we had a pre-tax loss of $121.2 million. We recorded such provision as no tax benefit has been recognized for the IPR&D charge of $28.1 million nor for the aggregate charge of $116.3 million related to the exchange of the 3½% convertible senior subordinated notes. We provided a tax provision at 35% on the remaining income in 2004.  The lower tax rate in 2004 reflected continuing implementation of our long-term tax strategies.

Net earnings (loss). Net earnings (loss) was $79.5 million, $(453.2) million and $(129.4) million in 2006, 2005 and 2004, respectively. Net earnings in 2006 was primarily due to the full year of operating results attributable to the VISX acquisition, the net gain on legal contingencies, partially offset by business repositioning costs, stock-based compensation expense under SFAS 123R and net charges incurred for the early retirement of convertible senior subordinated debt.  The net loss in 2005 included an aggregate after-tax charge of $536.9 million, primarily due to the VISX Acquisition, business repositioning costs, integration related costs, and termination of a distributor agreement in India, write-off of debt issuance costs and exchange of the 3 ½% convertible senior subordinated notes, partially offset by tax benefits from the American Jobs Creation Act of 2004 and final adjustments with Allergan.

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

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following the decision to move to a direct sales model in Belgium as a result of the Pfizer Acquisition and severance paid to employees considered redundant upon completion of the Pfizer Acquisition; the in-process research and development charge related to the Pfizer Acquisition; the pro-rata write-off of debt issuance costs and write-off of original issue discount net of a net realized gain on interest rate swaps; and the charges related to the repurchase of the 9¼%  senior subordinated notes and the exchange of the 3½% convertible senior subordinated notes.

Liquidity and Capital Resources

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

Historically, we have generated cash from operations in excess of working capital requirements, and we expect to do so in the future. Net cash provided by operating activities in 2006 was $224.8 million compared to $20.8 million in 2005 and $39.7 million in 2004.  Operating cash flow improved in 2006 compared to 2005 largely as a result of settlement of legal contingencies, the non-cash impact of stock-based compensation, depreciation and amortization and loss on exchange of convertible notes.  Other improvements included timing of collections on trade receivables and payments for interest on outstanding debt and income taxes, as well as the favorable impact of the VISX acquisition. These improvements were partially offset by an increase in cash payments to finalize business repositioning actions in 2006 and recall costs.  Operating cash flow decreased in 2005 compared to 2004 due to increases in cash paid for income taxes, timing of accounts payable payments and inventory buildup, partially offset by the favorable impact of the VISX acquisition and timing of accounts receivable collections.  The inventory buildup was due in part to “bridging” stock related to the recent transfer of eye care manufacturing from Allergan and the increases in the size and scope of our global manufacturing network.

Net cash used in investing activities was $40.4 million, $79.9 million, and $482.2 million in 2006, 2005 and 2004, respectively.  The majority of 2006 capital expenditures were for the Uppsala, Sweden manufacturing facility to separate the facility from existing Pfizer operations and related upgrades, and for upgrades to our eye care product manufacturing facility in Madrid, Spain. The 2005 capital expenditures are primarily comprised of expenditures to upgrade our viscoelastics manufacturing facility in Uppsala, Sweden.  The 2005 amount includes $36.9 million net cash paid primarily for the acquisition of VISX.  The 2004 capital expenditures are primarily comprised of expansion of our manufacturing facilities in preparation for the transition away from the Allergan manufacturing agreement, expenditures at the acquired manufacturing facilities and construction of research and development facilities at our leased headquarters. The 2004 amount also includes the $456.7 million Pfizer Acquisition purchase price, which was financed with a portion of the proceeds from the issuance of $350.0 million of 2 ½% convertible senior subordinated notes and a $250.0 million term loan. Expenditures for property, plant and equipment totaled $29.0 million, $23.1 million, and $17.5 million in 2006, 2005, and 2004, respectively.  Expenditures for demonstration (demo) and bundled equipment, primarily phacoemulsification and microkeratome surgical equipment, were $10.8 million, $11.1 million, and $6.8 million in 2006, 2005, and 2004, respectively. We maintain demo and bundled equipment to facilitate future sales of similar equipment and related products to our customers. Expenditures for capitalized internal-use software were $3.2 million, $8.8 million, and $2.4 million in 2006, 2005, and 2004, respectively. The 2005 software expenditures were due to acquisition related integrations and improvements to support common global technology platforms. We capitalize internal-use software costs after technical feasibility has been established. In 2007, we expect to invest approximately $50.0 million to $60.0 million in property, plant and equipment, demo and bundled equipment, and capitalized software as part of the overall expansion of our business.

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

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

Net cash provided by financing activities was $442.2 million in 2004, which primarily comprised $350.0 million of proceeds from the issuance of the 2½% convertible senior subordinated notes and a $250.0 million term loan, partially offset by repayment of debt of $149.2 million and financing related costs of $16.6 million.

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

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

Our senior credit facility provides that we will maintain certain financial and operating covenants which include, among other provisions, maintaining specific leverage and coverage ratios. Certain covenants under the senior credit facility may limit the incurrence of additional indebtedness. The senior credit facility prohibits dividend payments. We were in compliance with these covenants at December 31, 2006.  Our senior credit facility is collateralized by a first priority perfected lien on, and pledge of, all of the combined company’s present and future property and assets (subject to certain exclusions), 100% of the stock of the domestic subsidiaries, 66% of the stock of the foreign subsidiaries and all present and future intercompany debts.

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

We believe that the net cash provided by our operating activities, supplemented as necessary with borrowings available under our revolving credit facility and existing cash and equivalents, will provide sufficient resources to fund the expected 2007 capital expenditures, and to meet our working capital requirements, debt service and other cash needs over the next year.

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

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

Inflation. Although at reduced levels in recent years, inflation may cause upward pressure on the cost of goods and services used by us. The competitive and regulatory environments in many markets substantially limit our ability to fully recover these higher costs through increased selling prices. We continually seek to mitigate the adverse effects of inflation through cost containment and improved productivity and manufacturing processes.

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

Contractual obligations. The following represents a list of our material contractual obligations and commitments as of December 31, 2006:

	Payments Due by Period
	Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years		Total
	(in millions)
Long-term debt, principal amount	$	—	$	—	$	—	$	851.1	$	851.1
Cash commitments for interest payments	23.8		47.7		47.7		333.6		452.8
Operating lease obligations	16.1		17.0		8.2		21.8		63.1
IT services	3.6		—		—		—		3.6
Other purchase obligations, primarily purchases of inventory and capital equipment	62.0		4.6		—		—		66.6

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

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New Accounting Standards

In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 did not have a material impact on our consolidated financial position, results of operations or cash flows.

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

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

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently assessing the impact of SFAS No. 157 on our financial statements.

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

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income and as a separate component of stockholders’ equity. We adopted SFAS No. 158 in the fourth quarter of fiscal 2006.  The impact of the adoption of this new accounting standard is disclosed in Note 10 to the consolidated financial statements.  The effect on the balance sheet as of December 31, 2006 from the adoption of SFAS No. 158 was based on the funded status of the defined benefit plans as of September 30, 2006, the measurement date of the plans’ assets and obligations.  We will be required to change the measurement date to December 31 in fiscal year 2008.

42

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We routinely monitor the risks associated with fluctuations in currency exchange rates and interest rates. We address these risks through controlled risk management that may include the use of derivative financial instruments to economically hedge or reduce these exposures. We do not expect to enter into financial instruments for trading or speculative purposes.

Given the inherent limitations of forecasting and the anticipatory nature of the exposures intended to be hedged, there can be no assurance that such programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either interest or foreign exchange rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect our operating results and financial position.

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

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

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

43

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

December 31, 2006

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

December 31, 2005

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

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

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

44

We use foreign currency option contracts, which provide for the sale of foreign currencies to offset foreign currency exposures expected to arise in the normal course of our business. While these instruments are subject to fluctuations in value, such fluctuations are anticipated to offset changes in the value of the underlying exposures. The principal currencies subject to this process are the Japanese yen and the euro. The foreign exchange forward contracts are entered into to protect the value of foreign currency denominated monetary assets and liabilities and the changes in the fair value of the foreign currency forward contracts were economically designed to offset the changes in the revaluation of the foreign currency denominated monetary assets and liabilities. These forward contracts are denominated in currencies which represent material exposures. The changes in the fair value of foreign currency option and forward contracts are recorded through earnings as “Unrealized loss (gain) on derivative instruments” while any realized gains or losses on expired contracts are recorded through earnings as “Other, net” in the accompanying consolidated statements of operations. Any premium cost of purchased foreign exchange option contracts are recorded in “Other current assets” and amortized over the life of the options.

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

The following tables provide information about our foreign currency derivative financial instruments outstanding as of December 31, 2006 and 2005. The information is provided in U.S. dollar amounts, as presented in our consolidated financial statements.

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

45

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

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

46

Item 8: Financial Statements and Supplementary Data

Index to Financial Statements

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

47

ADVANCED MEDICAL OPTICS, INC.

CONSOLIDATED BALANCE SHEETS

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

See accompanying notes to consolidated financial statements.

48

ADVANCED MEDICAL OPTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

See accompanying notes to consolidated financial statements.

49

ADVANCED MEDICAL OPTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

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

See accompanying notes to consolidated financial statements.

50

ADVANCED MEDICAL OPTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

See accompanying notes to consolidated financial statements.

51

ADVANCED MEDICAL OPTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

Note 1: Description of Business

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

Note 2: Summary of Significant Accounting Policies

This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the consolidated financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America and have been applied consistently in all material respects. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and related disclosures. Actual results could differ from those estimates.

Basis of Presentation

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

Foreign Currency Translation

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

Cash and Equivalents

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

Investments

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

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

•the financial condition and near-term prospects of the investee;

•the reasons for the decline in market value;

•the investee’s performance against product development milestones; and

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

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

Inventories

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

Property, Plant and Equipment

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

Goodwill and Long-Lived Assets

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

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

Additionally, the Company reviews the carrying amount of goodwill whenever events and circumstances indicate that the carrying amount of goodwill may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit and adverse legal or regulatory developments. If it is determined such indicators are present and the review indicates goodwill will not be fully recoverable, based upon discounted estimated cash flows, the carrying value is reduced to implied fair value.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (SFAS 144), the Company assesses potential impairment to its long-lived assets when events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If required, an impairment loss is recognized as the difference between the carrying value and the fair value of the assets.

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Capitalized Software

The Company capitalizes certain internal-use computer software costs after technological feasibility has been established. These capitalized costs are amortized utilizing the straight-line method over their estimated economic life not to exceed three years.

Demonstration (Demo) and Bundled Equipment

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

Revenue Recognition and Accounts Receivable

Revenue is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collectibility is reasonably assured. The Company records revenue from product sales when title and risk of ownership have been transferred to the customer, which is typically upon delivery to the customer, with the exception of intraocular lenses distributed on a consignment basis, which is upon notification of implantation in a patient. The Company recognizes license fees and revenues from the sale of treatment cards to direct customers when it ships the treatment cards as it has no continuing obligations or involvement subsequent to shipment.

Some customers finance the purchase or rental of their VISX equipment directly from the Company over periods ranging from one to three years. These financing agreements are classified as either rental or operating leases or sales type leases as prescribed by SFAS No. 13, “Accounting for Leases.”  Under sales type leases, equipment revenues are recognized based on the net present value of the expected cash flow after installation to direct customers in the United States and Japan or after shipment to international distributors. Under rental or operating lease arrangements, rental revenue is recognized over the term of the agreement.

The Company generally permits returns of product if such product is returned in a timely matter, in good condition, and through the normal channels of distribution. However, the Company does not accept returns of treatment cards and does not provide rights of return or exchange, price protection or stock rotation rights to any VISX product distributors. Return policies in certain international markets can be more stringent and are based on the terms of contractual agreements with the customers. Allowances for returns are provided for based upon an analysis of the Company’s historical patterns of returns matched against the sales from which they originated. To date, historical product returns have been within the Company’s estimates.

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

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

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk principally consist of trade receivables. Wholesale distributors, major retail chains, and managed care organizations account for a substantial portion of trade receivables. This risk is limited due to the large number of customers comprising the Company’s customer base, and their geographic dispersion. Ongoing credit evaluations of customers’ financial condition are performed and, generally, no collateral is required. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management’s expectations.

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Income Taxes

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

In preparing its consolidated financial statements, the Company is required to estimate its income taxes in each jurisdiction in which it operates. This process involves estimating the current liability as well as assessing temporary differences resulting from differing treatment of items for tax and financial accounting purposes. Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities.

Stock Based Compensation

Prior to January 1, 2006, the Company’s stock-based compensation plans were accounted for under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and the disclosure only provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123). Accordingly, no compensation expense was recorded for stock options granted with exercise prices greater than or equal to the fair value of the underlying common stock at the option grant date. The fair value, as determined on the date of grant, of restricted stock awards was recognized as compensation expense ratably over the respective vesting period. Additionally, the ESPP qualified as a non-compensatory plan under APB 25; therefore, no compensation cost was recorded in relation to the discount offered to employees for purchases made under the ESPP.

On January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, requiring recognition of expenses equivalent to the fair value of stock-based compensation awards. The Company has elected to use the modified prospective application transition method as permitted by SFAS 123R and therefore has not restated the financial results reported in prior periods. Under this transition method, stock-based compensation expense for the year ended December 31, 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, as adjusted for estimated forfeitures. Compensation expense for all stock-based compensation awards granted subsequent to January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. In addition, the Company’s unearned compensation balance at January 1, 2006 was reclassified to additional paid-in capital upon the adoption of SFAS 123R.

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

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Research and Development

Research and development costs are charged to expense when incurred.

Acquired In-Process Research and Development

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

Comprehensive Income (Loss)

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

The components of accumulated other comprehensive income (loss) were as follows:

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

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Recently Adopted and Issued Accounting Standards

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

In June 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation)” to clarify diversity in practice on the presentation of different types of taxes in the financial statements. The Task Force concluded that, for taxes within the scope of the issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes subject to EITF 06-3 are significant, a company is required to disclose its accounting policy for presenting taxes and the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15, 2006 (the first quarter of our fiscal year 2007). The Company does not expect the adoption of EITF 06-3 to have a material impact on its results of operations, financial position or cash flow.

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

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently assessing the impact of SFAS No. 157 on its financial statements.

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

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income and as a separate component of stockholders’ equity. We adopted SFAS No. 158 in the fourth quarter of fiscal 2006.  The impact of the adoption of this new accounting standard is disclosed in Note 10 to the consolidated financial statements.  The effect on the balance sheet as of December 31, 2006 from the adoption of SFAS No. 158 was based on the funded status of the defined benefit plans as of September 30, 2006, the measurement date of the plans’ assets and obligations.   The Company will be required to change the measurement date to December 31 in fiscal year 2008.

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Note 3: Acquisitions

VISX, Incorporated (VISX)

On May 27, 2005, pursuant to the Agreement and Plan of Merger (Merger Agreement), dated as of November 9, 2004, as amended, by and among AMO, Vault Merger Corporation, a wholly owned subsidiary of AMO, and VISX, AMO completed its acquisition of VISX, for total consideration of approximately $1.38 billion, consisting of approximately 27.8 million shares of AMO common stock, the fair value of VISX stock options converted to AMO stock options and approximately $176.2 million in cash (VISX Acquisition). VISX products include the VISX STAR Excimer Laser System, the VISX WaveScan System and VISX treatment cards. As a result of the VISX Acquisition, the Company became the leader in the design and development of proprietary technologies and systems for laser vision correction of refractive vision disorders.  The VISX Acquisition has been accounted for as a purchase business combination. The results of operations of the VISX Acquisition have been included in the accompanying consolidated statements of operations from the date of the VISX Acquisition.

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

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

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

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

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

Identification and allocation of value to the identified intangible assets was based on the provisions of SFAS No. 141, “Business Combinations,” (SFAS No. 141). The fair value of the identified intangible assets was estimated by performing a discounted cash flow analysis using the “income” approach. This method includes a forecast of direct revenues and costs associated with the respective intangible assets and charges for economic returns on tangible and intangible assets utilized in cash flow generation. Net cash flows attributable to the identified intangible assets are discounted to their present value at a rate commensurate with the perceived risk. The projected cash flow assumptions considered contractual relationships, customer attrition, eventual development of new technologies and market competition.

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The estimates of expected useful lives are based on guidance from SFAS No. 141 and take into consideration the effects of competition, regulatory changes and possible obsolescence. The useful lives of technology rights are based on the number of years in which net cash flows have been projected. The useful lives of customer relationships was estimated based upon the length of the contracts currently in place, probability based estimates of contract renewals in the future and natural growth and diversification of other potential customers, which were considered insignificant. Management considers the VISX trade name to be the leading name in excimer laser vision correction procedures. VISX’s estimated market share of 60 percent demonstrates its commercial success.  Management intends to maintain and continue to market existing and new products under the VISX trade name. As management intends to continue to use the VISX trade name indefinitely, an indefinite life was assigned.

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

·VISX historical operating margins

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

·VISX market share

·Contractual and non-contractual relationships with large groups of surgeons and

·Patents and exclusive licenses held.

A history of operating margins and profitability, a strong scientific, service and manufacturing employee base and a leading presence in the excimer laser market were among the factors that contributed to a purchase price resulting in the recognition of goodwill. The acquired goodwill, which is not deductible for tax purposes, has been allocated to the LVC segment.

In-process research and development (IPR&D)

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

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

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

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

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•Additional research and development expenses will be incurred to bring excimer laser system improvements to market. Like the other IPR&D projects, maintenance R&D and sustaining engineering costs were allocated to the forecasted cash flows once commercialized;

•Revenue that is reasonably likely to result from the approved and unapproved potential uses of identifiable intangible assets that includes the estimated number of units to be sold, estimated selling prices, estimated market penetration and estimated market share and year-over-year growth rates over the product cycles. These estimates were based on management’s consideration of life cycles for similar products VISX has previously launched, the competitive landscape, and previous success in working with the FDA; and

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

The major risks and uncertainties associated with the timely and successful completion of these projects consist of the ability to confirm the safety and efficacy of the technology based on the data from clinical trials and obtaining necessary regulatory approvals. In addition, no assurance can be given that the underlying assumptions used to forecast the cash flows or the timely and successful completion of such projects will materialize, as estimated. For these reasons, among others, actual results may vary significantly from the estimated results.

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

Pfizer Inc. Surgical Ophthalmic Business

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

The following unaudited pro forma information assumes the VISX Acquisition and the Pfizer Acquisition occurred on January 1, 2004. These unaudited pro forma results have been prepared for informational purposes only and do not purport to represent what the results of operations would have been had the VISX Acquisition and the Pfizer Acquisition occurred as of the date indicated, nor of future results of operations. The unaudited pro forma results for years ended December 31, 2005 and 2004 are as follows (in thousands, except per share data):

	Year Ended December 31, 2005			Year Ended December 31, 2004
Net sales	$	1,000,842		$	982,834
Net earnings	37,377		(1)	70,603		(2)
Earnings per share:
Basic (3)	$	0.57		$	1.09
Diluted (4)	$	0.54		$	1.04

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

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

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on interest rate swaps; and early debt extinguishment costs of $127.2 million. The unaudited pro forma information also reflects a $2.3 million decrease in depreciation and amortization related to the fair value of property, plant and equipment and identifiable intangible assets acquired in the Pfizer Acquisition and a $4.1 million increase in interest expense resulting from the recapitalization to fund the Pfizer Acquisition.

The unaudited pro forma information for the year ended December 31, 2004 also includes a $28.2 million increase in amortization related to management’s estimate of the fair value of intangible assets acquired as the result of the VISX Acquisition and an $11.4 million increase in interest expense resulting from additional borrowings incurred to fund the cash portion of the VISX Acquisition and related costs and amortization of deferred financing costs.

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

The weighted average number of shares outstanding used for the computation of basic earnings per share for the year ended December 31, 2004 reflects the issuance of 7.0 million shares of AMO’s common stock in the private exchanges of the 3½% Convertible Senior Subordinated Notes less the 3.6 million weighted average shares related to the private exchanges already included in basic shares outstanding. The weighted average number of shares outstanding used for the computation of basic earnings per share for the year ended December 31, 2004 also includes the 27.8 million shares issued to VISX stockholders as the result of the VISX Acquisition.

(4)The weighted average number of shares outstanding used for the computation of diluted earnings per share for the year ended December 31, 2005 includes the aggregate dilutive effect of approximately 3.3 million shares for stock options and awards, the remaining 3½% Convertible Senior Subordinated Notes and VISX options exchanged for AMO stock options

The weighted average number of shares outstanding used for the computation of diluted earnings per share for the year ended December 31, 2004 includes the aggregate dilutive effect of approximately 3.6 million shares for stock options and awards, the remaining 3½% Convertible Senior Subordinated Notes and VISX options exchanged for AMO stock options.

Note 4:  Product Rationalization and Business Repositioning

On October 31, 2005, the Company’s Board of Directors approved a product rationalization and repositioning plan covering the discontinuation of non-strategic cataract surgical and eye care products and the elimination or redeployment of resources that support these product lines. The plan also included organizational changes and potential reductions in force in manufacturing, sales and marketing associated with these product lines, as well as organizational changes in research and development and other corporate functions designed to align the organization with our strategy and strategic business unit organization.

The plan further called for increasing the Company’s investment in key growth opportunities, specifically the Company’s refractive implant product line and international laser vision correction business, and accelerating the implementation of productivity initiatives. Following an analysis of its IOL manufacturing capabilities in the second quarter of 2006, the Company has decided to consolidate certain operations. In addition, the Company expanded the scope of its eye care rationalization initiatives in order to maximize manufacturing capacity and seize growth opportunities.  Total cumulative charges of $105.0 million have been incurred through December 31, 2006.

For the year ended December 31, 2006, the Company incurred $62.7 million of pre-tax charges, which included $16.3 million for inventory, manufacturing related and other charges included in cost of sales and $46.4 million included in operating expenses. Charges included in operating expenses comprised productivity and brand repositioning costs of $37.6 million and  severance, relocation and other one-time termination benefits of $13.7 million, offset by net asset disposal gains of $2.8 million and a net credit from settlement of contractual obligations of $2.1 million.

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

Business repositioning charges and related activity in the accrual balances during the year ended December 31, 2006 were as follows (in thousands):

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

The Company incurred $42.3 million in pre-tax charges during the fourth quarter of 2005 as follows (in thousands);

Business Repositioning Costs Reported In:	Costs Incurred		Cash Payments			Non-Cash Adjustments			Balance at December 31, 2005
Cost of sales —
Inventory, manufacturing and other charges	$	12,585	$	—		$	(12,585	)	$	—
Operating Expenses —
Severance, relocation and related costs	14,020		(5,241		)	—			8,779
Asset write-downs	9,172		—			(9,172		)	—
Contractual obligations	2,641		—			—			2,641
Productivity initiatives and brand repositioning costs	3,847		(2,964		)	—			883
	29,680		(8,205		)	(9172		)	12,303
	$	42,265	$	(8,205	)	$	(21,757	)	$	12,303

Productivity initiatives and brand repositioning costs resulted from the Company’s investment in key growth opportunities, specifically the Company’s refractive implant product line, international laser vision correction business and expanded eye care rationalization, and the implementation of productivity improvements in manufacturing operations, distribution, customer service and corporate functions. Severance, relocation and related costs were incurred for worldwide workforce reductions due to the Company’s discontinuation of certain non-core products and infrastructure and process improvements associated with the Company’s productivity initiatives. The majority of these costs occurred in the United States, Japan and Europe. Net asset gains resulted from disposals of long-lived assets from certain discontinued non-core products and relocation of certain facilities, offset by asset write-downs which resulted from the impairment and disposal of long-lived assets from the reduction in expected future cash flows. The fair values of impaired assets were based on probability weighted expected cash flows as determined in accordance with SFAS 144.  The net credit from contractual obligations primarily resulted from the settlement with a vendor during the third quarter of 2006.

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Note 5: Composition of Certain Financial Statement Captions

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

Intangible assets, net

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

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

Goodwill

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

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Effective January 1, 2006, the Company’s reportable segments are represented by three business units: Cataract/Implant, Laser Vision Correction and Eye Care (See Note 14, “Business Segment Information”). The change in goodwill during the year ended December 31, 2006 is due to an adjustment of Laser Vision Correction goodwill of $7.4 million as a result of excess tax benefits from the exercise of converted VISX stock options that were fully vested at the acquisition date and the impact of foreign currency fluctuations on the Eye Care and Cataract/Implant segments.  The Company performed its annual impairment test of goodwill during the second quarter of 2006 and determined there was no impairment.

Note 6: Debt

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

Senior Credit Facility

On June 25, 2004, the Company amended and restated its senior credit facility to provide a $250.0 million term loan and a $100.0 million revolving credit facility. The amended and restated senior credit facility matures on June 25, 2009. In January 2005, the Company entered into an amendment to the senior credit facility to provide for an increase of $100.0 million in the revolving loan commitments and an additional $100.0 million in term loan commitments. On May 27, 2005, the Company and certain of its subsidiaries, as guarantors thereunder, entered into an amendment to provide for an additional increase of $100.0 million in the revolving loan commitments under the senior credit facility, which amounts were made available to AMO to finance, in part, AMO’s acquisition of VISX, and are available for working capital and other general corporate purposes subject to satisfaction of certain conditions.  This amendment also provides for termination of $100.0 million of existing term loan commitment. The amendment increased the revolving loan commitments to $300.0 million. The maturity of the senior credit facility on June 25, 2009 remains unchanged.

During the second quarter of 2005, the Company paid approximately $44.5 million of the term loan. On June 30, 2005, the Company paid approximately $0.4 million of the term loan. On July 21, 2005, the Company repaid the balance of its term loan, including approximately $149.1 million of principal and approximately $1.2 million of accrued interest, using the net proceeds from the 1.375% convertible senior subordinated notes (see below) and existing cash. As a result of the repayment of the term loan, the Company wrote off remaining debt issuance costs of approximately $3.8 million in the third quarter of 2005.

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

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

At December 31, 2006, approximately $8.4 million of the senior revolving credit facility was reserved to support letters of credit on the Company’s behalf for normal operating purposes and the Company has approximately $291.6 million undrawn and available of revolving loan commitments. At December 31, 2005, the Company had $50.0 million borrowings outstanding under the revolving credit facility. Approximately $18.7 million of the revolving credit facility was reserved to support letters of credit issued on the Company’s behalf for normal operating purposes. At December 31, 2005, the Company had $10.0 million of borrowings outstanding under a short-term loan from Bank of Ireland to an AMO subsidiary, AMO Ireland. This loan was supported by a $10.0 million letter of credit which was part of the $18.7 million of letters of credit noted above. This loan was paid in its entirety on February 21, 2006 and is no longer available for borrowing.

Borrowings under the revolving credit facility, if any, bear interest at current market rates plus a margin based upon the Company’s ratio of debt to EBITDA, as defined. The incremental interest margin on borrowings under the revolving credit facility decreases as the Company’s ratio of debt to EBITDA decreases to specified levels. Under the senior credit facility,

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certain transactions may trigger mandatory prepayment of borrowings, if any. Such transactions may include equity or debt offerings, certain asset sales and extraordinary receipts. The Company pays a quarterly fee (1.95% per annum at December 31, 2006) on the average balance of outstanding letters of credit and a quarterly commitment fee (0.375% per annum at December 31, 2006) on the average unused portion of the revolving credit facility. The senior credit facility provides that the Company will maintain certain financial and operating covenants which include, among other provisions, maintaining specific leverage and coverage ratios. Certain covenants under the senior credit facility may limit the incurrence of additional indebtedness. The senior credit facility prohibits dividend payments.  The Company was in compliance with these covenants at December 31, 2006.  The senior credit facility is secured by a first priority perfected lien on, and pledge of, all of the combined company’s present and future property and assets (subject to certain exclusions), 100% of the stock of the domestic subsidiaries, 66% of the stock of foreign subsidiaries and all present and future intercompany debts.

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

In June 2006, the Company completed a private placement of $500 million aggregate principal amount of its 3.25% Notes due August 1, 2026.  Interest on the 3.25% Notes is payable on February 1 and August 1 of each year, commencing on February 1, 2007.  The 3.25% Notes are convertible into 16.7771 shares of the Company’s common stock for each $1,000 principal amount of the 3.25% Notes (which represents an initial conversion price of approximately $59.61 per share), subject to adjustment. The 3.25% Notes may be converted, at the option of the holders, into cash or under certain circumstances, cash and shares of the Company’s common stock at any time on or prior to the trading day preceding July 1, 2014, only under the following circumstances:

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

·during any fiscal quarter subsequent to September 29, 2006, if the closing sale price of the Company’s common stock measured over a specified number of trading days is above 130% of the conversion  then in effect;

·if a fundamental change occurs; or

·upon the occurrence of specified corporate transactions.

On and after July 1, 2014, to (and including) the trading day preceding the maturity date, subject to prior redemption or repurchase, the 3.25% Notes will be convertible into cash and, if applicable, shares of the Company’s common stock regardless of the foregoing circumstances.

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

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

Beginning with the six-month interest period commencing August 1, 2014, the Company will pay contingent interest during any six-month interest period if the trading price of the 3.25% Notes for each of the five trading days ending on the second trading day immediately preceding the first day of the applicable six-month interest period equals or exceeds 120% of the principal amount of the 3.25% Notes.  The contingent interest payable will equal 0.25% of the average trading price of $1,000 principal amount of the 3.25% Notes during the five trading days immediately preceding the first day of the applicable six-month interest period.  This contingent interest payment feature represents an embedded derivative.  However, based on the de minimis value associated with this feature, no value has been assigned at issuance and at December 31, 2006.

On or prior to August 1, 2014, upon the occurrence of a fundamental change, under certain circumstances, the Company will provide for a make whole amount by increasing, for the time period described herein, the conversion rate by a number of additional shares for any conversion of the 3.25% Notes in connection with such fundamental change transactions.  The amount of additional shares will be determined based on the price paid per share of the Company’s common stock in the

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transaction constituting a fundamental change and the effective date of such transaction. This make whole premium feature represents an embedded derivative.  However, based on the de minimis value associated with this feature, no value has been assigned at issuance and at December 31, 2006.

3½% Convertible Senior Subordinated Notes Due 2023 (3½% Notes)

On June 24, 2003, the Company issued $140.0 million of 3½% Notes due April 15, 2023. Interest on the 3½% Notes was payable on April 15 and October 15 of each year, commencing on October 15, 2003. The 3½% Notes were convertible into 48.69 shares of AMO’s common stock for each $1,000 principal amount of 3½% Notes (conversion price of $20.54 per share), subject to adjustment.

In the quarter ended June 25, 2004, the Company exchanged approximately 5.8 million shares of common stock and approximately $4.6 million in cash for approximately $108.6 million in aggregate principal amount of 3½% Notes in privately negotiated transactions with a limited number of holders (Private Exchanges). The Private Exchanges resulted in an aggregate increase of $216.4 million to common stock and additional paid-in capital. Because the 3½% Notes were not convertible into equity at the time of the Private Exchanges, a non-cash charge of approximately $107.2 million and a cash charge of approximately $4.6 million were recorded. The $107.2 million non-cash charge was comprised of a charge of $89.1 million representing the difference between the fair value of 5.3 million shares of common stock issued in exchange for the notes and the principal amount of notes exchanged and a charge of $18.1 million representing the fair value of 0.5 million shares of common stock issued as a premium. The $4.6 million cash charge represented cash issued as a premium. The Company also recorded a charge of approximately $3.2 million for the write-off of the pro-rata portion of capitalized debt related costs.  During the remainder of 2004, the Company exchanged approximately 1.2 million shares of common stock for approximately $22.8 million in aggregate principal amount of 3½% Notes. These exchanges resulted in an increase of $27.6 million to common stock and additional paid-in capital. A non-cash charge of $4.5 million representing the fair value of shares issued as a premium was recorded.

In the second quarter of 2005, the Company exchanged 160,695 shares of common stock for $3.0 million aggregate principal amount of the 3½% Notes in a privately negotiated transaction. The exchange resulted in an increase of $3.5 million to common stock and paid-in capital. A non-cash charge of $0.5 million representing the fair value of shares issued as a premium was recorded. In the fourth quarter of 2005, the Company exchanged 291,760 shares of common stock and approximately $0.4 million in cash for $5.6 million aggregate principal amount of the 3½% Notes in privately negotiated transactions. The exchange resulted in an aggregate increase of $6.6 million to common stock and paid-in capital. A non-cash charge of $1.2 million and a cash charge of $0.2 million representing the fair value of shares issued as a premium were recorded. As a result of the exchanges noted above, all of the 3½% Notes were retired in 2005.

2½% Convertible Senior Subordinated Notes Due 2024 (2½% Notes)

On June 22, 2004, the Company issued $350.0 million of 2½% Notes due July 15, 2024. Interest on the 2½% Notes is payable on January 15 and July 15 of each year, commencing on January 15, 2005. The 2½% Notes are convertible into 19.9045 shares of AMO’s common stock for each $1,000 principal amount of 2½% Notes (conversion price of approximately $50.24 per share), subject to adjustment. The 2½% Notes may be converted, at the option of the holders, on or prior to the final maturity date under certain circumstances, including:

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•during any fiscal quarter commencing after September 24, 2004, if the closing sale price per share of AMO’s common stock exceeds 130% of the conversion price for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding fiscal quarter;

•during the five business days after any five consecutive trading day period in which the trading price of the 2½% Notes for each day was less than 95% of the conversion value of the 2½% Notes; provided that holders may not convert their 2½% Notes in reliance on this provision after July 15, 2019, if on any trading day during such trading period the closing sale price per share of AMO’s common stock was between 100% and 130% of the then current conversion price. This conversion tenure represents an embedded derivative. However, based on the de minimis value associated with this feature, no value was assigned at issuance and at December 31, 2006 and 2005;

•upon the occurrence of specified ratings events with respect to the 2½% Notes. This conversion feature represents an embedded derivative. However, based on the de minimis value associated with this feature, no value has been assigned at issuance and at December 31, 2006 and 2005;

•if the 2½% Notes have been called for redemption;

•if a fundamental change occurs; or

•upon the occurrence of specified corporate events.

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

The Company may redeem some or all of the 2½% Notes for cash, on or after January 20, 2010, for a price equal to 100% of the principal amount plus accrued and unpaid interest, including contingent interest, if any, to but excluding the redemption date.

The 2½% Notes contain put options, which may require the Company to repurchase all or a portion of the 2½% Notes on January 15, 2010, July 15, 2014, and July 15, 2019 at a repurchase price of 100% of the principal amount plus accrued and unpaid interest, including contingent interest (as described below), if any, to but excluding the repurchase date. The Company may choose to pay the repurchase price in cash, shares of common stock or a combination of cash and shares of common stock.

Under the indenture for the 2½% Notes, the Company may irrevocably elect to satisfy in cash the conversion obligation with respect to the principal amount of the 2½% Notes and the Company made such election prior to December 31, 2004. As such, any future dilutive effect of the 2½% Notes will be calculated under the net share settlement method. As a result of this election, the Company also is required to satisfy in cash its obligations to repurchase any 2½% Notes that holders may put to the Company on January 15, 2010, July 15, 2014 and July 15, 2019.

Beginning with the six-month interest period commencing January 15, 2010, holders of the 2½% Notes will receive contingent interest payments during any six-month interest period if the trading price of the 2½% Notes for each of the five trading days ending on the second trading day immediately preceding the first day of the applicable six-month interest period equals or exceeds 120% of the principal amount of the 2½% Notes. The contingent interest payable will equal 0.25% of the average trading price of $1,000 principal amount of 2½% Notes during the five trading days immediately preceding the first day of the applicable six-month interest period. This contingent interest payment feature represents an embedded derivative. However, based on the de minimis value associated with this feature, no value has been assigned at issuance and at December 31, 2006 and 2005.

On or prior to January 15, 2010, upon the occurrence of a fundamental change, under certain circumstances, the Company will pay a make whole premium on 2½% Notes converted in connection with, or tendered for repurchase upon, the fundamental change. The make whole premium will be payable, in the same form of consideration into which the Company’s common stock has been exchanged or converted, on the repurchase date for the 2½% Notes after the fundamental change, both for 2½% Notes tendered for repurchase and for 2½% Notes converted in connection with the fundamental change. The amount of the make whole premium, if any, will be based on the Company’s stock price on the effective date of the fundamental change. This make whole premium feature represents an embedded derivative. However, based on the de minimis value associated with this feature, no value has been assigned at issuance and at December 31, 2006 and 2005.

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

The proceeds from the June 2004 term loan and a portion of the net proceeds from the 2½% Notes aggregating $450.0 million were used to fund the Pfizer Acquisition. In addition, approximately $80.8 million of the net proceeds from the 2½% Notes were used to consummate the June 2004 tender offer to purchase the remaining $70.0 million aggregate outstanding principal amount of the Company’s 9¼% senior subordinated notes and pay the related premium and consent fees. As a result of the purchase of the 9¼% senior subordinated notes, the Company recorded a charge of approximately $10.8 million for the premium and consent fees paid and a net gain of $0.7 million for the write-off of capitalized debt related costs and recognition of the realized gain on interest rate swaps.

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

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

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

•if a fundamental change occurs; or

•upon the occurrence of specified corporate events.

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

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

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

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

Beginning with the six-month interest period commencing July 1, 2011, holders of the 1.375% Notes will receive contingent interest payments during any six-month interest period if the trading price of the 1.375% Notes for each of the five trading days ending on the second trading day immediately preceding the first day of the applicable six-month interest period equals or exceeds 120% of the principal amount of the 1.375% Notes. The contingent interest payable will equal 0.25% of the average trading price of $1,000 principal amount of the 1.375% Notes during the five trading days immediately preceding the first day of the applicable six-month interest period. This contingent interest payment feature represents an embedded derivative. Since this feature has no measurable impact on the fair value of the 1.375% Notes and no separate trading market exists for this derivative, the value of the embedded derivative was determined to be de minimis. Accordingly, no value was assigned at issuance and at December 31, 2006 and 2005.

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On or prior to July 1, 2011, upon the occurrence of a fundamental change, under certain circumstances, the Company will provide for a make whole amount by increasing, for the time period described herein, the conversion rate by a number of additional shares for any conversion of the 1.375% Notes in connection with such fundamental change transactions. The amount of additional shares will be determined based on the price paid per share of AMO’s common stock in the transaction constituting a fundamental change and the effective date of such transaction. This make whole premium feature represents an embedded derivative. Since this feature has no measurable impact on the fair value of the 1.375% Notes and no separate trading market exists for this derivative, the value of the embedded derivative was determined to be de minimis. Accordingly, no value has been assigned at issuance and at December 31, 2006 and 2005.

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

Note 7: Financial Instruments

In the normal course of business, the Company’s operations are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates. The Company addresses these risks through controlled risk management that may include the use of derivative financial instruments to economically hedge or reduce these exposures. The Company does not enter into financial instruments for trading or speculative purposes.

The Company enters into derivative financial instruments with major financial institutions that have at least an “A” or equivalent credit rating. The Company has not experienced any losses on its derivative financial instruments to date due to credit risk and management believes that such risk is remote.

Interest Rate Risk Management

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

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

Foreign Exchange Risk Management

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

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the effect of changes in value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. The Company enters into foreign exchange option and forward contracts in amounts between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed one year. These derivative instruments are not designated as accounting hedges.

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

The following table provides information about our foreign currency derivative financial instruments outstanding as of December 31, 2006 and 2005, respectively. The information is provided in U.S. dollar amounts, as presented in our consolidated financial statements.

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

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The notional principal amount provides one measure of the transaction volume outstanding as of the end of the period, and does not represent the amount of the Company’s exposure to market loss. The estimate of fair value is based on applicable and commonly used prevailing financial market information as of December 31, 2006 and 2005, respectively. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

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

Fair Value of Financial Instruments

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

The carrying amount and estimated fair value of the Company’s financial instruments at December 31 were as follows (in thousands):

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

Note 8: Related Party Transactions

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

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

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

The following table summarizes the charges from Allergan for the above-mentioned transitional services for 2005 and 2004 (in thousands):

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

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

Note 9: Income Taxes

The Company’s income before provision for income taxes was generated from the United States and international operations as follows:

	Year Ended December 31,
	2006		2005			2004
	(in thousands)
Earnings (loss) before income taxes:
U.S.	$	87,803	$	(497,583	)	$	(105,537	)
Foreign	57,013		57,286			(15,679		)
Earnings (loss) before income taxes	$	144,816	$	(440,297	)	$	(121,216	)

The Company’s provision for income taxes consists of the following:

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

The reconciliations of the U.S. federal statutory tax rate to the Company’s effective tax rate are as follows:

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

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Temporary differences and carryforwards, which give rise to a significant portion of deferred tax assets and liabilities at December 31, 2006 and 2005, were as follows:

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

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

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

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

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

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

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

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The American Jobs Creation Act of 2004 (the “Act”), signed into law in October 2004, allowed companies to elect to repatriate cash into the United States in 2005 at a special, temporary effective tax rate of 5.25 percent. On December 6, 2005, the Board of Directors approved management’s plan for reinvestment and repatriation of specific foreign earnings under the Act. The Company repatriated $48.6 million under the provisions of the Act. Since the Company provides taxes currently on foreign earnings, the election of this provision enabled the Company to realize a tax benefit of $5.7 million in the fourth quarter of 2005.

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

The Company records a liability for potential tax assessments based on its estimate of the potential exposure. New laws and new interpretations of laws and rulings by tax authorities may affect the liability for potential tax assessments. Due to the subjectivity and complex nature of the underlying issues, actual payments or assessments may differ from estimates. To the extent the Company’s estimates differ from actual payments or assessments, income tax expense is adjusted. The Company’s income tax returns in several locations are being examined by the local taxation authorities. Management believes that adequate amounts of tax and related interest, if any, have been provided for any adjustments that may result from these examinations.

Note 10: Employee Retirement and Other Benefit Plans

Pension and Postretirement Benefit Plans

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

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

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

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

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

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

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

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

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

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

The accumulated benefit obligation for the defined benefit plans was $13.1 million and $12.8 million at December 31, 2006 and 2005, respectively.

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

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

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As of September 30, 2006, the Japan plan assets are invested using a passive investment strategy. Asset allocations and investment performance is reviewed by the Benefits Committee with a view to ensuring that sufficient liquidity will be available to meet expected cash flow requirements. The expected long-term rate of return on plan assets assumption is based on numerous factors including historical rates of return, long-term inflation assumptions, current and future financial market conditions and expected asset allocation.

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

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

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

Savings and Investment Plan

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

Note 11: Common Stock

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

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

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

Stock-Based Compensation

AMO has an Incentive Compensation Plan (ICP) that provides for the granting of stock options, restricted stock and restricted stock units to directors, employees and consultants. The Company has two Employee Stock Purchase Plans (ESPP) for United States and international employees, respectively, which allow employees to purchase AMO common stock. A total of 5 million shares of common stock have been authorized for issuance under the ICP. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R) as discussed below.

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Stock-Based Compensation Expense

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

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

At December 31, 2006, total pre-tax compensation costs related to unvested stock-based awards granted to employees and directors under the Company’s ICP and ESPP which are not yet recognized were approximately $28.8 million, net of estimated forfeitures. These costs are expected to be recognized over a weighted-average period of 2.75 years.

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

Determining Fair Value

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

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

Expected Volatility - The computation of expected volatility is based on a combination of historical and market-based implied volatility.  Implied volatility is based on publicly traded options of the Company’s common stock with a term of one year or greater.

Risk-Free Interest Rate - The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available on U.S. Treasury securities with an equivalent remaining term.

Expected Dividend - - No dividends are expected to be paid.

Estimated Forfeitures - When estimating forfeitures, the Company considers voluntary termination behavior as well as analysis of actual option forfeitures.

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The fair value of the Company’s stock-based compensation granted to employees for the year ended December 31, 2006 was estimated using the following weighted-average assumptions:

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

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

Stock Options

Stock options granted to employees are generally exercisable at a price equal to the fair market value of the common stock on the date of the grant and vest at a rate of 25% per year beginning twelve months after the date of grant. Grants under these plans expire ten years from the date of grant.

The following is a summary of stock option activity (in thousands, except per share amounts):

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

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

The following table summarizes information regarding options outstanding and options exercisable at December 31, 2006:

	Outstanding				Exercisable
Range of Exercise Prices	Number of Options	Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$5.00—$9.99	1,865,604	4.89	$	8.71	1,865,604	$	8.71
$10.00—$17.99	1,271,618	5.00	13.81		1,120,026	13.81
$18.00—$27.99	700,251	4.48	24.69		694,251	24.70
$28.00—$33.99	1,561,816	1.93	32.65		1,058,424	32.15
$34.00—$50.99	2,228,510	8.28	40.28		609,774	37.84

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Employee Stock Purchase Plans

Under the ESPP, eligible employees may authorize payroll deductions of up to 10% of their regular base salary to purchase shares at the lower of 85% of the closing price of the Company’s common stock on the first or last day of the six-month purchase period. In the second quarter of 2006, 78,000 shares of common stock were issued under the ESPP in the aggregate amount of $2.4 million and 72,637 shares of common stock were issued under the ESPP in the aggregate amount of $2.5 million as of the most recent purchase period ended on October 31, 2006. As of December 31, 2006 employee withholdings under the ESPP aggregated $0.6 million.

Restricted Stock

Restricted stock awards are granted at a price equal to the fair market value of the common stock on the date of the grant, subject to forfeiture if employment terminates prior to the release of restrictions, which is generally three years from the date of grant. During this restriction period, ownership of the shares cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. The cost of the awards, determined to be the fair market value of the shares at the date of grant, is expensed ratably over the period the restrictions lapse.

The following table summarizes the restricted stock award activity for the year ended December 31, 2006 (in thousands, except per share amounts):

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

Performance-Based Awards

In February 2006, the Company’s Board of Directors approved a 2006 performance award program under the Company’s incentive compensation plan (the 2006 Program), which provides the opportunity for certain executives to earn long-term incentive compensation awards based upon specified measures. The potential maximum aggregate award value for the 2006 program was $2.7 million. The award determination was based upon the Total Shareholder Return (TSR) (the increase or decrease in the Company’s common stock price) over a two-year period beginning January 1, 2005 compared to a peer group composed of various entities within the bio-technology and medical device industries. Awards would have been determined to be earned if the Company’s TSR was in excess of the 50th percentile of the peer group. When the TSR equals the 75th percentile of the peer group, the maximum amount would have been earned. Awards were to be settled in a number of restricted stock shares or units equal to the value of the award amount divided by the fair market value of the Company’s common stock on the date the performance criteria is deemed to have been met. The restricted stock shares or units will have the same terms and conditions as other restricted shares or units issued under the Company’s ICP. The estimated fair value of the 2006 Program was $0.8 million on the grant date using a lattice-based valuation model.   Since the specified measures were not achieved, no awards of stock or units were granted and no compensation expense was recognized in 2006.

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Pro-forma Disclosures under SFAS 123 for Periods Prior to Fiscal 2006

The following table illustrates the effect on net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation during the years ended December 31, 2005 and 2004 (in thousands, except per share amounts): 

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

For the purpose of the weighted-average estimated fair value calculations, the fair value of the Company’s stock-based compensation granted to employees for the years ended December 31, 2005 and 2004 was estimated using the following weighted-average assumptions:

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

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

Note 12: Earnings Per Share

Basic earnings per share is calculated by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by adjusting net earnings and the weighted average outstanding shares, assuming the conversion of all potentially dilutive convertible securities, stock options and stock purchase plan awards.

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The table below presents the computation of basic and diluted earnings (loss) per share for the years ended December 31, 2006, 2005 and 2004:

	2006		2005			2004
	(in thousands, except per share amounts)
Basic and diluted net earnings (loss)	$	79,471	$	(453,197	)	$	(129,370	)
Basic common shares outstanding	63,383		54,764			33,284
Effect of dilutive securities:
Stock options and awards	2,188		—			—
Diluted common shares outstanding	65,571		54,764			33,284
Basic earnings (loss) per share	$	1.25	$	(8.28	)	$	(3.89	)
Diluted earnings (loss) per share	$	1.21	$	(8.28	)	$	(3.89	)

For 2006, options to purchase 284,000 shares of common stock were excluded as the effect would be anti-dilutive. For 2005, the dilutive effect of stock options and stock purchase plan awards of approximately 2,674,000 shares and the dilutive effect of the 3 ½% Notes of approximately 290,000 shares have been excluded from the computation of diluted loss per share as the effect would be anti-dilutive. For 2004, the dilutive effect of stock options and stock purchase plan awards of approximately 2,125,000 shares and the dilutive effect of the 3 ½% Notes of approximately 3,559,000 shares have been excluded from the computation of diluted loss per share as the effect would be anti-dilutive.

The Company will settle in cash the principal amount of the 3.25% Notes, 2 ½% Notes and the 1.375% Notes.  In addition, there were no potentially diluted common shares associated with the 3.25% Notes, 2 ½% Notes and the 1.375% Notes as the Company’s year end stock price was less than the conversion prices of the notes.

Note 13: Commitments and Contingencies

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

Future minimum rental payments under non-cancelable operating lease commitments with a term of more than one year as of December 31, 2006, are as follows: $16.1 million in 2007; $10.9 million in 2008; $6.1 million in 2009; $4.3 million in 2010; $3.9 million in 2011 and $21.8 million thereafter.

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

The Company recognized a net gain on legal contingencies of $96.9 million in 2006, primarily from settlement of pending patent litigation, net of costs incurred. On July 7, 2006, the Company entered into a settlement agreement with Alcon, Inc., Alcon Laboratories, Inc., and Alcon Manufacturing Ltd. (collectively, “Alcon”) regarding all pending patent litigation between AMO and Alcon. The settlement required Alcon to pay AMO a lump-sum payment of $121 million which was received in July 2006 and was accounted for in the third quarter.  The parties agreed to dismiss all pending patent litigation in Delaware and Texas, agreed not to sue each other regarding the patents at issue in those cases, and cross-licensed patents covering existing features of commercially available phacoemulsification products.

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

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

81

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

While the Company is involved from time to time in litigation arising in the ordinary course of business, including product liability claims, the Company is not currently aware of any other actions against AMO or Allergan relating to the optical medical device business that the Company believes would have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows. The Company may be subject to future litigation and infringement claims, which could cause the Company to incur significant expenses or prevent the Company from selling its products. The Company operates in an industry susceptible to significant product liability claims. Product liability claims may be asserted against AMO in the future arising out of events not known to the Company at the present time. Under the terms of the contribution and distribution agreement effecting the spin-off, Allergan agreed to assume responsibility for, and to indemnify AMO against, all current and future litigation relating to its retained businesses and the Company agreed to assume responsibility for, and to indemnify Allergan against, all current and future litigation related to the optical medical device business.

Note 14: Business Segment Information

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

Through 2005, the Company’s reportable segments were based on geographic regions which comprised the Americas, which included North and South America, Europe/Africa/Middle East, Japan and Asia Pacific, which excluded Japan and included New Zealand and Australia. Effective January 1, 2006, the Company’s has reorganized its reportable segments to reflect the way it manages its business, represented by its three business units: Cataract/Implant, Laser Vision Correction and Eye Care. Sales and operating results for the prior period have been conformed to reflect the current period presentation of reportable segments. The cataract/implant segment markets four key products required for cataract surgery — foldable intraocular lenses, or IOLs, implantation systems, phacoemulsification systems and viscoelastics. The laser vision correction segment markets laser systems, diagnostic devices, treatment cards and microkeratomes for use in laser eye surgery. Sales of microkeratomes were included in the cataract/implant segment in 2004 and were not significant. The eye care segment provides a full range of contact lens care products for use with most types of contact lenses. These products include single-bottle, multi-purpose cleaning and disinfecting solutions, hydrogen peroxide-based disinfecting solutions, daily cleaners, enzymatic cleaners, contact lens rewetting drops and, in Europe and Asia, contact lenses.

The Company evaluates segment performance based on operating income (loss) excluding certain costs such as business repositioning costs, non-recurring acquisition related costs and stock-based compensation expense. Research and development costs, manufacturing operations and related variances, inventory provision/repricing costs and supply chain costs are managed on a global basis and are considered corporate costs. The Company presents the measure which management believes is determined in accordance with the measurement principles consistent with those used in measuring the corresponding amounts in the consolidated financial statements. Because operating segments are generally defined by the products they manufacture and sell, they do not make sales to each other. Depreciation and amortization, excluding amortization of intangible assets, related to the manufacturing of goods is included in operating income. The Company does not discretely allocate assets to its operating segments, nor does the Company’s chief operating decision maker evaluate operating segments using discrete asset information.

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

Depreciation and amortization expense by segment comprised the following (in thousands):

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

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Geographic Area Information

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

84

The United States information is presented separately as it is the Company’s headquarters country, and U.S. sales represented 41.6%, 32.9% and 25.2% of total net sales for the years ended December 31, 2006, 2005 and 2004, respectively. Additionally, sales in Japan represented 13.9%, 18.9% and 25.8% of total net sales for the years ended December 31, 2006, 2005 and 2004, respectively. No other country, or single customer, generated over 10% of total net sales in the periods presented.

	Property, Plant and Equipment						Other Long-Lived Assets
(In thousands)	2006		2005		2004		2006		2005		2004
United States	$	25,168	$	27,759	$	23,885	$	50,570	$	36,131	$	27,901
Americas, excluding United	564		629		120		2,303		2,144		1,817
Europe/Africa/Middle East	88,549		66,017		72,130		8,105		5,980		4,220
Japan	832		1,132		1,965		2,942		3,785		4,618
Asia Pacific	17,643		20,188		20,539		5,445		4,433		3,269
Total	$	132,756	$	115,725	$	118,639	$	69,365	$	52,473	$	41,825

Note 15: Quarterly Results (Unaudited)

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

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

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

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

(d)Includes charges of $52.7 million recorded during the second quarter of fiscal 2006, which comprised $18.2 million related to the company’s note repurchases, $17.7 million related to current business repositioning initiatives, $14.3 million for inventory provisions, manufacturing and distribution charges related to discontinued products and other charges, and $2.5 million in an unrealized loss on derivative instruments.  Includes a $451.5 million in-process research and development charge, debt recapitalization related costs of $2.4 million and $4.7 million in charges associated with recent acquisitions and integrations in the second quarter of fiscal 2005.

(e)Includes a pre-tax net gain of $102.9 million related to the settlement of legal matters in the third quarter of fiscal 2006. The third-quarter results in fiscal 2006 also included pre-tax net charges of $4.0 million associated with recently completed business rationalization and repositioning initiatives, $3.9 million associated with note repurchases and $2.3 million in an unrealized gain on derivative instruments.  Includes a $39.3 million in-process research and development charge, debt recapitalization related charges of $3.8 million, an $8.6 million charge for the termination of a distributor agreement and $9.7 million in charges associated with recent acquisitions and integrations in the third quarter of fiscal 2005 and a $1.4 million benefit from the resolution of a discrete item as the result of final adjustments to accrued, pre-spin-off taxes attributable to the Company’s business and payable to Allergan pursuant to a pre-spin tax sharing agreement.

85

(f)As a result of the eye care recall in the fourth quarter of fiscal 2006, eye care sales included approximately $9.5 million in returns.Gross profit was impacted by $19.0 million in returns and costs.  In addition, the Company incurred the final $1.2 million in charges associated with business repositioning initiatives in the fourth quarter of fiscal 2006.  Includes $42.3 million in charges associated with product rationalization and repositioning initiatives, debt recapitalization related costs of $1.4 million, $4.0 million in charges associated with recent acquisitions and integrations and a tax benefit of $5.7 million for repatriation of foreign earnings in the fourth quarter of fiscal 2005.

Note 16:  Pending Acquisition of IntraLase

On January 5, 2007, AMO entered into an agreement with IntraLase Corp. (IntraLase) to acquire IntraLase for approximately $808 million in cash.  IntraLase manufactures femtosecond laser systems utilized in LASIK surgery.  Under terms of the agreement, approved by the boards of directors of both companies, following the receipt of fairness opinions from their respective financial advisors, AMO will pay $25 in cash per share of IntraLase stock and the individually determined cash value per share of outstanding stock options. AMO has arranged committed financing from a consortium of banks to complete the transaction. AMO expects the transaction to be completed early in the second quarter of 2007. The transaction is subject to IntraLase stockholder approval as well as regulatory approvals and other customary closing conditions.

86

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Advanced Medical Optics, Inc:

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

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) (1)  present fairly, in all material respects, the financial position of Advanced Medical Optics, Inc. and its subsidiaries at December 31, 2006 and December 31, 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a) (2)presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

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

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO.  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

87

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Orange County, California
February 28, 2007

88

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

Our management evaluated our internal control over financial reporting and there have been no changes during the fiscal quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on our assessment, we have concluded that, as of December 31, 2006, the Company’s internal control over financial reporting is effective based on those criteria.

AMO’s independent registered public accounting firm has issued an attestation report on our assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. This report begins on page 87.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information required by this item, including that required pursuant to Item 401 of Regulation S-K, is included under the headings “Election of Directors” and “Executive Officers” in our proxy statement for the 2007 annual meeting of stockholders (the “Proxy Statement”), which will be filed no later than 120 days after the close of our fiscal year ended December 31, 2006 and which is incorporated herein by reference.

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

Item 11. Executive Compensation

The information required by Item 402 and by pertinent provisions of Item 407 of Regulation S-K is included in the Proxy Statement under the sections entitled “Election of Directors,” “Executive Officers,” and “Corporate Governance,” and is incorporated herein by this reference.

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

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

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

The information required by Items 404 and 407(a) of Regulation S-K is included in the Proxy Statement under the section entitled “Corporate Governance” and is incorporated herein by this reference.

Item 14. Principal Accounting Fees and Services

The section entitled “Independent Registered Public Accounting Firm” in the Proxy Statement is incorporated herein by reference.

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PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)Index to Financial Statements 

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

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

All other schedules have been omitted for the reason that the required information is presented in financial statements or notes thereto, the amounts involved are not significant or the schedules are not applicable.

(b)Item 601 Exhibits

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

(c)Other Financial Statements

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

91

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 28, 2007	ADVANCED MEDICAL OPTICS, INC.
	By	/s/ JAMES. V. MAZZO
		James V. Mazzo
		Chairman of the Board, President and Chief Executive Officer

We, the undersigned directors and officers of Advanced Medical Optics, Inc., hereby severally constitute James V. Mazzo and Aimee S. Weisner, and each of them singly, our true and lawful attorneys with full power to them and each of them to sign for us, in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

Date: February 28, 2007	By	/s/ JAMES. V. MAZZO
		James V. Mazzo
		Chairman of the Board, President and Chief Executive Officer
		(Principal Executive Officer)
Date: February 28, 2007	By	/s/ RICHARD A. MEIER
		Richard A. Meier
		Chief Operating Officer and Chief Financial Officer
		(Principal Financial Officer)
Date: February 28, 2007	By	/s/ ROBERT F. GALLAGHER
		Robert F. Gallagher
		Senior Vice President. Chief Accounting Officer and Controller
		(Principal Accounting Officer)
Date: February 26, 2007	By	/s/ CHRISTOPHER G. CHAVEZ
		Christopher G. Chavez, Director
Date: February 28, 2007	By	/s/ ELIZABETH H. DÁVILA
		Elizabeth H. Dávila, Director

S-1

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

S-2

Exhibits and Financial Statement Schedules

(a) Exhibits

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

S-3

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

S-4

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

S-5

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

S-6

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

*Management contract or compensatory plan or arrangement.

S-7

SCHEDULE II

ADVANCED MEDICAL OPTICS, INC.

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004

(IN MILLIONS)

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

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

(b)Accounts written off.

S-8

EX-10.7(B)

EXHIBIT 10.7(b)

SCHEDULE OF EXECUTIVE OFFICERS PARTY TO THE

CHANGE IN CONTROL AGREEMENT FILED AS EXHIBIT 10.7(a)

Each of the parties identified below is party to a change in control agreement (“CIC Agreement”) with Advanced Medical Optics, Inc. substantially in the form of Exhibit 10.7 to the Current Report on Form 8-K of Advanced Medical Optics, Inc. filed on May 18, 2005.

Name of Executive	Benefit Level Under Section 6(a) of of CIC Agreement	Benefit Level Under Section 8(a) of of CIC Agreement
Sheree L. Aronson	One Time	One Year
Leonard R. Borrmann	Two Times	Two Years
Robert F. Gallagher	One Time	One Year
Francine D. Meza	Two Times	Two Years

EX-10.8(D)

EXHIBIT 10.8(d)

AMO BONUS PLAN

2007 PERFORMANCE OBJECTIVE

2007 PERFORMANCE OBJECTIVE

The 2007 performance objective for the Bonus Plan is 75% based on Adjusted Operating Income and 25% based on Revenue for the full year of AMO performance.  “Adjusted Operating Income” is defined as sales less cost of goods sold and all basic operating expenses of the business.  “Adjusted Operating Income” excludes the impact of charges or write-offs associated with acquisitions, recapitalizations, and unrealized gains or losses on derivative instruments.  “Revenue” is defined as the total dollar payment for goods and services that are credited to the income statement over the measurement period.  Targets for both Adjusted Operating Income and Revenue both assume the closing of the IntraLase acquisition on March 31st, 2007.

Each segment of the bonus is funded when AMO achieves the threshold levels of Adjusted Operating Income and Revenue performance, respectively, as indicated below.   If the Adjusted Operating Income funding trigger threshold is not met, the 75% element of the plan is not funded.  If the Revenue funding trigger threshold is not met, the 25% element of the plan is not funded.  If neither funding trigger threshold is met, no bonuses will be paid out.

FUNDING TRIGGER ELEMENTS

75% - ADJUSTED OPERATING INCOME

PERFORMANCE LEVEL	2007 ADJ OP RANGE VARIANCE TO TARGET	BONUS AWARD AS A % OF TARGET
Below Threshold	-31.51 mm	0	%
Threshold	-31.50 mm	50	%
	Target	100	%
Maximum	+31.50 mm	150	%

If actual Adjusted Operating Income results fall between the performance levels shown above, the portion of bonus will be prorated accordingly.

25% - REVENUE

PERFORMANCE LEVEL	2007 REVENUE RANGE VARIANCE TO TARGET	BONUS AWARD AS A % OF TARGET
Below Threshold	-77.51 mm	0	%
Threshold	-77.50 mm	50	%
Tier 1	-62.50 mm	80	%
Tier 2	-12.50 mm	97	%
Tier 3	Target	100	%
Tier 4	+12.50 mm	105	%
Tier 5	+37.50 mm	125	%
Maximum	+51.15 mm	150	%

If actual Revenue results fall between the Tiers shown above, the portion of bonus will be prorated accordingly.

BONUS POOL FUNDING

At the end of the year, the President and Chief Executive Officer of Advanced Medical Optics, Inc. may recommend adjustments to the bonus funding levels to the Organization, Compensation and Corporate Governance Committee (the “Committee”) after consideration of key operating results.  When calculating Adjusted Operating Income and Revenue performance for purposes of this Plan, the Committee has the discretion to include or exclude any or all of the following items:

·      Extraordinary, unusual or non-recurring items

·      Effects of accounting changes

·      Effects of financing activities

·      Expenses for restructuring or productivity initiatives

·      Other non-operating items

·      Spending for acquisitions

·      Effects of divestitures

BONUS POOL DIFFERENTIATION BY BUSINESS UNIT/FUNCTION

The target bonus pool is determined by performance against Adjusted Operating Income (75%) and Revenue (25%).  The factors below will be considered for allocation of SBU/function bonus pools:

CORPORATE STAFFS

·      Corporate Adjusted Operating Income

·      Corporate Revenue

·      Strategic metrics and milestones

STRATEGIC BUSINESS UNITS

·      Business Unit Adjusted Operating Income

·      Business Unit Revenue

·      Strategic metrics

RESEARCH & DEVELOPMENT, WORLD WIDE MANUFACTURING, GLOBAL CUSTOMER SERVICES, IT

·      Strategic metrics and milestones

INDIVIDUAL BONUS AWARD CALCULATION

Target bonus awards are expressed as a percentage of the participant’s year-end annualized base salary.  The target percentages for managers other than corporate officers vary by salary grade:

SALARY GRADE	TARGET BONUS
5E *	5	%
6E *	10	%
7E	15	%
8E	20	%
9E	25	%
10E	30	%
11E	35	%

Target percentages or amounts for corporate officers are individually established by the Committee.

A participant’s actual bonus award may vary above or below the targeted level based on the supervisor’s evaluation of his or her performance in relation to the predetermined MBOs.  Each participant may receive from 0% to 150% of his or her target bonus amount, which may be adjusted upwards or downwards based on the Company’s relative attainment of the pre-established financial performance objectives.

* U.S. and Puerto Rico employees only.

EX-10.9(E)

EXHIBIT 10.9(e)

FOURTH AMENDMENT

TO

ADVANCED MEDICAL OPTICS, INC.

401(K) PLAN

The Section 5.3(d) of the Advanced Medical Optics, Inc. 401(k) Plan (the “Plan”) is hereby amended as follows:

I.Section 5.3(d) of the Plan is amended as follows:

(d)       For the 2005 and 2006 Plan Year, the Company shall contribute and allocate, for each Participant
                   set forth in Appendix C — Special Provisions for Transferred Pharmacia Employees, which is hereby attached and
                   made a part of the Plan, a Profit Sharing Contribution in addition to the Profit-Sharing Contribution described in
                   subsection (c) above which, when added to Forfeitures available after the application of Section 6.3, is equal to the
                   allocation amount set forth for each such Participant in the attached Appendix C.

IN WITNESS WHEREOF, Advanced Medical Optics, Inc. hereby executes this Fourth Amendment to the Advanced Medical Optics, Inc. 401(k) Plan on this 14th day of December, 2006.

ADVANCED MEDICAL OPTICS, INC.

BY:	/s/ AIMEE WEISNER
Aimee Weisner
Corporate Vice President, General Counsel, and Secretary

EX-10.28

EXHIBIT 10.28

LEASE AGREEMENT BETWEEN

TRINET MILPITAS ASSOCIATES, LLC,

AS LANDLORD

AND

ADVANCED MEDICAL OPTICS, INC.,

AS TENANT

DATED FEBRUARY 9, 2007

510 COTTONWOOD DRIVE, MILPITAS, CALIFORNIA

BASIC LEASE INFORMATION

Effective Date:	February 9, 2007
Landlord:	TriNet Milpitas Associates, LLC, a Delaware limited liability company
Tenant:	Advanced Medical Optics, Inc., a Delaware corporation
Premises:	The “Premises”, containing for purposes of this Lease approximately 180,086 square feet, are located at 510 Cottonwood Drive, Milpitas, California, are outlined on the plan attached to this Lease as Exhibit A, and consist of the real property described in Exhibit B, together with the partial two-story office/research and development building located thereon (the “Building”), and the driveways, parking facilities, and all other improvements and easements associated with the foregoing or the operation thereof.  Landlord and Tenant stipulate that the number of square feet in the Premises set forth above is conclusive and shall be binding upon them.
Term:	One Hundred Twenty (120) months, commencing on the Commencement Date and ending at 5:00 p.m. local time on the last day of the one hundred twentieth (120th) full calendar month following the Commencement Date, subject to extension and earlier termination as provided in the Lease.
Commencement Date:	July 1, 2007, subject to possible extension for “Landlord Delays” and “Force Majeure Delays” as and to the extent set forth in Exhibit D.
Basic Rent:	Basic Rent shall be the following amounts for the following periods of time:

Lease Month	Monthly Basic Rent
1 - 12	$	56,034.40
13 - 24	$	67,241.28
25 - 36	$	100,848.16
37 - 48	$	115,255.04
49 - 60	$	129,661.92
61 - 72	$	144,068.80
73 - 84	$	158,475.68
85 - 96	$	172,882.56
97 - 108	$	187,289.44
109 - 120	$	201,696.32

As used herein, the term “Lease Month” means each calendar month during the Term (and if the Commencement Date does not occur on the first day of a calendar month, the period from the Commencement Date to the first day of the next calendar month shall be included in the first Lease Month for purposes of determining the duration of the Term and the monthly Basic Rent rate applicable for such partial month).

Additional Rent:

Tenant’s Proportionate Share of Operating Costs, Taxes and Insurance Costs.

i

Prepaid Rent:	$85,452.46.
Security Deposit:	$140,000.00.
Rent:	Basic Rent, Additional Rent, and all other sums that Tenant may owe to Landlord or otherwise be required to pay under the Lease.
Permitted Use:	General office, research and development, manufacturing, assembly, warehousing and other legal uses directly related to the foregoing.
Tenant’s Proportionate Share:	Tenant’s Proportionate Share shall be as follows:  (a) 77.79% for Lease Months 1 — 24, subject to Section 11(g)(2) below; and (b) 100% for the remainder of the Term (including any extensions thereof).
Initial Liability Insurance Amount:	$3,000,000 per occurrence and aggregate.
Tenant’s Address:	Prior to Commencement Date: Advanced Medical Optics, Inc. 1700 East St. Andrews Place Santa Ana, California 92705 Attention:     Mr. Jamie Hardenbergh Telephone:   714-247-8200 Telecopy:     714-247-8722	Following Commencement Date: Advanced Medical Optics, Inc. 1700 East St. Andrews Place Santa Ana, California 92705 Attention:     Mr. Jamie Hardenbergh Telephone:   714-247-8200 Telecopy:     714-247-8722
	With a copy to: Advanced Medical Optics, Inc. 1700 East St. Andrews Place Santa Ana, California 92705 Attention: General Counsel	With a copy to: Advanced Medical Optics, Inc. 1700 East St. Andrews Place Santa Ana, California 92705 Attention: General Counsel
		With a copy to: Advanced Medical Optics, Inc. 510 Cottonwood Drive Milpitas, California Attn: Mr. Chris Carr
Landlord’s Address:	TriNet Milpitas Associates, LLC c/o iStar Financial Inc. One Embarcadero Center Suite 3300 San Francisco, California 94111 Attention:  Asset Management - 510 Cottonwood Drive, Milpitas, CaliforniaTelephone: 415-391-4300 Facsimile: 415-391-6259
	with a copy to: TriNet Milpitas Associates, LLC c/o iStar Financial Inc. 1114 Avenue of the Americas, 27th Floor New York, New York  10036 Attention:  COO - 510 Cottonwood Drive, Milpitas, California Telephone: 212-930-9400

ii

Facsimile: 212-930-9494

with a copy to:
TriNet Milpitas Associates, LLC
c/o iStar Financial Inc.
3480 Preston Ridge Road, Suite 575
Alpharetta, Georgia 30005
Attention: Director of Lease Administration -  510 Cottonwood Drive, Milpitas, California

Telephone:678-297-0100
Facsimile:   678-297-0101

iii

The foregoing Basic Lease Information is incorporated into and made a part of the Lease identified above.  If any conflict exists between any Basic Lease Information and the Lease, then the Lease shall control.

LANDLORD:	TRINET MILPITAS ASSOCIATES, LLC, a Delaware limited liability company
	By:	TriNet Realty Investors II, Inc., a Maryland corporation
		By:	/s/ ERICH STIGER
		Name:	Erich Stiger
		Title:	Senior Vice President
TENANT:	ADVANCED MEDICAL OPTICS, INC., a Delaware corporation
	By:	/s/ JAMES V. MAZZO
	Name:	Jim Mazzo
	Title:	Chairman, President and CEO

iv

TABLE OF CONTENTS

			Page No.
1.	Definitions and Basic Provisions		1
2.	Lease Grant		1
3.	Tender and Acceptance of Possession		1
4.	Rent		2
	(a)	Payment	2
	(b)	Operating Costs, Taxes and Insurance Costs	2
5.	Delinquent Payment; Handling Charges		2
6.	Security Deposit		3
7.	Landlord’s Maintenance Obligations		3
	(a)	Warranty Period Work	3
	(b)	Building’s Structure	3
	(c)	Water and Sewer Mains	3
	(d)	Exterior Compliance with Laws	3
	(e)	Outside Areas, Landscaping, Etc	3
	(f)	Air Handler Replacement	4
8.	Improvements; Alterations; Tenant’s Maintenance and Repair Obligations		4
	(a)	Improvements; Alterations	4
	(b)	Repairs; Maintenance	5
	(c)	Performance of Work	6
	(d)	Mechanic’s Liens	6
	(e)	Janitorial Services	6
	(f)	Landlord’s Right to Perform Tenant’s Obligations	7
	(g)	Signage	7
	(h)	Rooftop Communications Equipment	7
	(i)	Generator/UPS	7
9.	Utilities; Licenses and Permits		8
	(a)	Utilities	8
	(b)	Licenses and Permits	8
	(c)	Landlord’s Right to Perform Tenant’s Obligations	8
10.	Use; Compliance With Laws		8
	(a)	Use	8
	(b)	Compliance With Laws	9
11.	Assignment and Subletting		9
	(a)	Transfers	9
	(b)	Consent Standards	9
	(c)	Request for Consent	9
	(d)	Conditions to Consent	10
	(e)	Attornment by Subtenants	10
	(f)	Cancellation	10
	(g)	Additional Compensation	10
	(h)	Permitted Transfers	11
	(i)	Strategic Partners	12
12.	Insurance; Waivers; Subrogation; Indemnity		12
	(a)	Insurance	12

v

	(b)	No Subrogation	12
	(c)	Indemnity	12
13.	Subordination; Attornment; Notice to Landlord’s Mortgagee		13
	(a)	Subordination	13
	(b)	Attornment	13
	(c)	Notice to Landlord’s Mortgagee	13
	(d)	Landlord’s Mortgagee’s Protection Provisions	14
14.	Rules and Regulations		14
15.	Condemnation		14
	(a)	Total Taking	14
	(b)	Partial Taking — Tenant’s Rights	14
	(c)	Partial Taking — Landlord’s Rights	14
	(d)	Temporary Taking	15
	(e)	Award	15
	(f)	Repair	15
16.	Fire or Other Casualty		15
	(a)	Repair Estimate	15
	(b)	Tenant’s Rights	15
	(c)	Landlord’s Rights	15
	(d)	Repair Obligation	16
	(e)	Abatement of Rent	16
	(f)	Exclusive Remedy	16
17.	Personal Property Taxes		17
18.	Events of Default		17
	(a)	Payment Default	17
	(b)	Abandonment	17
	(c)	Estoppel	17
	(d)	Insurance	17
	(e)	Mechanic’s Liens	17
	(f)	Other Defaults	17
	(g)	Insolvency	17
19.	Remedies		18
	(a)	Continuance of Lease in Effect	18
	(b)	Termination of Lease	18
	(c)	Election to Terminate or Continue	18
	(d)	Rights and Remedies Upon Termination	18
	(e)	Landlord’s Default and Tenant’s Remedies	19
20.	Non-Waiver; Cumulative Remedies		19
	(a)	No Waiver	19
	(b)	Cumulative Remedies	20
21.	Intentionally Omitted		20
22.	Surrender of Premises		20
23.	Holding Over		20
24.	Certain Rights Reserved by Landlord		21
	(a)	Building Operations	21
	(b)	Security	21
	(c)	Prospective Purchasers and Lenders	21
	(d)	Prospective Tenants	21

vi

25.	Intentionally Omitted		21
26.	Miscellaneous		21
	(a)	Landlord Transfer	21
	(b)	Landlord’s Liability	21
	(c)	Brokerage	22
	(d)	Estoppel Certificates	22
	(e)	Notices	22
	(f)	Separability	22
	(g)	Amendments; Binding Effect	22
	(h)	Quiet Enjoyment	22
	(i)	No Merger	23
	(j)	No Offer	23
	(k)	Entire Agreement	23
	(l)	Waiver of Jury Trial	23
	(m)	Governing Law	23
	(n)	Recording	23
	(o)	Water or Mold Notification	23
	(p)	Joint and Several Liability	23
	(q)	Financial Reports	23
	(r)	Landlord’s Fees	24
	(s)	Telecommunications	24
	(t)	Confidentiality	24
	(u)	Authority	24
	(v)	Security Service	24
	(w)	Intentionally Omitted	24
	(x)	Prohibited Persons and Transactions	25
	(y)	List of Exhibits	25
	(z)	Attorneys Fees	25
27.	Environmental Requirements		25
	(a)	Prohibition against Hazardous Materials	25
	(b)	Environmental Requirements	25
	(c)	Removal of Hazardous Materials	26
	(d)	Tenant’s Indemnity	26
	(e)	Inspections and Tests	26
	(f)	Tenant’s Financial Assurance in the Event of a Breach	27
28.	Parking		27

vii

LEASE

THIS LEASE AGREEMENT (this “Lease”) is entered into as of the Effective Date between TRINET MILPITAS ASSOCIATES, LLC, a Delaware limited liability company (“Landlord”), and ADVANCED MEDICAL OPTICS, INC., a Delaware corporation (“Tenant”).

1.             Definitions and Basic Provisions.  The definitions and basic provisions set forth in the Basic Lease Information (the “Basic Lease Information”) executed by Landlord and Tenant contemporaneously herewith are incorporated herein by reference for all purposes.  Additionally, the following terms shall have the following meanings when used in this Lease: “Affiliate” means any person or entity which, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the party in question; “Building’s Structure” means the Building’s structural roof elements, footings, foundation, and structural portions of exterior load-bearing walls (expressly excluding any painting, sealing or other surface maintenance); “Building’s Systems” means the Building’s HVAC, life-safety, plumbing, electrical, and mechanical systems; “including” means including, without limitation; “Laws” means all federal, state, and local laws, ordinances, rules and regulations, all court orders, governmental directives, and governmental orders, and all interpretations of the foregoing, and all restrictive covenants affecting the Premises (provided that any private restrictive covenants that become effective after the Effective Date and materially affect the Premises or Tenant’s use thereof shall be subject to Tenant’s prior approval, which shall not be unreasonably withheld, conditioned or delayed), and “Law” means any of the foregoing; and “Tenant Party” means any of the following persons:  Tenant; any assignees claiming by, through, or under Tenant; any subtenants claiming by, through, or under Tenant; and any of their respective agents, contractors, employees, licensees, guests, and invitees.

2.             Lease Grant.  Subject to the terms of this Lease, Landlord leases to Tenant, and Tenant leases from Landlord, the Premises.

3.             Tender and Acceptance of Possession. Landlord shall tender possession of the Premises to Tenant on the Effective Date for performance of the Work by Tenant as provided in Exhibit D hereto.  Subject to the terms and conditions of this Section 3, Landlord shall deliver the Premises in good working condition (with all mechanical, electrical, plumbing, life safety, roll-up doors, walkways, parking lots and driveways in good working and operable condition, and the roof water tight), “broom clean”, and free of any personal property of prior tenants.  Access to, and use and occupancy of, the Premises by Tenant prior to the Commencement Date shall be subject to all of the provisions of this Lease excepting only those requiring the payment of Basic Rent and Additional Rent, provided that Tenant shall be solely responsible for the costs of utilities and other costs directly related to Tenant’s access, use and occupancy of the Premises prior to the Commencement Date, including for performance of the Work (the “Early Occupancy Costs”).  Tenant formally accepts the Premises as of the Effective Date and acknowledges that the Premises and all components thereof are in good working condition (including with all mechanical, electrical, plumbing, life safety, roll-up doors, walkways, parking lots and driveways in good working and operable condition, and the roof water tight), “broom clean”, and free of any personal property of prior tenants, except only that Landlord shall repair or replace, at no cost (as an Operating Expense or otherwise) to Tenant, any components of the Building’s Systems which (a) are not in good working condition for reasons other than the acts or omissions of a Tenant Party (including any alterations of the applicable Building’s Systems by or on behalf of a Tenant Party) and (b) Tenant, acting reasonably and in good faith, specifically identifies and describes as not being in good working condition in a written notice, together with reasonable supporting documentation, delivered to Landlord within ninety (90) days after the Effective Date (the “Warranty Period”), it being understood that, except for any components of the Building’s Systems so identified and described by Tenant during the Warranty Period, the Building’s Systems and the Premises shall be conclusively deemed to have been delivered to Tenant in good working condition, with the roof in watertight condition, and otherwise in the condition called for hereunder, and Landlord shall have no repair or replacement obligations with respect thereto (except for Landlord’s ongoing maintenance and repair obligations to the extent expressly set forth in Sections 7, 15 and 16 below).  To the extent in Landlord’s possession and assignable (it being understood that Landlord shall not be obligated to incur any costs in connection with any such assignment), Landlord shall assign to Tenant, on a non-exclusive basis, any warranties and/or service contracts related to the Building’s Systems or other items Tenant is responsible to maintain under this Lease; provided, however, that to the extent (1) such warranties or contracts are not assignable to Tenant or (2) Tenant elects not to pay all costs charged by the service provider under such warranties or service contracts to effect

the assignment, Landlord shall promptly upon request by Tenant use commercially reasonable efforts to enforce such warranties and contracts for the benefit of Tenant, and the costs incurred by Landlord in connection therewith shall be part of Operating Expenses.  Landlord represents and warrants that (i) it holds fee title to the Premises and has the right to enter into this Lease and (ii) there are no Mortgages (defined below) currently encumbering the Premises.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS SECTION 3 AND IN SECTION 27, LANDLORD DOES NOT, BY THE EXECUTION AND DELIVERY OF THIS LEASE, AND LANDLORD SHALL NOT, BY THE EXECUTION AND DELIVERY OF ANY DOCUMENT OR INSTRUMENT EXECUTED AND DELIVERED IN CONNECTION WITH THIS LEASE, MAKE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OF ANY KIND OR NATURE WHATSOEVER, WITH RESPECT TO THE PREMISES, AND ALL SUCH REPRESENTATIONS AND WARRANTIES ARE HEREBY DISCLAIMED.  WITHOUT LIMITING THE GENERALITY OF THE FOREGOING PROVISION, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS SECTION 3 AND IN SECTION 27, LANDLORD MAKES, AND SHALL MAKE, NO EXPRESS OR IMPLIED WARRANTY AS TO MATTERS OF TITLE, ZONING, TAX CONSEQUENCES, PHYSICAL OR ENVIRONMENTAL CONDITION, VALUATION, GOVERNMENTAL APPROVALS, GOVERNMENTAL REGULATIONS OR ANY OTHER MATTER OR THING RELATING TO OR AFFECTING THE PREMISES.  TENANT AGREES THAT, WITH RESPECT TO THE PREMISES, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS SECTION 3 AND IN SECTION 27, TENANT HAS NOT RELIED UPON AND WILL NOT RELY UPON, EITHER DIRECTLY OR INDIRECTLY, ANY REPRESENTATION OR WARRANTY OF LANDLORD.  EXCEPT TO THE EXTENT EXPRESSLY PROVIDED OTHERWISE IN THIS LEASE (INCLUDING LANDLORD’S ONGOING MAINTENANCE AND REPAIR OBLIGATIONS TO THE EXTENT EXPRESSLY SET FORTH IN SECTIONS 7, 15 AND 16 BELOW), LANDLORD SHALL LEASE TO TENANT, AND TENANT SHALL ACCEPT, THE PREMISES “AS IS”, “WHERE IS”, AND WITH ALL FAULTS, AND THERE ARE NO ORAL AGREEMENTS, WARRANTIES OR REPRESENTATIONS, COLLATERAL TO OR AFFECTING THE PREMISES BY LANDLORD OR ANY THIRD PARTY.

                4.             Rent.

(a)           Payment.  Tenant shall timely pay to Landlord Rent, without notice, demand, deduction or set off (except as otherwise expressly provided herein), by good and sufficient check at Landlord’s address provided for in this Lease or at such other address specified in writing to Tenant by Landlord.  The obligations of Tenant to pay Basic Rent and other sums to Landlord and the obligations of Landlord under this Lease are independent obligations.  Basic Rent, adjusted as herein provided, shall be payable monthly in advance.  The “Prepaid Rent” set forth in the Basic Lease Information shall be payable contemporaneously with the execution of this Lease and shall be applied to first installment(s) of Rent due under this Lease; thereafter, Basic Rent shall be payable on the first day of each calendar month of the Term.  The monthly Basic Rent for any partial month at the beginning of the Term shall equal the product of 1/365 of the annual Basic Rent in effect during the partial month and the number of days in the partial month, and shall be due on the Commencement Date.  Payments of Basic Rent for any fractional calendar month at the end of the Term shall be similarly prorated.  Tenant shall pay Additional Rent at the same time and in the same manner as Basic Rent.

(b)           Operating Costs, Taxes and Insurance Costs.  Tenant shall pay Operating Costs, Taxes and Insurance Costs in accordance with Exhibit G and Exhibit H hereto.

                5.             Delinquent Payment; Handling Charges.  All payments required of Tenant hereunder that are not paid within five days after their due date shall bear interest from the date due until paid at the lesser of twelve percent (12%) per annum or the maximum lawful rate of interest (such lesser amount is referred to herein as the “Default Rate”); additionally, Landlord, in addition to all other rights and remedies available to it, may charge Tenant a fee equal to the greater of (a) $50.00 or (b) five percent of the delinquent payment to reimburse Landlord for its cost and inconvenience incurred as a consequence of Tenant’s delinquency.  In no event, however, shall the charges permitted under this Section 4(b) or elsewhere in this Lease, to the extent they are considered to be interest under applicable Law, exceed the maximum lawful rate of interest.  Notwithstanding the foregoing, the late fee referenced above shall not be charged with respect to the first occurrence (but not any subsequent occurrence during a 12-month period) during any 12-month period that Tenant fails to make payment when due, until five days after Landlord delivers written notice of such delinquency to Tenant.

                6.             Security Deposit.  Contemporaneously with the execution of this Lease, Tenant shall pay to Landlord the Security Deposit, which shall be held by Landlord to secure Tenant’s performance of its obligations under this Lease.  The Security Deposit is not an advance payment of Rent or a measure or limit of Landlord’s damages upon an Event of Default (as defined herein).  Landlord may, from time to time following an Event of Default and without prejudice to any other remedy, use all or a part of the Security Deposit to perform any obligation Tenant fails to perform hereunder or to compensate Landlord for any damages due to an Event of Default by Tenant.  In this regard, Tenant hereby waives any restriction on the uses to which the Security Deposit may be applied as contained in Section 1950.7(c) of the California Civil Code and/or any successor statute  Following any such application of the Security Deposit, Tenant shall pay to Landlord within ten (10) days after Tenant’s receipt of Landlord’s written demand the amount so applied in order to restore the Security Deposit to its original amount.  Landlord shall, within 60 days after the expiration or earlier termination of the Term and Tenant’s surrender of the Premises, return to Tenant the portion of the Security Deposit which was not applied to satisfy Tenant’s obligations (and Tenant hereby waives the provisions of California Civil Code Section 1950.7 to the contrary).  The Security Deposit may be commingled with other funds, and no interest shall be paid thereon.  If Landlord transfers its interest in the Premises and the transferee assumes Landlord’s obligations under this Lease, then Landlord shall assign the Security Deposit to the transferee in conformity with the provisions of Section 1950.7 of the California Civil Code and/or any successor statute, and Landlord thereafter shall have no further liability for the return of the Security Deposit.  The rights and obligations of Landlord and Tenant under this Section 6 are subject to any other requirements and conditions imposed by Laws applicable to the Security Deposit.

                7.             Landlord’s Maintenance Obligations.  Landlord’s maintenance obligations are limited to the obligations specifically set forth in this Section 7.

(a)           Warranty Period Work.  Landlord shall, as and to the extent required under Section 3 above, repair all components of the Building’s Systems which Tenant specifically identifies and describes as not being in good working condition or repair in a written notice delivered to Landlord prior to the expiration of the Warranty Period.  Such work shall be at Landlord’s sole cost and expense and shall not be part of Operating Expenses.

(b)           Building’s Structure.  Subject to Tenant’s obligations under Section 10(b), Landlord shall repair and maintain the Building’s Structure.  The Building’s Structure does not include exterior surfaces, roof membranes, skylights, windows, glass or plate glass, doors or overhead doors, special fronts, or office entries, dock bumpers, dock plates or levelers, loading areas and docks, and loading dock equipment or any other items not expressly set forth in Section 1 above as being part of the Building’s Structure, all of which shall be maintained, repaired and replaced, as necessary, by Tenant.  Such work shall be at Landlord’s sole cost and expense and shall not be part of Operating Expenses.

(c)           Water and Sewer Mains.  Landlord shall repair and maintain the water and sewer mains serving the Premises up to the points of common connection.  Such work shall be at Landlord’s sole cost and expense and shall not be part of Operating Expenses.

(d)           Exterior Compliance with Laws.  Subject to Tenant’s obligations under Section 10(b), Landlord shall make any modifications, alterations or improvements to the exterior portions of the Premises required by Laws in effect and as interpreted as of the Effective Date.  Such work shall be at Landlord’s sole cost and expense and shall not be part of Operating Expenses.

(e)           Outside Areas, Landscaping, Etc.  Landlord shall maintain the areas of the Premises outside the Building, including landscaping and general property management duties, and the costs thereof shall be part of Operating Costs; in addition, Tenant shall pay to Landlord a property management fee equal to two and one-half percent (2.5%) of the Basic Rent payable by Tenant under this Lease, and such property management fee shall be payable 100% by Tenant notwithstanding Tenant’s Proportionate Share during the first two years of the Term.  Notwithstanding the foregoing, but subject to Section 8(f) below, at any time during the Term, Tenant may elect by written notice to Landlord to take over all of Landlord’s obligations under this Section 7(e), in which event starting on the first day of the second full calendar month following delivery of such notice, (i) Tenant shall be responsible, at Tenant’s sole cost and expense, to perform all of the obligations under this Section 7(e) (it being understood that

such costs shall not be part of Operating Expenses and that Tenant shall be responsible for 100% of such costs), (ii) Landlord shall have no further obligations under this Section 7(e), and (iii) the property management fee shall be reduced to one percent (1%) of the Basic Rent payable by Tenant under this Lease.  Notwithstanding the foregoing, any work which is required under this Section 7(e) but which constitutes a Major Capital Expenditure under Paragraph 4 of Exhibit G shall be paid for and performed as provided thereunder.

(f)            Air Handler Replacement.  Landlord shall replace the seven (7) existing air handler units and related system components in the Building in accordance with plans which are appropriate for a standard research and development buildout and otherwise reasonably acceptable to Landlord and Tenant.  The cost of such work shall be initially borne by Landlord, but (i) the cost up to one $1,000,000.00 shall be shared by Landlord and Tenant in proportions equal to the relationship between the length of the remaining Term (including any Extension Period if the applicable option to extend is then or thereafter exercised by Tenant) and the length of the useful life of the new air handler units (which useful life is eighteen (18) years), and (ii) any cost in excess of $1,000,000.00 shall be paid entirely by Tenant on an amortized basis over the remaining portion of the initial Term but only if and to the extent that the total amount of any such excess cost was approved in advance by Tenant prior to the landlord’s performance of the work.  Upon completion of such work, Tenant shall pay its portion of the cost on an amortized basis over the remaining months of the Term, as provided in the immediately preceding sentence, using the Amortization Interest Rate (as defined in Paragraph 4 of Exhibit G), along with Basic Rent, as part of Operating Costs, provided that such portion shall be payable 100% by Tenant notwithstanding Tenant’s Proportionate Share during the first two years of the Term.  Notwithstanding anything to the contrary in this Lease, including the provisions of Section 3 regarding the Warranty Period, Landlord shall have no obligations with respect to the maintenance, repair or replacement of the air handler units and related system components, except as expressly set forth in this Section 7(f), as well as Landlord’s obligations under Section 3 (concerning the assignment for the benefit of Tenant of all warranties and/or service contracts related to the air handler units), Section 15 (relating to the repair/replacement of any damage to the air handler units caused by a condemnation), and Section 16 (relating to the repair/replacement of any damage to the air handler units caused by a casualty).

                 Notwithstanding anything to the contrary in this Section 7 or elsewhere in this Lease (but subject to the waiver of subrogation provisions set forth in Section 12(b), as applicable), Landlord shall not be responsible for the payment or performance of any maintenance, repair or replacement work (i) unless and until Tenant notifies Landlord of the need therefor in writing, (ii) which is required by Laws and is Tenant’s responsibility under Section 10(b) below, (iii) which arises from any damage caused by the acts or omissions of any Tenant Party or failure to comply with Tenant’s obligations under this Lease, (iv) which is performed at Tenant’s request as an elective or upgrade item, or (v) to the extent such work requires that any costs be incurred and/or any specialized consultants be hired, which costs would not be incurred or which consultants would not be hired were it not for the existence of any improvement, alteration or other item constructed or installed in the Premises for Tenant’s particular and unique use of the Premises (including as part of the Work).

8.             Improvements; Alterations; Tenant’s Maintenance and Repair Obligations.

(a)           Improvements; Alterations.

(1)           In General.  Improvements to the Premises shall be installed at Tenant’s expense only in accordance with plans and specifications which have been previously submitted to and approved in writing by Landlord, and by engineers, contractors and subcontractors which have been previously approved in writing by Landlord, which approval shall be governed by the provisions set forth in this Section 8(a).  No alterations or physical additions in or to the Premises may be made without Landlord’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed; however, Landlord may withhold its consent to any alteration or addition that would materially adversely affect (in the reasonable discretion of Landlord) (a) the Building’s Structure or the Building’s Systems (including the Building’s restrooms or mechanical rooms), (b) the exterior appearance of the Building, or (c) the provision of services to other Building occupants, if applicable.  Except as expressly provided in Section 8(g) below, Tenant shall not paint or install lighting or decorations, signs, window or door lettering, or advertising media of any type visible from the exterior of  the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed.  Whenever Landlord’s consent

or approval is required under this Section 8, if Landlord fails to respond to Tenant in writing within fifteen (15) days after receipt of a specific, written request from Tenant, and such failure continues for more than ten (10) days after receipt of a second specific, written request from Tenant (which second requests states the following in bold, capital letters:  “THIS IS THE SECOND REQUEST FOR LANDLORD’S APPROVAL PURSUANT TO SECTION 8(a)(1) OF THE LEASE, AND LANDLORD’S FAILURE TO RESPOND WITHIN TEN (10) DAYS WILL BE DEEMED LANDLORD’S APPROVAL OF THE ITEMS IN QUESTION”), then Landlord shall be deemed to have granted its consent or approval to such request.  All alterations, additions, and improvements shall be constructed, maintained, and used by Tenant, at its risk and expense, in accordance with all Laws; Landlord’s consent to or approval of any alterations, additions or improvements (or the plans therefor) shall not constitute a representation or warranty by Landlord, nor Landlord’s acceptance, that the same comply with sound architectural and/or engineering practices or with all applicable Laws, and Tenant shall be solely responsible for ensuring all such compliance.  All alterations, additions and improvements made by Tenant shall become the property of Landlord upon installation and shall remain on and be surrendered with the Premises upon the expiration or sooner termination of this Lease, unless Landlord requires the removal of such alterations, additions or improvements.  Notwithstanding the foregoing:  (a) Tenant shall not be required to remove any alterations, additions or improvements which, in Landlord’s reasonable estimation, constitute generic and customary office improvements and which are approved by Landlord as and to the extent required under this Lease; and (b) upon Tenant’s specific, written request at the time it seeks Landlord’s approval of any alteration, addition or improvement (including the Work), Landlord agrees to indicate in writing whether such alteration, addition or improvement constitutes generic and customary office improvements and, if not, whether Landlord will require such alteration, addition or improvement to be removed upon the expiration or earlier termination of this Lease, and if Landlord fails to indicate a requirement that such alteration, addition or improvement be removed, and such failure continues for more than ten (10) days after receipt of a second specific, written request from Tenant (which second requests states the following in bold, capital letters:  “THIS IS THE SECOND REQUEST FOR LANDLORD’S REMOVAL DETERMINATION PURSUANT TO SECTION 8(a)(1) OF THE LEASE, AND LANDLORD’S FAILURE TO RESPOND WITHIN TEN (10) DAYS WILL RESULT IN NO REQUIREMENT THAT TENANT REMOVE THE ITEMS IN QUESTION”), then Tenant shall not be required to remove such alteration, addition or improvement.  Notwithstanding the foregoing, except to the extent otherwise indicated  on the preliminary plans identified on Schedule 1 attached to Exhibit D, Tenant shall not be required to remove any portions of the Work, so long as such portions of the Work are constructed strictly in accordance with all Laws, with such preliminary plans and the Working Drawings based on those preliminary plans and approved by Landlord in accordance with Exhibit D.

(2)           Minor Alterations.  Notwithstanding Section 8(a)(1) above, Tenant, without Landlord’s prior written consent (but subject to the other terms and conditions of this Section 8, including Section 8(c) below), shall be permitted to make alterations to the Premises that do not affect the Building’s  Structure, do not materially affect the Building’s Systems and do not materially affect the appearance of the Building viewed from the exterior, provided that: (a) such alterations do not exceed $50,000 individually or $150,000 in the aggregate; (b) Tenant shall timely provide Landlord the information required pursuant to Section 8(c) below; (c) Tenant shall notify Landlord in writing within thirty (30) days of completion of the alteration and deliver to Landlord a set of the plans and specifications therefor, either “as built” or marked to show construction changes made; and (d) Tenant shall, upon Landlord’s request, remove the alteration at the termination of the Lease and restore the Premises to its condition prior to such alteration; provided, however, that, within ten (10) days after a specific, written request from Tenant delivered together with Tenant’s notice of completion of the alteration, Landlord agrees to indicate in writing whether Landlord will require such alteration to be removed upon the expiration or earlier termination of this Lease, and if Landlord fails to indicate within such 10-day period a requirement that such alteration, addition or improvement be removed, and such failure continues for more than ten (10) days after receipt of a second specific, written request from Tenant (which second requests states the following in bold, capital letters:  “THIS IS THE SECOND REQUEST FOR LANDLORD’S REMOVAL DETERMINATION PURSUANT TO SECTION 8(a)(2) OF THE LEASE, AND LANDLORD’S FAILURE TO RESPOND WITHIN TEN (10) DAYS WILL RESULT IN NO REQUIREMENT THAT TENANT REMOVE THE ITEMS IN QUESTION”), then Tenant shall not be required to remove such alteration.

(b)           Repairs; Maintenance.  Except as expressly set forth to be Landlord’s responsibility under Sections 7, 15 and 16, Tenant, at its sole expense, shall repair, replace and maintain in good, clean, safe, and operable condition and in accordance with all Laws and the equipment manufacturer’s suggested service programs, all portions of the Premises, including entries, doors, ceilings, windows, interior walls, and the interior side of demising walls, and heating, ventilation and air conditioning systems (including any evaporative units), and other building and mechanical systems serving the Premises.  Such repair and replacements include capital expenditures and repairs whose benefit may extend beyond the Term; provided that any item which constitutes a Major Capital Expenditure under Paragraph 4 of Exhibit G shall be paid for and performed as provided thereunder.

(c)           Performance of Work.  All work described in this Section 8, or otherwise performed by or for Tenant under this Lease, shall be performed only by contractors and subcontractors approved in writing by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed.  Tenant shall cause all contractors and subcontractors to procure and maintain insurance coverage naming Landlord, Landlord’s property management company and Landlord’s asset management company as additional insureds against such risks and in such amounts as Landlord may reasonably require and with reputable, credit-worthy insurance companies.  Tenant shall provide Landlord with the identities, mailing addresses and telephone numbers of all persons performing work or supplying materials costing in excess of $5,000 prior to beginning such construction and Landlord may post on and about the Premises notices of non-responsibility pursuant to applicable Laws.  All such work shall be performed in accordance with all Laws and in a good and workmanlike manner so as not to damage the Premises (including the Building, the Building’s Structure and the Building’s Systems) and in accordance with all approved plans for such work, if applicable.  Subject to Section 8(a)(2) above, all such work which may materially affect the Building’s Structure or the Building’s Systems must be approved by an engineer reasonably acceptable to Landlord, at Tenant’s expense, with no markup or additional fee by Landlord.  Notwithstanding anything to the contrary in this Section 8, if any work affecting the roof of the Building may or could void or reduce the warranty on the roof, then it shall be deemed reasonable for Landlord to withhold its approval of such work.

(d)           Mechanic’s Liens.  All work performed, materials furnished, or obligations incurred by or at the request of a Tenant Party hereunder shall be deemed authorized and ordered by Tenant only, and Tenant shall not permit any mechanic’s liens to be filed against the Premises in connection therewith.  Upon completion of any such work, Tenant shall deliver to Landlord final lien waivers from all contractors, subcontractors and materialmen who performed such work costing in excess of $5,000.  If any mechanics or materialmans lien is filed, then Tenant shall, within fifteen days after Landlord has delivered notice of the filing thereof to Tenant (or such earlier time period as may be necessary to prevent the forfeiture of the Premises or any interest of Landlord therein or the imposition of a civil or criminal fine with respect thereto), either (1) pay the amount of the lien and cause the lien to be released of record, or (2) diligently contest such lien and deliver to Landlord a bond or other security reasonably satisfactory to Landlord.  If Tenant fails to timely take either such action, then Landlord may pay the lien claim, and any amounts so paid, including expenses and interest at the Default Rate from the time of Landlord’s payment, shall be paid by Tenant to Landlord within ten business days after Landlord has invoiced Tenant therefor.  Landlord and Tenant acknowledge and agree that their relationship is and shall be solely that of “landlord-tenant” (thereby excluding a relationship of “owner-contractor,” “owner-agent” or other similar relationships).  Accordingly, all materialmen, contractors, artisans, mechanics, laborers and any other persons now or hereafter contracting with Tenant, any contractor or subcontractor of Tenant or any other Tenant Party for the furnishing of any labor, services, materials, supplies or equipment with respect to any portion of the Premises, at any time from the Effective Date until the end of the Term, are hereby charged with notice that they look exclusively to Tenant to obtain payment for same.  Nothing herein shall be deemed a consent by Landlord to any liens being placed upon the Premises or Landlord’s interest therein due to any work performed by or for Tenant or deemed to give any contractor or subcontractor or materialman any right or interest in any funds held by Landlord to reimburse Tenant for any portion of the cost of such work.  Without limiting the generality of the foregoing, Tenant shall notify Landlord in writing no later than one (1) day after the commencement of any work or the furnishing of any materials at or to the Premises in order that Landlord shall be able timely to post and record Notices of Non-Responsibility.  Tenant shall defend, indemnify and hold harmless Landlord and its agents and representatives from and against all claims, demands, causes of action, suits, judgments, damages and expenses (including attorneys’ fees) in any way arising from or relating to the failure by any Tenant Party to pay for any work performed, materials furnished, or obligations incurred by or at the request of a Tenant Party.  This indemnity provision shall survive termination or expiration of this Lease.

(e)           Janitorial Services.  Tenant, at its sole expense, shall provide its own janitorial services to the Premises and shall maintain the Premises in a clean and safe condition.  Tenant shall store all trash and garbage in receptacles and shall, at its sole expense, arrange for the regular pickup of such trash and garbage.  If Tenant fails continuously and diligently to provide janitorial services to the Premises or trash removal services in compliance with the foregoing, Landlord, in addition to any other rights and remedies available to it, may cure such failure, and Tenant shall pay to Landlord the cost thereof, together with interest thereon at the Default Rate from the time of Landlord’s payment, plus an administrative fee equal to 5% of such cost, within ten days after Landlord delivers to Tenant an invoice therefor.

(f)            Landlord’s Right to Perform Tenant’s Obligations.  If Tenant fails continuously and diligently to perform any of Tenant’s maintenance, repair and/or replacement obligations under this Lease, Landlord, in addition to any other rights and remedies available to it, may elect (but without any obligation to do so) (i) to perform such obligation(s) on a one-time basis at Tenant’s cost, including interest thereon at the Default Rate from the time of Landlord’s payment, or (ii) to take over the performance of such obligation(s) for some or all of the remainder of the Term at Tenant’s cost, including an additional management fee equal to three percent (3%) of such cost.  For clarity, all such costs shall be payable 100% by Tenant notwithstanding Tenant’s Proportionate Share during the first two years of the Term.

(g)           Signage.  Notwithstanding Section 8(a) above, throughout the Term, Tenant, and its permitted subtenants, affiliates and/or transferees, shall have the right to install building and monument signs on, in or about the Premises, subject to Landlord’s prior approval, which shall not be unreasonably withheld, conditioned or delayed, and to all applicable Laws.  Tenant shall be responsible for maintaining any such signs in good condition and shall remove such signs at the expiration or earlier termination of this Lease.  Tenant shall repair all damage to the Premises caused by the installation, maintenance or removal of such signs.

(h)           Rooftop Communications Equipment.  Tenant, or any permitted assignee or permitted subtenant, shall have the exclusive right to install and operate antennas, satellite dishes and related communications equipment on the roof of the building; provided that such equipment shall be for Tenant’s own use, shall not have a negative impact on the appearance of the Building, shall be in compliance with plans and specifications approved in advance by Landlord (which approval shall not be unreasonably withheld, conditioned or delayed) and with all applicable Laws, shall be in a location subject to Landlord’s approval, which approval shall not be unreasonably withheld, conditioned or delayed, and shall otherwise comply with the terms and conditions of this Section 8.  Tenant shall be solely responsible for all costs related to such equipment, including the costs of designing, fabricating, engineering, permitting, installing, screening and maintaining any such equipment in good condition and shall remove all such equipment at the expiration or earlier termination of this Lease at Tenant’s sole cost and expense.  Tenant shall repair all damage to the Premises caused by the installation, maintenance or removal of such equipment.  Tenant shall not have the right to use any of the allowances provided in Exhibit D toward any of the costs related to such communications equipment.

(i)            Generator/UPS.  Tenant, or any permitted assignee of Tenant’s entire interest under this Lease, shall have the exclusive right to install and operate a backup generator in the area of the Premises outside of the Building; provided that such generator shall be for Tenant’s own use, shall not have a negative impact on the appearance of the Premises, shall be in compliance with plans and specifications approved in advance by Landlord (which approval shall not be unreasonably withheld, conditioned or delayed) and with all applicable Laws, shall be in a location subject to Landlord’s approval, which approval shall not be unreasonably withheld, conditioned or delayed, and shall otherwise comply with the terms and conditions of this Section 8.  Tenant shall be solely responsible for all costs related to the generator, including the costs of designing, fabricating, engineering, permitting, installing, screening and maintaining the generator in good condition, provided that Tenant may use the allowances provided in Exhibit D toward the costs of acquiring and installing the generator.  If Tenant uses the allowances provided in Exhibit D toward the costs of acquiring and installing the generator, then the generator and any related items shall be the property of Landlord and shall remain at the Premises at the expiration or earlier termination of this Lease, unless Landlord requires removal by Tenant.  If Tenant does not use any of the allowances provided in Exhibit D toward the costs of acquiring and installing the generator (or if Tenant uses such allowances but Landlord nevertheless requires removal), then Tenant shall remove the generator and any related items at the expiration or earlier termination of this Lease at Tenant’s sole cost and expense, in which case the generator shall

become the property of Tenant.  Tenant shall repair all damage to the Premises caused by the installation, maintenance or removal of the generator and any related items.

9.             Utilities; Licenses and Permits.

(a)           Utilities.  Tenant shall, at its sole cost and expense, contract for and pay for all water, gas, electricity, heat, telephone, sewer, sprinkler charges and other utilities and services used at the Premises, together with any taxes, penalties, surcharges, connection charges, maintenance charges, and the like pertaining to Tenant’s use of the Premises.  Landlord may, at Tenant’s expense, separately meter and bill Tenant directly for its use of any such utility service.  To the extent any utility service for the Premises is submetered, the meter shall be read by Landlord or Landlord’s designee, and Tenant shall pay to Landlord, within 30 days after receipt of an invoice therefor, the cost of such service based on the actual rates charged for such service by the utility company furnishing such service, including all fuel adjustment charges, demand charges and taxes.  To the extent that any particular utility is not separately metered or submetered as provided above (e.g., water or sewer charges), Landlord shall, using its good-faith, reasonable judgment, allocate the expenses for such utility among the existing users of such utility based upon square footage, usage and/or otherwise in accordance with industry standards.  Tenant, at its expense, shall obtain all utility services for the Premises (other than a utility that is submetered or otherwise provided to the Premises by Landlord), including making all applications therefor, obtaining meters and other related equipment, and paying all deposits and connection charges.  Landlord shall not be liable for any interruption or failure of utility service to the Premises, and such interruption or failure of utility service shall not be a constructive eviction of Tenant, constitute a breach of any implied warranty, or entitle Tenant to any abatement of Tenant’s obligations hereunder.  If, however, Tenant is prevented from using the Premises for more than 7 consecutive days because of the unavailability of any such service, Tenant promptly notifies Landlord of such unavailability, such unavailability was caused by Landlord or any of Landlord’s agents, contractors or invitees, and restoration of such service is within the reasonable control of Landlord, then Tenant shall, as its exclusive remedy be entitled to a reasonable abatement of Rent for each consecutive day (after such 7-day period) that Tenant is so prevented from using the Premises.  Rent shall not abate by reason of the interruption, insufficiency, unavailability or discontinuance of such service if Tenant does not promptly notify Landlord of such unavailability or if such unavailability or discontinuance was not caused by Landlord and restoration of such service is not within the reasonable control of Landlord.

(b)           Licenses and Permits.  Tenant shall, at its sole cost and expense, obtain and keep in force during the Term, and all extensions thereof, all licenses, certificates and permits necessary for it to use the Premises in accordance with applicable Laws.  Upon Landlord’s request, Tenant shall promptly deliver to Landlord copies of all such licenses, certificates and permits.

(c)           Landlord’s Right to Perform Tenant’s Obligations.  If any Event of Default by Tenant related to its failure to perform any of its obligations under this Section 9 shall occur, then Landlord may, if it so elects but expressly without any obligation to do so, following the expiration of any applicable notice and cure period provided herein, in addition to any other remedies provided herein, make such payments.  Any out-of-pocket sums expended by Landlord with respect to any of the foregoing, together with interest thereon at the Default Rate from the time of Landlord’s payment, shall be deemed to be Additional Rent owing by Tenant to Landlord and shall be due and payable within 30 days after written request therefor.

10.           Use; Compliance With Laws.

(a)           Use.  Tenant may use the Premises only for the Permitted Use, shall comply with all Laws relating to the use, condition, access to, and occupancy of the Premises and will not commit waste, overload the Building’s Structure or the Building’s Systems or subject the Premises to use that would damage the Premises.  The Premises shall not be used for any use which is disreputable, creates extraordinary fire hazards, or results in an increased rate of insurance on the Building or its contents (unless Tenant agrees to pay for such increase), or for the storage of any Hazardous Materials (except as provided in Section 27 hereto).  Except for parking of cars and a limited number of trucks in the normal course conducting Tenant’s operations at the Premises, outside storage, including storage of trucks or other vehicles, is prohibited without Landlord’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed. If, because of a Tenant Party’s acts or because Tenant vacates the

Premises, the rate of insurance on the Building or its contents increases, then Tenant shall pay to Landlord the amount of such increase on demand, and acceptance of such payment shall not waive any of Landlord’s other rights.  Tenant shall conduct its business and control each other Tenant Party so as not to create any nuisance or unreasonably interfere with other tenants (if any) or Landlord in its management of the Building.

(b)           Compliance With Laws.  Tenant shall not do or permit anything to be done in or about the Premises or the Building that will in any way violate or conflict with any Law now in force or hereinafter enacted.  Tenant, at its sole cost and expense, shall promptly comply with all present and future Laws (including any changes in interpretation thereof) relating to the use, condition, access to, and occupancy of the Premises and the Building, including Title III of the Americans With Disabilities Act of 1990 (“ADA”), any state laws governing handicapped access or architectural barriers, and all rules, regulations, and guidelines promulgated under such Laws, as amended from time to time.  Tenant shall promptly furnish Landlord with any notices received from any insurance company or governmental agency or inspection bureau regarding any unsafe or unlawful conditions within the Premises or the Building or the violation of any Law.  Without limiting the generality of the foregoing, Tenant, at its sole cost and expense, shall perform all work to the Premises and the Building, including structural work if applicable, required to effect such compliance with Laws (or, at Landlord’s election, Landlord may perform any such structural work at Tenant’s cost) as a result of or in any way relating to (i) Tenant’s use or occupancy of the Premises or the Building, (ii) Tenant’s application for any permit or governmental approval, (iii) any modifications, alterations or improvements made to, within or about the Premises or the Building by or on behalf of Tenant or any Tenant Party, and/or (iv) any new or change in Law or change in interpretation thereof; provided, however, that if the cost of any work or other modification, whether structural or otherwise, which results from any new or change in Law or change in interpretation thereof is considered a capital expenditure under GAAP and exceeds $50,000.00, then, subject to the penultimate sentence of Paragraph 4 of Exhibit G, such work or other modification shall constitute a Major Capital Expenditure under Paragraph 4 of Exhibit G and shall be paid for and performed as provided thereunder.

                11.           Assignment and Subletting.

(a)           Transfers.  Except as provided in Sections 11(h) or 11(i), Tenant shall not, without the prior written consent of Landlord, (1) assign, transfer, or encumber this Lease or any estate or interest herein, whether directly or by operation of law, (2) permit any other entity to become Tenant hereunder by merger, consolidation, or other reorganization, (3) if Tenant is an entity other than a corporation whose stock is publicly traded, permit the transfer of an ownership interest in Tenant so as to result in a change in the current control of Tenant, (4) sublet any portion of the Premises, (5) grant any license, concession, or other right of occupancy of any portion of the Premises, or (6) permit the use of the Premises by any parties other than Tenant (any of the events listed in Section 11(a)(1) through 11(a) (6) being a “Transfer”).

(b)           Consent Standards.  Landlord shall not unreasonably withhold its consent to any assignment or subletting of the Premises, provided that, in Landlord’s reasonable business judgment, the proposed transferee (1) is creditworthy, (2) does not have an unsavory reputation in the business community, (3) will use the Premises only for the Permitted Use, (4) is not a governmental entity, or subdivision or agency thereof, and (5) is not a person or entity with whom Landlord is then, or has within the prior six months been in active negotiations relating to the potential lease of space within ten miles of the Premises, or any Affiliate of any such person or entity; otherwise, Landlord may withhold its consent in its sole discretion.  Additionally, Landlord may withhold its consent in its sole discretion to any proposed Transfer if any Event of Default by Tenant then exists.  Notwithstanding any contrary provision of law, including California Civil Code Section 1995.310, Tenant shall have no right, and Tenant hereby waives and relinquishes any right, to cancel or terminate this Lease in the event Landlord is determined to have unreasonably withheld or delayed its consent to a proposed Transfer.

(c)           Request for Consent.  If Tenant requests Landlord’s consent to a Transfer, then, at least 15 business days prior to the effective date of the proposed Transfer, Tenant shall provide Landlord with a written description of all terms and conditions of the proposed Transfer, copies of the proposed documentation, and the following information about the proposed transferee: name and address; reasonably satisfactory information about its business and business history; its proposed use of the Premises; banking, financial, and other credit information; and general references sufficient to enable Landlord to determine the proposed transferee’s creditworthiness and

character.  Concurrently with Tenant’s notice of any request for consent to a Transfer, Tenant shall pay to Landlord a fee of $1,000 to defray Landlord’s expenses in reviewing such request, and Tenant shall also reimburse Landlord promptly upon request for its reasonable out-of-pocket attorneys’ fees incurred in connection with considering any request for consent to a Transfer.

(d)           Conditions to Consent.  If Landlord consents to a proposed Transfer, then the proposed transferee shall deliver to Landlord a written agreement whereby it expressly assumes the applicable obligations of Tenant hereunder; however, any transferee of less than all of the space in the Premises shall be liable only for obligations under this Lease that are properly allocable to the space subject to the Transfer for the period of the Transfer.  No Transfer shall release Tenant from its obligations under this Lease, but rather Tenant and its transferee shall be jointly and severally liable therefor.  Landlord’s consent to any Transfer shall not waive Landlord’s rights as to any subsequent Transfers.  If an Event of Default occurs while the Premises or any part thereof are subject to a Transfer, then Landlord, in addition to its other remedies, may collect directly from such transferee all rents becoming due to Tenant and apply such rents against Rent.  Tenant authorizes its transferees to make payments of rent directly to Landlord upon receipt of notice from Landlord to do so following the occurrence of an Event of Default hereunder.  Tenant shall pay for the cost of any demising walls or other improvements necessitated by a proposed subletting or assignment, which improvements shall be subject to Section 8 hereof.

(e)           Attornment by Subtenants.  Each sublease by Tenant hereunder shall be subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and each subtenant by entering into a sublease is deemed to have agreed that in the event of termination, re-entry or dispossession by Landlord under this Lease, Landlord may, at its option, take over all of the right, title and interest of Tenant, as sublandlord, under such sublease, and such subtenant shall, at Landlord’s option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not be (1) liable for any previous act or omission of Tenant under such sublease, (2) subject to any counterclaim, offset or defense that such subtenant might have against Tenant, (3) bound by any previous modification of such sublease not approved by Landlord in writing or by any rent or additional rent or advance rent which such subtenant might have paid for more than the current month to Tenant, and all such rent shall remain due and owing, notwithstanding such advance payment, (4) bound by any security or advance rental deposit made by such subtenant which is not delivered or paid over to Landlord and with respect to which such subtenant shall look solely to Tenant for refund or reimbursement, or (5) except for Landlord’s obligations expressly set forth in this Lease, obligated to perform any other work in the subleased space or to prepare it for occupancy, and in connection with such attornment, the subtenant shall execute and deliver to Landlord any instruments Landlord may reasonably request to evidence and confirm such attornment.  Each subtenant or licensee of Tenant shall be deemed, automatically upon and as a condition of its occupying or using the Premises or any part thereof, to have agreed to be bound by the terms and conditions set forth in this Section 11(e).  The provisions of this Section 11(e) shall be self-operative, and no further instrument shall be required to give effect to this provision.

(f)            Cancellation.  Landlord may, within 30 days after submission of Tenant’s written request for Landlord’s consent to an assignment or subletting for all or substantially all of the remainder of the Term (provided that the space subject to such request, together with any space previously assigned or subleased,  constitutes at least sixty-six percent (66%) of the square feet of the Premises), cancel this Lease as to the portion of the Premises proposed to be sublet or assigned as of the date the proposed Transfer is to be effective by delivering written notice of cancellation to Tenant (“Cancellation Notice”).  If Landlord cancels this Lease as to any portion of the Premises, then this Lease shall cease for such portion of the Premises and Tenant shall pay to Landlord all Rent accrued through the cancellation date relating to the portion of the Premises covered by the proposed Transfer.  Thereafter, Landlord may lease such portion of the Premises to the prospective transferee (or to any other person) without liability to Tenant.  Notwithstanding the foregoing or anything to the contrary contained in this Lease, (i) if Tenant rescinds the proposed assignment or sublease by giving written notice to Landlord within three (3) business days after receipt of the Cancellation Notice, then such cancellation shall be void and this Lease shall continue in full force without any such assignment or sublease, and (ii) this Section 11(f) shall not apply to, and Landlord will have no right to cancel all or any portion of this Lease in connection with, a Permitted Transfer under Section 11(h) or a Transfer to a Strategic Partner under Section 11(i).

(g)           Additional Compensation

(1)           In General.  Tenant shall pay to Landlord, immediately upon receipt thereof, fifty percent (50%) of the excess of (A) all compensation received by Tenant for a Transfer less the actual out-of-pocket costs reasonably incurred by Tenant with unaffiliated third parties specifically and only for market brokerage commissions, reasonable legal fees (not to exceed $5,000.00 in each case) and tenant improvement costs for work approved in writing by Landlord (which approval shall not be unreasonably withheld, conditioned or delayed), including demising walls, etc. over (B) the Rent allocable to the portion of the Premises covered thereby.

(2)           Lease Months 1-24.  Notwithstanding Section 11(g)(1) above, during Lease Months 1 through 24 of the initial Term, with respect to all Transfers of portions of the Premises up to 40,000 square feet in the aggregate, Tenant shall pay to Landlord, immediately upon receipt thereof, twenty-five percent (25%) of the excess of (A) all compensation received by Tenant for such Transfers less the actual out-of-pocket costs reasonably incurred by Tenant with unaffiliated third parties specifically and only for market brokerage commissions, reasonable legal fees (not to exceed $5,000.00 in each case) and tenant improvement costs for work approved in writing by Landlord (which approval shall not be unreasonably withheld, conditioned or delayed), including demising walls, etc. over (B) the Rent allocable to the portion of the Premises covered thereby; provided, that, (i) immediately upon the Transfer of any portion of the Premises up to 40,000 square feet in the aggregate, Tenant’s Proportionate Share shall be increased by an amount equal to the quotient of the square feet in such portion (as the numerator) and the total square feet in the Premises (as the denominator), and (ii) the Basic Rent for such portion shall be deemed to be zero dollars ($0.00).  For clarity, during Lease Months 1 through 24 of the initial Term, Section 11(g)(1) shall in any event apply to the portion of any such Transfers that are in excess of 40,000 square feet in the aggregate.

(h)           Permitted Transfers.  Notwithstanding Section 11(a), Tenant may Transfer all or part of its interest in this Lease or all or part of the Premises (a “Permitted Transfer”) to the following types of entities (a “Permitted Transferee”) without the written consent of Landlord:

(1)           an Affiliate of Tenant;

(2)           any corporation, limited partnership, limited liability partnership, limited liability company or other business entity in which or with which Tenant, or its corporate successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions governing merger and consolidation of business entities or other reorganization in which Tenant is not the surviving corporation, so long as (A) Tenant’s obligations hereunder are assumed by the entity surviving such merger or created by such consolidation or other reorganization; and (B) such surviving or created entity (or an Affiliate thereof which provides an unconditional guaranty of Tenant’s obligations under this Lease in form and content approved in advance by Landlord in its commercially reasonable discretion) either (i) has substantial experience operating the same line of business as Tenant and has a total rent-adjusted debt to EBITDAR ratio of no more than four (4) or (ii) has a credit rating of not less than two notches below “investment grade” (i.e., a rating of at least “BB” by S&P and “Ba2” by Moody’s); or

(3)           any corporation, limited partnership, limited liability partnership, limited liability company or other business entity acquiring all or substantially all of Tenant’s assets, or a separate division or line of Tenant’s business conducted at the Premises, if such entity (or an Affiliate thereof which provides an unconditional guaranty of Tenant’s obligations under this Lease in form and content approved in advance by Landlord in its commercially reasonable discretion) either (i) has substantial experience operating the same line of business as Tenant and has a total rent-adjusted debt to EBITDAR ratio of no more than four (4) or (ii) has a credit rating of not less than two notches below “investment grade” (i.e., a rating of at least “BB” by S&P and “Ba2” by Moody’s).

Tenant shall promptly notify Landlord of any such Permitted Transfer.  Tenant shall remain liable for the performance of all of the obligations of Tenant hereunder; provided, however, that (a) if Tenant no longer exists because of a merger, consolidation, or acquisition, the surviving or acquiring entity shall expressly assume in writing the obligations of Tenant hereunder, and (b) if the Permitted Transfer is an assignment of Tenant’s entire interest

under this Lease and the assignee (or an Affiliate thereof which provides an unconditional guaranty of Tenant’s obligations under this Lease in form and content approved in advance by Landlord in its commercially reasonable discretion) has an “investment grade” credit rating (i.e., a rating of at least “BBB-” by S&P and “Baa3” by Moody’s), then Tenant shall be released of its obligations hereunder to the extent, and only to the extent, such obligations are expressly assumed in writing by such assignee.  Additionally, the Permitted Transferee shall comply with all of the terms and conditions of this Lease, including the Permitted Use, and the use of the Premises by the Permitted Transferee may not violate any other agreements affecting the Premises or Landlord’s interest therein.  Any excess compensation received by Tenant in connection with a Permitted Transfer to an Affiliate as described in Section 11(h)(1) above shall be shared by Landlord and Tenant as and to the extent set forth in Section 11(g) above; provided, however, that Tenant shall have no obligation to pay any excess compensation that may be received in connection with a Permitted Transfer as described in Section 11(h)(2) or 11(h)(3), except to the extent that such Permitted Transfer includes a direct increase in rent charged to the surviving, created or acquiring entity with respect to this Lease.  No later than 30 days after the effective date of any Permitted Transfer, Tenant agrees to furnish Landlord with (A) copies of the instrument effecting any of the foregoing Transfers, (B) documentation establishing Tenant’s satisfaction of the requirements set forth above applicable to any such Transfer, and (C) evidence of insurance as required under this Lease with respect to the Permitted Transferee.  The occurrence of a Permitted Transfer shall not waive Landlord’s rights as to any subsequent Transfers. Any subsequent Transfer by a Permitted Transferee shall be subject to the terms of this Section 11.

(i)            Strategic Partners.  Notwithstanding Section 11(a), Tenant may sublease part of the Premises, not to exceed twenty percent (20%) of the square feet in Premises in the aggregate, to one or more Strategic Partners of Tenant without the written consent of Landlord.  As used herein, a “Strategic Partner” shall mean any entity with whom Tenant is undertaking a joint venture or similar joint research and development, marketing, distribution, sales or development project at the Premises, provided that Tenant is undertaking such joint venture or similar project as a bona fide strategic endeavor in the interest of Tenant’s primary, non-real estate related, business operations and not as an attempt to circumvent the sublease restrictions set forth in this Section 11.  Tenant shall give Landlord prior written notice of any anticipated sublease to a Strategic Partner, together with documentation reasonably evidencing the qualification of the proposed subtenant as a Strategic Partner.  Tenant shall remain liable for the performance of all of the obligations of Tenant hereunder.  Additionally, the Strategic Partner shall comply with all of the terms and conditions of this Lease applicable to the subleased portion of the Premises, including the Permitted Use, and the use of the subleased portion of the Premises by the Strategic Partner may not violate any other agreements affecting the Premises or Landlord’s interest therein.  Any excess compensation received by Tenant in connection with such sublease shall be shared by Landlord and Tenant as and to the extent set forth in Section 11(g) above.  No later than 30 days after the effective date of any sublease to a Strategic Partner, Tenant agrees to furnish Landlord with (A) copies of the sublease and (B) evidence of insurance as required under this Lease with respect to the Strategic Partner.

12.           Insurance; Waivers; Subrogation; Indemnity.

(a)           Insurance.  Landlord and Tenant shall maintain insurance policies in accordance with Exhibit H hereto.

(b)           No Subrogation.  Notwithstanding anything to the contrary contained in this Lease, Landlord and Tenant each waives any claim it might have against the other, and their respective agents, employees and subtenants, for any damage to or theft, destruction, loss, or loss of use of any property, to the extent the same is insured against under any insurance policy of the types described in this Section 12 that covers the Premises, Landlord’s or Tenant’s fixtures, personal property, or leasehold improvements, or is required to be insured against under the terms hereof, regardless of whether the negligence of the other party caused such Loss.  Each party shall cause its insurance carrier to endorse all applicable property insurance policies waiving the carrier’s rights of recovery under subrogation or otherwise against the other party.

(c)           Indemnity.  Tenant shall defend with competent counsel satisfactory to Landlord any claims made or legal actions filed or threatened against Landlord (i) with respect to the violation of any Law or any provisions of this Lease by Tenant or any Tenant Party, (ii) with respect to the death, bodily injury, personal injury, or property damage occurring within the Premises or resulting from Tenant’s use or occupancy of the Premises, or

(iii) resulting from Tenant’s activities in or about the Premises, and Tenant shall indemnify and hold Landlord, Landlord’s partners, principals, members, employees, agents and contractors harmless from any loss liability, penalties, or expense whatsoever (including any loss attributable to vacant space which otherwise would have been leased, but for such activities) resulting therefrom, except to the extent (A) caused by negligence or willful misconduct of Landlord, its employees, agents, contractors or invitees and (B) not covered by the insurance that Tenant is required to carry under this Lease.  Subject to the foregoing sentence, Landlord shall defend, indemnify and hold harmless Tenant, its representatives, employees and agents from and against all claims, demands, liabilities, causes of action, suits, judgments, damages and expenses (including reasonable attorneys’ fees) arising from the gross negligence or willful misconduct of Landlord or its employees, except to the extent caused by the negligence or willful misconduct of Tenant or a Tenant Party.  The indemnities set forth in this Lease shall survive termination or expiration of this Lease and shall not terminate or be waived, diminished or affected in any manner by any abatement or apportionment of Rent under any provision of this Lease.  If any proceeding is filed for which indemnity is required hereunder, the indemnifying party agrees, upon request therefor, to defend the indemnified party in such proceeding at its sole cost utilizing counsel satisfactory to the indemnified party.

13.           Subordination; Attornment; Notice to Landlord’s Mortgagee.

(a)           Subordination.  This Lease shall be subordinate to any deed of trust, mortgage, or other security instrument (each, a “Mortgage”), or any ground lease, master lease, or primary lease (each, a “Primary Lease”), that hereafter covers all or any part of the Premises (the mortgagee under any such Mortgage, beneficiary under any such deed of trust, or the lessor under any such Primary Lease is referred to herein as a “Landlord’s Mortgagee”); provided, however, that such subordination shall only be effective if the Landlord’s Mortgagee provides a commercially reasonable non-disturbance agreement providing that, so long as this Lease is in full force and effect and there exists no Event of Default hereunder, Tenant’s right to possession of the Premises shall not be disturbed by reason of foreclosure, exercise of the statutory power of sale, or receipt of a deed in lieu of foreclosure in the case of any such Mortgage.  Any Landlord’s Mortgagee may elect, at any time, unilaterally, to make this Lease superior to its Mortgage, Primary Lease, or other interest in the Premises by so notifying Tenant in writing.  The provisions of this Section shall be self-operative and no further instrument of subordination shall be required; however, in confirmation of such subordination and non-disturbance, Tenant shall execute and return to Landlord (or such other party designated by Landlord) within ten business days after written request therefor such documentation, in recordable form if required, as a Landlord’s Mortgagee may reasonably request to evidence the subordination of this Lease to such Landlord’s Mortgagee’s Mortgage or Primary Lease (including a subordination, non-disturbance and attornment agreement).

(b)           Attornment.  Tenant shall attorn to any party succeeding to Landlord’s interest in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease, or otherwise, upon such party’s request, and shall execute such agreements confirming such attornment as such party may reasonably request; provided that such party recognizes Tenant’s rights under this Lease, except that such party shall not:  (a) be liable for any act or omission of the original landlord under this Lease, provided, however, that such party shall be obligated to cure all defaults or breaches of the Landlord that are of a continuing nature (e.g., repair and maintenance obligations); (b) be subject to any offsets or defenses which Tenant might have against the Landlord under this Lease (prior to such party becoming landlord under this Lease), except for those offset rights which (1) are expressly provided in this Lease, (2) relate to periods of time following the acquisition of the Premises by Landlord’s Mortgagee, and (3) Tenant has provided written notice to Landlord’s Mortgagee and provided Landlord’s Mortgagee a reasonable opportunity to cure the event giving rise to such offset event; (c) be bound by any Rent or Additional Rent that is not actually received by such party which Tenant might have paid to the original landlord under this Lease for more than the current month or more than one (1) month prior to the due date for the then current installment; (d) be liable for any deposits made or prepaid Rent paid by Tenant hereunder unless such deposits or payments have been transferred to such party; or (e) be bound by any amendment or modification of this Lease made without any required lessor’s or lender’s consent.

(c)           Notice to Landlord’s Mortgagee.  Tenant shall not seek to enforce any remedy it may have for any default on the part of Landlord without first giving written notice by certified mail, return receipt requested, specifying the default in reasonable detail, to any Landlord’s Mortgagee whose address has been given to Tenant, and affording such Landlord’s Mortgagee a reasonable opportunity to perform Landlord’s obligations hereunder.

(d)           Landlord’s Mortgagee’s Protection Provisions.  If Landlord’s Mortgagee shall succeed to the interest of Landlord under this Lease, Landlord’s Mortgagee shall not be: (1) liable for any act or omission of any prior lessor (including Landlord), provided, however, that such party shall be obligated to cure all defaults or breaches of this Lease of any prior lessor that are of a continuing nature (e.g., repair and maintenance obligations); (2) bound by any rent or additional rent or advance rent which Tenant might have paid for more than the current month to any prior lessor (including Landlord) that is not actually received by Landlord’s Mortgagee, and all such rent shall remain due and owing, notwithstanding such advance payment; (3) bound by any security or advance rental deposit made by Tenant which is not delivered or paid over to Landlord’s Mortgagee and with respect to which Tenant shall look solely to Landlord for refund or reimbursement; (4) bound by any amendment or modification of this Lease that has the effect of (i) reducing the Rent owed by Tenant, (ii) shortening or lengthening the Term, (iii) adding to or increasing Tenant’s rights under this Lease, or (iv) materially increasing Landlord’s obligations under this Lease, in each case made without Landlord’s Mortgagee’s consent and written approval, except for those terminations, amendments and modifications permitted to be made by Landlord without Landlord’s Mortgagee’s consent pursuant to the terms of the loan documents between Landlord and Landlord’s Mortgagee; (5) subject to the defenses which Tenant might have against any prior lessor (including Landlord); and (6) subject to the offsets which Tenant might have against any prior lessor (including Landlord) except for those offset rights which (A) are expressly provided in this Lease, (B) relate to periods of time following the acquisition of the Premises by Landlord’s Mortgagee, and (C) Tenant has provided written notice to Landlord’s Mortgagee and provided Landlord’s Mortgagee a reasonable opportunity to cure the event giving rise to such offset event.  Landlord’s Mortgagee shall have no liability or responsibility under or pursuant to the terms of this Lease or otherwise after it ceases to own an interest in the Premises, except for any liability or obligations hereunder that accrue during Landlord’s Mortgagee’s ownership of the Premises.  Nothing in this Lease shall be construed to require Landlord’s Mortgagee to see to the application of the proceeds of any loan, and Tenant’s agreements set forth herein shall not be impaired on account of any modification of the documents evidencing and securing any loan.

14.           Rules and Regulations.  Tenant shall comply with the rules and regulations of the Premises which are attached hereto as Exhibit C.  Landlord may, from time to time, reasonably change such rules and regulations for the safety, care, or cleanliness of the Premises and related facilities, provided that such changes will not unreasonably interfere with Tenant’s use of the Premises, increase the Rent, or materially increase Tenant’s other obligations under this Lease, and are enforced by Landlord in a non-discriminatory manner.  Tenant shall be responsible for the compliance with such rules and regulations by each Tenant Party.

15.           Condemnation.

(a)           Total Taking.  If the entire Building or Premises are taken by right of eminent domain or conveyed in lieu thereof (a “Taking”), this Lease shall terminate as of the date of the Taking.

(b)           Partial Taking — Tenant’s Rights.  If any part of the Premises becomes subject to a Taking and such Taking will prevent Tenant from conducting on a permanent basis its business in the Premises in a manner reasonably comparable to that conducted immediately before such Taking, then Tenant may terminate this Lease as of the date of such Taking by giving written notice to Landlord within 30 days after the Taking, and Basic Rent and Additional Rent shall be apportioned as of the date of such Taking.  If Tenant does not terminate this Lease, then Rent shall be abated on a reasonable basis as to that portion of the Premises rendered untenantable by the Taking.

(c)           Partial Taking — Landlord’s Rights.  If any material portion, but less than all, of the Premises becomes subject to a Taking, or if Landlord is required to pay any of the proceeds arising from a Taking to a Landlord’s Mortgagee, then Landlord may terminate this Lease by delivering written notice thereof to Tenant within 30 days after such Taking, and Basic Rent and Additional Rent shall be apportioned as of the date of such Taking.  If Landlord does not so terminate this Lease, then this Lease will continue, but if any portion of the Premises has been taken, Rent shall abate as provided in the last sentence of Section 15(b).

(d)           Temporary Taking.  If all or any portion of the Premises becomes subject to a Taking for a period of time of one (1) year or less, this Lease shall remain in full force and effect and Tenant shall continue to perform all of the terms, conditions and covenants of this Lease, including the payment of Basic Rent and all other amounts required hereunder.  If any such temporary Taking terminates prior to the expiration of the Term, Tenant shall restore the Premises as nearly as possible to the condition prior to such temporary Taking, at Tenant’s sole cost and expense.  Landlord shall be entitled to receive the entire award for any such temporary Taking, except that Tenant shall be entitled to receive the portion of such award which (1) compensates Tenant for its loss of use of the Premises within the Term and (2) reimburses Tenant for the reasonable out-of-pocket costs actually incurred by Tenant to restore the Premises as required by this Section 15(d).

(e)           Award.  If any Taking occurs, then Landlord shall receive the entire award or other compensation for the Premises, the Building, and other improvements taken; provided, however, that Tenant shall be entitled to pursue a claim (to the extent it will not reduce Landlord’s award) against the condemnor for the value of Tenant’s personal property, alterations and fixtures which Tenant is entitled to remove under this Lease, moving and relocation costs, loss of business (including, without limitation, loss or goodwill), and other claims it may have (including claims for rent attributable to any portion of the Premises subject to a partial Taking without termination of the Lease).  The rights of Landlord and Tenant regarding any Taking shall be determined as provided in this Section, and each party hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure, and the provisions of any similar law hereinafter enacted, allowing either party to petition the Supreme Court to terminate this Lease and/or otherwise allocate condemnation awards between Landlord and Tenant in the event of a Taking.

(f)            Repair.  If this Lease is not terminated under this Section 15, Landlord shall, at its sole cost and expense and not as part of Operating Costs, proceed with reasonable diligence as and to the extent reasonably necessary to restore the remaining portion(s) of the Premises substantially to their former condition, as and to the extent feasible to constitute a complete and tenantable Premises; provided, however, that in no event shall Landlord be required to spend more than the condemnation proceeds received by Landlord for such repair.

16.           Fire or Other Casualty.

(a)           Repair Estimate.  If the Premises or the Building are damaged by fire or other casualty (a “Casualty”), Landlord shall, within 75 days after such Casualty, deliver to Tenant a good faith, reasonable estimate (the “Damage Notice”) of the time needed to repair the damage caused by such Casualty, together with reasonable supporting documentation (including confirmation of such estimate from a duly qualified and licensed general contractor), and shall include in such notice an estimate of the date upon which Landlord reasonably expects to have completed the restoration (the “Anticipated Restoration Date”).

(b)           Tenant’s Rights.  If a material portion of the Premises or the Building is damaged by Casualty such that Tenant is prevented from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Casualty and Landlord estimates that the damage caused thereby cannot be repaired within 240 days after the commencement of repairs (the “Repair Period”), then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant; provided, however, that if such damage occurs within twelve (12) months of the last day of the Term and the time estimated to substantially complete the repair exceeds fifty percent (50%) of the time then remaining in the Term (expressly excluding any extensions not then exercised), then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant .

(c)           Landlord’s Rights.  If a Casualty damages a material portion of the Building and (1) Landlord estimates that the damage to the Building cannot be repaired within the Repair Period, (2) the damage to the Building exceeds 50% of the replacement cost thereof (excluding foundations and footings), as reasonably estimated by Landlord (and confirmed by a duly qualified and licensed general contractor or duly qualified appraiser), and such damage occurs during the last two years of the Term; provided, however, that Landlord may not terminate this Lease pursuant to this clause (2) if (i) Tenant has any remaining option to extend the Lease Term, and (ii) within thirty (30) days after the date Tenant receives from Landlord written notification terminating this Lease

pursuant to the provisions of this clause (2), Tenant delivers to Landlord written notice exercising such extension option (“Tenant’s Termination Override”) at 100% of Fair Market Rent to be determined within 15 days after the later of receipt of Tenant’s Termination Override or the date that is twelve (12) months prior to the expiration of the 120th month of the initial Term or the expiration of the First Extension Period, as applicable (and for purposes of this Section 16(c), it is understood that Tenant may exercise such extension option earlier than the times set forth in Exhibit I), (3) adequate insurance proceeds (excluding the amount of any insurance deductibles then carried by Landlord) are not for any reason (other than Landlord’s failure to carry the insurance policies it is required to carry under this Lease), including a decision made by any Landlord’s Mortgagee, available to Landlord from Landlord’s insurance policies to cover the cost of the required repairs, and Tenant does not agree to fund such excess deficiency within fifteen (15) days after its receipt of a written termination notice from Landlord, or (4) the damage to the Building exceeds 66% of the replacement cost thereof (excluding foundations and footings) and Landlord makes a good faith determination that restoring the Building would be uneconomical and such damage occurs during the last five years of the Term, then Landlord may terminate this Lease by giving written notice of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant.

(d)           Repair Obligation.  If neither party elects to exercise any right it may have to terminate this Lease, or neither party is entitled to terminate this Lease, following a Casualty, then Landlord shall, as soon as reasonably practicable after such Casualty, begin to repair the Premises and shall proceed with reasonable diligence to restore the Premises to substantially the same condition as they existed immediately before such Casualty; however, Landlord shall not be required to repair or replace any alterations or improvements made by Tenant within the Premises (which shall be promptly and with due diligence repaired and restored by Tenant at Tenant’s sole cost and expense to the extent of the insurance proceeds actually received by Tenant for the Casualty in question, or the extent of the insurance proceeds Tenant would have received but for Landlord’s failure to carry the insurance policies it is required to carry under this Lease) or any furniture, equipment, trade fixtures or personal property of Tenant or others in the Premises or the Building. Except for the amount of any excess deficiency Tenant agrees to fund pursuant to Section 16(c)(3) above, Landlord’s repair and restoration obligations under this Section 16(d) shall be performed at Landlord’s sole cost and shall not be part of Operating Expenses, provided that Landlord’s obligation to repair or restore the Premises shall be limited to the extent of the insurance proceeds actually received by Landlord for the Casualty in question (or the extent of the insurance proceeds Landlord would have actually received but for Landlord’s failure to carry the insurance policies it is required to carry under this Lease), plus the amount of any excess deficiency Tenant agrees to fund.  If this Lease is terminated under the provisions of this Section 16, Landlord shall be entitled to the full proceeds of the insurance policies providing coverage for all alterations and improvements in the Premises (and, if Tenant has failed to maintain insurance on such items as required by this Lease, Tenant shall pay Landlord an amount equal to the proceeds Landlord would have received had Tenant maintained insurance on such items as required by this Lease).  If Landlord shall have failed to complete the restoration by a date that is thirty (30) days following the Anticipated Restoration Date, and such failure was not caused in whole or in part by any Tenant Party or events beyond Landlord’s reasonable control, then Tenant may terminate this Lease by delivering written notice to Landlord of its intention to terminate within sixty (60) days after the Anticipated Restoration Date; provided, however, that such termination shall be automatically rescinded, and this Lease shall continue in full force and effect, if Landlord substantially completes the restoration within sixty (60) days after receipt of Tenant’s notice of intention to terminate.

(e)           Abatement of Rent.  If the Premises are damaged by Casualty, Rent for the portion of the Premises rendered untenantable by the damage shall be abated on a reasonable basis from the date of damage until the completion of Landlord’s repairs (or until the date of termination of this Lease by Landlord or Tenant as provided above, as the case may be), except that Tenant shall continue to pay Rent without abatement if such damage results from the gross negligence or willful misconduct of Tenant or a Tenant Party.

(f)            Exclusive Remedy.  This Section 16 shall provide Tenant’s sole and exclusive remedy in the event of damage or destruction to the Premises or the Building, and Tenant, as a material inducement to Landlord entering into this Lease, irrevocably waives and releases Tenant’s rights under California Civil Code Sections 1932(2), 1933(4), 1941 and 1942.  No damages, compensation or claim shall be payable by Landlord for any inconvenience, any interruption or cessation of Tenant’s business, or any annoyance, arising from any damage to or destruction of all or any portion of the Premises or the Building, except for the abatement of rent provided in Section 16(e) above.

17.           Personal Property Taxes.  Tenant shall be liable for all taxes levied or assessed against personal property, furniture, or fixtures placed by Tenant in the Premises.  If any taxes for which Tenant is liable are levied or assessed against Landlord or Landlord’s property and Landlord elects to pay the same, or if the assessed value of Landlord’s property is increased by inclusion of such personal property, furniture or fixtures and Landlord elects to pay the taxes based on such increase, then Tenant shall pay to Landlord, within 30 days following written request therefor, the part of such taxes for which Tenant is primarily liable hereunder; however, Landlord shall not pay such amount if Tenant notifies Landlord that it will contest the validity or amount of such taxes before Landlord makes such payment, and thereafter diligently proceeds with such contest in accordance with Law and if the non-payment thereof does not pose a threat of loss or seizure of the Premises or interest of Landlord therein or impose any fee or penalty against Landlord (unless Tenant agrees to pay for such fee or penalty).

18.           Events of Default.  Each of the following occurrences shall be an “Event of Default”:

(a)           Payment Default.  Tenant’s failure to pay Rent within three (3) business days after Landlord has delivered written notice to Tenant that the same is due; however, an Event of Default shall occur hereunder without any obligation of Landlord to give any notice if Tenant fails to pay Rent when due and, during the 12 month interval preceding such failure, Landlord has given Tenant written notice of failure to pay Rent on one or more occasions;

(b)           Abandonment.  Tenant abandons the Premises while it is in default in the payment of Rent;

(c)           Estoppel.  Tenant fails to provide any estoppel certificate after Landlord’s written request therefor pursuant to Section 26(d) and such failure shall continue for five business days after Landlord’s second written notice thereof to Tenant;

(d)           Insurance.  Tenant fails to procure, maintain and deliver to Landlord evidence of the insurance policies and coverages as required under Exhibit H and such failure shall continue for three (3) business days after Landlord has delivered written notice thereof to Tenant; however, an Event of Default shall occur hereunder without any obligation of Landlord to give any notice if Tenant fails to procure, maintain and deliver to Landlord evidence of such insurance policies and coverages and, during the 12 month interval preceding such failure, Landlord has given Tenant written notice of failure to do so on one or more occasions;

(e)           Mechanic’s Liens.  Tenant fails to pay and release of record, or diligently contest and bond around, any mechanic’s lien filed against the Premises for any work performed, materials furnished, or obligation incurred by or at the request of Tenant, within the time and in the manner required by Section 8(d) and such failure shall continue for ten (10) days after Landlord has delivered written notice thereof to Tenant;

(f)            Other Defaults.  Tenant’s failure to perform, comply with, or observe any other agreement or obligation of Tenant under this Lease and the continuance of such failure for a period of more than 30 days after Landlord has delivered to Tenant written notice thereof; provided, however, that if the nature of Tenant’s failure to perform reasonably requires more than 30 days to cure, then Tenant shall not be deemed in default if Tenant commences to cure such failure within such 30-day period, and thereafter diligently prosecutes such cure to completion; and

(g)           Insolvency.  The filing of a petition by or against Tenant (the term “Tenant” shall include, for the purpose of this Section 18(g), any guarantor of Tenant’s obligations hereunder) (1) in any bankruptcy or other insolvency proceeding; (2) seeking any relief under any state or federal debtor relief law; (3) for the appointment of a liquidator or receiver for all or substantially all of Tenant’s property or for Tenant’s interest in this Lease; (4) for the reorganization or modification of Tenant’s capital structure; or (5) in any assignment for the benefit of creditors proceeding; however, if such a petition is filed against Tenant, then such filing shall not be an Event of Default unless Tenant fails to have the proceedings initiated by such petition dismissed within 90 days after the filing thereof.

19.           Remedies.  Upon any Event of Default, Landlord may, in addition to all other rights and remedies afforded Landlord hereunder or by law or equity, take any one or more of the following actions:

(a)           Continuance of Lease in Effect.  Landlord may, at Landlord’s election, keep this Lease in effect and enforce, by an action at law or in equity, all of its rights and remedies under this Lease including, without limitation, (i) the right to recover the rent and other sums as they become due by appropriate legal action, (ii) the right to make payments required by Tenant, or perform Tenant’s obligations and be reimbursed by Tenant for the cost thereof with interest at the Default Rate from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive relief and specific performance to prevent Tenant from violating the terms of this Lease and/or to compel Tenant to perform its obligations under this Lease, as the case may be.

(b)           Termination of Lease.  Landlord may, at Landlord’s election, terminate this Lease by giving Tenant written notice of termination, in which event this Lease shall terminate on the date set forth for termination in such notice. Any termination under this subparagraph shall not relieve Tenant from its obligation to pay to Landlord all Basic Rent and Additional Rent then or thereafter due, or any other sums due or thereafter accruing to Landlord, or from any claim against Tenant for damages previously accrued or then or thereafter accruing. In no event shall any one or more of the following actions by Landlord, in the absence of a written election by Landlord to terminate this Lease constitute a termination of this Lease:

(1)           Appointment of a receiver or keeper in order to protect Landlord’s interest hereunder;

(2)           Consent to any subletting of the Premises or assignment of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise; or

(3)           Any action taken by Landlord or its partners, principals, members, officers, agents, employees, or servants, which is intended to mitigate the adverse effects of any breach of this Lease by Tenant, including, without limitation, any action taken to maintain and preserve the Premises or any action taken to relet the Premises or any portion thereof for the account at Tenant.

(c)           Election to Terminate or Continue.  In the event Tenant breaches this Lease and abandons the Premises, Landlord may terminate this Lease, but this Lease shall not terminate unless Landlord gives Tenant written notice of termination. If Landlord does not terminate this Lease by giving written notice of termination, Landlord may enforce all its rights and remedies under this Lease, including the rights and remedies provided by California Civil Code Section 1951.4 (“lessor may continue lease in effect after lessee’s breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations”).

(d)           Rights and Remedies Upon Termination.  In the event Landlord terminates this Lease, Landlord shall be entitled, at Landlord’s election, to the rights and remedies provided in California Civil Code Section 1951.2. For purposes of computing damages pursuant to Section 1951.2, an interest rate equal to the maximum rate of interest then not prohibited by law shall be used where permitted. Such damages shall include, without limitation:

(1)           The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided, computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco, at the time of award plus one percent; and

(2)           Any other reasonable amount necessary to compensate Landlord for all detriment proximately caused by Tenant’s failure to perform Tenant’s obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom, including without limitation, the following: (i) expenses for cleaning, repairing or restoring the Premises, (ii) expenses for altering, remodeling or otherwise improving the Premises for the purpose of reletting, including removal of existing

leasehold improvements and/or installation of additional leasehold improvements (regardless of how the same is funded, including reduction of rent, a direct payment or allowance to a new tenant, or otherwise), (iii) broker’s fees allocable to the remainder of the Term, advertising costs and other expenses of reletting the Premises; (iv) costs of carrying and maintaining the Premises, such as taxes, insurance premiums, utility charges and security precautions, (v) expenses incurred in removing, disposing of and/or storing any of Tenant’s personal property, inventory or trade fixtures remaining therein; (vi) reasonable attorney’s fees, expert witness fees, court costs and other reasonable expenses incurred by Landlord (but not limited to taxable costs) in retaking possession of the Premises, establishing damages hereunder, and releasing the Premises; and (vii) any other expenses, costs or damages otherwise incurred or suffered as a result of Tenant’s default.

(e)           Landlord’s Default and Tenant’s Remedies.  Landlord shall not be in default of any of its obligations under this Lease unless Landlord fails to perform any covenant, condition, or agreement contained in this Lease and fails to cure the nonperformance within a reasonable time, but not later than thirty (30) days after receiving written notice of the failure from Tenant; provided, however, that if the nature of Landlord’s failure to perform reasonably requires more than thirty (30) days to cure, then Landlord shall not be in default if Landlord commences to cure such failure within such thirty (30) day period, and thereafter diligently prosecutes such cure to completion.  If Landlord is in default pursuant to this Section 19(e) and (i) such default materially and adversely impairs Tenant’s ability to use the Premises or any material portion thereof for the operation of its business pursuant to the terms of this Lease or (ii) poses a material and imminent risk to the health or safety of persons, then, and only then, as Tenant’s sole remedy at law and/or in equity, Tenant may perform such obligations subject to the following terms and conditions:

(1)           Tenant shall deliver to Landlord a written notice (“Self-Help Notice”) of Tenant’s intention to perform such obligations, which Self-Help Notice shall indicate in all capital bold-faced letters Tenant’s intention to exercise its self-help rights and to perform such obligations which are otherwise Landlord’s responsibility hereunder.  If Landlord fails to commence to cure its failure to perform within ten (10) business days after receipt of the Self-Help Notice, Tenant may take whatever action is reasonably necessary to perform such obligations;

(2)           All work performed by Tenant or its agents in accordance with this Section 19(e) must be performed at a reasonable and competitive cost and rate and so as to minimize interference with the rights of other occupants of the Building (if applicable); and

(3)           Landlord shall reimburse Tenant for the reasonable costs of such performance incurred in accordance with the terms of this Section 19(e) within thirty (30) days after Tenant’s submission to Landlord of receipted invoices therefor (accompanied by reasonable supporting documentation), but only to the extent the costs would have been paid by Landlord without reimbursement under this Lease (it being understood that costs which would have been reimbursed to Landlord by Tenant as an Operating Cost shall not be repaid to Tenant under this Section 19(e)).  If Landlord fails to reimburse Tenant within such thirty (30) day period, the Landlord shall also pay interest at the Default Rate on any undisputed portion of such amount; provided, however, that Tenant shall have no set off, abatement, withholding or similar rights with respect thereto.

20.           Non-Waiver; Cumulative Remedies.

(a)           No Waiver.  Landlord’s acceptance of Rent following an Event of Default shall not waive Landlord’s rights regarding such Event of Default (it being understood, however, that if the Event of Default is for the non-payment of Rent and Tenant thereafter pays, and Landlord accepts, all Rent necessary to cure that Event of Default and all other Rent then due, Landlord shall have no further rights regarding that particular Event of Default).  No waiver by Landlord or Tenant of any violation or breach of any of the terms contained herein shall waive either party’s rights regarding any future violation of such term by the other party.  Landlord’s acceptance of any partial payment of Rent shall not waive Landlord’s rights with regard to the remaining portion of the Rent that is due, regardless of any endorsement or other statement on any instrument delivered in payment of Rent or any

writing delivered in connection therewith; accordingly, Landlord’s acceptance of a partial payment of Rent shall not constitute an accord and satisfaction of the full amount of the Rent that is due.

(b)           Cumulative Remedies.  Any and all remedies set forth in this Lease:  (1) shall be in addition to any and all other remedies Landlord may have at law or in equity, (2) shall be cumulative, and (3) may be pursued successively or concurrently as Landlord may elect.  The exercise of any remedy by Landlord shall not be deemed an election of remedies or preclude Landlord from exercising any other remedies in the future.  Additionally, Tenant shall defend, indemnify and hold harmless Landlord, Landlord’s Mortgagee and their respective representatives and agents from and against all claims, demands, liabilities, causes of action, suits, judgments, damages and expenses (including reasonable attorneys’ fees) arising from Tenant’s failure to perform its obligations under this Lease.

21.           Intentionally Omitted.

22.           Surrender of Premises.  No act by Landlord shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless it is in writing and signed by Landlord.  At the expiration or termination of this Lease, Tenant shall deliver to Landlord all keys to the Premises, together with manuals and warranties running to Landlord’s benefit for improvements, alterations or other items installed by Tenant, and shall deliver to Landlord the Premises with all improvements located therein in good repair and condition, free of Hazardous Materials placed on the Premises during the Term (other than by Landlord, its employees, contracts or agents) and broom-clean, condemnation and Casualty damage (as to which Sections 15 and 16 shall control) and reasonable wear and tear excepted.  As used herein, “reasonable wear and tear” shall not include any damage or deterioration that would have been prevented by Tenant’s employment of ordinary prudence, care and diligence in the occupancy and use of the Premises and the performance of all of its obligations under this Lease; without limiting the generality of the foregoing, reasonable wear and tear shall not include (i) excessively soiled, stained, worn or marked surfaces, floors or finishes, (ii) damage, including holes in building surfaces (e.g., cabinets, doors, walls, ceilings and floors) caused by the installation or removal of Tenant’s trade fixtures, furnishings, decorations, equipment, alterations, utility installations, security systems, communications systems (including cabling, wiring and conduits), displays and signs, (iii) damage to any component, fixture, hardware, system or component part thereof within the Premises, or (iv) the condition of any portion of the Premises that would not be reasonably acceptable for immediate use by a subsequent tenant for comparable purposes.  Tenant shall remove all trade fixtures (and appurtenances thereto), furniture, and personal property placed in the Premises or elsewhere in the Building by Tenant (but Tenant may not remove any such item which was paid for, in whole or in part, by Landlord or any wiring or cabling unless Landlord requires such removal).  In addition, at Landlord’s option, but subject to the provisions of Section 8(a) above, Tenant shall remove the following to the extent required by Landlord:  (1) alterations, additions and improvements made to the Premises by Tenant; (2) trade fixtures (and appurtenances thereto), furniture, and personal property placed in the Premises by Tenant and paid for by Landlord; and (3) all wiring, conduits and cabling placed in the Premises by Tenant and/or any communications or data cabling and conduit used by Tenant (collectively, “Cabling”) in accordance with applicable Laws (provided, that, at Landlord’s sole option, Tenant shall instead leave all Cabling in good operating condition and repair, properly terminated and identified for future use in accordance with applicable laws).  Tenant shall repair all damage caused by such removal.  Landlord agrees that if Tenant requests in writing not later than one hundred twenty (120) days and not earlier than earlier than three hundred sixty (360) days before the expiration of the Term as to whether or not Landlord will require removal of the applicable alterations, additions, improvements, trade fixtures, personal property, equipment, furniture and/or Cabling as provided in the preceding sentences, Landlord shall notify Tenant in writing of such determination no later than ninety (90) days following receipt of Tenant’s written request for same.  All items not so removed shall, at Landlord’s option, be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant and without any obligation to account for such items.  The provisions of this Section 22 shall survive the end of the Term.

23.           Holding Over.  If Tenant fails to vacate the Premises at the end of the Term, then Tenant shall be a tenant at sufferance and, in addition to all other damages and remedies to which Landlord may be entitled for such holding over, Tenant shall pay, in addition to the other Rent, Basic Rent equal to the following:  (a) for the first two (2) holdover months, 125% of the Rent payable during the last month of the Term; and (b) thereafter, the greater of (i) 150% of the Rent payable during the last month of the Term, or (ii) 100% of the prevailing rental rate for

comparable buildings in the vicinity of the Premises.  Tenant shall otherwise continue to be subject to all of Tenant’s obligations under this Lease.  The provisions of this Section 23 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law.  If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys’ fees) and liability resulting from such failure, including any claims made by any succeeding tenant founded upon such failure to surrender, and any lost profits to Landlord resulting therefrom.

24.           Certain Rights Reserved by Landlord.  Provided that the exercise of such rights does not unreasonably interfere with Tenant’s occupancy or use of the Premises or Tenant’s parking rights, Landlord shall have the following rights:

(a)           Building Operations.  To make inspections, repairs, alterations, or improvements, whether structural or otherwise, in and about the Premises, or any part thereof in accordance with the terms of this Lease; to enter upon the Premises (after giving Tenant no less than 24 hours prior notice thereof, which may be oral notice, except in cases of real or apparent emergency, in which case no notice shall be required), and otherwise subject to Tenant’s reasonable security requirements, and, during the continuance of any such work, to temporarily close doors, entryways, public space, and corridors in the Building; to interrupt or temporarily suspend Building services and facilities; and to change the name of the Building;

(b)           Security.  To take such reasonable measures as Landlord reasonably deems advisable for the security of the Building and its occupants;

(c)           Prospective Purchasers and Lenders.  To market the Premises for sale, including entering the Premises at all reasonable hours, upon no less than 24 hours prior notice and otherwise subject to Tenant’s reasonable security requirements, to show the Premises to prospective purchasers or lenders, but Landlord shall not place any “for sale” or other marketing signs on or about the Premises except during the last 9 months of the Term (or earlier if Tenant has notified Landlord in writing that it does not desire to renew the Term) or at any time following the occurrence of an Event of Default; and

(d)           Prospective Tenants.  At any time during the last 9 months of the Term (or earlier if Tenant has notified Landlord in writing that it does not desire to renew the Term) or at any time following the occurrence of an Event of Default, to market the Premises for lease, including placing signs and/or about the Premises and entering the Premises at all reasonable hours, upon no less than 24 hours prior notice and otherwise subject to Tenant’s reasonable security requirements,  to show the Premises to prospective tenants.

25.           Intentionally Omitted.

26.           Miscellaneous.

(a)           Landlord Transfer.  Landlord may transfer the Premises and its rights under this Lease.  If Landlord assigns its rights under this Lease, then Landlord shall thereby be released from any obligations hereunder to the extent such obligations accrue after the date of transfer (it being understood that Landlord shall remain fully liable for all obligations under this Lease to the extent such obligations have accrued prior to the date of such transfer, as well as the return of Tenant’s Security Deposit, unless Landlord has paid such Security Deposit to the assignee), and the assignee shall be liable for Landlord’s obligations hereunder to the extent such obligations accrue from and after the transfer date.

(b)           Landlord’s Liability.  The liability of Landlord (and its partners, shareholders or members) to Tenant (or any person or entity claiming by, through or under Tenant) for any default by Landlord under the terms of this Lease or any matter relating to or arising out of the occupancy or use of the Premises shall be limited to Tenant’s actual direct, but not consequential, damages therefor and shall be recoverable only from the equity interest of Landlord in the Premises (and any sales, assignment, insurance or condemnation proceeds received therefrom by Landlord), and Landlord (and its partners, shareholders or members) shall not be personally liable for any deficiency.

(c)           Brokerage.  Neither Landlord nor Tenant has dealt with any broker or agent in connection with the negotiation or execution of this Lease, other than Don Reimann and Gregg von Thaden of Colliers International (“Landlord’s Broker”) and Michael R. McMillan, Rick Kaplan, John Tran and Roger Gage of Cushman and Wakefield of California (“Tenant’s Broker”).  Landlord’s Broker’s commission shall be paid by Landlord pursuant to a separate written agreement.  Tenant’s Broker’s commission shall be paid from and out of the commission paid to Landlord’s Broker,  one-half within thirty (30) days after Lease execution and one-half within thirty (30) days after the Commencement Date, and shall be an amount equal to Seven Hundred Fifty-Two Thousand Six Hundred Twenty-Eight and 00/100 Dollars ($752,628.00).   Except as expressly provided in this Section 26(c), Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys’ fees, liens and other liability for commissions or other compensation claimed by any broker or agent claiming the same by, through, or under the indemnifying party.  In no event shall any broker, including Landlord’s Broker and Tenant’s Broker, be considered a third party beneficiary of this Lease or any provision hereof.

(d)           Estoppel Certificates.  From time to time, Tenant shall furnish to any party designated by Landlord, within ten business days after Landlord has made a request therefor, an industry standard, commercially reasonable estoppel certificate signed by Tenant confirming and containing such factual certifications and representations as to this Lease as Landlord, Landlord’s Mortgagee and/or a prospective purchaser or mortgagee may reasonably request for leases of similar size premises, including the matters listed below in this Section 26(d).  If Tenant does not deliver to Landlord the certificate signed by Tenant within such time period and such failure shall continue for five business days after Landlord has sent a second written request therefor to Tenant, Landlord, Landlord’s Mortgagee and any prospective purchaser or mortgagee, may conclusively presume and rely upon the following facts: (1) this Lease is in full force and effect, (2) the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord, (3) not more than one monthly installment of Basic Rent and other charges have been paid in advance, (4) there are presently no claims against Landlord nor any defenses or rights of offset against collection of Rent or other charges, and (5) Landlord is not in default under this Lease.  In such event, Tenant shall be estopped from denying the truth of the presumed facts.

(e)           Notices.  All notices and other communications given pursuant to this Lease shall be in writing and shall be (1) mailed by first class, United States Mail, postage prepaid, certified, with return receipt requested, and addressed to the parties hereto at the address specified in the Basic Lease Information, (2) hand delivered to the intended addressee, (3) sent by a nationally recognized overnight courier service, or (4) sent by facsimile transmission during normal business hours followed by a confirmatory letter sent in another manner permitted hereunder.  All notices shall be effective upon delivery to the address of the addressee; provided, however, that if such delivery occurs on a weekend or holiday officially recognized in the City of Milpitas, then such notice shall not be deemed effective until the next business day.  The parties hereto may change their addresses by giving notice thereof to the other in conformity with this provision.

(f)            Separability.  If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws, then the remainder of this Lease shall not be affected thereby, and the remainder of this Lease shall remain in full force and effect.

(g)           Amendments; Binding Effect.  This Lease may not be amended except by instrument in writing signed by Landlord and Tenant.  No provision of this Lease shall be deemed to have been waived by Landlord or Tenant unless such waiver is in writing signed by the waiving party, and no custom or practice which may evolve between the parties in the administration of the terms hereof shall waive or diminish the right of Landlord or Tenant to insist upon the performance by the other party in strict accordance with the terms hereof.  The terms and conditions contained in this Lease shall inure to the benefit of and be binding upon the parties hereto, and upon their respective successors in interest and legal representatives, except as otherwise herein expressly provided.  This Lease is for the sole benefit of Landlord and Tenant, and, other than Landlord’s Mortgagee, no third party shall be deemed a third party beneficiary hereof.

(h)           Quiet Enjoyment.  Provided Tenant has performed all of its obligations hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term, without hindrance from Landlord or any party claiming by, through, or under Landlord, but not otherwise, subject to the terms and conditions of this Lease.

(i)            No Merger.  There shall be no merger of the leasehold estate hereby created with the fee estate in the Premises or any part thereof if the same person acquires or holds, directly or indirectly, this Lease or any interest in this Lease and the fee estate in the leasehold Premises or any interest in such fee estate.

(j)            No Offer.  The submission of this Lease to Tenant shall not be construed as an offer, and Tenant shall not have any rights under this Lease unless Landlord executes a copy of this Lease and delivers it to Tenant.

(k)           Entire Agreement.  This Lease constitutes the entire agreement between Landlord and Tenant regarding the subject matter hereof and supersedes all oral statements and prior writings relating thereto.  Except for those set forth in this Lease, no representations, warranties, or agreements have been made by Landlord or Tenant to the other with respect to this Lease or the obligations of Landlord or Tenant in connection therewith.  The normal rule of construction that any ambiguities be resolved against the drafting party shall not apply to the interpretation of this Lease or any exhibits or amendments hereto.

(l)            Waiver of Jury Trial.  TO THE MAXIMUM EXTENT NOW OR HEREAFTER PERMITTED BY LAW, LANDLORD AND TENANT EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY LITIGATION OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE ARISING OUT OF OR WITH RESPECT TO THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.

(m)          Governing Law.  This Lease shall be governed by and construed in accordance with the laws of the state in which the Premises are located.

(n)           Recording.  Tenant shall not record this Lease or any memorandum of this Lease without the prior written consent of Landlord, which consent may be withheld or denied in the sole and absolute discretion of Landlord, and any recordation by Tenant shall be a material breach of this Lease.  Tenant grants to Landlord a power of attorney to execute and record a release releasing any such recorded instrument of record that was recorded without the prior written consent of Landlord.

(o)           Water or Mold Notification.  To the extent either Tenant or Landlord discovers or is notified of any water leakage, water damage or any mold in or about the Premises that may be a danger to human health or safety, such party shall promptly notify the other party thereof in writing.

(p)           Joint and Several Liability.  If Tenant is comprised of more than one party, each such party shall be jointly and severally liable for Tenant’s obligations under this Lease.  All unperformed obligations of Tenant hereunder not fully performed at the end of the Term shall survive the end of the Term, including payment obligations with respect to Rent and all obligations concerning the condition and repair of the Premises, and all unperformed monetary obligations of Landlord hereunder not fully performed at the end of the Term shall survive the end of the Term.

(q)           Financial Reports.  Within 15 days after Landlord’s request, Tenant will furnish Tenant’s most recent audited financial statements (including any notes to them) to Landlord, or, if no such audited statements have been prepared, such other financial statements (and notes to them) as may have been prepared by an independent certified public accountant or, failing those, Tenant’s internally prepared financial statements.  If Tenant is a publicly traded corporation, Tenant may satisfy its obligations hereunder by providing to Landlord Tenant’s most recent annual and quarterly reports; provided, however, that, so long as such reports are readily available to Landlord in electronic form without payment of a fee, Tenant shall have no obligation to deliver copies thereof to Landlord.  Landlord will not disclose any aspect of Tenant’s financial statements that Tenant designates to Landlord as confidential except (1) to Landlord’s agents and advisers, (2) to Landlord’s Mortgagee or prospective mortgagees or purchasers of the Building, (3) in litigation between Landlord and Tenant, and/or (4) if required by court order.  Tenant shall not be required to deliver the financial statements required under this Section 26(q) more than once in any 12-month period unless requested by Landlord’s Mortgagee or a prospective buyer or lender of the Building or an Event of Default occurs.

(r)            Landlord’s Fees.  Whenever Tenant requests Landlord to take any action not required of it hereunder (including any supervision or coordination of Tenant’s work under Section 8 and/or Exhibit D) or give any consent required or permitted under this Lease (including any consent required under Section 8 and/or Exhibit D), Tenant will reimburse Landlord for Landlord’s actual and reasonable, out-of-pocket costs payable to third parties and incurred by Landlord in reviewing the proposed action or consent, including reasonable attorneys’, engineers’ or architects’ fees, within 30 days after Landlord’s delivery to Tenant of a statement of such costs along with reasonable supporting backup documentation.  Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action.

(s)           Telecommunications.  Subject to Landlord’s prior approval as and to the extent required under Section 8 above, Tenant and its telecommunications companies, including local exchange telecommunications companies and alternative access vendor services companies, shall have the right of access to and within the Premises, for the installation and operation of telecommunications systems, including voice, video, data, Internet, and any other services provided over wire, fiber optic, microwave, wireless, and any other transmission systems (“Telecommunications Services”), for part or all of Tenant’s telecommunications within the Building and from the Building to any other location.  All providers of Telecommunications Services shall be required to comply with the terms and conditions of this Lease (including Section 8 above), the rules and regulations of the Building and applicable Laws.  Tenant acknowledges that Landlord shall not be required to provide or arrange for any Telecommunications Services and that Landlord shall have no liability to any Tenant Party in connection with the installation, operation or maintenance of Telecommunications Services or any equipment or facilities relating thereto.  Tenant, at its cost and for its own account, shall be solely responsible for obtaining all Telecommunications Services.

(t)            Confidentiality.  Tenant acknowledges that the terms and conditions of this Lease are to remain confidential for Landlord’s benefit, and may not be disclosed by Tenant to anyone, by any manner or means, directly or indirectly, without Landlord’s prior written consent; provided, however, that it is understood and agreed that Tenant may disclose such terms and conditions (i) to the extent required by applicable Laws or court order, or (ii) to the employees, lenders, investors, consultants, accountants and attorneys of Tenant, provided that such persons agree to treat such terms and conditions confidentially.  The consent by Landlord to any disclosures shall not be deemed to be a waiver on the part of Landlord of any prohibition against any future disclosure.  Notwithstanding the foregoing, Landlord acknowledges that Tenant is a publicly regulated entity and, as such, may be required to disclose the terms and conditions of this Lease in government-mandated public filings, but Tenant shall thereafter use reasonable efforts to minimize disclosure of the terms of this Lease by Tenant or any Tenant Party, except (a) to the extent required to comply with applicable Laws or court order, or (b) to the employees, lenders, investors, consultants, accountants and attorneys of Tenant, provided that such persons agree to treat such terms and conditions confidentially.

(u)           Authority.  Tenant (if a corporation, partnership or other business entity) hereby represents and warrants to Landlord that Tenant is a duly formed and existing entity qualified to do business in the state in which the Premises are located, that Tenant has full right and authority to execute and deliver this Lease, and that each person signing on behalf of Tenant is authorized to do so.  Tenant shall, on or before execution of this Lease, deliver to Landlord reasonably acceptable documentation evidencing Tenant’s authorization of this Lease and execution of this Lease by the person(s) signing on Tenant’s behalf.  Landlord hereby represents and warrants to Tenant that Landlord is a duly formed and existing entity qualified to do business in the state in which the Premises are located, that Landlord has full right and authority to execute and deliver this Lease, and that each person signing on behalf of Landlord is authorized to do so.

(v)           Security Service.  Tenant acknowledges and agrees that, while Landlord may (but shall not be obligated to) patrol the Building, Landlord is not providing any security services with respect to the Premises or Tenant’s Off-Premises Equipment and that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any area where Tenant’s Off-Premises Equipment is located or any other breach of security with respect to the Premises or Tenant’s Off-Premises Equipment.

(w)          Intentionally Omitted.

(x)            Prohibited Persons and Transactions.  Tenant represents and warrants that neither Tenant nor any of its affiliates, nor any of their respective partners, members, shareholders or other equity owners, and none of their respective employees, officers, directors, representatives or agents is, nor will they become, a person or entity with whom U.S. persons or entities are restricted from doing business under regulations of the Office of Foreign Asset Control (“OFAC”) of the Department of the Treasury (including those named on OFAC’s Specially Designated and Blocked Persons List) or under any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism), or other governmental action and is not and will not Transfer this Lease to, contract with or otherwise engage in any dealings or transactions or be otherwise associated with such persons or entities.

(y)           List of Exhibits.  All exhibits and attachments attached hereto are incorporated herein by this reference.

Exhibit A  —  Outline of Premises

Exhibit B  —  Legal Description

Exhibit C  —  Rules and Regulations

Exhibit D  —  Tenant Finish-Work

Exhibit E  —  Intentionally Omitted

Exhibit F  —  Intentionally Omitted

Exhibit G  —  Operating Costs and Taxes

Exhibit H  —  Insurance

Exhibit I   —  Options to Extend

Exhibit J   —  Permitted Hazardous Materials

(z)            Attorneys Fees.  If there is any legal action or proceeding between Landlord and Tenant arising from or based on this Lease, the unsuccessful party to such action or proceeding shall pay to the prevailing party all costs and expenses, including reasonable attorneys’ fees and disbursements, incurred by such prevailing party in such action or proceeding and in any appeal in connection therewith.  If such prevailing party recovers a judgment in any such action, proceeding or appeal, such costs, expenses and attorneys’ fees and disbursements shall be included in and as a part of such judgment.

27.           Environmental Requirements.

(a)           Prohibition against Hazardous Materials.  Except for Hazardous Materials (i) contained in products used by Tenant in reasonable quantities for ordinary cleaning and office purposes and/or (ii) listed in Exhibit J hereto and used during the conduct of the Permitted Use in no materially greater quantities than the quantities set forth in Exhibit J, Tenant shall not permit or cause any party to transport, store, use, generate, manufacture, dispose, or release any Hazardous Materials in, on, under, about or from the Premises without Landlord’s prior written consent.  Tenant, at its sole cost and expense, shall operate its business in the Premises in strict compliance with all Environmental Requirements and all requirements of this Lease.  Tenant shall complete and certify to disclosure statements as requested by Landlord from time to time relating to Tenant’s transportation, storage, use, generation, manufacture, or release of Hazardous Materials on the Premises.  Each party shall promptly deliver to the other party a copy of any notice of violation it receives relating to the Premises of any Environmental Requirement.

(b)           Environmental Requirements.  The term “Environmental Requirements” means all Laws regulating or relating to health, safety, or environmental conditions on, under, or about the Premises or the environment including the following:  the Comprehensive Environmental Response, Compensation and Liability Act; the Resource Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; the Toxic Substances Control Act and all state and local counterparts thereto, and any common or civil law obligations including nuisance or trespass, and any other requirements of Section 14 and Exhibit C of this Lease.  The term “Hazardous Materials” means and includes any substance, material, waste, pollutant, or contaminant  that is or could be regulated under any Environmental Requirement or that may adversely affect human health or the environment, including any solid or hazardous waste, hazardous substance, asbestos, petroleum (including crude oil or any fraction thereof, natural gas, synthetic gas, polychlorinated biphenyls (PCBs), and radioactive material).  For

purposes of Environmental Requirements, to the extent authorized by law, Tenant is and shall be deemed to be the responsible party, including the “owner” and “operator” of Tenant’s “facility” and the “owner” of all Hazardous Materials brought on the Premises by a Tenant Party and the wastes, by-products, or residues generated, resulting, or produced therefrom.

(c)           Removal of Hazardous Materials.  Tenant, at its sole cost and expense, shall remove all Hazardous Materials stored, disposed of or otherwise released by a Tenant Party in, on, under, about or from the Premises, in a manner and to a level satisfactory to Landlord in its commercially reasonable discretion, but in no event to a level and in a manner less than that which complies with all Environmental Requirements and does not limit any future uses of the Premises or require the recording of any deed restriction or notice regarding the Premises.  Tenant shall perform such work at any time during the period of this Lease upon written request by Landlord or, in the absence of a specific request by Landlord, before Tenant’s right to possession of the Premises terminates.  If Tenant fails to perform such work within the time period before Tenant’s right to possession terminates, Landlord may at its discretion, but subject to applicable Laws and Environmental Requirements, and without waiving any other remedy available under this Lease or at law or equity (including an action to compel Tenant to perform such work), perform such work at Tenant’s cost.  Tenant shall pay all costs incurred by Landlord in performing such work, together with interest thereon at the Default Rate from the time of Landlord’s payment, within ten business days after Landlord’s request therefor.  Such work performed by Landlord is on behalf of Tenant and Tenant remains the owner, generator, operator, transporter, and/or arranger of the Hazardous Materials for purposes of Environmental Requirements.  Tenant agrees not to enter into any agreement with any person, including any governmental authority, regarding the removal of Hazardous Materials that have been disposed of or otherwise released onto or from the Premises without the written approval of the Landlord, which approval shall not be unreasonably withheld, conditioned or delayed.  If the removal work required of Tenant hereunder is not completed by the scheduled expiration of the Term, then, at Landlord’s option, either: (i) the Term shall be extended, and Tenant shall remain obligated to comply with all terms and conditions this Lease, until such work is completed; or (ii) Landlord and Tenant shall enter into a license or similar agreement setting forth the terms and conditions upon which Tenant shall have access to the Premises (or the applicable portion thereof) in order to complete such work.

(d)           Tenant’s Indemnity.  Tenant shall indemnify, defend, and hold Landlord harmless from and against any and all losses (including diminution in value of the Premises and loss of rental income from the Premises), claims, demands, actions, suits, damages (including punitive damages), expenses (including remediation, removal, repair, corrective action, or cleanup expenses), and costs (including actual attorneys’ fees, consultant fees or expert fees and including removal or management of any asbestos brought onto the Premises or disturbed in breach of the requirements of this Section 27, regardless of whether such removal or management is required by Law) which are brought or recoverable against, or suffered or incurred by Landlord as a result of any release of Hazardous Materials  or any breach of the requirements under this Section 27 by a Tenant Party regardless of whether Tenant had knowledge of such noncompliance.  The obligations of Tenant under this Section 27 shall survive any expiration or termination of this Lease.  For clarity, and notwithstanding anything to the contrary contained in this Lease, except to the extent caused or exacerbated by a Tenant Party, Tenant shall not be responsible for (as part of Operating Costs or otherwise) or required to indemnify, defend or hold harmless Landlord from or against any losses, claims, demands, actions, suits, damages, expenses, or costs, arising out of or in ay way related to any Hazardous Materials which (i) existed in, on, under or about the Premises prior to the Effective Date, (ii) were released by Landlord, its agents, employees, invitees or contractors, or (iii) migrate onto the Premises from an off-site source. Tenant shall promptly, diligently and in good faith notify Landlord of any such migration of any Hazardous Materials onto the Premises from an off-site source of which Tenant or any of its employees becomes aware.

(e)           Inspections and Tests.  Landlord shall have access to, and a right to perform inspections and tests of, the Premises to determine Tenant’s compliance with Environmental Requirements, its obligations under this Section 27, or the environmental condition of the Premises.  Access to the Premises shall be granted to Landlord upon Landlord’s prior notice to Tenant and at such times so as to minimize, so far as may be reasonable under the circumstances, any disturbance to Tenant’s operations.  Such inspections and tests shall be conducted at Landlord’s expense, unless such inspections or tests reveal that Tenant has not complied with any Environmental Requirement, in which case Tenant shall reimburse Landlord for the reasonable cost of such inspection and tests.  Landlord’s receipt of or satisfaction with any environmental assessment in no way waives any rights that Landlord holds against

Tenant.  Tenant shall promptly notify Landlord of any communication or report that Tenant makes to any governmental authority regarding any possible violation of Environmental Requirements or release or threat of release of any Hazardous Materials in violation of Environmental Requirements in, on, under, about or from the Premises.  Tenant shall, within five days of receipt thereof, provide Landlord with a copy of any documents or correspondence received from any governmental agency or other party relating to a possible violation of Environmental Requirements or claim or liability associated with the release or threat of release of any Hazardous Materials onto or from the Premises.  Except as indicated in the Phase I Report environmental report prepared by prepared by Flour Daniel GTI dated July 15, 1998, revised September 2, 1998, which has been provided to Tenant or as otherwise disclosed to Tenant in writing on or before the Effective Date, to Landlord’s knowledge, as of the Effective Date, (i) no Hazardous Materials are present in, on or under the Premises or the soil, surface water or groundwater thereof in violation of any applicable Environmental Requirements, (ii) no underground storage tanks are present on the Premises, and (iii) no action, proceeding or claim is pending or threatened regarding the Premises concerning any Hazardous Materials pursuant to any Environmental Requirements.  As used herein, “to Landlord’s knowledge” mean the actual present and conscious awareness or knowledge of Erich Stiger, Katie Padden Morris and/or Cassandra Permenter, without any duty of inquiry or investigation; provided that so qualifying Landlord’s knowledge shall in no event give rise to any personal liability on the part of such named individuals, or any of them, or any other officer or employee of Landlord, on account of any breach of the foregoing representation.  Said terms do not include constructive knowledge, imputed knowledge, or knowledge Landlord or such individuals do not have but could have obtained through further investigation or inquiry.

(f)            Tenant’s Financial Assurance in the Event of a Breach.  In addition to all other rights and remedies available to Landlord under this Lease or otherwise, Landlord may, in the event of a breach of the requirements of this Section 27 that is not cured within 30 days following notice of such breach by Landlord, require Tenant to provide reasonable financial assurance (such as insurance, escrow of funds or third party guarantee) in an amount and form satisfactory to Landlord.  The requirements of this Section 27 are in addition to and not in lieu of any other provision in this Lease.

28.           Parking.  Tenant shall have the exclusive right to use all parking spaces located at the Premises. Parking spaces will be available to Tenant without charge during the Term.  Landlord shall not be responsible for enforcing Tenant’s parking rights against third parties and Tenant may designate reserved parking stalls as it requires.

This Lease is executed as of the Effective Date.

LANDLORD:	TRINET MILPITAS ASSOCIATES, LLC, a Delaware limited liability company
	By:		TriNet Realty Investors II, Inc., a Maryland corporation
			By:	/s/ ERICH STIGER
			Name: Erich Stiger
			Title: Senior Vice President
TENANT:	ADVANCED MEDICAL OPTICS, INC., a Delaware corporation
	By:	/s/ JAMES V. MAZZO
	Name: Jim Mazzo
	Title: Chairman, President and CEO

EX-21.1

EXHIBIT 21.1

ENTITIES OF ADVANCED MEDICAL OPTICS, INC.

		PLACE OF INCORPORATION
NAME OF SUBSIDIARY		OR ORGANIZATION
1.	AMO Holdings, Inc.	United States (Delaware)
2.	AMO Nominee Holdings, LLC	United States (Delaware)
3.	AMO Spain Holdings, LLC	United States (Delaware)
4.	AMO U.K. Holdings, LLC	United States (Delaware)
5.	AMO USA, Inc.	United States (Delaware)
6.	Ironman Merger Corporation	United States (Delaware)
7.	Quest Vision Technology, Inc.	United States (California)
8.	VISX, Incorporated	United States (Delaware)
9.	WaveFront Sciences, Inc.	United States (New Mexico)
10.	Advanced Medical Optics Australia Pty Ltd.	Australia
11.	AMO Belgium BVBA	Belgium
12.	AMO Canada Company	Canada
13.	AMO Global Holdings	Cayman Islands
14.	AMO Ireland	Cayman Islands
15.	AMO Puerto Rico Manufacturing, Inc.	Cayman Islands
16.	VISX	Cayman Islands
17.	AMO (Hangzhou) Co., Ltd.	China
18.	AMO Denmark ApS	Denmark
19.	AMO France SAS	France
20.	AMO Germany GmbH	Germany
21.	AMO Asia Limited	Hong Kong
22.	Advanced Medical Optics India Private Limited	India
23.	Allergan Trading International Limited	Ireland
24.	AMO Ireland Export Ltd.	Ireland
25.	AMO International Holdings	Ireland
26.	AMO Ireland Finance	Ireland
27.	AMO Regional Holdings	Ireland (Non Resident)
28.	AMO Italy SrL	Italy
29.	AMO Japan KK	Japan
30.	AMO Malta Limited	Malta
31.	AMO Netherlands BV	Netherlands
32.	AMO Groningen B.V.	Netherlands
33.	Advanced Medical Optics Norway ASA	Norway
34.	AMO Singapore Pte. Ltd.	Singapore
35.	Advanced Medical Optics Spain S.L.	Spain
36.	AMO Manufacturing Spain, S.L.	Spain
37.	Advanced Medical Optics Norden AB	Sweden
38.	Advanced Medical Optics Uppsala AB	Sweden
39.	AMO Switzerland GmbH	Switzerland
40.	AMO United Kingdom, Ltd.	United Kingdom

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (Nos. 333-118922, 333-127245 and 333-136726) and Form S-8 (Nos. 333-90950, 333-109058, 333-116589 and 333-125305) of Advanced Medical Optics, Inc. of our report dated February 28, 2007 relating to the financial statements, financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PRICEWATERHOUSE COOPERS LLP

PricewaterhouseCoopers LLP
Orange County, California
February 28, 2007

1

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, James V. Mazzo, the Chief Executive Officer of Advanced Medical Optics, Inc., a Delaware corporation, hereby certify that:

1.I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of Advanced Medical Optics, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4.The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5.The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 28, 2007

/s/ JAMES V. MAZZO

James V. Mazzo, Chairman of the Board,

President and Chief Executive Officer

A signed original of this written statement required by Section 302 has been provided to Advanced Medical Optics, Inc. and will be retained by Advanced Medical Optics, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Richard A. Meier, the Chief Financial Officer of Advanced Medical Optics, Inc., a Delaware corporation, hereby certify that:

1.I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2006 of Advanced Medical Optics, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4.The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5.The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 28, 2007

/s/ RICHARD A. MEIER

Richard A. Meier, Chief Operating Officer and

Chief Financial Officer

A signed original of this written statement required by Section 302 has been provided to Advanced Medical Optics, Inc. and will be retained by Advanced Medical Optics, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.1

Exhibit 32.1

WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350

The undersigned, James V. Mazzo and Richard A. Meier, the Chief Executive Officer and the Chief Financial Officer, respectively, of Advanced Medical Optics, Inc. (the “Company”), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. §1350, hereby certify to the best of their knowledge that:

(i)            the Annual Report on Form 10-K of the Company for the quarterly and annual period ended December 31, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 780(d)); and

(ii)           the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 28, 2007

/s/ JAMES V. MAZZO

James V. Mazzo,

Chairman of the Board, President and

Chief Executive Officer

/s/ RICHARD A. MEIER

Richard A. Meier,

Chief Operating Officer and

Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Advanced Medical Optics, Inc. and will be retained by Advanced Medical Optics, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.