The following discussion and analysis presents the factors that had a material effect on AMO's cash flows and results of operations during the three and nine months ended September 26, 2008, and the Company's financial position at that date. Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risk and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Certain Factors and Trends Affecting AMO and Its Businesses." The following discussion should be read in conjunction with the 2007 Form 10-K and the unaudited consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.

OVERVIEW

We are a global leader in the development, manufacture and marketing of medical devices for the eye. AMO is focused on providing the full range of advanced refractive technologies and support to help eye care professionals deliver optimal vision and lifestyle experiences to patients of all ages. Our reportable segments are represented by our three business units: cataract, refractive and eye care. Our cataract business sells monofocal intraocular lenses ("monofocal IOLs"), phacoemulsification systems, viscoelastics and related products used in ocular surgery. Our refractive business sells and provides service for wavefront diagnostic devices, femtosecond lasers and associated patient interface devices, excimer laser systems and treatment cards, and refractive implants. Our eye care business sells disinfecting solutions, enzymatic cleaners, lens rewetting drops and artificial tears.

We have operations in approximately 27 countries and sell our products in approximately 60 countries within the following four region structure:

• Americas (North and South America);

• Europe, Africa and Middle East;

• Japan; and

• Asia Pacific (excluding Japan, but including Australia and New Zealand).

Restructuring Plan

After our acquisition of IntraLase Corp. in the second quarter of 2007, we continued femtosecond laser manufacturing operations in Irvine, California (Irvine Plant). As part of the overall integration of IntraLase, on December 13, 2007, we committed to a plan to relocate the femtosecond laser manufacturing operations from the Irvine Plant to our excimer laser and phacoemulsification manufacturing facility in Milpitas, California (Milpitas Plant), in order to consolidate equipment manufacturing in one location and to maximize opportunities to leverage core strengths. We also moved the assembly of IntraLase disposable patient interfaces from the Irvine Plant to our facility in Puerto Rico in order to obtain additional synergies.

As a continuation of our commitment to further enhance our global competitiveness, operating leverage and cash flow, our Board of Directors on February 12, 2008 approved an additional plan to reduce our fixed costs. The additional plan included a net workforce reduction of approximately 150 positions, or about 4% of our global workforce. In addition, we consolidated certain operations, including the relocation of all non-manufacturing related activities at the Irvine Plant, to improve our overall facility utilization.

These plans include workforce reductions and transfers, outplacement assistance, relocation of certain employees, facilities-related costs, and accelerated amortization of certain long-lived assets and termination of redundant supplier contracts. These plans also resulted in start-up costs such as expenses for moving, incremental travel, recruiting and duplicate personnel associated with hiring staff during ramp-up, as well as incremental costs associated with capacity underutilization of the Milpitas Plant during the ramp-up period.

We currently expect to complete these activities in 2008 and estimate the total pre-tax charges resulting from these plans to be in the range of $36 million to $43 million, substantially all of which are expected to be cash expenditures. The Company has recognized the following costs associated with the restructuring plans (in thousands):

                                                  Three Months Ended         Nine Months Ended
                                                  September 26, 2008         September 26, 2008
Costs included in cost of sales:
Facilities related and other costs               $              4,721       $              4,721
Termination of redundant supplier
contracts                                                         166                        166
Incremental costs for transition and
start-up activities at the Milpitas Plant                         803                        803

                                                                5,690                      5,690
Costs included in selling, general and
administrative expenses:
Accelerated depreciation relating to the
restructuring                                                   1,839                      3,678

Costs included in restructuring charges:
Severance, retention bonuses, employee
relocation and other one-time termination
benefits                                                        1,991                     22,463
Facilities related and other costs                                 -                         613
Travel and relocation                                           1,456                      1,456

                                                                3,447                     24,532

Total                                            $             10,976       $             33,900

Cumulative charges from plan inception through September 26, 2008 were $34.3 million. Expected annualized cost savings from these restructuring actions are expected to range from $12 million to $16 million. Actual cost savings could be significantly different from the estimated range if any unforeseen events or changes occur.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Actual results could differ materially from those estimates. Certain of these significant accounting policies are considered to be critical accounting policies as more fully described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of the our Annual Report on Form 10-K for the year ended December 31, 2007. Management believes that at September 26, 2008 there has been no material change to this information.

We performed our annual impairment test of goodwill and purchased intangible assets with indefinite lives during the second quarter of 2008 and determined there was no impairment. The valuation of goodwill and purchased intangible assets with indefinite lives requires assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, investments in capital equipment and working capital, and discount rates. As compared to our internal projections, we have experienced declines in our Refractive revenue during the third quarter as a result of the ongoing impact of deteriorating economic conditions on this business. Adverse changes in expected operating results and/or unfavorable changes in other economic factors used to estimate fair values could result in a non-cash impairment charge related to intangible assets and/or goodwill prior to the next annual review in the second quarter of 2009, which could be material to our consolidated financial statements.

RESULTS OF OPERATIONS

The following tables present net sales and operating income (loss) by operating
segment for the three and nine months ended September 26, 2008 and September 28,
2007:



                                                 Net Sales                          Operating Income
                                             Three Months Ended                    Three Months Ended
                                      September 26,      September 28,      September 26,      September 28,
(In thousands)                            2008               2007               2008               2007
Cataract                             $       129,441    $       118,888    $        70,558    $        61,142
Refractive                                    96,003            112,149             59,054             68,858
Eye Care                                      50,191             42,157             15,999                715

Total operating segments             $       275,635    $       273,194    $       145,611    $       130,715


                                                 Net Sales                      Operating Income (Loss)
                                             Nine Months Ended                     Nine Months Ended
                                      September 26,      September 28,      September 26,      September 28,
(In thousands)                            2008               2007               2008               2007
Cataract                             $       398,257    $       359,553    $       212,465    $       188,067
Refractive                                   334,781            306,207            200,946            188,233
Eye Care                                     166,825            120,504             56,472             (4,448 )

Total operating segments             $       899,863    $       786,264    $       469,883    $       371,852

Net sales. Total net sales increased 0.9% and 14.4% in the three and nine months ended September 26, 2008, respectively, compared to the same periods last year. The increases in net sales in the three and nine months ended September 26, 2008 resulted from higher net sales in our Cataract and Eye Care operating segments, partially offset by a decrease in net sales in the third quarter of 2008 in our Refractive operating segment. Net sales also include a favorable foreign currency impact of 2.7% and 5.4% in the three and nine months ended September 26, 2008, respectively. Our sales and earnings may be favorably impacted during times of a weakening U.S. dollar. Sales in the U.S. represented 36.1% and 37.6% of total net sales for the three and nine months ended September 26, 2008, respectively. Additionally, sales in Japan represented 16.8% and 15.2% of total net sales in the three and nine months ended September 26, 2008, respectively. No other country, or single customer, generated over 10% of total net sales in the periods presented.

Net sales from our Cataract business increased by 8.9% and 10.8% in the three and nine months ended September 26, 2008, respectively, compared with the same periods last year. The increases in net sales were the result of strong performance in all product categories both domestically and internationally. Total IOL sales increased by 9.0% and 9.6% to $67.0 million and $209.7 million in the three and nine months ended September 26, 2008, respectively, compared with the same periods last year, driven by our proprietary Tecnis line of aspheric monofocal IOLs, including Tecnis 1-piece, our first single piece acrylic IOL offering. Net sales from viscoelastics and phacoemulsification systems were up 5.7% and 12.0% to $55.4 million and $172.5 million in the three and nine months ended September 26, 2008, respectively, compared with the same periods last year, due to increased sales of our WhiteStar Signature system and continued growth of our Sovereign Compact phacoemulsification system and increases in surgical pack sales.

Cataract net sales growth in the U.S. of 5.6% and 4.2% and in the Other Americas of 9.8% and 12.8% in the three and nine months ended September 26, 2008, respectively, was due to strong demand for our core products, partially offset by decreases in sales of older-technology intraocular lenses and viscoelastics. Sales in Europe/Africa/Middle East increased by 10.3% and 13.5% in the three and nine months ended September 26, 2008, respectively, primarily due to continued strong IOL sales driven by our proprietary Tecnis line of aspheric monofocal IOLs. Sales in Japan increased by 12.3% and 17.0% in the three and nine months ended September 26, 2008, respectively. Sales in Asia Pacific increased by 8.6% and 9.8% in the three and nine months ended September 26, 2008, respectively, compared with the same periods last year. The increases reflect growth for all product lines. Net sales in our Cataract business reflect a favorable foreign currency impact of 3.8% and 7.0% in the three and nine months ended September 26, 2008, respectively, largely from fluctuations of the yen and the euro versus the U.S. dollar.

Net sales from our Refractive business decreased by 14.4% to $96.0 million in the three months ended September 26, 2008, compared with the same period last year. The decrease primarily reflects a $3.9 million decline in the sales of refractive implants, an $8.5 million decrease in system sales and declines in excimer and femtosecond procedure volumes associated with economic weakness affecting the United States, which were down about 35% in the current quarter. We expect U.S. procedures to continue to be impacted throughout 2008 and into 2009. An acceleration of this decline in the U.S. or globally would have a material adverse impact on our revenue, results of operations, financial condition and liquidity. Net sales from our Refractive business increased by 9.3% to $334.8 million in the nine months ended September 26, 2008, compared with the same period last year. The increase primarily reflects increased procedure and related and increased systems sales in the first two quarters of 2008, partially offset by an $8.7 million decline in sales of refractive implants and the decline in sales of procedure volumes discussed above. Net sales decreased in the U.S. by 33.8% and 10.8% in the three and nine months ended September 26, 2008, respectively, compared with the same periods last year, due to lower excimer and femtosecond laser procedure volumes. Net sales decreased in the Other Americas by 13.8% in the three months ended September 26, 2008 due to lower excimer and femtosecond laser procedure volumes. Net sales increased in the Other Americas by 11.9% in the nine months ended September 26, 2008, compared with the same period last year, due to a favorable shift toward CustomVue procedures. Net sales in the three and nine months ended September 26, 2008 increased in Europe/Africa/Middle East, Japan and Asia Pacific, as a result of our international expansion strategy for the Refractive business, offset by lower procedure volumes in Europe in the third quarter of 2008. Net sales in our Refractive business reflect a favorable foreign currency impact of 0.6% and 2.0% in the three and nine months ended September 26, 2008, respectively, largely from fluctuations of the yen and the euro versus the U.S. dollar.

Net sales from our Eye Care business increased by 19.1% and 38.4% in the three and nine months ended September 26, 2008, respectively, compared with the same periods last year. The increase in net sales reflects our continued recovery from the 2007 Recall with renewed sales of our multipurpose solutions, growing demand for our newly launched line of over-the-counter dry eye products sold under the blink® Tears brand and increased sales of hydrogen peroxide-based products, principally in Europe and Japan. Net sales increased significantly in every region in the three and nine months ended September 26, 2008, compared with the same periods last year, primarily as a result of higher multipurpose solutions sales attributable to the recovery from the 2007 Recall. Additionally, net sales in the U.S. and Europe benefitted from growing demand for our recently launched over-the-counter dry eye product. Net sales in our Eye Care business included a favorable foreign currency impact of 4.8% and 9.4% in the three and nine months ended September 26, 2008, respectively, largely resulting from fluctuations of the yen and the euro versus the U.S. dollar.

Gross margin and gross profit. Our gross margin percentage was 59.9% and 61.2% in the three and nine months ended September 26, 2008, respectively, compared with 55.7% in the same periods last year. The increases were a result of revenue shifts away from lower margin refractive equipment toward higher margin refractive procedures and cataract offerings, offset by $5.7 million of charges relating to the restructuring included in gross profit for the three and nine months ended September 26, 2008. Gross profit for the nine months ended September 28, 2007 included a $72.6 million negative impact from the 2007 Recall associated with sales returns and product-related costs. Gross profit for the nine months ended September 28, 2007 also included a $2.3 million negative impact from the 2006 China Eye Care recall, a $7.7 million non-cash charge for the step-up of inventory to fair value in connection with the IntraLase acquisition and a $4.7 million charge to discontinue the Amadeus microkeratome distributor agreement in the first quarter of 2007.

Selling, general and administrative. Selling, general and administrative ("SG&A") expenses decreased as a percent of net sales by 7.7 percentage points to 42.8%, and by 8.7 percentage points to 41.8% in the three and nine months ended September 26, 2008, respectively, compared with the same periods last year. The significant contributors to the decreases include lower headcount related spending, significantly lower discretionary spending and reductions in variable and performance based expenses. Also, these decreases are net of a $1.8 million charge and $3.7 million charge in the three and nine months ended September 26, 2008, respectively, for accelerated depreciation of the former IntraLase headquarters building we exited early in the fourth quarter of 2008 as part of our restructuring initiative. Integration-related costs associated with the IntraLase acquisition in the three and nine months ended September 28, 2007 were $4.9 million and $11.5 million, respectively. The nine months ended September 28, 2007 included $8.2 million in expenses for costs incurred in connection with a proposed acquisition of another company in the ophthalmic segment which we withdrew in August 2007, $2.1 million in China 2006 Eye Care recall-related costs in the first quarter of 2007 and a $16.8 million charge in 2007 Recall and product re-launch expenses.

Research and development. Research and development expenditures decreased as a percent of net sales by 1.6 percentage points to 6.1%, and by 1.5 percentage points to 6.2% in the three and nine months ended September 26, 2008, respectively, compared with the same periods last year. The decrease was due to the planned synergies following the IntraLase integration. In 2007, research and development as a percentage of sales reflected a loss in sales as a result of the 2007 Recall. We also recognized an impairment charge of $1.0 million in the first quarter of 2007 in connection with a research and development licensing agreement. Our research and development strategy is to develop proprietary products for vision correction that are safe and effective and address unmet needs. We are currently focusing on new advancements that will build on our Tecnis, Healon and phacoemulsification technologies, corneal and lens-based solutions to presbyopia, projects from the acquisitions of WFSI and IntraLase, and additional multipurpose solutions and dry eye products.

In-process research and development. In the nine months ended September 28, 2007, we recorded an $87.0 million in-process research and development ("IPR&D") charge from the IntraLase and WFSI acquisitions. This charge represented the estimated fair value of projects that, as of the acquisition date, had not reached technological feasibility and had no alternative future use.

Restructuring charges. In the three and nine months ended September 26, 2008, we incurred $3.4 million and $24.5 million, respectively, of pre-tax charges which comprised severance, retention bonuses and other one-time termination benefits of $2.0 million and $22.5 million, respectively, and travel, relocation and facilities related costs of $1.5 million and $2.1 million, respectively.

Net gain on legal contingencies. We recognized a net gain on legal contingencies of $20.5 million, net of legal costs incurred, in the second quarter of 2008 from the execution of an agreement with Alcon, Inc. As part of the agreement, Alcon made a payment of $31 million to us and we made a payment to Alcon of $10 million. We received the net cash proceeds of $21 million in the second quarter of 2008.

Operating Income (Loss). Operating income as a percentage of net sales, or operating margin, was 9.7% and 12.7% in the three and nine months ended September 26, 2008, respectively. Operating income of $26.6 million in the three months ended September 26, 2008 includes $9.1 million in restructuring charges, a $1.8 million charge for accelerated depreciation of leasehold improvements related to the restructuring, $17.1 million of intangible amortization included in SG&A and $5.9 million in share-based compensation expense. The net impact from these items reduced operating margin by 12.3 percentage points in the three months ended September 26, 2008. Operating income of $114.1 million in the nine months ended September 26, 2008 includes $20.5 million net gain on legal contingencies, $30.2 million in restructuring charges, a $3.7 million charge for accelerated depreciation of leasehold improvements related to the restructuring, $51.4 million of intangibles amortization included in SG&A and $17.2 million in share-based compensation expense. The net impact from these items reduced operating margin by 9.1 percentage points in the nine months ended September 26, 2008.

Operating loss as a percentage of net sales, or operating margin, was 2.5% and 13.7% in the three and nine months ended September 28, 2007, respectively. Operating loss of $6.7 million in the three months ended September 28, 2007 includes $5.1 million for IntraLase integration-related costs, $6.8 million from incremental amortization of acquired IntraLase intangible assets and $5.7 million in share-based compensation expense. The negative impact on operating loss from the 2007 Recall was $31.1 million in the third quarter of 2007 associated

with sales returns and product-related costs. The net impact from these items reduced operating margin by 17.8 percentage points in addition to the net effect of the decline in Eye Care sales in the three months ended September 28, 2007. Operating loss of $107.4 million in the nine months ended September 28, 2007 includes $120.0 million of IntraLase acquisition-related charges (including amortization expense of $13.6 million), $4.4 million from the 2006 China Eye Care recall in the first quarter, $15.5 million in share-based compensation expense, $8.2 million in connection with the proposal to acquire another company in the ophthalmic segment, $4.7 million related to the discontinuation of a distributor contract, $1.0 million impairment related to a R&D licensing agreement and $1.6 million for IPR&D related to the WFSI acquisition. The negative impact on operating loss from the 2007 Recall was $89.5 million year to date associated with sales returns and product-related costs. These charges reduced operating margin by 31.2 percentage points in addition to the net effect of the decline in Eye Care sales in the nine months ended September 28, 2007.

Operating income from our Cataract business increased by $9.4 million and $24.4 million in the three and nine months ended September 26, 2008, respectively, primarily due to the increase in net sales of IOL products, viscoelastics and phacoemulsification systems discussed above. Operating income from our Refractive business decreased by $9.8 million in the three months ended September 26, 2008, primarily due to lower U.S. procedure volumes and decreased refractive IOL sales in the U.S. Operating income from our Refractive business increased by $12.7 million in the nine months ended September 26, 2008, primarily due to the impact of the IntraLase acquisition, which was completed in the second quarter of 2007. Operating income from our Eye Care business increased by $15.3 million and $60.9 million in the three and nine months ended September 26, 2008, respectively, primarily due to the recovery from the 2007 Recall discussed above.

Non-operating expense. Interest expense was $17.6 million and $56.6 million in the three and nine months ended September 26, 2008, respectively, compared with $20.6 million and $48.8 million in the three and nine months ended September 28, 2007, respectively. The decrease in the three months ended September 26, 2008 was due to lower interest rates during the quarter on variable rate borrowings. The increase in the nine months ended September 26, 2008 was due to the issuance of more than $700 million in debt in April 2007 in connection with the IntraLase acquisition, partially offset by lower interest rates during the third quarter of 2008 on variable rate borrowings. Interest expense in the nine months ended September 28, 2007 includes a $1.3 million deferred financing cost write-off associated with the IntraLase acquisition.

We recorded an unrealized gain on derivative instruments of $5.8 million and $6.4 million in the three and nine months ended September 26, 2008, respectively, compared to an unrealized loss on derivative instruments of $2.4 million and $2.7 million in the three and nine months ended September 28, 2007, respectively. We record as "unrealized (gain) loss on derivative instruments, net" the mark-to-market adjustments on the outstanding foreign currency options and forward contracts which we enter into as part of our overall risk management strategy to reduce the volatility of expected earnings in currencies other than the U.S. dollar. The net gain in the first nine months of 2008 and net loss in the nine months ended September 28, 2007 were largely attributable to euro and Japanese yen instruments.

Income taxes. We recorded a provision for income taxes of $4.3 million and $22.0 million in the three and nine months ended September 26, 2008, respectively, resulting in effective tax rates of approximately 38.0% for both periods. The effective tax rate reflected a benefit from stock-based compensation expense of $2.1 million recognized at an estimated effective rate of approximately 34% for the nine months ended September 26, 2008.

We recorded a provision (benefit) for income taxes of ($5.3) million and $17.5 million in the three and nine months ended September 28, 2007, resulting in overall effective tax rates of 17.0% and (10.7%), respectively. For the three months ended September 28, 2007, the 2007 Recall continued to impact lower-tax foreign jurisdictions and resulted in a reduced tax benefit. The tax rate for the nine months ended September 28, 2007 was negatively impacted by the 2007 Recall, including the related impact on utilization of foreign tax credits resulting in a net deferred tax expense of $21 million. The results for the nine months ended September 28, 2007 included $87.0 million of IPR&D charges related to the purchase of IntraLase and WFSI and a $1.0 million write-off associated with a research and development agreement for which no tax benefits were . . .