Advanced Medical Optics (EYE)

Gross margin and gross profit. Our gross margin percentage was 63.1% and 63.6% in the three and nine months ended September 29, 2006, respectively, compared with 64.8% and 63.3% in the same periods last year.   Sales growth in the higher margin Tecnis and ReZoom intraocular lenses and eye care products, along with manufacturing productivity improvements were offset by approximately $4.5 million, or 1.7 percentage points, for inventory, manufacturing related and other charges incurred in connection with our business repositioning plan in the three months ended September 29, 2006.  Gross profit for the nine months ended September 29, 2006 included sales growth of higher margin Tecnis and ReZoom intraocular lenses and acquired VISX products and manufacturing productivity improvements, partially offset by $15.1 million in charges that were incurred in connection with the business repositioning plan. Gross profit for the three months ended September 30, 2005 was negatively impacted by approximately $1.6 million, or 0.6 percentage points, related to actions associated with accelerated manufacturing productivity improvements. Gross profit for the nine months ended September 30, 2005 was negatively impacted by approximately $3.5 million, or 0.5 percentage points, related to actions associated with accelerated manufacturing productivity improvements and integration related costs.

As described earlier, we expect to incur additional charges in the fourth quarter of 2006 of approximately $1.2 million under our product rationalization and repositioning strategy and supplemental consolidation of certain operations due to IOL manufacturing capabilities. During the three months ended September 29, 2006, we incurred charges of $0.2 million associated with the write-off of eye care products withdrawn from the Japan market due to potential product quality issues. Our investigation into the scope and extent of this issue is ongoing and we are likely to incur additional charges in future periods.

Gross margin and gross profit. Our gross margin percentage was 64.1% and 63.8% in the three and six months ended June 30, 2006, respectively, compared with 61.5% and 62.4% in the same periods last year due to sales growth in the higher margin Tecnis and ReZoom intraocular lenses and VISX products, along with manufacturing productivity improvements. These improvements were offset by lower eye care sales, as described above, and approximately $7.4 million, or 2.9 percentage points, for inventory, manufacturing related and other charges incurred in connection with our business repositioning plan in the three months ended June 30, 2006.  Total charges included in gross profit that were incurred in connection with the business repositioning plan were $10.5 million in the six months ended June 30, 2006.  Gross profit for the three and six months ended June 24, 2005 was negatively impacted by approximately $1.9 million, or 0.8 percentage points and 0.5 percentage points, respectively, related to acquisition and integration-related charges.

As described earlier, we expect to incur additional charges of approximately $5 million under our product rationalization and repositioning strategy and supplemental consolidation of certain operations due to IOL manufacturing capabilities and eye care product rationalizations which could have a significant negative impact on our gross margin through the remainder of 2006.

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