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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2003

or

For the transition period from _______ to _______

Commission File Number 1-10694

VISX, INCORPORATED

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )

Total number of shares of common stock outstanding as of July 25, 2003: 48,011,205

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VISX, INCORPORATED
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PART I. FINANCIAL INFORMATION

     Item 1. Condensed Consolidated Interim Financial Statements

VISX, INCORPORATED AND SUBSIDIARIES

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

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

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VISX, INCORPORATED AND SUBSIDIARIES

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

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

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VISX, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(In thousands)

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

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VISX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)

1.

Basis of Presentation:

We prepared our Condensed Consolidated Interim Financial Statements in conformity with Securities and Exchange Commission rules and regulations. Accordingly, we condensed or omitted certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. Please read our 2002 Annual Report on Form 10-K to gain a more complete understanding of these interim financial statements.

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

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

2.

Earnings Per Share:

Basic earnings per share (“EPS”) equals net income divided by the weighted average number of common shares outstanding. Diluted EPS equals net income divided by the weighted average number of common shares outstanding plus dilutive potential common shares calculated in accordance with the treasury stock method. All amounts in the following table are in thousands, except per share data.

Options to purchase 4,716,000 shares and 6,257,000 shares during the three months ended June 30, 2003 and 2002, respectively, were excluded from the computation of diluted EPS because the weighted average exercise prices for these options of $24.52 and $23.39, respectively, were greater than the average market price of VISX’s common stock during these periods.

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Options to purchase 6,095,000 shares and 6,055,000 shares during the six months ended June 30, 2003 and 2002, respectively, were excluded from the computation of diluted EPS because the weighted average exercise prices for these options of $22.35 and $23.79, respectively, were greater than the average market price of VISX’s common stock during these periods.

3.

Stock-Based Employee Compensation

We account for stock-based employee compensation arrangements using the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and Financial Accounting Standards Board (“FASB”) Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation – an Interpretation of APB No. 25” and comply with the disclosure provisions of Statement of Financial Accounting Standards No. 148, “Accounting For Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”). In accordance with APB 25 and FIN 44, we record no stock-based employee compensation cost in our net income because (1) all options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the date of grant and (2) stock purchased through our Employee Stock Purchase Plan (“ESPP”) is priced at 85% of the fair market value of the stock on the first day or the end of each six month segment of a two year offering period. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to stock-based employee compensation (unaudited, in thousands, except per share data).

For purposes of computing pro forma net income, we estimate the fair value of each option grant and employee stock purchase plan purchase right on the date of grant using the Black-Scholes option pricing model. The assumptions used to value the option grants and purchase rights are stated as follows:

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These pro forma amounts may not be representative of the effects for future years as options vest over several years and additional awards are generally made each year.

4.

Inventories (in thousands):

5.

Comprehensive Income (unaudited, in thousands):

6.

Warranty Obligations

Changes in product warranty obligations for the periods ended June 30, 2003 and 2002 are as follows (unaudited, in thousands):

7.

Stock Repurchase Program

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On April 4, 2001, our Board of Directors authorized a new Stock Repurchase Program under which up to 10 million shares of VISX common stock may be repurchased. In accordance with the April 4, 2001 authorization and applicable securities laws, through purchases on the open market we have repurchased 7.0 million shares cumulatively through June 30, 2003 at a total cost of $90.4 million. Additionally, under separate Board of Director authorization we repurchased 3.5 million shares of VISX stock during the quarter ended June 30, 2003. Accordingly, 3.0 million shares remain available as of June 30, 2003 for repurchase under the Board of Directors’ April 2001 authorization.

8.     Significant Customers

A significant portion of our revenues is derived from sales to TLC Vision Corporation (“TLC”), formed in May 2002 through the merger of TLC Laser Eye Centers, Inc. and Laser Vision Centers, Inc., both long-term customers of ours. Sales to the combined company, TLC, accounted for 10% and 17% of total revenues in the second quarter of 2003 and 2002, respectively, and 11% and 17% of total revenues in the first half of 2003 and 2002, respectively.

At June 30, 2003 TLC Vision Corporation and DVI, Inc., a healthcare finance company, represented 24% and 14% of accounts receivable, respectively. At December 31, 2002 TLC Vision Corporation and DVI, Inc. represented 22% and 6% of accounts receivable, respectively.

9.     New Accounting Pronouncements

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We are currently evaluating the effect that the adoption of EITF Issue No. 00-21 but do not expect a material impact on our financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a material impact on our financial position or results of operations.

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

This Report contains forward-looking statements, including but not limited to: declining laser upgrade revenues; our belief that a rebound in the U.S. economy and increases in consumer confidence will provide renewed support for the U.S. laser vision correction market in the future; our belief that ongoing technical advances (including our CustomVue™ procedure) have the potential to improve a person’s vision beyond that which can be obtained with contact lenses or glasses and will reduce concerns perceived by some consumers; research and development and regulatory expenditures; our belief that gross profit margin on system revenues will remain lower than the comparative 2002 period throughout the remainder of 2003; the sufficiency of our cash flow from operations combined with our existing cash, cash equivalents and short-term investments to meet our needs during the coming twelve months; our belief that our interest and other income for the remainder of 2003 will be significantly lower than the comparative 2002 periods; and our belief that legal actions will not materially affect our business. These forward-looking statements are estimates reflecting the best judgment of our senior management, and they involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. The risks and uncertainties include the potential reduction in demand for our equipment and upgrades, and the potential decline in demand for procedures caused by the continued weakness in the economy, consumer confidence and stock markets in the United States. In addition, please see the disclosure under the caption “Risk Factors” at the end of Item 2. Moreover, we caution you not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

The laser vision correction industry is evolving rapidly. Economic, market, and technology changes frequently affect VISX and could harm our business in the future. If any of the risks referred to above were to materialize, orders and revenues for the VISX STAR™ Excimer Laser System (“VISX STAR System”), WaveScan® System and/or VisionKey® Cards could fluctuate or decline. Accordingly, our past results may not be useful in predicting our future results.

     Overview

VISX, Incorporated (“VISX”), a Delaware corporation organized in 1988, is a worldwide leader in the design and development of proprietary technologies and systems for laser vision correction. We sell products worldwide and generate the majority of our revenues through the sale of VisionKey Cards that are required to perform laser vision correction procedures on the VISX STAR System. We have also licensed our technology to other excimer laser system companies and generally receive royalties from the sale of their systems outside the U.S. and from procedures that are performed in the U.S. using their systems.

The FDA and comparable international regulatory agencies have approved the VISX STAR System for use in the treatment of most types of refractive vision disorders including nearsightedness, farsightedness, and astigmatism. The FDA has also approved our WaveScan System, a diagnostic device that measures refractive errors in a person’s vision more precisely than did previously available technology. The WaveScan System is used in conjunction with our VISX STAR System to perform CustomVue laser vision correction, which enhances laser vision correction and potentially improves vision beyond that of contacts and glasses. In the U.S., we received FDA approval of our CustomVue procedure in May 2003.

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Results of Operations

System revenues

System revenues decreased $5.1 million, to $7.7 million for the three months ended June 30, 2003 from $12.8 million for the three months ended June 30, 2002. System revenues decreased $5.1 million, to $17.6 million for the six months ended June 30, 2003 from $22.7 million for the six months ended June 30, 2002. Sales of laser systems declined $3.4 million and $5.3 million in the second quarter and first half of 2003, respectively, from the comparable periods of the prior year. We believe the decline was due primarily to the economic slowdown in the United States and many of our markets abroad. Aggressive tactics by competitors also affected our sales. Additionally, we experienced a decline in Far East system revenues primarily due to political tensions in Korea and concerns with SARS in our other markets. Our average selling price for laser systems was lower than in the prior year due to the factors discussed above. Upgrade revenues declined $5.3 million and $6.2 million in the second quarter and first half of 2002, respectively, from the comparable periods of the prior year. The decline in upgrade revenues was due to the fact that approximately 80% of our lasers in active use in the U.S. have already been upgraded. We anticipate that upgrade revenues throughout 2003 will be significantly lower than in 2002. WaveScan system sales increased $3.5 million and $6.3 million in the second quarter and first half of 2002, respectively, over the comparable periods of the prior year due to CustomVue approval in May that had been long anticipated by our customers.

Service and parts revenues

Service and parts revenues decreased $0.6 million for the three months ended June 30, 2003, from $4.8 million for the three months ended June 30, 2002. Service and parts revenues decreased $0.9 million for the six months ended June 30, 2003, from $9.9 million for the six months ended June 30, 2002. The declines were due mainly to a new service plan introduced during 2002 that reduced the price charged for service contracts on laser systems with lower than average procedure volume.

License and other revenues

License and other revenues increased $1.1 million, to $20.1 million for the three months ended June 30, 2003 from $19.0 million for the three months ended June 30, 2002. The increase was attributable primarily to customers in the U.S. purchasing VisionKey cards for CustomVue procedures during June. Our selling price for CustomVue procedures is approximately double that for standard procedures. License and other revenues decreased $0.9 million to $39.7 million for the six months ended June 30, 2003 from $40.6 million for the six months ended June 30, 2002. The decrease was attributable primarily to customers in the U.S. purchasing VisionKey cards for fewer procedures in the first half of 2003 than in the comparable period of 2002.

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The U.S. economy has deteriorated over the last two years. One consequence has been a decline in consumers’ discretionary spending. Since laser vision correction surgery is elective and generally not covered by medical insurance, it has been adversely impacted. The volume of laser vision correction surgeries in the U.S. over the past two years has shown a correlation with changes in the stock market and consumer confidence index, both of which have declined significantly during this period. We believe these are the main factors causing the decline in U.S. procedure volume. In addition, consumers also consider perceptions about the safety and effectiveness of the procedure. The lack of long-term follow-up studies of the procedure combined with media coverage of selected unfavorable outcomes may have contributed to uncertainty and delay by some potential consumers.

We believe that a rebound in the U.S. economy and increases in consumer confidence will provide renewed support for the U.S. laser vision correction market in the future. We also expect that ongoing technical advances (including our CustomVue procedure), which have the potential to improve a person’s vision beyond that which can be obtained with contact lenses or glasses, will reduce concerns perceived by some consumers regarding the safety of laser vision correction. Notwithstanding, we cannot accurately predict when, or to what extent, these anticipated changes in the economy and technology would impact our license and other revenues.

Cost of system revenues

Cost of system revenues decreased slightly to $7.2 million for the three months ended June 30, 2003 from $7.2 million for the three months ended June 30, 2002. Cost of system revenues was largely unchanged in the six months ended June 30, 2003 from the corresponding period of the prior year. Sales of lasers and upgrades decreased while shipments of WaveScan Systems increased. The decline in cost of system revenues was due primarily to lower cost related to reduced laser upgrade revenue. The gross profit margin on system revenues was higher in 2002 than in 2003 due to more sales of lasers and upgrades in 2002 compared to 2003. We anticipate that the gross profit margin on system revenues will remain lower than the comparative 2002 period throughout the remainder of 2003.

Cost of service and parts revenues

Cost of service and parts revenues was largely unchanged in the second quarter of 2003 from the corresponding period of the prior year. Cost of service and parts revenues increased $0.5 million, to $7.2 million for the six months ended June 30, 2003, from $6.7 million for the six months ended June 30, 2002. Cost of service and parts revenues increased $0.5 million due to higher costs to service a larger installed base of products in the United States. The gross profit margin on service and parts revenues

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was lower in 2003 than in 2002 due primarily to the lower price associated with the new service plan introduced during 2002.

Cost of license and other revenues

Cost of license and other revenues decreased $0.6 million to $0.7 million for the three months ended June 30, 2003 from $1.3 million for the three months ended June 30, 2002. Cost of revenues decreased $1.0 million to $1.5 million for the six months ended June 30, 2003 from $2.5 million for the six months ended June 30, 2002. These decreases were due to the sale of fewer keycards in 2003 when compared to the related period in 2002.

Selling, general, and administrative expenses

Selling, general, and administrative expenses decreased $0.8 million to $10.9 million for the three months ended June 30, 2003 from $11.7 million for the three months ended June 30, 2002. Selling, general, and administrative expenses decreased $1.9 million to $20.3 million for the six months ended June 30, 2003 from $22.2 million for the six months ended June 30, 2002. Legal expenses decreased by $5.1 million in 2003 compared to 2002 primarily as a result of the Nidek settlement. In addition, legal expenses in the second quarter and first half of 2003 were lower as the result of $2.1 million in insurance reimbursements received during 2003. This compares to a $1.5 million insurance reimbursement in the second quarter of 2002. These decreases were offset by marketing costs incurred in connection with our new CustomVue procedure plus $1.2 million additional general expenses associated with the filing of the 2003 proxy statement and stockholder vote.

Research, development and regulatory expenses

Research, development and regulatory expenses were consistent between the three months ended June 30, 2003 and 2002. Research, development and regulatory expenses decreased $0.2 million to $8.8 million for the six months ended June 30, 2003 from $9.0 million for the six months ended June 30, 2002. We continued to focus on next generation technologies and developments for laser vision correction. These included laser platforms such as our STAR S4™ Excimer Laser System, eye diagnostic units such as our WaveScan System, and new methods for correcting vision disorders including our CustomVue procedure and early research and clinical trials on treatments for presbyopia. We also continued funding early stage research at Stanford University for future treatments for age-related macular degeneration (“AMD”) and other advanced technologies. We anticipate that our research, development and regulatory expenses in 2003 will be consistent with our expenditures in 2002.

Interest and other income