UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2004~~2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-50939

INTRALASE CORP.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		38-3380954
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
(State or Other Jurisdiction ofIncorporation or Organization)		(I.R.S. EmployerIdentification No.)

3 Morgan Irvine, California		92618
9701 Jeronimo RoadIrvine, California		92618
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (949) 859-5230

Securities registered pursuant to Section 12(b) of the Act: ~~None~~Common Stock, $0.01 par value Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act: ~~Common~~None ~~Stock, $0. 01 par value~~

Indicate by check mark ~~whether~~if the registrant: ~~(1)~~is ~~has~~a well-known ~~filed~~seasoned ~~all~~issuer, ~~reports~~as ~~required~~defined toin beRule ~~filed~~405 ~~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 ¨x

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated, or a non-accelerated filer (as defined in Rule 12b-2). ~~Yes ¨ No x~~

AsLarge ~~of March 21, 2005, the aggregate market value of voting stock held by~~accelerated ~~non~~filer ¨ Accelerated filer x Non-~~affiliates~~accelerated offiler ¨ the registrant, based upon the closing sales price for the registrant’s Common Stock, was $455,861,306. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.

~~The~~Indicate ~~number~~by ofcheck ~~shares~~mark ofwhether the registrant’s ~~Common~~is ~~Stock~~a ~~outstanding~~shell company (as ofdefined ~~March~~in ~~21,~~Rule ~~2005~~12b-2 ~~was~~of ~~26,831,154~~the Act. Yes ¨ No x

The aggregate market value of the registrant’s common stock held by non-affiliates was $478,078,581 based on the last sale price of common stock on June 30, 2006.

The number of shares of the registrant’s Common Stock outstanding as of February 28, 2007 was 28,894,172.

Documents Incorporated by Reference

None.


Document Description		10-K Part
Portions of the Registrant’s notice of annual meeting of stockholders and proxy statement to be filed pursuant to Regulation 14A within 120 days after Registrant’s fiscal year ended of December 31, 2006 are incorporated by reference into Part III of this report.		III

INTRALASE CORP.

ANNUAL REPORT ON

FORM 10-K

For the Fiscal Year Ended December 31, ~~2004~~2006

TABLE OF CONTENTS

		Page
	PART I
Item 1	Business	3
Item 2	Properties	23
Item 1A	Risk Factors	19
Item 3	Legal Proceedings	23
Item 1B	Unresolved Staff Comments	25
Item 4	Submission of Matters to a Vote of Security Holders	23
Item 2	Properties	25
Item 3	Legal Proceedings	25
Item 4	Submission of Matters to a Vote of Security Holders	28
	PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2428
Item 6	Selected Financial Data	2531
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2531
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	3844
Item 8	Financial Statements and Supplementary Data	3945
Item 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	3945
Item 9A	Controls and Procedures	3945
Item 9B	Other Information	3949
	PART III
Item 10	Directors, ~~and~~ Executive Officers and Corporate Governance of the Registrant	4049
Item 11	Executive Compensation	4449
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	5449
Item 13	Certain Relationships and Related Transactions, and Director Independence	5649
Item 14	Principal Accounting Fees and Services	5749
	PART IV
Item 15	Exhibits, Financial Statement Schedules	5849
SIGNATURES		63

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to us. All statements regarding future events, our future financial performance and results of operations, our business strategy and our financing plans are forward-looking statements. InForward-looking ~~some~~statements ~~cases,~~can ~~you~~be ~~can~~identified ~~identify~~by ~~forward-looking~~the ~~statements~~use byof ~~terminology~~ words such as “~~may~~believe,” “~~can~~expect,” “~~might~~anticipate,” “~~will~~intend,” “~~could~~plan,” “~~should~~estimate,” “~~expect~~project,” ~~“intend,”~~or ~~“plan,”~~words ~~“anticipate,”~~of similar meaning or conditional verbs such as “~~believe~~will,” “~~estimate~~should,” ~~“predict,”~~ “~~potential” or “continue~~could,” ~~the negative of such terms~~ or ~~other comparable terminology~~“may. ”

These statements are only predictions. Our actual results may differ materially from those anticipated in these forward-looking statements. In evaluating these forward-looking statements, you should specifically consider various other risks, uncertainties and factors, including those risks discussed under “Item 1A—Risk Factors.”

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

We assume no obligation to publicly update or revise any of these forward-looking statements or changes in our expectations after the date of this Annual Report on Form 10-K for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

PART I

Item 1— Business

Overview

IntraLase Corp. isdesigns, ~~the~~develops ~~leading~~and manufactures an ultra-fast laser ~~technology~~that ~~for~~is ~~the first~~revolutionizing ~~step~~refractive ofand ~~LASIK~~corneal surgery. Weby ~~have~~creating ~~developed~~safe and ~~market~~more anprecise ~~ultra-fast~~corneal incisions. Delivering on the promise of ophthalmic laser technology, the IntraLase® FS Laser, related software, and disposable devices ~~for~~replace ~~use~~the inhand-held microkeratome blade used when creating the corneal flap, in the first step of LASIK surgery,. ~~the~~The ~~most~~unsurpassed ~~common~~accuracy ~~surgical technique used to correct vision.~~of ~~Our~~IntraLase’s ~~patent~~computer-~~protected~~controlled ~~product~~femtosecond ~~offering consists of our INTRALASE® FS~~ laser ~~combined~~has ~~with~~been ~~our~~shown ~~proprietary~~to ~~IntraLASIK®~~improve ~~software,~~safety profiles and ~~our~~visual ~~per~~outcomes ~~procedure~~when ~~fee~~used ~~inclusive~~during ofLASIK. aIntraLase ~~disposable~~lasers ~~patient~~are ~~interface~~also ~~required~~used ~~for each eye treated~~ in ~~the~~corneal ~~LASIK~~transplants ~~procedure.~~and ~~Our~~other ~~computer-controlled~~surgical ~~laser~~approaches ~~solution~~to ~~replaces~~ the ~~hand-held~~treatment ~~mechanical,~~of ~~metal-bladed~~diseased ~~microkeratome~~corneas, ~~traditionally~~and ~~used~~we continue to ~~create~~explore ~~the~~other ~~corneal~~potential ~~flap~~ophthalmic applications. Our ~~advanced~~proprietary laser ~~technology~~and ~~improves~~disposable ~~the~~patient ~~safety,~~interfaces ~~precision~~are ~~and~~presently ~~visual~~marketed ~~acuity~~through ofthe ~~LASIK~~United ~~surgery,~~States and we33 ~~believe~~other ~~our~~countries. ~~product~~IntraLase ~~offering~~is ~~will~~headquartered ~~become the new standard of care for~~and ~~corneal~~manufactures ~~flap~~its ~~creation~~products in ~~LASIK~~Irvine, ~~surgery~~California.

Our business model is to target the most active LASIK surgery practices in the United States and in key international markets to buy or lease our ~~INTRALASE~~IntraLase® FS laser in order to generate repeat revenues by collecting a per procedure fee inclusive of a single disposable patient interface for each eye treated with our laser. We began commercial introduction of our product offering in late 2001 and, as of December 31, ~~2004~~2006, we had sold or leased ~~217~~577 lasers and we had sold ~~approximately~~over ~~306,859~~1.1 million per procedure fees, each inclusive of a single disposable patient ~~interfaces~~interface. In the three months ended December 31, ~~2004~~2006, we captured approximately 1630% of the U.S. market for LASIK corneal flap creation.

In addition to the medical and safety benefits of our product offering, our advanced laser technology allows our surgeon customers to improve the profitability of their LASIK surgery ~~practice~~practices. We believe this combination of “better medicine” and “better business” will continue to ~~assist~~positively inimpact the adoption of our product offering and ~~in turn~~ drive our growth.

Company Background

We were incorporated in Delaware in 1997. From 1997 through 2001, we devoted substantially all of our resources toward the ~~development~~ development of an ultra-fast laser, as well as the related software and patient interface, and toward testing to develop a commercial product to be used for eye surgery. In 2001, we also began developing manufacturing capabilities and selling to ~~prospective~~ prospective customers. In 2002 and 2003, we continued to expand our customer base, primarily in the United States. We obtained our CE Mark and ISO EN 13485 approval in March 2004, allowing us to significantly expand our international product launch ~~and support structures~~.

Our initial public offering, which was effective under applicable securities laws on October 6, 2004 and closed on October 13, 2004, resulted in our receipt of net proceeds of $86.1 million from the sale of 7,295,447 shares of common stock, ~~including the sale of 995,447 over-allotment~~ ~~shares. The proceeds were net of the payment of expenses for the initial public~~

including the sale of 995,447 over-allotment shares. The proceeds were net of the payment of expenses for the initial public offering of $2.2 million. The net proceeds of the offering were used, in part, for the repayment of our bank debt in the amount of $1.3 million and the payment to the University of Michigan of $765,000 for partial payment due ~~within~~under 15an ~~days~~agreement ofto ~~the~~convert ~~initial~~a ~~public~~royalty ~~offering~~license agreement to a fully-paid royalty-free license. In addition, 22,191,333 shares of redeemable convertible preferred stock converted to 16,797,103 shares of common stock.

Financial Information

Please refer to Item 6, “Selected Financial Data,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including discussion of Subsequent Events included within, for a review of revenue, net income (loss), and total assets for the last three years.

Market Opportunity

The Surgical Vision Correction Market

Vision correction represents one of the largest medical markets in the United States. According to Market Scope, approximately ~~166~~174.4 0 million people in the United States require some form of vision correction, and industry sources estimate that approximately $3224.27 billion was spent on eyeglasses, contact lenses and other corrective eyewear in the United States in ~~2004~~2005. Of the approximately ~~166~~174.4 0 million people in the United States who require vision correction, approximately 5559.5 0 million people, or ~~111~~ 118.0 million eyes, are eligible for surgical vision correction and have not yet been treated.

LASIK surgery is the most common means of surgical vision correction. According to Market Scope, approximately 9079% of all refractive surgical vision corrections today are LASIK corrections. LASIK surgery corrects refractive errors associated with myopia, the inability to see objects in the distance, and hyperopia, the inability to see up close, by reshaping the cornea. Approximately 3437.4 6 million people, or 6875.8 1 million eyes, are myopic, also called nearsighted, and approximately 2122.1 5 million people, or 4244.2 9 million eyes, are hyperopic, also called farsighted. Both of ~~these~~ these common vision problems are caused by irregularities in the shape of the eye, called refractive errors. The vision problem which typically requires reading glasses is called presbyopia and is not treated with LASIK surgery.

The market for LASIK surgery is currently under-penetrated. To date, only about 811.2 0 million LASIK eye surgeries have been performed in the United States, which amounts to a nominal market penetration rate of approximately 78.5%. The total U.S. annual market size for LASIK surgery is approximately $2.68 billion, based on an estimated 1.45 44 million LASIK procedures expected to be performed in 2007 ~~2005~~ at an industry average price of approximately $1,~~800~~950 per eye treated. Industry analysts expect the growth rate in U.S. LASIK procedures to be approximately 74.6% in ~~2005~~2007, based on approximately ~~100~~36,000 more procedures expected in ~~2005~~2007 than were performed in ~~2004~~2006.

Outside the United States there were approximately 12.8 1 million surgical vision surgeries performed in ~~2004~~2006, primarily LASIK. Industry analysts expect the growth rate outside the United States in LASIK procedures to be approximately 97.5% in ~~2005~~2007, to ~~over~~approximately 12.9 7 million procedures, with LASIK volume concentrated in Europe and the Asia-Pacific region.

We believe LASIK surgery procedure volume and market penetration will be driven by the following factors:

•

Technology advances. LASIK surgery has grown in procedure volume as successive technological innovations have improved safety, efficacy and visual acuity, increasing surgeon and patient confidence in LASIK surgery. Two recent technological advances are the laser created corneal flap and the custom correction procedure.

•

Demographics. As the general population grows, and an increasing number of young people with visual problems reach an age where their eye conditions stabilize, the pool of people eligible for LASIK surgery will continue to be replenished.

•

Economic factors. Since patients typically pay for LASIK surgery directly with their own discretionary funds, instead of through insurance programs or government reimbursement, general changes in economic conditions will affect the number of people willing and able to purchase the procedure.

The IntraLase Market Opportunity

There are approximately 4,500 LASIK surgery practices worldwide. Of these surgery practices, our key target customers are the 1,400 most active LASIK surgery practices in the United States and in key international markets. As of December 31, ~~2004~~2006, approximately ~~217~~574 of these 1,400 LASIK surgery practices worldwide were IntraLase customers, and, of ~~the total number of LASIK procedures performed in the~~ United States in the three months ended December 31, 2004, approximately 16% were performed using our product offering to create the corneal flap. We believe the other approximately 84% of total procedures performed in this time period were performed using the traditional microkeratome.

the total number of LASIK procedures performed in the United States in the three months ended December 31, 2006, approximately 30% were performed using our product offering to create the corneal flap. We believe the other approximately 70% of total procedures performed in this time period were performed using the traditional microkeratome.

U.S. Market

• There are approximately 3,~~900~~800 LASIK surgeons in the United States who are expected to perform 1.4544 million LASIK procedures in ~~2005~~2007.

• These procedures are performed in approximately 1,270 U.S. LASIK surgery practices, of which approximately 700 perform over 50 procedures per month, largely concentrated in LASIK surgery practices owned by individual surgeons or group surgery practices and corporate centers.

International Market

• Outside the United States there are approximately 3,~~230~~200 LASIK surgery practices that are expected to perform over 12.93 million LASIK procedures in ~~2005~~2007.

•

We estimate that there are approximately 700 LASIK surgery practices performing over 50 LASIK procedures per month in our primary target markets in the Asia-Pacific region, Europe and the Middle East.

LASIK Surgery

LASIK surgery involves two steps:

First step: A thin flap of tissue is created on the surface of the cornea. This is called a corneal flap. Traditionally, this first step ishas been done manually by the LASIK surgeon using a hand-held mechanical device called a microkeratome with a metal razor blade that oscillates across the face of the cornea at high speed. Microkeratomes are manufactured and sold by companies such as Bausch & Lomb, Moria/Microtech, Advanced Medical Optics and Nidek. Our solution replaces microkeratomes in this first step with a computer-controlled laser. The ~~INTRALASE~~IntraLase® FS laser optically focuses its beam of light at a focal point below the surface of the cornea to create the corneal flap. Second step: Once the corneal flap has been created, the surgeon then folds it back and a computer-controlled excimer laser is used to remove, or ablate, tissue from the surface of the cornea to reshape the eye to correct the patient’s vision. Excimer lasers are manufactured and sold by companies such as ~~VISX~~Advanced Medical Optics, Alcon, Nidek, Bausch & Lomb and Wavelight. Recently, excimer laser manufacturers introduced a more precise form of measuring the refractive aberrations of a particular eye with a device called a wavefront device. They then map these precise measurements into a software program to more precisely reshape the cornea to correct vision. This improvement to reshaping the cornea with an excimer laser is commonly called a “custom” correction.

Both steps are necessary for LASIK surgery. Excimer lasers, used in the second step, remove tissue at the point the beam of light comes into contact with tissue and are not capable of focusing below the surface of the clear eye tissue to create the corneal flap. Therefore, the ~~INTRALASE~~IntraLase® FS laser used in the first step and the excimer lasers used in the second step are complementary in LASIK surgery.

While using the microkeratome in the first step of the LASIK procedure is a successful and relatively safe procedure, the majority of complications with LASIK arise from the use of microkeratomes. Microkeratome complications arise in up to 10% of all LASIK procedures, including the most serious complications that may affect the visual outcome in a LASIK surgery.

IntraLase Enabled Keratoplasty

IntraLase Enabled Keratoplasty (IEK) was introduced during the third quarter of 2006. This procedure uses our laser for corneal transplant surgery, which involves replacing a diseased or scarred cornea with a new one.

The traditional method for transplanting corneas has not improved in decades. Doctors have performed these transplants using a hand-held bladed device to make a circular incision with straight, vertical edges in both the patient and the donor tissue. This method requires suturing around the circumference of the tissue graft to maintain the position of the new cornea. Sutures remain in the eye for at least one year and patients generally don’t achieve full visual recovery during the first year. With IEK, our computer-guided laser allows surgeons to create precisely shaped incisions, enabling the tissue to fit together much like a puzzle, which may provide a more stable graft that potentially requires fewer sutures and speeds patient healing and visual recovery. IEK also reduces the risk for displacement as shaped incisions have demonstrated an increase in biomechanical stability.

It is estimated that over 100,000 corneal transplants are performed worldwide every year, approximately half of which are performed in the United States. We collect a procedure fee on both the donor end and on the recipient procedure.

The IntraLase Solution—“Better Medicine” and “Better Business”

Our ~~INTRALASE~~ IntraLase® FS laser and proprietary IntraLASIK® software complement and improve LASIK surgery by providing a computer-controlled laser solution as an alternative to the microkeratome for creating flaps in the cornea during the essential first step of LASIK surgery. When the ~~INTRALASE~~IntraLase® FS laser is combined with the excimer laser used in the second step of the LASIK procedure, this results in an all-laser LASIK solution. The advantages of our product offering over the traditional method include fewer severe sight-threatening complications, greater predictability, greater control, greater precision and uniformity of flap depth. Additional advantages are a more centrally located flap, better sterility and greater likelihood of completed surgeries. In all of the commercial procedures performed by our customers to date, there have been no reported incidents of loss of corneal tissue (free cap) or anterior chamber penetration, serious complications historically associated with creation of the corneal flap with a bladed microkeratome. In addition, the use of our product offering ~~significantly~~ reduces the incidence of less serious complications such as epithelial defects and dry eye. The disadvantages of our product offering over the traditional microkeratome approach are the higher costs to the LASIK surgeon to acquire our product offering and the higher cost to the patient, as well as the additional training that is required for a surgeon to become accustomed to using our technology and ~~the~~ slightly higher procedure times. We believe that the advantages of our technology outweigh the disadvantages and give our LASIK surgeon customers and their patients a new level of confidence in LASIK surgery, which in turn will help further penetrate the market for LASIK surgery.

Benefits of the IntraLase Solution

We offer our surgeon customers and their patients the benefits of “Better Medicine.” LASIK surgeons who have adopted the IntraLase technology are now able to offer their patients improved safety and predictability and, as a result, patients achieve better visual acuity. Surgeons who use our solution also derive the benefits of “Better Business,” since they are able to increase their prices and procedure volume, thus enhancing profitability.

The benefits of Better Medicine and Better Business are:

Better vision. Patients achieve statistically significant better vision when the ~~INTRALASE~~IntraLase® FS laser is used in the LASIK procedure, as supported in ~~two recently conducted~~ prospective, comparative studies. In a prospective study, the study design is made in advance of the collection of data, whereas in a retrospective study, a design is applied to existing data. In ~~each~~two of these prospective studies, the corneal flap for one eye of each patient was created with the ~~INTRALASE~~ IntraLase® FS laser, and the corneal flap for the other eye was created with the microkeratome. In one study, the 37 participants were treated with standard excimer laser vision correction, and in the other, the other 51 participants were treated with the new custom excimer laser vision correction. Results showed that the eyes treated with the ~~INTRALASE~~IntraLase® FS laser had better vision and fewer induced aberrations compared to the mechanical, metal-bladed microkeratome. In two other prospective studies, one comparing eyes of patients treated with the IntraLase® FS laser and the other with the microkeratome, and another comparing approximately 300 patients, or 600 eyes, with corneal flaps created by an IntraLase laser or two types of microkeratomes, similar results were reported. We believe these better vision results were achieved using our product offering, in part, due to a reduction in the tissue variabilities caused by the microkeratome, which can affect the precision of the excimer laser.

Improved safety. Our product offering eliminates loss of corneal tissue and anterior chamber penetration, the most severe complications associated with the creation of the corneal flap with a bladed microkeratome. Seven comparative studies showed improved safety and elimination of certain risks of flap creation with our product offering, when compared to traditional microkeratomes. Additionally, since corneal flaps created with our product offering possess a unique edge profile, they are easily and securely repositioned following the excimer ablation, reducing the possibility of induced visual aberrations and slipped flaps.

Greater predictability and accuracy. The INTRALASE® FS laser produces flaps that are accurate within ± 12 microns, whereas the microkeratome manufacturers report variability up to ± 60 microns. Nine studies have shown that our approach generated significantly more predictable and accurate flap dimensions, including, most critically, reproducible flap thickness. This increased accuracy in flap creation preserves corneal tissue by precisely creating optimal flap thickness, and improves the predictability of the overall LASIK treatment.

Fewer retreatments. The number of LASIK retreatments are significantly lower when our product offering is used to create the corneal flap. This avoids the patient inconvenience and increased surgeon costs entailed with retreatments. In one study of 500 eyes treated with the traditional microkeratome, 5.8% of the eyes required retreatment within 13 months after the initial surgery while in 508 eyes where the INTRALASE® FS laser was used, there were no retreatments in an equivalent time period. In a separate survey of our surgeon customers, retreatment rates were reduced from an average of 10% to an average of 4% when using our product offering.

~~Reduced~~Improved ~~dry eye~~safety. AOur ~~frequently~~product ~~reported~~offering ~~side~~eliminates ~~effect~~loss of ~~LASIK~~corneal ~~surgery~~tissue is(free ~~dry eye.~~cap) ~~Three~~and ~~studies~~anterior ~~show~~chamber apenetration, ~~significant~~the ~~reduction~~most insevere ~~dry~~complications ~~eye~~associated with the ~~use~~creation of ~~our~~the ~~product~~corneal ~~offering.~~flap Inwith ~~the~~a ~~largest~~bladed ofmicrokeratome. ~~these~~Seven ~~three~~comparative studies, ~~comparing~~showed ~~300~~improved ~~LASIK~~safety ~~procedures~~and ~~with~~elimination ~~the~~of ~~microkeratome~~certain torisks ~~300~~of ~~LASIK~~flap ~~procedures~~creation with ~~the~~our product ~~INTRALASE® FS laser~~offering, ~~patient~~when ~~incidences~~compared ofto ~~dry~~traditional ~~eye~~microkeratomes. ~~were~~Additionally, ~~reduced~~since ~~by 72%.~~corneal Weflaps ~~believe~~created ~~that~~with ~~this~~our ~~lower~~product ~~occurrence~~offering ofpossess ~~dry~~a ~~eye~~unique isedge ~~due~~profile, tothey ~~our~~are ~~laser~~easily ~~creating~~and asecurely ~~uniform~~repositioned ~~and~~following ~~typically~~the ~~thinner~~excimer ~~flap~~ablation, ~~that~~reducing ~~does~~the possibility ~~not~~of ~~sever~~induced ~~important~~visual ~~nerves~~aberrations inand ~~the~~slipped ~~cornea~~flaps.

~~Higher~~Greater ~~procedure~~predictability ~~volume~~ and ~~revenues~~accuracy. ~~for~~The ~~our~~IntraLase® FS ~~customers.~~laser ~~Our~~produces ~~surgeon~~flaps ~~customers~~that ~~receive~~are anaccurate ~~average~~within ~~of $334~~± ~~more~~12 ~~per~~microns, ~~eye~~whereas ~~when~~the ~~using~~microkeratome ~~our~~manufacturers ~~product~~report ~~offering~~variability ~~instead~~ of ~~the~~approximately ~~traditional~~± ~~microkeratome.~~40 Anmicrons ~~independent~~with ~~survey~~their ofnewer ~~our~~microkeratome Umodels.S. ~~customers~~Nine instudies ~~early~~have ~~2004~~shown ~~indicated~~ that our ~~customers~~approach generated ~~experienced~~significantly anmore ~~11%~~predictable ~~increase in procedure volume~~ and aaccurate ~~38%~~flap ~~increase~~dimensions, ~~in revenues~~including, inmost ~~the~~critically, ~~comparable~~reproducible ~~time~~flap ~~period~~thickness. ~~during~~This ~~which~~increased ~~the~~accuracy ~~industry experienced a 3% increase~~ in ~~procedure~~flap ~~volume~~creation ~~and~~preserves acorneal ~~12%~~tissue ~~increase~~by inprecisely ~~revenues.~~creating ~~Patients~~optimal ~~readily~~flap ~~understand the safety profile of the INTRALASE® FS laser~~thickness, ~~are attracted to the concept of a bladeless procedure~~ and ~~surveys of our~~ ~~customers~~improves ~~demonstrate~~the ~~that~~predictability ~~patients are willing to pay for this new level~~ of ~~safety and assurance. In addition, according to a survey of our customers conducted by SM2 Consulting, an independent consultant, with our laser, our customers improve~~ the ~~rate~~overall atLASIK ~~which laser vision correction consultations translate into actual surgery from 64% to 77%~~treatment.

~~The~~Fewer ~~sixteen~~retreatments. ~~clinical~~The ~~studies~~number ~~referred to~~of ~~above~~LASIK ~~were~~retreatments ~~each~~are significantly ~~conducted~~lower bywhen ~~LASIK~~our ~~surgeons~~product ~~who~~offering ~~compared~~is ~~the~~used ~~attributes~~to ~~and~~create ~~results of creating~~ the corneal flap. ~~using~~This ~~our~~avoids ~~laser versus with~~ the ~~microkeratome.~~patient ~~The~~inconvenience ~~studies~~and ~~ranged~~increased insurgeon ~~size~~costs ~~from~~entailed 20with ~~to 1,000 eyes~~retreatments. ~~However,~~In weone ~~paid~~study anof ~~aggregate~~500 ~~of approximately~~eyes ~~$472,000~~treated towith the ~~LASIK~~traditional ~~surgeon~~microkeratome, ~~conducting~~5.8% of the ~~studies~~eyes inrequired ~~two~~retreatment ~~instances,~~within ~~including,~~13 inmonths ~~one~~after ~~instance,~~the ~~when~~initial wesurgery ~~sponsored~~while ~~the~~in ~~study.~~508 Weeyes ~~believe~~where athe ~~portion~~IntraLase® ofFS ~~such~~laser ~~payments~~ was used, tothere ~~subsidize~~were ~~lower~~no ~~patient~~retreatments ~~fees~~in ~~for~~an ~~patients~~equivalent totime ~~agree to participate in the studies~~period. In ~~addition,~~a ~~to the extent they provide advisory and consulting services to us~~ separate ~~from~~survey ~~their~~of ~~work~~our onsurgeon ~~the studies~~customers, retreatment orrates inwere ~~connection~~reduced ~~with~~from ~~their~~an ~~presenting~~average ~~their studies, some~~ of ~~these~~10% ~~LASIK surgeons have been issued options~~ to ~~purchase~~an ~~shares~~average of ~~our~~4% ~~common~~when ~~stock,~~using ~~have~~our ~~been~~product ~~paid cash or have been reimbursed for costs~~offering.

Reduced dry eye. A frequently reported side effect of LASIK surgery is dry eye. Three studies show a significant reduction in dry eye with the use of our product offering. In the largest of these three studies, comparing 300 LASIK procedures with the microkeratome to 300 LASIK procedures with the IntraLase® FS laser, patient incidences of dry eye were reduced by 72%. We believe that this lower occurrence of dry eye is due to our laser creating a uniform and typically thinner flap that does not sever important nerves in the cornea.

Higher procedure volume and revenues for our customers. Our surgeon customers receive an average of $394 more per eye when using our product offering instead of the traditional microkeratome. An independent survey of our U.S. customers in early 2005 indicated that our customers experienced a 15% increase in procedure volume and a 41% increase in revenues in the comparable time period during which the industry experienced a 13% increase in procedure volume and a 25% increase in revenues. Patients readily understand the safety profile of the IntraLase® FS laser, are attracted to the concept of a bladeless procedure and surveys of our customers demonstrate that patients are willing to pay for this new level of safety and assurance. In addition, according to the same independent survey of our customers, with our laser, approximately 50% of our customers improve the rate at which laser vision correction consultations translate into actual surgery from 65% to 78%.

The clinical studies referred to above were each conducted by LASIK surgeons who compared the attributes and results of creating the corneal flap using our laser versus with the microkeratome. The studies ranged in size from 20 to 1,000 eyes. We paid an aggregate of approximately $472,000 to the LASIK surgeon conducting the studies in two instances, including, in one instance, when we sponsored the study. We believe a portion of such payments was used to subsidize lower patient fees for patients to agree to participate in the studies. In addition, to the extent they provide advisory and consulting services to us separate from their work on the studies, or in connection with their presenting their studies, some of these LASIK surgeons have been issued options to purchase shares of our common stock, have been paid cash or have been reimbursed for costs.

Our Strategy

Our goals are to establish our product offering as the standard of care for corneal flap creation in LASIK surgery, and to leverage our technology to develop new products and applications. Key elements of our strategy for achieving these goals include:

Replacing microkeratome with our laser. We intend to replace the mechanical, metal-bladed microkeratome with our ~~INTRALASE~~IntraLase® FS laser in LASIK surgery practices. Our business model is to target the most active LASIK surgery practices in the United States and in key international markets to buy or lease our ~~INTRALASE~~ IntraLase® FS laser in order to generate repeat revenues from the sale of our per procedure fee inclusive of a disposable patient interface, required in connection with each successive use of our laser. In addition, we target prestigious teaching institutions and key industry thought leaders to drive adoption of our product offering by other practicing LASIK surgeons.

Expanding our market share. We intend to expand our market share for LASIK procedures and facilitate the rapid adoption of our product offering by continuing to build a body of clinical data that supports the benefits of our product offering and with marketing activities targeting surgeons and optometrists. We believe these strategies will enable us to sell more of our higher gross margin per procedure fees inclusive of disposable patient interfaces to users of our existing installed base of lasers, in addition to new users of our laser. A recent survey indicated that our U.S. surgeon customers had adopted our product offering in 84% of all the LASIK procedures they perform. We estimate that we captured 16% of the U.S. LASIK surgery market for creation of the corneal flap in the three months ended December 31, 2004.

Providing quality products and superior customer service. We intend to continue to offer high quality products and extensive support to our direct customers and to our international distributors to continue to build our reputation as a premier service provider and establish a loyal customer base. We believe that providing superior service is instrumental in maintaining and growing our market share, as our surgeon customers often actively refer our product offering to other surgeons. We currently provide services including a 24/7 technical support hotline, installation and training for our customers. We also aim to have all of our lasers functional for customer surgery days. We believe our reputation for providing quality products and superior responsiveness will differentiate us from any potential direct competitors.

Refining and enhancing our existing product offering. We intend to continue to devote resources to improving and optimizing our technology and product offering, with the goal of continuously increasing the safety, accuracy, efficiency and ease-of-use of our solution. In addition, we intend to increase our gross margin by improving the manufacturability and serviceability of our product offering.

~~Developing~~Expanding ~~innovative~~our ~~applications~~market ~~for~~share. We intend to expand our ~~technology.~~market Weshare ~~are~~for ~~currently~~LASIK procedures inand facilitate the ~~process~~ rapid adoption of ~~developing~~our ~~new~~product ~~therapeutic~~offering ~~applications~~by toleveraging ~~expand~~clinical data that supports the ~~use~~benefits of our ~~current~~product ~~technology~~offering and ~~product~~by ~~offering~~engaging in marketing activities that target surgeons and optometrists. We believe ~~the~~these strategies ~~unique~~will ~~capabilities~~enable us to sell more of our ~~laser~~higher ~~will~~gross ~~enable~~margin usper procedure fees (each inclusive of a disposable patient interface) to ~~introduce~~users ~~additional~~of ~~applications~~our ~~within~~existing ~~ophthalmology~~installed base of lasers, in addition to new users of our laser. An independent survey conducted in 2005 indicated that our U.S. surgeon customers had adopted our product offering in 88% of all the LASIK procedures they perform. We estimate that we captured 30% of the U.S. LASIK surgery market for creation of the corneal flap in the three months ended December 31, 2006.

Refining and enhancing our existing product offering. In the third quarter of 2005 IntraLase doubled the speed of its laser from 15 kilohertz (“kHz”) to 30 kHz, approximately halving the procedure time, while enabling tighter spot placement which facilitates easier flap lift, enhancing the surgical experience and reducing the potential for post-operative inflammatory response. In addition, IntraLase introduced a reasonably priced upgrade path to 30kHz for all of its existing customers, completing 145 upgrades in the second half of 2005. In February 2006, we again announced a further improvement in our technology, again almost doubling the speed of the laser with the introduction of a 60kHz laser in the second quarter of 2006 and an upgrade program and fee for all of its existing customers. We intend to continue to devote resources to improving and optimizing our technology and product offering, with the goal of continuously increasing the safety, accuracy, efficiency and ease-of-use of our solution.

Developing innovative applications for our technology. We are currently in the process of developing new therapeutic applications to expand the use of our current technology and product offering. The IntraLase® FS laser is the first femtosecond laser cleared by the FDA for use in intrastromal incisions used with ring implants, lamellar keratoplasty, penetrating keratoplasty and for the preparation of the donor tissue used in corneal transplants. In January 2006, IntraLase announced that the first corneal transplant cases using the IntraLase® FS laser had been successfully performed in patients. The use of IntraLase’s laser to create a contoured, full-thickness corneal resection in preparation for corneal transplant has the potential to make corneal transplantation a safer, more precise procedure. The launch of this new therapeutic application, IntraLase Enabled Keratoplasty (IEK), occurred in the third quarter of 2006. We believe the unique capabilities of our laser will enable us to introduce additional applications within ophthalmology.

Providing quality products and superior customer service. We intend to continue to offer high quality products and extensive support to our direct customers and to our international distributors to continue to build our reputation as a premier service provider and establish a loyal customer base. We believe that providing superior service is instrumental in maintaining and growing our market share, as our surgeon customers often actively refer our product offering to other surgeons. We currently provide services including a 24/7 technical support hotline, installation, clinical training and other marketing support services for our direct customers as well as technical and clinical training for our distributors. We believe our reputation for providing quality products and superior responsiveness will differentiate us from any potential direct competitors.

Our Product Offering

Our product offering consists of three key elements:

• ~~INTRALASE~~IntraLase® FS laser;

•

IntraLASIK^{^®} software; and

•

per procedure fee inclusive of a disposable patient interface.

The creation of the corneal flap using our product offering begins with the set up of the laser, followed by the placement of our disposable patient interface onto the patient’s eye. Using the IntraLASIK® software, the surgeon then centers a video display of a 2-millimeter circle overlaid on an image of the patient’s eye. Once the desired location has been determined and set, the surgeon initiates the flap procedure by engaging the computer- controlled laser. The laser creates the flap by focusing its beam of light below the surface of the corneal tissue, thereby creating a precise cut, leaving an uncut section of tissue to act as a hinge. It takes approximately 30 seconds for our 30 kHz laser and approximately 4520 seconds for our 60 kHz laser to create the corneal flap.

~~INTRALASE®~~8 ~~FS Laser~~

OurTable INTRALASE® FS laser is an ultra-fast femtosecond, or FS, laser that produces a stream of high-repetition, short-duration light pulses with an extremely high-quality optical beam. Our laser generates fifteen thousand pulses per second, with each pulse having a duration of six hundred femtoseconds, the equivalent of less than a billionth of a second per pulse. Contents

IntraLase® FS Laser

Our IntraLase® FS laser is an ultra-fast femtosecond, or FS, laser that produces a stream of high-repetition, short-duration light pulses with an extremely high-quality optical beam.

Our IntraLASIK^{^®} software controls our laser and beam delivery device that focuses the laser into tiny spots, passing through the outer layers of the cornea until reaching the exact focal point within the cornea. In an “inside out” process, the laser beam creates a cut, leaving an uncut section of tissue to act as a hinge. As with the traditional microkeratome procedure, the surgeon then folds the tissue back to expose the underlying layer of the cornea for the excimer laser treatment that will make the vision correction by reshaping the cornea.

Each pulse of light creates a bubble, less than five microns in diameter, a process known as photodisruption. Our laser aligns hundreds of thousands of bubbles contiguously along predetermined three-dimensional surfaces to create precise surgical incisions. Because our laser uses low energy pulses and is computer controlled, a very precise surgical procedure is accomplished without damage to the surrounding tissue.

Our laser is a solid-state laser, meaning that the light pulses are generated using solid-state optical materials. Many lasers, including the excimer lasers used for the second step of LASIK surgery, produce their pulses of light utilizing a chamber of toxic gas. By comparison, our solid-state laser does not require laser gases or dye to operate and is therefore easier to support at LASIK surgery practices.

Our laser is completely self-contained, consisting of a laser engine, a delivery system, a user interface and a chassis to house the system. The laser is extremely compatible for installation in surgical centers, as it requires only a grounded electrical supply.

IntraLASIK^{^®} Software

We design, program, test and periodically update our IntraLASIK® software that controls the ~~INTRALASE~~IntraLase® FS laser, which enables the surgeon to ~~cut~~make a precise ~~flap~~cuts at predetermined ~~parameters~~ parameters within the eye’s corneal tissue. Each patient’s surgical parameters, including flap diameter and thickness, location and angle of the hinge, and angle of the side cut, ~~are~~can be input into the IntraLASIK® software prior to surgery. The software then directs the laser to create a precise corneal flap or perform the selected therapeutic procedure based on the input parameters. Prior to each surgery, the software automatically performs multiple pre-procedure system checks to verify the readiness of the laser and multiple calibration checks are also available to the surgeon.

The software allows the surgeon to perform a pre-determined number of procedures in conjunction with our per procedure fees inclusive of disposable patient interfaces separately purchased by the surgeon. To prevent reuse or unauthorized reproduction of the per procedure disposable patient interface, the software maintains a record of the number of procedures performed and available, and notifies the surgeon when to order additional per procedure disposable patient interfaces. In addition, the software includes a patient and surgeon database, system utilities and diagnostic tools. The diagnostic software is also proprietary to us and is used to detect the source of any errors in our laser. When an error is detected, a message appears with a brief description of the error. Depending upon the severity of the error, the message may provide the user with steps to follow for continued use, or for more technical issues, the information displayed may be used to contact us for diagnostic or on-site field service support.

Per Procedure Fee and Disposable Patient Interface

A per procedure fee is required for each eye treated. The per procedure fee is inclusive of a disposable patient interface. The disposable patient interface consists of a metal cone and glass lens that interfaces between our laser and the patient by attaching to the laser at one end and docking at the other end to the patient’s eye, and a proprietary plastic gripper and syringe that is used to locate the glass lens in the metal cone and create suction between the glass lens and the patient’s eye.

The disposable patient interface is integral to depth control and accuracy ~~as the glass at the narrow end of the disposable patient interface provides the reference plane for depth control for the beam of light created by the laser~~. The disposable patient interface comes in a sealed, sterile package, which ensures a high level of patient safety and protection from infection. The disposable patient interface is unique to our laser and we believe that we are the only available source for these devices.

Historically, we have protected our per procedure revenue stream with a combination of contract terms, software controls and manual periodic counts of machine usage, as necessary, to compare our shipments of disposable patient interfaces with the individual counter embedded in each IntraLase® FS laser. WeDuring ~~are~~2005 in the process of converting our new and existing customers to a system of remote electronic activation when the customer orders procedures, which are inclusive of the disposable patient interface. This allows the customer to perform only the number of procedures purchased. We are making this change to remote electronic activation because we ~~believe it to be a more scalable~~ and ~~secure method of protecting~~ our ~~per~~international ~~procedure revenue stream. In addition, in the future, we intend to offer our customers new features which this electronic link will facilitate, such as~~ ~~remote software upgrades and diagnostics.~~

Sales and Marketing

Our primary objective is to rapidly expand our market share for the creation of corneal flaps in the first step of LASIK surgery. Of the 1,270 LASIK surgery practices in the United States, approximately 700 perform over 50 procedures per month. Of the 3,230 LASIK surgery practices outside the United States, we estimate that there are approximately 700 laser centers performing over 50 LASIK procedures per month in our primary international target markets in the Asia-Pacific region, Europe and the Middle East. We focus our sales and marketing efforts on these high volume LASIK surgery practices.

We began selling the INTRALASE® FS laser and our per procedure fee inclusive of a disposable patient interface in the United States during the fourth quarter of 2001, in Asia during the third quarter of 2003 and in Europe during the first quarter of 2004. As of December 31, 2004, we had sold or leased a total of 166 lasers in the United States and we had sold 51 outside the United States. In addition, we had sold approximately 307,000 per procedure disposable patient interfaces worldwide.

Sales

We sell our laser through our direct sales force in the United States and through our direct sales efforts and distributors internationally. In the United States, we have six direct sales personnel, plus an executive managing our sales efforts. The U.S. sales force primarily consists of personnel with extensive experience in the sale of lasers and other products to refractive surgeons. Internationally, we sell through local country distributors and two sales consultants and an executive devoted to direct sales efforts and international distributor development. We have signed 14 distributor contracts with distributors in the Asia Pacific region, Europe and the Middle East, and we also sell our product offering directly to customers in selected countries. Our sales team is supported by internal sales administration and customer service team based in Irvine, California. We do not anticipate adding to our sales force substantially. However, it is likely that we will continue to add international distributors as we expand into new countries.

~~Each~~ distributors ~~distributor~~converted ~~contract~~approximately ~~gives~~90% ~~the~~of ~~appointed~~IntraLase® ~~distributor~~FS ~~the~~lasers ~~exclusive right~~ to ~~promote,~~new ~~market, sell, service and support our INTRALASE FS® Laser, IntraLASIK®~~ software, ~~per~~versions ~~procedure~~that ~~fee~~require ~~inclusive of~~either aremote ~~disposable~~electronic ~~patient~~activation ~~interface~~when ~~and~~ the customer ~~associated~~orders ~~tool~~procedures ~~kit within a specified country~~ or ~~set~~an ofIntraLase-generated ~~countries,~~secure ~~for~~activation ~~use~~code inused by the ~~field of ophthalmology surgical centers. Distributors are obligated to develop~~ customer ~~prospects,~~at ~~sell product and provide servicing and training relating to our product offering in~~ their ~~territory~~site. ~~Distributor~~These ~~contract~~methods ~~terms~~allow ~~are between one and three years, and generally automatically renew unless either party terminates~~ the ~~agreement,~~customer ~~however there are termination rights for either party in the event the other party fails~~ to perform ~~any~~only ~~material obligations. Payments by~~ the ~~distributor~~number ~~to us are in U.S. currency and contractually must be made cash in advance or by irrevocable letter~~ of ~~credit.~~procedures ~~However~~purchased, ~~on occasion,~~which we ~~have~~believe ~~granted limited terms~~ to ~~distributors,~~be ~~usually for less than net 10 days to ensure shipment by~~ a ~~specified~~more ~~carrier.~~scalable ~~Title to the equipment transfers upon shipment~~ and ~~there~~secure method ~~is no right~~ of ~~return~~securing ofour ~~any~~per ~~product~~procedure torevenue usstream. ~~The distributor~~For ~~contracts~~further ~~provide~~discussion, asee ~~standard~~Risk ~~twelve~~Factors ~~month~~– ~~warranty~~Risks ~~for~~Related ~~defective components, subject~~ to ~~customary exclusions. All of the contracts contain standard provisions regarding~~ our ~~ownership~~Business—“Measures ofwe ~~our~~take ~~intellectual property and the distributors’ obligations~~ to ~~maintain~~ensure ~~the~~collection ~~confidentiality~~ of ~~our~~per ~~intellectual~~procedure ~~property.~~charges ~~Distributors~~may ~~are~~be ~~obligated~~inadequate.” toIn ~~indemnify us for liabilities arising from~~ addition, the ~~distributor’s~~electronic ~~failure~~link tofacilitates ~~perform~~remote ~~its~~software ~~obligations~~upgrades ~~under~~and ~~the distributor contract, or for its misconduct or negligence~~ in ~~handling~~ the ~~products.~~future ~~Under some of the contracts,~~ we ~~will~~intend ~~indemnify the distributor for claims arising out of or relating~~ to ~~the~~offer ~~manufacture, use and sale of~~ our ~~product~~customers ~~offering~~new orfeatures, ~~any~~such ~~infringement by~~as usremote ofdiagnostics ~~the~~using ~~intellectual~~this ~~property~~electronic ~~of third parties with respect to our product offering~~link.

Sales and Marketing

Our primary objective is to rapidly expand our market share for the creation of corneal flaps in the first step of LASIK surgery. Of the 1,270 LASIK surgery practices in the United States, approximately 700 perform over 50 procedures per month. Of the 3,200 LASIK surgery practices outside the United States, we estimate that there are approximately 700 laser centers performing over 50 LASIK procedures per month in our primary international target markets in the Asia-Pacific region, Europe and the Middle East. We focus our sales and marketing efforts on these high volume LASIK surgery practices.

We began selling the IntraLase® FS laser and our per procedure fee inclusive of a disposable patient interface in the United States during the fourth quarter of 2001, in Asia during the third quarter of 2003 and in Europe during the first quarter of 2004. As of December 31, 2006, we had an installed base of 335 lasers in the United States and 239 outside the United States. In addition, we had sold over 1.1 million per procedure disposable patient interfaces worldwide.

Sales

We sell our laser through our direct sales force in the United States and through our direct sales efforts and distributors internationally. In the United States, we have six direct sales personnel, plus an executive managing our sales efforts. The U.S. sales force primarily consists of personnel with extensive experience in the sale of lasers and other products to refractive surgeons. Internationally, we sell through local country distributors and three sales consultants and an executive devoted to direct sales efforts and international distributor development. We have approximately 20 distributor contracts with distributors in the Asia Pacific region, Europe and the Middle East, and we also sell our product offering directly to customers in selected countries. Our sales team is supported by internal sales administration and a customer service team based in Irvine, California. We do not anticipate adding to our sales force substantially. However, it is likely that we will continue to add international distributors as we expand into new countries.

Each distributor contract typically gives the appointed distributor the exclusive right to promote, market, sell, service and support our IntraLase® FS Laser, IntraLASIK^{^®} software, per procedure fee inclusive of a disposable patient interface and the associated tool kit within a specified country or set of countries, for use in the field of ophthalmology surgical centers. Distributors are obligated to develop customer prospects, sell product and provide servicing and training relating to our product offering in their territory. Distributor contract terms are typically between one and three years. However, there are termination rights for either party in the event the other party fails to perform any material obligations. Payments by the distributor to us are in U.S. currency and generally are made cash in advance or by irrevocable letter of credit; however, in the second quarter of 2005, we began selling to selected and qualified distributors on credit terms. Title to the equipment transfers upon shipment and there is no right of return of any product to us. The distributor contracts provide a standard twelve month warranty for defective components, subject to customary exclusions. All of the contracts contain standard provisions regarding our ownership of our intellectual property and the distributors’ obligations to maintain the confidentiality of our intellectual property. Distributors are obligated to indemnify us for liabilities arising from the distributor’s failure to perform its obligations under the distributor contract, or for its misconduct or negligence in handling the products. Under some of the contracts, we will indemnify the distributor for claims arising out of or relating to the manufacture, use and sale of our product offering or any infringement by us of the intellectual property of third parties with respect to our product offering.

Marketing

Our marketing efforts involve two key strategies:

•

Marketing to prospective customers. We market our product offering to LASIK surgery practices with a combination of printed and electronic media sales literature and educational seminars and training, the publication of clinical studies and articles in ophthalmic journals by surgeons who are users of our product offering, advertising in ophthalmology magazines and journals, and public speaking by surgeon customers at the major ophthalmology shows and conferences we attend. We provide a consistent message about our product offering, and our better medicine and better business model.

•

Complementing our surgeon customers’ marketing efforts. LASIK surgery practices generally obtain patients through direct advertising in their local markets or through referrals from the patients’ optometrists. Our marketing efforts are designed to complement these dual marketing strategies of our customers. Many large LASIK surgery practices advertise directly to potential patients. We complement and support our customers’ marketing strategies by providing public relations support, a strong branding, product and consumer brochures, educational CD ROMs, as well as literature and templates for radio and print advertising which our surgeon customers can use in their own advertising. In addition, since many LASIK surgeons rely on their potential patient’s optometrists for referrals, we assist surgeons in strengthening their optometrist referral network by sponsoring continuing medical education seminars, soliciting key opinion leaders in optometry to make presentations and write articles on our technology, as well as sponsoring training “wet labs” in which optometrists are brought to the surgeon’s center for education about our technology and an opportunity to use our technology to make a flap cut on a non-live animal eye.

Customer Service and Support

Our customer support strategy is to continue to offer extensive support to our customers to build a reputation as a premier service provider. In the United States, we provide customer service through the following measures:

•

Technical Services. Our technical services personnel are responsible for our technical support hotline that handles customer calls 24 hours a day, seven days a week. These personnel also are responsible for phone support to customers and distributors, scheduling on-site routine maintenance visits by our field service personnel and dispatching our personnel to the customer’s site if necessary.

•

Field Services. Our field service engineers are responsible for laser site inspection, installation, training, on-going routine maintenance and necessary repair.

• Clinical Applications. Our clinical applications personnel are responsible for clinical training on the use of our ~~INTRALASE~~IntraLase® FS laser and per procedure disposable patient interface, telephone support and on-site support to ensure successful clinical integration of our product offering at customer sites. These personnel also provide free per procedure fees inclusive of disposable patient interfaces on the first surgery day where the surgeon typically performs a majority of LASIK surgeries with our technology.

We provide laser site inspection, installation and clinical training prior to the acceptance of our laser by our surgeon customers. Clinical training typically takes no more than one day, since most of our surgeon customers have already acquired some of the skills necessary for the operation of our laser based on prior experience using the excimer laser. The surgeon is likely to become more proficient with our product offering as he or she gains additional experience, similar to other devices and surgical techniques.

In international markets, we provide customer service through our distributors. Our technical services, field service and clinical applications personnel each provide training and support to our distributors and their personnel, and our distributors in turn provide all customer services and support to the end-user surgeons. All international distributors are required to send at least one service engineer to our training facility in Irvine, California, for an intensive ~~one-month~~ training course on the installation, routine maintenance and repair of our laser and are required to send their engineer(s) for additional training provided by IntraLase at specified times. We expect to establish training facilities in one or more select international locations in the near future.

As of December 31, ~~2004~~2006, we had 45101 field service, technical services and clinical applications personnel worldwide who are responsible for ~~supporting our distributors and~~ servicing customers in direct sales markets and supporting our distributors.

All of our direct customers who purchase or lease our laser receive a one-year limited warranty and are required toeither to maintain a maintenance contract thereafter or to pay for service and preventive maintenance on a time and materials basis in order to use our laser and to receive on-going maintenance and support. International distributor agreements generally provide for a one-year parts only warranty, with the distributor responsible for customer support to the end-user surgeons. The international distributor is responsible for obtaining a fee based maintenance agreement from their customer and servicing the equipment.

Intellectual Property Rights

We rely on a combination of patent, trademark, copyright, trade secret and other intellectual property laws, nondisclosure agreements and other measures to protect our intellectual property. We believe that in order to have a competitive advantage, we must develop and maintain the proprietary aspects of our technologies. We require our employees, consultants and advisors to execute confidentiality agreements in connection with their employment, consulting or advisory relationships with us. We also require our employees, consultants and advisors who we expect to work on our product offering to agree to disclose and assign to us all inventions conceived during the work day, using our property, or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our product offering or to obtain and use information that we regard as proprietary.

Patents

We have developed a patent portfolio that covers many aspects of our laser, laser beam guidance, other components of our laser, methods for inducing breakdown of corneal tissue and our per procedure disposable patient interface. As of December 31, ~~2004~~2006, we own 1220 issued U.S. patents and ~~nine~~16 U.S. pending patent applications, ~~eight~~nine issued foreign patents and 2242 pending foreign patent applications. Our patents expire between 2016 and ~~2022~~2024. We have multiple patents covering unique aspects of our laser and per procedure disposable patient interface.

We have entered into three licenses for several key patents and patent applications ~~covering~~relating ~~different~~to different aspects of our laser and our per procedure fee inclusive of a disposable patient interface. As of December 31, ~~2004~~2006, we exclusively license, for human health, 1722 issued U.S. patents, with expiration dates from 2008 through 2019, and ~~two~~four U.S. pending patent applications, ~~seven~~ 12 foreign patents and ~~five~~10 foreign pending patent applications. One of these licenses is for exclusive worldwide use of the intellectual property covered by such patents in the fields of lasers designed for human health applications and another is for exclusive worldwide use of the intellectual property covered by such patents in the fields of ultra-fast lasers designed for human health applications. Under two of these licenses we pay periodic license maintenance fees.

In addition, we have entered into two non-exclusive worldwide license agreements with third parties ~~covering~~relating to patents that apply either to components of our laser or our disposable patient interface, as applicable. We pay royalties on the sale or lease of our laser or the sale of our disposable patient interface, as applicable, under these license agreements and are also required to pay a minimum amount of royalties per year.

On July 15, 2004, we entered an agreement to acquire a fully-paid royalty-free irrevocable and worldwide license from the University of Michigan for the use of certain technology and to settle all past contract disputes for aggregate consideration of $2,000,000. Upon closing this agreement on July 15, 2004 we recorded a charge of $765,000, which is included within research and development expenses in 2004, related to the settlement of the contract disputes and capitalized $1,235,000, which is included at its amortized value within total long-term assets at December 31, ~~2004~~2006, associated with acquired licenses in accordance with the terms of the agreement.

11On August 23, 2004, the United States Patent and Trademark Office (PTO) granted a request for reexamination with respect to US Patent RE 37,585, one of the four U.S. patents licensed to us by the University of Michigan, which means that the PTO found that the request raised a new issue of patentability with regard to some of the claims. On July 25, 2006, the PTO terminated the proceedings favorable to the Patent Owner, the University of Michigan, by issuing a document entitled “Notice of Intent to Issue Ex Parte Reexamination Certificate” (NIRC). In the NIRC, the PTO confirmed the patentability of the RE 37,585 claims as amended during the reexamination.

On February 27, 2007 we entered into a settlement agreement with Escalon Medical Corp., Inc. pursuant to which, among other things, all right, title and interest in and to the patents and related intellectual property that previously had been licensed from Escalon was transferred to us. Under the settlement agreement, we will pay Escalon an aggregate of $9.6 million. A significant portion of the settlement was expensed in the fourth quarter of 2006 in accordance with SFAS No. 5, Accounting for Contingencies and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss. The remaining amount will be recorded as an intangible asset in the first quarter of 2007 and amortized over its remaining life. As a result of this settlement, 15 of the U.S. patents listed above as licensed by us as of December 31, 2006, one of the U.S. patent applications listed above as licensed by us as of December 31, 2006, eight of the foreign patents listed above as licensed by us as of December 31, 2006 and seven of the foreign patent applications listed above as licensed by us as of December 31, 2006 will, upon consummation of the settlement, be owned by us.

On uncertain. ~~August~~Any ~~23,~~claim ~~2004,~~relating ~~the~~to ~~United~~infringement ~~States~~of ~~Patent~~patents ~~and~~that ~~Trademark~~is ~~Office,~~successfully orasserted ~~PTO,~~against ~~granted~~us amay ~~request~~require ~~for re-examination~~us ~~with~~to ~~respect~~pay tosubstantial ~~U.S.~~damages ~~Patent~~or REdiscontinue the ~~37,585,~~manufacture ~~one~~and sale of ~~the~~our ~~four U~~products.S. ~~patents~~Even ~~licensed~~if towe uswere byto ~~the~~prevail, ~~University~~any oflitigation ~~Michigan,~~could ~~which~~be ~~means~~costly ~~that~~and ~~the~~time ~~PTO~~consuming ~~found~~and ~~that~~would divert the ~~request~~attention ~~raised~~of aour ~~new~~management ~~issue~~and ofkey ~~patentability~~personnel ~~with~~from ~~regard~~our tobusiness ~~some~~operations. ofOur ~~the~~success ~~claims. Re-examination~~also ~~may~~will ~~result~~depend in part ~~the~~on ~~scope~~our ofnot ~~protection~~infringing ~~and~~patents ~~rights~~issued ~~provided~~to byothers, ~~the~~including ~~patent~~our ~~license~~competitors ~~being~~and ~~lost~~potential ~~or narrowed~~competitors. ~~The~~If ~~irrevocable~~any ~~license~~key weaspect ~~acquired~~of ~~and~~our ~~the~~product ~~payment~~offering weis ~~made~~found ~~pursuant~~ to ~~the~~infringe ~~July 15, 2004 license agreement will not be affected by~~ the ~~granting~~patents of ~~re-examination~~others, ~~regardless~~our ofdevelopment, ~~the~~manufacture ~~outcome.~~and ~~Although~~sale weof ~~believe~~our ~~that~~product offering ~~the~~could ~~intellectual~~be ~~property~~severely ~~covered~~restricted byor ~~the~~prohibited. ~~patent~~In ~~subject~~addition, tothird ~~the~~parties ~~re-examination~~including ~~is important to~~ our ~~business,~~competitors ifmay ~~this~~independently ~~patent~~develop issimilar ~~invalidated~~technologies. ~~there~~Because ~~will~~of bethe noimportance ~~effect on~~of our ~~ability~~patent portfolio to ~~sell~~ our ~~products. However~~business, ~~invalidation~~we ormay ~~narrowing~~lose ofmarket ~~this~~share ~~patent might allow others~~ to our ~~market~~potential ~~competitive~~competitors ~~products~~if ~~that~~we ~~would~~fail ~~otherwise~~to ~~have~~protect ~~infringed~~our ~~the~~intellectual ~~patent~~property rights.

The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. Patent litigation can involve complex factual and legal questions and its outcome is uncertain. Any claim relating to infringement of patents that is successfully asserted against us may require us to pay substantial damages or discontinue the manufacture and sale of our products. Even if we were to prevail, any litigation could be costly and time consuming and would divert the attention of our management and key personnel from our business operations. Our success also will depend in part on our not infringing patents issued to others, including our competitors and potential competitors. If any key aspect of our product offering is found to infringe the patents of others, our development, manufacture and sale of our product offering could be severely restricted or prohibited. In addition, third parties including our competitors may independently develop similar technologies. Because of the importance of our patent portfolio to our business, we may lose market share to our potential competitors if we fail to protect our intellectual property rights.

If an entrant with products or technology directly competitive to our products or technology should arise, the possibility of a patent infringement claim against us grows. While we make an effort to ensure that our product offering does not infringe other parties’ patents and proprietary rights, our product offering and related methods may be covered by patents held by others. In addition, third parties may assert that future products we may market infringe their patents.

Further, a patent infringement suit brought against us may force us to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a third party’s intellectual property, unless that party grants us rights to use its intellectual property. In such cases, we may be required to obtain licenses to patents or proprietary rights of others in order to continue to commercialize such potential products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if we were able to obtain rights to the third party’s intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize some of our potential products or may have to cease some of our business operations as a result of patent infringement claims, which could severely harm our business.

Under our license agreements with Escalon Medical and the University of Michigan, we are obligated to indemnify the party granting the license against claims, losses and expenses arising out of the manufacture, use, sale or other disposition by us of the products we manufacture using the licensed technology, out of any other person’s use of the products we manufacture, or our other use of the licensed technology or patents. Under our license agreement with Mr. Shui Lai, we are obligated to indemnify Mr. Lai against claims, losses and expenses arising out of the distribution of the products we manufacture using the licensed technology.

Trademarks

We own or have rights to material trademarks or trade names that we use in conjunction with the sale of our product offering, which include, among others, IntraLase®, ~~INTRALASE~~IntraLase® FS, IntraLASIK® and The New Shape of Vision®~~, as well as our dot and swoosh mark~~. Generally, elements of our product offering are marketed under one of these trademarks or brand names.

Manufacturing

We have one manufacturing facility located in Irvine, California where our ~~INTRALASE~~IntraLase® FS laser is assembled and tested and our IntraLASIK® software ~~program~~ is designed, programmed and tested. This facility is also where we assemble, in a semi-automated process, the metal cone and glass lens for our disposable patient interface, the components of which are manufactured by outside vendors. We then ship the disposable patient interface to a third party for sterilization and packaging. At December 31, 2006, we had approximately 95 employees in operations, regulatory and quality assurance.

12We purchase all of the components used in the manufacture and assembly of our product offering from outside vendors. These outside vendors produce the components we require, including the printed circuit boards and objective lens used in the laser and the metal cone, glass and packaging used for our disposable patient interface, to our specifications and in many instances to our design. Our quality assurance personnel audit our vendors for conformance to our specifications, policies and procedures and inspect and test the components or assemblies at various steps in the manufacturing and assembly cycle. This process facilitates compliance with the regulatory requirements for the manufacturing and sale of our product offering.

A portion of components for our laser product are made by sole source vendors. Although these components constitute only a portion of the total components in our product offering, these components are integral to the success of our product offering and as a result our success is tied to our continuing ability to obtain supplies of these components. We have never experienced any significant disruption in supply of any of our components. We endeavor to manage the risk of single sources by maintaining inventories in excess of lead time requirements and by maintaining good vendor relationships. In addition, we continuously seek to identify and qualify additional suppliers based on our volume requirements. We purchase our product inventories through standard purchase orders and do not currently have supply agreements with our outside vendors. In the

We event ~~have~~of ~~approximately~~any 64disruption ~~employees~~ in ~~operations~~our vendor relationships, ~~regulatory~~arrangements ~~and~~for ~~quality~~additional ~~assurance.~~or Atreplacement ~~our~~suppliers ~~current~~for ~~rate~~ some of ~~growth,~~these weparts ~~anticipate~~may ~~that~~not webe ~~will~~achieved ~~need~~quickly and toour ~~expand~~business could be harmed by such delays. See “Risk Factors—Risks Related to our ~~manufacturing~~Business—We ~~capacity,~~depend on certain single-source suppliers and asmanufacturers ~~such~~for onkey ~~January~~components 31of our laser, ~~2005~~and wethe ~~entered~~loss ~~into~~of aany ~~lease~~of ~~agreement~~these ~~for~~suppliers aor manufacturers, ~~larger~~or ~~facility~~their ininability ~~Irvine,~~to ~~California.~~supply ~~See~~us ~~further~~with ~~discussion~~an atadequate ~~Part~~supply Iof materials, ~~Item~~could 2harm ~~– Properties~~our business.”

We purchase all of the components used in the manufacture and assembly of our product offering from outside vendors. These outside vendors produce the components we require, including the printed circuit boards and objective lens used in the laser and the metal cone, glass and packaging used for our disposable patient interface, to our specifications and in many instances to our design. Our quality assurance personnel audit our vendors for conformance to our specifications, policies and procedures and inspect and test the components at various steps in the manufacturing and assembly cycle. This process facilitates compliance with the regulatory requirements for the manufacturing and sale of our product offering.

A minor portion of components for our laser product are made by sole source vendors. Although these components constitute only a small portion of the total components in our product offering, these components are integral to the success of our product offering and as a result our success is tied to our continuing ability to obtain supplies of these components. We have never experienced any significant disruption in supply of any of our components. We endeavor to manage the risk of single sources by maintaining inventories in excess of lead time requirements and by maintaining good vendor relationships. In addition, we continuously seek to identify and qualify additional suppliers based on our volume requirements. We purchase our product inventories through standard purchase orders and do not currently have agreements with our outside vendors. In the event of any disruption in our vendor relationships, arrangements for additional or replacement suppliers for some of these parts may not be achieved quickly and our business could be harmed by such delays. See “Risk Factors—Risks Related to our Business—We depend on certain single-source suppliers and manufacturers for key components of our laser, and the loss of any of these suppliers or manufacturers, or their inability to supply us with an adequate supply of materials, could harm our business.”

Research and Development

We believe that research and development activities are essential to maintaining and enhancing our business. We continuously improve our product by introducing product enhancements such as the 30 kHz laser introduced in mid 2005, ~~including~~which ~~sponsoring~~doubled the speed of our laser and the anticipated second quarter 2006 introduction of our 60 kHz laser, which again doubles the speed. We also sponsor clinical studies to validate our existing product offering ~~and~~are developing ~~potential~~ new therapeutic applications for our technology. Our research and development group consists of 3743 individuals with research, engineering, medical and regulatory affairs experience. Our research and development expenses, including regulatory and clinical ~~trial~~study expenses, were approximately $1220.76 million in ~~2004~~2006, $911.17 million in ~~2003~~2005 and $912.07 million in ~~2002~~2004.

Competition

Although we believe that our product offering has substantial advantages over existing and prospective corneal flap creation technologies, we face, and will continue to face, intense competition from medical device companies, as well as numerous academic and research institutions and governmental agencies, both in the United States and abroad. The principal elements of competition in the surgical vision correction market include safety, quality, functionality, better outcomes, support and service, the ability to develop new technologies and new therapeutic applications, as well as pricing. We believe that overall we compete favorably with respect to the increased safety, precision and visual acuity achieved when using our laser technology and our extensive support structure.

The principal sources of this competition are as follows:

Competition in Creating the Corneal Flap

• Microkeratome companies. Principal microkeratome manufacturers and suppliers with whom we compete include Bausch & Lomb, with approximately ~~half~~40% of the U.S. microkeratome and blade market, Moria/Microtech, the second largest supplier of microkeratomes and blades in the U.S. market, Advanced Medical Optics and Nidek. We believe that these microkeratome manufacturers will continue to enhance and further develop microkeratomes to improve performance and accuracy to compete with our laser. Microkeratomes are less expensive than our laser, although surgeons typically need to purchase more than one microkeratome ~~machine~~ because the machine must be serviced at the manufacturer’s location. In addition, our competitors may offer microkeratome systems at a lower price, may ~~in the future~~ price their microkeratome systems as part of a bundle of products or services, including the excimer laser used in the second step of LASIK surgery, or may enhance or further develop products to improve performance and accuracy of their existing product to compete against us. Some of these competitors have substantially greater resources, larger customer bases, longer operating histories and greater name recognition than we have.

13• Competing femtosecond lasers. We may also in the future compete with manufacturers of other femtosecond lasers to create the corneal flap. Several manufacturers have announced their intention to launch new femtosecond lasers that would compete directly with our products. These include Wavelight Technologies, Zeimer Ophthalmic Systems and 20/10 Perfect Vision. Successful introduction of competing products by these or other manufacturers could reduce demand for our products, particularly if the competing products were perceived to offer superior capabilities or were marketed at a lower price. However, even if these potential competitors are able to fully commercialize their products, they may not be able to successfully compete against our product offering.

•

Other competing technologies. Since our product offering is used in the first step of LASIK surgery, we also compete with other vision disorder treatments that compete with LASIK, such as eyeglasses, contact lenses and other surgical products and techniques. Such techniques include PRK and similar so-called “surface” procedures, where no corneal flap is created prior to refractive treatment with the excimer laser. Surface procedures represent a small but growing portion of the laser vision correction market. Other techniques include intra-ocular lenses and epithelial flaps, also known as Epi-LASIK.

New intraocular lenses have been developed and recently approved for use in the U.S. for correction of refractive error. These lenses, termed “phakic” intraocular lenses are inserted into the anterior chamber or posterior chamber of the eye

• with ~~Other~~the ~~competing~~patient’s ~~technologies.~~crystalline Welens ~~are~~left ~~aware of other companies that have developed alternative technologies that may~~ in ~~the~~place. ~~future~~They ~~compete~~are ~~with~~primarily usused infor ~~the~~correction ~~creation~~ of ~~the~~high ~~corneal~~refractive ~~flap,~~errors ~~including~~when ~~other~~corneal ~~ultra-fast~~surgical ~~lasers~~procedures ~~and high pressure water jets~~are contraindicated. However, ~~based~~if onused ~~the~~in ~~lack~~patients ~~of any published studies or articles, demonstrations, or any other affirmative indication from these companies~~ that ~~they~~would ~~are~~otherwise ~~delivering~~be acandidates ~~commercial~~for ~~product into the marketplace~~LASIK, ~~we do not believe that these companies have yet fully commercialized their products. Even if~~ they ~~are~~could ~~able~~impact ~~to fully commercialize their products, they may not be able to successfully compete against~~ our ~~product offering~~market.

~~Competition~~Presbyopic intraocular ~~Against~~lenses ~~LASIK~~(accommodative lenses and multifocal lenses) have also been developed for correction of distance and near vision after cataract surgery. Although not approved for this use in the U.S., some surgeons are using these lenses to correct refractive error in patients that do not have a cataract. This procedure is known as “refractive lens exchange” and involves removal of the patient’s clear crystalline lens and implantation of the presbyopic intraocular lens. Patients with a refractive correction that do not have a cataract would normally fall within our market segment. If the use of refractive lens exchange increases in popularity, this could impact our market.

~~Because~~Corneal ~~our~~based ~~technology~~refractive isprocedures ~~used~~which inbegin ~~the~~with ~~first~~removal ~~step~~ of the ~~LASIK~~ ~~surgery,~~epithelial welayer ~~also~~of ~~compete against other vision correction technologies that bypass~~ the ~~need~~corneal ~~for~~include ~~the~~PRK, ~~creation~~LASEK ofand ~~the corneal flap~~epi-LASIK. ~~LASIK~~An ~~competes~~increase ~~with~~in ~~other~~any of ~~treatments~~these ~~such~~three asprocedures ~~eyeglasses,~~could ~~contact~~impact ~~lenses~~the ~~and~~volume ~~other~~of ~~surgical~~the ~~techniques~~LASIK market. ~~Such techniques~~If ~~include~~any ~~corneal~~of ~~inlays~~these ~~and~~alternative ~~epithelial~~treatments ~~flaps,~~result ~~which are currently~~ in ~~the~~decreased ~~early~~demand ~~stages~~for ofLASIK ~~commercialization~~surgery, ~~and~~this dowould ~~not~~decrease ~~have~~demand afor ~~significant~~our ~~presence~~product ~~in the market~~offering.

Government Regulation

Our product offering is regulated as a medical device. Accordingly, our product design and development, testing, labeling, manufacturing, processes, promotional activities and sales are regulated extensively by government agencies in the United States and other countries in which we market and sell our product offering. We have clearance from the U.S. Food and Drug Administration, or FDA, to market our laser in the United States. We also have the approvals necessary to sell our product offering in the European Union and other international markets in which we currently sell our product offering.

United States

In the United States, the FDA regulates the design, manufacture, distribution, quality standards and marketing of medical devices. FDA regulation includes, among other things, post-market surveillance and adverse event reporting requirements.

There are two principal methods by which FDA regulated devices may be marketed in the United States: 510(k) clearance and pre-market approval, or PMA. To obtain 510(k) clearance, we must demonstrate that our product offering is substantially equivalent to a previously cleared 510(k) device or other appropriate predicate device. A PMA application is a longer and more complicated process, and is required for a device that does not qualify for 510(k) clearance. We intend to utilize the 510(k) notification procedure whenever possible. To date, all components of our product offering have qualified for 510(k) clearance, and have not required a PMA application.

After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new 510(k) clearance, or could even require a PMA application. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing or recall the modified device until 510(k) clearance or a PMA is obtained.

We received 510(k) clearance in December 1999 to market our ~~INTRALASE~~IntraLase® FS laser and our disposable patient interface in the United States. In addition, we have received 510(k) clearances for the creation of channels for intracorneal ring segments for lamellar keratoplasty and for ~~lamellar~~penetrating keratoplasty, ~~both~~all of which are used in therapeutic corneal procedures. As we develop new products and applications or make significant modifications to our existing product offering, we will need to obtain the regulatory approvals necessary to market such products for vision correction and other medical procedures in our target markets.

After the FDA permits a device to enter commercial distribution, numerous regulatory requirements apply. These include:

•

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

•

quality system regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process;

1415

•

labeling regulations;

•

the FDA’s general prohibition against promoting products for unapproved or “off-label” uses;

•

medical device reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and

•

reporting of corrections and removals of devices that are intended to reduce a risk to health.

We also are subject to unannounced inspections for our U.S. facility by the FDA and the Food and Drug Branch of the California Department of Health Services, and these inspections may include the manufacturing facilities of our subcontractors.

Our laser is a radiation emitting product as well as a medical device. Therefore, we are also regulated by the FDA under the Radiation Control for Health and Safety Act. This law is intended to ensure that medical devices are safe and effective and seeks to reduce unnecessary exposure to radiation from medical, occupational, and consumer products.

If we do not comply with the FDA’s regulatory requirements we may be subject to an FDA enforcement action, which may include any of the following sanctions:

•

fines, injunctions and civil penalties;

•

recall or seizure of our product offering;

•

operating restrictions, partial suspension or total shutdown of production;

•

refusing our request for 510(k) clearance or PMA approval of new products;

•

withdrawing 510(k) clearance or PMA approvals that are already granted;

•

suspension in the issuance of export certificates; and

•

criminal prosecution.

To date, we have not been subject to any material enforcement action by the FDA.

International

Sales of our laser-based product offering outside the United States are subject to the regulatory requirements of the foreign country or, if applicable, the harmonized standards of the European Union. These regulatory requirements vary widely among countries and may include technical approvals, such as electrical safety, as well as demonstration of clinical efficacy. In Europe, the 25 member countries of the European Union have promulgated rules that require medical products to receive the certifications necessary to affix the CE Mark to the device. The CE Mark is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. Certification under the ISO standards for quality assurance and manufacturing processes is one of the CE Mark requirements. We are licensed to apply the CE Mark to our product offering in accordance with the European Medical Device Directives, which permits us to commercially distribute our lasers throughout the European Union and to perform ~~the~~ flap ~~procedure~~procedures and corneal transplant procedures using our product offering. We rely on foreign regulatory approvals and export certifications from the FDA to comply with certain regulatory requirements in several foreign jurisdictions, such as Australia, Canada, Korea, Taiwan and countries in Western Europe. We intend to meet applicable foreign country regulatory requirements for our product offering.

Other Regulatory Requirements

We also are subject to extensive and frequently changing regulations under many other laws administered by U.S. and foreign governmental agencies on the national, state and local levels, including requirements regarding occupational health and safety and the use, handling and disposing of toxic or hazardous substances.

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Product Liability Insurance

We maintain product liability insurance with respect to our product offering with a general coverage limit of $510.0 million in the aggregate. ~~Since commencing the sale of our systems, no material product liability claims have been initiated against us.~~

Employees

As of December 31, ~~2004~~2006, we had ~~202~~319 full-time employees, ~~and~~approximately 8two ~~full-time~~thirds ~~equivalent consultants, most~~ of whom are located in our facilities in Irvine, California, and with ~~the exception of~~ worldwide-based sales, field service and clinical applications personnel located primarily outside of California. We have 2838 sales and marketing employees; 3743 research, development and engineering employees; 1895 operations, regulatory ~~affairs~~ and quality assurance employees: 45101 technical services, field services and clinical applications employees: ~~46 operations employees~~ and 2842 general and administrative employees. None of our employees is represented by a collective bargaining agreement and we have not experienced any work stoppage. We believe that we have good relations with our employees.

Executive Officers of the Registrant

The following table sets forth information with respect to our executive officers and one of our directors that also is an executive officer as of December 31, 2006:


Name	Age	Position
Robert J. Palmisano	62	President and Chief Executive Officer, Director
Shelley B. Thunen	54	Executive Vice President and Chief Financial Officer
P. Bernard Haffey	44	Executive Vice President and Chief Commercial Officer
Charline Gauthier, O.D., Ph.D.	44	Executive Vice President and Chief Operating Officer
James Lightman	49	Senior Vice President and General Counsel
Kevin Harley	47	Vice President, Human Resources
Tibor Juhasz, Ph.D.	48	Vice President and Chief Technical Officer
Eric Weinberg	46	Vice President, Marketing and Professional Affairs

Robert J. Palmisano. Mr. Palmisano joined us as our President, Chief Executive Officer and a director in April 2003. From April 2001 to April 2003, Mr. Palmisano was the President, Chief Executive Officer and a director of MacroChem Corporation, a development stage pharmaceutical corporation. From April 1997 to January 2001 Mr. Palmisano served as President and Chief Executive Officer and a director of Summit Autonomous, Inc., a global medical products company that was acquired by Alcon, Inc. in October 2000. Prior to 1997, Mr. Palmisano held various executive positions with Bausch & Lomb Incorporated, a global eye care company. Mr. Palmisano earned his B.A. in Political Science from Providence College. Since March 2005, Mr. Palmisano has served as a member of the Board of Directors of Osteotech, Inc. Since May 2002, Mr. Palmisano has served as a member of the Board of Directors of Songbird Hearing, Inc.

Shelley B. Thunen. Ms. Thunen joined us as our Chief Financial Officer in May 2001. Ms. Thunen was promoted to Executive Vice President and Chief Financial Officer in October 2004. From January 2000 to January 2001, she was the Executive Vice President, Chief Financial Officer and Corporate Secretary of Versifi, Inc., which designs, develops and markets Java internet infrastructure software. Versifi was acquired by Reef SA/NV in December 2000. From August 1992 to January 2000, Ms. Thunen was the Chief Financial Officer, Vice President of Operations and Corporate Secretary of VitalCom, Inc., a leading manufacturer of computer networks for cardiac monitoring systems. VitalCom was acquired by General Electric Corp. in 2001. Ms. Thunen earned her M.B.A. and her B.A. in Economics from the University of California, Irvine.

P. Bernard Haffey. Mr. Haffey has served as our Executive Vice President and Chief Commercial Officer since July 2004. From March 2003 to July 2004, Mr. Haffey served as our Vice President, Business Development. From September 2001 to September 2002, Mr. Haffey was the Chief Executive Officer of NeuroVision, Inc., an early stage vision therapy company. From September 1997 to December 2000, Mr. Haffey was Executive Vice President, Chief Commercial Officer and Vice President of Marketing and Sales at Summit Autonomous, Inc. Prior to September 1997, Mr. Haffey held key sales and marketing positions with Mentor Corporation, a medical device company serving multiple markets including the ophthalmic market. Mr. Haffey earned his B.A. from Colgate University and his M.B.A. from Cornell University.

Charline Gauthier, O.D., Ph.D. Dr. Gauthier joined us as our Vice President, Research, Development and Corporate Affairs in July 2003. Ms. Gauthier was promoted to Executive Vice President and Chief Operating Officer in October 2004. After Summit Autonomous Inc. was acquired by Alcon, Inc. in October 2000, Dr. Gauthier was hired by Alcon, Inc. and from October 2000 to December 2001 served as its Vice President and General Manager of the Orlando Technology Center and was responsible for medical lasers and accessories for eye surgery. From April 2000 to October 2000, she was the Executive Vice President and Chief Operations Officer of Summit Autonomous, Inc. From October 1998 to April 2000, Dr. Gauthier was the Chief Operating Officer of Autonomous Technologies Corporation or ATC. ATC was acquired by Summit Autonomous in April 2000. Dr. Gauthier earned her M.B.A. from Crummer Graduate School of Business, Rollins College, her Ph.D. from the University of New South Wales in Sydney, Australia and her Doctor of Optometry, from the University of Waterloo, Canada.

James Lightman. Mr. Lightman has served as our Senior Vice President and General Counsel since February 2005, From December 2004 to January 2005, Mr. Lightman was the Vice President, Finance and Administration and General Counsel at Amicore, Inc., which provides software and services to physicians. From May 2002 to December 2004, Mr. Lightman was Vice President and General Counsel at Amicore, Inc. From January 2001 to May 2002, Mr. Lightman was Vice President, General Counsel and Secretary at Zaiq Technologies, Inc., a semiconductor design engineering solutions firm. From January 2000 through December 2000, Mr. Lightman was Senior Vice President, General Counsel and Clerk for Summit Autonomous, Inc., a global medical products company that was acquired by Alcon, Inc. in October 2000. Mr. Lightman earned his law degree, cum laude, from Boston University School of Law and his B.S., magna cum laude, from Boston University School of Management.

Kevin Harley. Mr. Harley has served as our Vice President, Human Resources since August 2004. From July 2001 to August 2004, Mr. Harley served as Vice President of Employee Relations for Edwards Lifesciences Corporation, a cardiology company. From April 2000 to July 2001, Mr. Harley served as Vice President of Human Resources for Edwards. From December 1999 to April 2000, Mr. Harley served as Vice President of Human Resources for Baxter Healthcare Corporation (Cardiovascular Group), the principal U.S. operating subsidiary of Baxter International Inc., a global medical products and services company. From May 1994 to December 1999, Mr. Harley served as Director of Human Resources for Baxter and, prior to May 1994, Mr. Harley held various other positions with Baxter. Mr. Harley earned his B.A. from the University of Buffalo in Psychology and his M.B.A. in Human Resources from National University.

Tibor Juhasz, Ph.D. Dr. Juhasz is a co-founder of IntraLase. Dr. Juhasz has served as our Chief Technical Officer since September 1997. From August 1988 to March 1996, Dr. Juhasz was the Chief Scientist at Intelligent Surgical Lasers Inc., where he led a team in developing the first ultra-fast laser ever used in ophthalmology. From March 1996 to September 1997, Dr. Juhasz held key research positions with Escalon Medical. From 1996 to the present, Dr. Juhasz has been an associate professor of biomedical engineering and ophthalmology at the University of Michigan. Dr. Juhasz earned his B.A. and Ph.D. in Physics from JATE University of Szeged, Hungary in 1986, along with post-doctoral training at the University of Rochester and the University of California, Irvine.

Eric Weinberg. Mr. Weinberg has served as our Vice President, Marketing and Professional Affairs since September 1999. From March 1993 to September 1999, Mr. Weinberg was the Global Director of Refractive Surgery at Chiron Vision, a subsidiary of the Chiron Corporation specializing in ophthalmic surgical products. At Chiron Vision, Mr. Weinberg was responsible for the management of its microkeratome blade technology, laser product lines and its LASIK education program.

Available Information

Our website is located at www.intralase.com. We make available free of charge through this website all of our SEC filings including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after those reports are electronically filed with the SEC. You also may obtain all our SEC filings free of charge via EDGAR through the SEC website at www.sec.gov.

~~Risk~~18 ~~Factors~~

Item 1A— Risk Factors

Risks Related to our Industry

Our success depends upon the continued acceptance of LASIK surgery.

Our business depends upon continued market acceptance of LASIK surgery by both surgeons and patients in the United States and international markets. LASIK surgery has only been approved since 1995 and commercially available since 1996 and, to date, has penetrated approximately 78% of the eligible U.S. population. We believe that if market acceptance of LASIK surgery declines, demand for our product offering by LASIK surgery practices and potential patients will decline, resulting in a decrease in our revenues.

Some consumers may choose not to undergo LASIK surgery due to concerns with the safety and efficacy of an elective surgery in general or the LASIK procedure in particular, due to concerns about price or due to their belief that improved technology or alternative methods of treatment will be available in the near future. LASIK surgery itself can result in potential complications and side effects, such as post-operative discomfort, unintended over- or under- corrections, disorders in corneal healing, undesirable visual sensations caused by bright lights, ~~such as~~ glare or halos and dry eye.

Should either the ophthalmic community or the general population turn away from LASIK surgery as an alternative to existing methods of treating refractive vision disorders, or if future technologies replace LASIK surgery, these developments would have a material adverse effect on our business, financial condition and results of operations.

Weak or uncertain economic conditions could adversely affect demand for our product offering.

Because LASIK surgery is not generally paid for through insurance programs or government reimbursement, patients typically pay for LASIK surgery directly with their own discretionary funds. Accordingly, weak or uncertain economic conditions may cause individuals to be less willing to pay for LASIK surgery, as was evidenced by the 14% decline in LASIK procedures in the United States in 2002 as compared to 2001, and the more recent softness in United States LASIK procedure volumes noted by industry observers and participants during 2006. A decline in economic conditions in the United States or in international markets could result in a decline in demand for LASIK surgery and could have a material adverse effect on our business, financial condition and results of operations.

Changes in U.S. federal tax laws governing the ability of potential LASIK patients to use pre-tax dollars to pay for LASIK surgery could adversely affect demand for our product offering.

We believe a significant number of U.S. patients pay for LASIK surgery with pre-tax dollars pursuant to plans sponsored under Section 125 of the Internal Revenue Code. These plans are commonly referred to as cafeteria plans. Changes in the U.S. tax laws or regulations governing cafeteria plans could reduce or eliminate the ability of patients to use pre-tax dollars to pay for LASIK surgery, resulting in an increase in the total cost borne by patients, which would likely reduce the volume of LASIK surgeries, and thus demand for our per procedure fee inclusive of a disposable patient interface, which would have a material adverse effect on our business, financial condition and results of operations.

dollars to pay for LASIK surgery, resulting in an increase in the total cost borne by patients, which would likely reduce the volume of LASIK surgeries, and thus demand for our per procedure fee inclusive of a disposable patient interface, which would have a material adverse effect on our business, financial condition and results of operations.

Risks Related to our Business

We are subject to extensive government regulation, and a failure to comply may increase our costs and prevent us from selling our product offering.

We are subject to extensive government regulation, including inspections and controls over research and development, testing, manufacturing, safety and environmental controls, efficacy, labeling, advertising, promotion, pricing, record keeping and the sale and distribution of our product offering. Although we have obtained all necessary clearances from the Food and Drug Administration, or FDA, as well as all necessary foreign governmental approvals to market and sell our product offering, we must continue to comply with such regulations to continue to manufacture, market and sell our product offering. Noncompliance with FDA requirements can result in fines, injunctions, penalties, mandatory recalls or seizures, manufacturing suspensions, recommendations by the FDA against governmental contracts, suspension in the issuance of export certificates and criminal prosecution. The FDA also has authority to request repair, replacement or the refund of the cost of any product we manufacture or distribute. Regulatory authorities outside of the United States may impose similar sanctions for noncompliance with applicable regulatory requirements. If we are subject to any sanctions by the FDA or a foreign regulatory agency, our costs may increase and we may be prevented from manufacturing or selling our product offering, which would have a material adverse effect on our business, financial condition and results of operations.

LASIK surgeons must continue to adopt our product offering as an attractive alternative to the microkeratome for creating the corneal flap.

~~In the three months ended December 31, 2004, we captured approximately 16% of the U.S. market for creating the corneal flap.~~ We believe that LASIK surgeons may not continue to adopt our product offering unless they determine, based on experience, clinical data and studies and published journal articles, including peer review articles, that our product offering provides significant benefits or an attractive alternative over the traditional method of creating the corneal flap using the microkeratome. A small number of surgeons have informed us, based on their experiences, of the following issues with our product offering when compared to the traditional microkeratome approach:

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surgeons may need to perform multiple procedures with our product offering to become skilled with our laser and related techniques; and

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the overall procedure to prepare the patient and create the corneal flap with our laser may take slightly longer per patient.

LASIK surgeons also must determine that the advantages and benefits of our product offering outweigh the increased costs associated with switching to our technology from the microkeratome. The microkeratome device costs between $40,000 and $60,000 per device, and, because the devices must be cleaned after each patient use and must be returned to the manufacturer for any service, LASIK surgeons typically purchase multiple devices to ensure a device is available for each surgery being performed. In comparison, the list price of our laser ~~costs~~is approximately $~~375~~425,000. Additionally, using the microkeratome results in a cost between $25 and $50 per procedure to purchase the disposable blades, while our per procedure fee inclusive of a disposable patient interface ~~costs~~carries ~~new~~a ~~LASIK~~list ~~surgeons~~price of approximately $160 per procedure. The additional costs associated with our product offering could hinder continued adoption of our technology by LASIK surgeons, which would have a material adverse effect on our business, financial condition and results of operations.

In addition, we believe that recommendations and support of our laser by influential LASIK surgeons are essential for its market acceptance and adoption. If we do not receive support from such surgeons or from the data and experience of users, it may become difficult to have additional LASIK surgeons adopt our product offering. In such circumstances, we may not achieve expected revenues ~~and~~or ~~may never become profitable~~profits.

Presently unknown side effects related to the use of our laser could emerge in the future.

Use of the ~~INTRALASE~~IntraLase® FS laser to create the LASIK flap is a relatively new technique. Consequently there is no long term follow up data beyond five years that might reveal unknown side effects or complications associated specifically with this technique. The possibility of unfavorable side effects, and any concomitant adverse publicity, could seriously harm our business. In addition to the potential side effects and complications associated with LASIK generally, some LASIK surgeons have observed incidents of transient light sensitivity in patients treated with our system, although this has affected only a small percentage of patients and appears to resolve quickly with treatment. Any future reported adverse outcomes or pattern of side effects involving the use of our laser specifically, or with respect to LASIK procedures generally, could have a material adverse effect on our business, financial condition and results of operations.

surgeons have observed incidents of transient light sensitivity in patients treated with our system, although this has affected only a small percentage of patients and appears to resolve quickly with treatment. Any future reported adverse outcomes or pattern of side effects involving the use of our laser specifically, or with respect to LASIK procedures generally, could have a material adverse effect on our business, financial condition and results of operations.

Patients must continue to be willing to pay for LASIK surgery using our product offering despite it being more expensive than LASIK surgery with the microkeratome.

LASIK surgeons typically receive an average of $~~334~~394 more per eye when using our product offering instead of the traditional microkeratome. To date, LASIK surgeons have been able to improve the rate at which laser vision correction consultations translate into actual surgery from 64approximately 65% to 7778% when using our product offering instead of the traditional microkeratome, according to aan independent survey of our customers conducted byin ~~SM2~~early ~~Consulting, an independent consultant~~2005. This indicates that patients have been willing to pay for LASIK surgery using our product offering despite its higher cost. WeThere ~~cannot~~can ~~assure~~be ~~you~~no assurance that this trend will continue.

We may not be able to compete successfully against our current and future competitors.

WeTo ~~compete~~date, we have competed primarily with manufacturers of the microkeratome, the traditional method used to create the corneal flap as ~~the~~ the first step in LASIK surgery. Principal manufacturers of the microkeratome include Bausch & Lomb, with approximately ~~half~~40 percent of the U.S. microkeratome and blade market, Moria/Microtech, the second largest supplier of microkeratomes and blades in the U.S. market, Advanced Medical Optics and Nidek. Microkeratomes are less expensive to manufacture than our laser and our competitors may offer microkeratome systems at a lower price, ~~may in the future price their microkeratome systems~~ as part of a bundle of products or services, including the excimer laser used in the second step of LASIK surgery~~, or may enhance or further develop products to improve performance and accuracy of their existing product to compete against us~~. ~~Any of these actions could decrease demand for our product offering~~Further, ~~which~~we ~~would~~expect ~~have~~that ~~a material adverse effect on~~ our ~~business, financial condition and results of operations. Some of these competitors, particularly Bausch & Lomb, have substantially greater~~ ~~resources, larger customer bases, longer operating histories and greater name recognition than we have.~~

We20 may also in the future compete with manufacturers of alternative technologies to create the corneal flap, such as other ultra-fast lasers or high pressure water jet products. If any of these alternative technologies gain market acceptance, this may reduce demand for our product offering.

InTable addition, since our product offering is used in the first step of LASIK surgery, we also compete with other vision disorder treatments that compete with LASIK, such as eyeglasses, contact lenses and other surgical products and techniques. Such techniques include corneal inlays and epithelial flaps, which are currently in the early stages of commercialization. If any of these alternative treatments result in decreased demand for LASIK surgery, this would decrease demand for our product offering. In addition, medical companies, academic and research institutions and others could develop new therapies, medical devices or surgical procedures that could potentially render LASIK surgery obsolete. Any such developments would have a material adverse effect on our business, financial condition and results of operations. Contents

competitors will continue to release new or enhanced microkeratome models which may offer improved performance over earlier generation products. Any of these actions could decrease demand for our product offering, which would have a material adverse effect on our business, financial condition and results of operations. Some of these competitors have substantially greater resources, larger customer bases, longer operating histories and greater name recognition than we have.

We may also in the future compete with manufacturers of alternative technologies to create the corneal flap. In addition, several manufacturers have announced their intention to launch new femtosecond lasers that would compete directly with our products. These include Wavelight Technologies, Carl Zeiss Meditech, Zeimer Ophthalmic Systems and 20/10 Perfect Vision, which claims to have placed approximately ten systems internationally. Successful introduction of competing products by these or other manufacturers could reduce demand for our products, particularly if the competing products were perceived to offer superior capabilities or were marketed at a lower price. If alternative technologies gain market acceptance, this may also reduce demand for our product offering.

Since our product offering is used in the first step of LASIK surgery, we also compete with other vision disorder treatments that compete with LASIK, such as eyeglasses, contact lenses and other surgical products and techniques. Such techniques include intra-ocular lenses, corneal inlays, photorefractive keratectomy (PRK) and epithelial flaps, also known as Epi-LASIK. If any of these alternative treatments result in decreased demand for LASIK surgery, this would decrease demand for our product offering. In addition, medical companies, academic and research institutions and others could develop new therapies, medical devices or surgical procedures that could potentially render LASIK surgery obsolete. Any such developments would have a material adverse effect on our business, financial condition and results of operations.

The medical device and ophthalmic laser industries are subject to rapid and significant technological change, frequent new device introductions and evolving surgical techniques. Demand for our product offering may decline if a new or alternative product or technology is introduced by one of our competitors that represents a substantial improvement over our existing product offering, which would have a material adverse effect on our business, financial condition and results of operations.

Measures we take to ensure collection of per procedure charges may be inadequate.

Generating per procedure revenues from our installed base of lasers is a key aspect of our business. We charge our customers a per procedure fee for each eye treated. This fee is inclusive of ~~our~~a disposable patient interface, which is intended to be used on a single eye and discarded. We typically charge our customers procedure fees based on our shipments to them of per procedure disposable interfaces.

We believe that a small percentage of our customers, in an effort to avoid procedure fees, ~~are~~have ~~using~~in the past used a single patient interface to treat multiple eyes. If this practice (or other fee avoidance practices) were to continue or to proliferate, it could have a material adverse ~~affect~~effect on our business.

18Our proprietary IntraLASIK® software contains a feature which requires the laser to periodically be reprogrammed in order to perform additional procedures. We have introduced technology which allows us to do this remotely using secure activation techniques. Over 90 percent of IntraLase lasers have been upgraded to new software versions that require either remote electronic activation when the customers order procedures or an IntraLase-generated activation code used by the customers at their sites. Secure activation capabilities allow us to align the number of procedures available on the laser with the number of patient interfaces purchased to prevent reuse. However, if these capabilities prove inadequate, or if other fee avoidance methods are devised which we are unable to detect or counter, or if we are unable to enhance all of the lasers in our worldwide installed base, this could have a material adverse effect on our business. By way of example, circumstances that could potentially hamper our enforcement efforts include: theft or disclosure of confidential passwords, improper or unauthorized tampering with laser hardware or software, lack of cooperation from international distributors, inability to obtain access to lasers in the field, legal impediments imposed by foreign jurisdictions and/or counterfeit patient interfaces.

Our proprietary IntraLASIK® software contains a feature which we must periodically reprogram to enable the laser to function. The frequency of reprogramming is determined solely by us on a laser by laser basis. Our software also tracks the number of procedures each laser has performed. This allows us to identify and address procedure fee violations. We are continuing to augment these capabilities through remote activation and other means. However, if these capabilities prove inadequate, or if other fee avoidance methods are devised which we are unable to detect or counter, this could have a material adverse affect on our business. By way of example, circumstances that could potentially hamper our enforcement efforts include: theft or disclosure of confidential passwords, improper or unauthorized tampering with laser hardware or software, lack of cooperation from international distributors, inability to obtain access to lasers in the field, legal impediments imposed by foreign jurisdictions and/or counterfeit patient interfaces.

Product liability suits brought against us could result in expensive and time-consuming litigation, payment of substantial damages and an increase in our insurance rates.

If our ~~INTRALASE~~IntraLase® FS laser or our per procedure disposable patient interface is defectively designed or manufactured or contains defective components, our IntraLASIK® software is defective, any component of our product offering is misused or if a customer fails to adhere to operating guidelines, or if someone claims any of the foregoing, whether or not such claims are meritorious, we may become subject to substantial and costly litigation. Any product liability claims brought against us, with or without merit, could divert management’s attention from our business, be expensive to defend, result in sizable damage awards against us, damage our reputation, increase our product liability insurance rates, prevent us from securing ~~continuing coverage, or prevent or interfere with commercialization efforts for our product offering, any of~~ which occurrences would have a material adverse effect on us. In addition, we may not have sufficient insurance coverage for all future claims. Product liability claims brought against us in excess of our insurance coverage would likely be paid out of cash reserves, harming our financial condition and results of operations.

~~From~~21 time to time, we make field corrections to our laser, which are made by our field service representatives during scheduled service calls. Although these field corrections have not had a financial impact on us to date, any future corrections or recalls, especially any that result in preventing use of our laser or customers returning the laser to us for repair, would have a material adverse effect on us.

continuing coverage, or prevent or interfere with commercialization efforts for our product offering, any of which occurrences would have a material adverse effect on us. In addition, we may not have sufficient insurance coverage for all future claims. Product liability claims brought against us in excess of our insurance coverage would likely be paid out of cash reserves, harming our financial condition and results of operations.

From time to time, we make field corrections to our laser that are typically made by our field service representatives during scheduled service calls but which may sometimes be made using remote diagnostics. Although these field corrections have not had a financial impact on us to date, any future corrections or recalls, especially any that result in preventing use of our laser or customers returning the laser to us for repair, would have a material adverse effect on us.

Our inability to adequately protect our intellectual property could allow our competitors and others to produce products based on our intellectual property rights, which could substantially impair our ability to compete.

Our success and ability to compete depends in part upon our ability to maintain the proprietary nature of our technologies. We rely on a combination of patent, trade secret, copyright and trademark law and license agreements, as well as nondisclosure agreements, to protect our intellectual property. These legal means, however, afford only limited protection and may not be adequate to protect our rights. In addition, we cannot assure you that any of our pending patent applications will issue. The U.S. Patent and Trademark Office, or PTO, may deny or significantly narrow claims made under our patent applications and, even if issued, these patents may be challenged or may otherwise not provide us with commercial protection. On August 23, 2004, the PTO granted a request for re-examination with respect to U.S. Patent RE 37,585, one of the patents licensed to us by the University of Michigan, which means that the PTO found that the request raised a new issue of patentability with regard to a number of claims. Re-examination may result in the scope of protection and rights provided by the patent license being lost or narrowed.

We may in the future need to assert claims of infringement against third parties to protect our intellectual property. Regardless of the final outcome, any litigation to enforce our intellectual property rights in patents, copyrights, or trademarks could be highly unpredictable and result in substantial costs and diversion of resources, which could have a material adverse effect on our business, financial condition and results of operations. In the event of an adverse judgment, a court could hold that some or all of our asserted intellectual property rights are not infringed, or are invalid or unenforceable, and could award attorneys’ fees to the other party. In addition, the laws of other countries in which our product offering is or may be sold may not protect our product offering and intellectual property to the same extent as U.S. laws, if at all. We also may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries. Despite our efforts to safeguard our unpatented and unregistered intellectual property rights, we may not be successful in doing so, or the steps taken by us in this regard may not be adequate to detect or deter misappropriation of our technology or to prevent an unauthorized third party from copying or otherwise obtaining and using our products, technology or other information that we regard as proprietary. Our inability to adequately protect our intellectual property could allow our competitors and others to produce products based on our patented or proprietary technology and other intellectual property rights, which could substantially impair our ability to compete.

19We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from selling our product offering, require us to obtain licenses from third parties, require us to develop non-infringing alternatives and/or subject us to substantial monetary damages and injunctive relief.

Third parties could assert infringement or misappropriation claims against us with respect to our current or future product offerings, whether or not such claims are valid. We cannot be certain that we have not infringed the intellectual property rights of such third parties or others. Any infringement or misappropriation claim could result in significant costs, substantial damages and our inability to manufacture market or sell our existing or future product offerings that are found to infringe. If a court determined, or if we independently discovered, that our product offering violated third-party proprietary rights, there can be no assurance that we would be able to re-engineer our product offering to avoid those rights or obtain a license under those rights on commercially reasonable terms, if at all. As a result, we could be prohibited from selling products that are found to infringe. Even if obtaining a license were feasible, it may be costly and time-consuming. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and/or our customers from making, using, selling, offering to sell or importing our product offering, or could enter orders mandating that we undertake certain remedial activities. A court also could order us to pay compensatory damages for such infringement, plus prejudgment interest, and could in addition treble the compensatory damages and award attorneys’ fees. These damages could be substantial and could harm our reputation, business, financial condition and results of operations. We have been involved in litigation with Escalon Medical Corp. concerning a license agreement with Escalon under which we license certain intellectual property. The litigation arose as a result of Escalon’s attempt to terminate the license agreement based on alleged underpayment of royalties (see Part I, Item 3, Legal Proceedings).

We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from selling our product offering, require us to obtain licenses from third parties to develop non-infringing alternatives and/or subject us to substantial monetary damages and injunctive relief.

Third parties could assert infringement or misappropriation claims against us with respect to our current or future product offerings, whether or not such claims are valid. We cannot be certain that we have not infringed the intellectual property rights of such third parties or others. Any infringement or misappropriation claim could result in significant costs, substantial damages and our inability to manufacture, market or sell our existing or future product offerings that are found to infringe. If a court determined, or if we independently discovered, that our product offering violated third-party proprietary rights, there can be no assurance that we would be able to re-engineer our product offering to avoid those rights or obtain a license under those rights on commercially reasonable terms, if at all. As a result, we could be prohibited from selling products that are found to infringe. Even if obtaining a license were feasible, it may be costly and time-consuming. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and/or our customers from making, using, selling, offering to sell or importing our product offering, or could enter orders mandating that we undertake certain remedial activities. A court also could order us to pay compensatory damages for such infringement, plus prejudgment interest, and could in addition treble the compensatory damages and award attorneys’ fees. These damages could be substantial and could harm our reputation, business, financial condition and results of operations.

We depend on certain single-source suppliers and manufacturers for key components of our laser, and the loss of any of these suppliers or manufacturers, or their inability to supply us with an adequate supply of materials, could harm our business.

We rely upon certain suppliers and contract manufacturers to supply key parts for our laser on a sole or limited source basis. Our arrangements with these key suppliers and manufacturers are not on a contractual basis and can be terminated by either party without advance notice. If any of these suppliers and manufacturers were to fail to supply our needs on a timely basis or cease providing us these key components, we would be required to locate and contract with substitute suppliers. We could have difficulty identifying a substitute supplier in a timely manner or on commercially reasonable terms. If this were to occur, we may not be able to meet our sales goals or continue manufacturing lasers, either of which would have a material adverse effect on our business, financial condition and results of operations.

Our failure to manage our rapid growth may strain the capabilities of our managers, operations and facilities.

We are growing rapidly. In ~~2004~~2006 we sold or leased ~~111~~204 lasers and sold ~~191~~approximately 509,~~861~~ 000 per ~~procedure~~procedures fees inclusive of a disposable patient interface;. inIn ~~2003,~~2005 we sold or leased 67156 lasers and sold ~~84,230~~approximately 338,000 per procedure fees inclusive of a disposable patient interface; and in ~~2002~~2004, we sold 35or leased 111 lasers and ~~29,622~~sold approximately 192,000 per procedure fees inclusive of a disposable patient interface. This growth has resulted in, and continued growth will create in the future, additional capacity requirements, new and ~~increased~~ increased responsibilities for our management team and may create pressures on our operating and financial systems.

IfOur we continue to grow, our current facilities are unlikely to be adequate for our needs. As a result, on January 31, 2005 we entered into a lease agreement for a larger facility in Irvine, California with approximately 128,670 square feet. The lease is for a period of ten years and four months beginning May 1, 2005. Any delays in moving into this new facility could cause us to incur additional expenses and could divert management time and energy from the operation and growth of our business. In addition, our expected growth will require us to hire, train and manage additional qualified personnel sufficiently in advance to be in a position to meet the requirements of such growth. Continued growth ~~also~~ will also require us to improve existing, and implement new operating, financial and management information controls, reporting systems and procedures, and effectively manage multiple relationships with our customers, suppliers and other third parties. In addition, our anticipated growth may strain the ability of our suppliers to deliver an increasingly large supply of components in accordance with agreed-upon specifications on a timely basis. Additional growth may also prevent us from being able to respond to new opportunities and challenges quickly.

If we are unable to effectively manage our expected growth, this could have a material adverse effect on our business, financial condition and results of operations.

We plan to expand further into markets outside the United States, which subjects us to additional business and regulatory risks.

Our international sales commenced in 2003 and represented 2947% ~~of our total revenues in 2004~~ and 1842% of our total revenues in ~~2003~~2006 and 2005, respectively. We intend to derive an increasing portion of our total revenues from sales of our product offering in foreign countries. We plan to focus most of our efforts on the Asia-Pacific region, Europe, South America and the Middle East.

Conducting business internationally subjects us to a number of risks and uncertainties. In addition to being subject to political and economic instability in foreign markets, we require export licenses and are subject to tariffs and other trade barriers and overlapping tax structures. In addition, we must comply with foreign regulatory requirements. In creating and building our infrastructure internationally, we must also educate LASIK surgeons and optometrists about our product offering and attract and maintain relationships with third-party distributors. If we are unable to do any of this successfully, we may not be able to grow our international presence, and this could have an adverse effect on our business, financial condition and results of operations.

Our success is tied to a single product offering.

We have a single product offering used primarily in LASIK surgery. As a result, our success is tied to the success of this product offering since we are not currently able to derive revenues from alternate product offerings. If for any reason we are unable to continue to manufacture or sell our product offering or if production of our product offering were interrupted or could not continue in a cost-effective or timely manner, whether due to regulatory sanctions, manufacturing constraints, product defects or recalls, obsolescence of our technology, increased competition, intellectual property concerns or otherwise, our business would be materially harmed.

All of our operations are conducted at a single location. Any disruption at our existing or at a new facility could increase our expenses.

All of our operations are currently and, ~~with our new lease signed in 2005,~~ will continue to be conducted at a single location. We take precautions to safeguard our existing facility ~~and intend to take substantially similar precautions at any new or additional facility~~, including insurance, health and safety protocols and off-site storage of computer data. However, a natural disaster, such as an earthquake or fire could cause substantial delays in our operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur additional expenses. The insurance we maintain against fires and other natural disasters and the property and business interruption insurance we maintain may not be adequate to cover our losses in any particular case.

A loss of key executives or failure to attract qualified personnel could limit our growth and adversely affect our business.

Our future success depends in part on the continued service of key personnel, particularly our Chief Executive Officer, Robert Palmisano, our Chief Technical Officer and co-founder, Tibor Juhasz, our Medical Director and co-founder, Ron Kurtz, as well as our sales and marketing executives and our regulatory and compliance officer. We do not have employment agreements with any of our employees other than with our Chief Executive Officer; our Executive Vice President, Chief Operating Officer; our Senior Vice President and General Counsel; ~~our Vice President, Corporate Communications~~ and ~~Investor Relations; and~~ our Vice President, Human Resources; and we do not have key person insurance on any of our executives. The loss of any one or more ofkey ~~these individuals~~managers could place a significant strain on our remaining management team and we may have difficulty replacing any of these individuals. Furthermore, our future growth will depend in part upon our ability to identify, hire and retain additional key personnel, including qualified management, research and other highly skilled technical personnel.

Our new products or applications may not be commercially viable.

While we devote significant resources to research and development, our research and development may not lead to improved or new products or applications that are commercially successful. The research and development process is expensive, prolonged and entails considerable uncertainty. Development of medical devices, from discovery through testing and registration to initial product launch, typically takes between three and seven years. Each of these periods varies considerably from product to product and country to country. Because of the complexities and uncertainties associated with ophthalmic research and development, products and applications we are currently developing may not complete the development process or obtain the regulatory approvals required to market such products or applications successfully. The products and applications currently in our development pipeline may not be approved by regulatory entities and may not be commercially successful, and our current and planned products and applications could be surpassed by more effective or advanced products and applications developed and marketed by others.

If we choose to acquire new or complementary businesses, products or technologies instead of developing them ourselves, we may be unable to complete those acquisitions or to successfully integrate them in a cost-effective and non-disruptive manner.

While we have not made any acquisitions in the past and do not have current commitments to do so, we may in the future choose to acquire businesses, products or technologies to retain our competitive position within the marketplace or to expand into new markets. We cannot assure you, however, that we would be able to successfully complete any acquisition we choose to pursue, or that we would be able to successfully integrate any acquired business, product or technology in a cost-effective and non-disruptive manner. If we were unable to integrate any acquired businesses, products or technologies effectively, our business would likely suffer.

We have a history of net losses and may ~~never~~not ~~achieve or~~ maintain profitability.

WeAlthough we were profitable in 2006 and in 2005, we have incurred significant operating losses ~~every~~in each previous full year, prior to 2005, since our inception in 1997. We incurred net losses applicable to common stockholders of $10.2 million in 2004, ~~$12.0 million in 2003~~ and $12.0 million in ~~2002~~2003. As of December 31, ~~2004~~2006, we had an accumulated deficit of approximately $6329.46 million. In order to ~~achieve~~ maintain profitability, we will need to ~~significantly~~continue to increase our revenues from sales of our product offering, and we will also need to continue to derive an increasing percentage of our total revenues from sales of our per procedure fee inclusive of a disposable patient interface, which generate a higher gross margin than sales and leases of our ~~INTRALASE~~IntraLase® FS laser. Even if we do ~~achieve~~maintain profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis due to, among other things, competitive pressures and regulatory compliance, in which case the price of our common stock may decline.

~~Our~~24 ~~ability to use net operating loss carryforwards may be limited.~~

SectionTable 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. We have internally reviewed the applicability of the annual limitations imposed by Section 382 caused by previous changes in our stock ownership and believe such limitations should not be significant. Based on our review, we believe that as of December 31, 2004 approximately $55.5 million of net operating loss carryforwards were available to us for federal income tax purposes. Based on the size and price of our initial public offering, which was effective October 6, 2004 and closed October 13, 2004, we may trigger the annual limitations imposed by Section 382 and may limit our ability to use our remaining net operating loss carryforwards to approximately $15.3 million annually. In addition, any future ownership changes may affect our ability to use our remaining net operating loss carryforwards. If we lose our ability to use net operating loss carryforwards, our income will be subject to tax earlier, resulting in lower net income. Contents

Changes to our accounting for stock options will adversely affect our earnings and may adversely affect stock price.

We ~~currently~~adopted ~~are~~SFAS ~~not~~No. 123R, ~~required to record stock~~Share-~~based~~Based ~~compensation~~Payment, ~~charges~~using ifthe anmodified ~~employee’s~~prospective ~~stock~~transition ~~option~~method, ~~exercise~~which ~~price~~required ~~equals or exceeds~~ the ~~fair~~ ~~value~~application of ~~our~~the ~~common~~accounting ~~stock~~standard atin the ~~date~~first quarter of ~~grant~~fiscal year 2006. ~~However,~~Our inFinancial ~~December~~Statements ~~2004~~as of and for the ~~Financial~~three ~~Accounting~~and ~~Standards~~twelve ~~Board~~months ~~issued~~ended ~~Statement~~December 31, of2006 ~~Financial~~reflect ~~Accounting~~the ~~Standards,~~impact orof adopting SFAS, No. 123R ~~123~~and ~~(Revised~~in ~~2004)~~accordance ~~that~~with the ~~will~~modified ~~require~~prospective ustransition tomethod, ~~expense~~ the ~~fair~~Financial ~~value~~Statements ~~of stock~~presented ~~options~~in ~~granted.~~prior Ifperiods wehave ~~were~~not tobeen ~~change~~restated ~~our~~to ~~accounting~~reflect, ~~policy~~and inthey ~~accordance~~do ~~with~~not include, the ~~existing~~impact of SFAS No. 123R. ~~123, Accounting for~~ Stock-~~Based~~based ~~Compensation~~compensation, ~~and~~including expense recognized under SFAS No. 123R ~~148, Accounting~~ for ~~Stock-Based~~2006 ~~Compensation-Transition~~was ~~and~~$7.0 ~~Disclosure~~million ~~and retroactively restate all prior periods~~ as ifcompared weto ~~had~~stock-based ~~adopted~~compensation ~~SFAS~~of ~~123~~$2.1 ~~for~~million ~~all~~in ~~periods~~2005. ~~presented~~Additionally, ~~our~~unearned ~~operating~~deferred ~~expenses~~stock ~~would~~compensation ~~increase~~for bynon-employees ~~approximately~~is ~~$509,000~~periodically ~~and~~remeasured ~~$168,000~~through ~~for~~the ~~2004~~vesting ~~and~~date ~~2003,~~under current ~~respectively.~~and Wefuture ~~believe~~accounting ~~the adoption of SFAS No~~rules. ~~123 (Revised~~This ~~2004)~~periodic ~~will~~remeasurement could have a ~~material~~significant impact on our results of operations .

We may incur increased costs as a result of recently enacted and proposed changes in laws and regulations.

Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the Securities and Exchange Commission and by the Nasdaq Stock Market, have resulted in and are expected to continue to result in increased costs to us as a public company. The new rules could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.

22 Item 1B— Unresolved Staff Comments

~~Table~~Not ofapplicable. ~~Contents~~

developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. Additionally, unearned deferred stock compensation for non-employees is periodically remeasured through the vesting date under current and future accounting rules. This periodic remeasurement could have a significant impact on our results of operations.

Item 2—Properties

We lease 41 128,~~400~~670 square feet of office and manufacturing space for our corporate, research and development and manufacturing headquarters in Irvine, California, under a ~~five-year renewable~~ lease, ~~the initial term of which expires on October 31, 2005. It is not our intention to renew this lease at the end of the lease term. To address our expected increased demand~~ for ~~administrative offices and manufacturing capacity, we have rented 11,449 square feet of additional office space nearby on~~ a ~~month-to-month~~ ~~basis, and on January 31, 2005 we entered into a lease agreement for a larger facility in Irvine, California with approximately 128,670 square feet. The lease is for a~~ period of ten years and four months ~~beginning~~that ~~May~~began May 1, 2005. We believe the new facility will be adequate to meet our current requirements.

Item 3—Legal Proceedings

~~From~~On ~~time~~June 10, 2004, we received notice from Escalon Medical Corp. of its intent to ~~time~~terminate weour ~~are~~license ~~involved~~agreement inunless ~~various~~we ~~legal~~paid ~~proceedings~~additional royalties and ~~disputes~~expenses ~~that~~which ~~arise~~Escalon inclaimed ~~the~~were ~~normal~~owed ~~course~~under its interpretation of ~~business~~the parties’ license agreement. ~~These~~Escalon ~~matters~~sought ~~have~~payment ~~included~~of ~~product~~approximately ~~liability~~$645,000 ~~actions~~through March 31, ~~intellectual~~2004 ~~property~~and ~~disputes,~~additional unspecified amounts for future periods. We disputed Escalon’s contract ~~disputes~~interpretation. On June 21, ~~employment disputes~~2004, ~~and~~we ~~other~~filed ~~matters.~~a Wecomplaint doagainst ~~not~~Escalon ~~believe~~for ~~that~~declaratory ~~the~~and ~~resolution~~injunctive ofrelief ~~any~~in ofthe ~~these~~United ~~matters~~States District ~~has~~Court ~~had~~for orthe isCentral ~~likely~~District of California to ~~have~~clarify aour ~~material~~obligations ~~adverse~~and ~~effect~~prevent onEscalon ~~our~~from ~~business,~~terminating ~~financial~~the ~~condition~~license oragreement ~~future~~(the ~~results~~“First ofCalifornia ~~operations~~Action”).

WeOn ~~are~~March 1, ~~currently~~2005, ~~involved~~the court in ~~litigation~~the ~~with~~First ~~Escalon~~California ~~Medical~~Action ~~Corp., tentatively~~entered ~~set~~a ~~for~~summary ~~trial~~judgment inorder, ~~May~~ruling ofon ~~2005.~~the Onmajority ~~June~~of ~~10,~~issues ~~2004,~~in wethe ~~received~~case. ~~notice~~The ~~from~~court ruled ~~Escalon~~in ofour ~~its~~favor ~~intent~~on tosome ~~terminate~~issues ~~our~~and ~~license~~in ~~agreement~~Escalon’s ~~unless~~favor weon ~~paid~~others. inOn ~~full~~April 1, ~~certain~~2005 ~~royalties which~~ Escalon ~~believes~~again weattempted ~~owe~~to ~~under~~terminate the license agreement. ~~Escalon seeks~~On ~~payment~~April 25, of2005 ~~approximately~~the ~~$645,000~~court infound ~~additional~~the ~~royalties~~purported ~~and~~termination ~~other~~to ~~expenses~~be ineffective. On May 5, ~~and~~2005, ~~seeks~~the ~~additional~~court ~~royalties~~entered ~~for~~a ~~future~~final ~~periods~~judgment ~~that~~in ~~would~~the First California Action, ifin ~~Escalon~~effect ~~prevailed~~adopting onits ~~all~~prior ~~aspects~~summary ofjudgment ~~their~~rulings. ~~claims,~~This ~~represent~~ended anthe ~~increase~~First inCalifornia Action. Of the ~~royalties~~approximately ~~paid~~$645,000 ~~to them~~demanded by ~~approximately~~Escalon ~~one~~through March 31, ~~percent~~2004, ofapproximately ~~revenues~~$229,000 ~~and~~was afound ~~subsequent~~to ~~one~~be ~~percent~~due ~~reduction~~under inthe ~~our~~court’s ~~future~~rulings ~~gross~~in ~~margins~~the ~~and~~First ~~operating~~California ~~profits~~Action. OnWe ~~June~~have ~~21,~~timely ~~2004,~~paid wethis ~~filed~~amount. aWe ~~complaint~~do ~~for~~not ~~declaratory~~believe ~~relief~~that ~~and~~the ajudgment ~~preliminary~~in ~~injunction~~the ~~and~~First aCalifornia ~~temporary restraining~~Action ~~order~~will tohave ~~prevent~~a ~~Escalon~~material adverse ~~from~~effect ~~terminating~~on our ~~license~~business, ~~agreement~~financial ~~until~~condition ~~the~~and ~~court~~results ~~rules~~of operations. ~~Escalon~~The ~~subsequently~~decision ~~agreed~~in tothe ~~stipulate~~First toCalifornia ~~the~~Action, ~~temporary~~if ~~restraining~~upheld, ~~order~~represents toan ~~prevent~~increase anin ~~immediate~~royalties ~~termination~~payable to Escalon of ~~the~~approximately ~~license~~0.2% ~~agreement~~of ~~until~~revenues, and a ~~preliminary~~ ~~injunction~~concomitant ~~hearing~~0.2% reduction Onin ~~October~~gross ~~29,~~margins ~~2004,~~and ~~the~~operating ~~court~~profits. ~~accepted~~These aeffects ~~second~~have ~~stipulation~~been byreflected ~~the~~in ~~parties~~our toreported ~~waive~~financial ~~the~~results. ~~preliminary~~We ~~injunction~~have ~~hearing.~~appealed ~~This~~certain ~~second~~aspects ~~stipulation~~of ~~precludes~~the ~~Escalon~~court’s ~~from~~judgment ~~declaring~~in athe ~~breach~~First onCalifornia ~~this~~Action ~~dispute~~to ~~pending~~the ~~a trial~~United orStates ~~dispositive~~Court ~~ruling~~of byAppeals for the ~~court~~Ninth Circuit.

OnThe ~~February~~First 7,California ~~2005,~~ Action did not resolve all of the parties’ ~~submitted~~disputes, ~~cross~~and ~~motions~~Escalon ~~for~~continued ~~summary~~to ~~judgment~~contend in written notices to ~~the~~us ~~court~~that our royalty payments were inadequate. On ~~March 1~~May 9, 2005, ~~the~~we ~~court~~commenced ~~entered~~a ~~its~~new ~~order~~lawsuit onagainst ~~the~~Escalon ~~parties’~~in ~~cross-motions~~the ~~for~~United ~~summary~~States ~~judgment,~~District ~~ruling~~Court onfor the ~~majority~~Central District of ~~issues~~California into clarify the ~~case.~~open ~~The~~issues ~~court~~(the ~~ruled in our favor~~“Second onCalifornia ~~some~~Action”). ~~issues~~One ~~and~~week inlater, Escalon’s ~~favor~~commenced ona ~~others.~~new Welawsuit ~~believe~~against ~~that~~us ~~neither~~in the ~~court’s~~Delaware ~~order~~Chancery ~~nor~~Court, ~~the~~alleging, ~~ultimate~~among ~~resolution~~other things, breach of the ~~case~~license ~~will~~agreement ~~have~~and abreach ~~material~~of ~~adverse~~fiduciary ~~effect~~duty on(the ~~our~~“Delaware ~~business,~~Action”). Escalon ~~financial~~moved ~~condition~~to ~~and~~dismiss ~~results~~the ofSecond ~~operations.~~California ~~Our financial~~Action, ~~statements~~and ~~were~~we ~~not~~moved ~~affected~~to atdismiss ~~December~~or ~~31,~~stay ~~2004~~the later filed Delaware Action.

On25 August 23, 2004, the United States Patent and Trademark Office, or PTO, granted a request for re-examination with respect to U.S. Patent RE 37,585, one of the four U.S. patents licensed to us by the University of Michigan, which means that the PTO found that the request raised a new issue of patentability with regard to some of the claims. Re-examination may result in the scope of protection and rights provided by the patent license being lost or narrowed. The irrevocable license we acquired and the payment we made pursuant to the July 15, 2004 license agreement will not be affected by the granting of re-examination, regardless of the outcome. Although we believe that the intellectual property covered by the patent subject to the re-examination is important to our business, if this patent is invalidated there will be no effect on our ability to sell our products. However, invalidation or narrowing of this patent might allow others to market competitive products that would otherwise have infringed the patent.

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

No matters were submitted to a vote of our stockholders during the quarter ended December 31, 2004.

On January 11, 2006, the Second California action was dismissed without prejudice. In its decision, the court explained that it was exercising its discretion to abstain from hearing the case because of the pending Ninth Circuit appeal, as well as the similar issues presented in the Delaware Action. By prior agreement of the parties, this triggered the briefing schedule on our motion to dismiss or stay the Delaware Action, and on January 31, 2006 we filed our opening brief in support of the motion. On February 21, 2006, Escalon filed an amended complaint in the Delaware Action in lieu of responding to our opening brief. On the same day, it sent a new default notice to us, alleging breach of the license agreement (see below).

One of the issues now in dispute is valuation of our accounts receivable for royalty calculation purposes. The court in the First California Action found that creation of an account receivable on our books constituted non-cash “other property” received, but expressly left open the value of such property for royalty calculation purposes. On April 22, 2005, Escalon, purporting to act in its capacity as a Company shareholder, sent us an inspection demand under section 220 of the Delaware corporation law (the “First 220 Demand”), seeking, among other things, detailed records concerning our accounts receivable. We rejected Escalon’s First Section 220 Demand as having an improper purpose under Delaware law. On July 18, 2005, Escalon Holdings, Inc., apparently a wholly-owned subsidiary of Escalon, also purporting to act as a Company shareholder, sent us a new section 220 demand (the “Second 220 Demand”) with language copied verbatim from the First 220 Demand. We rejected the Second 220 Demand on the same basis as the first. Under Delaware law, a shareholder may bring an action to enforce a section 220 demand if its statutory demand upon the corporation has been rejected.

On September 2, 2005, Escalon and Escalon Holdings, Inc. commenced an action against us in the Delaware Chancery Court under section 220 of the Delaware Corporation Law (the “220 Action”). In the 220 Action, Escalon seeks to inspect our records described in the Section 220 Demands. The crux of Escalon’s position appears to be that the amount of royalties which Escalon receives under its contract with us is less than what it believes it would receive if receivables were valued under the contract the same way they are valued on our financial statements, and that therefore we are purportedly overstating the value of receivables on our financial statements to the detriment of shareholders. The question of the proper valuation of receivables under the contract is already the subject of pending litigation between us and Escalon. We do not believe that a disruptive inspection of our proprietary business records would have a bearing on the resolution of this contract dispute. We contend that the 220 Action is an Escalon litigation tactic intended to benefit Escalon in its capacity as a litigant by allowing it to circumvent existing contractual limitations on its inspection rights. We believe this is an improper basis for a demand under section 220 of the Delaware corporation statute, and are defending against the 220 Action vigorously. There is presently no date set for trial of the 220 Action.

On February 21, 2006, we received a written notice from Escalon asserting that we were in default under the license agreement by reason of alleged improper valuation of accounts receivable in our royalty payments as well as our alleged refusal to permit Escalon to audit our books and records (the “Default Notice”). The Default Notice appears to threaten termination of the license agreement if the accounts receivable deductions taken against royalty payments for each of the first three quarters of 2005 are not paid within fifteen days of the date of the letter. However, to date Escalon has refused to confirm this or provide us with the amount it believes is required to cure the alleged default, despite multiple requests from us. The Default Notice also threatened termination if Escalon was not satisfied with respect to the resolution of its audit rights within sixty days of the date of the letter.

On February 24, 2006, the parties agreed to submit their disputes to mediation, in Delaware, under Court of Chancery Rule 174, and to stay all litigation pending the outcome of the mediation. In addition, Escalon agreed that its Termination Notice would be suspended pending the outcome of the mediation and that, should the mediation be unsuccessful, we would be afforded the full fifteen and sixty day response periods set forth in the Notice, which periods would commence ten days after the Chancery Court issued an order lifting the stay. Escalon has also agreed that the time period for responding to Escalon’s amended complaint in the Delaware Action would be tolled on the same basis.

On June 28, 2006 Escalon notified the Chancery Court that the mediation was unsuccessful, resulting in a lifting of the stay effective July 19, 2006. Accordingly, the parties’ Delaware Chancery Court litigation will proceed, and the cure periods in Escalon’s February termination notice began to run as of July 19, 2006.

By agreement of the parties, the Chancery Court agreed to separate, and conduct an expedited trial of, just the parties’ audit dispute. However, prior to commencement of the audit dispute trial (which had been scheduled for August 30, 2006), the parties entered into a Court-approved stipulation (“Audit Stipulation”) which provided an agreed framework for exercise of Escalon’s audit rights, thereby avoiding the need for a trial. Among other things, the Audit Stipulation requires that

Escalon’s auditors exercise independent professional judgment when conducting an audit. Escalon’s audit commenced on September 5, 2006. We believe commencement of the audit effectively cured the audit default alleged by Escalon (which we dispute), although there can be no assurance that Escalon will not continue to allege that the audit failed to satisfy its audit rights, in which event the dispute would be resolved by the Court.

As noted above, Escalon did not provide us with a cure amount for its alleged payment default, and did not respond to our written request that it confirm a methodology for calculating an amount. Although we do not believe a default exists, we have, in good faith, timely deposited into escrow an amount that is our best estimate of Escalon’s demand. The escrow fund may be distributed only by order of a court or by agreement of the parties.

On February 27, 2007, we entered into a settlement agreement with Escalon under which the parties agreed to settle all disputes and litigation between them. Under the settlement agreement, we will make a lump sum payment to Escalon of $9.6 million, in exchange for which all pending litigation between the parties will be dismissed, the parties will exchange general releases, full ownership of all patents and intellectual property formerly licensed from Escalon will be obtained by us, and the parties’ license agreement will terminate. In addition, the payment will satisfy any outstanding royalties owed or alleged to be owed by us to Escalon, including disputed royalties, fourth quarter 2006 royalties and all future royalties.

A significant portion of the settlement was expensed in the fourth quarter of 2006 in accordance with SFAS No. 5, Accounting for Contingencies and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss. The remaining amount will be recorded as an intangible asset in the first quarter of 2007 and amortized over its remaining life.

In June, 2004, we entered into a two year exclusive distributorship agreement with Veni Vidi (OPHTH) Ltd. (“Veni Vidi”), wherein Veni Vidi was appointed the exclusive distributor of our products in the UK and Ireland. The agreement, which requires binding arbitration of disputes in Orange County, California, provided that it would automatically renew at the end of the initial two year term, unless either party gave notice to the other of its intention not to renew at least 90 days before the termination date.

In October, 2005, approximately eight months before the contract termination date of June 24, 2006, we sent timely written notice to Veni Vidi that we would not renew the distributorship agreement upon expiration of the initial two year term. Accordingly, we treated the distributorship contract as terminated as of June 24, 2006, which was exactly two years after the contract commencement date.

On June 9, 2006, in response to threats from Veni Vidi that it would commence litigation against us in the UK, the Company, pursuant to the mandatory arbitration provisions of the distributorship agreement, filed a Demand for Arbitration against Veni Vidi in Orange County, California. In our Demand, we contended that we properly terminated the agreement and were not in breach. On August 31, 2006, Veni Vidi filed a response and counter-claim to the arbitration demand alleging that we improperly terminated the distributor agreement and breached the agreement by improperly contacting customers in its territory. Veni Vidi seeks damages of $7,690,000 as a result of our alleged conduct, an amount which we consider to be wholly without basis. The matter is presently pending as IntraLase Corp. v. Veni Vidi (OPHTH) Ltd., American Arbitration Association, Case No. 50-155-T-00244-06 01 CACA-R (through the International Centre for Dispute Resolution). A hearing on the threshold issue of whether we properly terminated the Distributor Agreement will be held on March 27-29, 2007, in Orange County, California.

We believe that Veni Vidi’s counter-claims in the arbitration are without merit, are contesting them vigorously and do not believe that the ultimate resolution of this dispute will have a material impact on our financial position.

On May 24, 2005, Ari Weitzner M.D., P.C., a Brooklyn ophthalmologist, commenced a lawsuit against us in the United States District Court for the Eastern District of New York, purportedly as a class action, alleging that we violated the Telephone Consumer Protection Act (“TCPA”) by sending unsolicited fax advertisements in violation of the TCPA. The complaint seeks statutory damages, costs and attorneys fees. The TCPA provides for statutory damages of $500 per violation ($1,500 if knowing and willful). On December 19, 2006, the Weitzner action was dismissed with prejudice pursuant to a settlement agreement between the parties under which, without admitting any wrongdoing, we agreed to comply with the requirements of TCPA in connection with the sending of faxes. The settlement did not require any payment by us.

On August 23, 2004, the United States Patent and Trademark Office (“PTO”) granted a request for reexamination with respect to US Patent RE 37,585, one of the four U.S. patents licensed to us by the University of Michigan, which means that the PTO found that the request raised a new issue of patentability with regard to some of the claims. On July 25, 2006, the PTO terminated the proceedings favorable to the Patent Owner, the University of Michigan, by issuing a document entitled “Notice of Intent to Issue Ex Parte Reexamination Certificate” (“NIRC”). In the NIRC, the PTO confirmed the patentability of the RE 37,585 claims as amended during the reexamination.

We are also currently involved in other litigation incidental to our business. In the opinion of management, the ultimate resolution of such litigation will not likely have a significant effect on our financial statements.

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

No matters were submitted to a vote of our stockholders during the quarter ended December 31, 2006.

PART II

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

Our common stock has been traded on the Nasdaq Global Market or its predecessor, the Nasdaq National Market under the symbol “ILSE” since October 7, 2004.

The following table shows the high and low closing prices of our common stock as reported on the Nasdaq Global Market or its predecessor the Nasdaq National Market for the periods indicated:

Quarter Ended	High		Low
December 31, 2004	$	23.48	$	13.00
2006
March 31, 2006	$	23.20	$	17.20
June 30, 2006	$	23.24	$	15.66
September 30, 2006	$	19.87	$	15.91
December 31, 2006	$	22.69	$	18.23
2005
March 31, 2005	$	23.95	$	16.57
June 30, 2005	$	19.98	$	14.82
September 30, 2005	$	21.90	$	14.71
December 31, 2005	$	19.31	$	12.54

As of ~~March 21~~February 28, ~~2005~~2007, there were ~~100~~44 holders of record based on the records of our transfer agent.

We have never paid cash dividends on our common stock. We currently anticipate that we will retain earnings, if any, to support operations and to finance the growth and development of our business and do not anticipate paying cash dividends in the foreseeable future.

The following table sets forth all purchases made by us of our common stock during each month within the fourth quarter of 2004. No purchases were made pursuant to a publicly announced repurchase plan or program.

Month	Total Number ofShares (or Units)Purchased (1)	Average Price Paidper Share (or Unit)		Total Number ofShares (or Units)Purchased as Part ofPublicly AnnouncedPlans or Programs	Maximum Number (or Approximate Dollar Value) ofShares (or Units) thatMay Yet Be PurchasedUnder the Plans orPrograms
October	12,008	$	1.36	—	—
November	—		—	—	—
December	—		—	—	—
Total	12,008	$	1.36	—	—

(1) Represents shares repurchased from an employee.

The information required by this item regarding equity compensation plan information is set forth in Part III, Item 12 of this Annual Report on Form 10-K.

(a)

Recent Sales of Unregistered Securities

There were no sales of unregistered equity securities during 2006. For a listing of our sales of unregistered equity securities during ~~fiscal~~ 2004 see our Quarterly Report on Form 10-Q for the quarterly period ended ~~September~~ September 30, 2004.

(b)

Use of Proceeds

The initial public offering of our common stock was effected through a Registration Statement on Form S-1 (File No. 333-116016) that was declared effective by the Securities and Exchange Commission on October 6, 2004. On October 13, 2004, 7,295,447 shares of common stock were sold on our behalf and for our account at an initial public offering price of $13.00 per share, for an aggregate net offering price of $88.2 million. In addition, 336,314 shares of our common stock were sold for the account of the Regents of the University of Michigan and the Wolverine Venture Fund for an aggregate net offering price of $4.07 million. The managing underwriters for the offering were Banc of America Securities LLC, Wachovia Capital Markets LLC, First Albany Capital Inc. and ThinkEquity Partners LLC. The amounts sold on October 13, 2004 included the exercise of the underwriters’ over-allotment option. The offering did not terminate until the sale of all the registered securities set forth above to the underwriters. As of December 31, ~~2004~~2006, all of the remaining net proceeds from this offering were invested in short-term, high-grade interest-bearing marketable securities, certificates of deposit or direct or guaranteed obligations of the U.S. government.

2428

(c)

Issuer Purchases of Equity Securities

We did not purchase company shares during any of the three month periods in the year ended December 31, 2006.

Securities Authorized For Issuance under Equity Compensation Plans

Our stockholders have previously approved all stock option plans under which our Common Stock is reserved for issuance. The following table provides summary information as of December 31, 2006, for all of our stock option and stock purchase plans:


	Number of Shares of Common Stock to be Issued upon Exercise of Outstanding Options, Warrants and Rights (1)	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (2)		Number of Shares of Common Stock Remaining Available for Future Issuance under our Stock Option Plans (Excluding Shares Reflected in Column 1) (3)
Equity compensation plans approved by stockholders	6,187,610	$	11.18	3,221,900
Employee stock purchase plan approved by stockholders	—			530,812
Not approved by stockholders	—		—	—

Total	6,187,610			3,752,712

Comparison of 5 Year* Cumulative Total Return

Among IntraLase Corp., The Nasdaq Composite Index and The Russell 2500 Healthcare Index

LOGO


Measurement Period	IntraLase Corp.		Nasdaq Composite Index		Russell 2500 Healthcare Index
10/06/04 to 12/31/06*	$	172.15	$	122.54	$	125.21

*	$100 invested on October 6, 2004 in stock or index-including reinvestment of dividends

Item 6—Selected Financial Data

The following statements of operations data and balance sheet data for the five years ended December 31, ~~2004~~2006 were derived from our audited consolidated financial statements. The information set forth below is not necessarily indicative of the results to be expected for any future periods and should be read in conjunction with the audited consolidated financial statements, related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K.

	Year Ended December 31,
	2004			2003				2002				2001				2000
	2006			2005			2004				2003				2002
	(in thousands, except share and per share data)
Statements of Operations Data:
Revenues:
Product revenues	$	59131,~~968~~927		$	2594,~~429~~433		$	$59,968	~~18,002~~		$	$25,429	~~1,326~~		$	$18,002	—
Research contracts		—			—			—	~~100~~			—	~~445~~			100	~~921~~
Total revenues		59131,~~968~~927			2594,~~429~~433			59,968	~~18,102~~			25,429	~~1,771~~			18,102	~~921~~
Costs of goods sold		3459,~~491~~001			1744,~~070~~237			34,491	~~13,307~~			17,070	~~1,716~~			13,307	—
Gross margin		2572,~~477~~926			850,~~359~~196			25,477	~~4,795~~			8,359	55			4,795	~~921~~
Operating expenses:
Research and development		1220,~~719~~569			911,~~117~~653			12,719	~~9,011~~			9,117	~~9,894~~			9,011	~~7,628~~
Selling, general and administrative		2343,~~352~~164			1131,~~212~~612			23,352	~~7,971~~			11,212	~~6,239~~			7,971	~~2,995~~
Total operating expenses		3663,~~071~~733			2043,~~329~~265			36,071	~~16,982~~			20,329	~~16,133~~			16,982	~~10,623~~
Loss from operations		(10,594	)		(11,970	)			(12,187	)			(16,079	)			(9,702	)
Income (loss) from operations		9,193			6,931			(10,594	)			(11,970	)			(12,187	)
Interest and other income, net		~~427~~4,391			692,934			427	~~299~~			69	~~346~~			299	~~436~~
Loss before provision for income taxes		(10,167	)		(11,901	)			(11,888	)			(15,733	)			(9,266	)
Income (loss) before income tax (benefit) provision		13,584			9,865			(10,167	)			(11,901	)			(11,888	)
Provision for income taxes		30			23				24				1				1
Income tax (benefit) provision		(10,700	)		341			30				23				24
Net loss		(10,197	)		(11,924	)			(11,912	)			(15,734	)			(9,267	)
Net income (loss)		24,284			9,524			(10,197	)			(11,924	)			(11,912	)
Accretion of preferred stock		~~(45~~	)		~~(60~~	)		(45	~~(57~~)	)		(60	~~(40~~)	)		(57	~~(20~~)	)
Net loss applicable to common stockholders	$	(10,242	)	$	(11,984	)		$	(11,969	)		$	(15,774	)		$	(9,287	)
Net income (loss) applicable to common stockholders	$	24,284		$	9,524		$	(10,242	)		$	(11,984	)		$	(11,969	)
Net loss per share applicable to common stockholders—basic and diluted(1)	$	(1.28	)	$	(5.66	)		$	(6.82	)		$	(11.17	)		$	(12.17	)
Net income (loss) per share applicable to common stockholders—basic (1)	$	0.85		$	0.35		$	(1.28	)		$	(5.66	)		$	(6.82	)
Weighted average shares outstanding—basic and diluted(1)		8,008,494			2,118,898				1,755,873				1,412,412				763,319
Net income (loss) per share applicable to common stockholders—diluted(1)	$	0.78		$	0.31		$	(1.28	)		$	(5.66	)		$	(6.82	)
	As of December 31,
Weighted-average shares outstanding—basic (1)		28,539,206			27,405,499			8,008,494				2,118,898				1,755,873
	2004			2003				2002				2001				2000
Weighted-average shares outstanding—diluted(1)		31,212,634			31,136,538			8,008,494				2,118,898				1,755,873
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	92,014		$	11,893			$	26,008			$	9,203			$	17,681
Working capital		94,053			14,791				29,722				11,581				18,242
Total assets		118,212			29,957				37,301				19,005				21,449
Long-term debt, less current portion		—			448				192				498				—
Redeemable convertible preferred stock		—			73,261				73,201				43,268				33,244
Total stockholders’ equity (deficit)		102,294			(52,011	)			(40,371	)			(28,842	)			(13,238	)

(1) Please see note 1 of the notes to our financial statements included elsewhere in this Annual Report on Form 10-K for an explanation of the determination of the number of shares used in computing per share data.


	As of December 31,
	2006		2005		2004		2003			2002
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	103,597	$	90,199	$	92,014	$	11,893		$	26,008
Working capital		103,882		59,926		95,022		14,791			29,722
Total assets		187,664		139,628		118,212		29,957			37,301
Long-term debt, less current portion		—		—		—		448			192
Redeemable convertible preferred stock		—		—		—		73,261			73,201
Total stockholders’ equity (deficit)		154,000		117,973		102,294		(52,011	)		(40,371	)

(1)	Please see Note 1 of the notes to our financial statements included elsewhere in this Annual Report on Form 10-K for an explanation of the determination of the number of shares used in computing per share data.

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

You should read the following discussion of our financial condition and results of operations together with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements due to known and unknown risks, uncertainties and other factors, including those risks discussed under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements as defined within the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Such forward-looking statements are subject to risks and uncertainties that ~~could cause actual results to differ~~ materially from those projected or implied. Those risks and uncertainties include, but are not limited to: the degree of continued acceptance of LASIK surgery; potential complications revealed by long term follow

2531

could cause actual results to differ materially from those projected or implied. Those risks and uncertainties include, but are not limited to: the degree of continued acceptance of LASIK surgery; potential complications revealed by long term follow up; the extent of adoption of our product offering by LASIK surgeons; general economic conditions; changes in federal tax laws governing the ability of potential LASIK patients to use pre-tax dollars to pay for LASIK surgery; the scope of government regulation applicable to our products; ~~the extent of adoption of our product offering by LASIK surgeons;~~ patients’ willingness to pay for LASIK surgery; our ability to compete against our competitors; the effectiveness of our measures to ensure full payment of procedure fees; the occurrence and outcome of product liability suits against us; our ability to adequately protect our intellectual property; whether we become subject to claims of infringement or misappropriation of the intellectual property rights of others; the continued availability of supplies from single-source suppliers and manufacturers of our key laser components; the ability of our managers, operations and facilities to manage our growth; the success of our expansion into markets outside the United States; whether we lose any of our key executives or fail to attract qualified personnel; or if our new products or applications fail to become commercially viable.

Overview

Background

We are a medical device company focused on the design, development and ~~marketing~~manufacture of an ultra-fast laser, related software and disposable devices for use in LASIK surgery. Our product offering is primarily used to create the corneal flap in the first step of LASIK surgery. IntraLase lasers are also used in corneal transplants and other surgical approaches to the treatment of diseased corneas, and we continue to explore other potential ophthalmic applications. From our incorporation in late 1997 through late 2001, we devoted substantially all of our resources to designing, developing, commercializing and marketing our ~~INTRALASE~~IntraLase® FS laser, our IntraLASIK® software and our disposable patient interface. In late 2001, we introduced our product offering to the U.S. market, and we began expanding into key international markets in the second half of 2003. ~~In the three months ended December 31, 2004, we captured approximately 16% of the U.S. market for LASIK corneal flap creation.~~

Our quarterly laser sales or leases, cumulative lasers installed and ~~per~~approximate per-procedure patient interface units in ~~2002~~2006, ~~2003~~2005 and 2004 ~~by territory~~ were as follows:

	2002				2003				2004
	2006				2005				2004
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
	Q4	Q3	Q2	Q1	Q4	Q3	Q2	Q1	Q4	Q3	Q2	Q1
Laser Sales/Leases Per Quarter	56	47	52	49	44	34	39	39	37	27	30	17
US	8	8	7	12	4	20	12	21	12	19	18	21
Cumulative Lasers Installed (1)	574	518	471	419	371	327	293	254	217	180	153	123
International	—	—	—	—	1	2	2	5	5	11	9	16
Total Per-procedure Fees, Inclusive of Disposable Patient Interface, Units Sold	146,000	132,000	119,000	112,000	95,000	83,000	85,284	75,188	52,418	49,927	48,422	41,094
Total Placements	8	8	7	12	5	22	14	26	17	30	27	37
Cumulative Lasers Installed
US	12	20	27	39	43	63	75	96	108	127	145	166
International	—	—	—	—	1	3	5	10	15	26	35	51
Total Lasers Installed	12	20	27	39	44	66	80	106	123	153	180	217
Total Per-procedure Patient Interface Units Sold	3,870	5,240	8,966	11,586	15,486	19,208	22,164	27,372	41,094	48,422	49,927	52,418

~~Since~~(1) ~~inception~~Installed ~~we have~~base ~~been~~does ~~unprofitable.~~not Werepresent ~~incurred~~cumulative ~~net~~sales ~~losses~~since ~~applicable~~existing tocustomers ~~common~~bought ~~stockholders~~lasers ~~of approximately $15.8 million~~ in ~~2001,~~the ~~$12.0~~first ~~million~~quarters inof ~~2002,~~2006 ~~$12.0 million in 2003~~ and ~~$10.2~~2005 ~~million~~to inretire ~~2004.~~original ~~As of December 31, 2004, we had an accumulated deficit of approximately $63~~purchases.~~4 million.~~

~~Initial~~We ~~Public~~were ~~Offering~~profitable in 2006 and 2005 with net income of ~~Common~~$24.3 ~~Stock~~million and $9.5 million, respectively. We incurred net losses of $10.2 million in 2004. As of December 31, 2006, we had an accumulated deficit of approximately $29.6 million.

~~Our~~32 initial public offering, which was effective under applicable securities laws on October 6, 2004 and closed on October 13, 2004, resulted in our receipt of net proceeds of $86.1 million from the sale of 7,295,447 shares of common stock, including the sale of 995,447 over-allotment shares. The proceeds were net of the payment of expenses for the initial public offering of $2.2 million. The net proceeds of the offering were used for the repayment of our bank debt in the amount of $1.3 million and the payment to the University of Michigan of $765,000 due within 15 days of the initial public offering. In addition, 22,191,333 shares of redeemable convertible preferred stock converted to 16,797,103 shares of common stock.

Revenues

We generate revenues primarily from the sale or lease of our INTRALASE® FS laser and the sale of our per procedure fee inclusive of a disposable patient interface. We derive a smaller portion of our revenues from product maintenance.

Revenues

We generate revenues primarily from the sale or lease of our IntraLase^{^®} FS laser and the sale of our per procedure fees inclusive of a disposable patient interface. We derive a smaller portion of our revenues from product maintenance.

The following table sets forth the sources and amounts of our revenues for the periods indicated:

	Year Ended December 31,
	2002			2003			2004
	2006			2005			2004
	Units	Revenue		Units	Revenue		Units	Revenue
INTRALASE® FS laser	35	$	14,296,738	67	$	14,777,010	111	$	33,237,551
IntraLase® FS laser	204	$	61,454,247	156	$	46,812,834	111	$	33,237,551
Per procedure disposable patient interface	29,662		3,354,242	84,230		9,115,731	191,861		22,256,211
Per procedure fees inclusive of a disposable patient interface	509,000		59,545,682	338,000		39,908,016	191,861		22,256,211
Product maintenance	—		~~351~~10,~~483~~926,805	—		17,~~536~~711,~~723~~985	—		4,474,512
Research contracts	—		100,000	—		—	—		—
Total revenues		$	131,926,734		$	94,432,835		$	59,968,274
Total revenues		$	18,102,463		$	25,429,464		$	59,968,274

We target the most active LASIK surgery practices in the United States and in key international markets to adopt our product offering in order to generate recurring business from our per procedure fees inclusive of a disposable patient ~~interfaces~~interface. We expect that, even with increased ~~sales~~ sales and leases of our ~~INTRALASE~~IntraLase® FS laser, repeat revenues from the higher gross margin per procedure fees ~~inclusive of disposable patient interfaces~~ will continue to increase as a percentage of our total revenues, which will, in turn, drive higher overall gross margin.

Terms of Sale and Revenue Recognition

Laser

• Terms of sale. In the United States, we primarily sell our lasers to LASIK surgery practices. We also selectively enter into operating leases, ~~either directly~~ or ~~through third~~sales-~~party~~type ~~financing companies~~leases. Leases typically have terms of 36up to 39four ~~months~~years, commencing on installation and acceptance. Our terms of sale are typically on the basis of cash in advance, paid directly by our customers or byon ~~fiscally-sound~~terms, ~~third-party~~typically ~~financing~~net ~~companies~~30 ~~upon~~days ~~acceptance~~from ~~by our customers~~acceptance, ~~however,~~to wefiscally ~~will~~sound ~~extend terms to~~ third party financing companies, institutions or well established corporate customers, ~~primarily~~or tounder ~~adhere~~sales-type toleases over the ~~customer’s~~term ~~internal~~of ~~payment~~the ~~processes~~agreement. No customer accounted for more than 10% of revenue in ~~2004 or 2003. In 2002~~2006, ~~revenues~~2005 ~~generated~~or ~~from products sold to De Lage Landen Financial Services accounted for 69% of our total revenues~~2004.

In ~~2004~~2006, 85approximately 78% of our new domestic laser ~~sales~~unit orplacements ~~leases~~ were sales or sales-type leases, representing 9693% of of our total domestic laser revenues, and 15approximately 22% were operating leases, representing 47% of our total domestic laser revenues. In comparison, in ~~2003~~2005, ~~the~~approximately ~~first year in which we began leasing lasers on a direct basis, 52~~67% of our new domestic laser unit placements were sales, or sales-type leases, representing 9693% of our total domestic laser revenues, and 4833% were operating leases, representing 47% of our total domestic laser revenues.

Outside the United States, we primarily sell to our international distributors and, in selected ~~instances~~countries, directly to LASIK surgery practices. ~~Payment~~Historically, payment terms ~~are~~ have been cash in advance or irrevocable ~~letter~~letters of credit.; ~~However~~however, in onthe ~~occasion,~~second wequarter ~~have~~of ~~granted~~2005 ~~limited~~we ~~terms~~began selling to selected and qualified distributors on credit terms, ~~usually~~with ~~for~~the ~~less~~dollar ~~than~~amount ~~net~~of 10international ~~days~~accounts toreceivable ~~ensure~~and ~~shipment~~the bynumber of international distributors qualifying for credit generally expanding on a ~~specified~~quarterly ~~carrier~~basis.

• Revenue recognition. For the lasers we sell directly, we recognize revenue when the equipment has been delivered, installed and accepted at the customer location. Revenues from our leased lasers are ~~recognized~~classified ~~ratably~~as ~~over~~either ~~the~~operating ~~term~~or ofsales-type leases as prescribed by SFAS No. 13, Accounting for Leases. Revenues from our lasers under operating leases are recognized as earned over the lease term, commencing immediately after the laser is installed and accepted by the customer. Under sales-type lease arrangements, laser revenues are recognized based on the net present value of the expected cash flow after installation. For laser sales to a distributor, revenues are recognized when the laser is shipped and title has transferred to the distributor. For laser sales in the first quarter of 2006 that were sold prior to the availability of our 60 kilohertz (“kHz”) upgrade, the fair value of the upgrade was deferred and revenue has been or will be subsequently recognized when the upgrade has been delivered, installed and accepted at the customer location.

~~Per~~33 ~~procedure fee and disposable patient interface~~

• Terms of sale. Our customers order per procedure fees inclusive of disposable patient interfaces directly from us as needed. In the United States, payment is typically due 30 days after shipment and the per procedure fee inclusive of a disposable patient interface is non-refundable. A small percentage of our U.S. customers have agreed to a minimum monthly purchase requirement for per procedure fees inclusive of disposable patient interfaces. International customers pay for their per procedure fees inclusive of disposable patient interfaces cash in advance or by irrevocable letter of credit.

• Revenue recognition. Revenue from the sale of our per procedure fees inclusive of disposable patient interfaces is recognized upon shipment, and when title has passed in accordance with sales terms. We do not allow customers to return product.

During the third quarter of 2006, a limited number of customers ordered an IntraLase laser with IntraLase Enabled Keratoplasty (“IEK”). For those lasers sold prior to the availability of the IEK upgrade application, the fair value of the IEK application was deferred and revenue has been or will be subsequently recognized when the upgrade has been delivered, installed and accepted at the customer location. The IEK application is not required for laser functionality, but provides an additional application that enables surgeons and eye banks to create corneal incisions for corneal transplant surgery. The deferrals for the 60 kHz upgrade and the IEK application are consistent with the deferral of the fair value of our 30 kHz upgrade in the second quarter of 2005, prior to availability. The 30 and 60 kHz upgrades are also not required for laser functionality but do increase the speed of the procedure.

Per procedure fee inclusive of a disposable patient interface

•

Terms of sale. Our customers order per procedure fees inclusive of a disposable patient interface directly from us as needed. In the United States, payment is typically due 30 days after shipment and the per procedure fee inclusive of a disposable patient interface is non-refundable. A small percentage of our customers have agreed to a minimum monthly purchase requirement for per procedure fees. International customers, primarily distributors, have typically paid for their per procedure fees inclusive of a disposable patient interface with cash in advance or by irrevocable letter of credit; however, in the second quarter of 2005, we began selling to selected and qualified distributors on credit terms, with the number of international distributors qualifying for credit generally expanding each quarter.

•

Revenue recognition. Revenue from the sale of our per procedure fees inclusive of a disposable patient interface is recognized upon shipment, and when title has passed in accordance with the sales terms. We do not allow customers to return product.

Product maintenance

• Terms of sale. Our product offering includes maintenance. We provide product maintenance when we sell directly or lease to customers and our international distributors provide maintenance for ~~sales~~their ~~outside~~territory ~~the United States~~sales. Where we provide maintenance, maintenance agreements are renewable annually ~~and~~(as ~~are~~maintenance is required ~~at all times~~ for the ~~continued~~ use of our laser ~~and receive on-going maintenance and support~~). ~~Prior~~When ~~to 2003, when~~ we ~~sold~~receive ~~our~~prepaid ~~lasers we would establish a provision for warranty expense for related~~ maintenance. ~~Commencing~~funds ~~in 2003 and in conjunction with establishing an annual maintenance program for our lasers,~~ we ~~began~~amortize ~~deferring~~ the ~~fair value of the maintenance agreement and amortizing the~~ deferred maintenance amounts over the ~~twelve-month~~ maintenance period. ~~As a result, in 2003 our deferred revenues increased while our accrued expenses associated with warranty decreased.~~

• Revenue recognition. Revenue from product maintenance is recognized on a straight-line basis over the term of the maintenance ~~agreement~~period.

International Revenue Expansion

We introduced our product offering in the United States in late 2001 and internationally in the second half of 2003. As of December 31, ~~2004~~2006, we had sold or leased ~~166~~338 lasers in the United States and we had sold 239 51 internationally, primarily in the Asia-Pacific region, ~~Europe~~ and ~~the Middle East~~Europe. In international markets, we mainly sell our product offering through local country third-party distributors. These distributors are responsible for sales, customer support and product maintenance, and as a result generally pay a lower price for our product offering. As a result, the mix between direct sales in the United States and distributor sales internationally may create fluctuations in our ~~gross~~revenues and gross margin.

Seasonality

Lasers. Sales and leases of our lasers are seasonal. The second and fourth calendar quarters are typically stronger than the first and third calendar quarters. Two of the largest ophthalmology shows for refractive surgeons, the American Society of Cataract and Refractive Surgery, or ASCRS, and the American Academy of Ophthalmology, or AAO, are typically held in the second and fourth quarters, leading prospective customers to delay purchases in the first and third quarters until they have an opportunity to attend the shows, visit with us and attend lectures and symposiums on our product offering. In 2006, the ASCRS show was held in late March of the first quarter, and the 2006 AAO occurred in early November, during the fourth quarter. In addition, tax incentives typically help to drive U.S. capital equipment spending higher in the fourth quarter. Sales and leases of our lasers in the third quarter are generally slower as surgeons in the United States and internationally typically take increased vacation time during the summer.

Per procedure fees ~~and~~inclusive of a disposable patient ~~interfaces~~ interface. Sales of our per procedure fees inclusive of a disposable patient ~~interfaces~~interface are also seasonal. The first quarter typically shows an increase in volume in the United States. We believe this is because many potential LASIK patients in the United States access annual funding accounts established under Internal Revenue Code Section 125 pre-tax medical savings plans, or cafeteria plans, to purchase LASIK surgery, as LASIK surgery ~~is not generally paid for through insurance programs~~ or government reimbursement. The second and fourth quarter do not show any significant seasonal change. However, procedure volume is slower during the third quarter, as surgeons in the United States and internationally typically take increased vacation time during the summer.

is not generally paid for through insurance programs or government reimbursement. The second quarter typically is lower than the seasonally highest first quarter. Generally, procedure volume is slowest during the third quarter, as surgeons in the United States and internationally typically take increased vacation time during the summer.

Subsequent Events

On January 5, 2007, we entered into a definitive agreement to merge with Advanced Medical Optics, Inc., a Delaware corporation (“AMO”). Pursuant to the terms and subject to the conditions set forth in the merger agreement, we will continue as a wholly-owned subsidiary of AMO. Our Board of Directors has approved the merger and has recommended it for stockholder approval.

In connection with the merger, each share of common stock that is outstanding at the effective time of the merger will be converted into the right to receive $25.00 in cash without interest. In addition, each outstanding option to purchase common stock that has an exercise price less than $25.00 will be converted into the right to receive $25.00 in cash without interest, less (i) the exercise price of such option and (ii) applicable withholding taxes.

Consummation of the merger is subject to customary closing conditions, including, among others (i) the approval of the merger agreement, the merger and any other transactions contemplated by the merger agreement by our stockholders, (ii) the absence of any material adverse effect with respect to our business, and (iii) expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. We have filed a proxy statement with the Securities and Exchange Commission that has been sent to stockholders in order to obtain stockholder approval for the merger.

On February 27, 2007, we entered into a settlement agreement with Escalon Medical Corp. to settle all outstanding disputes and litigation between the parties.

Under the settlement agreement, we will make a lump sum payment to Escalon of $9.6 million, in exchange for which all pending litigation between the parties will be dismissed, the parties will exchange general releases, full ownership of all patents and intellectual property formerly licensed from Escalon will be obtained by us and all of our obligations under the license agreement will terminate. In addition, the payment will satisfy any outstanding royalties owed or alleged to be owed by us to Escalon, including disputed royalties, fourth quarter 2006 royalties and all future royalties.

Results of Operations

The following table sets forth our results of operations expressed as a percentage of total revenues for the periods indicated.

	Year Ended December 31,
	2002		2003		2004
	2006		2005		2004
Revenues:
Total revenues	100.0	%	100.0	%	100.0	%
Product revenues	99.4	%	100.0	%	100.0	%
Costs of goods sold	44.7		46.8		57.5
Research contracts	0.6		0.0		0.0
Gross margin	55.3		53.2		42.5
Total revenues	100.0		100.0		100.0
Costs of goods sold	73.5		67.1		57.5
Gross margin	26.5		32.9		42.5
Operating expenses:
Research and development	4915.86		3512.94		21.2
Selling, general and administrative	4432.07		4433.15		39.0
Total operating expenses	9348.83		8045.09		60.2
Loss from operations	(67.3	)	(47.1	)	(17.7	)
Income (loss) from operations	7.0		7.3		(17.7	)
Interest and other income, net	13.63		0.3.1		0.7
Loss before provision for income taxes	(65.7	)	(46.8	)	(17.0	)
Income (loss) before income tax (benefit) provision	10.3		10.4		(17.0	)
Provision for income taxes	0.1		0.1		0.0
Income tax (benefit) provision	(8.1	)	0.3		0.0
Net loss	(65.8	)	(46.9	)	(17.0	)
Net income (loss)	18.4		10.1		(17.0	)
Accretion of preferred stock	(0.30	)	(0.20	)	(0.1	)
Net loss applicable to common stockholders	(66.1	)%	(47.1	)%	(17.1	)%
Net income (loss) applicable to common stockholders	18.4	%	10.1	%	(17.1	)%

2835

Comparison of the ~~years~~Years ~~ended~~Ended December 31, ~~2004~~2006 and ~~December~~2005 ~~31, 2003~~

Revenues

Total revenues increased to $60131.09 million in ~~2004~~2006 from $2594.4 million in ~~2003~~2005. The increase was attributable to continued market acceptance of our product offering and our ~~further~~continued expansion into international markets, primarily in the Asia-Pacific region, ~~Europe~~ and ~~the Middle East~~Europe, ~~with~~and ~~the~~new markets ~~European~~opened ~~increase due primarily to obtaining our CE mark~~ in ~~the~~South ~~first quarter of 2004~~America. ~~During~~In ~~2004~~2006, we sold or leased ~~111~~204 lasers and generated $3356.2 million in revenues. ~~In comparison~~Additionally, ~~during~~our ~~2003,~~60 wekHz ~~sold or leased 67 lasers~~ and ~~generated~~IEK ~~$14.8~~upgrades ~~million~~resulted in ~~revenues.~~the Insale ~~2004, 85%~~ of ~~our~~355 ~~total~~upgrades ~~new~~and ~~laser~~generated ~~sales~~$5.3 ormillion ~~leases~~in ~~were sales~~revenues, ~~representing~~for ~~96% of our~~ total laser revenues, ~~and 15% were operating leases, representing 4%~~ of ~~our~~$61.5 ~~total laser revenues~~million. In comparison, in ~~2003,~~2005 ~~the~~we ~~first~~sold ~~year~~or inleased ~~which~~156 welasers ~~began~~and ~~leasing~~generated ~~lasers~~$42.8 onmillion ain ~~direct basis~~revenues, ~~52%~~and of our ~~total~~30 ~~new~~kHz ~~unit placements~~upgrades ~~were~~resulted ~~sales,~~in ~~representing~~the ~~96%~~sale of ~~our~~145 ~~total~~upgrades ~~laser revenues,~~ and ~~48%~~generated ~~were~~$4.0 ~~operating~~million ~~leases~~in revenues, ~~representing~~for 4%total laser revenues of $46.8 ~~our~~million. While total laser revenues. ~~The~~increased, the average selling price per laser sold or leased in ~~2004~~2006 ~~increased~~remained 36relatively ~~percent~~constant as compared to ~~2003~~2005 primarily ~~because~~ wedue ~~had~~to 19increased ~~fewer~~corporate ~~leases,~~center ~~which~~business ~~generate~~and ~~revenue~~a ~~over~~higher 39international ~~months, in 2004 as compared to 2003~~sales mix. The average selling price per laser excludes the deferred laser upgrades, if applicable, and the deferral of the fair value of the maintenance ~~agreement~~services from US and international direct sale laser revenue, which is amortized over the twelve month warranty period as maintenance revenue. As noted above, ~~and~~the isaverage ~~also~~selling ~~effected~~price sold or leased is affected by the mix ofbetween international distributor sales and ~~domestic~~is ~~sales~~also ~~and~~affected by the ~~mix~~number of ~~laser~~ leases ~~versus~~sold ~~laser~~as ~~sales~~opposed into ~~the~~being USplaced as operating leases.

In ~~2004~~2006, we sold ~~191,861~~approximately 509,000 per procedure fees inclusive of a disposable patient ~~interfaces~~ interface and generated $2259.36 million in revenues. In comparison, during ~~2003,~~2005 we sold ~~84,230~~approximately 338,000 per procedure fees inclusive of a disposable patient ~~interfaces~~interface and generated $939.19 million in revenues. We attribute the increase in sales of per procedure ~~fees~~ ~~inclusive of disposable patient interfaces~~ fees to an increased installed base of lasers, as we entered ~~2004~~the 2006 with ~~approximately~~an ~~2.5 times the~~ installed base of lasers that is 70% larger as compared to the ~~same~~beginning ~~period~~of ~~in 2003~~2005. We expect sales of our per procedure fees inclusive of a disposable patient ~~interfaces~~interface to continue to increase as the installed base of lasers increases.

The increase in our installed base of lasers ~~also~~in the US and direct international customers that we service and increased sales of parts to distributors led to an increase in our maintenance revenues to $410.59 million during ~~2004~~2006, as compared to $17.57 million during ~~2003~~2005. We expect our maintenance revenues to continue to increase as the installed base of lasers in the US and lasers directly serviced outside the US increases.

Gross Margin

Gross margin, as a percentage of total revenues, ~~increased~~was ~~to 42~~55% in ~~2004~~2006 ~~from~~and 3353% in ~~2003~~2005. Costs of goods sold, as a percentage of total revenues, decreased primarily due to ~~higher average selling prices for~~ our ~~laser,~~per ~~lower~~procedure ~~royalty expenses on our laser due to lower amortization costs for our licensing~~ fees asinclusive ~~compared to the royalties previously paid to the University~~ of ~~Michigan,~~a ~~lower material costs and lower per unit labor and overhead costs for both our laser and our~~ patient interface, inwhich ~~2004~~generate ashigher ~~compared to the prior year period. Per unit material~~margins, ~~labor~~increasing ~~and~~to ~~overhead~~45% ~~costs were lower as the increase in the number~~ of ~~lasers~~total ~~sold~~revenues ~~or leased and the increase~~ in ~~the~~2006 ~~number~~from of42% ~~per procedure fees inclusive~~ of ~~disposable~~total ~~patient~~revenues ~~interfaces sold resulted~~ in ~~volume~~2005, ~~discounts~~along ~~for~~with ~~material~~lower ~~components~~production and ~~lower~~material ~~fixed overhead~~ costs ~~per~~for ~~unit. Additionally, changes in our~~ laser ~~product reduced vendor~~and ~~material~~patient ~~costs~~interface products.

We expect gross margins to ~~continue to~~ improve ~~for~~ ~~the~~since ~~next several years at rates that are similar to, or slightly lower than,~~ the ~~rates~~percentage of ~~improvement~~total inrevenues ~~gross~~derived ~~margin~~from ~~between~~per ~~2003~~procedure ~~and~~fees inclusive ~~2004. We believe that the primary drivers~~ of ~~this~~a ~~continued~~disposable ~~improvement~~patient ininterface ~~2005~~is ~~will~~expected beto ~~increases~~increase inas ~~the~~ a percentage of total revenues ~~derived from per procedure fees inclusive of disposable patient interfaces~~.

Research and Development

Research and development expenses consist of costs of product research, product development, engineering, regulatory compliance and clinical support studies. Research and development expenses increased by $38.69 million to $1220.76 million in ~~2004~~ 2006 from $911.17 million in ~~2003~~2005. This increase resulted primarily from ~~increased~~higher ~~expenses~~consulting ~~for~~service ~~stock~~and support fees associated with clinical studies of $1.8 million, higher stock-based compensation of $1.31 million, higher salaries and compensation of $1.2 million and increased research and development prototype development expense of $455,000. The remaining increase in expense from 2006 to 2005 was primarily due to the 2006 expense associated with the settlement of our lawsuit with Escalon Corporation in February of 2007. This expense was recorded in 2006 in accordance with SFAS No. 5, Accounting for Contingencies and FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss.

29Excluding the 2006 effect of the Escalon settlement described above, we expect research and development expenses as a percentage of our revenues incurred in future years will be closer to or lower than the percentage of revenues incurred in 2006. We also expect that the dollar amount of our research and development expenses will continue to increase in future years as we continue to develop, enhance and commercialize new and existing products, product enhancements and applications. We also expect to incur increased expenses relating to regulatory compliance associated with new and existing applications and products and for regulatory approval for expansion of our existing product offering into new markets outside of the United States. We also expect to incur increased expenses as we continue to support clinical studies.

million, a $765,000 expensed portion of converting a royalty agreement to a full-paid royalty free technology license from the University of Michigan, $698,000 of higher personnel costs, $306,000 to reimburse the selling stockholders for discounts and commissions to underwriters payable by the selling stockholders, $236,000 in increased depreciation expense on higher fixed assets, increased legal fees associated with our intellectual property and licensing agreements of $175,000, increased expenses of $117,000 for regulatory and quality costs incurred in connection with obtaining our ISO EN 13485 certification and CE mark in the first quarter of 2004.

Selling, General and Administrative

Selling, general and administrative expenses consist of expenses associated with sales, marketing, field service and clinical applications that are not otherwise direct costs of installing and supporting our product offering, finance, information technology, legal and human resources. Selling, general and administrative expenses increased by $1211.16 million to $2343.42 million in ~~2004~~2006 from $1131.26 million in ~~2003~~2005. The increase resulted from higher personnel costs in sales, marketing and general and administrative departments of $26.93 million;, anhigher ~~increase in~~ stock -based compensation of ~~$2.7~~expense ~~million; an increase in travel, relocation and recruiting fees~~ of $23.63 million; and higher marketing, ~~advertising,~~expenses ~~promotion and event costs~~ of $1.14 million; increase in commissions paid to sales representatives on higher sales totaling $791,000; higher personnel costs primarily for the addition of international sales and sales support personnel totaling $777,000; an increase in facilities expense of $629,000 and higher legal and accounting fees of $486,000.

We expect selling, general and administrative expenses, which are primarily driven by sales and marketing expenses, to decline slightly as a percentage of revenues, although we expect the dollar amount to increase in the future as a result of continued growth in our sales and support infrastructure to support projected growth in revenues.

Interest and other income, Net

Interest and other income, net consists primarily of interest earned on investments in cash, cash equivalents and marketable securities offset by interest expense. Interest and other income, net increased by $1.5 million to $4.4 million in 2006 from approximately $2.9 million in 2005 due to higher interest income earned from higher average investment balances with higher applicable average interest rates.

Income tax (benefit) provision

During 2006, we recorded a 79 percent tax benefit in the amount of $10.7 million. During 2005, we recorded a 3.5 percent tax provision in the amount of $340,000.

The recording of a tax benefit in 2006 was the result of management’s analysis of our profitability in connection with other qualitative factors and uncertainties concerning our business and industry that provided more positive evidence than negative evidence regarding the eventual realizability of the tax benefit of our deferred tax assets as of December 31, 2006. As a result of this analysis, we concluded that it is more likely than not that we will realize the deferred tax assets and reversed the deferred tax asset valuation allowance, resulting in an income tax benefit for 2006.

Stock-Based Compensation

~~Over~~In ~~the~~December ~~next~~2004, ~~several~~FASB ~~years,~~issued weSFAS ~~will~~No ~~incur~~123 ~~non-cash~~(revised ~~expenses~~2004) ~~for~~(“SFAS ~~employee stock~~No. 123R”), Share-~~based~~Based ~~compensation,~~Payment. ~~decreasing~~SFAS ~~quarterly,~~No. 123R was effective for ~~stock-based~~us ~~compensation~~beginning ~~for~~in ~~stock~~the ~~options~~first ~~determined~~quarter toof ~~have~~fiscal ~~been~~2006 ~~issued~~and atwe ~~less~~used ~~than~~the ~~estimated~~modified prospective ~~fair~~application ~~value~~method. In addition, we expect to incur stock-based compensation expenses, primarily for options granted to non-employees, that may decrease or increase quarterly, depending upon future fluctuations in our stock price. ~~In December 2004, FASB issued SFAS No 123 (revised 2004) (“SFAS 123R”), Share-Based Payment .We are currently~~ ~~evaluating~~Similar ~~SFAS No. 123R~~ to determine which fair-value-based model and transitional provision we will follow upon adoption. SFAS No. 123R will be effective for us beginning in our third quarter of fiscal 2005. Although we will continue to evaluate the ~~application~~historical ~~of SFAS No. 123R~~accounting, ~~management expects adoption to have a material impact on our results of operations in amounts not yet determinable. Additionally,~~ unearned deferred stock compensation for non-employees iscontinues to be periodically remeasured through the vesting date under ~~current~~SFAS ~~and future accounting rules~~No. 123R. This periodic remeasurement could have a significant impact on our results of operations. See “—Critical Accounting Policies—Stock-Based Compensation.” and Note 10 to our financial statements contained elsewhere within this Form 10-K for further discussion.

~~Comparison~~Prior to the adoption of SFAS No. 123R, we accounted for stock-based awards to employees using the ~~Years~~intrinsic ~~Ended~~value ~~December~~method 31under Accounting Principles Board Opinion No. 25, ~~2003~~Accounting for Stock Issued to Employees (“APB 25”) and ~~December~~related ~~31,~~Interpretations. ~~2002~~Stock-based awards to non-employees were recorded using the fair value method in accordance with FSAS No. 123, Accounting for Stock-Based Compensation.

~~Revenues~~On December 19, 2005, IntraLase’s Board of Directors approved the accelerated vesting of all unvested and “out-of-the-money” stock options with an exercise price per share of $18.88 or higher. The accelerated vesting caused options previously awarded for the purchase of approximately 505,000 shares of IntraLase common stock, representing approximately 9% of total options outstanding, to vest and become exercisable immediately, subject to continued restrictions on sale. Of the 505,000 options subject to accelerated vesting, approximately 250,000 are held by directors and executive officers. Under APB No. 25 and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, the acceleration of the vesting of these options did not result in a compensation charge because the exercise prices of the affected options was greater than the closing price of our common stock on December 19, 2005.

~~Total~~The ~~revenues~~decision ~~increased~~ to ~~$25.4~~accelerate ~~million~~the investing ~~2003~~of ~~from~~these ~~$18.1~~options ~~million~~was ~~in 2002.~~made ~~The~~primarily ~~increase~~to reduce non-cash compensation expense that would have been recorded in ~~2003~~IntraLase’s ~~resulted~~income ~~from~~statement ~~the~~in ~~continued~~future ~~market~~periods ~~acceptance~~upon the adoption of ~~our~~SFAS ~~product offering~~No. 123R

~~The~~37 growth rate of our laser revenues slowed in 2003, notwithstanding our growth in laser unit volume. This resulted from the change in our sales model in early 2003. First, in response to market feedback, we reduced the fixed acquisition price of our laser by approximately 12%. Second, we began placing lasers using operating leases, where we recognize revenues ratably over the term of the lease, which results in a deferral of our laser revenues. These two factors resulted in a 46% decrease in revenues per average laser sold or leased in 2003 as compared to lasers sold in 2002.

During 2003, we also made changes to our model for selling per procedure fees inclusive of disposable patient interfaces, which are purchased on an as-needed basis by surgeons. These changes included increasing the list price of the per procedure fees inclusive of a disposable patient interface by 50% to new customers, introducing a volume discount pricing to higher volume customers, commencing international sales to distributors at a discounted distributor price, and reducing the price to some existing customers for purchases in excess of their expected monthly volumes. This new pricing model resulted in an overall 4% decrease in the average sales price of each per procedure fee inclusive of a disposable patient interface in 2003 compared with 2002.

Revenues associated with maintenance services increased to $1.5 million in 2003 from $351,000 in 2002 primarily from the increase in our installed base of lasers. During 2003, our cost of providing maintenance services approximated our maintenance revenues.

(Share-Based Payment) beginning in January 2006. As a result of this acceleration, we reduced the stock option expense we would otherwise be required to record by approximately $4.6 million, which is included in the pro forma calculation of net income under SFAS No. 123 for 2005 included in Note 10 to the consolidated financial statements. Approximately $1.3 million of the $4.6 million would have related to 2006. The Board of Directors believes the accelerated vesting of these options to be in the best interest of our shareholders and employees.

Comparison of the years ended December 31, 2005 and 2004

Revenues

Total revenues increased to $94.4 million in 2005 from $60.0 million in 2004. The increase was attributable to continued market acceptance of our product offering and our accelerated expansion into international markets, primarily in the Asia-Pacific region and Europe. During 2005, we sold or leased 156 lasers and generated $42.8 million in revenues. Additionally, our 30 kHz upgrades resulted in the sale of 145 upgrades and generated $4.0 million in revenues, for total laser revenues of $46.8 million. In comparison, 2004, we sold or leased 111 lasers and generated $33.2 million in revenues. The average selling price per laser sold or leased in 2005 decreased 8% as compared to 2004 primarily because U.S. operating leased units, which generate revenue typically over 39 months, increased to 33% of all U.S. placements in the 2005 as compared to 15% of all U.S. placements in 2004.

In 2005, we sold approximately 338,000 per procedure fees inclusive of a disposable patient interface and generated $39.9 million in revenues. In comparison, during 2004, we sold approximately 192,000 per procedure fees inclusive of a disposable patient interface and generated $22.3 million in revenues. We attribute the increase in sales of per procedure fees to an increased installed base of lasers, as we entered 2005 with approximately twice the installed base of lasers as compared to the same period in 2004.

The increase in our installed base of lasers in the U.S. also led to an increase in our maintenance revenues to $7.7 million in 2005, as compared to $4.5 million in 2004.

Gross Margin

Gross margin, ~~was~~as ~~33%~~a percentage of total revenues, inincreased ~~2003 and 26% in 2002. The increase in gross margin~~ to 3353% in ~~2003~~2005 from 2642% in ~~2002~~ ~~was primarily due to a $5~~2004.7 ~~million~~Costs ~~increase in sales~~ of ~~our~~goods ~~per procedure fee inclusive of a disposable patient interfaces~~sold, ~~which have a higher gross margin than our lasers. This was an increase~~ as a percentage of total revenues ~~from to 36% in 2003 from 19% in 2002. In addition~~, ~~the~~decreased ~~gross~~primarily ~~margin~~due ofto our per procedure ~~fee~~fees inclusive of a ~~disposable~~ patient interface, ~~improved~~which bygenerate ~~approximately~~higher ~~10%~~margins, ~~due~~increasing to ~~cost~~42% ~~savings~~of ~~associated~~total ~~with~~revenues ~~higher volume purchasing and manufacturing. The improvement~~ in ~~gross~~ ~~margin~~2005 ~~was~~from ~~offset~~37% ~~in part by lower revenues per average laser sold or leased~~ of ~~approximately~~total ~~46%, resulting~~ revenues in ~~a 42% decrease in the gross margin on our laser~~2004. In addition, ~~overall~~larger ~~gross~~production ~~margins~~runs ~~improved~~and asimprovements ~~additions~~in toour ~~inventory~~manufacturing ~~reserves decreased~~processes byhave ~~$1.0~~contributed ~~million from 2002~~ to ~~2003.~~cost ~~The~~savings ~~decrease~~for ~~in inventory reserves occurred because, as~~ our ~~products~~laser ~~matured, there were fewer design changes~~ and ~~thus~~patient ~~fewer components became obsolete~~interface. Upon determining component parts are obsolete, we establish a 100% reserve. We believe these components will ultimately be scrapped, and to date, no component parts reserved have been subsequently resold.

Research and Development

Research and development expenses ~~totaled~~decreased by $91.1 million into ~~2003 and~~ $911.07 million in ~~2002.~~2005 ~~The~~from ~~increase~~$12.7 million in ~~2003~~2004. This decrease resulted primarily from ~~higher~~one-time ~~regulatory spending~~expenses incurred in 2004 of $~~649~~765,000 ~~due~~related to ~~expanded~~a ~~commercial~~technology ~~activities~~license ~~requiring~~from athe ~~larger~~University ~~regulatory~~of ~~organization~~Michigan and $306,000 ~~partially~~of ~~offset~~expenses byassociated ~~lower~~with ~~spending~~their related sale of stock in ~~research~~our ~~and~~initial public ~~development~~offering ~~activities~~in ~~and~~2004. In addition, decreased stock based compensation expense of $765,000, decreased clinical ~~support~~study ~~studies~~and inoutside ~~the~~service ~~amount~~expense of $~~544~~112,000 and decreased legal expense of $109,000 offset a $1.0 million increase in personnel costs. The decrease in stock based compensation resulted primarily from lower stock based compensation associated with options granted to non-employees subject to remeasurement.

Selling, General and Administrative

Selling, general and administrative expenses ~~totaled~~increased by $118.23 million to $31.6 million in ~~2003 and~~2005 from $823.04 million in ~~2002~~2004. The increase ~~reflects~~resulted from higher personnel costs in sales, marketing and ~~commission~~general ~~costs~~and administrative departments of $13.7 million; inhigher ~~2003.~~outside ~~The~~services, ~~increase~~which ~~also~~primarily ~~reflects~~include consulting and legal fees, of $2.3 million; higher marketing, advertising, promotion and event costs of $~~828,000~~1.6 inmillion; ~~2003~~an ~~associated~~increase ~~with~~in ~~increased~~commissions paid to sales ofrepresentatives ~~our~~on ~~product~~higher ~~offering~~sales totaling $830,000; and ~~higher~~an increase in facilities and ~~personnel~~depreciation ~~costs~~expense of $~~566,000~~1.3 inmillion; ~~2003~~offset by decreased stock based compensation of $1.6 million.

Interest and other income, net

Interest and other income (expense), net increased by $2.5 million to $2.9 million of income in 2005 from $427,000 in 2004 due to the investment of the proceeds from our initial public offering in the fourth quarter of 2004 and the resulting increase in interest income from the investment.

Income tax(benefit) provision

In 2005, we recorded a 3.5 percent tax provision in the amount of $340,000. Our effective tax rate of 3.5 percent is primarily due to changes in the valuation allowance recorded against certain deferred tax assets primarily related to net operating loss carryforwards.

Seasonality and Quarterly Results

Our business is seasonal. Sales and leases of our lasers are typically stronger in the second and fourth quarters and sales of our higher gross margin per procedure fees inclusive of disposable patient interfaces are typically stronger in the first quarter and slower in the third quarter. See “—Overview—Seasonality” for a discussion of the reasons for the seasonality of our business.

The following table presents unaudited quarterly information for each quarter of fiscal years ~~2004~~2006 and ~~2003~~ 2005. This information has been derived from our unaudited financial statements prepared on the same basis as our financial statements, which, in our opinion, reflects all adjustments, which include only normal recurring adjustments, necessary to present fairly the unaudited quarterly results when read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K. These historical operating results are not necessarily indicative of the results to be expected for any future period.

	Quarter Ended
	Mar. 312003			June 302003				Sept. 302003				Dec. 312003			Mar. 312004				June 302004				Sep. 302004			Dec. 312004
	Dec. 312006			Sep. 302006			Jun. 302006			Mar. 312006			Dec. 312005		Sep. 302005			Jun. 302005			Mar. 312005
	(unaudited)
	(in thousands, except unit data)
Statements of Operations Data:
New laser placement units		556			2247			52	14		49		26	44		1734			39	30		39		27			37
Per-procedure patient interface units		15146,~~486~~000			19132,~~208~~000			119,000	~~22,164~~		112,000		~~27,372~~	95,000		4183,~~094~~000			85,284	~~48,422~~		75,188		~~49,927~~			~~52,418~~
Revenues:
Total revenues	$	37,400		$	32,293		$	32,171		$	30,063		$	27,361	$	22,888		$	23,003		$	21,181
Product revenues	$	2,860		$	5,690			$	6,545			$	10,334		$	9,485			$	15,827			$	15,493		$	19,163
Costs of goods sold		16,455			14,553			14,396			13,597			12,745		10,526			10,944			10,022
Total revenues		2,860			5,690				6,545				10,334			9,485				15,827				15,493			19,163
Gross margin		20,945			17,740			17,775			16,466			14,616		12,362			12,059			11,159
Costs of goods sold		2,146			3,998				4,204				6,722			5,621				9,536				8,499			10,835
Operating expenses:
Gross margin		714			1,692				2,341				3,612			3,864				6,291				6,994			8,328
Research and development		8,853			4,431			3,689			3,596			3,261		2,793			3,083			2,515
Operating expenses:
Selling, general and administrative		11,846			11,452			9,382			10,484			8,201		7,873			8,290			7,249
Research and development		2,053			2,406				2,387				2,272			2,357				2,875				3,772			3,714
Total operating expenses		20,699			15,883			13,071			14,080			11,462		10,666			11,373			9,764
Selling, general and administrative		2,256			2,724				2,620				3,611			3,610				5,288				6,361			8,094
Income from operations		246			1,857			4,704			2,386			3,154		1,696			686			1,395
Total operating expenses		4,309			5,132				5,007				5,883			5,967				8,163				10,133			11,808
Interest and other income, net		1,194			1,207			1,058			933			830		771			664			668
Loss from operations		(3,595	)		(3,438	)			(2,666	)			(2,271	)		(2,103	)			(1,872	)			(3,139	)		(3,480	)
Income before income tax (benefit) provision		1,440			3,064			5,762			3,319			3,984		2,467			1,350			2,063
Interest and other income (expense), net		(12	)		41				26				14			17				23				(2	)		389
Income tax (benefit) provision		(11,101	)		110			198			93			155		77			40			67
Loss before provision for income taxes		(3,607	)		(3,397	)			(2,640	)			(2,257	)		(2,086	)			(1,849	)			(3,141	)		(3,091	)
Net income	$	12,541		$	2,954		$	5,564		$	3,226		$	3,829	$	2,390		$	1,310		$	1,996
Provision for income taxes		11			5				4				3			8				7				7			8
Net loss	$	(3,618	)	$	(3,402	)		$	(2,644	)		$	(2,260	)	$	(2,094	)		$	(1,856	)		$	(3,148	)	$	(3,099	)

Liquidity and Capital Resources

General

We require capital principally for operating our business, working capital and capital expenditures for both the fixed assets used in our business and the revenue-generating assets under our operating leases. Our capital expenditures for fixed assets consist primarily of capitalization of our lasers for use in manufacturing and developing our product offering, and information technology infrastructure and equipment used to support the growth of our business. ~~Additionally, in 2005 we will spend approximately $3.9 million for leasehold improvements related to improvements to our new rental facility in Irvine, California.~~ Our capital expenditures for revenue-generating assets consist of the capitalization of lasers under operating leases. Working capital is required principally to finance accounts receivable and inventory, as well as to enable us to provide long-term financing for customer laser purchases.

~~Prior~~We tobelieve that our ~~initial~~current ~~public~~cash ~~offering,~~and ~~our~~cash ~~operations~~equivalents, ~~were~~together ~~funded primarily~~ with ~~proceeds from the issuance of~~ our ~~preferred stock.~~marketable ~~Cumulative~~securities ~~net~~and ~~proceeds~~investments ~~from~~and ~~issuances~~cash ofexpected ~~our preferred stock totaled $73.1 million as of September 30, 2004. In addition, we received government sponsored research grants from inception through 2002, amounting~~ to ~~$2.2~~be ~~million, cumulatively. From 2001 through December 31, 2004, we~~ generated ~~cumulative gross profit~~ from sales of our product offering, ofwill ~~$38.1~~be ~~million.~~sufficient Weto ~~have~~meet ~~financed purchases of equipment and leasehold improvements through~~ our ~~equipment~~projected ~~advance~~operating ~~facility.~~

~~Our~~39 initial public offering, which was effective under applicable securities laws on October 6, 2004 and closed on October 13, 2004, resulted in our receipt of net proceeds of $86.1 million from the sale of 7,295,447 shares of common stock, including the sale of 995,447 over-allotment shares. The proceeds were net of payments of estimated expenses for the initial public offering of $2.2 million. The net proceeds of the offering were used for the repayment of our bank debt in the amount of $1.3 million and the payment to the University of Michigan of $765,000 due within 15 days of the initial public offering. In addition, 22,191,333 shares of redeemable convertible preferred stock converted to 16,797,103 shares of common stock. The equipment advance facility described above, representing all of our bank debt, was paid in full subsequent to the completion of our initial public offering.

We believe that our current cash and cash equivalents, together with our marketable securities, cash expected to be generated from sales of our product offering, will be sufficient to meet our projected operating requirements for at least the next 12 months. Our uses of cash include purchases of investment-grade securities with diversification among issuers and maturities. We maintain our cash and cash equivalents and marketable securities with two major financial institutions in the United States.

Cash and cash equivalents increased to $26.0 million at December 31, 2004 from $8.9 million at December 31, 2003. This increase was primarily due to the net proceeds from our initial public offering of common stock, partially offset by the purchase of marketable securities and a net loss of $10.2 million in 2004, of which $6.9 million was for non-cash depreciation, amortization and stock-based compensation expenses as well as net changes in other cash flow activities.

Net cash used in operating activities decreased to $2.0 million in 2004 from $8.9 million in 2003. The improvement of $7.0 million was due to a reduction of our net loss by $1.8 million, an increase in non-cash expenses for depreciation, amortization and stock-based compensation of $5.7 million, an increase in accrued expenses of $3.0 million, an increase in deferred revenues of $1.2 million and an increase in accounts receivable of $690,000, offset in part by an increase in inventories of $3.0 million. Accounts payable, accrued expenses and inventories increased as the size of our business, measured by revenues, more than doubled in 2004 as compared to 2003, resulting in higher balances. Deferred revenues increased more in 2004 as compared to 2003, as at December 31, 2004 we had more prepaid operating leases and deferred maintenance than at December 31, 2003.

Net cash used by investing activities was $66.8 million in 2004 as compared to $6.5 million used in 2003. This increase was due to an increase in the purchase of marketable securities of $67.5 million, and increase in the purchase of property, plant and equipment of $1.5 million and a purchase of a $1.2 million technology license. These uses of cash were offset by a decrease in the purchase of equipment under operating leases of $2.9 million as 19 fewer operating leases were entered into during 2004 as compared to 2003 and an increase in proceeds from marketable securities of $5.5 million.

~~Net~~ requirements for at least the next 12 months. Our uses of cash ~~flows~~included ~~provided~~purchases byof ~~financing~~investment-grade ~~activities~~securities, ~~were~~for which $8591.90 million inwere ~~2004~~held asat December 31, ~~compared~~2006 with diversification among issuers and maturities ranging from one to ~~$288,000~~24 ~~in 2003~~months. ~~This~~We ~~increase~~maintain ~~was~~our ~~primarily~~cash ~~due~~and tocash ~~the~~equivalents, ~~net~~marketable ~~proceeds~~securities ~~from~~and investments with two major financial institutions in the ~~issuance~~United ofStates ~~common~~and intend ~~stock~~to hold our marketable securities and investments to maturity.

Net cash ~~used~~provided inby operating activities ~~decreased~~increased to $16.1 million in 2006 from $8.2 million in 2005. The increase of $7.9 million was primarily due to an increase in ~~2003~~net ~~from~~income of $1114.38 million. In addition, an increase in ~~2002~~non-cash charges for stock-based compensation of $4.9 ~~The~~million, an increase in accounts payable of $9.0 million, a decrease in ~~2003~~cash ~~was~~used for inventory of $3.4 million and an increase in accrued expense of $1.3 million primarily ~~due~~contributed to ~~the~~an ~~following~~increase ~~factors:~~in net cash provided by operating activities and were offset by an increase in deferred income taxes of $11.4 million, an increase in accounts receivable of $6.9 million, an increase in other assets of $3.4 million, a decrease in deferred rent, lease incentives and deferred interest of $3.5 million and a decrease in deferred revenues.

•Net ancash ~~increase~~used by investing activities decreased to $19.5 million in 2006 from $26.9 million in 2005. This decrease of $27.4 million was primarily due to a decrease in purchase of property, plant and equipment of $5.6 million, a decrease in ~~accounts~~purchase ~~payable~~of asequipment ~~the~~under ~~volume~~operating leases of ~~our~~$1.2 ~~sales~~million and ~~leases~~a ~~increased~~decrease in purchase of marketable securities net of proceeds of $1.0 million. In 2005, purchase of property, plant and weequipment ~~began~~of ~~purchasing~~$7.9 ~~more~~million ~~inventory~~included ~~supplies~~approximately $3.6 million for leasehold improvements and ~~services;~~other expenditures related to new rental facility in Irvine, California.

•Net ancash ~~increase~~flows ofprovided by financing activities increased to $14.58 million in ~~deferred~~2006 ~~revenues~~from in$3.8 ~~connection~~million ~~with~~in ~~new~~2005. ~~selling~~The ~~models~~increase ~~for~~of ~~which~~$954,000 wewas ~~began~~primarily ~~receiving~~due to ~~maintenance~~an ~~revenues~~increase in ~~advance~~proceeds ~~with~~from ~~the~~exercise ~~payment~~of ~~for~~stock ~~the~~options ~~laser~~under ~~and~~employee ~~began~~stock ~~receiving~~plans ~~some~~of ~~operating~~$1.4 ~~lease~~million, ~~income~~offset upby ~~front;~~a decrease in cash received from collection of officer and employee receivables for stock sales of $626,000.

•Net ~~increases~~cash provided by operating activities increased to $8.2 million in ~~other~~2005 from a $2.0 million use of cash in 2004. The increase of $10.2 million was primarily due to a $19.7 million increase caused by the improvement to net income in 2005 from a net loss in 2004, an increase in deferred rent and lease incentives of $4.1 million, and an increase in depreciation and amortization of $2.2 million partially offset by a decrease in accounts payable and accrued expenses of $4.5 million, an increase in accounts receivable of $3.5 million, an increase in other assets of $3.1 million, a decrease in stock-based compensation of $2.4 million and an increase in inventories of $1.9 million, as well as changes in other assets and liabilities. The decrease in accounts payable and ~~depreciation~~accrued ~~charges~~expenses ~~consistent~~was ~~with~~primarily due to the ~~growth~~timing of payments for purchases of inventory during the fourth quarter of 2005 as compared to the timing of payments for purchases of inventory during the fourth quarter of 2004 and the remaining initial public offering expenses accrued but unpaid at December 31, 2004. However, the increase in cash used for inventory, accounts receivable and other assets, which included $1.8 million of net notes receivable associated with our ~~business~~sales-type leases, was due to our growing revenue, which resulted in higher balances in accounts receivable and inventory at December 31, 2005 as compared to December 31, 2004. The increase in deferred rent and lease incentives was primarily due to a $3.3 million leasehold improvement allowance from the landlord of our new building.

~~The~~Net ~~increases~~cash used by investing activities decreased to $26.9 million in ~~accounts~~2005 ~~payable,~~as ~~deferred~~compared ~~revenues~~to ~~and~~$66.8 ~~accrued~~in ~~liabilities~~2004. This decrease of $39.9 million was primarily due ~~and~~to ~~depreciation~~the ~~charges~~initial ~~were~~investment ~~partially~~of our initial public offering proceeds in marketable securities in 2004 offset partially by an increase in ~~net~~the ~~accounts~~purchase ~~receivable~~of property, plant and equipment of $7.9 million in 2005 that included approximately $3.56 million onfor leasehold ~~higher~~improvements ~~revenues~~and other expenditures related to our new rental facility in Irvine, California paid by us and the $3.3 million leasehold improvement allowance from the landlord of our new building.

Net cash ~~used~~flows inprovided ~~investing~~by financing activities ~~increased~~were by $23.8 million in ~~2003~~2005 ~~from~~as ~~2002~~compared $85.9 million in 2004. The ~~increase~~decrease inof ~~2003~~$82.1 ~~was~~million ~~primarily~~is primarily due to our ~~placing~~initial ~~$3.6~~public ~~million~~offering of ~~our~~ ~~lasers~~common ~~under~~stock ~~operating~~occurring ~~leases,~~in ~~partially~~2004. This decrease was offset by aincreases in net ~~reduction~~proceeds infrom the ~~purchase~~issuance of ~~marketable~~stock ~~securities~~options under employee stock plans and the employee stock purchase plan of $12.05 million in aggregate; the decrease net payment on long-term debt of $809,000 and notes receivable payments received of $700,000.

Net cash provided by financing activities decreased to $288,000 from $29.7 million in 2002. Net cash flow provided by financing activities decreased in 2003 due to the absence of any preferred stock issuance.

Accounts Receivable

Our accounts receivable days sales outstanding were 3464 days at December 31, ~~2004~~2006 ~~and~~compared 35to 52 days at December 31, ~~2003~~2005. The ~~Our~~increase ~~laser sales are typically on the basis of cash~~ in ~~advance,~~days ~~however,~~sales weoutstanding ~~will~~from ~~extend~~52 ~~terms~~days toat ~~third party financing companies~~December 31, ~~institutions~~2005 orwas ~~well~~due ~~established corporate customers, primarily~~ to ~~adhere to the customer’s internal payment processes, and~~ our ~~per~~introduction ~~procedure fees inclusive~~ of ~~disposable~~credit ~~patient interfaces are typically sold for~~ terms ~~net 30 days from shipment. We review our accounts receivable balances and customers regularly to establish and maintain an appropriate allowance~~ for ~~doubtful~~selected ~~accounts.~~international Wedistributors ~~take~~in ~~into~~2005 ~~account the customer’s payment history, the number of days an account is overdue~~ and ~~any specific knowledge about an account’s financial status. On that basis~~2006, ~~allowance~~further ~~for~~described ~~doubtful accounts as a percentage of gross accounts receivable was 2.1% and 2.7% at December 31~~below, ~~2004~~ and ~~December~~the ~~31,~~increase ~~2003,~~in respectively. The reserve requirements are based on our review of every account and we place particular emphasis on analyzing each account with an accounts receivable balance more than 90 days old and on that account’s specific payment history and financial risk. As revenues from our per procedure ~~fee~~fees inclusive of a disposable patient interface ~~increase as a percentage of total revenues~~, wewhich ~~expect~~generally ~~days~~have ~~sales~~longer ~~outstanding~~credit ~~to increase as we grant payment~~ terms ~~of a longer duration on these revenues~~ than welasers. doOur ~~on our~~ laser sales. Asin ~~per~~the ~~procedure fees~~U.S. ~~inclusive~~are oftypically ~~a disposable patient interface revenues increase, we will be exposed to an increased risk of not receiving payment~~ on ~~time for a portion of our sales. In addition, as~~ the ~~percentage~~basis of ~~our~~cash ~~revenues with longer credit terms increase, we will use more capital resources to fund the increase~~ in ~~accounts~~advance ~~receivable~~paid ~~outstanding.~~directly ~~Payment~~by ~~terms for~~ our ~~sales~~customers ~~outside the United States are currently cash in advance~~ or ~~irrevocable letter of credit, resulting in limited exposure to international receivables, which typically take longer to collect. However,~~ on ~~occasion, we have offered limited~~ terms ~~to customers outside the United States~~, ~~usually~~which ~~for~~are ~~less~~typically ~~than~~ net 1030, ~~days~~ to ~~ensure shipment by a specified carrier. In the~~ ~~future,~~fiscally ~~were~~sound wethird toparty ~~offer~~financing ~~credit terms internationally similar to those in the United States~~companies, ~~our~~institutions ~~days~~or ~~sales~~well ~~outstanding~~established ~~would~~corporate ~~likely increase~~customers. Our per

~~Debt~~40

At December 31, 2004, we had a revolving line of credit, which allowed for maximum borrowing of $3.5 million, with a $1.0 million sub-limit to secure a separate revolving line of credit. At December 31, 2004, there were no outstanding balances under the line. The line of credit has a variable rate of interest equal to 1.0% above the bank’s prime rate (6.25% at December 31, 2004) and matured December 31, 2004.

In addition, we had an equipment advance facility, which allowed for maximum borrowing of $1.9 million. The equipment advance facility had variable rates of interest equal to .75% to 1% above the bank’s prime rate, with a minimum rate of 5%. The ability to draw down against the equipment advance facility expired on December 31, 2004, however, the outstanding balance of our equipment advance facility was paid in full and the equipment advance facility was terminated in October 2004 with a portion of our net proceeds from our initial public offering of common stock.

~~Our~~ procedure ~~loan~~fees ~~and~~inclusive ~~security~~of ~~agreement,~~a ~~covering~~disposable ~~both~~patient ~~our~~interface ~~revolving~~are ~~line~~typically ofsold ~~credit~~for ~~and~~terms ~~our~~net ~~equipment~~30 ~~advance facility,~~days ~~includes~~from ~~several~~shipment. ~~restrictive~~International ~~covenants~~customers, ~~including~~primarily distributors, ~~requirements~~have ~~that~~typically wepaid ~~meet~~with ~~certain~~cash ~~operating~~in ~~margin~~advance ~~goals~~or ~~and~~by ~~that~~irrevocable weletter ~~maintain~~of acredit; ~~quick ratio~~however, ~~as defined~~ in the ~~loan~~second ~~agreement.~~quarter Atof ~~December 31~~2005, ~~2003~~we ~~and~~began ~~December~~selling ~~31,~~to ~~2004,~~selected weand ~~exceeded~~qualified ~~our maximum~~distributors ~~net~~on ~~loss~~credit ~~covenant~~terms, ~~for~~with the ~~years~~dollar ~~then~~amount ~~ended.~~of ~~The~~international accounts ~~bank~~receivable ~~waived~~and the ~~requirement~~number ~~that~~of weinternational ~~comply~~distributors ~~with~~qualifying ~~this~~for ~~covenant~~credit ~~for~~generally ~~both~~expanding ~~periods~~on a quarterly basis.

OnWe ~~September~~review our ~~29,~~accounts ~~2004,~~receivable webalances ~~entered~~and ~~into~~customers ~~amendments~~regularly to ~~our~~establish ~~loan~~ and ~~security~~maintain ~~agreement~~an ~~revising~~appropriate ~~our~~allowance ~~modified~~for ~~quick~~doubtful ~~ratio~~accounts. ~~covenant~~We take into account the customer’s payment history, the number of days an account is overdue and ~~our~~any ~~quarterly/annual~~specific ~~net~~knowledge ~~loss/profitability~~about ~~covenant~~an ~~for~~account’s ~~through~~financial ~~September~~status. ~~2004~~The ~~consistent~~reserve ~~with~~requirements are based on our ~~expected~~review ~~financial~~of ~~performance~~every ~~due~~account toand ~~the~~we ~~incurrence~~place ofparticular ~~non-cash~~emphasis ~~stock~~on ~~based~~analyzing ~~compensation~~each ~~expenses~~account ~~that~~with ~~were~~an ~~not~~accounts ~~anticipated~~receivable ~~when~~balance ~~the~~more ~~original~~than ~~covenants~~90 ~~were~~days ~~written.~~old Inand on that ~~addition,~~account’s wespecific ~~received~~payment ahistory ~~waiver~~and atfinancial ~~December~~risk. 31On that basis, ~~2004~~the allowance for doubtful accounts as toa ~~our~~percentage ~~quarterly/annual~~of ~~net~~gross ~~loss/profitability~~accounts ~~covenant~~receivable was 1.1% and 1.9% at December 31, 2006 and December 31, 2005 respectively.

WeAs ~~plan~~we further extend terms to ~~enter~~additional ~~into~~international ~~new~~distributors and increase their credit ~~agreements~~lines, we expect day’s sales outstanding to increase, although our expectation is that days sales outstanding will remain in the ~~future~~range ~~consistent~~of ~~with~~60 days in the short term. Additionally, as revenues from our ~~business~~per ~~requirements~~procedure fee inclusive of a disposable patient interface increase as a percentage of total revenues, we expect days sales outstanding to increase as we grant payment terms of a longer duration on these revenues than we do on our laser sales. As extensions of international credit and per procedure fees inclusive of a disposable patient interface revenues increase, we will be exposed to an increased risk of not receiving payment on time for a portion of our sales. In addition, as the percentage of our revenues with longer credit terms increase, we will use more capital resources to fund the increase in accounts receivable outstanding.

~~Purchase~~Debt ~~of Technology~~

On July 15, 2004, we entered into an agreement to acquire a fully-paid royalty-free, irrevocable and worldwide license from the University of Michigan for the use of certain technology and to settle all past contract disputes for an aggregate consideration of $2.0 million. We ~~closed~~have ~~this~~no ~~agreement~~outstanding ondebt ~~July~~or ~~15,~~credit ~~2004,~~banking ~~and~~facilities ~~recorded~~as ~~a charge~~ of ~~$765~~December 31,~~000,~~ ~~which is included within research and development expenses in 2004, related to the settlement of the contract disputes and capitalized $1~~2006.~~235~~ ~~million associated with acquired licenses in accordance with the terms of the agreement.~~

Contractual Obligations

The following summarizes our long-term contractual obligations as of December 31, ~~2004~~2006:

	Payments due by period
Contractual Obligations	Total		Less than1 year		1 to 3years		34 to 5years		After ~~5 years~~5years
	(in thousands)
Leasehold improvements (1)	$	3,859	$	3,859	$	—	$	—	$	—
Operating leases	$	16,288	$	1,583	$	3,357	$	3,632	$	7,716
Operating leases (1)		18,532		1,651		3,500		3,491		9,890
Royalty payments (1)		549		222		218		109		—
Royalty payments (2)		688		124		237		218		109
Inventory purchase commitments		448		448
Employment agreement with Robert Palmisano, CEO		908		507		401		—		—
Employment agreement with Robert Palmisano, President and CEO		1,226		535		691
Employment agreement with Randy Alexander		3		3		—		—		—
	$	18,511	$	2,788	$	4,266	$	3,741	$	7,716
	$	23,990	$	6,144	$	4,138	$	3,709	$	9,999

(1) OnRepresents ~~January~~minimum ~~31,~~annual ~~2005~~royalties weunder ~~entered~~licensing ~~into~~agreements awhich ~~lease~~continue ~~agreement~~until ~~for~~the asoonest ~~larger~~of ~~facility~~the infollowing: ~~Irvine,~~expiration ~~California~~of ~~with~~the ~~approximately~~patents ~~128,670~~or ~~square~~termination ~~feet. The lease is for a period~~ of ~~ten~~the ~~years~~agreement ~~and~~in ~~four~~accordance ~~months~~with ~~beginning~~its ~~May 1, 2005~~terms.

(2) Represents minimum annual royalties under licensing agreements which continue until the soonest of the following: expiration of the patents or termination of the agreement in accordance with its terms.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet arrangements within the meaning of Item 303(a)(4)(ii) of Regulation S-K under the Securities Act of 1933.

Income Taxes

Realization of our deferred tax assets is dependent upon the uncertainty of the timing and amount of our future earnings, if any. Accordingly, webased ~~have~~upon ~~established~~available ~~full~~evidence ~~deferred~~and the criteria set forth in SFAS 109, Accounting for Income Taxes, we recorded an income tax ~~asset~~benefit ~~valuation~~in ~~allowances~~2006 as the result of ~~December~~management’s analysis of our profitability in connection with other qualitative factors and uncertainties concerning our business and industry, that provided more positive evidence than negative evidence regarding the eventual realizability of the deferred tax assets as of December 31, ~~2004~~2006. As a result of this analysis, we concluded that it is more likely than not that we will realize the deferred tax assets and reversed our deferred ~~December~~tax 31asset valuation allowance, ~~2003~~resulting toin ~~reflect~~an ~~these~~income ~~uncertainties~~tax benefit in 2006.

As41 of December 31, 2004, we had federal and state net operating loss carryforwards of approximately $55.6 million and $38.8 million, respectively, and federal and state tax credit carryforwards of approximately $1.6 million and $1.7 million,

~~respectively.~~Based ~~Federal~~upon ~~tax~~available ~~credit~~evidence ~~carryforwards~~and ~~will~~the ~~begin~~criteria toset ~~expire~~forth in ~~2005~~SFAS ~~unless previously utilized. The state credit carryforwards do not expire. Pursuant to Section 382 of the Internal Revenue Code~~109, ~~use~~Accounting offor ~~our~~Income ~~net operating loss and credit carryforwards may be limited if~~ Taxes, we ~~experience~~established a ~~cumulative~~full ~~change~~deferred intax ~~ownership~~asset ofvaluation ~~greater~~allowances ~~than~~as ~~50%~~of inDecember 31, a2005 ~~moving three-year period. Ownership changes could impact our ability~~ to ~~utilize~~reflect ~~net operating losses and credit carryforwards remaining at~~ the ~~ownership~~uncertainties ~~change~~described ~~date~~above. ~~See “Risk Factors—Risks Related to our Business—Our ability to use net operating loss carryforwards may be limited.”~~

As of December 31, 2006, we had federal and state net operating loss carryforwards of approximately $40.9 million and $25.5 million, respectively, which will expire on various dates beginning in 2010 through 2025.

Pursuant to Section 382 of the Internal Revenue Code, use of our net operating loss and credit carryforwards may be limited if in the future we experience cumulative change in ownership of greater than 50% in a moving three-year period. Ownership changes would impact the Company’s ability to utilize net operating losses and credit carryforwards remaining at the ownership change date.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations during the periods presented, and we do not anticipate that it will have a material effect in the future.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates including those related to bad debts, inventories and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 1 to our financial statements appearing elsewhere within this Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our condensed consolidated financial statements.

Revenue Recognition

We recognize revenues in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. ~~101~~ 104, Revenue Recognition ~~in Financial Statements, as amended by SAB 101A and 101B (“SAB 101”)~~. SAB ~~101~~ 104 requires that four basic criteria must be met before revenues can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgment regarding the fixed nature of the fee charged for products delivered and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenues recognized for any reporting period could be adversely impacted.

For arrangements with multiple deliverables, we allocate the total revenues to each deliverable based on its relative fair value in accordance with the provisions of Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” and recognize revenues for each separate element as the above criteria are met.

Reserves for Doubtful Accounts, Billing Adjustments and Contractual Allowances

At the end of each fiscal quarter, we estimate the reserve necessary for doubtful accounts to ensure that we have established an appropriate allowance for accounts receivable that may not ultimately be collectible. To develop this estimate we review all accounts and identify those with overdue balances, particularly those with balances 90 days, or more, overdue. For these accounts we estimate individual specific reserves based on our analysis of the amount overdue, the customer’s payment history, operations and finances of each account. For all other accounts, we review historical bad debt trends, general and industry-specific economic trends, and current payments along with the reasonable probability that payment will occur in the future. On that basis, the allowance for doubtful accounts as a percentage of gross accounts receivable was 21.1% and 21.79% at December 31, ~~2004~~2006 and December 31, ~~2003~~2005, respectively ~~as the percentage of accounts receivable determined to be uncollectible decreased~~. The reserve, as a percentage of gross accounts receivable, decreased from December 31, 2002 to December 31, 2003 as two-thirds of the accounts identified as payment risks at December 31, 2002 brought their accounts current in 2003 and one problem account at December 31, 2002 reduced its outstanding balance, while additional identified accounts with probable risk of non-payment were minor in comparison to total accounts receivable at December 31, 2003. To date, our estimates of our doubtful accounts have been materially accurate. Subject to any major changes in our business model, our operating environment or the economy in general, and taking into consideration our typical customer, we do not expect either our methodology or the accuracy of our estimates to change significantly in the future.

3542

Inventories

Adjustments to the carrying value of inventory for excess and obsolete items are based, in part, on our estimate of usage of component parts in the assembly of our lasers and the timing of design changes. This estimate, though based on our product design plans and other relevant factors, such as the current economic climate, is subject to some uncertainty. Amounts charged to income for excess and obsolete inventories and as a percentage of total revenues, were $~~433,000~~1.3 million or 0.79% of total revenues in ~~2004~~2006 as compared to $~~383,000~~1.0 million or 1.51% of total revenues in ~~2003~~2005. Inventory reserves were established in 2001and 2002, in the introductory phases of our product offering as technical design changes and manufacturability changes made certain components obsolete. These additions to inventory reserves were used to cover inventory scrapped. Additions to the inventory reserve have diminished as the product has matured and fewer changes are made to the product to make it easier to manufacture, assemble or otherwise produce. To date, our estimates of excess and obsolete inventory have been materially accurate. Subject to any major changes in our business model, our operating environment or the economy in general, and taking into consideration the ongoing development of our technology we do not expect either our methodology or the accuracy of our estimates to change significantly in the future.

Stock-Based Compensation

WeIn ~~account~~December ~~for~~2004, ~~employee~~the ~~and director stock options and restricted stock~~FASB ~~using~~issued ~~the~~SFAS ~~intrinsic-value method in accordance with Accounting Principles Board (APB) Opinion~~ No. 25 123R, ~~Accounting~~which ~~for~~requires ~~Stock~~that ~~Issued~~the tocompensation ~~Employees,~~cost ~~and~~ related ~~interpretations~~to ~~and have adopted the disclosure~~share-~~only~~based ~~provisions~~payment oftransactions, ~~Statement~~measured ~~of Financial~~based ~~Accounting~~on ~~Standards~~the ~~(SFAS)~~fair ~~No.~~value ~~123,~~of ~~Accounting~~the ~~for~~equity ~~Stock-Based~~or ~~Compensation.~~liability ~~Stock~~instruments ~~options~~ issued ~~to non-employees~~, ~~principally~~be ~~individuals~~recognized ~~who~~in ~~provide~~the ~~clinical~~financial ~~support~~statements. ~~studies,~~We ~~are recorded at their fair value as determined in~~adopted ~~accordance with~~ SFAS No. 123R ~~123~~effective ~~and~~January 1, ~~Emerging~~2006. ~~Issues~~Determining ~~Task~~the ~~Force~~fair ~~(EITF)~~value ~~No.~~of ~~96-18,~~options ~~Accounting~~using ~~for~~the ~~Equity~~Black-Scholes ~~Instruments~~model ~~That~~requires ~~are~~subjective ~~Issued~~assumptions, toincluding ~~Other~~future ~~Than~~stock ~~Employees~~price ~~for~~volatility ~~Acquiring,~~and orexpected intime ~~Conjunction~~until ~~with Selling~~exercise, ~~Goods~~which orgreatly ~~Services,~~affects the ~~and~~calculated ~~amortized~~fair ~~over~~value on the ~~service~~ ~~period~~grant date.

~~Stock~~Prior ~~compensation~~to ~~expense,~~the ~~which~~adoption isof aSFAS ~~noncash charge~~No. 123R, ~~results~~we ~~from~~accounted for stock-based ~~option~~awards ~~grants made~~ to employees using ~~at exercise prices below~~ the ~~deemed~~intrinsic ~~fair~~ value ofmethod ~~the~~under ~~underlying~~Accounting ~~common~~Principles ~~stock,~~Board ~~and~~Opinion ~~from~~No. 25, ~~stock~~Accounting ~~option~~for ~~grants~~Stock ~~made~~Issued to ~~non-employees~~Employees at(“APB ~~the~~25”) ~~fair~~and ~~value~~related ~~of the option granted as determined using the Black-Scholes valuation model~~Interpretations. Stock-based ~~compensation~~awards ~~expense~~to isnon-employees ~~amortized~~were onrecorded ausing ~~straight line basis over~~ the fair ~~vesting~~value ~~period~~method ofin ~~the~~accordance ~~underlying~~with ~~option,~~FSAS ~~generally four years~~No. 123, ~~Unearned~~Accounting ~~deferred compensation~~ for ~~non~~Stock-~~employees~~Based ~~is periodically remeasured through the vesting date~~Compensation. WeIn ~~have~~addition, ~~recorded~~prior ~~deferred~~to ~~stock-based~~the ~~compensation~~adoption ~~representing~~of ~~the~~SFAS ~~difference~~No. 123R, ~~between~~we ~~the~~accounted ~~option~~for ~~exercise~~employee ~~price~~ and ~~the~~director ~~fair~~stock ~~value~~options ofand ~~our~~restricted ~~common~~ stock onusing the intrinsic-value ~~grant~~method ~~date~~in ~~for~~accordance ~~financial~~with ~~reporting~~APB ~~purposes.~~25 Weand ~~determined~~related ~~the deemed~~interpretations. ~~fair~~Stock ~~value~~options ofissued ~~our~~to ~~common stock based upon several factors~~non-employees, ~~including~~who ~~operating~~are ~~performance,~~principally ~~liquidation~~surgeons ~~preferences~~on ofour ~~the~~medical ~~preferred~~advisory ~~stock~~board, anwere ~~independent~~recorded ~~valuation~~at ~~analysis,~~their ~~the~~fair ~~market~~value ~~capitalization~~as ofdetermined ~~peer~~in ~~companies~~accordance ~~and~~with ~~the expected~~SFAS ~~valuation~~No. 123 weand ~~would~~Emerging ~~obtain~~Issues inTask anForce ~~initial~~(EITF) ~~public~~Issue ~~offering~~No. 96-18, ~~Had~~Accounting ~~different~~for ~~assumptions~~Equity orInstruments ~~criteria~~That ~~been~~are ~~used~~Issued to ~~determine~~Other ~~the~~Than ~~deemed~~Employees ~~fair~~for ~~value~~Acquiring, ofor ~~our~~in ~~common~~Conjunction ~~stock~~with Selling, ~~different~~Goods ~~amounts~~or ofServices, ~~stock-based~~and ~~compensation~~amortized ~~could~~on ~~have~~a ~~been~~ratable basis ~~reported~~over the service period.

WeStock ~~recorded~~compensation ~~stock-based~~expense ~~compensation~~prior ~~charges~~to the adoption of $4SFAS No.5 123R ~~million~~resulted infrom ~~2004.~~stock ~~From~~option grants ~~inception~~made ~~through~~to ~~December~~employees ~~31,~~at ~~2004,~~exercise weprices ~~recorded~~below ~~amortization~~the deemed fair value of ~~deferred~~the underlying common stock, ~~compensation~~and offrom ~~$5.3~~stock ~~million.~~option Atgrants ~~December~~made ~~31,~~to ~~2004,~~non-employees weat ~~had~~the afair ~~total~~value of $4the option granted as determined using the Black-Scholes valuation model.3 Unearned ~~million~~deferred ~~remaining~~compensation tofor benon-employees ~~amortized~~is ~~over~~periodically remeasured through the vesting ~~period~~date ofunder ~~the~~current ~~stock~~and ~~options,~~historical ofaccounting ~~which $2~~rules.~~7 million~~ isSee ~~subject~~Note 10 to ~~periodic~~our ~~remeasurement~~financial statements contained elsewhere within this Form 10-K for further discussion.

The amount of deferred compensation expense to be recorded in future periods may decrease if unvested options for which we have recorded deferred compensation are subsequently cancelled or expire, or may increase if the fair market value of our stock increases or we make additional grants of non-qualified stock options to members of our scientific advisory board or other non-employees.

Pro forma information regarding net loss applicable to common stockholders and net loss per share applicable to common stockholders is required in order to show our net loss as if we had accounted for employee stock options under the fair value method of SFAS No. 123, as amended by SFAS No. 148. This information is contained in Note 1 to our financial statements contained elsewhere within this Form 10-K. The fair values of options and shares issued pursuant to our option plan at each grant date were estimated using the Black-Scholes option-pricing model.

We currently are not required to record stock-based compensation charges if the employee stock option exercise price or restricted stock purchase price equals or exceeds the deemed fair value of our common stock at the date of grant. In December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share Based Payment, which is a revision to SFAS 123 and supersedes APB 25 and SFAS 148. This statement requires that the estimated fair value resulting from all share-based payment transactions be recognized in the financial statements. If we had estimated the fair value of the options or restricted stock on the date of grant in our financial statements, and then amortized this estimated fair value over the vesting period of the options or restricted stock, our net loss would have been adversely affected. See Note 1 to our financial statements contained elsewhere within this Form 10-K for a discussion of how our net loss would have been adversely affected.

The American Institute of Certified Public Accountants recently issued a practice aid titled “Valuation of Privately-Held-Company Equity Securities Issued as Compensation”. In accordance with recommendations set forth in this practice aid, the following sets forth information relating to our option grants during the twelve month period ended September 30, 2004.

The fair value of common stock for options granted from September 1, 2003 through September 30, 2004 was estimated contemporaneously by our board of directors, with input from management. We did not obtain contemporaneous valuations by an unrelated valuation specialist because our efforts were focused upon executing our strategic operating plan and the financial resources for doing so were limited.

Determining the fair value of our common stock requires making complex and subjective judgments. The methodology we used to value our common stock for stock option grants occurring between July 1, 2003 and April 1, 2004 was to first estimate our future expected equity value at an initial public offering based upon a multiple of the estimated twelve months forward revenues, using the forward multiples of public high growth medical device and ophthalmology companies. Second, the estimated initial public offering proceeds were deducted to arrive at an estimated future value which was discounted back to present, given the time involved and the risks related to estimated timing, the stock market in general and the risks inherent in our ability to execute our operating plans. Third, the value was then discounted to account for the preferences of our preferred stockholders, relating primarily to their redemption and liquidation rights. In late April 2004, based upon significantly improved stock market and initial public offering conditions, we began assessing with investment bankers the potential of an initial public offering of our common stock. Subsequently, we received estimated valuations from several investment bankers, along with a recommendation to commence preparing for an initial public offering. These factors caused us to reassess the estimated fair value of common stock associated with stock option grants in late April 2004. The revised fair value per common share was based upon valuation and timing information provided to us by the investment bankers. This same valuation information was used to contemporaneously value our common stock associated with stock option grants in June 2004.

As disclosed more fully in Note 9 to the financial statements contained elsewhere within this Form 10-K, we granted stock options with weighted average exercise prices ranging from $2.87 to $19.68 during the quarterly periods in the twelve months ended December 31, 2004. Also as disclosed, we determined that the weighted average fair value of our common stock increased from $2.87 to $19.68 per share during that period. For stock options issued subsequent to our initial public offering, we have issued, and plan to continue to issue, those options with exercise prices at the closing market price on the date of grant.

Accounting for Income Taxes

We account for income taxes under the provisions of ~~Statement~~SFAS ~~of Finance Accounting Standards~~ No. 109, “Accounting for Income Taxes.” Under this method, we determine deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of assets and income. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. WeAs ~~have~~a result of management’s analysis of available evidence and the criteria set forth in SFAS 109, we concluded that it is more likely than not that we will realize the tax benefit of our deferred tax assets and reversed the deferred tax asset valuation allowance into income, resulting in an income tax benefit for 2006. We recorded a full valuation allowance on our net deferred tax assets as of December 31, ~~2004 and December 31~~2005, ~~2003,~~ due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable future. ~~These deferred tax assets primarily consist of net operating loss carryforwards and research and development tax credits.~~

Recent Accounting Pronouncements

In ~~January~~November ~~2003~~2004, the FASB issued ~~FIN~~SFAS 46No. 151, ~~Consolidation~~Inventory ofCosts. ~~Variable Interest~~SFAS ~~Entities,~~No. 151 ~~and~~clarifies inthe ~~December~~accounting ~~2003,~~for ~~issued~~abnormal ~~FIN~~amounts ~~46(R) (revised December 2003), Consolidation~~ of ~~Variable~~idle ~~Interest~~facility ~~Entities—an interpretation of ARB 51. In general~~expense, ~~a variable interest entity is a corporation~~freight, ~~partnership, trust~~handling orcosts ~~any~~and ~~other~~wasted ~~legal~~material ~~structure used for business purposes that either~~ (aspoilage) ~~does~~to be ~~not~~expensed ~~have~~as ~~equity~~incurred ~~investors~~and ~~with~~not ~~voting~~included ~~rights~~in oroverhead. ~~(b)~~Further, ~~has~~SFAS ~~equity~~No. 151 ~~investors~~requires that doallocation ~~not~~of ~~provide~~fixed ~~sufficient~~production ~~financial~~overheads ~~resources for the entity~~ to ~~support~~conversion ~~its~~costs ~~activities. FIN~~should ~~46 requires certain variable interest entities to~~ be ~~consolidated~~based byon ~~the~~normal ~~primary~~capacity ~~beneficiary~~ of the ~~entity~~production iffacilities. ~~the~~The ~~investors~~provisions ~~do not have the characteristics~~ of aSFAS No. 151 ~~controlling~~are ~~financial~~effective ~~interest~~for orinventory docosts ~~not~~incurred ~~have~~during ~~sufficient~~fiscal ~~equity~~years atbeginning ~~risk~~after ~~for~~June 15, ~~the entity~~2005. toOur ~~finance~~current ~~its~~accounting ~~activities~~policies ~~without~~are ~~additional~~consistent ~~subordinated~~with ~~financial~~the ~~support~~accounting ~~from~~required ~~other~~by ~~parties.~~SFAS ~~FIN 46(R) clarifies Accounting Research Bulletin~~ No. 151 51and, ~~Consolidated~~as ~~Financial Statements~~such, ~~to certain entities in which equity investors do not have~~ the ~~characteristics~~adoption of athis statement ~~controlling~~had ~~financial~~no ~~interest~~effect oron doour ~~not have sufficient equity at risk for the entity to finance its activities without subordinated~~ financial ~~support from other parties~~statements. ~~The~~

3743

~~consolidation~~In ~~requirements~~May of2005, ~~FIN~~the 46FASB ~~apply~~issued ~~immediately~~SFAS toNo. 154, ~~variable~~Accounting ~~interest~~Changes ~~entities~~and ~~created~~Error ~~after~~Corrections, ~~January~~which replaces 31APB Opinion No. 20, ~~2003~~Accounting Changes and SFAS No. 3, ~~The~~Reporting ~~consolidation~~Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements ~~apply~~for toaccounting and reporting a change in accounting ~~older~~principle, ~~entities~~and applies to all voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the ~~first~~unusual ~~fiscal~~instance ~~year~~it ~~beginning~~does ~~after~~not ~~June~~include ~~15,~~specific ~~2003~~transition provisions. ~~Certain~~Specifically, ofSFAS ~~the~~No. 154 ~~disclosure~~requires retrospective ~~requirements~~application ~~apply~~to inprior ~~all~~periods’ financial statements, ~~issued~~unless ~~after~~it ~~January~~is ~~31,~~impracticable ~~2003,~~to ~~regardless~~determine ofthe ~~when~~period-specific effects or the ~~variable~~cumulative ~~interest~~effect ~~entity~~of ~~was~~the ~~established~~change. ~~FIN~~When ~~46(R) applies~~it ~~immediately~~is impracticable to ~~variable~~determine ~~interest~~the ~~entities~~effects ~~created~~of ~~after~~the ~~December 31~~change, ~~2003~~the new ~~and~~accounting principle must be applied to ~~variable~~the ~~interest~~balances ~~entities~~of inassets ~~which~~and anliabilities ~~enterprise~~as ~~obtains~~of anthe ~~interest~~beginning ~~after~~of ~~that~~the ~~date.~~earliest Itperiod ~~applies~~for nowhich ~~later~~retrospective ~~than~~application ~~the~~is ~~first~~practicable ~~reporting~~and ~~period~~a ~~ending~~corresponding ~~after~~adjustment ~~March 15,~~must ~~2004~~be made to ~~variable~~the ~~interest~~opening ~~entities~~balance inof retained ~~which~~earnings anfor ~~enterprise~~that ~~holds~~period arather ~~variable~~than ~~interest~~being ~~(other~~reported ~~than~~in ~~special~~an ~~purpose)~~income ~~that~~statement. When it ~~acquired~~is ~~before~~impracticable ~~January~~to 1,determine ~~2004.~~the ~~The~~cumulative ~~adoption~~effect of ~~FIN~~the 46change ~~and~~the ~~FIN~~new ~~46(R)~~principle ~~did~~must ~~not~~be ~~have~~applied aas ~~material~~if ~~impact~~it onwere ~~our~~adopted ~~financial~~prospectively from the earliest ~~condition~~date orpracticable. ~~results~~SFAS No. 154 is effective for accounting changes and corrections of ~~operations~~errors made in fiscal years beginning after December 15, ~~because~~2005. weSFAS ~~are~~No. 154 does not achange ~~beneficiary~~the transition provisions of any ~~variable~~existing pronouncements. ~~interest~~The ~~entities~~adoption of SFAS No. 154 did not have a significant impact on our financial statements.

InDuring ~~May~~2005 ~~2003,~~ the FASB issued ~~SFAS~~Interpretation ~~No.~~47 ~~150~~(“FIN 47”), Accounting for ~~Certain~~Conditional ~~Instruments~~Asset ~~with~~Retirement ~~Characteristics of both Liabilities and Equity~~Obligations, which ~~establishes~~ ~~standards~~addresses ~~for how an issuer classifies and measures~~ certain ~~financial~~aspects ~~instruments with characteristics~~ of ~~both liabilities and equity.~~ SFAS No. ~~150 requires that an issuer classify a financial instrument that is within its scope~~ 143, ~~which may~~Accounting ~~have~~for ~~previously~~Asset ~~been~~Retirement ~~reported as equity or temporarily, as a liability (or an asset in some circumstances)~~Obligations. ~~This~~FIN ~~statement~~47 is effective ~~for~~no ~~financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the~~later ~~beginning~~than of the ~~first~~end ~~interim~~of ~~period~~fiscal ~~beginning~~years ending after ~~June~~ December 15, ~~2003, except for mandatory redeemable financial instruments of nonpublic companies~~2005. The adoption of ~~SFAS~~FIN ~~No.~~47 ~~150~~had ~~did~~no ~~not~~impact ~~have a material effect~~ on our financial ~~condition or results of operations~~statements.

In ~~December 2004~~ July 2006, the FASB issued ~~SFAS~~FASB Interpretation No. 48 ~~123~~ (~~revised~~“FIN ~~2004~~48”), ~~Share-Based Payment. This statement replaces SFAS No. 123,~~ Accounting for ~~Stock-Based~~Uncertainty ~~Compensation~~in ~~and~~Income ~~supersedes ABP Opinion No. 25~~Taxes, ~~Accounting~~which ~~for~~prescribes ~~Stock~~a ~~Issued~~recognition tothreshold ~~Employees.~~and ~~SFAS~~measurement ~~No.~~process ~~123R addresses the accounting~~ for ~~share-based~~recording ~~payment transactions~~ in ~~which an enterprise receives employee services in exchange for (a) equity instruments of~~ the ~~enterprise~~financial orstatements uncertain ~~(b)~~tax ~~liabilities~~positions ~~that~~taken ~~are based on the fair value of the enterprise’s equity instruments~~ or ~~that~~expected ~~may~~to be ~~settled~~taken byin ~~the~~a ~~issuance~~tax ~~of such equity instruments~~return. ~~SFAS~~Additionally, ~~No.~~FIN ~~123R~~48 ~~eliminates~~provides ~~the~~guidance ~~ability~~on ~~to account for share-based compensation transactions using~~ the ~~intrinsic~~derecognition, ~~value~~classification, ~~method~~interest ~~under~~and ~~APB 25~~penalties, ~~Accounting~~accounting ~~for~~in ~~Stock~~interim ~~Issued~~periods ~~to Employees,~~ and ~~requires~~disclosure ~~instead~~requirements ~~that such transactions be accounted~~ for ~~using~~uncertain ~~a fair-value-based method~~tax positions. WeThe ~~are~~accounting ~~currently~~provisions ~~evaluating~~of ~~SFAS~~FIN ~~No.~~48 ~~123R~~are ~~to determine which fair-value-based model and transitional provision we will follow upon adoption. SFAS No. 123R will be~~ effective for usreporting periods beginning inafter ~~our~~December 15, ~~third quarter of fiscal 2005~~2006. ~~Although~~We weare ~~will~~currently ~~continue~~evaluating ~~to evaluate~~ the ~~application~~impact of ~~SFAS~~adoption ~~No.~~of ~~123R,~~FIN ~~management~~48 ~~expects~~and ~~adoption~~have tonot ~~have~~yet adetermined ~~material~~the ~~impact~~effect on our ~~results~~earnings ~~of operations in~~or ~~amounts~~financial ~~not yet determinable~~position.

In ~~December~~September ~~2004~~2006, the ~~FASB~~ Securities and Exchange Commission staff issued ~~SFAS~~Staff Accounting Bulletin No. ~~153~~ 108, Considering ~~“Exchanges~~the Effects of ~~Nonmonetary~~Prior ~~Assets~~Year –Misstatements Anwhen ~~amendment~~Quantifying ofMisstatements ~~APB~~in ~~29,~~Current ~~Accounting~~Year ~~for~~Financial ~~Nonmonetary~~Statements ~~Transactions~~(“SAB 108”). ~~This~~SAB ~~statement~~108 ~~amends~~provides ~~APB~~guidance ~~Opinion~~for ~~No.~~how 29errors toshould ~~eliminate~~be ~~the~~evaluated ~~exception~~to ~~for~~assess ~~nonmonetary~~materiality ~~exchanges~~from ~~of similar~~a ~~productive~~quantitative ~~assets~~perspective. ~~and~~SAB ~~replaces~~108 itpermits ~~with~~companies ato ~~general~~initially ~~exception~~apply ~~for~~its ~~exchanges~~provisions ofby ~~nonmonetary~~either ~~assets~~restating ~~that~~prior dofinancial ~~not~~statements ~~have~~or ~~commercial~~recording ~~substance.~~the Acumulative ~~nonmonetary~~effect ~~exchange~~of ~~has~~initially ~~commercial~~applying ~~substance if~~ the ~~future~~approach ~~cash~~as ~~flows~~adjustments ofto the ~~entity~~carrying ~~are~~values ~~expected~~of assets toand ~~change significantly~~liabilities as aof ~~result~~January 1, of2006 ~~the~~with ~~exchange~~an offsetting adjustment to retained earnings. WeSAB ~~will~~108 ~~evaluate~~is ~~the~~required ~~effect,~~to ifbe ~~any~~adopted by December 31, of2006 ~~adopting~~and ~~SFAS~~did ~~No.~~not ~~153~~have an effect on our financial statements.

In ~~November~~September ~~2004~~2006, the FASB issued SFAS No. ~~151~~ 157, ~~“Inventory~~Fair ~~Costs”~~Value Measurements, which ~~amends~~defines ~~ARB~~fair ~~Opinion No. 43~~value, ~~Chapter,~~establishes ~~“Inventory~~a ~~Pricing”.~~framework ~~SFAS~~for ~~No.~~consistently ~~151~~measuring ~~clarifies~~fair ~~the~~value ~~accounting~~under ~~for~~generally ~~abnormal~~accepted ~~amounts~~accounting ~~of idle facility expense~~principles, ~~freight, handling costs~~ and ~~wasted~~expands ~~material~~disclosures ~~(spoilage)~~about tofair bevalue ~~expensed as incurred and not included in overhead~~measurements. ~~Further, Statement~~ SFAS No. 157 ~~151~~is ~~requires~~effective ~~that~~for ~~allocation~~us ~~of fixed~~beginning ~~production~~January 1, ~~overheads~~2008, toand ~~conversion costs should be based on normal capacity of~~ the ~~production facilities. The~~ provisions of SFAS No. 157 ~~151~~will ~~are~~be ~~effective~~applied ~~for~~prospectively ~~inventory~~as ~~costs~~of ~~incurred~~that ~~during fiscal years beginning after June 15, 2005~~date. ~~Our~~We ~~current accounting policies~~ are ~~consistent~~currently ~~with~~evaluating the ~~accounting~~effect ~~required~~that ~~by SFAS No. 151 and, as such, the~~ adoption of this statement will have ~~no effect~~ on our financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the effect that adoption of this statement will have on our financial statements.

Item 7A—Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing the risk of loss. Some of the securities in which we may invest in the future may be subject to market risk for changes in interest rates. To mitigate this risk, we plan to maintain a portfolio of cash equivalents and short-term investments in a variety of marketable securities, which may include commercial paper, money market funds, government and non-government debt securities. Currently, we are exposed to minimal market risks. We manage the sensitivity of our results of operations to these risks by maintaining a conservative portfolio, which is comprised solely of highly rated, short-term investments. We do not hold or issue derivative, derivative commodity instruments or other financial instruments for trading purposes.

~~The~~44 risk associated with fluctuating interest rates is limited to our investment portfolio and our borrowings. We do not believe that a 10% change in interest rates would have a significant effect on our results of operations or cash flows.

The risk associated with fluctuating interest rates is limited to our investment portfolio and our borrowings. We do not believe that a 10% change in interest rates would have a significant effect on our results of operations or cash flows.

All of our sales since inception have been made in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate fluctuations. We expect to continue to realize our sales in U.S. dollars, regardless of our intended expansion into international markets, although no assurances can be given. As we increase our international sales and support organization, we anticipate some level of exposure to foreign currency risk as a result of compensating these employees in local currencies.

Item 8—Financial Statements and Supplementary Data

The financial statements required by this Item 8 are set forth at the pages indicated at Item 15(a)(1).

The supplementary financial data required by this Item 8 are located under the subheading “Seasonality and Quarterly Results” located under Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 9—Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A—Controls and Procedures

We maintain disclosure controls and procedures (aas defined in Rules 13a-15(e) ~~Evaluation~~and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives.

We have established disclosure controls to ensure that material information relating to us is made known to the officers who certify our financial reports, to allow timely decisions regarding required disclosures. As of December 31, 2004, we have carried out an evaluation, under the supervision and with the participation of ~~our~~ management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures ~~pursuant~~as toof December 31, ~~Rule~~2006, ~~13a-15~~the end of the ~~Securities~~period ~~Exchange~~covered ~~Act~~by ofthis ~~1934~~report. Based ~~upon~~on that evaluation, ~~the~~our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures ~~are~~were effective, inand ~~timely~~were ~~alerting them~~operating toat ~~material~~the reasonable ~~information~~assurance ~~related~~level toas usof ~~that~~December 31, ~~is required to be included in our periodic SEC filings~~2006.

~~Our~~There ~~management,~~have ~~including~~been ~~our~~no ~~Chief~~changes ~~Executive~~in ~~Officer and Chief Financial Officer, does not expect that~~ our ~~disclosure~~internal ~~controls~~control ~~and~~over ~~procedures~~financial orreporting ~~our~~(as ~~internal~~defined ~~controls~~in ~~will~~Rules ~~prevent~~13a-15(f) ~~all error~~ and ~~all~~15d-15(f) ~~fraud.~~under Athe ~~control~~Exchange ~~system,~~Act) noduring ~~matter~~the ~~how~~quarter ~~well conceived~~ and ~~operated,~~year ~~can~~ended ~~provide only reasonable~~December 31, ~~not~~2006 ~~absolute, assurance~~ that ~~the~~materially ~~objectives of the control system are met. Further~~affected, ~~the~~or ~~design of a control system must reflect the fact that there~~ are ~~resource~~reasonably ~~constraints,~~likely ~~and the benefits of controls must be considered relative~~ to ~~their~~materially ~~costs. Because of the inherent limitations in all control systems~~affect, noour ~~evaluation~~internal ~~of controls can provide absolute assurance that all~~ control ~~issues~~over ~~and~~financial ~~instances of fraud, if any, within IntraLase have been detected~~reporting.

~~(b)~~Management’s ~~Changes~~Report inon ~~internal~~Internal ~~controls~~Control Over Financial Reporting

~~There~~Internal ~~have~~control ~~been~~over nofinancial ~~significant~~reporting ~~changes~~refers into ~~our~~the ~~internal~~process ~~controls~~designed by, or inunder ~~other~~the ~~factors~~supervision ~~that~~of, ~~could~~IntraLase’s ~~significantly~~Chief ~~affect~~Executive ~~these~~Officer ~~internal~~and Chief ~~controls~~Financial ~~subsequent~~Officer, and effected by our board of directors, IntraLase’s management and other personnel, to provide reasonable assurance regarding the ~~date~~reliability of ~~our~~financial ~~most~~reporting ~~recent~~and ~~evaluation.~~the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

~~Item~~• ~~9B—Other~~Pertain ~~Information~~to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transaction and dispositions of our assets;

~~None.~~• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

PART III

Item 10—Directors and Executive Officers of the Registrant

Executive Officers and Directors

The following table sets forth information with respect to our executive officers and directors as of December 31, 2004:

Name	Age	Position
Robert J. Palmisano	60	President and Chief Executive Officer, Director
Shelley B. Thunen	52	Executive Vice President and Chief Financial Officer
P. Bernard Haffey	42	Executive Vice President and Chief Commercial Officer
Charline Gauthier, O.D., Ph.D.	42	Executive Vice President and Chief Operating Officer
James Lightman	47	Senior Vice President and General Counsel
Franklin T. Jepson	58	Vice President, Corporate Communications and Investor Relations
Kevin Harley	45	Vice President, Human Resources
Tibor Juhasz, Ph.D.	46	Vice President and Chief Technical Officer
Ronald M. Kurtz, M.D.	41	Vice President, Medical Director
Eric Weinberg	44	Vice President, Marketing and Professional Affairs
William J. Link, Ph.D.(2)	58	Director, Chairman of the Board
Frank M. Fischer(1)(2)	63	Director
Gilbert H. Kliman, M.D.(2)(3)	46	Director
Mark Lortz(1)(3)	53	Director
Donald B. Milder(3)	51	Director
Thomas S. Porter(1)(2)	61	Director

(1) Member of our audit committee.

(2) Member of our compensation committee.

(3) Member of our nominating and governance committee.

Robert J. Palmisano. Mr. Palmisano joined us as our President, Chief Executive Officer and a director in April 2003. From April 2001 to April 2003, Mr. Palmisano was the President, Chief Executive Officer and a director of MacroChem Corporation, a development stage pharmaceutical corporation. From April 1997 to January 2001 Mr. Palmisano served as President and Chief Executive Officer and a director of Summit Autonomous, Inc., a global medical products company that was acquired by Alcon, Inc. in October 2000. Prior to 1997, Mr. Palmisano held various executive positions with Bausch & Lomb Incorporated, a global eye care company. Mr. Palmisano earned his B.A. in Political Science from Providence College.

Shelley B. Thunen. Ms. Thunen joined us as our Chief Financial Officer in May 2001. From January 2000 to January 2001, she was the Executive Vice President, Chief Financial Officer and Corporate Secretary of Versifi, Inc., which designs, develops and markets Java internet infrastructure software. Versifi was acquired by Reef SA/NV in December 2000. From August 1992 to January 2000, Ms. Thunen was the Chief Financial Officer, Vice President of Operations and Corporate Secretary of VitalCom, Inc., a leading manufacturer of computer networks for cardiac monitoring systems. VitalCom was acquired by General Electric Corp. in 2001. Ms. Thunen earned her M.B.A. and her B.A. in Economics from the University of California, Irvine.

P. Bernard Haffey. Mr. Haffey has served as our Executive Vice President and Chief Commercial Officer since July 2004. From March 2003 to July 2004, Mr. Haffey served as our Vice President, Business Development. From September 2001 to September 2002, Mr. Haffey was the Chief Executive Officer of NeuroVision, Inc., an early stage vision therapy company. From September 1997 to December 2000, Mr. Haffey was Executive Vice President, Chief Commercial Officer and Vice President of Marketing and Sales at Summit Autonomous, Inc. Prior to September 1997, Mr. Haffey held key sales and marketing positions with Mentor Corporation, a medical device company serving multiple markets including the ophthalmic market. Mr. Haffey earned his B.A. from Colgate University and his M.B.A. from Cornell University.

Charline Gauthier, O.D., Ph.D. Dr. Gauthier has served as our Vice President, Research, Development and Corporate Affairs since July 2003. After Summit Autonomous Inc. was acquired by Alcon, Inc. in October 2000, Dr. Gauthier was hired by Alcon, Inc. and from October 2000 to December 2001 served as its Vice President and General Manager of the Orlando Technology Center and was responsible for medical lasers and accessories for eye surgery. From April 2000 to October 2000, she was the Executive Vice President and Chief Operations Officer of Summit Autonomous, Inc. From October 1998 to April 2000, Dr. Gauthier was the Chief Operating Officer of Autonomous Technologies Corporation or

ATC. ATC was acquired by Summit Autonomous in April 2000. Dr. Gauthier earned her M.B.A. from Crummer Graduate School of Business, Rollins College, her Ph.D. from the University of New South Wales in Sydney, Australia and her Doctor of Optometry, from the University of Waterloo, Canada.

James Lightman. Mr. Lightman has served as our Senior Vice President and General Counsel since February 2005, From December 2004 to January 2005, Mr. Lightman was the Vice President, Finance and Administration and General Counsel at Amicore, Inc., which provides software and services to physicians. From May 2002 to December 2004, Mr. Lightman was Vice President and General Counsel at Amicore, Inc. From January 2001 to May 2002, Mr. Lightman was Vice President, General Counsel and Secretary at Zaiq Technologies, Inc., a semiconductor design engineering solutions firm. From January 2000 through December 2000, Mr. Lightman was Senior Vice President, General Counsel and Clerk for Summit Autonomous, Inc., a global medical products company that was acquired by Alcon, Inc. in October 2000. Mr. Lightman earned his law degree, cum laude, from Boston University School of Law and his B.S., magna cum laude, from Boston University School of Management.

Franklin T. Jepson. Mr. Jepson has served as our Vice President, Corporate Communications and Investor Relations since July 2004. From February 2004 to July 2004, Mr. Jepson served as Vice President Communications and Investor Relations for ALARIS Medical Systems, Inc., a manufacturer of products for the delivery of intravenous medications that was acquired by Cardinal Health in July 2004. From August 2001 to February 2004, Mr. Jepson worked as an independent financial communications consultant. From November 1999 to August 2001, Mr. Jepson served as Executive Vice President of Golin/Harris International, a public relations firm that provides professional counsel and strategic communications programs worldwide. From August 1998 to November 1999, Mr. Jepson was Senior Vice President Capital Market Relations for WinStar Communications, a broadband telecommunications company, and for the preceding 16 years Mr. Jepson held various positions with Bausch & Lomb, concluding with his position as Corporate Vice President Communications and Investor Relations. Mr. Jepson earned his B.A. in Journalism and Business from Syracuse University.

Kevin Harley. Mr. Harley has served as our Vice President, Human Resources since August 2004. From July 2001 to August 2004, Mr. Harley served as Vice President of Employee Relations for Edwards Lifesciences Corporation, a public company that provides products and technologies designed to treat advanced cardiovascular disease. From April 2000 to July 2001, Mr. Harley served as Vice President of Human Resources for Edwards Lifesciences Corporation. From December 1999 to April 2000, Mr. Harley served as Vice President of Human Resources for Baxter Healthcare Corporation (Cardiovascular Group), the principal U.S. operating subsidiary of Baxter International Inc., a public company that operates as a global medical products and services company for the treatment of complex medical conditions related to the blood and circulatory systems. From May 1994 to December 1999, Mr. Harley served as Director of Human Resources for Baxter Healthcare Corporation (Cardiovascular Group) and, prior to May 1994, Mr. Harley held various other positions with Baxter Healthcare Corporation. Mr. Harley earned his B.A. from the University of Buffalo in Psychology and his M.B.A. in Human Resources from National University.

Tibor Juhasz, Ph.D. Dr. Juhasz is a co-founder of IntraLase. Dr. Juhasz has served as our Chief Technical Officer since September 1997. From August 1988 to March 1996, Dr. Juhasz was the Chief Scientist at Intelligent Surgical Lasers Inc., where he led a team in developing the first ultra-fast laser ever used in ophthalmology. From March 1996 to September 1997, Dr. Juhasz held key research positions with Escalon Medical. From 1996 to the present, Dr. Juhasz has been an associate professor of biomedical engineering and ophthalmology at the University of Michigan. Dr. Juhasz earned his B.A. and Ph.D. in Physics from JATE University of Szeged, Hungary in 1986, along with post-doctoral training at the University of Rochester and the University of California, Irvine.

Ronald M. Kurtz, M.D. Dr. Kurtz is a co-founder of IntraLase. Dr. Kurtz has served as our Vice President, Medical Director since January 1999. Since October 2000, Dr. Kurtz has served as an Associate Clinical Professor at the University of California, Irvine. From December 1997 to January 1999, Dr. Kurtz served as our President and Chief Executive Officer. From July 1995 to October 2000, Dr. Kurtz was an Assistant Professor of Ophthalmology at the University of Michigan where he established the Ultrafast Laser Medical Group, which was responsible for developing many of IntraLase’s key licensed patents. Dr. Kurtz earned his B.A. in Biochemistry from Harvard College and his M.D. from the University of California, San Diego.

Eric Weinberg. Mr. Weinberg has served as our Vice President, Marketing and Professional Affairs since September 1999. From March 1993 to September 1999, Mr. Weinberg was the Global Director of Refractive Surgery at Chiron Vision, a subsidiary of the Chiron Corporation specializing in ophthalmic surgical products. At Chiron Vision, Mr. Weinberg was responsible for the management of its microkeratome blade technology, laser product lines and its LASIK education program.

William J. Link, Ph.D. Dr. Link has served on our Board of Directors since December 1998 and became our Chairman of the Board in July 2003. Dr. Link has served on the board of directors of Advanced Medical Optics, Inc. since June 2002. Dr. Link is a founder and since November 1999 has been a managing director of Versant Ventures, a medical and healthcare venture capital firm. Since January 1998, Dr. Link has been a managing member of Brentwood IX Ventures and Brentwood VIII Ventures. From January 1986 to December 1997, Dr. Link was the Chairman and Chief Executive Officer of Chiron Vision. Dr. Link earned his B.S., M.S. and Ph.D. degrees in Mechanical Engineering from Purdue University.

Frank M. Fischer. Mr. Fischer has served on our Board of Directors since September 2002. Since January 2000, Mr. Fischer has served as the President and Chief Executive Officer and a director of NeuroPace, Inc., a private company that develops and sells treatment devices for neurological disorders. From May 1998 until December 1999, Mr. Fischer was President, Chief Executive Officer and a director of Heartport, Inc., a public cardiac surgery company. Mr. Fischer earned his B.S.M.E. and his M.S. in Management from Rensselaer Polytechnic Institute.

Gilbert H. Kliman, M.D. Dr. Kliman has served on our Board of Directors since October 2000. Since February 1999, Dr. Kliman has been a Managing Director of InterWest Partners, a venture capital firm. From December 1996 to February 1999, Dr. Kliman was a Venture Partner of InterWest. A board-certified ophthalmologist, Dr. Kliman is the former West Coast Director of LCA Vision and previously was an Assistant Professor of Ophthalmology at New England Medical Center. Dr. Kliman earned his B.A. from Harvard University, his M.D. from the University of Pennsylvania and his M.B.A. from Stanford University.

Mark Lortz. Mr. Lortz has served on our Board of Directors from October 2002 to the present. Since July 2004, Mr. Lortz has served on the board of directors of NeuMetrix, Inc., a public company that develops products to treat diseases of the peripheral nerves and spine. Since June 2004, Mr. Lortz has served on the board of directors of Cutera, Inc., a public company which manufactures laser and other light-based products for aesthetic treatments. From April 1997 to April 2004, Mr. Lortz was the President and Chief Executive Officer of TheraSense, Inc., a public company offering glucose self-monitoring systems for diabetes management. TheraSense, Inc. was purchased by Abbott Laboratories in April 2004. Prior to April 1997, Mr. Lortz held various positions at LifeScan, a subsidiary of Johnson & Johnson, including Group Vice President, Worldwide Operations and International Franchise Development. Mr. Lortz earned his M.B.A. in Management from Xavier University and his B.S. in Engineering Science from Iowa State University.

Donald B. Milder. Mr. Milder has served on our Board of Directors since May 2002. Since November 1999, Mr. Milder has been a Managing Director at Versant Ventures, where he specializes in medical device and healthcare service investing. Prior to co-founding Versant Ventures, from 1989 to the present, Mr. Milder has led healthcare investing at Crosspoint Venture Partners, where he is a general partner. Mr. Milder has assumed roles as a board member in more than 20 companies, including TheraTx, Inc., Informed Access Systems, Discovery Partners International, Inc. and Sonus Pharmaceuticals, Inc. Mr. Milder earned his B.A. in economics at Union College and his M.B.A. from Harvard Business School.

Thomas S. Porter. Mr. Porter has served on our Board of Directors since December 1997. Since January 2004, Mr. Porter has served as a Partner Emeritus of Trillium Ventures, a venture capital firm. From May 1987 to January 2004, Mr. Porter was a General Partner with EDF Ventures. Since February 1, 2004, Mr. Porter has served as Partner Emeritus of EDF Ventures, a venture capital firm that he co-founded. Mr. Porter has also served as interim Chief Executive Officer for several health care companies in the EDF Ventures’ portfolio. Mr. Porter was an initial investor in several companies, including: Theragen, Inc., a gene therapy company, which subsequently merged with GenVec, Inc.; Coagulation Systems, Inc., a diagnostics company; Matrigen, Inc., a tissue regeneration company, which subsequently merged with Prizm Pharmaceuticals to form Selective Genetics Inc. Mr. Porter earned his B.A. from DePauw University and earned an M.B.A. degree from the University of Michigan, where he also teaches and is a member of its Corporate Advisory Board.

Board Composition

We are managed under the direction of our board of directors. Four of our directors, Thomas Porter, Donald Milder, William Link and Gilbert Kliman, were elected as members of our board of directors pursuant to a voting agreement among our preferred stockholders. The voting agreement terminated by its terms on the effectiveness of our initial public offering of common stock. At this time, there are no arrangements or understandings pursuant to which directors will serve on our board of directors.

Our certificate of incorporation and bylaws provides for a classified board of directors consisting of three staggered classes of directors, as nearly equal in number as possible. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the

directors will expire upon election and qualification of successor directors at the annual meeting of stockholders to be held during the years 2005 for the Class I directors, 2006 for the Class II directors and 2007 for the Class III directors.

• Our Class I directors will be Thomas S. Porter and Donald B. Milder.

• Our Class II directors will be William J. Link, Ph.D. and Gilbert H. Kliman, M.D.

• Our Class III directors will be Frank M. Fischer, Mark Lortz and Robert J. Palmisano.

Our bylaws provide that the authorized number of directors, which is seven, may be changed by a resolution adopted by at least a majority of our directors then in office or by at least a majority of our stockholders at a duly called meeting. Any additional directorships resulting from an increase in the number of directors may only be filled by the directors and will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our board of directors could have the effect of delaying or preventing changes in control or changes in our management.

Board Committees

Our board of directors has an audit committee, compensation committee and nominating committee. Each of our committees will have the composition and responsibilities described below:

Audit Committee

Our audit committee is a standing committee of, and operates under a written charter adopted by, our board of directors. The functions of the audit committee of our board of directors include appointing and determining the compensation for our independent auditors, establishing procedures for the receipt, retention and treatment of complaints regarding internal accounting controls and reviewing and overseeing our independent auditors. The chairman of the audit committee is Thomas S. Porter and the other current members are Frank M. Fischer and Mark Lortz. All members of the audit committee are non-employee directors and satisfy the current standards with respect to independence, financial expertise and experience established by rules of the Nasdaq National Market. Our board of directors has determined that Mr. Lortz meets the Securities and Exchange Commission’s definition of “audit committee financial expert.”

Compensation Committee

Our compensation committee is a standing committee of, and operates under a written charter adopted by, our board of directors. The compensation committee of our board of directors reviews and approves the salaries and benefits for our executive officers, establishes overall employee compensation policies and administers our incentive compensation and benefit plans, including our 2004 Stock Incentive Plan and 2004 Employee Stock Purchase Plan. The chairman of the compensation committee is William J. Link, Ph.D. and the other current members are Frank M. Fischer, Gilbert H. Kliman, M.D. and Thomas S. Porter.

Nominating and Governance Committee

Our nominating and governance committee is a standing committee of, and operates under a written charter adopted by, our board of directors. The nominating and governance committee is responsible for identifying and recommending potential candidates qualified to become members of our board of directors and for evaluating and reviewing the performance of our existing directors. Additionally, this committee makes recommendations to our board of directors regarding governance matters. The nominating committee consists of Gilbert H. Kliman, M.D., Mark Lortz and Donald B. Milder.

Code of Business and Ethical Conduct

We have a written Code of Business and Ethical Conduct for our directors, officers and employees. The Code also sets forth specific ethical policies and principles that apply to our directors, officers and employees that are designed to prevent wrongdoing and to promote:

• honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

• full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;

• compliance with applicable governmental laws, rules and regulations;

• the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and

• accountability for adherence to the Code.

A copy of our Code of Business and Ethical Conduct is attached to this Annual Report on Form 10-K as Exhibit 14.1. A copy also is posted on our internet website at www.intralase.com. We also intend to disclose, on our internet website and through appropriate Securities and Exchange Commission filings, any amendments to the Code and any waivers of its requirements that may be granted by our board of directors to any director or executive officer.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership with the Securities and Exchange Commission and Nasdaq. Directors, executive officers and greater than ten-percent beneficial owners are required by Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based solely on a review of filings with the Securities and Exchange Commission and written representations by each executive officer and director that no other reports are required, we believe that all of our directors and executive officers have complied with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 during fiscal 2004.

Item 11—Executive Compensation

Director Compensation

Each of our directors who is not an employee, referred to throughout this annual report as an “outside director,” effective January 1, 2005, receives an annual retainer of $14,000, payable quarterly, $2,500 for each board meeting attended in person and $1,000 for each committee meeting attended in person or for telephonic meetings exceeding one hour. In addition, the audit committee chairperson receives an annual retainer of $14,000, payable quarterly, and all directors may be reimbursed for expenses incurred in connection with their attendance at board and committee meetings. Outside directors may receive their annual retainer and the audit committee chairperson may receive his annual retainer in cash or in a stock option issued for the fair market value on the date of grant, vesting immediately, for the number of shares equivalent to the value of the cash compensation based upon using a Black-Scholes or bi-nomial model to determine the value of each on the date of grant.

In addition, each person who is elected or appointed for the first time to be an outside director is granted an initial option, on the date of his or her election or appointment to the board, to purchase 40,000 shares of our common stock. The initial option grants become exercisable as to 20,000 shares on the first anniversary of the date of grant, with the balance becoming exercisable one year thereafter. Outside directors will, following the one-year anniversary of their appointment and each one year anniversary thereafter, receive an additional option to purchase 12,000 shares of our common stock on the next business day following our annual meeting, such option becoming exercisable immediately. Options are granted with an exercise price equal to the fair market value of our common stock on the date of grant.

The Compensation Committee requested that our Human Resources department hire an independent executive compensation firm to collect and assess competitive compensation information for outside directors and to report the information to the Compensation Committee in order that the Compensation Committee could consult such report prior to implementing the outside director compensation effective January 1, 2005.

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Executive Compensation

The following table sets forth all compensation received for services rendered to us in all capacities during the year ended December 31, 2004, by our current chief executive officer, and each of the four other most highly compensated executive officers whose salary and bonus exceeded $100,000 in 2004. These officers are referred to in this annual report as the “named executive officers.”

Summary Compensation Table

Name and Principal Position	Annual Compensation									Long TermCompensation	All OtherCompensation
	Year	Salary			Bonus		Other AnnualCompensation			SecuritiesUnderlyingOptions(#)
Robert J. Palmisano President and Chief Executive Officer (1)	200420032002	$	438,109290,570—	(4)	$	280,714179,263—	$	46,66532,150—	(5)(6)	126,2671,154,445—	$	1,645715—
Shelley B. Thunen Executive Vice President and Chief Financial Officer	200420032002		208,850186,923175,673			93,57560,29117,785		— — —		14,43133,37897,999		573552—
P Bernard Haffey Executive Vice President and Chief Commercial Officer (2)	200420032002		243,029158,092—			106,50171,511—		— — —		28,860237,311—		249185—
Charline Gauthier Executive Vice President and Chief Operating Officer (3)	200420032002		229,251112,988—			93,28662,016—		— 60,767—	(7)	14,431230,095—		249102—
Eric Weinberg Vice President, Marketing and Professional Affairs	200420032002		194,059180,000175,933			65,61238,78820,000		— — —		7,21514,43183,321		249240—

(1) Mr. Palmisano joined us as our President and Chief Executive Officer in April 2003.

(2) Mr. Haffey joined us as our Vice President, Business Development in March 2003.

(3) Dr. Gauthier joined us as our Vice President, Research, Development and Corporate Affairs in July 2003.

(4) Includes signing bonus for accepting the position as our Chief Executive Officer.

(5) Includes $46,665 in temporary living expenses.

(6) Includes $32,150 in temporary living expense.

(7) Includes $60,767 in relocation expenses.

Option Grants in Fiscal 2004

The following table sets forth information concerning stock options granted to our named executive officers during the fiscal year ended December 31, 2004, including the potential realizable value over the ten-year term of the options, based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These assumed rates of appreciation comply with the rules of the Securities and Exchange Commission and do not represent our estimate of future stock price. Actual gains, if any, on stock option exercises will depend on the future performance of our common stock. No stock appreciation rights were granted to our named executive officers during 2004.

~~Option~~• ~~Grants~~Provide Inreasonable ~~Last~~assurance ~~Fiscal~~regarding ~~Year~~prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Name	Number ofSecuritiesUnderlyingOptionsGranted		Percentage ofTotal OptionsGranted toEmployees inFiscal Year2004		ExercisePricePer Share		Expiration Date	Potential Realizable Value atAssumed Annual Rates ofStock Price Appreciationfor Option Term(7)
								5%		10%
Robert J. Palmisano	126,267	(1)	10.44	%	$	4.49	April 27, 2014	$	356,584	$	903,655
Charline Gauthier	14,431	(2)	1.19			4.49	April 27,2014		40,754		103,278
P. Bernard Haffey	14,430	(3)	1.19			4.49	April 27,2014		40,751		103,271
P. Bernard Haffey	14,430	(4)	1.19			11.91	June 25, 2014		108,040		273,795
Shelley B. Thunen	14,431	(5)	1.19			4.49	April 27,2014		40,754		103,278
Eric Weinberg	7,215	(6)	0.60			4.49	April 27, 2014		20,376		51,636

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over our financial reporting.

~~(1)~~Management ~~Pursuant~~has used to the ~~terms~~framework ofset ~~our~~forth ~~2000~~in ~~Stock~~the ~~Incentive~~report ~~Plan,~~entitled ~~Mr.~~“Internal ~~Palmisano~~Control—Integrated ~~was~~Framework” ~~granted~~published ~~incentive~~by ~~stock~~the ~~options~~Committee toof ~~purchase~~Sponsoring ~~10,522~~Organizations ~~shares~~(“COSO”) of ~~our~~the ~~common~~Treadway ~~stock~~Commission ~~and nonqualified stock options~~ to ~~purchase~~evaluate ~~115,745~~the ~~shares~~effectiveness of ~~our~~its internal ~~common~~control ~~stock~~over financial reporting. ~~With~~Management ~~respect~~has toconcluded ~~Mr.~~that ~~Palmisano’s~~its ~~incentive~~internal ~~stock~~control ~~options,~~over ~~the~~financial ~~options~~reporting ~~become~~was ~~exercisable~~effective as ~~to 25%~~ of the ~~shares~~end onof ~~January 27,2008, with~~ the ~~balance~~most ~~becoming~~recent ~~exercisable~~fiscal inyear. ~~25%~~Deloitte & ~~increments~~Touche ~~each~~LLP ~~month~~has ~~thereafter~~issued ~~through~~an ~~April~~attestation ~~27,2008.~~report ~~With~~(see below) ~~respect~~on ~~to Mr. Palmisano~~management’s ~~nonqualified~~assessment ~~stock options, the options become exercisable as to 27.27%~~ of ~~the~~our ~~shares~~internal oncontrol ~~the~~over ~~first~~financial ~~anniversary of the date of grant, with the balance becoming exercisable in 2~~reporting.~~27%~~ ~~increments each month thereafter.~~

~~(2)~~The ~~Pursuant~~foregoing tohas ~~the~~been ~~terms~~approved ofby our ~~2000 Stock Incentive Plan~~ management, ~~Dr.~~including ~~Gauthier was granted incentive stock options to purchase 4,520 shares of~~ our ~~common~~Chief ~~stock~~Executive Officer and ~~nonqualified~~Chief ~~stock~~Financial ~~options to purchase 9~~Officer,~~911~~ ~~shares~~who ofhave ~~our~~been ~~common~~involved ~~stock. Dr. Gauthier’s incentive stock options become exercisable as to 6.1% of the shares on January 27, 2007,~~ with the ~~balance~~assessment ~~becoming exercisable in 6.1% increments each month through December 27, 2007~~ and inanalysis ~~6.64% increments per month thereafter through April 27, 2008. Dr. Gauthier’s nonqualified stock options became exercisable as to 36.4%~~ of ~~the~~our ~~shares~~internal oncontrols ~~the~~over ~~first~~financial anniversary of the date of grant, with the balance becoming exercisable in 3% increments each month through December 27, 2006 and the remaining 3% thereafter becoming exercisable in equal monthly increments until December 27, 2007reporting.

(3) Pursuant to the terms of our 2000 Stock Incentive Plan, Mr. Haffey was granted incentive stock options to purchase 4,810 shares of our common stock and nonqualified stock options to purchase 9,620 shares of our common stock. Mr. Haffey’s incentive stock options become exercisable as to 6.25% of the shares on January 27, 2007, with the balance becoming exercisable in 6.25% increments each month through April 27, 2008. Mr. Haffey’s nonqualified stock options become exercisable as to 37.5% of the shares on the first anniversary of the date of grant, with the balance becoming exercisable in 3.13% increments each month through April 27, 2006.

(4) Pursuant to the terms of our 2000 Stock Incentive Plan, Mr. Haffey was granted incentive stock options to purchase 3,736 shares of our common stock and nonqualified stock options to purchase 10,694 shares of our common stock. Mr. Haffey’s incentive stock options become exercisable as to 4.31% of the shares on January 27, 2007, with 4.31% of the shares becoming exercisable each month through December 25, 2007 and in 8.04% increments per month thereafter through June 25, 2008. Mr. Haffey’s nonqualified stock options become exercisable as to 33.74% of the shares on the first anniversary of the date of grant, with the balance becoming exercisable in 2.81% increments each month through December 25, 2006 and in 1.3% increments through December 25, 2007.

(5) The options became exercisable as to 25% of the shares on April 27, 2005, with the balance becoming exercisable in 2.08% increments each month thereafter.

(6) The options became exercisable as to 25% of the shares on April 27, 2004 with the balance becoming exercisable in 2.08% increments each month thereafter.

(7) The potential realizable value represents amounts, net of exercise price before taxes, that may be realized upon exercise of the options immediately prior to the expiration of their terms assuming appreciation of 5% and 10% over the option term. The 5% and 10% are calculated based on rules promulgated by the Securities and Exchange Commission based upon a per share market price of the common stock underlying the stock options at the time the options were granted and do not reflect our estimate of future stock price growth. The actual value realized may be greater or less than the potential realizable value set forth in the table.

~~Aggregated~~REPORT ~~Option~~OF ~~Exercises~~INDEPENDENT ~~and~~REGISTERED ~~Values~~PUBLIC ~~for~~ACCOUNTING ~~Fiscal~~FIRM ~~2004~~

~~The~~To ~~following table sets forth information concerning~~ the ~~number~~Board of ~~shares underlying~~Directors ~~unexercised stock options held by our named executive officers at December 31, 2004,~~ and ~~the~~Stockholders ~~value~~ of such named executive officers’ unexercised options at December 31, 2004. The value of unexercised in-the-money options at December 31, 2004 represents an amount equal to the difference between the price of $23.48 per share and the applicable option exercise price, multiplied by the number of unexercised in-the-money options. No stock options were exercised by our named executive officers in 2004.

~~Aggregated~~IntraLase ~~Option~~Corp. ~~Exercises in Last Fiscal Year~~

~~And~~Irvine, ~~Fiscal~~California ~~Year-End Option Values~~

Name	Number of Securities UnderlyingUnexercised Options at December 31, 2004		Value of Unexercised In-the-Money Options at December 31, 2004
	Exercisable	Unexercisable	Exercisable		Unexercisable
Robert J. Palmisano	481,021	799,691	$	10,074,360	$	16,501,737
Bernard Haffey	94,390	171,780		1,976,876		3,434,315
Charline Gauthier	81,495	163,031		1,706,807		3,386,271
Shelley B. Thunen	109,021	94,086		2,366,988		2,002,705
Eric Weinberg	36,725	52,370		803,244		1,122,816

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that IntraLase Corp. and subsidiary (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

~~Employment~~We ~~Agreement~~conducted our audit in accordance with Mrthe standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was ~~Palmisano~~maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

~~Mr.~~A ~~Palmisano~~company’s internal control over financial reporting is ~~employed~~a asprocess ~~our~~designed ~~President~~by, ~~and Chief~~or ~~Executive~~under ~~Officer~~the ~~pursuant~~supervision toof, athe ~~three-year~~company’s ~~employment~~principal ~~agreement~~executive ~~dated~~and ~~April~~principal 10financial officers, ~~2003.~~or ~~Under~~persons ~~his~~performing ~~employment~~similar functions, ~~agreement~~and effected by the company’s board of directors, ~~Mr.~~management, ~~Palmisano~~and isother ~~entitled~~personnel to ~~receive~~provide areasonable ~~base~~assurance ~~annual~~regarding ~~salary~~the reliability of ~~$450,000,~~financial ~~effective~~reporting ~~with~~and the ~~initial~~preparation ~~public~~of ~~offering~~financial ~~during~~statements for external purposes in ~~2004.~~accordance Mrwith generally accepted accounting principles. ~~Palmisano~~A iscompany’s ~~also~~internal ~~entitled~~control over financial reporting includes those policies and procedures that (1) pertain to athe ~~monthly~~maintenance ~~housing~~of ~~expense~~records ~~allowance~~that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of upthe assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to $3permit preparation of financial statements in accordance with generally accepted accounting principles,~~750~~ and athat ~~monthly~~receipts ~~car~~and ~~expense~~expenditures ~~allowance~~of the company are being made only in accordance with authorizations of $1management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,~~000~~ use, or disposition of the company’s assets that could have a material effect on the financial statements.

~~For~~Because ~~eighteen~~of ~~months following~~ the ~~closing~~inherent limitations of ~~the~~internal ~~initial~~control ~~public~~over ~~offering~~financial ~~and~~reporting, including the ~~commencement~~possibility of ~~trading~~collusion ofor ~~our~~improper ~~common~~management ~~stock~~override ~~and~~of ~~during~~controls, ~~such~~material ~~period~~misstatements ~~for~~due ~~as long~~to aserror ~~Mr.~~or ~~Palmisano~~fraud ismay not ~~employed~~be byprevented ~~us,~~or ifdetected heon ~~moves~~a ~~his~~timely ~~primary~~basis. ~~residence to Orange County~~Also, ~~California,~~projections weof ~~will~~any ~~pay~~evaluation ~~for~~of ~~(i)~~the upeffectiveness toof ~~two~~the ~~round-trip~~internal ~~airfares~~control ~~for~~over ~~his~~financial ~~family~~reporting to ~~come~~future toperiods ~~Orange~~are ~~County~~subject to ~~participate~~the inrisk ~~identifying~~that athe ~~home~~controls inmay ~~Orange~~become ~~County and~~inadequate ~~(ii)~~because ~~the consequential costs~~ of changes ~~selling his home~~ in ~~Massachusetts. In addition~~conditions, ~~when~~or ~~Mr.~~that ~~Palmisano~~the ~~decides~~degree toof ~~relocate,~~compliance wewith ~~will pay for his reasonable moving expenses. We will pay Mr. Palmisano an amount to reimburse him for any income taxes due on~~ the ~~moving~~policies ~~expense~~or ~~reimbursement~~procedures onmay ~~a gross-up basis~~deteriorate.

~~Prior to~~In ~~the~~our ~~closing of the offering~~opinion, ~~Mr.~~management’s assessment ~~Palmisano~~that ~~was~~the ~~entitled~~Company tomaintained ~~receive~~effective aninternal ~~annual~~control ~~cash~~over ~~bonus~~financial inreporting anas ~~amount~~ of upDecember 31, to2006, ~~fifty~~is ~~percent~~fairly ~~(50%)~~stated, ofin ~~his~~all ~~then-current~~material ~~base~~respects, ~~salary.~~based ~~From~~on the ~~closing~~criteria ofestablished ~~the~~in ~~initial~~Internal ~~public~~Control—Integrated ~~offering~~Framework issued ~~and~~by the ~~commencement~~Committee of ~~trading~~Sponsoring Organizations of ~~our~~ ~~common~~the ~~stock~~Treadway heCommission. ~~was~~Also ~~entitled~~in toour ~~receive~~opinion, anthe ~~annual~~Company ~~cash~~maintained, ~~bonus~~ in anall ~~amount~~material ofrespects, upeffective tointernal ~~sixty~~control ~~five~~over ~~percent~~financial ~~(65%)~~reporting as of ~~his~~December 31, ~~then-current~~2006, ~~base salary. The annual bonus will be paid~~ based ~~upon~~on ~~IntraLase’s~~the criteria ~~performance~~established asin ~~measured~~Internal ~~against~~Control—Integrated ~~the~~Framework ~~goals~~issued ~~set~~ by ~~our~~the ~~board~~Committee of ~~directors~~Sponsoring ~~for~~Organizations ~~each~~of ~~fiscal year. The bonus is payable within ninety days following~~ the ~~end~~Treadway ~~of each fiscal year~~Commission.

Upon joining IntraLase, Mr. Palmisano received options to purchase 1,154,445 shares of our common stock at an exercise price of $2.54 per share. The options vest over four years of continuous service in accordance with the usual vesting provisions of our 2000 Stock Incentive Plan. Any unvested options held by him will vest in full and become immediately exercisable upon a merger, sale of a majority of our voting stock, sale of all or substantially all of our assets, or liquidation, dissolution or winding up of IntraLase. In addition, he is eligible to receive annual option grants in accordance with our policies and procedures. On April 27, 2004, Mr. Palmisano received options to purchase 126,267 shares of our common stock at an exercise price of $4.49 per share. The options vest over four years of continuous service in accordance with the vesting provisions of our 2000 Stock Incentive Plan.

Pursuant to the terms of the foregoing employment agreement, Mr. Palmisano is eligible to participate in any and all other plans providing general benefits for our employees including, without limitation, life, medical, dental and 401(k) savings plans. If Mr. Palmisano’s employment is terminated other than for good cause or if he resigns voluntarily for good reason, he is entitled to receive:

• accrued salary;

• accrued but unused vacation;

•We ~~his~~have ~~then~~also ~~current~~audited, ~~annual~~in ~~salary~~accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated financial statements and financial statement schedule as of and for athe ~~two-~~year ~~period;~~ended December 31, 2006, of IntraLase Corp. and subsidiary and our report dated March 6, 2007, expressed an unqualified opinion and included an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standards No. 123(R), Share Based Payment in 2006, on those financial statements and financial statement schedule.

LOGO

•Costa aMesa, ~~bonus~~California proportional to the annual bonus which would have been achievable for such fiscal year provided our actual performance equals or exceeds the agreed upon goals on a year to date basis for the period from the end of the prior fiscal year through the effective date of such expiration or termination; and

•March 6, ~~payment~~2007 ~~of premiums if he elects continuation coverage under COBRA.~~

If terminated upon a merger, sale of a majority of our voting stock, sale of all or substantially all of our assets, or liquidation, dissolution or winding up of IntraLase, he will receive each of the foregoing benefits except that he will continue receive his then-current annual salary for a three-year period and a lump sum payment of three years’ worth of his bonus. If Mr. Palmisano’s employment is terminated for good cause or if he voluntarily resigns for other than a good reason he will be entitled to receive accrued, but unpaid salary and accrued vacation pay, but no other amounts. Mr. Palmisano’s employment agreement also contains obligations to maintain the confidentiality of IntraLase’s information.

Employment Agreement with Mr. Jepson

Mr. Jepson is employed as our Vice President, Corporate Communications and Investor Relations pursuant to an employment letter agreement dated July 13, 2004. Under his employment letter agreement, he is entitled to receive a base salary of approximately $180,000 per year. Mr. Jepson is also eligible to receive an annual bonus in an amount of up to thirty percent (30%) of his then-current base salary, which shall be paid based upon IntraLase’s performance as measured against certain predetermined goals for each fiscal year.

Mr. Jepson moved his primary residence from Connecticut to Orange County, California in 2004 and, as such, we paid for some of his costs associated with selling his home in Connecticut and moving to Orange County, totaling $100,000, inclusive of the gross up of such costs deemed taxable by the Internal Revenue Service.

In addition, Mr. Jepson was entitled to the following:

• Upon joining IntraLase and the approval of our board of directors, Mr. Jepson was granted options to purchase 128,280 shares of our common stock at an exercise price of $12.73.

• Mr. Jepson is eligible to receive severance equal to one year’s base salary if he is terminated for any reason other than just cause which rights are greater than the rights provided in the change in control agreements described below.

• Mr. Jepson is eligible to participate in any and all other plans providing general benefits for our employees including, without limitation, life, medical, dental and 401(k) savings plans.

Employment Agreement with Dr. Gauthier

Dr. Gauthier is employed as our Executive Vice President and Chief Operating Officer. Pursuant to an employment letter agreement dated May 14, 2003 she is entitled to receive a base salary of $234,000 per year after our initial public offering. Effective October 2004, Dr. Gauthier was promoted from Vice President, Research, Development and Corporate Affairs to her current position and received a salary increase to $275,000 per annum. Dr. Gauthier is also eligible to receive an annual bonus in an amount of up to thirty percent (30%) of her then-current base salary (increased to 40% in 2004 upon her promotion to Executive Vice President and Chief Operating Officer), which shall be paid based upon IntraLase’s performance as measured against certain predetermined goals for each fiscal year. Dr. Gauthier is also entitled to a monthly car expense of $500.

Upon joining IntraLase, Dr. Gauthier received options to purchase 230,095 shares of our common stock at an exercise price of $2.54 per share. The options vest over four years of continuous service in accordance with the usual vesting provisions of our 2000 Stock Incentive Plan. Any unvested options held by her will vest in full and become immediately exercisable upon a merger, sale of a majority of our voting stock, sale of all or substantially all of our assets, or liquidation, dissolution or winding up of IntraLase. In addition, she is eligible to receive annual option grants in accordance with our policies and procedures. On April 27, 2004, Dr. Gauthier received options to purchase 14,431 shares of our common stock at an exercise price of $4.49 per share. The options vest over four years of continuous service in accordance with the vesting provisions of our 2000 Stock Incentive Plan.

~~Pursuant to the terms of the foregoing employment letter agreement, Dr. Gauthier is eligible to~~ ~~participate~~Item 9B—Other inInformation ~~any and all other plans providing general benefits to our employees including, without limitation, life, medical, dental and 401(k) savings plans.~~

~~Employment Agreement with Mr~~None. ~~Harley~~

~~Mr. Harley is employed as our Vice President, Human Resources pursuant to an employment letter agreement dated July 14, 2004. Under his employment letter~~ ~~agreement,~~PART heIII is entitled to receive a base salary of approximately $180,000 per year. Mr. Harley is also eligible to receive an annual bonus in an amount of up to thirty percent (30%) of his then-current base salary, which shall be paid based upon IntraLase’s performance as measured against certain predetermined goals for each fiscal year.

~~In addition~~ Item 10—Directors, ~~Mr.~~Executive ~~Harley~~Officers isand ~~entitled~~Corporate toGovernance ~~the following:~~

•There ~~Upon~~is ~~joining~~incorporated ~~IntraLase~~herein ~~and~~by reference the ~~approval~~information ofrequired by this Item in our ~~board~~definitive proxy statement for the 2006 Annual Meeting of ~~directors~~Stockholders, ~~Mr.~~which ~~Harley~~will ~~was~~be ~~granted~~filed ~~options~~with tothe ~~purchase~~Securities ~~128~~and Exchange Commission no later than 120 days after the close of the year ended December 31,~~280~~ ~~shares~~2006. See Part I, Item 1 – “Executive Officers of ~~our~~the ~~common~~Registrant” ~~stock~~for atinformation anregarding ~~exercise~~the ~~price~~executive officers of ~~$12~~IntraLase Corp.73 or its operating subsidiary.

• Item 11—Executive ~~Mr.~~Compensation ~~Harley is eligible to participate in any and all other plans providing general benefits for our employees including, without limitation, life, medical, dental and 401(k) savings plans.~~

~~Employment~~There ~~Agreement~~is incorporated herein by reference the information required by this Item in our definitive proxy statement for the 2006 Annual Meeting of Stockholders that will be filed with ~~Mr.~~the ~~Lightman~~Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 2006.

~~Mr. Lightman is employed as our Senior Vice President and General Counsel~~ ~~pursuant~~Item 12—Security toOwnership ~~an employment letter agreement dated December 23, 2004. Under his employment letter agreement, he is entitled to receive a base salary~~ of ~~approximately~~Certain ~~$225,000~~Beneficial ~~per~~Owners ~~year.~~and HeManagement ~~also~~and ~~received~~Related aStockholder ~~one~~Matters time signing bonus of $25,000. Mr. Lightman is also eligible to receive an annual bonus in an amount of up to thirty-five percent (35%) of his then-current base salary, which shall be paid based upon IntraLase’s performance as measured against certain predetermined goals for each fiscal year.

IfThere ~~Mr.~~is ~~Lightman~~incorporated ~~moves~~herein ~~his~~by ~~primary~~reference ~~residence~~the ~~from~~information ~~Boston, Massachusetts~~required toby ~~Orange~~this ~~County,~~Item ~~California~~in ~~IntraLase~~our ~~will~~definitive ~~pay~~proxy statement for ~~some~~the of2006 ~~his~~Annual ~~costs~~Meeting ~~associated~~of ~~with~~Stockholders ~~selling~~that ~~his~~will ~~home~~be infiled ~~Massachusetts~~with ~~and~~the ~~moving~~Securities toand ~~California,~~Exchange ~~not~~Commission tono ~~exceed~~later ~~$125,000,~~than ~~inclusive~~120 days ofafter ~~any~~the ~~gross-up~~close of ~~such~~the ~~costs~~year ~~deemed~~ended ~~taxable~~December 31, ~~by the Internal Revenue Service~~2006.

In Item 13—Certain ~~addition,~~Relationships ~~Mr.~~and ~~Lightman~~Related ~~is entitled~~Transactions, toand ~~the~~Director ~~following:~~Independence

•There ~~Mr.~~is incorporated ~~Lightman~~herein ~~was~~by ~~granted~~reference ~~options~~the toinformation ~~purchase~~required ~~229,740~~by ~~shares~~this ofItem in our ~~common~~definitive ~~stock~~proxy atstatement anfor ~~exercise~~the ~~price~~2006 Annual Meeting of ~~$21~~Stockholders that will be filed with the Securities and Exchange Commission no later than 120 days after the close of the year ended December 31, 2006.~~40.~~

• If Mr. Lightman is terminated without cause or he leaves for good reason, other than in connection with a change of control, he will receive the severance benefits set forth in his change of control agreement described below except that the severance payment will be equal to one year’s base salary and the period for extension of his benefits will be limited to one year. These rights are greater than the rights provided in the change in control agreements described below.

• Mr. Lightman is eligible to participate in any and all other plans providing general benefits for our employees including, without limitation, life, medical, dental and 401(k) savings plans.

Change-in-Control Arrangements

In addition to the change in control arrangements provided in Mr. Palmisano’s employment agreement, each of our outstanding stock option agreements and restricted stock purchase agreements provides that there will be an acceleration of vesting upon a change in control event as described in the section “Management—Stock Option Plans.”

In addition, each of Robert Palmisano, Shelley Thunen, Eric Weinberg, Charline Gauthier, Frank Jepson, Kevin Harley, Bernard Haffey, Tibor Juhasz, Ronald Kurtz and James Lightman has entered into a Change of Control Agreement with us. All of these agreements are substantially similar to each other. Under these agreements, after we begin any effort to sell IntraLase and prior to a change of control as defined below or twelve months following or otherwise in connection with a change of control, if we terminate the executive officer’s employment without cause, or if the executive officer quits for good reason, we will pay them the following as severance:

• a cash amount equal to a percentage of the sum of (a) their then current annual base salary subject to possible adjustment if their salary was lowered in the prior 60 days, plus (b) their target bonus for the then current year or

for the year immediately prior to the change of control, whichever is higher. These payments are in addition to and not in lieu of salary and bonus for the current year that has been earned but not yet paid. The percentage is 100% in the case of Mr. Jepson, Mr. Harley, Dr. Juhasz, Dr. Kurtz and Mr. Weinberg, 200% in the case of Dr. Gauthier, Mr. Haffey, Mr. Lightman and Ms. Thunen and 300% in the case of Mr. Palmisano;

• until the earlier of a certain period of time from the date of termination or the date they start a new job with substantially similar benefits, whichever is earlier, we will provide them with any medical, dental, disability, life insurance and automobile reimbursement benefits and other perquisites in effect at the time of termination, subject to possible adjustment if benefits were lowered within the past 60 days. The period of time is one year in the case of Mr. Jepson, Mr. Harley, Dr. Juhasz, Dr. Kurtz and Mr. Weinberg, two years in the case of Dr. Gauthier, Mr. Haffey, Mr. Lightman and Ms. Thunen and three years in the case of Mr. Palmisano;

• following such time period of payment of benefits, we will permit the executive officer to elect to continue their medical and dental benefits under COBRA, which election shall be made at the time of termination and paid by us for the period provided herein;

• all IntraLase stock options held by the executive officer will become exercisable and remain exercisable for the life of the options; and

• we will continue to manage our Non-Qualified Executive Deferred Compensation Plan during the full period that the executive officer has elected to receive benefits under such plan. An election to commence payments thereunder upon retirement shall be executive’s retirement from full-time employment with any employer or age 65, whichever is earlier.

If and to the extent that any payments in the context of a change of control are made to our executive officers and exceed three times the average of that executive officer’s W-2 compensation for the five years preceding the change of control, the payments or benefits will be subject to the excise tax imposed by Section 4999 and the nondeductibility provisions imposed by Section 280G of the Internal Revenue Code. In such circumstances we will make a gross-up payment to the executive officer to compensate the executive officer for all taxes imposed under Section 4999 and we will not be permitted to deduct from our taxes the full amount of the compensation paid to the executive officer.

In these agreements, change of control means one or more of the following:

• any person becomes the owner of at least 50% of our common stock;

• if individuals who constitute our board of directors as of the date of the Change of Control Agreement cease to be at least a majority of the board, unless the new directors are approved by at least a majority of the directors in office at the time this agreement is signed, subject to limited exceptions;

• there is a reorganization, merger, consolidation or similar transaction that will transfer ownership of more than 50% of our outstanding common stock or result in the issuance of new shares of our common stock in an amount equal to more than 50% of the amount of common stock outstanding immediately prior to such issuance; or

• we are liquidated, dissolved or sell substantially all of our assets.

STOCK PERFORMANCE COMPARISON

The following graph compares the cumulative total stockholder returns for IntraLase’s Common Stock with the cumulative total return of the Nasdaq Composite Index and the Russell 2500 Heathcare Index. The presentation assumes $100 invested on October 6, 2004 in IntraLase’s Common Stock, the Nasdaq Composite Index and the Russell 2500 Healthcare Index with all dividends reinvested. No cash dividends were declared on IntraLase’s Common Stock during this period. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

COMPARISON OF 5 YEAR* CUMULATIVE TOTAL RETURN

Among IntraLase Corp., The Nasdaq Composite Index and

The Russell 2500 Healthcare Index

Measurement Period (Fiscal Year Covered)		IntraLase Corp.			Nasdaq Composite Index			Russell2500 Heathcare Index
2004 *		$	180.62		$	110.54		$	111.47

* $100 invested on October 6, 2004 in stock or index-including reinvestment of dividends.

Report of the Compensation Committee on Executive Compensation

IntraLase’s compensation policies applicable to its executive officers are administered by the Compensation Committee of the Board of Directors. The Compensation Committee’s members consist of directors who are independent from the executive officers or the management of the Company. IntraLase’s executive compensation programs are designed to attract, motivate and retain the executive talent needed to optimize stockholder value. The programs are designed to enhance stockholder value by aligning the financial interests of our executive officers with those of our stockholders.

Compensation Policy

IntraLase’s executive compensation programs are based on the belief that the interests of the executives should be closely aligned with the Company’s stockholders. In support of this philosophy, a meaningful portion of each executive’s compensation is placed at-risk and is linked to the accomplishment of specific results that are expected to lead to the creation of value for IntraLase’s stockholders from both a short-term and long-term perspective. With this pay-for-performance and stockholder alignment orientation, IntraLase’s compensation policies and programs are designed to (1) attract, develop, reward and retain highly qualified and productive individuals; and (2) motivate executives to improve the overall performance and profitability of IntraLase.

There are three primary components of executive compensation: base salary, bonus and stock option grants. While the elements of compensation are considered separately, the Compensation Committee takes into account the total compensation package afforded by the Company to the individual executive. The Compensation Committee periodically requests that the Human Resources department of the Company hire an independent executive compensation firm to collect and assess competitive compensation information and to report the information to the Compensation Committee in order that the committee can assess each executive’s compensation. The most recent independent executive compensation firm engagement was completed and reported to the Compensation Committee in February 2005.

Base Salary

Salaries paid to executive officers (including the Chief Executive Officer) are reviewed annually by the Compensation Committee and proposed adjustments are based upon an assessment of the nature of the position and the individual’s contribution to achieving corporate and individual goals which support the corporate goals, experience and tenure of the executive officer, comparable market salary data, growth in the Company’s size and complexity, and changes in the executive’s responsibilities. The Compensation Committee approves all changes to executive officers’ salaries.

Annual Management Bonus

IntraLase has established cash bonus plans for all employees including a plan which includes executive management. Payment of bonuses is dependent on the Company achieving specific performance criteria for the fiscal year. During fiscal 2004, 50% of the bonus was tied to objective Company performance criteria related to revenue, net loss, U.S. market share and completing an initial public offering; provided, however, all of the bonus for our Chief Executive Officer was tied to the Company achieving the corporate performance criteria. The remaining 50% was tied to objective individual performance targets. No amounts attributable to individual performance targets are paid unless the Company first achieves the Company performance targets for the fiscal year at a level of at least 80%. The Company-wide performance targets are established at the beginning of the fiscal year on the basis of an annual budget developed by management and approved by the Board of Directors. The individual performance targets are also established at the beginning of the fiscal year by the individual’s manager and these targets are designed to further IntraLase’s corporate goals. Employee participants are eligible for their individual bonuses based upon IntraLase’s overall achievement of its performances goals and their individual goals by multiplying such participant’s base rate of salary by a percentage value assigned to such participant and the percentage achievement of goals. The Compensation Committee reviews and approves all bonuses for executive officers, based upon an evaluation of the company performance criteria and performance of individual goals. The bonus payments made for fiscal 2004 were based on 110% achievement of corporate criteria, with varying individual performance achievement.

Stock Options

Stock options are designed to align the interests of executives with those of the stockholders. Stock option grants may be made to executive officers when one of the following events occurs: upon initial employment, upon promotion to a new, higher level position that entails increased responsibilities and accountability, for the recognition of superior performance, or as an incentive for continued service with IntraLase as well as continued superior performance. For executive officers, the Chief Executive Officer recommends the number of options to be granted within a range associated with the individual executive’s salary level, and presents this to the Compensation Committee and the entire Board of Directors for their review and approval. The Compensation Committee takes into account the total compensation offered to its executives and the most recent independent executive compensation report when considering the number of options awarded. All grants for employees of the Company are submitted to the Compensation Committee for approval. All grants for executive officers of IntraLase are submitted to the Compensation Committee for approval, which approval is ratified by the entire Board of Directors. See “Executive Officers—Option Grants In Fiscal 2004.”

CEO Compensation

Review of Components of Chief Executive Officer and Named Executive Officer Compensation

The principal components of compensation for the Chief Executive Officer for fiscal 2004 included base salary, bonus and stock options. The Compensation Committee increased Mr. Palmisano’s base salary from $375,000 to $450,000, effective October, 2004, based on the terms and provisions of his employment agreement, which provides for an increase in his base salary upon the successful completion of IntraLase’s initial public offering.

The Compensation Committee has reviewed all components of the Chief Executive Officer’s and the named executive officers’ compensation, including salary, bonus, equity and long-term incentive compensation, accumulated realized and unrealized stock option and restricted stock gains, the dollar value to the executive and cost to the company of all perquisites and other personal benefits and the potential payouts under several potential severance and change-in-control scenarios. Most recently, an analysis setting forth all the above components was prepared by the independent executive compensation firm and reviewed, affixing dollar amounts under the various payout scenarios.

The Committee’s Conclusion

Based on the Compensation Committee’s review and the report prepared by the executive officer compensation consultant engaged by the Committee to assist in such review, the Committee finds the Chief Executive Officer’s and Named Executive Officers’ total compensation (and, in the case of the severance and change-in-control scenarios, the potential payouts) in the aggregate to be reasonable and not excessive.

It should be noted that when the Committee considers any component of the Chief Executive Officer’s and an Named Executive Officer’s total compensation, the aggregate amounts and mix of all the components, including accumulated (realized and unrealized) option and restricted stock gains are taken into consideration in the Committee’s decisions. In addition, it is the Committee’s policy to make most compensation decisions taking into account all three elements of compensation.

Our Committee Meetings

At the first committee meeting during the year, the Chief Executive Officer’s proposed compensation is presented, reviewed and analyzed in the context of all the components of his total compensation. Members then have additional time between meetings to ask for additional information and to raise and discuss further questions. Also, at the first Committee meeting during the year, the executive officers’ cash bonuses are determined following a review of the achievement of the corporate and individual performance criteria for the year just ended. The discussion covering the Chief Executive Officer’s compensation is continued at a second Committee meeting, after which a vote is taken. The equity grants to executive officers are planned to be discussed and decided upon annually at the second Committee meeting during the year.

Internal Pay Equity

In the process of reviewing each component separately, and in the aggregate, the Committee directs the Company’s human resources department to prepare or have prepared by an independent consultant, a spreadsheet showing “internal pay equity” within the Company. This spreadsheet shows the relationship between each management level of compensation within the Company (e.g., between the Chief Executive Officer and the Chief Financial Officer and other Named Executive Officers, and then between the Chief Executive Officer and the lower levels of executives). The comparison includes all components of compensation (as previously described), both individually and in the aggregate.

The Committee believes that the relative difference between Chief Executive Officer compensation and the compensation of IntraLase’s other executives for the period reviewed has been reasonably consistent over time and currently with the independent executive consultant’s competitive analysis and an appropriate multiple of other executive’s compensation.

Members of the Compensation Committee:

William J. Link, Ph.D., Chairman

Frank M. Fischer

Gilbert H. Kliman, M.D.

Thomas S. Porter

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

Principal Stockholders

Set forth below is certain information as of March 21, 2005 regarding the beneficial ownership of our common stock by:

• any person (or group of affiliated persons) who was known by us to own more than 5% of our voting securities;

• each of our directors;

• each of our named executive officers identified in Part III, Item 11—Executive Compensation; and

• all current directors and executive officers as a group.

Applicable percentage ownership in the following table is based on 26,831,154 shares of our common stock outstanding as of March 21, 2005. Unless otherwise indicated, the persons named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable.

Name and Address of Beneficial Owners (1)	Number of SharesBeneficially Owned (2)	Percentage of SharesBeneficially Owned
5% Stockholders
Brentwood Associates IX, L.P. (3)	4,706,357	17.54	%
Domain Partners IV and affiliated partnerships (4)	2,036,176	7.59	%
Enterprise Development Fund and affiliated partnerships (5)	2,463,846	9.18	%
InterWest Partners and affiliated partnerships (6)	3,387,376	12.62	%
Meritech Capital and affiliated partnerships (7)	1,544,729	5.76	%
Versant Ventures and affiliated partnerships (8)	2,091,386	7.79	%
Directors and Named Executive Officers
Robert J. Palmisano (9)	608,792	2.22	%
Shelley B. Thunen (10)	180,531	*
P. Bernard Haffey (11)	117,773	*
Charline Gauthier (12)	104,277	*
Eric Weinberg (13)	183,606	*
Frank M. Fischer (14)	39,684	*
Gilbert H. Kliman, M.D. (6)	3,387,376	12.62	%
William J. Link, Ph.D. (3)(8)(15)	6,898,144	25.71	%
Mark Lortz (16)	39,684	*
Donald B. Milder (8)	2,091,386	7.79	%
Thomas S. Porter	7,215	*
All executive officers and directors as a group (16 persons) (17)	14,766,945	52.31	%

* Represents beneficial ownership of less than 1%

(1) Unless otherwise indicated, the business address of each holder is: c/o IntraLase Corp., 3 Morgan, Irvine, California, 92618.

(2) Beneficial ownership is based on information furnished by the individuals or entities and is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options currently exercisable, or exercisable within 60 days of March 21, 2005 are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote and subject to community property laws where applicable, to the knowledge of IntraLase, the companies and persons named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them.

(3) Consists of 4,706,357 shares held by Brentwood Associates IX, L.P. Dr. Link, one of our directors, is a managing member of Brentwood IX Ventures LLC, the general partner of Brentwood Associates IX. In such capacity, Dr. Link may be deemed to share voting and investment power with respect to the shares held by Brentwood Associates IX. Dr. Link disclaims beneficial ownership of the shares owned by this fund, except to the extent of his proportionate pecuniary interest therein. The address for this entity is 11150 Santa Monica Blvd., Suite 1200, Los Angeles, California 90025.

(4) Consists of 2,011,938 shares held by Domain Partners IV, L.P. and 24,238 shares held by DP IV Associates, L.P. The address for each of these entities is One Palmer Square, Princeton, New Jersey 08542.

(5) Consists of 1,039,883 shares held by Enterprise Development Fund II, L.P., 1,423,963 shares held by EDF Ventures, L.P. The address for each of these entities is 425 North Main Street, Ann Arbor, Michigan, 48104.

(6) Consists of 3,266,029 shares held by InterWest Partners VIII, L.P. 93,491 shares held by InterWest Investors Q VIII, L.P. and 27,856 shares held by InterWest Investors VIII, L.P. Dr. Kliman, one of our directors, is a managing director of InterWest Management Partners VIII, LLC, the general partner of InterWest Partners VIII, InterWest Investors Q VIII and InterWest Investors VIII, collectively, the InterWest Funds. In such capacity, Dr. Kliman may be deemed to share voting and investment power with respect to the shares held by the InterWest Funds. Dr. Kliman disclaims beneficial ownership of the shares owned by these funds, except to the extent of his proportionate pecuniary interest therein. The address for each of these entities is 2710 Sand Hill Road, Second Floor, Menlo Park, California 94025.

(7) Consists of 1,494,834 shares held by Meritech Capital Partners II, L.P., 38,464 shares held by Meritech Capital Affiliates II, L.P. and 11,431 shares held by MCP Entrepreneur Partners II, L.P. The address for each of these entities is 285 Hamilton Avenue, Suite 200, Palo Alto, California 94301.

(8) Consists of 1,924,075 shares held by Versant Venture Capital I, L.P., 41,828 shares held by Versant Affiliates Fund I-A, L.P., 87,838 shares held by Versant Affiliates Fund I-B, L.P. and 37,645 shares held by Versant Side Fund I, L.P. Each of Dr. Link and Mr. Milder, each of whom is also one of our directors, is a managing director at Versant Ventures, the general partner of Versant Venture Capital I, Versant Affiliates Fund I-A, Versant Affiliates Fund I-B and Versant Side Fund. In such capacity, each of Dr. Link and Mr. Milder, separately, may be deemed to share voting and investment power with respect to the shares held by Versant Venture Capital I, Versant Affiliates Fund I-A, Versant Affiliates Fund I-B and Versant Side Fund I. Each of Dr. Link and Mr. Milder disclaims beneficial ownership of the shares owned by these funds, except to the extent of his proportionate pecuniary interest therein. The address for each of these entities is 450 Newport Center Drive, Suite 380, Newport Beach, California 92660.

(9) Consists of 608,792 shares issuable pursuant to options exercisable within 60 days of March 21, 2005.

(10) Includes 124,153 shares issuable pursuant to options exercisable within 60 days of March 21, 2005.

(11) Consists of 117,773 shares issuable pursuant to options exercisable within 60 days of March 21, 2005.

(12) Consists of 104,277 shares issuable pursuant to options exercisable within 60 days of March 21,2005.

(13) Includes 41,098 shares issuable pursuant to options exercisable within 60 days of March 21, 2005.

(14) Consists of 39,684 shares issuable pursuant to options exercisable within 60 days of March 21, 2005.

(15) Consists of 100,401 shares held by Brentwood Affiliates Fund II, L.P. Dr. Link, one of our directors, is a managing member of Brentwood VIII Ventures, LLC, the general partner of Brentwood Affiliates Fund II. In such capacity, Dr. Link may be deemed to share voting and investment power with respect to the shares held by Brentwood Affiliates Fund II. Dr. Link disclaims beneficial ownership of the shares held by this fund except to the extent of his proportionate pecuniary interest therein. The address for this entity is 11150 Santa Monica Blvd., Suite 1200, Los Angeles, California 90025.

(16) Consists of 39,684 shares issuable pursuant to options exercisable within 60 days of March 21, 2005.

(17) Includes 1,395,886 shares issuable pursuant to options exercisable within 60 days of March 21, 2005 held by the following executive officers: Robert Palmisano, Shelley Thunen, Charline Gauthier, P. Bernard Haffey, James Lightman, Eric Weinberg, Tibor Juhasz, Ronald Kurtz, Frank Fischer and Mark Lortz. Includes 10,285,520 shares beneficially owned by entities affiliated with Gilbert Kliman, William Link and Donald Milder. Includes shares owned by the following executive officers, Frank Jepson, Kevin Harley and Tibor Juhasz.

Securities Authorized For Issuance under Equity Compensation Plans

Our stockholders have previously approved all stock option plans under which our Common Stock is reserved for issuance. The following table provides summary information as of December 31, 2004, for all of our stock option and stock purchase plans:

	Number of Shares ofCommon Stock tobe Issued uponExercise ofOutstandingOptions, Warrantsand Rights	Weighted AverageExercise Price ofOutstanding Options,Warrants and Rights		Number of Shares ofCommon StockRemaining Availablefor Future Issuanceunder our StockOption Plans(Excluding SharesReflected in Column 1)
Equity compensation plans approved by stockholders	5,439,795	$	$3.83	4,117,486
Employee stock purchase plan approved by stockholders	—			721,528
Not approved by stockholders	—		—	—
Total	5,439,795	$		4,839,014

Item 13—Certain Relationships and Related Transactions

Other than the compensation agreements and other arrangements which are described in “Management” and the transactions described below, since January 1, 2004, there has not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed $60,000 and in which any director, executive officer, holder of 5% or more of any class of our capital stock or any member of their immediate family had or will have a direct or indirect material interest.

We believe that we have executed all of the transactions set forth below on terms no less favorable to us than we could have obtained from unaffiliated third parties. It is our intention to ensure that all future transactions between us and our officers, directors and principal stockholders and their affiliates are approved by our audit committee or a majority of the independent and disinterested members of our board of directors, and are on terms no less favorable to us than those that we could obtain from unaffiliated third parties.

Loans to Executive Officers

We received full recourse promissory notes in exchange for loans used to exercise stock options from the following executive officers on September 25, 2000 or March 8, 2002. The outstanding loan balances shown are as of December 31, 2004.

Name of Executive Officer	Date	Loan BalanceOutstanding
Eric Weinberg	September 25, 2000(1)	$	77,655
Tibor Juhasz	September 25, 2000(1)		37,857
Ronald M. Kurtz	September 25, 2000(1)		37,857
Shelley B. Thunen	March 7, 2002(2)		88,004
Eric Weinberg	March 8, 2002(3)		76,505
Tibor Juhasz	March 8, 2002(3)		87,435
Ronald M. Kurtz	March 8, 2002(3)		87,435

(1) These notes bear interest at a rate of 6.22% per annum. Interest accrues and is payable annually, with all remaining accrued and unpaid interest due and payable at such time as the outstanding principal amount is due. The notes are secured by all shares of our common stock held by such executive officer, and such executive officer is obligated to apply any cash proceeds received from the sale of our common stock, or from any distribution with respect to the stock, to the repayment of his or her loan obligations. The notes mature on September 25, 2005.

(2) The terms of these notes are identical to the September 2000 notes except that these notes mature on March 7, 2007 and Ms. Thunen’s note bears interest at 6.222%.

(3) The terms of such notes are identical to the September 2000 notes except that these notes mature on March 8, 2007.

As of July 30, 2002, under the relevant provisions of the Sarbanes-Oxley Act of 2002, no further extension of credit, or renewal thereof, directly or indirectly, to or for our executive officers or directors (or equivalent persons) is permitted except for the above grandfathered loans and other permissible exceptions as provided by the Sarbanes-Oxley Act.

Employment Agreements with Mr. Palmisano, Dr. Gauthier, Mr. Jepson, Mr. Harley and Mr. Lightman

In April 2003, we entered into an employment agreement with Mr. Palmisano as described in Part III, Item 11 – Executive Compensation. In May 2003, we also entered into an employment letter agreement with Dr. Gauthier, as described in Part III, Item 11 – Executive Compensation. In July 2004, we entered into an employment letter agreement with Mr. Jepson, as described in Part III, Item 11 – Executive Compensation. In July 2004, we entered into an employment letter agreement with Mr. Harley, as described in Part III, Item 11 – Executive Compensation. In February 2005, we also entered into an employment letter agreement with Mr. Lightman, as described in Part III, Item 11 – Executive Compensation.

Change-in-Control Arrangements

We have entered into change in control agreements and other change in control arrangements with our executive officers as described in Part III, Item 11 – Executive Compensation.

Indemnification Agreements

Upon the completion of our offering, we entered into an indemnification agreement with each of our directors, executive officers and certain key employees. The indemnification agreement provides that the director or officer will be indemnified to the fullest extent not prohibited by law for claims arising in such person’s capacity as a director or officer. We believe that these agreements are necessary to attract and retain skilled management with experience relevant to our industry.

Registration Rights Agreement

Certain persons that previously held our preferred stock and warrants to purchase our preferred stock and who are currently holders of our common stock, have entered into a registration rights agreement with us, as described in our Registration Statement on Form S-1 (File No. 333-116016). These holders include the following entities, each of which is a holder of greater than 10% of our outstanding voting stock: Brentwood Associates IX, Domain Partners IV and DP IV Associates, Enterprise Development Fund II and EDF Ventures, L.P., InterWest Partners VIII, L.P., InterWest Investors Q VIII, L.P. and InterWest Investors VIII, L.P., Versant Venture Capital I, Versant Affiliates Fund I-A, L.P., Versant Affiliates Fund I-B, L.P. and Versant Side Fund I, L.P. General or managing partners of the Brentwood, InterWest and Versant funds also are directors serving on our board of directors. See “Board Composition.” Holders of registration rights also include Ronald Kurtz and Tibor Juhasz, who are officers of IntraLase and holders of our stock that was previously preferred stock.

Founders’ Agreement

In November 2002, we entered into a third amended and restated founders’ agreement with Ronald Kurtz and Tibor Juhasz, our two founders. This agreement provides that we may not terminate either founder for any reason, except upon unanimous agreement of our board of directors. In addition, the agreement provides that either founder may terminate the agreement at any time and for any reason upon thirty days notice.

Item 14—Principal Accounting Fees and Services

~~The~~There ~~Audit~~is ~~Committee~~incorporated ~~regularly~~herein ~~reviews,~~by ~~pre-approves~~reference ~~and determines whether specific projects or expenditures with our independent auditors, Deloitte & Touche LLP and their affiliates, potentially affect their~~the ~~independence.~~information ~~The~~required ~~Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided~~ by ~~Deloitte~~this &Item ~~Touche.~~in ~~Pre-approval~~our isdefinitive ~~generally~~proxy ~~provided~~statement byfor the ~~Audit~~2006 ~~Committee~~Annual ~~for~~Meeting upof toStockholders ~~one~~that ~~year,~~will isbe ~~detailed~~filed aswith to the ~~particular~~ ~~service~~Securities ~~to be rendered,~~ and isExchange ~~generally~~Commission ~~subject~~no tolater athan ~~specific~~120 ~~budget.~~days ~~The~~after ~~Audit Committee may also pre-approve additional services or specific engagements on a case-by-case basis. Management is required to provide quarterly updates to~~ the ~~Audit~~close ~~Committee regarding the extent~~ of ~~any services provided in accordance with this pre-approval policy, as well as~~ the ~~cumulative~~year ~~fees~~ended ~~for all non-audit services incurred to date~~December 31, 2006.

All audit and non-audit service provided by Deloitte & Touche during the fiscal years ended December 31, 2004 and December 31, 2003 were pre-approved by the Audit Committee. The following table sets forth the aggregate fees billed to us by Deloitte & Touche for those fiscal years.

	December 31,2004		December 31,2003
Audit fees (1)	$	196,909	$	49,510
Audit-related fees (2)		441,960		18,000
Tax fees (3)		98,060		43,463
All other fees		6,232
Total audit and non-audit fees	$	743,161	$	110,973

(1) Includes fees for professional services rendered for the audit of IntraLase’s annual financial statements for fiscal years 2004 and 2003 and for reviews of the interim financial statements for the first three quarters of fiscal 2004 and 2003.

(2) Includes $425,160 in fees for professional and consultation services rendered in fiscal 2004 in connection with U.S. Securities and Exchange Commission registration statements.

(3) Includes fees for professional services rendered in connection with tax compliance (including U.S. federal and international returns) of $35,305 and $18,250 in fiscal 2004 and 2003, respectively, and in connection with tax consulting of $62,755 and $25,213 in fiscal 2004 and 2003, respectively.

PART IV

Item 15—Exhibits, Financial Statement Schedules

(a)

List of documents filed as part of this Form 10-K:

(1)

Financial Statements.

See Index to Financial Statements and Schedule on page F-1.

(2)

Financial Statement Schedules.

See Index to Financial Statements and Schedule on page F-1.

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(3)

Exhibits.

The following exhibits are filed (or incorporated by reference herein) as part of this Form 10-K:

Exhibit No.		Description
3.1		Seventh Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).
3.2		Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).
4.1		Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on September 13, 2004).
4.2		Fourth Amended and Restated Registration Rights Agreement, dated May 17, 2002, among IntraLase Corp. and certain of its stockholders (incorporated by reference to Exhibit 4.2 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
4.3		Warrant to Purchase 31,300 Shares of Series E Preferred Stock issued on July 12, 2001 to Silicon Valley Bank (incorporated by reference to Exhibit 4.3 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
4.4		Warrant to Purchase 16,500 shares of Series G Preferred Stock issued on December 12, 2002 to Silicon Valley Bank (incorporated by reference to Exhibit 4.4 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
10.1		Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.1 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
10.2		2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
10.3		2000 Executive Option Plan (incorporated by reference to Exhibit 10.3 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
10.4		Amended and Restated 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.41 to IntraLase’s ~~Registration~~Quarterly ~~Statement~~Report on Form S10-1Q ~~(File~~for ~~No.~~the ~~333-116016)~~period ended June 30, 2006 as filed with the Securities and Exchange Commission on ~~July~~August 131, ~~2004~~2006).
10.5		Form of Stock Option Agreement under Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.5 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
10.6		Form of Stock Option Agreement under 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
10.7		Form of Stock Option Agreement under 2000 Executive Option Plan (incorporated by reference to Exhibit 10.7 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
10.8		Form of Stock Option Agreement under 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.8 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).

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10.9		Form of Restricted Stock Purchase Agreement entered into on September 2000 and March 2002 between IntraLase Corp. and certain of its officers (incorporated by reference to Exhibit 10.9 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
10.10		Form of Amendment to the Restricted Stock Purchase Agreement entered into on September 2000 and March 2002 between IntraLase Corp. and certain of its officers (incorporated by reference to Exhibit 10.10 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
10.11		Patent License Agreement, dated December 31, 2001, between Agere Systems Guardian Corporation and IntraLase Corp. (incorporated by reference to Exhibit 10.11 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).
10.12		License Agreement Michigan File 939 Technology, dated December 16, 1997, between the University of Michigan and IntraLase Corp. (incorporated by reference to Exhibit 10.12 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).
10.13		License Agreement Michigan File 1387 Technology, dated August 10, 1998, between the University of Michigan and IntraLase Corp. (incorporated by reference to Exhibit 10.13 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
10.14		License Agreement Michigan File 1509 Technology, dated August 10, 1998, between the University of Michigan and IntraLase Corp. (incorporated by reference to Exhibit 10.14 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).
10.15		Amendment to License Agreement Michigan File 1509 Technology dated February 17, 2003, between the University of Michigan and IntraLase Corp. (incorporated by reference to Exhibit 10.15 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 24, 2004).
10.16		Amended and Restated License Agreement, dated October 17, 2000, between IntraLase Corp. and Escalon Medical Corp. (incorporated by reference to Exhibit 10.16 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 24, 2004).
10.17		Amendment No. 1 to Amended and Restated License Agreement, dated May 17, 2001, between IntraLase Corp. and Escalon Medical Corp. (incorporated by reference to Exhibit 10.17 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).
10.18		License Agreement, dated March 16, 2000, between Shui Lai and IntraLase Corp. (incorporated by reference to Exhibit 10.18 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 24, 2004).
10.19		Separation and Consulting Agreement, dated February 13, 2003, between IntraLase Corp. and Randy Alexander (incorporated by reference to Exhibit 10.19 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
10.20		Industrial Lease, dated September 7, 2000, between the Irvine Company and IntraLase Corp. (incorporated by reference to Exhibit 10.20 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).
10.21		2004 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.21 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 3, 2004).
10.22		Form of Indemnification Agreement between IntraLase and each of its officers and directors (incorporated by reference to Exhibit 10.22 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).
10.23		Employment Agreement, dated April 10, 2003, between IntraLase and Robert Palmisano (incorporated by reference to Exhibit 10.23 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).*

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10.24		Form of Change in Control Agreement between IntraLase and each of Bernard Haffey, Charline Gauthier, Scott Scholler, Frank Jepson, Kevin Harley, Eric Weinberg, Tibor Juhasz and Ronald Kurtz (incorporated by reference to Exhibit 10.24 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
10.23		Form of Change in Control Agreement between IntraLase and each of Bernard Haffey, Charline Gauthier, Scott Scholler, Frank Jepson, Kevin Harley, Eric Weinberg, Tibor Juhasz and Ronald Kurtz (incorporated by reference to Exhibit 10.24 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
10.25		Change in Control Agreement, dated March 3, 2004, between IntraLase and Shelley Thunen (incorporated by reference to Exhibit 10.25 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
10.24		Change in Control Agreement, dated March 3, 2004, between IntraLase and Shelley Thunen (incorporated by reference to Exhibit 10.25 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
10.26		Change in Control Agreement, dated March 3, 2004, between IntraLase and Robert Palmisano (incorporated by reference to Exhibit 10.26 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
10.25		Change in Control Agreement, dated March 3, 2004, between IntraLase and Robert Palmisano (incorporated by reference to Exhibit 10.26 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
10.27		The Executive Nonqualified Excess Plan Document (incorporated by reference to Exhibit 10.27 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
10.26		The Executive Nonqualified Excess Plan Document (incorporated by reference to Exhibit 10.27 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
10.28		The Executive Nonqualified Excess Plan Adoption Agreement (incorporated by reference to Exhibit 10.28 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
10.27		The Executive Nonqualified Excess Plan Adoption Agreement (incorporated by reference to Exhibit 10.28 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
10.29		The Executive Nonqualified Excess Plan Trust Agreement (incorporated by reference to Exhibit 10.29 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
10.28		The Executive Nonqualified Excess Plan Trust Agreement (incorporated by reference to Exhibit 10.29 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on May 28, 2004).*
10.30		Amended and Restated License and Settlement Agreement, Michigan Files 939, 1387, 1509 and 1662, dated July 15, 2004, between IntraLase and the Regents of the University of Michigan (incorporated by reference to Exhibit 10.30 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 3, 2004).
10.29		Amended and Restated License and Settlement Agreement, Michigan Files 939, 1387, 1509 and 1662, dated July 15, 2004, between IntraLase and the Regents of the University of Michigan (incorporated by reference to Exhibit 10.30 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 3, 2004).
10.31		Employment Letter Agreement, dated July 13, 2004, between IntraLase and Franklin T. Jepson (incorporated by reference to Exhibit 10.31 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 3, 2004).*
10.30		Employment Letter Agreement, dated July 13, 2004, between IntraLase and Franklin T. Jepson (incorporated by reference to Exhibit 10.31 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 3, 2004).*
10.32		Third Amended and Restated Founders’ Agreement dated November 2002, between IntraLase and Ronald M. Kurtz and Jennifer Simpson, and Tibor Juhasz (incorporated by reference to Exhibit 10.32 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 3, 2004).
10.31		Third Amended and Restated Founders’ Agreement dated November 2002, between IntraLase and Ronald M. Kurtz and Jennifer Simpson, and Tibor Juhasz (incorporated by reference to Exhibit 10.32 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 3, 2004).
10.33		Employment Letter Agreement, dated July 14, 2004, between IntraLase and Kevin Harley (incorporated by reference to Exhibit 10.33 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 24, 2004).*
10.32		Employment Letter Agreement, dated July 14, 2004, between IntraLase and Kevin Harley (incorporated by reference to Exhibit 10.33 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on August 24, 2004).*
10.34		Employment Letter Agreement, dated May 14, 2003, between IntraLase and Charline Gauthier (incorporated by reference to Exhibit 10.34 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on September 13, 2004).*
10.33		Employment Letter Agreement, dated May 14, 2003, between IntraLase and Charline Gauthier (incorporated by reference to Exhibit 10.34 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on September 13, 2004).*
10.35		Employment Letter Agreement, dated December 23, 2004, between IntraLase and James Lightman.*
10.34		Employment Letter Agreement, dated December 23, 2004, between IntraLase and James Lightman (incorporated by reference to Exhibit 10.35 to IntraLase’s 2004 Annual Report on Form 10-K (File No. 000-50939) as filed with the Securities and Exchange Commission on March 29, 2005).*
10.36		Change of Control Severance Agreement, dated February 14, 2005, between IntraLase Corp. and James Lightman.*
10.35		Change of Control Severance Agreement, dated February 14, 2005, between IntraLase Corp. and James Lightman (incorporated by reference to Exhibit 10.36 to IntraLase’s 2004 Annual Report on Form 10-K (File No. 000-50939) as filed with the Securities and Exchange Commission on March 29, 2005).*
10.37		Lease, dated January 31, 2005, between 9701 Jeronimo Holdings, LLC and IntraLase Corp.
10.36		Lease, dated January 31, 2005, between 9701 Jeronimo Holdings, LLC and IntraLase Corp. (incorporated by reference to Exhibit 10.37 to IntraLase’s 2004 Annual Report on Form 10-K (File No. 000-50939) as filed with the Securities and Exchange Commission on March 29, 2005).
14.1		Code of Business and Ethical Conduct (incorporated by reference to Exhibit 14.1 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).
10.37		Employment Agreement, dated February 15, 2006, between IntraLase and Robert Palmisano (incorporated by reference to Exhibit 10.1 to IntraLase’s Quarterly Report on Form 10-Q for the period ended March 31, 2006 as filed with the Securities and Exchange Commission on May 9, 2006).

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14.1		Code of Business and Ethical Conduct (incorporated by reference to Exhibit 14.1 to IntraLase’s Registration Statement on Form S-1 (File No. 333-116016) as filed with the Securities and Exchange Commission on July 13, 2004).
21.1		Subsidiaries of the registrant.
23.1		Consent of Independent Registered Public Accounting Firm.
24.1		Power of Attorney (included in signature page).
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

*	Indicates Item 15(a)(3) exhibit (management contract or compensation plan or arrangement).

In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

6253

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 29 6, ~~2005~~2007.


IntraLase Corp.

By:		/s/ Robert J. Palmisano
		Robert J. Palmisano,
		President and Chief Executive Officer

POWER OF ATTORNEY

Each of the undersigned hereby constitutes and appoints Robert J. Palmisano and Shelley B. Thunen, or either of them, his/her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, to sign any or all amendments to the Form 10-K of IntraLase Corp. for the year ended December 31, ~~2004~~2006 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his/her substitute or substitutes, may do or cause to be done by virtue hereof in any and all capacities.

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

Signature	Title	Date
/s/ Robert J. Palmisano	President, Chief Executive Officer and ~~Director (principal executive officer)~~	March 296, ~~2005~~2007
Robert J. Palmisano	Director (principal executive officer)
/s/ Shelley B. Thunen	Executive Vice President and Chief ~~Financial Officer (principal financial and accounting officer)~~	March 296, ~~2005~~2007
Shelley B. Thunen	Financial Officer (principal financial and accounting officer)
/s/ William J. Link, Ph.D.	Director (Chairman of the Board of ~~Directors)~~	March 296, ~~2005~~2007
William J. Link, Ph.D.	Directors)
/s/ Frank M. Fischer	Director	March 29, 2005
/s/ Michael Ball	Director	March 6, 2007
Michael Ball
/s/ Frank M. Fischer	Director	March 6, 2007
Frank M. Fischer
/s/ Gilbert H. Kliman, M.D.	Director	March 29, 2005
/s/ Jay T. Holmes	Director	March 6, 2007
Jay T. Holmes
/s/ Gilbert H. Kliman, M.D.	Director	March 6, 2007
Gilbert H. Kliman, M.D.
/s/ Mark Lortz	Director	March 29, 2005
/s/ Thomas S. Porter	Director	March 6, 2007
Mark Lortz
/s/ Donald B. Milder	Director	March 29, 2005
Donald B. Milder
/s/ Thomas S. Porter	Director	March 29, 2005
Thomas S. Porter

6354

IntraLase Corp. and Subsidiary

Index to Consolidated Financial Information

		Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets—December 31, 2004 and 2003		F-3
Consolidated Balance Sheets—December 31, 2006 and 2005		F-3
Consolidated Statements of Operations—For the years ended December 31, 2004, 2003 and 2002		F-4
Consolidated Statements of Operations—For the years ended December 31, 2006, 2005 and 2004		F-4
Consolidated Statements of Stockholders’ Equity—For the years ended December 31, 2004, 2003 and 2002		F-5
Consolidated Statements of Stockholders’ Equity—For the years ended December 31, 2006, 2005 and 2004		F-5
Consolidated Statements of Cash Flows—For the years ended December 31, 2004, 2003 and 2002		F-6
Consolidated Statements of Cash Flows—For the years ended December 31, 2006, 2005 and 2004		F-6
Notes to Consolidated Financial Statements		F-8
Financial Statement Schedule – Valuation and Qualifying Accounts		F-2227

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

IntraLase Corp.

~~We have audited the accompanying consolidated balance sheets of IntraLase Corp. and subsidiary (the “Company”) as of December 31~~Irvine, ~~2004~~California and 2003, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item (15) a 2. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

We ~~conducted~~have ~~our~~audited ~~audits in accordance with standards of~~ the ~~Public~~accompanying ~~Company~~consolidated ~~Accounting~~balance ~~Oversight~~sheets ~~Board~~of ~~(United~~IntraLase ~~States)~~Corp. ~~Those standards require that we plan~~ and ~~perform~~subsidiary (the ~~audit~~“Company”) toas ~~obtain~~of ~~reasonable~~December 31, ~~assurance~~2006 ~~about~~and 2005, ~~whether~~and the ~~financial~~related consolidated statements ~~are free~~ of ~~material misstatement.~~operations, ~~The~~stockholders’ ~~Company is not required to have~~equity, ~~nor~~and ~~were~~cash weflows ~~engaged~~for toeach ~~perform,~~of anthe ~~audit~~three ofyears ~~its~~in ~~internal~~the ~~control~~period ~~over~~ended ~~financial~~December 31, ~~reporting~~2006. Our ~~audit~~audits ~~included~~also ~~consideration~~include ofthe ~~internal control over~~ financial ~~reporting~~statement asschedule alisted ~~basis for designing audit procedures that are appropriate~~ in the Index ~~circumstances,~~at ~~but~~Item 15(a)(2). ~~not~~These ~~for~~financial ~~the~~statements ~~purpose~~and offinancial ~~expressing~~statement anschedule ~~opinion~~are on the ~~effectiveness~~responsibility of the Company’s ~~internal~~management. ~~control~~Our ~~over~~responsibility ~~financial~~is ~~reporting.~~to ~~Accordingly, we~~ express noan ~~such~~ opinion. ~~An audit also includes examining,~~ on ~~a test basis, evidence supporting~~ the ~~amounts and disclosures in the~~ financial statements, ~~assessing the accounting principles used~~ and ~~significant estimates made by management, as well as evaluating the overall~~ financial statement schedule ~~presentation.~~based Weon ~~believe that~~ our audits ~~provide a reasonable basis for our opinion~~.

InWe conducted our ~~opinion,~~audits ~~such~~in ~~consolidated~~accordance ~~financial~~with ~~statements~~the ~~present~~standards ~~fairly,~~of ~~in all material respects,~~ the ~~financial~~Public ~~position~~Company ofAccounting ~~IntraLase~~Oversight ~~Corp~~Board (United States). ~~and~~Those ~~subsidiary~~standards atrequire ~~December~~that ~~31,~~we ~~2004~~plan and ~~2003,~~perform ~~and~~ the ~~results~~audit ofto ~~their operations~~obtain ~~and~~reasonable ~~their~~assurance ~~cash~~about ~~flows~~whether ~~for~~the ~~each~~financial ofstatements ~~the~~are ~~three~~free ~~years~~of inmaterial ~~the~~misstatement. ~~period~~An ~~ended~~audit ~~December~~includes 31examining, ~~2004~~on ina ~~conformity~~test ~~with~~basis, ~~accounting~~evidence ~~principles~~supporting the ~~generally~~amounts ~~accepted~~and disclosures in the ~~United~~financial ~~States~~statements. ofAn ~~America.~~audit ~~Also~~also inincludes ~~our~~assessing ~~opinion,~~the ~~such~~accounting ~~financial~~principles ~~statement~~used ~~schedule, when~~and ~~considered~~significant inestimates ~~relation~~made toby ~~the~~management, ~~basic~~as ~~consolidated~~well ~~financial~~as ~~statements~~evaluating ~~taken~~the asoverall afinancial ~~whole,~~statement ~~presents~~presentation. ~~fairly,~~We inbelieve that ~~all~~our ~~material~~audits ~~respects,~~provide ~~the~~a ~~information~~reasonable ~~set~~basis ~~forth~~for ~~therein~~our opinion.

~~/s/~~In ~~Deloitte~~our &opinion, ~~Touche~~such ~~LLP~~consolidated financial statements present fairly, in all material respects, the financial position of IntraLase Corp. and subsidiary as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Notes 1 and 10 to the consolidated financial statements, the Company changed its method of accounting for share-based compensation in 2006, as a result of adopting Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 6, 2007, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

LOGO

Costa Mesa, California

March 25 6, 2007 ~~2005~~

F-2

INTRALASE CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, ~~2004~~2006 AND ~~2003~~2005

	2004			2003
	2006			2005
Assets
Current assets:
Cash and cash equivalents	$	2612,~~014~~597,~~926~~242		$	811,~~903~~198,~~715~~665
Marketable securities		6669,000,000			235,~~989~~000,~~165~~000
Accounts receivable—Net of allowance for doubtful accounts of $151,604 (2004) and $118,780 (2003)		7,186,163			4,213,288
Accounts receivable—Net of allowance for doubtful accounts of $295,830 (2006) and $269,308 (2005)		26,879,021			13,575,776
Inventories, Net		8,901,684			6,266,973
Inventories		14,685,136			13,471,961
Prepaid expenses and other current assets		1,868,186			663,914
Deferred income taxes		3,900,695			—
Total current assets		109,970,959			23,037,055
Prepaid expenses and other current assets		5,925,400			3,190,412
Property, plant and equipment—Net		4,597,546			3,354,140
Total current assets		132,987,494			76,436,814
Equipment under operating leases—Net of accumulated depreciation of $682,889 (2004) and $360,502 (2003)		2,224,785			3,268,912
Marketable securities		22,000,000			44,000,000
Other assets		1,418,774			296,776
Property, plant and equipment—Net		14,799,103			12,422,428
Total	$	118,212,064		$	29,956,883
Equipment under operating leases—Net of accumulated depreciation of $1,777,035 (2006) and $1,155,270 (2005)		3,500,192			3,681,099
Liabilities and Stockholders’ Equity (Deficit)
Deferred income taxes		7,486,751			—
Other assets		6,890,566			3,087,216
Total	$	187,664,106		$	139,627,557
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	512,~~685~~986,~~565~~530		$	34,~~424~~830,~~223~~731
Accrued expenses		6,030,507			2,957,215
Accrued expenses — including deferred rent and lease incentives of $323,281 (2006) and $311,298 (2005)		11,151,092			7,805,567
Deferred revenues		34,~~232~~967,~~272~~419			13,~~505~~874,~~793~~335
Current portion of long-term debt					358,332
Total current liabilities		29,105,041			16,510,633
Total current liabilities		14,948,344			8,245,563
Deferred rent, lease incentives and deferred interest		4,208,240			3,964,894
Accrued expenses—Long-term					13,295
Deferred revenues		350,886			1,179,466
Deferred revenues-Long-term		970,115
Total liabilities		33,664,167			21,654,993
Long-term debt—Net of current portion					448,193
Commitments and Contingencies (Notes 11 and 12)
Total liabilities		15,918,459			8,707,051
Stockholders’ Equity:
Commitments and Contingencies (Notes 10 and 12)
Preferred stock, $0.01 par value — 10,000,000 shares issued and authorized and no shares outstanding in 2006 and 2005
Redeemable Convertible Preferred Stock;
Common stock, $0.01 par value—45,000,000 shares authorized; 28,888,487 (2006) and 28,073,627 (2005) shares issued and outstanding		288,885			280,736
$0.01 par value; no shares issued, authorized and outstanding in 2004; 22,376,981 shares authorized, 22,191,333 shares issued and outstanding in 2003 liquidation value: $73,460,000 in 2003					73,260,687
Additional paid-in capital		184,486,338			173,941,312
Stockholders’ Equity (Deficit):
Deferred stock-based compensation		(1,119,080	)		(2,235,113	)
Preferred stock, $0.01 par value — 10,000,000 shares issued and authorized and no shares outstanding in 2004
Receivable from sale of stock to officers and employees		(64,529	)		(138,747	)
Common stock, $0.01 par value—45,000,000 shares authorized; 26,769,185 (2004) and 2,232,938 (2003) shares issued and outstanding		267,692			22,329
Accumulated deficit		(29,591,675	)		(53,875,624	)
Additional paid-in capital		170,567,316			2,357,480
Total stockholders’ equity		153,999,939			117,972,564
Deferred stock-based compensation		(4,302,631	)		(377,286	)
Total	$	187,664,106		$	139,627,557
Receivable from sale of stock to officers and employees		(838,690	)		(855,043	)
Accumulated deficit		(63,400,082	)		(53,158,335	)
Total stockholders’ equity (deficit)		102,293,605			(52,010,855	)
Total	$	118,212,064		$	29,956,883

See accompanying notes to consolidated financial statements.

F-3

INTRALASE CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, ~~2004~~2006, ~~2003~~ 2005 AND ~~2002~~2004

	2004			2003			2002
	2006			2005			2004
Revenues:
Total revenues	$	131,926,734		$	94,432,835		$	59,968,274
Product revenues	$	59,968,274		$	25,429,464		$	18,002,463
Costs of goods sold(1)		59,000,395			44,237,314			34,491,140
Research contracts								100,000
Gross margin		72,926,339			50,195,521			25,477,134
Total revenues		59,968,274			25,429,464			18,102,463
Costs of goods sold(1)		34,491,140			17,070,126			13,307,070
Gross margin		25,477,134			8,359,338			4,795,393
Operating expenses:
Research and development(1)		1220,~~718~~569,~~418~~157			911,~~117~~652,~~013~~675			912,~~011~~718,~~281~~418
Selling, general and administrative(1)		2343,~~352~~164,~~288~~305			1131,~~213~~611,~~055~~517			723,~~971~~352,~~353~~288
Total operating expenses		3663,~~070~~733,~~706~~462			2043,~~330~~264,~~068~~192			1636,~~982~~070,~~634~~706
Loss from operations		(10,593,572	)		(11,970,730	)		(12,187,241	)
Income (loss) from operations		9,192,877			6,931,329			(10,593,572	)
Interest and other income, Net
Interest expense		(~~185~~277,~~190~~697	)		(~~180~~348,~~211~~614	)		(~~105~~185,~~120~~190	)
Interest income		~~575~~4,~~900~~694,919			~~232~~3,~~858~~090,329			~~392~~575,~~137~~900
Other income		35(25,~~960~~994	)		16191,~~437~~577			1135,~~507~~960
Total interest and other income, Net		~~426~~4,~~670~~391,228			692,~~084~~933,292			~~298~~426,~~524~~670
Loss before provision for income taxes		(10,166,902	)		(11,901,646	)		(11,888,717	)
Income (loss) before income tax (benefit) provision		13,584,105			9,864,621			(10,166,902	)
Provision for income taxes		30,000			22,660			23,550
Income tax (benefit) provision		(10,699,844	)		340,163			30,000
Net loss		(10,196,902	)		(11,924,306	)		(11,912,267	)
Net income (loss)		24,283,949			9,524,458			(10,196,902	)
Accretion of preferred stock		~~(44,845~~—	)		~~(59,792~~—	)		(5644,~~659~~845	)
Net loss applicable to common stockholders	$	(10,241,747	)	$	(11,984,098	)	$	(11,968,926	)
Net income (loss) applicable to common stockholders	$	24,283,949		$	9,524,458		$	(10,241,747	)
Net loss per share applicable to common stockholders—basic and diluted	$	(1.28	)	$	(5.66	)	$	(6.82	)
Net income (loss) per share applicable to common stockholders—basic	$	0.85		$	0.35		$	(1.28	)
Weighted average shares outstanding—basic and diluted		8,008,494			2,118,898			1,755,873
Net income (loss) per share applicable to common stockholders—diluted	$	0.78		$	0.31		$	(1.28	)
Weighted-average shares outstanding—basic		28,539,206			27,405,499			8,008,494
Weighted-average shares outstanding—diluted		31,212,634			31,136,538			8,008,494
(1) Amounts include stock-based compensation expenses, as follows:
Costs of goods sold	$	~~197~~613,~~614~~780		$	8104,~~597~~516		$	12197,~~393~~614
Research and development		1,~~467~~771,~~311~~339			~~159~~702,~~583~~688			~~183~~1,~~693~~467,311
Selling, general and administrative		24,~~844~~589,~~188~~314			~~138~~1,~~983~~290,873			752,~~546~~844,188
Total stock-based compensation expenses	$	46,~~509~~974,~~113~~433		$	~~307~~2,~~163~~098,077		$	~~271~~4,~~632~~509,113

See accompanying notes to consolidated financial statements

F-4

INTRALASE CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ ~~DEFICIT~~EQUITY

YEARS ENDED DECEMBER 31, ~~2004~~2006, ~~2003~~2005 AND ~~2002~~2004

	Common Stock					AdditionalPaid-In Capital			DeferredStock-BasedCompensation			Receivablefrom Saleof Stock			AccumulatedDeficit			NetStockholders’Equity (Deficit)
	Shares		Amount
BALANCE—January 1, 2002	1,527,566			15,276			692,217			(93,617	)		(250,327	)		(29,205,311	)		(28,841,762	)
Stock option exercises	654,675			6,547			732,458						(604,716	)					134,289
Stock option grants							483,874			(483,874	)
Stock-based compensation										271,632									271,632
Exercise of warrant	25,549			255			(255	)
Issuance of warrant							33,407												33,407
Accretion to redemption value																(56,659	)		(56,659	)
Net loss																(11,912,267	)		(11,912,267	)
BALANCE—December 31, 2002	2,207,790			22,078			1,941,701			(305,859	)		(855,043	)		(41,174,237	)		(40,371,360	)
Stock option exercises	25,148			251			37,189												37,440
Stock option grants							378,590			(378,590	)
Stock-based compensation										307,163									307,163
Accretion to redemption value																(59,792	)		(59,792	)
Net loss																(11,924,306	)		(11,924,306	)
BALANCE—December 31, 2003	2,232,938		$	22,329		$	2,357,480		$	(377,286	)	$	(855,043	)	$	(53,158,335	)	$	(52,010,855	)
Stock option exercises	455,705			4,557			675,321												679,878
Stock option grants							8,434,458			(8,434,458	)
Deferred stock compensation related to stock option grants							8,434,458			(8,434,458	)								—
Stock-based compensation										4,509,113									4,509,113
Accretion to redemption value																(44,845	)		(44,845	)
Conversion of preferred shares	16,797,103			167,971			73,137,561												73,305,532
Issuance of common stock, net of issuance costs of $2,150,270	7,295,447			72,954			85,978,730												86,051,684
Repurchase of shares	(12,008	)		(119	)		(16,234	)					16,353						—
Net loss																(10,196,902	)		(10,196,902	)
BALANCE—December 31, 2004	26,769,185		$	267,692		$	170,567,316		$	(4,302,631	)	$	(838,690	)	$	(63,400,082	)	$	102,293,605
Stock option exercises	1,172,240			11,722			1,886,953												1,898,675
Deferred stock compensation related to stock option grants							30,559			(30,559	)								—
Stock-based compensation										2,098,077									2,098,077
Cashless exercise of warrant	28,584			286			(286	)											—
Payments for 2004 IPO expenditures							(17,798	)											(17,798	)
Proceeds from collection of receivable													699,943						699,943
Issuance of common stock under employee stock purchase plan	103,618			1,036			1,233,503												1,234,539
Tax benefit from exercise of stock options							241,065												241,065
Net income																9,524,458			9,524,458
BALANCE—December 31, 2005	28,073,627			280,736			173,941,312			(2,235,113	)		(138,747	)		(53,875,624	)		117,972,564

See accompanying notes to financial statements.


Stock option exercises	727,762		7,278		3,247,016												3,254,294
Deferred stock compensation related to stock option grants					(73,130	)		73,130									—
Stock-based compensation					5,931,530			1,042,903									6,974,433
Proceeds from collection of receivable											74,218						74,218
Issuance of common stock under employee stock purchase plan	87,098		871		1,254,794												1,255,665
Excess tax benefit from exercise of stock options					184,816												184,816
Net income														24,283,949			24,283,949

BALANCE—December 31, 2006	28,888,487	$	288,885	$	184,486,338		$	(1,119,080	)	$	(64,529	)	$	(29,591,675	)	$	153,999,939

See accompanying notes to consolidated financial statements.

F-5

INTRALASE CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, ~~2004~~2006, ~~2003~~ 2005 AND ~~2002~~2004

	2004			2003			2002
	2006			2005			2004
Cash flows from operating activities:
Net loss	$	(10,196,902	)	$	(11,924,306	)	$	(11,912,267	)
Net income (loss)	$	24,283,949		$	9,524,458		$	(10,196,902	)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		24,~~395~~794,~~263~~989			14,~~909~~571,~~837~~546			12,~~490~~395,~~490~~263
Loss on disposition of property, plant and equipment		2,348			23,707			119,675
Income tax benefit from exercise of stock options		—			241,065			—
Provision for bad debt expense		64,884			132,973			135,814
Excess tax benefit from stock-based compensation		(184,816	)		—			—
Amortization of debt discount		2,755			91,062			36,420
Loss on disposition of property, plant and equipment		20,717			9,514			2,348
Stock-based compensation		4,509,113			307,163			271,632
Provision for bad debt expense		136,023			136,873			64,884
Amortization of technology license		118,528
Deferred income taxes		(11,387,446	)		—			—
Amortization of debt discount		—			—			2,755
Stock-based compensation		6,974,433			2,098,077			4,509,113
Amortization of technology license		377,808			288,912			118,528
Changes in operating assets and liabilities:
Accounts receivable		(313,~~037~~439,~~759~~268	)		(36,~~727~~526,~~304~~486	)		(~~182~~3,~~906~~037,759	)
Grants receivable					100,000			(100,000	)
Prepaid expenses and other current assets		(2,550,172	)		(2,972,327	)		(1,204,272	)
Prepaid expenses and other current assets		(1,204,272	)		30,049			(385,306	)
Inventories		(1,213,175	)		(4,570,277	)		(2,634,711	)
Inventories		(2,634,711	)		238,775			(927,512	)
Other assets		(3,730,128	)		(307,253	)		(5,526	)
Other assets		(5,526	)		(23,916	)		(16,760	)
Accounts payable		8,155,799			(854,834	)		2,261,342
Accounts payable		2,261,342			2,281,750			(287,252	)
Deferred rent, lease incentives and deferred interest		616,386			4,088,818			—
Accrued expenses		32,~~059~~972,~~997~~485			~~105~~1,~~575~~651,136			~~490~~3,~~124~~059,997
Deferred revenues		2264,~~696,594~~504			1851,~~505,793~~414			2,696,594
Net cash used in operating activities		(1,968,346	)		(8,948,842	)		(11,267,848	)
Net cash provided by (used in) operating activities		16,092,088			8,230,636			(1,968,346	)
Cash flows from investing activities:
Purchase of property, plant and equipment		(35,~~318~~603,~~629~~693	)		(111,~~834~~185,~~556~~137	)		(13,~~628~~318,~~231~~629	)
Proceeds from sale of equipment		62,625			~~9,316~~—			~~3,753~~—
Disposals (purchases) of equipment under operating leases		721,739			(3,629,414	)
(Purchases) disposals of equipment under operating leases		(1,470,406	)		(2,677,119	)		721,739
Purchase of technology license		~~(1,235,000~~—	)		—			(1,235,000	)
Purchase of marketable securities		(7049,~~991~~066,~~998~~004	)		(375,~~488~~892,~~946~~500	)		(2170,~~907~~991,~~453~~998	)
Proceeds from maturities of marketable securities		737,~~981~~066,~~163~~004			262,~~486~~892,~~365~~500			197,~~920~~981,~~869~~163
Net cash used in investing activities		(66,842,725	)		(6,457,235	)		(3,611,062	)
Change in restricted cash		(451,030	)		—			—
Net cash used in investing activities		(19,462,504	)		(26,862,256	)		(66,842,725	)
Cash flows from financing activities:
Net proceeds from issuance of preferred stock								29,875,907
Net proceeds from the exercise of stock options		3,254,294			1,898,675			679,878
Net proceeds from the exercise of stock options		679,878			37,440			134,289
Net proceeds from issuance of stock under the employee stock purchase plan		1,255,665			1,234,539			—
Net proceeds from issuance of long-term debt		898,956			1,074,994
Net proceeds from collection of receivable – sale of stock to officers and employees		74,218			699,943			—
Net proceeds from issuance of common stock		~~86,051,684~~—			—			86,051,684
Payments on long-term debt		(1,708,236	)		(823,947	)		(312,830	)
Payment for issuance costs associated with 2004 common stock offering		—			(17,798	)
Net cash provided by financing activities		85,922,282			288,487			29,697,366
Net proceeds from issuance of long-term debt		—			—			898,956
Payments on long-term debt		—			—			(1,708,236	)
Excess tax benefit from stock-based compensation		184,816			—			—
Net cash provided by financing activities		4,768,993			3,815,359			85,922,282

F-6

INTRALASE CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

YEARS ENDED DECEMBER 31, ~~2004~~ 2006, ~~2003~~2005 AND ~~2002~~2004

	2004		2003			2002
	2006		2005			2004
Net (decrease) increase in cash and cash equivalents	$	17,111,211	$	(15,117,590	)	$	14,818,456
Net increase (decrease) in cash and cash equivalents	$	1,398,577	$	(14,816,261	)	$	17,111,211
Cash and cash equivalents—beginning of year		811,~~903~~198,~~715~~665		2426,~~021~~014,~~305~~926			98,~~202~~903,~~849~~715
Cash and cash equivalents—end of year	$	2612,~~014~~597,~~926~~242	$	811,~~903~~198,~~715~~665		$	2426,~~021~~014,~~305~~926
Supplemental disclosures of cash flow information—cash paid during the year for:
Interest	$	65277,~~364~~697	$	51348,~~576~~614		$	6465,~~517~~364
Income taxes	$	22241,~~660~~829	$	~~800~~504,654		$	~~800~~22,660

SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:

In 2004, ~~2003 and 2002,~~ the Company recorded accretion of $44,845, ~~$59,792 and $56,659, respectively,~~ to the redemption value of redeemable convertible preferred stock. There was no such accretion in 2006 and 2005.

InSee ~~2002,~~accompanying innotes ~~connection~~to ~~with~~consolidated afinancial ~~debt financing, the Company recorded the fair value associated with the issuance of a stock warrant of $33,407 as a reduction in the carrying value of the related debt~~statements.

See accompanying notes to financial statements.

F-7

INTRALASE CORP. AND SUBSIDIARY

~~CONSOLIDATED~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Years~~YEARS ~~ended~~ENDED ~~December~~DECEMBER 31, ~~2004~~ 2006, ~~2003~~2005 ~~and~~AND ~~2002~~2004

1.	Organization and Summary of Significant Accounting Policies

IntraLase Corp. and Subsidiary (the “Company”) was incorporated on September 29, 1997 for the purpose of developing, marketing and selling surgical lasers for vision correction in physicians’ offices and eye centers in domestic and international markets.

Basis of Presentation—The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Basis of Consolidation- —The accompanying consolidated financial statements include the accounts of IntraLase Corp. and its wholly-owned subsidiary IntraLase Espana S.L. All intercompany transactions and balances have been eliminated in consolidation.

Cash and Cash Equivalents—The Company considers all highly liquid investments with a maturity of three months or less from the purchase date to be cash equivalents. The Company’s cash equivalents consist principally of uninsured money market securities and commercial paper.

Marketable Securities—The Company accounts for investments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Investments, consisting of short-term debt securities, have been classified as held-to-maturity and are reported at amortized cost, which approximates fair value, in the accompanying balance sheets.

Concentration of Credit Risks—The Company is subject to concentration of credit risk, primarily from its cash and cash equivalents. At ~~December~~ December 31, ~~2004~~2006, the Company managed credit risk through the purchase of investment-grade securities (rated A1/P1 for money market instruments, A or better for debt) with diversification among issues and maturities. The Company primarily maintains its cash and cash equivalents and marketable securities with two major financial institutions in the United States of America and maintains small balances in two operational accounts outside the United States of America.

The Company’s customer base is concentrated in the surgical vision correction market. No single customer represents greater than 10 percent of revenues during the years ended December 31, ~~2004~~2006, ~~2003~~2005 and ~~2002~~2004. The Company is exposed to risks associated with extending credit to its customers, primarily related to the sale of per procedure fees inclusive of disposable patient interfaces. Management believes that credit risks on trade accounts receivable are moderated by the geographical diversity and number of the Company’s customers. The Company performs onongoing ~~going~~ credit evaluations of its customers’ financial condition and to date, credit losses have been within management’s expectations.

~~Inventories~~Impaired Loans—~~Inventories~~The Company accounts for its notes receivable related to sales-type lease transactions in accordance with SFAS No. 114, ~~consisting~~Accounting ~~principally~~by Creditors for Impairment of ~~raw~~a ~~materials~~Loan, as ~~work-~~amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosure, in~~-process~~ accounting for and ~~completed~~disclosing ~~units,~~all ~~are~~loans ~~carried~~for which it is probable that the creditor will be unable to collect all amounts due according to the terms of the loan agreement at the ~~lower~~loan’s fair value. The Company records the current portion of ~~cost~~loans orin ~~market~~prepaid expenses and other current assets and the long-term portion in other assets as appropriate. ~~Cost~~Fair value ismay be determined ~~using~~based ~~standard~~upon ~~costing~~the present value of expected cash flows, ~~which approximates~~market price of the ~~first-in~~loan, ~~first-out~~if ~~method~~available, or the value of the underlying collateral. Expected cash flows are required to be discounted at the loan’s effective interest rate. SFAS 114 was amended by SFAS 118 to allow a creditor to use existing methods for recognizing interest income on an impaired loan and by requiring additional disclosures about how a creditor recognizes interest income related to impaired loans. No losses have been recognized for the periods presented.

~~Property~~Inventories—Inventories, consisting ~~Plant~~principally ~~and~~of ~~Equipment—The~~raw ~~Company’s property~~materials, ~~plant~~work-in-process and ~~equipment~~completed units, are ~~stated~~carried at the lower of cost or market. ~~Depreciation~~Cost is ~~provided~~determined byusing standard costing, which approximates the ~~straight~~first-~~line~~in, first-out method. ~~over~~The Company establishes a reserve for obsolete inventory based upon forecasted usage. Once established, the ~~estimated~~reserve ~~useful~~is ~~lives~~considered ofa permanent adjustment to the ~~assets~~cost asof ~~follows:~~the inventory.

Office equipment		5 years
Furniture and fixtures		5 years
Computer equipment and software		3 years
Production equipment		2 to 5 years
Research and development equipment		2 years
Exhibits and displays		2 years

Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the lease term. Maintenance and repairs are charged to operations when incurred.

Long-Lived Assets—The Company assesses potential impairments of its long-lived assets whenever events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. An impairment loss would be recognized when the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). At December 31, 2004 the Company determined that there were no indications of impairment.

F-8

INTRALASE CORP. AND SUBSIDIARY

~~CONSOLIDATED~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Years~~YEARS ~~ended~~ENDED ~~December~~ DECEMBER 31, ~~2004~~2006, ~~2003~~2005 ~~and~~AND ~~2002~~2004

~~Fair~~Property, ~~Value~~Plant ofand ~~Financial Instruments~~Equipment—~~SFAS~~The ~~No.~~Company’s ~~107~~property, ~~Disclosures~~plant ~~about Fair Value of Financial Instruments, requires management to disclose the estimated fair value of certain assets~~ and ~~liabilities~~equipment ~~defined by SFAS No. 107 as financial instruments. Financial instruments~~ are ~~generally defined by SFAS No. 107 as cash, evidence of ownership~~ ~~interest~~stated inat an entity, or a contractual obligation that both conveys to one entity a right to receive cash or other financial instruments from another entity and imposes on the other entity the obligation to deliver cash or other financial instruments to the first entitycost. AtDepreciation ~~December~~is ~~31,~~provided ~~2004,~~by ~~management believes that~~ the ~~carrying amounts of cash, short~~straight-~~term~~line ~~investments,~~method ~~receivables~~over ~~and~~the ~~payables~~estimated ~~approximate~~useful ~~fair~~lives ~~value because~~ of the ~~short~~assets ~~maturity~~as offollows: ~~these financial instruments.~~

Accrued Warranty—The Company provides a limited warranty ranging from one to three years against manufacturer’s defects on its lasers sold or leased to customers. The Company’s standard warranties require the Company to repair or replace, at the Company’s discretion, defective parts during such warranty period. In addition, the Company charges customers an annual maintenance fee for routine and periodic maintenance, which constitutes the majority of the Company’s activities related to direct customer support. Commencing in 2003 and in conjunction with establishing an annual maintenance program, the Company deferred the fair value of the maintenance agreement and amortized the deferred maintenance amount over the twelve month service period, as the services and component parts associated with the one year warranty are essentially equivalent to the routine maintenance provided by the Company under its maintenance agreements. The Company accrues for its product warranty liabilities based on estimates of costs not covered by the maintenance revenues, calculated using estimates of future uncovered costs, based on historical repair information for uncovered costs. Warranty liability activity for the years ended December 31, was as follows:


Office equipment		5 years
Furniture and fixtures		5 years
Computer equipment and software		3 years
Production equipment		2 to 5 years
Research and development equipment		2 to 5 years
Exhibits and displays		2 to 4 years

	2004			2003
Balance—January 1	$	84,967		$	269,840
Warranty claims and expenses		(227,202	)		(220,635	)
Provisions for warranty expense		515,950			35,762
Balance—December 31	$	373,715		$	84,967

Leasehold improvements are depreciated over the shorter of the estimated useful life of the asset or the lease term. Maintenance and repairs are charged to operations when incurred.

~~Revenue Recognition~~Long-Lived Assets—InThe ~~the~~Company assesses ~~normal~~potential ~~course~~impairments of ~~business,~~its long-lived assets whenever events or changes in circumstances indicate that the ~~Company~~asset’s ~~generates~~carrying ~~revenue~~value ~~through~~may not be recoverable. An impairment loss would be recognized when the ~~sale~~carrying amount of a long-lived asset (asset group) is not recoverable and ~~rental~~exceeds its fair value. The carrying amount of ~~lasers,~~a long-lived asset (asset group) is not recoverable if it exceeds the ~~sale~~sum of ~~per~~the ~~procedure~~undiscounted ~~fees~~cash ~~inclusive~~flows ofexpected ~~disposable~~to ~~patient~~result ~~interfaces~~from the use and ~~maintenance~~eventual disposition ~~services~~of the asset (asset group). ~~Revenue~~At ~~related~~December 31, ~~to sales~~2006 ofand 2005 the Company’s ~~products~~determined ~~and~~that ~~services~~there iswere ~~recognized~~no asindications ~~follows:~~of impairment.

~~Laser~~Fair ~~revenues:~~Value ~~Revenues~~of ~~from~~Financial ~~the~~Instruments—SFAS ~~sale~~No. 107, orDisclosures ~~lease~~about ofFair ~~lasers~~Value ~~are~~of ~~recognized~~Financial atInstruments, ~~the~~requires ~~time~~management ofto ~~sale~~disclose orthe atestimated ~~the~~fair ~~inception~~value of ~~the~~certain ~~lease,~~assets asand ~~appropriate.~~liabilities ~~For~~defined ~~laser~~by SFAS ~~sales~~No. 107 ~~that~~as ~~require~~financial ~~the~~instruments. ~~Company~~Financial toinstruments ~~install~~are ~~the~~generally ~~product~~defined ~~at the~~by ~~customer~~SFAS ~~location,~~No. 107 ~~revenue~~as iscash, ~~recognized~~evidence ~~when~~of ~~the~~ownership ~~equipment~~interest ~~has~~in ~~been~~an ~~delivered~~entity, ~~installed~~or ~~and~~a ~~accepted~~contractual atobligation ~~the~~that ~~customer~~both ~~location.~~conveys ~~For~~to ~~laser~~one ~~sales~~entity a right to areceive ~~distributor~~cash ~~whereby~~or other ~~installation~~financial isinstruments ~~the~~from ~~responsibility~~another ofentity ~~the~~and ~~distributor,~~imposes ~~revenue~~on ~~is recognized~~the ~~when~~other entity the ~~laser~~obligation isto ~~shipped~~deliver ~~and~~cash ~~title~~or ~~has~~other ~~transferred~~financial instruments to the ~~distributor~~first entity. ~~The~~At ~~Company~~December 31, ~~does~~2006 ~~not~~and ~~allow~~2005, ~~customers~~management believes that the carrying amounts of cash, ~~including~~marketable ~~distributors~~securities, toreceivables ~~return~~and ~~any~~payables ~~products~~approximate fair value because of the short maturity of these financial instruments. ~~Revenues~~The ~~from~~receivables ~~lasers~~associated ~~under~~with ~~operating~~sales-type leases ~~are~~approximate ~~recognized~~fair asvalue ~~earned~~because ~~over~~ the ~~lease~~ ~~term,~~interest ~~which~~rate isused ~~generally~~to discount onthe anotes ~~straight-line~~to ~~basis~~their ~~over~~present 36value toreflects 39current ~~months~~rates at December 31, 2006.

~~Per~~Accrued ~~Procedure~~Warranty—The Company ~~Fees~~provides ~~and~~a ~~Disposable~~limited ~~Patient~~warranty ~~Interfaces~~ranging ~~revenues:~~from ~~Per~~one ~~procedure~~to ~~fees~~three ~~inclusive~~years ofagainst ~~disposable~~manufacturer’s ~~patient~~defects ~~interface~~on ~~revenue~~its islasers ~~recognized~~sold ~~upon~~or ~~shipment~~leased to customers. The Company’s standard warranties require the ~~customer~~Company to repair or replace, at the Company’s discretion, defective parts during such warranty period. In addition, the Company charges customers an annual maintenance fee for routine and ~~when~~periodic maintenance, which constitutes the ~~title~~majority ~~has~~of ~~passed~~the Company’s activities related to direct customer support. Commencing in 2003 and in conjunction with establishing an annual maintenance program, the Company deferred the fair value of the maintenance agreement and amortized the deferred maintenance amount over the 12-month service period, ~~accordance~~as the services and component parts associated with ~~sales~~the ~~terms~~one-year warranty are essentially equivalent to the routine maintenance provided by the Company under its maintenance agreements. The Company ~~does~~accrues for its product warranty liabilities based on estimates of costs not ~~allow~~covered ~~customers~~by tothe ~~return~~maintenance ~~product~~revenues, calculated using estimates of future uncovered costs, based on historical repair information for uncovered costs. Warranty liability activity for the years ended December 31, was as follows:

Maintenance revenues: Maintenance revenues are derived primarily from maintenance contracts, which the Company began selling in 2003, on the Company’s laser systems sold to customers. Prepaid maintenance expenses are deferred and recognized on a straight line basis over the term of the contracts, generally 12 months. A substantial portion of the Company’s products are sold with a one year maintenance agreement for which the Company defers an amount equal to its fair value. To the extent the Company determines revenues associated with a specific maintenance contract are not sufficient to recover the estimated costs to provide such maintenance services, the Company accrues for such excess costs upon identification of the associated embedded loss. To date, these embedded losses have been insignificant.


	2006			2005			2004
Balance—January 1	$	603,054		$	373,715		$	84,967
Warranty claims and expenses		(1,069,557	)		(830,914	)		(227,202	)
Provisions for warranty expense		1,052,753			1,060,253			515,950

Balance—December 31	$	586,250		$	603,054		$	373,715

Revenue Recognition— ~~under~~In ~~Bundled~~the ~~Arrangements:~~normal ~~The Company~~course ~~sells most~~ of ~~its products and services under bundled contract arrangements~~business, ~~which~~the ~~contain~~Company ~~multiple~~generates revenue ~~deliverable~~through ~~elements. These contractual arrangements typically include~~ the ~~laser~~sale and ~~maintenance~~rental ~~for~~of ~~which~~lasers, the ~~customer~~sale ~~pays~~of aper ~~single negotiated~~procedure ~~price~~fees ~~for~~inclusive ~~all~~of ~~elements~~a ~~with~~disposable ~~separate~~patient ~~prices~~interface ~~listed~~and inmaintenance ~~the multiple element customer contracts~~services. ~~Such~~Revenue ~~separate~~related ~~prices~~to ~~may~~sales ~~not always be representative~~ of the ~~fair~~Company’s ~~values~~products ofand ~~those~~services ~~elements,~~is ~~because~~recognized ~~the~~as ~~prices of the different components of~~follows: ~~the arrangement may be modified~~

Laser revenues: Revenues from the sale or lease of lasers are recognized at the time of sale or at the inception of the lease, as appropriate. For laser sales that require the Company to install the product at the customer location,

F-9

INTRALASE CORP. AND SUBSIDIARY

~~CONSOLIDATED~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Years~~YEARS ~~ended~~ENDED ~~December~~ DECEMBER 31, ~~2004~~2006, ~~2003~~2005 ~~and~~AND ~~2002~~2004

~~through~~ revenue ~~customer~~is ~~negotiations,~~recognized ~~although~~when the ~~aggregate~~equipment ~~consideration~~has ~~may~~been ~~remain~~delivered, installed and accepted at the ~~same~~customer location. ~~Revenues~~For ~~under~~laser ~~bundled~~sales ~~arrangements~~to a distributor whereby ~~are~~installation ~~allocated~~is ~~based~~the ~~upon~~responsibility of the ~~residual~~distributor, ~~method~~revenue inis ~~accordance~~recognized ~~with~~when ~~Emerging~~the ~~Issues~~laser ~~Task~~is ~~Force~~shipped ~~(“EITF”)~~and ~~Issue~~title Nohas transferred to the distributor. ~~00-21,~~For ~~Revenue~~laser ~~Arrangements~~sales ~~with~~in ~~Multiple~~the ~~Deliverables.~~first ~~The~~quarter of 2006 that were sold prior to the availability of the Company’s ~~revenue~~60 ~~allocation~~kilohertz toupgrade, the ~~deliverables~~fair ~~begins by~~value ~~allocating~~of ~~revenues~~the toupgrade was deferred and revenue has been or will be subsequently recognized when the ~~maintenance~~upgrade ~~service~~has been delivered, installed and ~~second~~accepted byat ~~allocating~~the ~~revenue~~customer tolocation. During the third quarter of 2006, a limited number of customers ordered an IntraLase laser with IntraLase Enabled Keratoplasty (“IEK”). ~~There~~For isthose ~~reliable~~lasers ~~third-party~~sold ~~and~~prior ~~entity-specific~~to ~~evidence~~the availability of the Company’s IEK upgrade application, the fair value of the ~~maintenance~~IEK application ~~service~~was deferred and revenue has been or will be subsequently recognized when the upgrade has been delivered, installed and accepted at the ~~residual~~customer ~~method~~location. isThe ~~used~~deferrals tofor ~~allocate~~ the ~~arrangement~~60 ~~consideration~~kilohertz toupgrade and the ~~delivered~~IEK ~~item~~application (are consistent with the ~~laser).~~deferral ~~Fair~~of ~~value~~the ~~evidence~~fair ~~consists~~value of ~~amounts~~the ~~charged~~Company’s ~~for~~30 ~~annual~~kilohertz ~~renewals~~upgrade in the second quarter of ~~maintenance~~2005, ~~agreements~~prior byto ~~the~~availability. ~~Company~~The IEK application is not required for laser functionality, ~~which~~but provides an additional application that enables surgeons and eye banks to create corneal incisions for corneal transplant surgery. The 30 and 60 kilohertz upgrades are also not required for laser functionality but do increase the ~~customer~~speed of the procedure. The Company does not allow customers, including distributors, to ~~continue~~return ~~using~~any products. Some customers finance the ~~laser,~~purchase ~~prices~~ or rental of the Company’s ~~third~~lasers ~~party~~over ~~distributors~~periods ~~charge~~up ~~their~~to ~~customers~~four ~~and~~years ~~amounts~~directly ~~charged~~from ~~for~~the ~~maintenance~~Company. byThese ~~excimer~~financing ~~laser~~agreements ~~manufacturers~~are classified as either operating leases or sales-type leases as prescribed by SFAS No. 13, Accounting for ~~which~~Leases. ~~maintenance~~Under ~~may~~sales-type belease ~~different~~agreements, ~~than~~where ownership is transferred to the ~~maintenance~~lessee at the end of the lease term, laser revenues are recognized based on the ~~Company’s~~net present value of the contractual lease payments upon installation and customer acceptance. Revenues from lasers under operating leases are recognized as earned over the lease term, commencing immediately after the laser is installed and accepted by the customer.

Per Procedure Fees Inclusive of a Disposable Patient Interface revenues: Per procedure fees inclusive of a disposable patient interface revenue is recognized upon shipment to the customer and when the title has passed in accordance with sales terms. The Company does not allow customers to return product.

Maintenance revenues: Maintenance revenues are derived primarily from maintenance services on the Company’s laser systems sold to customers in the United States of America and some customers in international markets that are not serviced by distributors. Maintenance revenues also include sales of parts and tool kits. When prepaid maintenance funds are received the Company amortizes the deferred maintenance amounts over the maintenance period. A substantial portion of the Company’s products are sold with one year of maintenance services for which the Company defers an amount equal to its fair value. To the extent the Company determines revenues associated with a specific maintenance contract are not sufficient to recover the estimated costs to provide such maintenance services, the Company accrues for such excess costs upon identification of the associated embedded loss. To date, these embedded losses have been insignificant.

Revenue Recognition under Bundled Arrangements: The Company sells many of its products and services under bundled contract arrangements, which contain multiple deliverable elements. These contractual arrangements typically include the laser and maintenance for which the customer pays a single negotiated price for all elements with separate prices listed in the multiple element customer contracts. Such separate prices may not always be representative of the fair values of those elements, because the prices of the different components of the arrangement may be modified through customer negotiations, although the aggregate consideration may remain the same. Revenues under bundled arrangements are allocated based upon the residual method in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The Company’s revenue allocation to the deliverables begins by allocating revenues to the maintenance service and upgrades, for the short periods during which upgrades are not available, and lastly by allocating revenue to the laser. There is reliable third-party and entity-specific evidence of the fair value of the maintenance service and upgrades, and the residual method is used to allocate the arrangement consideration to the delivered item (the laser). Fair value evidence for maintenance consists of amounts charged for annual renewals of maintenance agreements by the Company (as maintenance is required for the customer to use the laser), prices the Company’s third party distributors charge their customers and amounts charged for maintenance by excimer laser manufacturers, for which maintenance may be different than the maintenance on the Company’s lasers. Fair value evidence for the upgrades is the average upgrade price received from the Company’s customers for previously installed or ordered similar upgrades.

F-10

INTRALASE CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

Revenues from product sales are as follows for the year ended December 31:

	2004		2003		2002
	2006		2005		2004
Laser revenues	$	3361,~~237~~454,~~551~~247	$	1446,~~777~~812,~~010~~834	$	1433,~~296~~237,~~738~~551
Per procedure disposable patient interface revenues		2259,~~256~~545,~~211~~682		939,~~115~~908,~~731~~016		322,~~354~~256,~~242~~211
Maintenance revenues		410,~~474~~926,~~512~~805		17,~~536~~711,~~723~~985		~~351~~4,~~483~~474,512
	$	59131,~~968~~926,~~274~~734	$	2594,~~429~~432,~~464~~835	$	1859,~~002~~968,~~463~~274

Major Customers—The Company’s largest customer accounted for approximately six 9%percent of total revenues ~~for~~in ~~both the years ended December 31~~2006, ~~2004~~seven ~~and~~percent ~~December~~in ~~31,~~2005 ~~2003. In 2002, surgeons generally rented laser equipment~~ and ~~purchased~~nine ~~supplies and~~percent services through a multiyear fee-per-procedure contract primarily through an independent third-party financing company, De Lage Landen Financial Services (“DLL”). As a result, revenues generated from products sold to DLL accounted for 69% in ~~2002~~2004.

Research and Development—Research and development expenses consist of costs incurred for proprietary and collaborative research and development and regulatory and compliance activities. Research and development costs are charged to operations as incurred. The cost of equipment used in research and development activities, which has alternative uses, is capitalized and depreciated over the estimated useful lives of the equipment.

Software Development Costs—The Company’s lasers incorporate software which is incidental to the laser as a whole. Software development costs incurred prior to the establishment of technological feasibility are included in research and development expenses. The Company defines establishment of technological feasibility as the completion of a final working model approved by the U.S. Food and Drug Administration, at which time the product can be sold to third parties. Therefore, all software development costs have been expensed.

Advertising Costs—Advertising costs are expensed as incurred and are included in selling, general and administrative expense. Total advertising and promotional expenses were approximately $~~196~~323,~~443~~806, $37299,~~508~~440 and $~~186~~196,~~433~~443 for the years ended December 31, ~~2004~~2006, ~~2003~~2005 and ~~2002~~2004, respectively.

Stock-Based Compensation—~~The~~ ~~Company~~In ~~accounts~~December ~~for stock~~2004, the FASB issued SFAS No. 123R (revised 2004), Share-~~based~~Based ~~awards~~Payment, or SFAS No. 123R. SFAS No. 123R requires that the compensation cost related to ~~employees~~share-based ~~using~~payment transactions, measured based on the ~~intrinsic~~fair value ~~method~~of inthe ~~accordance~~equity ~~with~~or ~~Accounting~~liability ~~Principles~~instruments ~~Board~~issued, ~~(“APB”)~~be ~~Opinion~~recognized Noin the financial statements. 25Effective January 1, ~~Accounting~~2006, ~~for~~the ~~Stock~~Company ~~Issued~~adopted toSFAS ~~Employees~~No. 123R ~~The~~using ~~Company~~the ~~accounts~~modified prospective application method, which provides for only current and future period stock-based compensation awards to ~~nonemployees~~ ~~using~~be ~~the~~measured and recognized at fair value. ~~method~~Refer into ~~accordance~~Note ~~with~~10 ~~SFAS~~– ~~No.~~Stockholders’ ~~123,~~Equity ~~Accounting~~and ~~for~~ Stock-Based Compensation. for additional discussion and disclosure.

InIncome ~~December~~Taxes—The ~~2002,~~Company ~~the~~accounts ~~Financial~~for ~~Accounting~~income ~~Standards~~taxes ~~Board~~under ~~(“FASB”)~~the ~~issued~~provisions of SFAS No. ~~148~~ 109, Accounting for ~~Stock-Based~~Income ~~Compensation—Transition and Disclosure~~Taxes. ~~SFAS~~Current ~~No.~~income ~~148~~tax ~~amends~~expense ~~SFAS~~is ~~No.~~the ~~123~~amount toof ~~provide~~income ~~alternative~~taxes ~~methods~~expected ~~for~~to ~~voluntary~~be ~~transition~~payable tofor ~~SFAS~~the Nocurrent year. ~~123’s~~A ~~fair~~deferred ~~value~~income ~~method~~tax ofasset ~~accounting~~or ~~for~~liability ~~stock-based~~is ~~employee~~established ~~compensation~~for (“the ~~fair value~~expected ~~method”).~~future ~~SFAS~~consequences ~~No.~~of ~~148~~temporary ~~also~~differences ~~requires~~in ~~disclosure of~~ the ~~effects~~financial reporting ofand antax ~~entity’s~~bases ~~accounting~~of ~~policy~~assets ~~with~~and ~~respect~~liabilities. toEvaluating ~~stock-based~~the ~~employee~~value ~~compensation~~of onthese ~~reported~~assets ~~net~~is ~~income~~necessarily ~~(loss)~~based inon ~~annual~~the ~~financial~~Company’s ~~statements~~judgment. ~~The~~Prior ~~Company is required~~ to ~~follow~~2006, ~~the~~a ~~prescribed~~valuation ~~disclosure~~allowance ~~format~~was ~~and~~recorded ~~has~~to ~~provided~~reduce the ~~additional~~deferred ~~disclosures~~tax ~~required~~assets byto ~~SFAS~~that ~~No.~~portion ~~148~~which more ~~for~~likely ~~the~~than ~~years~~not ~~ended~~will ~~December~~be ~~31, 2004, 2003 and 2002 below~~realized.

~~SFAS~~Comprehensive ~~No.~~Income ~~123~~(Loss) ~~requires~~—There ~~the~~was ~~disclosure~~no ofdifference ~~pro~~between ~~forma net~~ comprehensive income (loss) ~~had~~and ~~the~~net ~~Company~~income ~~adopted~~(loss) ~~the fair value method in accounting~~ for ~~employee~~the ~~stock-based~~years ~~awards.~~ended ~~Under SFAS No. 123~~December 31, ~~the fair value of stock- based awards to employees is calculated through the use of option-pricing models~~2006, ~~even~~2005 ~~though~~and ~~such~~2004. ~~models were developed to estimate the fair value of~~

~~F-10~~Net Income (Loss) Applicable to Common Stockholders—Net loss applicable to common stockholders for 2004 has been calculated by adding to the net loss the accretion to the redemption value of redeemable convertible preferred stock.

~~Table~~Net Income (Loss) per Share Applicable to Common Stockholders— Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of ~~Contents~~shares of common stock outstanding for the period. Diluted net income (loss) per share is computed giving effect to all common stock, including options, warrants, common stock subject to repurchase and redeemable convertible preferred stock, if dilutive.

INTRALASE CORP.

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (Continued)

Years ended December 31, 2004, 2003 and 2002

freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock-option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company’s calculations were made using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected life, 60 months for employee stock options plans, six months for employee stock purchase plan in 2004; volatility ranging from 67% to 104%; risk-free interest rates ranging from 2.53% to 4.4%; no dividends during the expected term; and forfeitures are recognized as they occur.

If the computed fair value of the awards had been amortized to expense over the vesting period of the awards, net loss would have increased as follows:

	2004			2003			2002
Net loss applicable to common stockholders as reported	$	(10,241,747	)	$	(11,984,098	)	$	(11,968,926	)
Add: Stock-based employee compensation expense included in reported net loss		1,803,680			85,450			146,992
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(2,312,278	)		(253,605	)		(216,092	)
Pro forma net loss applicable to common stockholders	$	(10,750,345	)	$	(12,152,253	)	$	(12,038,026	)
Pro forma net loss per share applicable to common stockholders	$	(1.34	)	$	(5.74	)	$	(6.86	)

Income Taxes—The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. Evaluating the value of these assets is necessarily based on the Company’s judgment. A valuation allowance has been recorded to reduce the deferred tax assets to that portion which more likely than not will be realized.

Comprehensive Loss—There was no difference between comprehensive loss and net loss for the years ended December 31, 2004, 2003 and 2002.

Net Loss Applicable to Common Stockholders—Net loss applicable to common stockholders for the periods presented has been calculated by adding to the net loss the accretion to the redemption value of redeemable convertible preferred stock.

Net Loss per Share Applicable to Common Stockholders—Basic net loss per share applicable to common stockholders is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share is computed giving effect to all potential dilutive common stock, including options, warrants, common stock subject to repurchase and redeemable convertible preferred stock, none of which were dilutive during any of the periods presented.

F-11

INTRALASE CORP. AND SUBSIDIARY

~~CONSOLIDATED~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Years~~YEARS ~~ended~~ENDED ~~December~~ DECEMBER 31, ~~2004~~2006, ~~2003~~2005 ~~and~~AND ~~2002~~2004

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share follows:

	Year Ended December 31,
	2004				2003				2002
	2006			2005			2004
Numerator:
Net loss applicable to common stockholders	$	(10,241,747	)		$	(11,984,098	)		$	(11,968,926	)
Net income (loss) applicable to common stockholders	$	24,283,949		$	9,524,458		$	(10,241,747	)
Denominator:
Weighted-average common stock outstanding		8,024,790				2,220,416				2,051,165
Basic net income (loss) per share – weighted-average shares outstanding		28,539,206			27,405,499			8,024,790
Less: unvested common shares subject to repurchase		(16,296	)			(101,518	)			(295,292	)
Less: weighted-average shares subject to repurchase		—			—			(16,296	)
Total weighted-average number of shares used in computing net loss per share applicable to common stockholders—basic and diluted		8,008,494				2,118,898				1,755,873
Total weighted-average number of shares used in computing net income (loss) per share applicable to common stockholder—basic		28,539,206			27,405,499			8,008,494
Effect of dilutive securities:
Weighted-average dilutive options outstanding		2,673,428			3,731,039			—
Total weighted-average number of shares used in computing net income (loss) per share applicable to common stockholder—diluted		31,212,634			31,136,538			8,008,494

~~The~~Outstanding ~~following outstanding~~ options to purchase ~~common stock~~5,439,795 ~~redeemable~~shares ~~convertible~~of ~~preferred~~common stock and 39,514 warrants were excluded from the computation of diluted net loss per share in 2004 as they had an antidilutive effect:.

	Year Ended December 31,
	2004	2003	2002
Options to purchase common stock	5,439,795	5,014,893	2,934,515
Redeemable convertible preferred stock		22,191,333	22,191,333
Warrants	39,514	39,514	39,514

Included in the calculation of net loss attributable to common stockholders is accretion to redemption value of $44,845 for the year ended December 31, 2004 related to the issuance of the Company’s redeemable convertible preferred stock.

~~Included~~Initial inPublic ~~the calculation~~Stock ofOffering—The ~~net~~Company’s ~~loss~~initial ~~attributable~~public tooffering of its common ~~stockholders~~stock, iswhich ~~accretion~~was toeffective ~~redemption~~under ~~value~~applicable securities oflaws ~~$44,845,~~on ~~$59~~October 6,~~792~~ 2004 and ~~$56~~closed on October 13,~~659~~ ~~for~~2004, ~~the~~resulted ~~years~~in ~~ended~~the ~~December~~sale ~~31,~~of ~~2001~~7,295,447 ~~2002~~shares ~~and~~of ~~2003,~~common ~~respectively~~stock, ~~related~~net toproceeds ~~the~~of ~~issuance~~$86.1 ofmillion and the ~~Company’s~~conversion ~~redeemable convertible~~of all outstanding preferred stock into 16,797,103 shares of common stock.

Initial Public Stock Offering—The Company’s initial public offering of its common stock, which was effective under applicable securities laws on October 6, 2004 and closed on October 13, 2004, resulted in the sale of 7,295,447 shares of common stock, net proceeds of $86.1 million and the conversion of all outstanding preferred stock into 16,797,103 shares of common.

Segment Reporting—SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, established standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker or group, in deciding how to allocate resources and in assessing performance. The Company’s chief decision maker reviews the results of operations and requests for capital expenditures based on one industry segment: producing and selling products and procedures to improve people’s vision through laser vision correction. The Company’s entire revenue and profit stream is generated through this segment.

The following table summarizes revenues by geographic region:

	Year Ended December 31,
	2004		2003		2002
	2006			2005		2004
United States	42,832,917		20,961,892		17,535,463
United States of America	$	70,530,064		$	54,721,281	$	42,832,917
Asia Pacific	~~7,641,496~~	26,714,381	~~3,942,572~~		19,624,201		7,641,496
Europe	~~8,703,180~~	27,535,887			17,099,226		8,703,180
Other	~~790,681~~	7,146,402	~~525,000~~		~~567~~2,~~000~~988,127		790,681
	59,968,274		25,429,464		18,102,463
	$	131,926,734		$	94,432,835	$	59,968,274

Substantially all of the Company’s long-lived assets are located in the United States of America.

Use of Estimates in the Preparation of the Financial Statements—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-12

INTRALASE CORP. AND SUBSIDIARY

~~CONSOLIDATED~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Years~~YEARS ~~ended~~ENDED ~~December~~ DECEMBER 31, ~~2004~~2006, ~~2003~~2005 ~~and~~AND ~~2002~~2004

~~Use~~Recent ofAccounting ~~Estimates~~Pronouncements—In inNovember 2004, the ~~Preparation~~FASB ofissued SFAS No. 151, “Inventory Costs”. SFAS No. 151 clarifies the ~~Financial~~accounting ~~Statements—The~~for ~~preparation~~abnormal amounts of ~~financial~~idle ~~statements in~~facility ~~conformity~~expense, ~~with~~freight, ~~accounting~~handling ~~principles~~costs ~~generally~~and ~~accepted~~wasted material (spoilage) to be expensed as incurred and not included in ~~the~~overhead. Further, ~~United~~Statement ~~States~~No. 151 requires ~~management~~that toallocation ~~make~~of ~~estimates~~fixed ~~and~~production ~~assumptions~~overheads ~~that~~to ~~affect~~conversion ~~the~~costs ~~reported~~should ~~amounts~~be based on normal capacity of ~~assets~~the ~~and~~production ~~liabilities~~facilities. ~~and~~The ~~disclosure~~provisions of ~~contingent~~SFAS ~~assets~~No. 151 ~~and~~are ~~liabilities~~effective atfor inventory costs ~~the~~incurred ~~date~~during offiscal ~~the~~years ~~financial~~beginning ~~statements~~after ~~and~~June 15, 2005. The Company’s current accounting policies are consistent with the ~~reported~~accounting ~~amount~~required ofby ~~revenues~~SFAS No. 151 and, ~~expenses~~as ~~during~~such, the ~~reporting~~adoption ~~period.~~of ~~Actual~~this ~~results~~statement ~~could~~had ~~differ~~no ~~from~~effect ~~those~~on ~~estimates~~its financial statements.

~~Recent Accounting Pronouncements—~~In ~~January~~May ~~2003~~2005, the FASB issued ~~FIN~~SFAS 46No. 154, ~~Consolidation~~Accounting ofChanges ~~Variable Interest~~and ~~Entities~~Error Corrections, ~~and~~which inreplaces ~~December~~APB Opinion ~~2003~~No. 20, ~~issued~~Accounting ~~FIN~~Changes ~~46(R)~~and ~~(revised~~SFAS ~~December 2003)~~No. 3, ~~Consolidation~~Reporting ofAccounting ~~Variable~~Changes ~~Interest~~in ~~Entities—an~~Interim ~~interpretation~~Financial ofStatements. ~~ARB~~SFAS 51No. 154 Inchanges ~~general,~~the arequirements ~~variable~~for ~~interest~~accounting ~~entity~~and isreporting a ~~corporation,~~change ~~partnership~~in accounting principle, ~~trust~~and orapplies ~~any~~to ~~other~~all ~~legal~~voluntary ~~structure~~changes ~~used~~in ~~for~~accounting ~~business~~principles, ~~purposes~~as ~~that~~well ~~either~~as ~~(a)~~changes ~~does~~required ~~not~~by ~~have~~an ~~equity~~accounting ~~investors~~pronouncement ~~with~~in ~~voting~~the ~~rights~~unusual orinstance ~~(b)~~it ~~has~~does ~~equity investors that do~~ not ~~provide~~include ~~sufficient~~specific ~~financial~~transition ~~resources~~provisions. ~~for~~Specifically, ~~the~~SFAS ~~entity to support its activities~~No. 154 ~~FIN~~requires 46retrospective ~~requires~~application ~~certain variable interest entities~~ to beprior ~~consolidated~~periods’ byfinancial ~~the~~statements, ~~primary~~unless ~~beneficiary~~it ofis ~~the~~impracticable ~~entity~~to ifdetermine the ~~investors~~period-specific doeffects ~~not~~or ~~have~~ the ~~characteristics~~cumulative effect of athe ~~controlling~~change. ~~financial~~When ~~interest~~it oris doimpracticable ~~not~~to ~~have~~determine ~~sufficient~~the ~~equity~~effects atof ~~risk~~the ~~for~~change, the ~~entity~~new toaccounting ~~finance~~principle ~~its~~must ~~activities~~be ~~without~~applied ~~additional subordinated financial support from other parties. FIN 46(R) clarifies Accounting Research Bulletin No. 51, Consolidated Financial Statements,~~ to ~~certain~~the ~~entities~~balances inof ~~which~~assets ~~equity~~and ~~investors~~liabilities doas ~~not~~of ~~have~~ the ~~characteristics~~beginning of athe ~~controlling~~earliest ~~financial~~period ~~interest or do not have sufficient equity at risk~~ for ~~the~~which ~~entity~~retrospective toapplication ~~finance~~is ~~its~~practicable ~~activities~~and ~~without~~a ~~subordinated~~corresponding ~~financial~~adjustment ~~support~~must ~~from~~be ~~other~~made ~~parties.~~to ~~The~~the ~~consolidation~~opening ~~requirements~~balance of ~~FIN~~retained ~~46 apply~~earnings ~~immediately~~for tothat ~~variable~~period ~~interest~~rather ~~entities~~than ~~created~~being ~~after~~reported ~~January~~in ~~31,~~an ~~2003~~income statement. ~~The~~When ~~consolidation~~it ~~requirements~~is ~~apply~~impracticable to ~~older~~determine ~~entities in~~ the ~~first~~cumulative ~~fiscal~~effect ~~year beginning after June 15, 2003. Certain~~ of the ~~disclosure~~change ~~requirements~~the ~~apply~~new inprinciple ~~all~~must ~~financial statements~~be ~~issued~~applied ~~after~~as ~~January~~if ~~31,~~it ~~2003,~~were ~~regardless~~adopted ofprospectively ~~when~~from the ~~variable~~earliest ~~interest~~date ~~entity~~practicable. SFAS ~~was established~~No. 154 ~~FIN~~is ~~46(R)~~effective ~~applies~~for ~~immediately~~accounting tochanges ~~variable interest entities created after December 31, 2003~~ and tocorrections ~~variable~~of ~~interest~~errors ~~entities~~made in ~~which~~fiscal ~~an enterprise~~years ~~obtains~~beginning ~~an interest~~ after ~~that~~December 15, ~~date~~2005. ItSFAS ~~applies~~No. 154 nodoes ~~later~~not ~~than~~change the ~~first~~transition ~~reporting~~provisions ~~period~~of ~~ending~~any ~~after~~existing ~~March 15, 2004 to variable interest entities in which an enterprise holds a variable interest (other than special purpose) that it acquired before January 1, 2004~~pronouncements. The adoption of SFAS ~~FIN~~No. 154 ~~46 and FIN 46(R)~~ did not have a ~~material~~significant impact on the Company’s financial ~~condition or results of operations, because the Company is not a beneficiary of any variable interest entities~~statements.

InDuring ~~May~~2005 ~~2003,~~ the FASB issued ~~SFAS~~Interpretation 47 ~~No.~~(“FIN ~~150~~47”), Accounting for ~~Certain~~ ~~Instruments~~Conditional ~~with~~Asset ~~Characteristics~~Retirement ~~of both Liabilities and Equity~~Obligations, which ~~establishes~~addresses ~~standards for how an issuer classifies and measures~~ certain ~~financial~~aspects ~~instruments with characteristics~~ of ~~both liabilities and equity.~~ SFAS No. ~~150 requires that an issuer classify a financial instrument that is within its scope~~ 143, ~~which~~Accounting ~~may~~for ~~have~~Asset ~~previously~~Retirement ~~been reported as equity or temporarily, as a liability (or an asset in some circumstances)~~Obligations. ~~This~~FIN ~~statement~~47 is effective ~~for~~no ~~financial instruments~~later ~~entered~~than ~~into or modified after May 31, 2003, and otherwise is effective at~~ the ~~beginning~~end of ~~the~~fiscal years ~~first~~ending ~~interim period beginning~~ after ~~June~~ December 15, ~~2003, except for mandatory redeemable financial instruments of nonpublic companies~~2005. The adoption of ~~SFAS~~FIN ~~No.~~47 ~~150~~had ~~did~~no ~~not~~impact ~~have a material effect~~ on the Company’s financial ~~condition or results of operations~~statements.

In ~~December 2004~~ July 2006, the FASB issued ~~SFAS~~FASB Interpretation No. 48 ~~123~~ (~~revised~~“FIN ~~2004~~48”), ~~Share-Based Payment. This statement replaces SFAS No. 123,~~ Accounting for ~~Stock-Based~~ ~~Compensation~~Uncertainty ~~and~~in ~~supersedes~~Income ~~ABP Opinion No. 25~~Taxes, ~~Accounting~~which ~~for~~prescribes ~~Stock~~a ~~Issued~~recognition tothreshold ~~Employees.~~and ~~SFAS~~measurement ~~No.~~process ~~123R addresses the accounting~~ for ~~share-based~~recording ~~payment transactions~~ in ~~which~~the anfinancial ~~enterprise receives employee services in~~statements ~~exchange~~uncertain ~~for~~tax ~~(a)~~positions ~~equity~~taken ~~instruments of the enterprise~~ or ~~(b)~~expected ~~liabilities~~to ~~that are based on the fair value of the enterprise’s equity instruments or that may~~ be ~~settled~~taken byin ~~the~~a ~~issuance~~tax ~~of such equity instruments~~return. ~~SFAS~~Additionally, ~~No.~~FIN ~~123R~~48 ~~eliminates~~provides ~~the ability~~guidance toon ~~account for share-based compensation transactions using~~ the ~~intrinsic~~derecognition, ~~value~~classification, ~~method~~interest ~~under~~and ~~APB 25~~penalties, ~~Accounting~~accounting ~~for~~in ~~Stock~~interim ~~Issued~~periods ~~to Employees,~~ and ~~requires~~disclosure ~~instead~~requirements ~~that such transactions be accounted~~ for ~~using~~uncertain ~~a fair-value-based~~tax ~~method~~positions. The ~~Company~~accounting isprovisions ~~currently~~of ~~evaluating~~FIN ~~SFAS~~48 ~~No.~~are ~~123R to determine which fair-value-based model and transitional provision it will follow upon adoption. SFAS No. 123R will be~~ effective for ~~the~~reporting ~~Company~~periods beginning inafter ~~its~~December 15, ~~third quarter of fiscal 2005~~2006. ~~Although~~The ~~the~~ Company ~~will~~is ~~continue~~currently toevaluating ~~evaluate~~ the ~~application~~impact of ~~SFAS~~adoption ~~No.~~of ~~123R,~~FIN ~~management~~48 ~~expects~~and ~~adoption~~has tonot ~~have~~yet adetermined ~~material~~the ~~impact~~effect on its ~~results~~earnings ofor financial ~~operations in amounts not yet determinable~~position.

In ~~December~~September ~~2004~~2006, the ~~FASB~~Securities and Exchange Commission staff issued ~~SFAS~~Staff Accounting Bulletin No. ~~153~~ 108, Considering ~~“Exchanges~~the Effects of ~~Nonmonetary~~ ~~Assets~~Prior –Year AnMisstatements ~~amendment~~when ofQuantifying ~~APB~~Misstatements ~~29,~~in ~~Accounting~~Current ~~for~~Year ~~Nonmonetary~~Financial ~~Transactions~~Statements (“SAB 108”). ~~This~~SAB ~~statement~~108 ~~amends~~provides ~~APB~~guidance ~~Opinion~~for ~~No.~~how 29errors toshould ~~eliminate~~be ~~the~~evaluated ~~exception~~to ~~for~~assess ~~nonmonetary~~materiality ~~exchanges~~from ofa quantitative ~~similar~~perspective. ~~productive~~SAB ~~assets~~108 ~~and~~permits ~~replaces~~companies itto ~~with~~initially ~~a general~~apply ~~exception~~its ~~for~~provisions ~~exchanges~~by ofeither ~~nonmonetary~~restating ~~assets~~prior ~~that~~financial dostatements ~~not~~or ~~have~~recording ~~commercial~~the ~~substance.~~cumulative Aeffect ~~nonmonetary~~of ~~exchange~~initially ~~has~~applying ~~commercial~~the ~~substance~~approach ifas ~~the~~adjustments ~~future~~to ~~cash~~the ~~flows~~carrying values of assets ~~the~~and ~~entity~~liabilities ~~are~~as ~~expected~~of toJanuary 1, ~~change~~2006 ~~significantly~~with asan aoffsetting ~~result~~adjustment ofto ~~the~~retained ~~exchange~~earnings. ~~The Company~~SAB ~~will~~108 ~~evaluate~~is ~~the~~required ~~effect,~~to ifbe ~~any~~adopted by December 31, of2006 ~~adopting~~and ~~SFAS~~did ~~No.~~not ~~153~~have an effect on the Company’s financial statements.

In ~~November~~September ~~2004~~2006, the FASB issued SFAS No. ~~151~~ 157, ~~“Inventory~~Fair ~~Costs”~~Value Measurements, which ~~amends~~defines ~~ARB~~fair ~~Opinion~~value, establishes a framework for consistently measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 43is effective for us beginning January 1, ~~Chapter~~2008, ~~“Inventory~~and ~~Pricing”.~~the ~~SFAS~~provisions of SFAS No. 157 ~~151~~will ~~clarifies~~be ~~the~~applied ~~accounting~~prospectively ~~for~~as ~~abnormal~~of ~~amounts~~that date. The Company is currently evaluating the effect that adoption of ~~idle~~this ~~facility~~statement ~~expense, freight,~~will ~~handling~~have on its financial statements.

F-13

INTRALASE CORP. AND SUBSIDIARY

~~CONSOLIDATED~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Years~~YEARS ~~ended~~ENDED ~~December~~ DECEMBER 31, ~~2004~~2006, ~~2003~~2005 ~~and~~AND ~~2002~~2004

~~costs~~ option ~~and~~has ~~wasted~~been ~~material~~elected ~~(spoilage) to be expensed as incurred and not included~~ in ~~overhead.~~earnings ~~Further,~~at ~~Statement~~each ~~No.~~subsequent ~~151 requires~~reporting ~~that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities~~date. ~~The provisions of~~ SFAS No. 159 ~~151~~is ~~are~~ effective for ~~inventory costs incurred during~~ fiscal years beginning after ~~June~~ November 15, ~~2005~~ 2007. The Company’s ~~current~~is ~~accounting~~currently ~~policies~~evaluating ~~are consistent with~~ the ~~accounting~~effect ~~required~~that ~~by SFAS No. 151 and, as such, the~~ adoption of this statement will have ~~no effect~~ on its financial statements.

2.	Cash, Cash Equivalents and Marketable Securities

The Company’s portfolio of cash, cash equivalents and marketable securities ~~are~~is asmade ~~follows~~up atof ~~December~~the ~~31:~~following at

	2004		2003
Cash and money market funds	$	4,074,091	$	1,915,434
Commercial paper		21,940,835		9,977,446
Municipal bonds		66,000,000
	$	92,014,926	$	11,892,880

December 31:

All of the Company’s investments are classified as held-to-maturity with maturities within 90 days at December 31, 2004 and maturities within 120 days at December 31, 2003, and the Company has the positive intent and ability to hold these securities to maturity.


	2006		2005
Cash and money market funds	$	12,597,242	$	11,198,665
Agency bonds – short term		69,000,000		35,000,000
Agency bonds – long term		22,000,000		44,000,000

At December 31, 2006, all of the Company’s investments are classified as held-to-maturity and are reported at amortized cost that approximates fair value as the Company has the positive intent and ability to hold these securities to maturity. As of December 31, 2006 and 2005, the long term agency bonds had maturity dates within 24 months and all other investments had maturities within 12 months.

3.	Inventories

Inventories are as follows at December 31:

	2004				2003
	2006			2005
Raw materials	$	45,~~757~~078,~~720~~574		$	$3,973,984	~~3,309,078~~
Work-in-process		36,~~303~~642,~~745~~384			6,275,690	~~2,288,566~~
Finished goods		12,~~620~~964,~~043~~178			3,222,287	~~1,304,850~~
		9,681,508				6,902,494
	$	14,685,136		$	13,471,961
Less reserve for obsolescence		(779,824	)			(635,521	)
	$	8,901,684			$	6,266,973

Amounts charged to expense for excess and obsolete inventories were $1.3 million, $1.0 million, and $433,000 for 2006, 2005 and 2004, respectively.

4.	Property, Plant and Equipment

Property, plant and equipment are as follows at December 31:

	2004			2003
	2006			2005
Leasehold improvements	$	16,~~001~~402,~~113~~122		$	~~996~~6,~~814~~286,297
Office equipment		~~380~~780,~~962~~690			89668,~~628~~376
Furniture and fixtures		~~399~~1,~~903~~335,035			~~302~~1,~~240~~052,738
Computer equipment and software		23,~~051~~913,~~270~~205			12,~~453~~708,~~087~~394
Production equipment		25,~~892~~537,~~519~~213			14,~~934~~245,~~695~~346
Research and development equipment		36,~~495~~897,~~896~~324			24,~~329~~475,~~311~~634
Exhibits and displays		~~119~~580,~~438~~620			~~116~~536,~~331~~494
		10,341,101			7,222,106
		25,446,209			19,973,279
Less accumulated depreciation		(510,~~743~~647,~~555~~106	)		(37,~~867~~550,~~966~~851	)
Property and equipment—net	$	414,~~597~~799,~~546~~103		$	312,~~354~~422,~~140~~428

5. Equipment Under ~~Operating~~Lease ~~Leases~~Arrangements

At December 31, ~~2004~~2006 and December 31,~~2003~~ 2005 equipment under operating leases consisted of lasers leased to customers. The operating leases typically have ~~a term~~terms ofup 36 to 3948 months and are generally cancelable during the first three to six months., converting ~~The lease typically converts~~ to a non-cancelable lease at the end of six months unless the customer provides a written notice of cancellation 30 days prior to the cancellation date. To date only one operating lease has been canceled. The customer typically can purchase the leased equipment at any time during lease term for the difference between the purchase price and the underlying operating lease payments made.

Future lease payments receivable under non-cancelable operating leases as of December 31, 2004 are as follows:

Years Ending December 31,
2005	$	1,309,033
2006		1,144,034
2007		310,879
	$	2,763,946

F-14

INTRALASE CORP. AND SUBSIDIARY

~~CONSOLIDATED~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Years~~YEARS ~~ended~~ENDED ~~December~~ DECEMBER 31, ~~2004~~2006, ~~2003~~2005 ~~and~~AND ~~2002~~2004

The Company provides long-term financing under sales-type lease arrangements for certain customers. The Company had approximately $6.9 million and $1.8 million of net receivables outstanding at December 31, 2006 and 2005, respectively, under sales-type lease arrangements. Approximately $5.0 million and $1.4 million of these balances were due to be paid after one year at December 31, 2006 and 2005, respectively, with the balance due within one year. The Company includes the portion of receivables and long-term notes due to be paid within one year in prepaid expenses and other current assets and the remaining balance in long term other assets in the accompanying balance sheets (see Note 7 – Other Assets). The Company records interest during the sales-type lease term using a market rate of interest.

Future lease payments receivable under non-cancelable operating leases and sales-type leases as of December 31, 2006 are as follows:


Years Ending December 31,	Operating Leases		Sales-Type Leases
2007	$	1,126,962	$	2,337,501
2008		1,330,044		2,337,501
2009		563,059		2,245,835
2010		151,836		968,230
2011		86,185		—

	$	3,258,086		7,889,067

Less amount representing interest				(1,004,855	)

			$	6,884,212

6.	Purchase of Technology

On July 15, 2004, the Company entered an agreement to acquire a fully-paid royalty-free irrevocable and worldwide license from the University of Michigan for the use of certain technology and to settle all past contract disputes for aggregate consideration of $2,000,000. Upon closing this agreement on July 15, 2004 the Company recorded a charge of $765,000, which is included within research and development expenses in 2004 related to the settlement of the contract disputes and capitalized $1,235,000, which is included at its amortized value within total long-term assets ~~at December 31~~, ~~2004,~~ associated with acquired licenses in accordance with the terms of the agreement.

7. ~~Accrued~~Other ~~Expenses~~Assets

~~Short-term~~Other ~~and~~assets ~~long-term accrued expenses~~ consist of the following at December 31:

	2004		2003
	2006		2005
Customer deposits	$	489,102	$	176,667
Notes receivable	$	$5,551,566	$	1,650,101
Payroll and related accruals		3,156,082		1,552,572
Other		1,339,000		1,437,115
Royalties		891,153		563,312
	$	6,890,566	$	3,087,216
Product warranties		373,715		84,967
Other		1,120,455		592,992
	$	6,030,507	$	2,970,510

8. ~~Redeemable~~Accrued ~~Convertible Preferred Stock~~Expenses

~~Upon~~Accrued ~~closing~~expenses ~~the~~consist ~~Company’s initial public offering on October 13, 2004, all shares~~ of the ~~outstanding redeemable convertible preferred stock~~ ~~converted~~following ~~into~~at ~~16,797,103~~December 31: ~~shares of common stock.~~

9. Stockholders’ Deficit


	2006		2005
Customer deposits	$	652,452	$	602,058
Payroll and related accruals		5,586,284		3,716,054
Royalties		1,748,390		1,183,399
Product warranties		586,250		603,054
Other		2,577,716		1,701,002

	$	11,151,092	$	7,805,567

Warrants—During 2003 and 2002, warrants were issued in connection with the Company’s debt financing, as disclosed in Note 11.

Restricted Stock Purchase Agreements for Common Stock and Receivable from Sale of Stock to Officers and Employees—Certain common stock is issued pursuant to restricted stock purchase agreements. During the years ended December 31, 2002 and 2000, 544,745 and 433,278, respectively, shares of common stock were sold pursuant to restricted stock purchase agreements. In both years, the restricted shares were issued upon the exercise of previously granted stock options (whose exercise price equaled fair market value on the date of grant). The restricted stock vests at the same rate as the underlying exercised options. The Company financed the aggregate exercise price of the options by granting full recourse loans to employees. The loans bear interest at 6.22% annually and mature after five years. Interest receivable related to these loans is included in other assets in the accompanying balance sheets.

Restricted shares are subject to the risk of forfeiture, certain restrictions on transferability and to the Company’s repurchase rights. The restrictions and repurchase options lapse 25%, each year over a four-year vesting period. The Company has a repurchase option, exercisable upon discontinuance of the purchaser’s service with the Company, to repurchase the unvested shares at the original price paid by the purchaser. During 2004, unvested shares of 12,008 were repurchased under this provision through reduction in a loan to an employee of $16,353, when the employee’s service with the Company ended. Holders of restricted stock have all rights of a stockholder.

F-15

INTRALASE CORP. AND SUBSIDIARY

~~CONSOLIDATED~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Years~~YEARS ~~ended~~ENDED ~~December~~ DECEMBER 31, ~~2004~~2006, ~~2003~~2005 ~~and~~AND ~~2002~~2004

Stock Option Plans—The Company has four stock option plans: (i) the 1997 Stock Option Plan under which nonstatutory or incentive stock options to acquire shares of the Company’s common stock may be granted to employees and nonemployees of the Company; (ii) the 2000 Stock Incentive Plan provides for granting of options which vest over time; (iii) the 2000 Executive Option Plan provides for the granting of options which vest after the earlier of seven years or upon the grantee’s achievement of preset goals or milestones (performance-based stock-option awards) and (iv) the 2004 Stock Incentive Plan for granting nonstatutory or incentive stock options, restricted stock, stock appreciation rights, performance shares and performance units to employees, directors and consultants9. ~~The~~Redeemable ~~plans~~Convertible ~~permit~~Preferred the issuance of options for the purchase of up to 1,309,213 shares of common stock, 5,772,224 shares of common stock, 721,528 shares of common stock, and 3,607,640 shares of common stock respectively. On October 12, 2004 the 1997 Stock ~~Option Plan and 2000 Executive Option Plan were expired to allow no further grants from the plans. All shares left available for grant were cancelled and deleted from the plan.~~

Upon closing the Company’s initial public offering on October 13, 2004, all shares of the outstanding redeemable convertible preferred stock converted into 16,797,103 shares of common stock.

10.

Stockholders’ Equity and Stock-Based Compensation

Warrants—During 2005 all outstanding warrants were exercised on a cashless basis and as of December 31, 2006 and 2005 there were no outstanding warrants.

Restricted Stock Purchase Agreements for Common Stock and Receivable from Sale of Stock to Officers and Employees—Certain common stock is issued pursuant to restricted stock purchase agreements. During the years ended December 31, 2002 and 2000, 544,745 and 433,278, respectively, shares of common stock were sold pursuant to restricted stock purchase agreements. In both years, the restricted shares were issued upon the exercise of previously granted stock options (whose exercise price equaled fair market value on the date of grant). The restricted stock vests at the same rate as the underlying exercised options. The Company financed the aggregate exercise price of the options by granting full recourse loans to employees. The loans bear interest at 6.22% annually and mature after five years. Interest receivable related to these loans is included in other assets in the accompanying balance sheets.

Restricted shares are subject to the risk of forfeiture, certain restrictions on transferability and to the Company’s repurchase rights. The restrictions and repurchase options lapse 25%, each year over a four-year vesting period. The Company has a repurchase option, exercisable upon discontinuance of the purchaser’s service with the Company, to repurchase the unvested shares at the original price paid by the purchaser. During 2006 and 2005, repayments of $74,218 and $699,943, respectively, were made by employees. During 2004, unvested shares of 12,008 were repurchased under this provision through reduction in a loan to an employee of $16,353, when the employee’s service with the Company ended. Holders of restricted stock have all rights of a stockholder.

Employee Stock Purchase Plan —The Company’s Employee Stock Purchase Plan was created in 2004. The purchase price of the common stock under the Employee Stock Purchase Plan is equal to 85% of the fair market value per share of common stock on either the start of the offering period or on the purchase date, whichever is less. The Employee Stock Purchase Plan has six month offering periods with purchases occurring each November 1 and May 1. Under the plan, eligible employees are permitted to purchase common stock through payroll deductions that may not exceed the lesser of 20% of any employee’s compensation or $25,000 during any calendar year. In addition, no employee may purchase more than 3,608 shares of common stock on any purchase date. The plan permits the issuance of up to 721,528 shares of common stock.

At December 31, 2006, there were 530,812 shares available for grant under the Employee Stock Purchase Plan.

Stock Option Plans—The Company has four stock option plans: (i) the 1997 Stock Option Plan under which nonstatutory or incentive stock options to acquire shares of the Company’s stock may be granted to employees and non-employees of the Company, (ii) the 2000 Stock Incentive Plan provides for granting of options which vest over time, (iii) the 2000 Executive Option Plan provides for the granting of options which vest after the earlier of seven years or upon the grantee’s achievement of present goals or milestones (performance-based stock awards) and (iv) the 2004 Stock Incentive Plan for granting nonstatutory or incentive stock options, restricted stock, stock appreciation rights, performance shares and performance units to employees, directors and consultants. The plans permit the issuance of options for the purchase of up to 1,309,213 shares of common stock, 5,772,224 shares of common stock, 721,528 shares of common stock, and 5,607,640 shares of common stock respectively.

The plans are administered by the Board of Directors (the “Administrator”) and permit the issuance for purchase of the Company’s common stock at exercise prices not less than fair market value of the underlying shares on the date of grant. Options granted under the plans are exercisable over a period of time (generally not to exceed 10 years), designated by the Administrator and are subject to other terms and conditions, as determined by the Administrator.

A summary of the Company’s stock option activity follows as of December 31:

	SharesunderOption		Weighted-AverageExercisePrice		Exercisableat End ofPeriod	Weighted-AverageExercisePrice
Outstanding—January 1, 2002	2,025,603		$	1.26	488,147	$	1.00
Granted (weighted-average fair value of $0.16)	1,706,554		$	1.55
Forfeited	(142,967	)	$	1.25
Exercised	(654,675	)	$	1.13
Outstanding—December 31, 2002	2,934,515		$	1.46	816,286	$	1.19
Granted (weighted-average fair value of $0.24)	2,182,369		$	2.55
Forfeited	(76,843	)	$	2.05
Exercised	(25,148	)	$	1.49
Outstanding—December 31, 2003	5,014,893		$	1.92	1,605,654	$	1.38
Granted (weighted-average fair value of $9.67)	1,318,693		$	9.67
Forfeited	(438,084	)	$	2.04
Exercised	(455,705	)	$	1.49
Outstanding—December 31, 2004	5,439,795		$	3.83	2,418,454	$	3.83

F-16

INTRALASE CORP. AND SUBSIDIARY

~~CONSOLIDATED~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Years~~YEARS ~~ended~~ENDED ~~December~~ DECEMBER 31, ~~2004~~2006, ~~2003~~2005 ~~and~~AND ~~2002~~2004

AtA ~~December~~summary ~~31,~~of ~~2004, there were 4,117,486 shares available for future grant under~~ the ~~plans.~~Company’s ~~Information~~stock ~~regarding~~option ~~the weighted-average~~activity ~~remaining~~follows ~~contractual~~as ~~life and weighted-average exercise price~~ of ~~options outstanding and options exercisable at~~ December 31~~, 2004 for each exercise price is as follows~~:

	Options Outstanding							Options Exercisable
	SharesunderOption			Weighted-AverageExercisePrice			Weighted-AverageRemainingContractual Term		AggregateIntrinsic Value
Range of Exercise Prices	NumberOutstandingAs of12/31/2004		Weighted-AverageRemainingContractualLife (In Years)		Weighted-AverageExercisePrice			NumberExercisableAs of12/31/2004		Weighted-AverageExercisePrice
Outstanding—December 31, 2003	5,014,893			$	1.92
$0.14 - $0.83	560,844		5.80		$	0.67		446,574		$	0.63
Granted (weighted-average fair value of $5.04)	1,318,693			$	9.67
$1.11	127,536		5.37		$	1.11		123,469		$	1.11
Forfeited	(438,086	)		$	2.04
$1.44	575,769		7.36		$	1.44		346,300		$	1.44
Exercised	(455,705	)		$	1.49
$1.80	596,025		6.45		$	1.91		504,624		$	1.88
Outstanding—December 31, 2004	5,439,795			$	3.83
$2.48	166,683		7.74		$	2.48		126,290		$	2.48
Granted (weighted-average fair value of $8.45)	1,526,009			$	17.44
$2.54	2,072,779		8.32		$	2.54		831,225		$	2.54
Forfeited	(288,949	)		$	10.46
$2.87	635,133		9.23		$	4.06		39,972		$	2.87
Exercised	(1,172,240	)		$	1.62
$11.91	469,861		9.55		$	12.42
Outstanding—December 31, 2005	5,504,615			$	7.73
$16.70	122,265		9.78		$	16.70
Granted (weighted-average fair value of $10.94)	1,705,698			$	20.30
$19.68	112,900		9.97		$	19.68
Forfeited	(294,941	)		$	15.64
$0.14 - $19.68	5,439,795		7.95		$	3.83		2,418,454		$	1.82
Exercised	(727,762	)		$	4.47
Outstanding—December 31, 2006	6,187,610			$	11.18		7.57		$	69,270,777
Ending Vested and Expected to Vest in the Future – December 31, 2006	5,865,430			$	10.81		7.10		$	67,862,525
Exercisable—December 31, 2006	3,566,046			$	7.22		6.75		$	54,066,964

AsAt ~~disclosed in Note 1~~December 31, ~~the~~2006 ~~Company~~there ~~applies~~were ~~APB~~3,221,900 ~~Opinion~~shares ~~No.~~available ~~25 and related interpretations in accounting~~ for ~~its~~future ~~stock-based~~grant ~~awards~~under ~~to employees and SFAS No. 123 in accounting for its stock-based awards to nonemployees. Certain of~~ the ~~Company’s performance-based~~plans. ~~and~~Information ~~certain~~regarding ~~time-based stock-option awards do not meet~~ the ~~criteria for fixed plan accounting and are accounted for under variable~~weighted-~~plan~~average ~~accounting~~remaining incontractual ~~accordance~~life ~~with SFAS No. 123~~ and ~~Emerging Issues Task Force (EITF No. 96~~weighted-~~18),~~average Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services. Under variable-plan accounting, the market value of the underlying common stock in excess of the stock-option exercise price ~~is charged to income ratably over the period in which management anticipates these awards will vest. The final market value~~ of ~~the~~options ~~performance-based~~outstanding ~~awards~~and ~~is determined at the date the milestones are met. In addition, stock-based compensation for option grants to nonemployees, which related to 598,868 of the~~ options ~~outstanding~~exercisable at December 31, ~~2004,~~2006 isfor ~~recorded~~each byexercise ~~using~~price ~~the~~is ~~Black-Scholes~~as ~~option-pricing model at the measurement date, using the following weighted average assumptions~~follows:

	2004			2003			2002
	Options Outstanding							Options Exercisable
Expected life	60 months			120 months			60 months
Range of Exercise Prices	NumberOutstandingAs of12/31/2006		Weighted-AverageRemainingContractualLife (In Years)		Weighted-AverageExercisePrice			NumberExercisableAs of12/31/2006	Weighted-AverageExercisePrice
Risk-free rate of return	3.12	%		2.53	%		3.03	%
$ 0.14 - $2.48	578,419		4.86		$	1.56		546,288	$	1.57
Volatility(1)	85.18	%		99	%		104	%
$ 2.54	1,855,321		6.32		$	2.54		1,668,200	$	2.54
Dividends	none			none			None
$ 2.87 - $12.73	671,115		7.37		$	7.16		403,126	$	6.99
$14.85 - $15.56	645,883		8.38		$	15.42		246,323	$	15.42
$16.32 - $18.89	657,640		9.05		$	17.43		150,317	$	17.50
$18.90 - $21.40	662,807		8.61		$	20.05		462,245	$	20.38
$21.48	994,250		9.32		$	21.48		—	$	—
$22.22	98,700		8.11		$	22.22		88,572	$	22.22
$22.36	975		9.25		$	22.36		975	$	22.36
$22.38	22,500		9.97		$	22.38		—	$	—
$ 0.14 - $22.38	6,187,610		7.57		$	11.18		3,566,046	$	7.22

~~(1)~~In ~~Estimated~~December ~~using~~2004, athe ~~peer~~FASB ~~company~~issued ~~prior~~SFAS No. 123R, which requires that the compensation cost related to ~~initial~~share-based ~~public~~payment ~~offering~~transactions, measured based on the fair value of ~~stock~~the equity or liability instruments issued, be recognized in ~~October~~the ~~2004~~financial statements. The Company adopted SFAS No. 123R on January 1, 2006. Determining the fair value of options using the Black-Scholes model requires subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affects the calculated fair value on the grant date.

~~Stock-based~~In ~~compensation~~fiscal ~~related~~years to2005 ~~nonemployees~~and is2004, ~~amortized over~~ the ~~vesting~~Company ~~period~~accounted offor ~~the~~its ~~underlying option. Stock~~stock-based ~~compensation~~ ~~expense~~awards ofto ~~$4,509,113,~~employees ~~$307,163~~using ~~and~~the ~~$271,632~~intrinsic ~~was~~value ~~recognized~~method in ~~2004,~~accordance ~~2003~~with Accounting ~~and~~Principles ~~2002,~~Board ~~respectively~~(“APB”) Opinion No. 25, ~~associated~~“Accounting ~~with~~for ~~employee~~Stock ~~performance~~Issued to Employees”. Stock-based, ~~employee~~awards ~~time~~to non-~~based~~employees ~~and~~were ~~nonemployee~~accounted ~~stock~~for using the fair value method in accordance with SFAS No. 123, Accounting for Stock-~~option~~Based ~~awards~~Compensation.

The following summarizes information about restricted common stock issued pursuant to restricted stock purchase agreements:

	Numberof Shares
Unvested common shares—January 1, 2002	101,459
Common shares issued pursuant to restricted stock purchase agreements	544,748
Shares vested	(350,955	)
Unvested common shares—December 31, 2002	295,252
Shares vested	(193,734	)
Unvested common shares—December 31, 2003	101,518
Shares repurchased pursuant to restricted stock purchase agreements	(12,008	)
Shares vested	(73,214	)
Unvested common shares—December 31, 2004	16,296

F-17

INTRALASE CORP. AND SUBSIDIARY

~~CONSOLIDATED~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Years~~YEARS ~~ended~~ENDED ~~December~~ DECEMBER 31, ~~2004~~2006, ~~2003~~2005 ~~and~~AND ~~2002~~2004

If the computed fair value of the awards had been amortized to expense over the vesting period of the awards, net income (loss) would have been as follows:


	2005			2004
Net income (loss) applicable to common stockholders as reported	$	9,524,458		$	(10,241,747	)
Add: Stock-based employee compensation expense included in reported net income (loss)		1,746,584			1,803,680
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(10,037,768	)		(2,312,278	)

Pro forma net income (loss) applicable to common stockholders	$	1,233,274		$	(10,750,345	)

Net income (loss) per share applicable to common stockholders—basic as reported	$	0.35		$	(1.28	)

Net income (loss) per share applicable to common stockholders—diluted as reported	$	0.31		$	(1.28	)

Pro forma net income (loss) per share applicable to common stockholders—basic	$	0.05		$	(1.34	)

Pro forma net income (loss) per share applicable to common stockholders—diluted	$	0.04		$	(1.34	)

SFAS No. 123 requires the disclosure of pro forma net income (loss) had the Company adopted the fair value method in accounting for employee stock-based awards. Under SFAS No. 123, the fair value of stock- based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock-option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company’s calculations were made using the Black-Scholes option-pricing model with the following weighted-average assumptions:


	2006		2005		2004
Expected life (1)	75 months		68 months		60 months
Risk free rate of return	4.8	%	4.1	%	3.3	%
Volatility (2)	49	%	56	%	46	%
Dividends	None		none		none

(1).	Expected life of six months for employee stock purchase plan in 2006, 2005 and 2004.

(2).	88 to 89% volatility for grants from June 2004 through September 2004, 0% volatility for grants from January 2004 through May 2004.

Stock-based compensation for option grants to non-employees, which related to 2,160,287 of the options outstanding at December 31, 2006, is recorded by using the Black-Scholes option-pricing model at the measurement date, using the following weighted-average assumptions:


	2006		2005		2004
Expected life (1)	120 months		120 months		120 months
Risk free rate of return	4.8	%	4.1	%	3.1	%
Volatility (2)	49	%	56	%	85	%
Dividends	None		none		none

(1).	Expected life of 10 years for options granted to non-employees in 2006, 2005 and 2004.

(2).	Estimated using a peer company prior to initial public offering of stock in October 2004.

As of December 31, 2006, there was $17,745,281 of total unrecognized compensation cost related to non-vested share-based compensation arrangements under the plans in addition to the deferred stock-based compensation for non-employees described below. That cost is expected to be recognized over a weighted-average period of 2.9 years.

F-18

INTRALASE CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

The weighted-average fair value of option awards granted during 2006 and 2005 were approximately $10.94 per share and $8.45 per share, respectively. The total intrinsic value of stock options exercised during the 2006 and 2005 were $10,833,553 and $18,216,791, respectively.

Cash received from share option exercises under stock-based payment plans for 2006 and 2005 was $3,254,294 and $1,898,675, respectively.

Deferred stock-based compensation is included as a component of stockholders’ equity and includes options granted to non-employees that are accounted for in accordance with SFAS No. 123R and EITF No. 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services. The market value of the underlying common stock is remeasured during each reporting period and the excess of the fair value over the option exercise price is charged to operations ratably over the remaining period in which the awards vest. As of December 31, 2006, the total remaining deferred compensation of $1,119,080 is subject to periodic remeasurement.

The following summarizes information about restricted common stock issued pursuant to restricted stock purchase agreements:


	Number of Shares
Unvested common shares—December 31, 2002	295,252
Shares vested	(193,734	)

Unvested common shares—December 31, 2003	101,518
Shares repurchased pursuant to restricted stock purchase agreements	(12,008	)
Shares vested	(73,214	)

Unvested common shares—December 31, 2004	16,296
Shares vested	(16,296	)

Unvested common shares—December 31, 2005	—

Unvested common shares—December 31, 2006	—

Changes in Capitalization—On June 25, 2004, the Company’s Board of Directors approved the following:

Subject to stockholder approval and filing of a Certificate of Amendment to the Company’s Certificate of Incorporation, a 1-to-0.721528 reverse stock split of the Company’s outstanding common stock. All share, per share and conversion amounts relating to common stock, mandatorily redeemable convertible preferred stock and stock options included in the accompanying financial statements and footnotes have been restated to reflect the reverse stock split, which was consummated on July 12, 2004;.

Upon the completion of the Company’s initial public offering on October 13, 2004:

(i). an increase in the authorized number of common shares to 45,000,000 and the creation of preferred stock for which the Board of Directors may designate the rights, preferences and privileges;

(ii). the creation of the 2004 Stock Incentive Plan with a reserve of 3,607,640 shares of common stock; and

(iii). the creation of the Employee Stock Purchase Plan with a reserve of 721,528 shares of common stock. The purchase price of the common stock under the Employee Stock Purchase Plan will be equal to 85% of the fair market value per share of common stock on either the start of the offering period or on the purchase date, whichever is less. The Employee Stock Purchase Plan will be implemented by six month offering periods with purchase occurring each November 1 and May 1, provided that the first offering period commenced on October 6, 2004, the effective date of the Company’s initial public offering. The Employee Stock Purchase Plan permits eligible employees to purchase common stock through payroll deductions that may not exceed the lesser of 20% of any employee’s compensation, or $25,000 during any calendar year. In addition, no employee may purchase more than 3,608 shares of common stock on any purchase date.

~~10.~~F-19 ~~Leases~~

The Company leases its office space under an operating lease expiring October 31, 2005. Aggregate rent expense for the years ended December 31, 2004, 2003 and 2002 was $679,391, $556,134 and $555,641, respectively. On January 31, 2005 the Company entered into a lease agreement for a larger facility in Irvine, California with approximately 128,670 square feet. The lease is for a period of ten years and four months beginning May 1, 2005.

Future lease payments under operating leases as of December 31, 2004 are as follows:

Years Ending December 31
2005	$	1,650,824
2006		1,749,779
2007		1,750,044
2008		1,745,364
2009		1,745,364
Thereafter		9,890,396
Total	$	18,531,771

Under the terms of the Company’s current operating lease, the Company is required to pay property taxes and common area maintenance costs to the lessor. Additionally, as a condition to the Company’s current operating lease, which expires in October 2005, the Company was required to provide a letter of credit with a current requirement for $118,487.

11. Debt

At December 31, 2003, the Company had outstanding debt of $806,000 related to a term loan utilized to finance capital equipment purchases. All outstanding debt was repaid using proceeds from the Company’s initial public offering of stock in October 2004 and the equipment advance facility was terminated.

Through December 31, 2004 the Company had a revolving line of credit which allows for maximum borrowings of $3,500,000 with a $1,000,000 sublimit to secure a separate revolving line of credit (the “Line”). At December 31, 2004, there was no outstanding balance. The line of credit bears a variable interest rate equal to 0.75% above the bank’s prime rate (6.25% at December 31, 2004). The revolving line of credit matured on December 31, 2004.

F-18

INTRALASE CORP. AND SUBSIDIARY

~~CONSOLIDATED~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Years~~YEARS ~~ended~~ENDED ~~December~~ DECEMBER 31, ~~2004~~2006, ~~2003~~2005 ~~and~~AND ~~2002~~2004

~~Pursuant to the borrowing agreements, during the year ended December 31, 2000 the Company issued warrants to the lender for the purchase of 31,300 shares of Series E preferred stock for $5.~~11 ~~per share, which expire July 12, 2008~~. AtEmployee ~~December~~Retirement ~~31,~~Savings 2003, the 31,300 shares of Series E preferred stock issuable upon conversion of the warrants are convertible into 27,609 shares of common stock due to an antidilution adjustment. During the year ended December 31, 2002 the Company issued warrants for the purchase of 12,500 shares of Series G preferred stock for $3.45 per share, which expire December 31, 2009. In addition, during the year ended December 31, 2003, the Company issued warrants for the purchase of 4,000 shares of Series G preferred stock for $3.45 per share which expire December 31, 2009. Value ascribed to these warrants using the Black-Scholes option-pricing model at the measurement date was zero, zero and $33,407 for the periods ended December 31, 2004, 2003 and 2002, respectively, using the following weighted average assumptions: expected life, 60 months; volatility of 104%; risk-free interest rates of 3.03%; and no dividends in 2002. The value of the warrants has been recorded as a debt discount and amortization is provided over the term of the credit agreement as interest expense. For the years ended December 31, 2004, 2003 and 2002, zero, $91,062 and $36,420 respectively, was amortized to interest expense. None of these warrants have been exercised to date. In connection with these financing arrangements, the Company is required to maintain certain reporting and financial loan covenants, including maintaining minimum financial ratios and net income or loss requirements. The Company received a waiver pertaining to non-compliance with one financial covenant relating to maximum allowable net loss, as of December 31, 2004 and December 31, 2003. Plans

~~12.~~The ~~Commitments~~Company has a pretax savings and ~~Contingencies~~profit-sharing plan under Section 401(k) of the Internal Revenue Code (“IRC”) (“the Plan”) for substantially all domestic employees. Under the Plan, eligible employees are able to contribute up to the maximum IRC deferral amount. In 2006, the Company began discretionary contributions match up to 2% of a participant’s compensation. The Company’s contributions under this plan were approximately $354,000 in 2006.

~~Licensing Agreements—~~In ~~connection with various licensing agreements~~2006, the Company isestablished ~~obligated to pay license fees and aggregate royalties ranging from~~ a ~~minimum~~similar ofplan ~~2.5%~~for toemployees ain ~~maximum~~Spain ofand 5Ireland.0% ofUnder ~~net sales of products incorporating~~ the ~~licensed~~plan, ~~technology.~~eligible ~~The~~employees ~~Company~~are isable ~~also obligated~~ to ~~pay~~contribute ~~royalties of~~ up to 15% of ~~certain~~their ~~sublicensing~~compensation. ~~revenues~~In in2006, the ~~event the~~ Company ~~sublicenses~~’s indiscretionary ~~the~~contributions ~~future.~~matched ~~The~~up ~~Company generally has the option~~ to ~~cancel~~2% ~~these~~of ~~agreements~~a ~~upon 90 days~~participant’s ~~written notice~~compensation. AsThe ofCompany’s ~~December~~contributions ~~31, 2004 and 2003, royalties and license fees due~~ under these ~~licensing~~plans ~~agreements~~ were ~~$716,000~~approximately ~~and~~ $~~563~~11,000~~, respectively~~. ~~The Company recorded royalty and license fee expense for the years ended December 31, 2004, 2003 and 2002 of $2,025,000, $981,000 and $845,000, respectively, which is included in cost of sales.~~

12.

Lease Commitments

The Company leases its office space under an operating lease expiring August 31, 2015. Aggregate rent expense for the years ended December 31, 2006, 2005 and 2004 was $1.4 million, $1.4 million and $679,000, respectively. The 2006 rent expense relates almost entirely to its Irvine facility, which has a lease period of ten years and four months beginning May 1, 2005 and included landlord incentives that are being amortized to rent expense over the lease term.

Future lease payments under operating leases as of December 31, 2006 are as follows:


Years Ending December 31
2007	$	1,583,315
2008		1,647,386
2009		1,709,376
2010		1,774,856
2011		1,857,209
Thereafter		7,715,499

Total	$	16,287,641

Under the terms of the Company’s current Irvine facility operating lease, the Company is required to pay property taxes and common area maintenance costs to the lessor.

13.

Commitments and Contingencies

Licensing Agreements—In connection with various licensing agreements, the Company is obligated to pay license fees and aggregate royalties ranging from a minimum of 2.5% to a maximum of 5.0% of net sales of products incorporating the licensed technology. The Company is also obligated to pay royalties of up to 15% of certain sublicensing revenues in the event the Company sublicenses in the future. The Company generally has the option to cancel these agreements upon 90 days’ written notice. As of December 31, 2006 and 2005, royalties and license fees due under these licensing agreements were $1,748,390 and $1,183,399, respectively. The Company recorded royalty and license fee expense for the years ended December 31, 2006, 2005 and 2004 of $4,579,751, $3,388,601 and $2,025,000, respectively, which is included in cost of sales.

In 1997, the Company entered into agreements requiring the payment of license fees and royalties to two stockholders, pursuant to licensing agreements entered into in exchange for common stock, annual license fees and royalties. The license agreements expire upon the occurrence of certain events, as defined, or 10 years from the date of the license agreement. These agreements are generally cancelable at the Company’s sole option upon 90 days’ written notice; however, the license cannot be canceled by the licensors except in the event of default. On July 15, 2004, the Company entered an agreement to acquire a fully-paid royalty-free irrevocable and worldwide license from the University of Michigan for the use of certain technology and to settle all past contract disputes for aggregate consideration of $2,000,000. Minimum license fee commitments under the remaining agreement are currently $15,000 per year, which are fully off-settable against unit royalties. License fees may be credited against royalties to be paid to the licensors for the calendar year in which the license fees are paid. In addition, the Company is responsible for all patent maintenance costs.

~~The~~F-20 Company has entered into three other license agreements for the use of intellectual property in its products. These agreements contain provisions for the payment of license fees and royalty payments. These agreements are generally cancelable at the Company’s sole option upon 90 days’ written notice for one agreement and upon 60 days’ written notice for the other agreement; however, the license cannot be canceled by the licensors except in the event of default. The Company pays license fees, subject to offset against unit royalties in the calendar quarter or year, as applicable, in which the license fees are paid. Minimum license fees were $109,000 in 2004 and 2003.

Research and Development Agreements—The Company has entered into research agreements with various agencies, including the United States Department of Defense, the National Science Foundation and the National Eye Institute. The agreements are related to the development of corneal laser technology for eye surgery procedures and the development of technology for the treatment of eye diseases, such as glaucoma and presbyopia. The contracts expired at various dates through March 2003. Pursuant to the terms of the agreements, the agencies reimbursed the Company for certain costs incurred in its research efforts. The Company recognized no revenue in 2004 and 2003 and $100,000 in 2002.

F-19

INTRALASE CORP. AND SUBSIDIARY

~~CONSOLIDATED~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Years~~YEARS ~~ended~~ENDED ~~December~~ DECEMBER 31, ~~2004~~2006, ~~2003~~2005 ~~and~~AND ~~2002~~2004

The Company has entered into three other license agreements for the use of intellectual property in its products. These agreements contain provisions for the payment of license fees and royalty payments. These agreements are generally cancelable at the Company’s sole option upon 90 days’ written notice for one agreement and upon 60 days’ written notice for the other agreement; however, the license cannot be canceled by the licensors except in the event of default. The Company pays license fees, subject to offset against unit royalties in the calendar quarter or year, as applicable, in which the license fees are paid. Minimum license fees were $109,000 in 2006, 2005 and 2004.

Indemnities and Guarantees—During its normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include (i) certain real estate leases, under which the Company may be required to indemnify property owners for general liabilities; and (ii) certain agreements with the Company’s officers; under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship; (iii) certain agreements with its customers in which the Company provides intellectual property indemnities; and (iv) certain agreements with licensors, under which the Company indemnifies the party granting the license against claims, losses and expenses arising out of the manufacture, use, sale or other disposition of the products the Company manufactures using the licensed technology or patents. The duration of these indemnities and guarantees varies and, in certain cases, is indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to, nor does it expect to make significant payments for these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying balance sheets.

Employment Agreement— In ~~April~~February ~~2003~~of 2006, the Company entered into ana new three-year employment agreement with the Chief Executive Officer of the Company ~~that~~, ~~calls~~which ~~for~~took ~~minimum~~effect ~~annual~~in ~~payments~~April atof a2006, ~~rate~~upon expiration of ~~$450,000,~~his ~~effective~~previous ~~with~~contract. ~~the~~The ~~initial~~new ~~public~~employment ~~offering,~~agreement ~~plus~~provides ~~reimbursement~~ for ~~certain~~minimum ~~expenses.~~annual ~~The~~payments ~~employment~~of ~~agreement~~$472,500 ~~has~~plus areimbursement ~~three~~for ~~year~~certain ~~term~~expenses.

Litigation— ~~The Company is currently involved in litigation with Escalon Medical Corp., tentatively set for trial in May of 2005.~~ On June 10, 2004, the Company received notice from Escalon Medical Corp. of its intent to terminate the Company’s license agreement unless the Company paid inadditional ~~full certain~~ royalties and expenses which Escalon ~~believes~~claimed ~~the~~were ~~Company~~owed ~~owes~~ under its interpretation of the parties’ license agreement. Escalon ~~seeks~~sought payment of approximately $645,000 inthrough March 31, ~~additional~~2004 ~~royalties~~ and ~~other expenses, and seeks~~ additional ~~royalties~~unspecified amounts for future periods. ~~that~~The ~~would,~~Company ifdisputed Escalon ~~prevailed on all aspects of their claims, represent an increase in the royalties paid to them by approximately one percent of revenues, and a subsequent one percent reduction in the Company~~’s ~~future~~contract ~~gross margins and operating profits~~interpretation. On June 21, 2004, the Company filed a complaint against Escalon for declaratory ~~relief~~ and ainjunctive ~~preliminary~~relief ~~injunction~~in ~~and a temporary restraining order to prevent Escalon from terminating~~ the United ~~Company’s~~States ~~license~~District ~~agreement~~Court ~~until~~for the ~~court~~Central ~~rules.~~District ~~Escalon~~of ~~subsequently~~California ~~agreed~~ to ~~stipulate~~clarify toits ~~the~~obligations ~~temporary~~and ~~restraining order to~~ prevent anEscalon ~~immediate~~from ~~termination~~terminating of the license agreement ~~until a preliminary injunction hearing. On October 29, 2004,~~ (the ~~court~~“First ~~accepted~~California ~~a second stipulation by the parties to waive the preliminary injunction hearing~~Action”). ~~This second stipulation precludes Escalon from declaring a breach on this dispute pending a trial or dispositive ruling by the court.~~

On ~~February 7, 2005, the parties submitted cross motions for summary judgment to the court. On~~ March 1, 2005, the court ~~entered~~in ~~its~~the ~~order~~First onCalifornia ~~the parties’~~Action ~~cross-motions~~entered ~~for~~a summary judgment order, ruling on the majority of issues in the case. The court ruled in the Company’s favor on some issues and in Escalon’s favor on others. ~~The~~On ~~Company~~April 1, ~~believes~~2005 ~~that~~Escalon ~~neither~~again attempted to terminate the license agreement. On April 25, 2005 the court found the purported termination to be ineffective. On May 5, 2005, the court entered a final judgment in the First California Action, in effect adopting its prior summary judgment rulings. This ended the First California Action. Of the approximately $645,000 demanded by Escalon through March 31, 2004, approximately $229,000 was found to be due under the court’s ~~order~~ ~~nor~~rulings in the ~~ultimate~~First ~~resolution~~California ofAction. The Company has timely paid this amount. The Company does not believe that the ~~case~~judgment in the First California Action will have a material adverse effect on its business, financial condition and results of operations. The decision in the First California Action, if upheld, represents an increase in royalties payable to Escalon of approximately 0.2% of revenues, and a concomitant 0.2% reduction in gross margins and operating profits. These effects have been reflected in the Company’s reported financial ~~statements~~results. ~~were~~The ~~not~~Company ~~affected~~has atappealed ~~December~~certain ~~31,~~aspects ~~2004~~of the court’s judgment in the First California Action to the United States Court of Appeals for the Ninth Circuit.

OnThe ~~August~~First ~~23,~~California ~~2004,~~Action ~~the~~did ~~United~~not ~~States~~resolve ~~Patent~~all ~~and~~of ~~Trademark Office (PTO)~~the ~~granted~~parties’ adisputes, ~~request~~and ~~for~~Escalon ~~re-examination~~continued ~~with respect~~ to ~~U.S.~~contend ~~Patent~~in REwritten ~~37,585,~~notices ~~one of the four U.S. patents licensed~~ to the Company bythat the ~~University~~Company’s ofroyalty ~~Michigan,~~payments ~~which~~were ~~means~~inadequate. ~~that~~On ~~the~~May 9, ~~PTO~~2005, ~~found that~~ the ~~request~~Company ~~raised~~commenced a new ~~issue~~lawsuit ofagainst ~~patentability~~Escalon ~~with regard~~in ~~to some of~~ the ~~claims.~~United ~~Re-examination~~States District ~~may~~Court ~~result~~for in the ~~scope~~Central District of ~~protection~~California ~~and~~to ~~rights~~clarify ~~provided by~~ the ~~patent~~open ~~license~~issues ~~being~~(the ~~lost~~“Second orCalifornia ~~narrowed~~Action”). ~~The~~One ~~irrevocable~~week ~~license~~later, ~~the~~Escalon ~~Company~~commenced ~~acquired~~a ~~and~~new ~~the~~lawsuit ~~payment~~against the Company ~~made~~in ~~pursuant~~the toDelaware ~~the~~Chancery ~~July 15~~Court, ~~2004~~alleging, ~~license~~among ~~agreement~~other things, ~~will~~breach ~~not~~of ~~be affected by~~ the ~~granting~~license ofagreement ~~re-examination,~~and ~~regardless~~breach of ~~the~~fiduciary ~~outcome.~~duty ~~Although~~ (the ~~Company~~“Delaware ~~believes~~Action”). ~~that~~Escalon ~~the~~moved ~~intellectual~~to ~~property~~dismiss ~~covered by~~ the ~~patent~~Second ~~subject~~California ~~to the re-examination is important to its business~~Action, ifand ~~this~~the ~~patent~~Company ismoved ~~invalidated there will be no effect on its ability~~ to ~~sell~~dismiss ~~its products. However, invalidation~~ or ~~narrowing~~stay ofthe ~~this~~later ~~patent~~filed ~~might~~Delaware ~~allow others to market competitive products that would otherwise have infringed the patent~~Action.

F-21

INTRALASE CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

well as the similar issues presented in the Delaware Action. By prior agreement of the parties, this triggered the briefing schedule on the Company’s motion to dismiss or stay the Delaware Action, and on January 31, 2006 the Company filed its opening brief in support of the motion. On February 21, 2006, Escalon filed an amended complaint in the Delaware Action in lieu of responding to the Company’s opening brief. On the same day, it sent a new default notice to the Company, alleging breach of the license agreement (see below).

One of the issues now in dispute is valuation of the Company’s accounts receivable for royalty calculation purposes. The court in the First California Action found that creation of an account receivable on the Company’s books constituted non-cash “other property” received, but expressly left open the value of such property for royalty calculation purposes. On April 22, 2005, Escalon, purporting to act in its capacity as a Company shareholder, sent the Company an inspection demand under section 220 of the Delaware corporation law (the “First 220 Demand”), seeking, among other things, detailed records concerning the Company’s accounts receivable. The Company rejected Escalon’s First Section 220 Demand as having an improper purpose under Delaware law. On July 18, 2005, Escalon Holdings, Inc., apparently a wholly-owned subsidiary of Escalon, also purporting to act as a Company shareholder, sent the Company a new section 220 demand (the “Second 220 Demand”) with language copied verbatim from the First 220 Demand. The Company rejected the Second 220 Demand on the same basis as the first. Under Delaware law, a shareholder may bring an action to enforce a section 220 demand if its statutory demand upon the corporation has been rejected.

On September 2, 2005, Escalon and Escalon Holdings, Inc. commenced an action against the Company in the Delaware Chancery Court under section 220 of the Delaware Corporation Law (the “220 Action”). In the 220 Action, Escalon seeks to inspect the Company records described in the Section 220 Demands. The crux of Escalon’s position appears to be that the amount of royalties which Escalon receives under its contract with the Company is less than what it believes it would receive if receivables were valued under the contract the same way they are valued on the Company’s financial statements, and that therefore the Company is purportedly overstating the value of receivables on its financial statements to the detriment of shareholders. The question of the proper valuation of receivables under the contract is already the subject of pending litigation between the Company and Escalon. The Company does not believe that a disruptive inspection of its proprietary business records would have a bearing on the resolution of this contract dispute. The Company contends that the 220 Action is an Escalon litigation tactic intended to benefit Escalon in its capacity as a litigant by allowing it to circumvent existing contractual limitations on its inspection rights. The Company believes this is an improper basis for a demand under section 220 of the Delaware corporation statute, and is defending the 220 Action vigorously. There is presently no date set for trial of the 220 Action.

On February 21, 2006, the Company received a written notice from Escalon asserting that the Company was in default under the license agreement by reason of alleged improper valuation of accounts receivable in the Company’s royalty payments as well as the Company’s alleged refusal to permit Escalon to audit the Company’s books and records (the “Default Notice”). The Default Notice appears to threaten termination of the license agreement if the accounts receivable deductions taken against royalty payments for each of the first three quarters of 2005 are not paid within fifteen days of the date of the letter. However, to date Escalon has refused to confirm this or provide the Company with the amount it believes is required to cure the alleged default, despite multiple requests from the Company. The Default Notice also threatened termination if Escalon was not satisfied with respect to the resolution of its audit rights within sixty days of the date of the letter.

On February 24, 2006, the parties agreed to submit their disputes to mediation, in Delaware, under Court of Chancery Rule 174, and to stay all litigation pending the outcome of the mediation. In addition, Escalon agreed that its Termination Notice would be suspended pending the outcome of the mediation and that, should the mediation be unsuccessful, the Company would be afforded the full fifteen and sixty day response periods set forth in the Notice, which periods would commence ten days after the Chancery Court issued an order lifting the stay. Escalon has also agreed that the time period for responding to Escalon’s amended complaint in the Delaware Action would be tolled on the same basis.

F-22

INTRALASE CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

Escalon’s auditors exercise independent professional judgment when conducting an audit. Escalon’s audit commenced on September 5, 2006. The Company believes commencement of the audit effectively cured the audit default alleged by Escalon (which the Company disputes), although there can be no assurance that Escalon will not continue to allege that the audit failed to satisfy its audit rights, in which event the dispute would be resolved by the Court.

As noted above, Escalon did not provide the Company with a cure amount for its alleged payment default, and did not respond to the Company’s written request that it confirm a methodology for calculating an amount. Although the Company does not believe a default exists, the Company has, in good faith, timely deposited into escrow an amount that is the Company’s best estimate of Escalon’s demand. The escrow fund may be distributed only by order of a court or by agreement of the parties.

On February 27, 2007, the Company entered into a settlement agreement with Escalon under which the parties agreed to settle all disputes and litigation between them. Under the settlement agreement, the Company will make a lump sum payment to Escalon of $9.6 million, in exchange for which all pending litigation between the parties will be dismissed, the parties will exchange general releases, full ownership of all patents and intellectual property formerly licensed from Escalon will be obtained by the Company, and the parties’ license agreement will terminate. In addition, the payment will satisfy any outstanding royalties owed or alleged to be owed by the Company to Escalon, including disputed royalties, fourth quarter 2006 royalties and all future royalties.

In June, 2004, the Company entered into a two year exclusive distributorship agreement with Veni Vidi (OPHTH) Ltd. (“Veni Vidi”), wherein Veni Vidi was appointed the exclusive distributor of Company products in the UK and Ireland. The agreement, which requires binding arbitration of disputes in Orange County, California, provided that it would automatically renew at the end of the initial two year term, unless either party gave notice to the other of its intention not to renew at least 90 days before the termination date.

In October, 2005, approximately eight months before the contract termination date of June 24, 2006, the Company sent timely written notice to Veni Vidi that it would not renew the distributorship agreement upon expiration of the initial two year term. Accordingly, the Company treated the distributorship contract as terminated as of June 24, 2006, which was exactly two years after the contract commencement date.

On June 9, 2006, in response to threats from Veni Vidi that it would commence litigation against the Company in the UK, the Company, pursuant to the mandatory arbitration provisions of the distributorship agreement, filed a Demand for Arbitration against Veni Vidi in Orange County, California. In its Demand, the Company contended that it properly terminated the agreement and was not in breach. On August 31, 2006, Veni Vidi filed a response and counter-claim to the arbitration demand alleging that the Company improperly terminated the distributor agreement and breached the agreement by improperly contacting customers in its territory. Veni Vidi seeks damages of $7,690,000 as a result of the Company’s alleged conduct, an amount which the Company considers to be wholly without basis. The matter is presently pending as IntraLase Corp. v. Veni Vidi (OPHTH) Ltd., American Arbitration Association, Case No. 50-155-T-00244-06 01 CACA-R (through the International Centre for Dispute Resolution). A hearing on the threshold issue of whether the Company properly terminated the Distributor Agreement will be held on March 27-29, 2007, in Orange County, California.

The Company believes that Veni Vidi’s counter-claims in the arbitration are without merit, is contesting them vigorously and does not believe that the ultimate resolution of this dispute will have a material impact on its financial position.

On May 24, 2005, Ari Weitzner M.D., P.C., a Brooklyn ophthalmologist, commenced a lawsuit against the Company in the United States District Court for the Eastern District of New York, purportedly as a class action, alleging that the Company violated the Telephone Consumer Protection Act (“TCPA”) by sending unsolicited fax advertisements in violation of the TCPA. The complaint seeks statutory damages, costs and attorneys fees. The TCPA provides for statutory damages of $500 per violation ($1,500 if knowing and willful). On December 19, 2006, the Weitzner action was dismissed with prejudice pursuant to a settlement agreement between the parties under which, without admitting any wrongdoing, the Company agreed to comply with the requirements of TCPA in connection with the sending of faxes. The settlement did not require any payment by the Company.

F-23

INTRALASE CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

On August 23, 2004, the United States Patent and Trademark Office (“PTO”) granted a request for reexamination with respect to US Patent RE 37,585, one of the four U.S. patents licensed to the Company by the University of Michigan, which means that the PTO found that the request raised a new issue of patentability with regard to some of the claims. On July 25, 2006, the PTO terminated the proceedings favorable to the Patent Owner, the University of Michigan, by issuing a document entitled “Notice of Intent to Issue Ex Parte Reexamination Certificate” (“NIRC”). In the NIRC, the PTO confirmed the patentability of the RE 37,585 claims as amended during the reexamination.

The Company is also currently involved in other litigation incidental to its business. In the opinion of management, the ultimate resolution of such litigation will not likely have a significant effect on the Company’s financial statements.

~~F-20~~14. Income Taxes

A summary of the income tax (benefit) provision for the year ended December 31 is as follows:


	2006			2005			2004
Current:
Federal	$	921,918		$	241,064		$	—
State		95,783			90,161			30,000
Foreign		16,055			8,938			—

Total Current		1,033,756			340,163			30,000

Deferred:
Federal		3,908,875			4,328			(3,149,634	)
State		1,169,153			(641,089	)		(1,237,668	)
Valuation allowance		(16,811,628	)		636,761			4,387,302

Total Deferred		(11,733,600	)		—&n

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Filing Compare · INTRALASE CORP