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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 25, 2005

or

For the transition period from              to             .

COMMISSION FILE NUMBER 001-31257

ADVANCED MEDICAL OPTICS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code 714/247-8200

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.    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  ¨

As of April 21, 2005, there were 37,348,323 shares of common stock outstanding.

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ADVANCED MEDICAL OPTICS, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 25, 2005

INDEX

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Advanced Medical Optics, Inc.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share data)

See accompanying notes to unaudited condensed consolidated financial statements.

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Advanced Medical Optics, Inc.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except share data)

See accompanying notes to unaudited condensed consolidated financial statements.

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Advanced Medical Optics, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

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Advanced Medical Optics, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1: Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (consisting only of normal recurring accruals) to state 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 consolidated financial statements of Advanced Medical Optics, Inc. (the Company) for the year ended December 31, 2004. The results of operations for the three months ended March 25, 2005 are not necessarily indicative of the results to be expected for the year ending December 31, 2005.

All material intercompany balances have been eliminated.

Certain reclassifications of prior year amounts have been made to conform with current year presentation.

Stock-Based Compensation

The Company measures stock-based compensation for option grants to employees and members of the board of directors using the intrinsic value method. The fair value of each option grant for determining the pro forma impact of stock-based compensation expense is estimated on the date of grant using the Black-Scholes option-pricing model with weighted average assumptions. These assumptions consist of expected dividend yield, expected volatility, risk-free interest rate and expected life.

Had compensation expense for the Company’s stock options and employee stock purchase plans been recognized based upon the fair value of awards granted, the Company’s net earnings would have been decreased to the following pro forma amounts (in thousands, except per share data):

These pro forma effects are not indicative of future amounts. The Company expects to grant additional awards in the future.

Note 2: Acquisition of Pfizer Inc. Surgical Ophthalmic Business

On June 26, 2004, pursuant to a stock and asset purchase agreement dated as of April 21, 2004, the Company completed the purchase of Pfizer Inc.’s surgical ophthalmic business for $450 million in cash (Acquisition). Pfizer’s surgical ophthalmic business manufactured and marketed surgical devices for the eyes. The Company acquired ophthalmic surgical products and certain manufacturing and research and development facilities located in Uppsala, Sweden, Groningen, Netherlands and Bangalore, India. The products acquired include the Healon line of viscoelastic products used in ocular surgery, the CeeOn and Tecnis intraocular lenses and the Baerveldt glaucoma shunt. The Acquisition has been accounted for as a purchase business combination.

The following unaudited pro forma information assumes the Acquisition occurred on January 1, 2004. These unaudited pro forma results have been prepared for informational purposes only and do not purport to represent what the results of operations would have been had the Acquisition occurred as of the date indicated, nor of future results of operations. The unaudited pro forma results for the three months ended March 26, 2004 are as follows (in thousands, except per share data):

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Advanced Medical Optics, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 3: Composition of Certain Financial Statement Captions

The components of inventories were as follows:

The components of amortizable intangibles and goodwill were as follows:

Intangibles

The intangible assets balance decreased due to the impact of foreign currency fluctuations. Amortization expense was $2.9 million in the three months ended March 25, 2005 and immaterial in the three months ended March 26, 2004 and is recorded in selling, general and administrative in the accompanying unaudited condensed consolidated statements of operations. Amortization expense is expected to be $11.6 million in 2005, 2006, 2007 and 2008 and $10.8 million in 2009. Actual amortization expense may vary due to the impact of foreign currency fluctuations.

Goodwill

The decrease in goodwill is primarily due to the impact of foreign currency fluctuations.

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Advanced Medical Optics, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4: Debt and Interest Rate Swap Agreement

At March 25, 2005, an aggregate principal amount of $350.0 million of 2 ¹/2% convertible senior subordinated notes due July 15, 2024 (Notes), an aggregate principal amount of $8.6 million of 3 ¹/2% convertible senior subordinated notes due April 15, 2023 (Existing Notes), a balance of $7.5 million under the senior revolving credit facility and a balance of $194.0 million on the term loan were outstanding. The Notes may be converted, at the option of the holders, on or prior to the final maturity date under certain circumstances, none of which had occurred as of March 25, 2005. The Existing Notes are currently convertible at the option of the holders for the fiscal quarter ending June 24, 2005. Upon conversion of the Existing Notes, the Company has the right to deliver, in lieu of shares of common stock, cash or a combination of cash and shares of common stock. Upon conversion of the Notes, the Company has irrevocably elected to satisfy in cash the conversion obligation with respect to the principal amount of the Notes, with any remaining amount of the conversion obligation to be satisfied in shares of common stock. As a result of this election, the Company also is required to satisfy in cash its obligations to repurchase any Notes that holders may put to the Company on January 15, 2010, July 15, 2014 and July 15, 2019.

At March 25, 2005, approximately $10.0 million of the senior revolving credit facility has been reserved to support letters of credit issued on the Company’s behalf.

In January 2005, the Company entered into an amendment to the senior credit facility to provide for an increase of $100.0 million in the revolving loan commitments and an additional $100.0 million in term loan commitments. The Company expects to utilize this additional $200.0 million to fund certain transaction fees and the cash consideration portion of the proposed acquisition of VISX, Incorporated, which was announced on November 9, 2004.

The $194.0 million term loan bears interest at current market rates plus a 2.00% margin (4.84% per annum at March 25, 2005). The $7.5 million of borrowings under the revolving credit facility bear interest at current market rates plus a margin based upon the Company’s ratio of debt to EBITDA, as defined (4.84% per annum at March 25, 2005). The incremental interest margin on borrowings under the revolving credit facility decreases as the Company’s ratio of debt to EBITDA decreases to specified levels. Under the senior credit facility, certain transactions may trigger mandatory prepayment of borrowings, if any. Such transactions may include equity or debt offerings, certain asset sales and extraordinary receipts. The Company pays a quarterly fee (2.25% per annum at March 25, 2005) on the average balance of outstanding letters of credit and a quarterly commitment fee (0.50% per annum at March 25, 2005) on the average unused portion of the revolving credit facility.

The senior credit facility provides that the Company will maintain certain financial and operating covenants which include, among other provisions, maintaining specific leverage and coverage ratios. Certain covenants under the senior credit facility and the indentures relating to the Notes and the Existing Notes may limit the incurrence of additional indebtedness. The senior credit facility prohibits dividend payments. The Company was in compliance with these covenants at March 25, 2005.

As of March 25, 2005, the aggregate maturities of total long-term debt are as follows: $9.4 million in 2005; $2.0 million in 2006; $1.9 million in 2007; $94.6 million in 2008; $93.6 million in 2009; and $358.6 million after 2009.

In July 2004, the Company entered into an interest rate swap agreement, which effectively converts the interest rate on $125.0 million of term loan borrowings from a floating rate to a fixed rate. This interest rate swap matures in July 2006 and qualifies as a cash flow hedge. Changes in fair value of the interest rate swap agreement are recorded in other comprehensive income (loss) to the extent such changes are effective and as long as the cash flow hedge requirements are met. At March 25, 2005, the fair value of $1.3 million of the interest rate swap is recorded in “Other assets” in the accompanying unaudited condensed consolidated balance sheet.

In April 2005, the Company realized the value of the interest rate swap agreement. The Company received approximately $0.8 million and included the related gain of approximately $0.8 million, which includes the accrued but unpaid net amount between the Company and the swap counterparty, as a component of accumulated other comprehensive income.

On April 14, 2005, the Company exchanged approximately 0.2 million shares of common stock for $3.0 million principal amount of Existing Notes in a privately negotiated transaction and recorded a non-cash charge of $0.5 million representing the fair value of shares issued as a premium.

Note 5: Related Party Transactions

Under a manufacturing agreement, Allergan, Inc. (Allergan) manufactures certain eye care products and VITRAX viscoelastics for a period of up to three years from the date of the June 29, 2002 spin-off. The Company purchases these products from Allergan at a price equal to Allergan’s fully allocated costs plus 10%. During the three months ended March 25, 2005 and March 26, 2004, the Company purchased $20.1 million and $19.4 million, respectively, of product from Allergan. On an annual basis, a pricing “true up” calculation is to be performed during the first calendar quarter. This “true up” calculation is based upon the actual volume of products shipped by Allergan to AMO during the preceding year versus the forecasted volume submitted by AMO that was used to calculate the invoiced prices. During the year, the Company periodically reviews the volume of purchases and accrues for estimated shortfalls, if any. In each of March 2005 and 2004, we made a payment of $0.2 million to Allergan based upon the “true up” calculations for the years ended December 31, 2004 and 2003, respectively.

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Advanced Medical Optics, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

As of March 25, 2005, an interest-free relocation loan of $0.5 million, collateralized by real property, was due from the chief executive officer. This relocation loan is evidenced by a promissory note dated July 3, 2002, prior to the adoption of the Sarbanes-Oxley Act of 2002.

Note 6: Earnings Per Share

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

The following represents a reconciliation from basic earnings per share to diluted earnings per share (in thousands, except per share data):

Note 7: Other Comprehensive Income (Loss)

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

Note 8: Business Segment Information

The Company has organized its operations into four geographic operating segments or regions: the Americas, which is comprised of North and South America, Europe/Africa/Middle East, Japan and Asia Pacific (excluding Japan, but including Australia and New Zealand).

The United States information is presented separately as it is the Company’s headquarters country, and U.S. sales represented 24.4% and 25.6% of total net sales in the quarters ended March 25, 2005 and March 26, 2004, respectively. Additionally, sales in Japan represented 21.0% and 24.5% of total net sales in the quarters ended March 25, 2005 and March 26, 2004, respectively. No other country, or single customer, generated over 10% of total net sales.

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. The Company uses other measures of segment performance, whereby the impact of non-recurring acquisition related costs are excluded. The Company presents the measure which management believes is determined in accordance with the measurement principles consistent with those used in measuring the corresponding amounts in the consolidated financial statements.

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Advanced Medical Optics, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

Balances of identifiable assets attributable to each operating segments are materially consistent with December 31, 2004 balances.

Geographic Operating Segments

In each geographic segment, the Company markets products in two product lines: Ophthalmic Surgical and Eye Care. The Ophthalmic Surgical product line markets intraocular lenses, phacoemulsification equipment, viscoelastics, and other products related to cataract and refractive surgery. The Eye Care product line markets cleaning, storage, disinfection and rewetting products for the consumer contact lens market, as well as contact lenses. 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, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 9: Commitments and Contingencies

On December 3, 2003, the Company filed a complaint in the U.S. District Court for the District of Delaware against Alcon, Inc. and Alcon Laboratories, Inc. for infringement of U.S. Patent Nos. 5,700,240 (Barwick Patent) and 6,059,765 (Cole/Sutton Patent). The Company alleged that Alcon’s “Infiniti” and “Series 2000 Legacy” phacoemulsification machines infringe the patents. The Company is seeking damages and a permanent injunction. On March 28, 2005, the court denied three motions by Alcon for summary judgment to dismiss the lawsuit, two with respect to the Cole/Sutton Patent and one relating to the Barwick Patent. The court also denied a motion by Alcon for partial summary judgment that AMO is not entitled to lost profits. On March 28, 2005, the court also issued its claim construction ruling on disputed patent claim language in the Barwick and Cole/Sutton Patents. The trial of this matter began April 25, 2005.

On January 28, 2004, Alcon Manufacturing, Ltd. filed a complaint against AMO and Allergan, Inc. in the U.S. District Court for the Northern District of Texas, Fort Worth Division, for infringement of U.S. Patent Nos. 4,832,685 and 4,935,005 (Haines Patents). Alcon alleged that AMO’s Prestige and Sovereign phacoemulsification systems and replacement cassettes infringe the patents. Alcon is seeking damages and a permanent injunction. At Alcon’s request the case has been stayed in Texas while Alcon seeks re-examination by the U.S.P.T.O. on the Haines Patents in light of another patent the Company alleges invalidates the Haines Patents.

On January 4, 2005, Dr. James Nielsen filed a complaint against the Company and Allergan, Inc. in the U.S. District Court of the Northern District of Texas, Dallas Division, for infringement of U.S. Patent No. 5,158,572. Dr. Nielsen alleges that the Company’s Array multifocal intraocular lens infringes the patent. He is seeking damages and a permanent injunction.

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

Note 10: Pension Benefit Plans

The Company sponsors defined benefit pension plans in Japan and in certain European countries. Components of net periodic benefit cost under these plans were (in thousands):

Note 11: Pending Acquisition of VISX, Incorporated

On November 9, 2004, the Company entered into an agreement with VISX, Incorporated (VISX), the global leader in laser vision correction, to acquire VISX for a combination of cash and stock with an estimated value of approximately $1.3 billion on the announcement date. VISX manufactures excimer laser systems, associated diagnostic devices and treatment cards. Under the terms of the definitive merger agreement, VISX stockholders are expected to receive 0.552 shares of Company common stock and $3.50 in cash for every share of VISX common stock they own. The transaction is expected to close during the second quarter of 2005.

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ADVANCED MEDICAL OPTICS, INC.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE QUARTER ENDED MARCH 25, 2005

The following discussion and analysis presents the factors that had a material effect on AMO’s cash flows and results of operations during the three months ended March 25, 2005, and the Company’s financial position at that date. Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risk and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Certain Factors and Trends Affecting AMO and Its Businesses.” The following discussion should be read in conjunction with the 2004 Form 10-K and the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.

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 eye care products 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, lens rewetting drops to provide added wearing comfort, and contact lenses.

We have operations in approximately 20 countries, sell our products in approximately 60 countries and have organized our operations into four regions:

Pending Acquisition of VISX, Incorporated

On November 9, 2004, we entered into an agreement with VISX, Incorporated (VISX), the global leader in laser vision correction, to acquire VISX for a combination of cash and stock with an estimated value of approximately $1.3 billion on the announcement date. VISX manufactures excimer laser systems, associated diagnostic devices, and treatment cards. Under the terms of the definitive agreement, VISX stockholders are expected to receive 0.552 shares of our common stock and $3.50 in cash for every share of VISX common stock they own. The transaction is expected to close during the second quarter of 2005.

Acquisition of Pfizer Inc. Surgical Ophthalmic Business

On June 26, 2004, we completed the acquisition of the Pfizer Inc. surgical ophthalmic business for $450 million in cash (Acquisition). We acquired ophthalmic surgical products and certain manufacturing and research and development facilities located in Uppsala, Sweden, Groningen, Netherlands and Bangalore, India. The products acquired include the Healon line of viscoelastic products used in ocular surgery, the CeeOn and Tecnis intraocular lenses and the Baerveldt glaucoma shunt. The Acquisition has been accounted for as a purchase business combination. Under the purchase method of accounting, the assets acquired and liabilities assumed were recorded at the date of acquisition, at their respective fair values. Our reported financial position and results of operations after June 26, 2004 reflect these values.

Purchases from Allergan

Under a manufacturing agreement, Allergan, Inc. (Allergan) manufactures certain eye care products and VITRAX viscoelastics for a period of up to three years from the date of the June 29, 2002 spin-off. We purchase these products from Allergan at a price equal to Allergan’s fully allocated costs plus 10%. During the three months ended March 25, 2005 and March 26, 2004, we purchased $20.1 million and $19.4 million, respectively, of product from Allergan. On an annual basis, a pricing “true up” calculation is to be performed during the first calendar quarter. This “true up” calculation is based upon the actual volume of products shipped by Allergan to us during the preceding year versus the forecasted volume submitted by us that was used to calculate the invoiced prices. During the year, we periodically review the volume of purchases and accrue for estimated shortfalls, if any. In each of March 2005 and 2004, we made a payment of $0.2 million to Allergan based upon the “true up” calculations for the years ended December 31, 2004 and 2003, respectively.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Revenue Recognition and Accounts Receivable

Revenue is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is determinable and collectibility is reasonably assured. We record revenue from product sales when title and risk of ownership has been transferred to the customer, which is typically upon delivery to the customer, with the exception of intraocular lenses distributed on a consignment basis, which is upon notification of implantation in a patient.

We generally permit returns of product if such product is returned in a timely matter, in good condition, and through the normal channels of distribution. Return policies in certain international markets can be more stringent and are based on the terms of contractual agreements with the customers. Allowances for returns are provided for based upon an analysis of our historical patterns of returns matched against the sales from which they originated. To date, historical product returns have been within our estimates.

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

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

Inventories

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

Goodwill and Long-Lived Assets

On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, whereby goodwill is no longer amortized, but instead is subject to a periodic impairment review performed during the second quarter of each fiscal year. In a business combination, goodwill is allocated to our various reporting units, which are the same as our reportable operating segments based on relative fair value of the asset acquired and liabilities assumed. As our operations are composed of four reporting units (Americas, Europe/Africa/Middle East, Japan and Asia Pacific), we review the recoverability of goodwill by comparing each unit’s fair value to the net book value of its assets. If the book value of the reporting unit’s assets exceeds its fair value, the goodwill is written down to its implied fair value.

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

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

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Income Taxes

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

Stock-Based Compensation

We measure stock-based compensation for option grants to employees and members of the board of directors using the intrinsic value method. The fair value of each option grant for determining the pro forma impact of stock-based compensation expense is estimated on the date of grant using the Black-Scholes option-pricing model with weighted average assumptions. These assumptions consist of expected dividend yield, expected volatility, expected life, and risk-free interest rate. If the assumptions used to calculate the value of each option grant do not properly reflect future activity, the weighted average fair value of our grants could be impacted.

RESULTS OF OPERATIONS

Net sales. The following table compares net sales by geographic region and major product line for the three month periods ended March 25, 2005 and March 26, 2004:

We have organized our operations into four regions: the Americas, which is comprised of North and South America, Europe/Africa/Middle East, Japan and Asia Pacific.

Net sales increased by $42.2 million, or 28.1%, to $192.5 million in the three months ended March 25, 2005 from $150.3 million in the three months ended March 26, 2004. The increase in net sales was the result of sales of products acquired in the Acquisition and favorable foreign currency changes. Net sales of acquired products approximated $40.2 million in the three months ended March 25, 2005 compared to $32.8 million in the three months ended March 28, 2004 (prior to the Acquisition). Foreign currency fluctuations, particularly related to the Japanese yen and the euro, increased sales by $5.6 million, or 3.7%, as compared to average rates in effect in 2004. Our sales and earnings may be negatively impacted during times of a strengthening U.S. dollar.

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The U.S. information is presented separately as it is our headquarters country, and U.S. sales represented 24.4% and 25.6% of total net sales in the three months ended March 25, 2005 and March 26, 2004, respectively. Additionally, sales in Japan represented 21.0% and 24.5% of total net sales in the three months ended March 25, 2005 and March 26, 2004, respectively. No other country, or any single customer, generated over 10% of total net sales in the periods.

Net sales in the Americas, including the United States, increased $10.3 million in the three months ended March 25, 2005 from the three months ended March 26 2004, and such increase was comprised of a $8.6 million increase in sales of ophthalmic surgical products and a $1.7 million increase in sales of eye care products. Net sales in the Americas include the favorable impact of foreign currency fluctuations of $0.5 million. The increase in sales of ophthalmic surgical products includes $10.9 million in sales of acquired products, including the Healon family of viscoelastics and Tecnis intraocular lenses, partially offset by a decrease in sales of phacoemulsification products and a decrease in sales of non-promoted older-technology intraocular lenses. The increase in sales of eye care products was primarily due to an increase in sales of Complete branded products.

Net sales in Europe/Africa/Middle East increased $19.1 million in the three months ended March 25, 2005 from the three months ended March 26 2004, and such increase was comprised of a $18.9 million increase in sales of ophthalmic surgical products and a $0.2 million increase in sales of eye care products. Net sales in Europe/Africa/Middle East include the favorable impact of foreign currency fluctuations of $3.5 million primarily due to the strengthening of the euro versus the U.S. dollar. The increase in sales of ophthalmic surgical products includes $18.0 million in sales of acquired products, including the Healon family of viscoelastics and Tecnis and CeeOn intraocular lenses partially offset by a decrease in sales of non-promoted older-technology intraocular lenses. Ophthalmic surgical products sales were also negatively impacted by a slight reduction in government reimbursement rates for certain intraocular lenses and viscoelastics.

Net sales in Japan increased $3.6 million in the three months ended March 25, 2005 from the three months ended March 26 2004, and such increase was comprised of a $7.7 million increase in sales of ophthalmic surgical products and a $4.1 million decrease in sales of eye care products. Net sales in Japan include the favorable impact of foreign currency fluctuations of $1.3 million resulting from the strengthening of the Japanese yen versus the U.S. dollar. The increase in sales of ophthalmic surgical products includes $7.9 million in sales of acquired products, including the Healon family of viscoelastics, partially offset by decreased sales of non-promoted older-technology intraocular lenses. The decrease in sales of eye care products was primarily due to a decrease in sales of hydrogen peroxide-based products and private-label multipurpose products due to market penetration of lower-priced competitor products.

Net sales in Asia Pacific increased $9.2 million in three months ended March 25, 2005 from the three months ended March 26 2004, and such increase was comprised of a $5.2 million increase in sales of ophthalmic surgical products and a $4.0 million increase in sales of eye care products. Net sales in Asia Pacific include the favorable impact of foreign currency fluctuations of $0.3 million. The increase in sales of ophthalmic surgical products includes $3.4 million in sales of acquired products, including the Healon family of viscoelastics and Tecnis and CeeOn intraocular lenses, and increased sales of the Sensar intraocular lens and phacoemulsification products. The increase in sales of eye care products was primarily due to an increase in sales of Complete branded products and hydrogen peroxide-based products.

Global sales of our ophthalmic surgical products increased by $40.4 million, or 51.6%, from the three months ended March 26, 2004 to the three months ended March 25, 2005. Sales of our ophthalmic surgical products increased primarily due to sales of acquired products of $40.2 million, including the Healon family of viscoelastics, the Tecnis and CeeOn intraocular lenses and Baerveldt glaucoma shunts, and favorable currency changes. Foreign currency fluctuations in the three months ended March 25, 2005 increased international ophthalmic surgical sales by $3.3 million, or 4.2%, as compared to average rates in effect in the three months ended March 26, 2004. Excluding the favorable impact of foreign currency fluctuations, ophthalmic surgical product sales were negatively impacted by the reduction in government reimbursement rates and decreased sales of non-promoted older-technology intraocular lenses. We believe that global sales of ophthalmic surgical products will continue to grow due to our continued promotion of acquired products, including the Healon family of viscoelastics, the Tecnis intraocular lens and the Baerveldt glaucoma shunt and increased sales of our Sensar intraocular lens. We expect this growth to be partially offset by decreased sales of our non-promoted older-technology intraocular lenses as we continue our strategy of promoting our higher-technology intraocular lenses, the Tecnis and Sensar brands.

Global sales of our eye care products increased by $1.8 million, or 2.5%, from the three months ended March 26, 2004 to the three months ended March 25, 2005. Sales of our eye care products increased primarily due to increased sales of Complete branded products and favorable currency changes partially offset by decreased sales of hydrogen peroxide-based products. Foreign currency fluctuations in the three months ended March 25, 2005 increased international eye care sales by $2.3 million, or 3.3%, as compared to average rates in effect in the three months ended March 26, 2004. Excluding the favorable impact of foreign currency fluctuations, eye care sales in Japan were negatively impacted by the market penetration of lower-priced competitor products. In the future, we expect global sales of our eye care products will continue to experience moderate growth due to increased sales of our Complete branded products and continued sales growth in Asia Pacific, partially offset by decreased eye care sales in Japan.

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Gross margin. Our gross margin percentage increased as a percent of net sales by 3.1 percentage points to 63.4% in the three months ended March 25, 2005 from 60.3% in the three months ended March 26, 2004. The increase in gross margin as a percent of net sales was primarily due to sales growth in the higher margin Complete branded line of eye care products and sales of the Healon family of viscoelastics. In addition, the 2004 period was negatively impacted by pre-production costs incurred at our manufacturing facility in Madrid, Spain, as well as expansion of our manufacturing facility in Hangzhou, China. In 2005, we expect our gross margin percentage to be favorably impacted as we fully transition manufacturing of our eye care products from Allergan and continue to shift our sales mix to higher margin products, including the Healon family of viscoelastics and the Tecnis and Sensar intraocular lenses.

Selling, general and administrative. Selling, general and administrative expenses decreased as a percent of net sales by 3.8 percentage points to 43.5% in the three months ended March 25, 2005 from 47.3% in the three months ended March 26, 2004. The decrease in selling, general and administrative expenses as a percent of net sales was primarily due to the higher net sales associated with the Acquisition and our promoted products and continued leveraging of our global cost structure.

Upon completion of the acquisition of VISX, we expect to incur significant costs as we integrate VISX into our existing domestic and international operations.

Research and development. Research and development expenditures increased as a percent of net sales by 0.4 percentage points to 6.4% in the three months ended March 25, 2005 from 6.0% in the three months ended March 26, 2004. The increase in research and development expenditures as a percentage of net sales was primarily the result of an increase in spending for research efforts in the ophthalmic surgical business. In 2005, we expect to bring to market various new products such as the Tecnis acrylic and ReZoom intraocular lenses and a new viscoelastic in the U.S. and several new eye care products in Japan.

Upon completion of the acquisition of VISX, we expect to incur an in-process research and development charge of approximately $453.0 million representing the fair value of projects and technologies which have no alternative future use and which have not reached technological feasibility at the date of the acquisition. A final determination of fair value, which can not be made prior to the completion of the acquisition, may differ materially from the preliminary estimate and will include management’s final valuation of the fair value of assets acquired and liabilities assumed.

Operating income. Operating income was $25.9 million or 13.5 percent of net sales and $10.5 million or 7.0 percent of net sales in the three months ended March 25, 2005 and March 26, 2004, respectively.