1     The decline in service cost in 2005 for the pension benefit plans was primarily due to the freezing of the Company's U.S. defined benefit pension plan effective December 31, 2004.

Lines of Credit Obligations of the Company's subsidiaries under certain lines of credit used for working capital are guaranteed in writing by the Company. Availability under such lines of credit totaled approximately $20.3 and $24.3 at March 26, 2005 and December 25, 2004, respectively. There were no outstanding balances at March 26, 2005 and December 25, 2004. From time-to-time, the Company may also make verbal assurances with respect to indebtedness of its subsidiaries under certain lines of credit, also used for working capital.

Letters of Credit The Company had outstanding standby letters of credit totaling approximately $22.2 and $20.8 at March 26, 2005 and December 25, 2004, respectively, to ensure payment of possible workers' compensation, product liability and other insurance claims. At March 26, 2005 and December 25, 2004, the Company had recorded liabilities of approximately $12.9 and $11.1, respectively, as it relates to workers' compensation, product liability and other insurance claims.

Guarantees As of March 26, 2005, the Company guaranteed a real property mortgage loan of a research and development partner. The mortgage was secured by the property with an appraised value of $4.0. The principal balance of the guaranteed loan totaled approximately $3.5 at March 26, 2005 and December 25, 2004. In April 2005, the research partner sold the property and the outstanding debt was satisfied. The Company had not recorded any liabilities under this guarantee as it believed the likelihood of material payments was remote.
     The Company guarantees a lease obligation of a customer in connection with a joint marketing alliance. The lease obligation has a term of ten years expiring November 2011. The amount guaranteed at March 26, 2005 and December 25, 2004 was approximately $10.0. In the event of default, the guarantee would require payment from the Company. Sublease rights as specified under the agreement would reduce the Company's exposure. The Company believes the likelihood is remote that material payments will be required in connection with this guarantee and, therefore, has not recorded any liabilities under this guarantee.

Tax Indemnifications In connection with divestitures, the Company has agreed to indemnify certain tax obligations arising out of tax audits or administrative or court proceedings relating to tax returns for any periods ending on or prior to the closing date of the respective divestiture. The Company believes that any claim would not have a material impact on the Company's financial position. The Company has not recorded any liabilities associated with these claims.

Environmental Indemnifications The Company has certain obligations for environmental remediation and Superfund matters related to current and former company sites. There have been no material changes to estimated future remediation costs as reflected in the Notes to Financial Statements in the Company's 2004 Form 10-K. The Company does not believe that its financial position, results of operations, and cash flows are likely to be materially affected by environmental liabilities.

Other Commitments and Contingencies The Company is involved in lawsuits, claims, investigations and proceedings, including patent, trademark, commercial and environmental matters, which are being handled and defended in the ordinary course of business as described in Note 11 - Other Matters.

Deferred Service Revenue Service revenues are derived from service contracts on surgical equipment sold to customers and are recognized over the term of the contracts while costs are recognized as incurred. Changes in the Company's deferred service revenue for the year ended December 25, 2004 and the quarter ended March 26, 2005 were as follows:

In December 2004, the Financial Accounting Standards Board (FASB) issued its standard on accounting for share-based payments, SFAS No. 123 (revised 2004), Share-Based Payment requiring companies to recognize compensation cost relating to share-based payment transactions in the financial statements. SFAS No. 123(R) requires the measurement of compensation cost to be based on the fair value of the equity or liability instruments issued. Upon issuance, SFAS No. 123(R) required public companies to apply SFAS No. 123(R) in the first interim or annual reporting period beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission (SEC) approved a new rule that delays the effective date, requiring public companies to apply SFAS 123(R) in the first annual period beginning after June 15, 2005. Except for the deferral of the effective date, the guidance in SFAS 123(R) is unchanged. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company is currently assessing the impact of SFAS No. 123(R) and considering the valuation models available. The Company expects to adopt SFAS No. 123(R) in its first interim period of fiscal 2006.
     On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was signed into law. In part, the Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing a dividends received deduction of 85% for certain dividends from controlled foreign corporations. In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 (FSP FAS 109-2), Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. FSP FAS 109-2 provides accounting and disclosure guidance for this repatriation provision. The Company has begun its evaluation of the effects of this provision. Although FSP FAS 109-2 was effective immediately, the Company will not be able to complete its evaluation until after Congress or the U.S. Treasury Department provides additional clarifying language on key elements of the provision. As such, the Company is not yet in a position to decide whether, and to what extent, the Company might repatriate foreign earnings that have not yet been remitted to the U.S. Based on analysis to date, the range of possible amounts that the Company is considering for repatriation is between $0 and $805, with the respective tax liability ranging from $0 to $60. The Company expects to be in a position to finalize its assessment by the end of the second quarter of 2005.

The Company is engaged in various lawsuits, claims, investigations and proceedings including patent, trademark, commercial and environmental matters that are in the ordinary course of business. The Company cannot at this time estimate with any certainty the impact of such matters on its financial position.

The Company reported net income of $35 or $0.63 per share for the quarter ended March 26, 2005, compared to net income of $24 or $0.43 per share reported for the same quarter in 2004.

Geographic Region For the first quarter ended March 26, 2005, net sales in markets outside the U.S. totaled $342, an increase of $26 or eight percent (four percent excluding the impact of currency) over the same quarter in 2004. Net sales outside the U.S. represented approximately 62 percent of consolidated net sales for the quarters ended March 26, 2005 and March 27, 2004.
     First quarter 2005 net U.S. sales totaled $212, an increase of $18 or nine percent over the same 2004 quarter. Net U.S. sales represented approximately 38 percent of consolidated net sales for the quarters ended March 26, 2005 and March 27, 2004 with U.S. revenues representing approximately 90 percent of the Americas region revenue in the first quarters of 2005 and 2004.

     Each of the Company's geographic regions reported sales increases for all product categories with the exception of the refractive product category. On a constant-currency basis, sales growth reflected gains in each geographic region for contact lens, lens care and pharmaceuticals product categories. These constant-currency gains more than offset slight declines of cataract and vitreoretinal sales in the Europe region and declines in sales of refractive surgery products in all geographic regions. Constant-currency contact lens sales growth was attributable to the Company's lines of soft contact lenses, led by double-digit gains for the Company's SofLens Toric, SofLens Multi-Focal, PureVision, SofLens One Day and SofLens59 lines, which more than offset declines in older-generation products. Combined, those five products represented about 60 percent of contact lens revenues. Lens care category growth mainly reflected higher sales of multi-purpose solutions, which grew in excess of 20 percent. Gains in the lens care product category were driven by the timing of a significant order from a major U.S. retail customer, market share gains subsequent to the late 2004 launch of ReNu with MoistureLoc and incremental sales associated with the launch of ReNu MultiPlus in Japan. Overall growth within the pharmaceutical product category primarily reflected incremental sales from the U.S. launch of Zylet combination ophthalmic suspension and continued gains by the Company's lines of ocular nutritional products in each geographic region. Cataract and vitreoretinal revenue growth was led by the Company's lines of intraocular lenses and insertion systems and phacoemulsification products, which more than offset declines in viscoelastics. Constant-currency intraocular lens sales growth of six percent reflected strong double-digit gains for the Company's SofPort and Akreos lines of foldable IOLs. Refractive surgery sales declines were attributed to lower laser equipment sales in the Americas and Europe region. Prior-year results for the Americas included incremental revenues from initial placements and upgrades to the Company's Zyoptix system for customized LASIK surgery, which had received U.S. regulatory clearance late in 2003. Non-U.S. revenues in the prior-year included sales associated with the launch of the Company's Technolas z100 laser.
     The following three sections entitled Americas, Europe and Asia describe net sales results by product category in each geographic region for the quarters ended March 26, 2005 and March 27, 2004.

     The following table presents total Company net sales, including percent changes from the comparable prior-year quarter, by product categories for the quarters ended March 26, 2005 and March 27, 2004:

Cash Flows from Operating Activities Cash provided by operating activities was $13 and $19 through the first quarter of 2005 and 2004, respectively. The decrease in operating cash flow reflected the impact of higher inventories and the timing of cash collections on accounts receivable, partially offset by higher earnings and lower tax payments. Days sales outstanding (DSO) at the end of the 2005 first quarter was 82 days, compared to 81 days at the end of the comparable period in 2004. Average DSO was 77 days in the first quarter of 2005, compared to 79 days for the same 2004 period.

Cash Flows from Investing Activities Cash used in investing activities of $28 for the first three months of 2005 represented capital expenditures of $15 and $13 of acquired intangibles. The Company acquired product rights for $12 in connection with the FDA approval of Zylet ophthalmic suspension and acquired a license agreement for $1 to commercialize Lotemax in South Korea (see Note 5 - Acquired Intangible Assets). Cash used of $19 for the first three months of 2004 primarily represented capital expenditures.

Cash Flows from Financing Activities Through the first three months of 2005, there was a net cash flow use of $6 from financing activities. The 2005 period outflows primarily consisted of $22 to repurchase 300,000 shares of the Company's Common stock at an average price of $73.19 per share (see Part II - Other Information, Item 2. Changes in Securities) and $7 for dividends paid. The recent appreciation in the Company's stock price resulted in cash inflows of $24 from the exercise of stock options. During the first three months of 2004, cash used in financing activities of $1 consisted of $18 to repurchase 300,000 shares of the Company's Common stock at an average price of $59.46, $1 in net repayments of debt and $7 for dividends paid. The appreciation in the Company's stock price in the first quarter of 2004 resulted in cash inflows of $25 from the exercise of stock options.

Financial Position The Company's total debt, consisting of short- and long-term borrowings, was $643 at the end of the first quarter of 2005, down $1 from year-end 2004 and $202 from March 2004. The ratio of total debt to capital was 30.4 percent at the end of the first quarter of 2005, 31.1 percent at the end of 2004, and 40.7 percent at the end of March 2004.
     Cash and cash equivalents totaled $483 and $561 at the end of the first quarters of 2005 and 2004, respectively, and $502 at the end of 2004.

Access to Financial Markets As of March 26, 2005, the Company's long-term debt was rated BBB with a stable outlook by Fitch Ratings, BBB- with a positive outlook by Standard & Poor's and Ba1 by Moody's Investors Services. On April 11, 2005 Standard & Poor's upgraded the Company's credit rating to an investment grade of BBB with a stable outlook, citing improving operational and financial trends resulting from the Company's restructuring efforts of the past years.
     In August 2003, the Company issued $160 variable-rate Convertible Senior Notes (Old Notes) due in 2023. In December 2004, the Company completed its offer to exchange up to $160 of the Old Notes for an equal amount of its 2004 Senior Convertible Securities due 2023 (New Securities). The terms of the New Securities are primarily consistent with those of the Old Notes except that settlement upon conversion of the New Securities will be paid in cash up to the principal amount of the converted New Securities with any excess of the conversion value settled in shares of the Company's stock. An amount equal to $156 of the Old Notes, or 97 percent of the outstanding issue, was tendered in exchange for an equal amount of the New Securities.
     The Company maintains a $250 syndicated revolving credit facility. The underlying agreement includes covenants that require the Company to maintain certain EBITDA to interest and debt ratios. In the event of violation of the covenants, the facility would not be available for borrowing until the covenant provisions were waived, amended or satisfied. There were no covenant violations during the quarter ended March 26, 2005, or year ended December 25, 2004, and the Company does not anticipate that a violation of the covenants is likely to occur. The interest rate under the agreement is based on the Company's credit rating and, at the Company's option, LIBOR or the base rate of one of the lending banks. There were no outstanding borrowings under the syndicated revolving credit agreements as of March 26, 2005 or December 25, 2004. In addition, a number of subsidiary companies outside the U.S. have credit facilities to meet their liquidity requirements. There were no outstanding borrowings under these non-U.S. credit facilities as of March 26, 2005 or December 25, 2004.
     The Company believes its existing credit facilities, in conjunction with the financing activities mentioned above, provide adequate liquidity to meet obligations, fund capital expenditures and invest in potential growth opportunities.

     The Company has a minority equity interest valued at $0 on its balance sheet that results from a strategic partnering arrangement entered into during 1999 that involves implant technology for treating retinal and other back-of-the-eye diseases. Under the original agreement, the Company remitted payments to the strategic partner for R&D activities and the achievement of certain milestones such as completion of clinical testing, NDA filings and FDA approvals. As described in Note 6 ¾ Related Party Transaction, an anticipated delay of up to three years in U.S. regulatory filings for the Retisert drug delivery product for the diabetic macular edema indication was announced in May 2003. The Company indicated that this delay resulted in a reevaluation of its role in the ongoing development and approval process, and it had decided to conduct and supervise directly the day-to-day development and clinical activities. During the fourth quarter of 2003, the Company renegotiated its arrangement to formalize this change.
     The Company also has an equity investment of $0.2 as of March 26, 2005 and December 25, 2004 recorded as an other long-term asset, in connection with a licensing agreement signed during 2002 to develop treatments for ocular infections. During the quarter ended June 28, 2003, the Company recorded an other-than-temporary impairment charge of $1.8 based on negative earnings and cash flow trends of the licensor, and inconclusive efforts by the licensor to secure interim financing. The licensing agreement and $4.0 of preferred stock were canceled in December 2003 in conjunction with the Company's decision to invest in and internally develop this ocular infection technology. As such, the Company is no longer required to remit payments to the licensor originally due upon the achievement of certain milestones.
     As a result of the renegotiation and license cancellation described above, future payments for R&D activities and milestone achievements over the next five years are estimated to be immaterial.
     The Company has obligations under certain guarantees, letters of credit, indemnifications and other contracts that contingently require the Company to make payments to guaranteed parties upon the occurrence of specified events. The Company believes the likelihood is remote that material payments will be required under these contingencies, and that they do not pose potential risk to the Company's future liquidity, capital resources and results of operations. See Note 8 ¾ Commitments and Contingencies for further descriptions and discussions regarding the Company's obligations.

Information Concerning Forward-Looking Statements Forward-looking statements include statements concerning plans, objectives, goals, projections, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. When used in this discussion, the words "anticipate", "appears", "foresee", "should", "expect", "estimate", "project", "will", "are likely" and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this report under the heading Outlook and elsewhere are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements involve predictions of future Company performance, and are thus dependent on a number of factors, which may affect the Company's performance. In many cases, specific factors that may impact performance materially have been identified in connection with specific forward-looking statements. Additional risks and uncertainties include, without limitation, general global and local economic, political and sociological conditions including, without limitation, periods of localized disease outbreak and the effect on economic, commercial, social and political systems caused by natural disasters (such as, without limitation, earthquakes, hurricanes/typhoons, tornadoes and tsunamis), changes in such conditions, the impact of competition, seasonality and general economic conditions in the global lens and lens care, ophthalmic cataract and refractive and pharmaceutical markets where the Company's businesses compete, effects of war or terrorism, changing currency exchange rates, the general political climate existing between and within countries throughout the world, events affecting the ability of the Company to timely deliver its products to customers, including those which affect the Company's carriers' ability to perform delivery services, changing trends in practitioner and consumer preferences and tastes, changes in technology, medical developments relating to the use of the Company's products, routine and material legal proceedings initiated by or against the Company, including those related to patents and other intellectual property in the U.S. and throughout the world, the impact of Company performance on its financing costs, enactment of new legislation or regulations or changes in application or interpretation of existing legislation or regulations that affect the Company, changes in government regulation of the Company's products and operations, changes in governmental laws and regulations relating to the import and export of products, government pricing changes and initiatives with respect to healthcare products in the U.S. and throughout the world, changes in private and regulatory schemes providing for the reimbursement of patient medical expenses, changes in the Company's credit ratings, or the cost of access to sources of liquidity, the Company's ability to maintain positive relationships with third-party financing resources, the financial well-being and commercial success of key customers, development partners and suppliers, changes in the availability of and other aspects surrounding the supply of raw materials used in the manufacture of the Company's products, changes in tax rates or policies or in rates of inflation, changes in accounting principles and the application of such principles to the Company, the performance by third parties upon whom the Company relies for the provision of goods or services, the ability of the Company to successfully execute marketing strategies, the ability of the Company to secure and maintain intellectual property protections, including patent rights, with respect to key technologies in the U.S. and throughout the world, the ability of the Company to secure and maintain copyright protections relative to its customer-valued names, trademarks, trade names and other designations in the U.S. and throughout the world, difficulties or delays in the development, laboratory and clinical testing, regulatory approval, manufacturing, release or marketing of products, the successful completion and integration of acquisitions by the Company, the successful relocation of certain manufacturing processes, the continued successful implementation of efforts in managing and reducing costs and expenses, the continued successful execution of the Company's profitability improvement plans, the Company's success in the process of management testing, including the evaluation of results, and auditor attestation of internal controls, as required under the Sarbanes-Oxley Act of 2002, the Company's success in introducing and implementing its enterprise-wide information technology initiatives, including the corresponding impact on internal controls and reporting, the effect of changes within the Company's organization, including the selection and development of the Company's management team and such other factors as are described in greater detail in the Company's filings with the Securities and Exchange Commission, including, without limitation, the Company's Form 10-K for the period ended December 25, 2004 and the Current Report on Form 8-K dated June 14, 2002.

At March 26, 2005 the Company's floating rate assets exceeded its floating rate liabilities. A sensitivity analysis to measure the potential impact that a change in interest rates would have on the Company's net income indicates that a one percentage point decrease in interest rates, which represents a greater than 10 percent change, would increase the Company's net financing expense by approximately $3 on an annualized basis.
     A sensitivity analysis to measure the potential impact that a change in foreign currency exchange rates would have on the Company's net income indicates that, if the U.S. dollar strengthened against all foreign currencies by 10 percent the Company would realize net losses of approximately $12 on foreign currency forward contracts outstanding at March 26, 2005. Such net losses would be substantially offset by net gains from the revaluation or settlement of the underlying positions hedged.

Changes in Internal Controls - During the most recently completed fiscal quarter, the Company continued to implement its global enterprise reporting system at its commercial operations, including at its global operations surgical business. In addition, the Company has engaged a third party provider to perform deduction management activities for its shared services center in the Americas region. Other than the foregoing, there were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company is continuing to implement the global enterprise reporting system, and in that process, expects that there will be future material changes in internal controls as a result of this implementation.