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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

ADVANCED MEDICAL OPTICS, INC.

1700 E. ST. ANDREW PLACE, SANTA ANA, CALIFORNIA 92799-6162

TELEPHONE NUMBER 714/247-8200

FORMER ADDRESS:

2525 DUPONT DRIVE, IRVINE, CALIFORNIA 92612

TELEPHONE NUMBER 714/246-4500

Indicate by a 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.

(1) x yes o no
(2) x yes o no

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of August 9, 2002 there were 28,723,512 shares of common stock outstanding.

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ADVANCED MEDICAL OPTICS, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 28, 2002

INDEX

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PART I — FINANCIAL INFORMATION

Advanced Medical Optics, Inc.
Unaudited Condensed Combined Statements of Earnings
(In thousands)

See accompanying notes to unaudited condensed combined financial statements.

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Advanced Medical Optics, Inc.
Unaudited Condensed Combined Balance Sheets
(In thousands)

See accompanying notes to unaudited condensed combined financial statements.

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Advanced Medical Optics, Inc.
Unaudited Condensed Combined Statements of Cash Flows
(In thousands)

See accompanying notes to unaudited condensed combined financial statements.

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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Combined Financial Statements

Note 1: Description of Business

On January 22, 2002, Allergan, Inc. (Allergan) announced a plan to spin off its optical medical device business consisting of ophthalmic surgical and contact lens care product business lines to Allergan stockholders. The 28,723,512 shares of the new optical medical device company, Advanced Medical Optics, Inc. (AMO or the Company), were distributed on June 29, 2002 to Allergan stockholders of record on June 14, 2002 by means of a tax-free dividend. The distribution resulted in AMO operating as an independent entity with publicly traded common stock.

On June 29, 2002 in accordance with the contribution and distribution agreement, cash and equity were reduced by approximately $50.1 million due to a cash distribution to Allergan.

Note 2: Basis of Presentation

In the opinion of management, the accompanying unaudited condensed combined financial statements contain all adjustments necessary (consisting only of normal recurring accruals) to present fairly the financial information contained therein. These statements do not include all disclosures required by accounting principles generally accepted in the United States of America for annual financial statements and should be read in conjunction with the audited combined financial statements of the Company for the year ended December 31, 2001. The results of operations for the three and six months ended June 28, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002.

Allergan did not account for the business that comprises AMO on the basis of separate legal entities, subsidiaries, divisions or segments. The accompanying unaudited combined financial statements as of December 31, 2001 and for each of the periods ended June 28, 2002 and June 29, 2001 include those assets, liabilities, revenues and expenses directly attributable to AMO’s operations and allocations of certain Allergan corporate assets, liabilities and expenses to AMO. These amounts have been allocated to AMO on the basis that is considered by Allergan management to reflect most fairly or reasonably the utilization of the services provided to or the benefit obtained by the Company. Allergan believes the methods used to allocate these amounts are reasonable and consistent with prior periods. The accompanying unaudited combined balance sheet as of June 28, 2002 includes those assets and liabilities directly related to the optical medical device business. All material intercompany balances have been eliminated. At June 28, 2002, approximately $7.0 million of intercompany payables were converted to third party payables to Allergan. The financial information included herein does not necessarily reflect what the financial position and results of operations of the Company would have been had it operated as a stand-alone public entity during the periods covered, and may not be indicative of future operations or financial position. Subsequent to the distribution, the Company estimates that it will incur incremental annual pre-tax costs of approximately $58 million associated with being an independent public company. Such incremental annual costs include approximately $7 million for cost of sales, $31 million for selling,

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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Combined Financial Statements (continued)

general and administrative expenses including accounting, information systems, legal, human resources and other costs, $1 million for research and development costs, and interest expense of $19 million, including the estimated annual amortization of capitalized debt origination fees. The estimate of incremental interest expense is based on the incurrence of $300 million of debt at a weighted average interest rate of 6.89%, including the benefit of interest rate swaps.

Note 3: Recently Adopted Accounting Standards

In July 2001, Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS No. 141), was issued. SFAS No. 141 required that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method combinations completed after June 30, 2001. SFAS No. 141 also required the Company to evaluate its existing intangible assets and goodwill that were acquired in prior business combinations, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition of intangibles apart from goodwill.

Additionally, in July 2001, Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), was issued and is effective for all periods of fiscal years beginning after December 15, 2001 (January 1, 2002 for the Company). SFAS No. 142 establishes accounting and reporting standards for intangible assets. SFAS No. 142 requires goodwill and intangible assets with indefinite useful lives be evaluated annually for impairment rather than amortized. Upon adoption of SFAS No. 142, the Company is also required to test goodwill and intangible assets with indefinite useful lives for impairment within the first interim period with any impairment loss being recognized as a cumulative effect of a change in accounting principle.

In connection with the transitional goodwill impairment evaluation, SFAS No. 142 requires the Company to perform an assessment of whether there is an indication that goodwill and intangible assets with indefinite useful lives are impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company then has up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired.

The Company adopted the provisions of SFAS No. 141 on June 30, 2001 and SFAS No. 142 on January 1, 2002, effective with Allergan’s adoption of the new accounting standard. Allergan’s adoption did not result in a negative impact on Allergan’s Consolidated Financial Statements. The Company is required to complete a separate assessment of goodwill and intangibles on a

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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Combined Financial Statements (continued)

stand-alone basis. The Company’s separate assessment is not expected to result in a negative impact on its combined financial statements.

The components of amortizable intangibles and goodwill were as follows:

Intangibles

Amortization expense for the three and six months ended June 28, 2002 and June 29, 2001 was approximately $78,000 and $154,000, respectively.

Estimated amortization expense for years ending December 31, 2002, 2003, 2004, 2005, 2006 and thereafter are $352,000, $401,000, $401,000, $185,000, $96,000 and $58,000, respectively.

Goodwill

There was no activity related to goodwill during the six months ended June 28, 2002, except for the impact of foreign currency fluctuations.

Pro forma financial information related to the adoption of SFAS No. 142 is as follows:

In October 2001, Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), was issued. SFAS No. 144 superseded Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations — Reporting the effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and

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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Combined Financial Statements (continued)

Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business. SFAS No. 144 retained the requirement in Opinion No. 30 to report separately discontinued operations and extended that reporting to a component of an entity that either has been disposed of or is classified as held for sale. The Company adopted the provisions of SFAS No. 144 for the quarter ended March 29, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company’s combined financial statements.

In April 2002, Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS No. 145) was issued. SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Upon adoption of SFAS No. 145, we will be required to apply the criteria in APB Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion No. 30), in determining the classification of gains and losses resulting from the extinguishment of debt. SFAS No. 145 is effective for annual periods beginning after May 15, 2002, with earlier adoption encouraged. The Company elected to early-adopt SFAS No. 145 during the quarter ended June 28, 2002. The adoption of SFAS 145 did not have a material effect on the Company’s combined financial statements.

Note 4: Inventories

Components of inventories were:

Note 5: Debt and Interest Rate Swap Agreements

At June 28, 2002, the Company had $197.2 million, net of $2.8 million of original issue discount, of 9-1/4% senior subordinated notes due July 15, 2010 outstanding. Interest on the senior subordinated notes is payable on January 15 and July 15 of each year, commencing January 15, 2003. The notes are redeemable at the option of the Company, in whole or in part, at any time on or after July 15, 2006 at various redemption prices.

In addition, the Company entered into a senior credit facility, consisting of a $100.0 million term loan and a $35.0 million revolving line of credit. Currently, approximately $17.0 million of the revolving line of credit has been reserved to support letters of credit issued on the Company’s behalf.

A portion of the proceeds from the senior subordinated notes and the term loan were used to repay debt in Japan. As a result of the prepayment of the Japan debt and the adoption of SFAS No. 145, $3.5 million of early debt extinguishment costs were incurred and are recorded in “Other, net” on the accompanying condensed combined statement of earnings.

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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Combined Financial Statements (continued)

The senior credit facility provides that the Company will maintain certain financial and operating covenants which include, among other provisions, maintaining specific leverage and interest coverage ratios. Certain covenants under the senior credit facility and the indenture relating to the senior subordinated notes also limit the incurrence of additional indebtedness and restrict dividend payments.

The aggregate maturities of total long-term debt are as follows: $1.0 million each year between 2003 and 2006; $48.0 million in 2007 and $248.0 million after 2007.

In June and July 2002, the Company entered into various interest rate swap agreements which effectively convert the interest rate on $150.0 million of the senior subordinated notes from a fixed to a floating rate and convert the interest rate on $50.0 million of the $100.0 million term loan from a floating rate to a fixed rate. The interest rate swaps have maturity dates beginning in 2005 and qualify as either fair value or cash flow hedges. Changes in fair value of these swap agreements are recorded in other comprehensive income to the extent such changes are effective and as long as the fair value or cash flow hedge requirements are met.

At June 28, 2002, the fair value of $(2.0) million of the interest rate swap agreements related to the senior subordinated notes is recorded in “Other liabilities.”

Note 6: Income Taxes

The Company’s operations were historically included in Allergan’s consolidated U.S. federal and state income tax returns and in the tax returns of certain Allergan foreign subsidiaries. The provision for income taxes has been determined as if the Company had filed separate tax returns under its existing structure for the periods presented. Accordingly, the effective tax rate of the Company in future years could vary from its historical effective tax rate depending on the Company’s future legal structure and tax elections. A majority of income taxes were paid by Allergan and reflected through the “Allergan, Inc. net investment” account.

Note 7: Commitments and Contingencies

In conjunction with the spin-off from Allergan, the Company has entered into various facility leases worldwide. Future minimum rental payments under non-cancelable operating lease commitments with a term of more than one year are as follows: $6.8 million in 2003; $4.5 million in 2004; $3.8 million in 2005; $3.9 million in 2006; $2.4 million in 2007 and $18.4 million thereafter.

The Company is involved in various litigation and claims arising in the normal course of business. Management believes that recovery or liability with respect to any pending lawsuits or asserted claims, will not have a material adverse effect on the Company’s combined financial position or results of operations.

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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Combined Financial Statements (continued)

Note 8: Other Comprehensive Income

The following table summarizes components of comprehensive income (in thousands):

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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Combined Financial Statements (continued)

Note 9: Business Segment Information

As a part of Allergan, the Company operated in regions or geographic operating segments. The United States information is presented separately as it is the Company’s headquarters country, and U.S. sales represented 29.0% and 30.6% of total net sales in the quarters ended June 28, 2002 and June 29, 2001, respectively, and 29.7% and 31.6% of total net sales for the six months ended June 28, 2002 and June 29, 2001, respectively. Additionally, sales in Japan represented 25.8% and 25.0% of total net sales in the quarters ended June 28, 2002 and June 29, 2001, respectively, and 25.6% and 22.8% of total net sales for the six months ended June 28, 2002 and June 29, 2001, respectively. No other country, or single customer, generates over 10% of total net sales. Operations for the Europe Region also include sales to customers in Africa and the Middle East, and operations in the Asia Pacific Region include sales to customers in Australia and New Zealand.

Operating income attributable to each operating segment is based upon the management assignment of costs to such regions, which includes the manufacturing standard cost of goods produced by the Company’s manufacturing operations (or the cost to acquire goods from third parties), freight, duty and local distribution costs, and royalties. Operating income for all operating segments and manufacturing operations also includes a charge for corporate services and asset utilization which permits management to better measure segment performance by including a cost of capital in the determination of operating income for each segment.

Income from manufacturing operations is not assigned to geographic regions because most manufacturing operations produce products for more than one region. Research and development costs are corporate costs.

Identifiable assets for each geographic operating segment consist of trade receivables, inventories and property, plant and equipment. All other assets are assigned to general corporate as corporate maintains responsibility for all other assets. Corporate assets are primarily cash and equivalents, goodwill, intangibles and other assets. Assets in each geographic operating segment have not changed materially since December 31, 2001.

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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Combined Financial Statements (continued)

Geographic Operating Segments

In each geographic segment the Company markets products in two product lines: Ophthalmic Surgical and Contact Lens Care. The Ophthalmic Surgical product line markets intraocular lenses, phacoemulsification equipment, viscoelastics, and other products related to cataract and refractive surgery. The Contact Lens Care product line markets cleaning, storage and disinfection products for the consumer contact lens market. The Company provides global marketing strategy teams to ensure development and execution of a consistent marketing strategy for products in all geographic operating segments. There are no transfers between product lines.

Net Sales by Product Line

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ADVANCED MEDICAL OPTICS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 28, 2002

OVERVIEW

     We are a global leader in the development, manufacture and marketing of medical devices for the eye and contact lens care products. Our products in the ophthalmic surgical market include intraocular lenses, phacoemulsification systems, viscoelastics and surgical packs used in cataract surgery, and microkeratomes used in refractive surgery. Our products in the contact lens care market include 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.

     We have operations in approximately 20 countries and sell our products in approximately 60 countries. As part of Allergan, we had organized our operations into four regions: North America, Latin America, Asia Pacific and Europe. Operations for the Europe Region included sales to customers in Africa and the Middle East, and operations in the Asia Pacific Region included sales to customers in Australia and New Zealand. Since the distribution, we have organized our operations into three regions:

	•		Americas (North and South America);
	•		Japan; and
	•		Europe, Africa and Asia Pacific (excluding Japan, but including Australia and New Zealand).

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 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 distribution, we are an independent public company and Allergan no longer maintains any stock ownership in us.

On June 29, 2002 in accordance with the contribution and distribution agreement, our cash and equity were reduced by approximately $50.1 million due to a cash distribution to Allergan.

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Advanced Medical Optics, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 28, 2002

OVERVIEW (Continued)

We anticipate incurring incremental annual pre-tax costs of approximately $58 million associated with being an independent public company. Our management believes that these costs are a reasonable estimate of the incremental costs we will incur as an independent company; however, we cannot assure you that actual costs will not exceed this estimate in a material amount. These incremental annual costs include approximately:

	•		$7 million for cost of sales;
	•		$31 million for selling, general and administrative expenses including accounting, legal, human resources and other costs;
	•		$1 million for research and development costs; and
	•		$19 million for interest expense, including the estimated annual amortization of capitalized debt origination fees. This estimate is based on the incurrence of $300 million of debt at a weighted average interest rate of 6.89%, including the benefit of interest rate swaps.

Allergan did not account for our business on the basis of separate legal entities, subsidiaries, divisions or segments. The accompanying unaudited combined financial statements as of December 31, 2001 and for each of the periods ended June 28, 2002 and June 29, 2001 include those assets, liabilities, revenues and expenses directly attributable to our operations and allocations of certain Allergan corporate assets, liabilities and expenses. These amounts have been allocated on a basis that is considered by Allergan management to reflect most fairly or reasonably the utilization of the services provided to us or the benefit obtained by us. Allergan believes the methods used to allocate these amounts to us are reasonable and consistent with prior periods. The accompanying unaudited combined balance sheet as of June 28, 2002 includes those assets and liabilities directly related to the optical medical device business. All material intercompany balances have been eliminated. The financial information included herein does not necessarily reflect what the financial position and results of our operations would have been had we operated as a stand-alone public entity during the periods covered, and may not be indicative of future operations or financial position.

As part of Allergan, we historically participated in various Allergan administered functions including shared services surrounding selling, general and administrative expenses, retirement and other post retirement benefit plans, income taxes and cash management. Additionally, Allergan has manufactured certain of our products. Shared services include finance, human resources, information systems and legal services. Our allocated portion of the expenses for these services are included in selling, general and administrative expense in our unaudited combined statements of earnings. For the three months ended June 28, 2002 and June 29, 2001, these

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Advanced Medical Optics, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 28, 2002

OVERVIEW (Continued)

allocated expenses were $15.0 million and $8.4 million, respectively. For the six months ended June 28, 2002 and June 29, 2001, these allocated expenses were $23.2 million and $17.0 million, respectively. The Allergan retirement plans and other post retirement benefit plans, which primarily provide medical benefits, historically have covered all Allergan employees. We have included in our unaudited combined statements of earnings allocations for expenses attributable to our employees participating in these plans. We have also included in our unaudited combined financial statements assets and liabilities associated with certain foreign plans to the extent that these plans were transferred to us.

Our income historically has been included in consolidated income tax returns filed by Allergan and most of the related income taxes have been paid by Allergan. Allergan has managed its tax position for the benefit of its entire portfolio of businesses. Allergan’s tax methodologies and elections are not necessarily reflective of the tax methodologies and elections that we would have followed or will follow as a stand-alone company. Our income tax expense has been recorded as if we filed tax returns separate from Allergan.

Cash and equivalents consist of cash in banks and repurchase agreements with financial institutions with original maturities of 90 days or less. We historically have participated in a centralized cash management program administered by Allergan. Cash and equivalents include only those amounts that will be considered part of our operations upon the distribution.

Prior to the distribution, we entered into several agreements with Allergan in connection with, among other things, transitional services, employee matters, manufacturing and tax sharing. Under the transitional services agreement, Allergan provides us, on an interim basis, transitional services such as facilities subleases, research and development services, retail channel support and general and administrative services. In addition, the transitional services agreement provides that we will provide certain limited transitional services to Allergan on an interim basis. Such services include: facilities subleases, retail channel support, and certain general and administrative services.

The transitional services agreement sets forth charges generally intended to allow Allergan to fully recover the allocated costs of providing the services, plus all out-of-pocket costs and expenses, except that we will pay to Allergan a commission related to our products that are sold by them during the transition period. We will recover costs from Allergan in a similar manner for services provided by us. Access to research and development facilities will be provided to us for up to three years following the distribution. With limited exceptions, we do not expect that the other transitional services will extend beyond the 12-month period

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Advanced Medical Optics, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 28, 2002

OVERVIEW (Continued)

following the distribution. We cannot assure you that the costs we incur under the transitional services agreement will be equal to or less than the costs of providing these services internally.

Under the manufacturing agreement, Allergan manufactures certain contact lens care products and VITRAX for a period of up to 3 years from the date of the distribution. We purchase these products from Allergan at a price equal to Allergan’s fully allocated costs plus 10%. If we are unable to either build or obtain regulatory approval for new facilities or locate and obtain regulatory approval for third party manufacturers to produce our products, our business may be harmed.

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 distribution. Generally, Allergan is liable for all pre-distribution taxes attributable to its business, and we generally indemnify Allergan for all unpaid pre-distribution taxes attributable to our business for the current taxable year. In addition, the tax sharing agreement provides that Allergan is generally liable for taxes that are incurred as a result of restructuring activities undertaken to effectuate the distribution.

We and Allergan have made representations to each other and to the Internal Revenue Service in connection with the private letter ruling that Allergan has received regarding the tax-free nature of the distribution of our common stock by Allergan to its stockholders. If either we or Allergan breach our 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 distribution failing to meet the requirements of a tax-free distribution pursuant to Section 355 of the Internal Revenue Code, the party in breach will indemnify the other party for any and all resulting taxes.

CRITICAL ACCOUNTING POLICIES

Revenue and Accounts Receivable

We recognize revenue from product sales when the goods are shipped and title and risk of loss transfer to the customer (i.e., F.O.B. shipping point), with the exception of intraocular lenses, which are generally distributed on a consignment basis and recognized as revenue upon implantation in a patient. We generally permit returns of product from any product line by any class of customer if the product is returned in a timely manner, in good condition, and through the normal channels of

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Advanced Medical Optics, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 28, 2002

CRITICAL ACCOUNTING POLICIES (Continued)

distribution. Return policies in certain international markets can be more stringent and are based on the terms of contractual agreements with 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. Historically, product returns have been within the amounts reserved.

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 receivable aging categories and establish reserves 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. Inventory balances are reduced, if necessary, based on the analysis.

RESULTS OF OPERATIONS

Net Sales. The following table compares net sales by product line for the three month and six month periods ended June 28, 2002 and June 29, 2001:

Net sales decreased $1.5 million, or 1.1%, to $137.7 million in the three months ended June 28, 2002 from $139.2 million in the three months ended June 29, 2001. Net sales for the six months ended June 28, 2002 were $251.7 million, a 3.2% decrease from the comparable 2001 amount.

The impact of foreign currency changes compared to the comparable prior year periods increased net sales by $0.1 million, or 0.1%, and decreased net sales by $5.6 million, or 2.2%, for the three and six months ended June

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Advanced Medical Optics, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 28, 2002

RESULTS OF OPERATIONS (Continued)

28, 2002, respectively. At constant currency rates, net sales decreased $1.6 million, or 1.2%, and decreased $2.7 million, or 1.0%, for the three and six months ended June 28, 2002, respectively, compared with the same periods last year. The total decrease in net sales in the three and six months ended June 28, 2002 compared with the same periods last year was primarily the result of a decrease in sales of contact lens care products, partially offset by an increase in sales of our ophthalmic surgical products.

Global sales of our contact lens care products decreased $6.9 million, or 9.4%, and decreased $14.4 million, or 10.5%, in the three and six months ended June 28, 2002, respectively, as compared with the same periods last year. Sales of our contact lens care products in the United States decreased $3.3 million, or 20.1%, and decreased $9.0 million, or 26.6%, in the three and six months ended June 28, 2002, respectively, compared with the same periods last year, primarily due to a decrease in sales of private-label cold-chemical one-bottle disinfection systems. International sales of our contact lens care products decreased $3.6 million, or 6.3%, and decreased $5.4 million, or 5.3%, in the three and six months ended June 28, 2002, respectively, compared with the same periods last year. The decrease in the six months ended June 28, 2002 was partially a result of the weakening of foreign currencies, primarily the Japanese yen and euro, versus the dollar, which accounted for $3.5 million of the decrease in international sales. At constant currency rates, international contact lens care sales in the three and six months ended June 28, 2002 decreased $3.6 million, or 6.3%, and decreased $2.0 million, or 1.9%, respectively.

The overall decreases in net sales for the three and six months ended June 28, 2002 are primarily attributable to management’s strategic decision to exit the low-margin private label business. Excluding the results of the private label business from all periods, contact lens care sales were materially unchanged. We expect that our global sales of contact lens care products will continue to contract as customers continue to increase their use of lower priced one-bottle cold-chemical disinfection systems and decrease their use of peroxide-based disinfection systems. As our mix of products shifts towards one-bottle disinfection systems, we expect that this trend will have a diminishing impact on our sales.

Global sales of our ophthalmic surgical products increased $5.4 million, or 8.2%, and increased $6.1 million, or 5.0%, in the three and six months ended June 28, 2002, respectively, compared with the same periods last year. In the United States, sales of our ophthalmic surgical products increased $0.6 million, or 2.0%, and increased $1.5 million, or 3.0%, in the three and six months ended June 28, 2002, respectively, compared with the same periods last year. International sales of our ophthalmic surgical products increased $4.8 million, or 12.4%, and increased $4.6 million, or 6.3%, in the three and six months ended June 28, 2002, respectively, compared with the same periods last year. Sales in the United States

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Advanced Medical Optics, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 28, 2002

RESULTS OF OPERATIONS (Continued)

increased primarily due to an increase in sales of phacoemulsification equipment. International sales of our ophthalmic surgical products in the six months ended June 28,2002 were negatively impacted primarily by the weakening of the Japanese yen and the euro versus the dollar, which resulted in a $2.1 million, or 1.7%, unfavorable currency impact. At constant currency rates, international sales of our ophthalmic surgical products for the three and six months ended June 28, 2002, increased $4.7 million, or 12.0%, and increased $6.7 million, or 9.3%, respectively. The increases were primarily attributable to sales increases in phacoemulsification equipment and the SENSAR acrylic intraocular lens, offset in part by sales decreases in PMMA intraocular lenses and silicone intraocular lenses. We believe that global sales of ophthalmic surgical products will continue to grow if sales of higher margin foldable intraocular lenses, most notably the SENSAR acrylic lens, continue to improve.

Gross Margin. Our gross margin was 61.2% of net sales in the three months ended June 28, 2002, which was unchanged from a year ago. Our gross margin increased as a percent of net sales by 1.3 percentage points from 59.9% in the six months ended June 29, 2001 to 61.2% in the six months ended June 28, 2002. Our gross margin in the three and six months ended June 28, 2002 was negatively impacted by the write-off of $2.6 million of inventory deemed unusable due to our spin-off from Allergan. Excluding this write-off, gross margin as a percent of net sales would have been 63.1% and 62.2% in the three and six months ended June 28, 2002, respectively. The increase in gross margin as a percent of net sales was primarily the result of higher gross margins achieved on sales of contact lens care products and a change in product sales mix to higher margin surgical products. Gross margin in dollars declined by $1.0 million and $1.8 million in the three and six months ended June 28, 2002, respectively, compared with the same periods last year, due to the decrease in net sales and the write-off of inventory, partially offset by the increase in gross margin percentage.

Selling, general and administrative. Selling, general and administrative expenses were $59.6 million, or 43.3% of net sales, and $113.8 million, or 45.2% of net sales, in the three and six months ended June 28, 2002, respectively, compared to $58.5 million, or 42.0% of net sales, and $120.6 million, or 46.4% of net sales, in the three and six months ended June 29, 2001, respectively. The increase in both selling, general and administrative dollars and as a percent of net sales in the three months ended June 28, 2002 as compared to the same period last year was primarily a result of increased general and administrative expenses incurred in preparation for our spin-off from Allergan. This was partially offset by reduced selling expenses due to the lower combined net sales and cost improvements primarily in Europe resulting from a restructuring of our sales force completed in 2001 and a reduction in goodwill amortization of $2.2 million. The decrease in both selling, general and administrative

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RESULTS OF OPERATIONS (Continued)

dollars and as a percent of net sales in the six months ended June 28, 2002 as compared to the same period last year was primarily a result of lower selling expenses and a reduction in goodwill amortization of $4.5 million partially offset by increased general and administrative expenses incurred in preparation for our spin-off. Beginning in 2002, we no longer amortize goodwill in accordance with SFAS No. 142.

Research and development. Research and development expenses were $7.9 million, or 5.7% of net sales, and $14.9 million, or 5.9% of net sales, in the three and six months ended June 28, 2002, respectively, compared to $7.2 million, or 5.2% of net sales, and $14.4 million, or 5.6% of net sales, in the three and six months ended June 29, 2001, respectively. The increase in both research and development dollars and as a percent of net sales was a result of an increase in spending for research efforts in the ophthalmic surgical business, partially offset by a small decrease in research and development spending for the contact lens care business.

Operating income. Operating income was $16.8 million, or 12.2% of net sales, and $25.3 million, or 10.1% of net sales, in the three and six months ended June 28, 2002, respectively, compared to $19.6 million, or 14.1% of net sales, and $20.7 million, or 8.0% of net sales, in the three and six months ended June 29, 2001, respectively. The decrease in operating income in the three months ended June 28, 2002 as compared to the same period last year was primarily the result of the decrease in gross margin and higher general and administrative expenses, partially offset by lower selling expenses. The increase in operating income in the six months ended June 28, 2002 as compared to the same period last year was primarily the result of the lower selling, general and administrative expenses, partially offset by a decrease in gross margin.

Non-operating expense. Non-operating expense was $6.2 million and $7.1 million in the three and six months ended June 28, 2002, respectively, compared to $1.2 million and $0.7 million in the three and six months ended June 29, 2001, respectively. We recorded an unrealized loss on derivative instruments of $1.9 million in the six months ended June 28, 2002 compared to an unrealized gain of $1.0 million in the six months ended June 29, 2001. We record as “unrealized loss/(gain) on derivative instruments” the mark to market adjustments on the outstanding foreign currency options which we enter into, as part of Allergan’s overall risk management strategy, to reduce the volatility of expected earnings in currencies other than U.S. dollar. Additionally, the three and six months ended June 28, 2002 include early debt extinguishment costs of $3.5 million associated with the prepayment of debt in Japan. Interest expense increased $0.6 million and $0.5 million in the three and six months ended June 28, 2002, respectively, compared with the same periods last year due primarily to the $300.0 million of debt incurred in late June 2002.

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RESULTS OF OPERATIONS (Continued)

Income taxes. The effective tax rate for the three and six months ended June 28, 2002 was 38.0%, as compared to the effective tax rate of 29.5% and 29.3% for the three and six months ended June 29, 2001, respectively. The annual effective tax rate in 2001 included the recognition of certain tax benefits associated with the utilization of a net operating loss carryforward and the realization of other deferred tax assets in Japan for which we previously had established a valuation allowance. In 2001, we determined, based solely on our judgment, that realization of the deferred tax assets had become “more likely than not” and accordingly, we reversed the valuation allowance previously established. We do not anticipate that our future provision for income taxes will include tax benefits similar to those we recognized in 2001. 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 that we implement, including a determination of our policy regarding repatriation of future accumulated foreign earnings.

Net earnings. Net earnings for the three and six months ended June 28, 2002 were $6.6 million and $11.3 million, respectively, compared to $12.9 million and $13.8 million in the three and six months ended June 29, 2001, respectively. The $6.4 million decrease in net earnings for the three months ended June 28, 2002 is primarily the result of the $2.8 million decrease in operating income and the increase in non-operating expense partially offset by the decrease in the provision for income taxes. The $2.5 million decrease in net earnings for the six months ended June 28, 2002 is primarily the result of the increase in non-operating expenses and the increase in the provision for income taxes partially offset by the increase in operating income. Net earnings for the six months ended June 29, 2001 included a $0.4 million after-tax loss related to the adoption of SFAS No. 133 — “Accounting for Derivative Instruments and Hedging Activities.”

LIQUIDITY AND CAPITAL RESOURCES

Management assesses 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.

Historically, we have generated cash from operations in excess of working capital requirements, and we expect to do so in the future. The net cash provided by operating activities was $40.1 million in the six months ended June 28, 2002 compared to $16.5 million in six months ended June 29, 2001. Operating cash flow increased in the six months ended June 28, 2002 compared to the six months ended June 29, 2001 primarily as a result of improved management of trade receivables and inventory and an increase in

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LIQUIDITY AND CAPITAL RESOURCES (Continued)

accrued expenses and other liabilities, partially offset by a lower net earnings and a decrease in accounts payable.

Net cash used in investing activities was $12.3 million and $5.2 million in the six months ended June 28, 2002 and June 29, 2001, respectively. Expenditures for property, plant and equipment totaled $8.7 million and $1.6 million in the six months ended June 28, 2002 and June 29, 2001, respectively. These expenditures included expansion of manufacturing facilities, improvements to our recently leased headquarters in 2002 and a variety of other projects designed to improve productivity. We expect to invest a total of $10 million to $15 million in property, plant and equipment in 2002. Expenditures for demonstration (demo) and bundled equipment, primarily phacoemulsification and microkeratome surgical equipment, were $2.7 million and $2.3 million in the six months ended June 28, 2002 and June 29, 2001, respectively. We maintain demo and bundled equipment to facilitate future sales of similar equipment and related products to our customers. In addition to the property, plant and equipment expenditures, we expect to invest a total of $4.0 million to $5.0 million in demo and bundled equipment in 2002. Expenditures for capitalized internal-use software were $0.9 million and $1.2 million in the six months ended June 28, 2002 and June 29, 2001, respectively. We expect to invest a total of $5.0 million to $7.0 million in capitalized internal-use software in 2002.

Net cash provided by financing activities was $47.6 million in the six months ended June 28, 2002, which was comprised of $305.6 million of long-term debt borrowings partially offset by long-term debt repayments of $111.4 million and $146.6 million of distributions to Allergan, net of advances. Net cash used in financing activities was $18.7 million in the six months ended June 29, 2001, which was comprised of distributions to Allergan, net of advances. Net transfers to Allergan have ceased as a result of the spin-off.

As of the distribution date, we had incurred $300.0 million of debt with an estimated weighted average interest rate of 6.89%, including the benefit of interest rate swaps, resulting in incremental annual interest expense of approximately $18.8 million at current interest rates. As a result, we expect a significant decrease in our cash flows from operations. We used approximately $258.1 million of these credit facilities to repay indebtedness borrowed from Allergan to purchase various assets from Allergan, make a distribution to Allergan in exchange for various assets contributed to us and repay a portion of Allergan’s debt assumed by us in connection with the spin-off. We also entered into a new $35.0 million revolving credit facility to fund future capital expenditures and working capital, if needed. Currently, approximately $17.0 million of the $35.0 million revolving credit facility has been reserved to support letters of credit issued on our behalf.

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LIQUIDITY AND CAPITAL RESOURCES (Continued)

Historically, a majority of our international and domestic cash accounts were linked to Allergan’s centralized cash management system. Accordingly, a majority of cash generated from operations has been transferred to Allergan. The net effect of these cash transfers has been reflected in the “Allergan, Inc. net investment” account as shown in the equity section of our unaudited condensed combined balance sheets.

Our cash position includes amounts denominated in foreign currencies, and the repatriation of those cash balances from some of our non-U.S. subsidiaries could 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 new revolving credit facility and existing cash and equivalents, will provide sufficient resources to meet our working capital requirements, debt service and other cash needs over the next year.

We are dependent, in part, 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 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 continues to apply 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 70% of our revenues for the six months ended June 28, 2002 were derived from operations outside the

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LIQUIDITY AND CAPITAL RESOURCES (Continued)

United States and a significant portion of our cost structure is denominated in currencies other than the U.S. dollar. Therefore, we are subject to fluctuations in sales and earnings reported in U.S. dollars as a result of changing currency exchange rates.

The impact of foreign currency fluctuations on sales was a $0.1 million increase and a $5.6 million decrease for the three and six months ended

June 28, 2002, respectively, and a $10.0 million decrease and a $16.7 million decrease for the three and six months ended June 29, 2001, respectively. The 2002 and 2001 sales decreases were due primarily to a weakening of the Japanese yen and European currencies.

Contractual obligations. The following represents a list of our contractual obligations and commitments as of June 28, 2002: