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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended September 30, 2003

or

For the transition period from              to             

Commission File Number 1-10694

VISX, INCORPORATED

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

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

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

Total number of shares of common stock outstanding as of October 31, 2003: 48,330,443

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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 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 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 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
September 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.

These interim financial statements include 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 1,996,000 shares and 6,640,000 shares during the three months ended September 30, 2003 and 2002, respectively, were excluded from the computation of diluted EPS because the weighted average exercise prices for these options of $34.97 and $21.67, respectively, were greater than the average market price of VISX’s common stock during these periods.

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Options to purchase 4,795,000 shares and 6,349,000 shares during the nine months ended September 30, 2003 and 2002, respectively, were excluded from the computation of diluted EPS because the weighted average exercise prices for these options of $24.46 and $22.95, 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 of a two-year offering period or as of the end of each six month purchase segment of a two year offering period, whichever is lower. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to stock-based employee compensation (unaudited, in thousands, except per share data).

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

Warranty obligations are included in accrued liabilities. Changes in product warranty obligations for the periods ended September 30, 2003 and 2002 are as follows (unaudited, in thousands):

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7.     Patents and Technology Assets

In April 2003, we acquired technology, including patents and other assets associated with our WaveScan WaveFront® System (“WaveScan System”) from 20/10 Perfect Vision Optische Gerate GmbH. We paid $5.9 million for this technology, which was previously licensed to us under an exclusive licensing agreement that is superseded by the acquisition. These assets are included in other assets and are being amortized to cost of system revenues over the estimated useful life of five years.

8.     Stock Repurchase Program

On April 4, 2001, our Board of Directors authorized a Stock Repurchase Program under which up to 10 million shares of VISX common stock may be repurchased. In accordance with this authorization and applicable securities laws, we have repurchased 7.0 million shares cumulatively on the open market through September 30, 2003, at a total cost of $90.4 million. Accordingly, 3.0 million shares remain available as of September 30, 2003 for repurchase under the Board of Directors’ April 2001 authorization. Additionally, on May 28, 2003, the Board of Directors authorized the repurchase of an additional 3.5 million shares of VISX stock at a total cost of $63 million, all of which were purchased during the quarter ended June 30, 2003.

9.     Significant Customer

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 TLC and its operating subsidiaries accounted for 17% and 12% of total revenues in the third quarter of 2003 and 2002, respectively, and 16% and 15% of total revenues in the first nine months of 2003 and 2002, respectively.

At September 30, 2003, TLC represented 23% of accounts receivable. At December 31, 2002, TLC represented 22% of accounts receivable.

10.     Legal Proceedings

From time to time, we have been involved in a variety of legal proceedings. For a complete description of legal proceedings, see our annual report on Form 10-K for the year ended December 31, 2002 and our quarterly reports on Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003. During the quarter ended September 30, 2003, there were no material developments with respect to such previously existing proceedings and no new material proceedings not previously disclosed.

11.     New Accounting Pronouncement

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 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 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 in 2003 as compared to 2002; our belief that a rebound in the United States economy and increases in consumer confidence will provide renewed support for the United States 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, as well as the potential decline in demand for procedures caused by the weakness in the economy, consumer confidence or 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 continually evolving. 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 Wavefront® System (“WaveScan System”) and/or treatment cards for standard or CustomVue procedures 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 treatment cards that are used 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 United States and from procedures that are performed in the United States using their systems.

The Food and Drug Administration (“FDA”) in the United States and comparable regulatory agencies in other countries 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 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 possible with contacts and glasses. In May 2003, we received FDA approval of our CustomVue procedure for the treatment of myopia and astigmatism.

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Results of Operations

     System revenues

System revenues are comprised of the following: revenues from sales of the VISX STAR System, revenues from the sales of upgrades to the VISX STAR System, and revenues from the sales of the WaveScan System®. Overall, system revenues increased $0.9 million, to $11.1 million for the three months ended September 30, 2003 from $10.2 million for the three months ended September 30, 2002. System revenues decreased $4.2 million, to $28.7 million for the nine months ended September 30, 2003 from $32.9 million for the nine months ended September 30, 2002.

Sales of the VISX STAR System declined $1.2 million and $6.4 million in the third quarter and nine months, respectively, from the comparable periods of the prior year. The United States and many of our key international markets began to experience an economic slowdown in the later part of 2000 that has continued into 2003. This has lead to industry-wide reductions in procedure volume in the United States as well as in many key international markets during this period. We believe the reduction in procedure volume is the principle cause for the decline in demand for new lasers. We also believe that economic slowdown was responsible for the decline in our average selling price for VISX STAR Systems in the United States as compared to the prior year.

Upgrade revenues declined $1.7 million and $7.8 million in the third quarter and first nine months of 2002, respectively, from the comparable periods of the prior year. The decline in upgrade revenues was due to the fact that approximately 90% of our lasers in active use in the United States have already been upgraded to the STAR S3® platform. We anticipate that upgrade revenues throughout 2003 will be significantly lower than in 2002.

WaveScan System sales increased $3.8 million and $10.0 million in the third quarter and first nine months of 2002, respectively, over the comparable periods of the prior year due to the CustomVue approval in May 2003 that had been long anticipated by our customers.

     Service and parts revenues

Service and parts revenues decreased $0.1 million, to $4.6 million for the three months ended September 30, 2003, from $4.7 million for the three months ended September 30, 2002. Service and parts revenues decreased $1.0 million, to $13.7 million for the nine months ended September 30, 2003, from $14.7 million for the nine months ended September 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.

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     License and other revenues

License and other revenues increased $7.9 million, to $23.5 million for the three months ended September 30, 2003, from $15.6 million for the three months ended September 30, 2002. License and other revenues increased $7.0 million, to $63.2 million for the nine months ended September 30, 2003, from $56.2 million for the nine months ended September 30, 2002. These increases are attributable primarily to customers in the United States purchasing treatment cards for our new CustomVue procedure, which was introduced in June 2003. Our selling price for the CustomVue procedure is more than double that for our standard procedure. In addition, procedure volume increased slightly in the third quarter of 2003, reversing our normal seasonal decline in procedure volume from the second to the third quarter.

We believe that a rebound in the United States economy and increases in consumer confidence will provide renewed support for the United States laser vision correction market. 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. Nevertheless, we cannot accurately predict when, or to what extent, these anticipated changes in the economy and technology will impact our license and other revenues.