Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004

OR

For the transition period from              to            

Commission File Number 000-50939

INTRALASE CORP.

(Exact Name of Registrant as Specified in Its Charter)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0. 01 par value

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

Indicate by check mark 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 an accelerated filer (as defined in Rule 12b-2).    Yes  ¨    No  x

As of March 21, 2005, the aggregate market value of voting stock held by non-affiliates of 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 number of shares of the registrant’s Common Stock outstanding as of March 21, 2005 was 26,831,154.

Documents Incorporated by Reference

None.

Table of Contents

INTRALASE CORP.

ANNUAL REPORT ON

FORM 10-K

For the Fiscal Year Ended December 31, 2004

TABLE OF CONTENTS

Table of Contents

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. In some cases, you can identify forward-looking statements by terminology such as “may,” “can,” “might,” “will,” “could,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology.

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 “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. is the leading laser technology for the first step of LASIK surgery. We have developed and market an ultra-fast laser, related software and disposable devices for use in creating the corneal flap, the first step of LASIK surgery, the most common surgical technique used to correct vision. Our patent-protected product offering consists of our INTRALASE^® FS laser combined with our proprietary IntraLASIK^® software, and our per procedure fee inclusive of a disposable patient interface required for each eye treated in the LASIK procedure. Our computer-controlled laser solution replaces the hand-held mechanical, metal-bladed microkeratome traditionally used to create the corneal flap. Our advanced laser technology improves the safety, precision and visual acuity of LASIK surgery, and we believe our product offering will become the new standard of care for corneal flap creation in LASIK surgery.

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^® 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, we had sold or leased 217 lasers and we had sold approximately 306,859 per procedure fees inclusive of disposable patient interfaces. In the three months ended December 31, 2004, we captured approximately 16% 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. We believe this combination of “better medicine” and “better business” will continue to assist in 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 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 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

3

Table of Contents

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.

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,” 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 166.4 million people in the United States require some form of vision correction, and industry sources estimate that approximately $32.2 billion was spent on eyeglasses, contact lenses and other corrective eyewear in the United States in 2004. Of the approximately 166.4 million people in the United States who require vision correction, approximately 55.5 million people, or 111 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 90% of all 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 34.4 million people, or 68.8 million eyes, are myopic, also called nearsighted, and approximately 21.1 million people, or 42.2 million eyes, are hyperopic, also called farsighted. Both of 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 8.2 million LASIK eye surgeries have been performed in the United States, which amounts to a nominal market penetration rate of approximately 7%. The total U.S. annual market size for LASIK surgery is approximately $2.6 billion, based on an estimated 1.45 million LASIK procedures expected to be performed in 2005 at an industry average price of approximately $1,800 per eye treated. Industry analysts expect the growth rate in U.S. LASIK procedures to be approximately 7% in 2005, based on approximately 100,000 more procedures expected in 2005 than were performed in 2004.

Outside the United States there were approximately 1.8 million surgical vision surgeries performed in 2004, primarily LASIK. Industry analysts expect the growth rate outside the United States in LASIK procedures to be approximately 9% in 2005, to over 1.9 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:

The IntraLase Market Opportunity

There are approximately 4,500 LASIK surgery practices worldwide. Of these surgery practices, our 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, approximately 217 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.

4

Table of Contents

U.S. Market

International Market

LASIK Surgery

LASIK surgery involves two steps:

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^® 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.

5

Table of Contents

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

Our 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^® 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 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 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^® 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 of these prospective studies, the corneal flap for one eye of each patient was created with the 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^® FS laser had better vision and fewer induced aberrations compared to the mechanical, metal-bladed microkeratome. We believe these better vision results were achieved using our product offering, in part, due to a reduction in the 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.

6

Table of Contents

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 $334 more per eye when using our product offering instead of the traditional microkeratome. An independent survey of our U.S. customers in early 2004 indicated that our customers experienced an 11% increase in procedure volume and a 38% increase in revenues in the comparable time period during which the industry experienced a 3% increase in procedure volume and a 12% 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 a survey of our customers conducted by SM² Consulting, an independent consultant, with our laser, our customers improve the rate at which laser vision correction consultations translate into actual surgery from 64% to 77%.

The sixteen 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. However, 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^® 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^® 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.

7

Table of Contents

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. We believe the unique capabilities of our laser will enable us to introduce additional applications within ophthalmology.

Our Product Offering

Our product offering consists of three key elements:

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 45 seconds for our laser to create the corneal flap.

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 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.

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^® FS laser, which enables the surgeon to cut a precise flap at predetermined 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 input into the IntraLASIK^® software prior to surgery. The software then directs the laser to create a precise corneal flap 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.

8

Table of Contents

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. We are 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 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.

9

Table of Contents

Each distributor contract 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 between one and three years, and generally automatically renew unless either party terminates the agreement, 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 contractually must be made cash in advance or by irrevocable letter of credit. However, on occasion, we have granted limited terms to distributors, usually for less than net 10 days to ensure shipment by a specified carrier. 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:

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:

10

Table of Contents

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.

As of December 31, 2004, we had 45 field service, technical services and clinical applications personnel worldwide who are responsible for supporting our distributors and servicing customers in direct sales markets.

All of our direct customers who purchase or lease our laser receive a one-year limited warranty and are required to maintain a maintenance contract thereafter 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, we own 12 issued U.S. patents and nine U.S. pending patent applications, eight issued foreign patents and 22 pending foreign patent applications. Our patents expire between 2016 and 2022. 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 different aspects of our laser and our per procedure fee inclusive of a disposable patient interface. As of December 31, 2004, we exclusively license, for human health, 17 issued U.S. patents, with expiration dates from 2008 through 2019, and two U.S. pending patent applications, seven foreign patents and five 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 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 within total long-term assets at December 31, 2004, associated with acquired licenses in accordance with the terms of the agreement.

11

Table of Contents

On 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.

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^® 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^® 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.

12

Table of Contents

We have approximately 64 employees in operations, regulatory and quality assurance. At our current rate of growth, we anticipate that we will need to expand our manufacturing capacity, and as such on January 31, 2005 we entered into a lease agreement for a larger facility in Irvine, California. See further discussion at Part I, Item 2 – Properties.

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, including sponsoring clinical studies to validate our existing product offering and developing potential new applications for our technology. Our research and development group consists of 37 individuals with research, engineering, medical and regulatory affairs experience. Our research and development expenses, including regulatory and clinical trial expenses, were approximately $12.7 million in 2004, $9.1 million in 2003 and $9.0 million in 2002.

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

13

Table of Contents

Competition Against LASIK

Because our technology is used in the first step of the LASIK surgery, we also compete against other vision correction technologies that bypass the need for the creation of the corneal flap. LASIK competes with other treatments such as eyeglasses, contact lenses and other surgical techniques. Such techniques include corneal inlays and epithelial flaps, which are currently in the early stages of commercialization and do not have a significant presence in the market.

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^® 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 and for lamellar keratoplasty, both 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:

14

Table of Contents

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: