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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 FORM 10-K
 þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the fiscal year ended December 30, 2006
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the transition period fromto.
 Commission file number 0-27598
 IRIDEX CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    77-0210467(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification Number)
 1212 Terra Bella Avenue, Mountain View CA 94043-1824
(Address of principal executive offices)
(Zip Code)
(650) 940-4700
(Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on which RegisteredCommon
    
    NASDAQ Global Market
 Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
 o þ
 o þ
 þ o
 o
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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Page No.Part IItem 1. Business
    
    
    3Item 1A Risk Factors
    
    
    18Item 2. Properties
    
    
    35Item 3. Legal Proceedings
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Part IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    37Item 6. Selected Financial Data
    
    
    39Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    40Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    46Item 8. Financial Statements and Supplementary Data
    
    
    46Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    72Item 9A. Controls and Procedures
    
    
    72Item 9B. Other Information
    
    
    74Part IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    74Item 11. Executive Compensation
    
    
    74Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    74Item 13. Certain Relationships and Related Transactions
    
    
    74Item 14. Principal Accountant Fees and Services
    
    
    74Part IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    75Signatures
    
    
    78EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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PART I
 This Annual
 Report on Form 10-K contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, such as statements relating to levels of future sales and
operating results; actual order rate and market acceptance of our products; expectations for future sales
 growth, generally, including expectations of additional
sales from our new products and new applications of our existing
products; impact of the acquisition of the Laserscope aesthetics
business leveraging our core
business and increasing recurring revenues; broadening our product lines through product
innovation; our marketing programs, generally, including the Valued
IRIDEX Partner Program; efforts to decrease costs; higher gross estimate of the size of our
markets; levels of future investment in research and development efforts; our ability to develop
and introduce new products through strategic alliances, OEM
relationships and acquisitions; outcome of our current litigation; results
of clinical studies, risks associated with bringing new products to market, general economic
conditions and levels of international sales, our current liquidity, ability to obtain additional financing and impact of concern regarding our ability to continue as a going concern. In some cases, forward-looking statements can be identified by
terminology, such as may, will, should, expects,
 plans, anticipates, believes,
estimates, predicts, intends, potential, continue, or the
 negative of such terms or other
comparable terminology. These statements involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to differ materially from
those expressed or implied by such forward-looking statements. The reader is strongly urged to read
the information contained under the captions Part I, Item 1, Business, and Part II,
 Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations-Factors That
May Affect Future Results in this Annual Report on Form 10-K for a more detailed description of
these significant risks and uncertainties. The reader is cautioned not to place undue reliance on
these forward-looking statements, which reflect managements analysis only as of the date of this
Form 10-K. We undertake no obligation to update such forward-looking statements to reflect events
or circumstances occurring after the date of this report.
 
 Item 1. Business
 General
   3




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 -i -i -i i
   The IRIDEX Strategy
  1. Leverage our Core Business and Increase Recurring Revenues
 4




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2. Br oaden Product Lines through Product Innovation.
 
    
    the OcuLight TX, a new green light laser with an optional remote control and wireless
foot switch. This first shipped in late 2006, and
    
    the first true yellow 577nm laser system which requires FDA approval and is currently
scheduled to ship in mid 2007.


5



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3. Develop New Market Opportunities Through Strategic Acquisitions and Alliances.
  Products
  Consoles:
 Infrared Photocoagulator Consoles.
 6




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Visible (or Green) Photocoagulator Consoles.
 Combination Infrared/Visible Photocoagulator Consoles.
 Specialized
Delivery Devices.
 Ophthalmic Delivery Devices  TruFocus Laser Indirect Ophthalmoscope (LIO).
 Slit Lamp Adapter (SLA).
 Operating Microscope Adapter.
 EndoProbe.
 G-Probe.
 7




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DioPexy Probe.  Dermatology Delivery Devices:
 DioLite Handpiece.
 VariLite Handpiece.
 ScanLite Scanner
  Ophthalmology Treatments:
 Condition
    
    Procedure
    
    Console
    
    Delivery DevicesAge-related Macular
Degeneration
    
    Retinal 
Photocoagulation
    
    Infrared & Visible
    
    Slit Lamp AdapterDiabetic RetinopathyMacular Edema
    
    Grid Retinal 
Photocoagulation
    
    Infrared & Visible
    
    Slit Lamp Adapter &
Operating Microscope
Adapter,Focal Retinal 
Photocoagulation
    
    Visible
    
    Slit Lamp AdapterProliferative
    
    Pan-Retinal 
Photocoagulation 
Vitrectomy 
Procedure
    
    Infrared & Visible
    
    Slit Lamp Adapter,
Operating
Microscope Adapter,
Laser
Indirect
Ophthalmoscope,
EndoProbe*GlaucomaPrimary Open-Angle
    
    Trabeculoplasty
    
    Infrared & Visible
    
    Slit Lamp AdapterAngle-closure
    
    Iridotomy
    
    Infrared & Visible
    
    Slit Lamp Adapter
 8




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##### Table of Contents



Condition
    
    Procedure
    
    Console
    
    Delivery DevicesUncontrolled Gluacoma
    
    Transscleral 
Cyclophotocoagulation
    
    Infrared
    
    G-Probe*Retinal Tears and
Detachments
    
    Retinopexy Retinal 
Photocoagulation 
Vitrectomy 
Procedure
    
    Infrared & Visible
    
    Slit Lamp Adapter,
LaserIndirect
Ophthalmoscope,
Operating Microscope
Adapter, EndoProbe*Transscleral Retinal 
Photocoagulation
    
    Infrared
    
    DioPexy ProbeRetinopathy of Prematurity
    
    Retinal 
Photocoagulation
    
    Infrared
    
    Laser Indirect
OphthalmoscopeOcular Tumors
    
    Retinal 
Photocoagulation
    
    Infrared
    
    Slit Lamp Adapter,
Operating
Microscope Adapter,
Laser
Indirect
OphthalmoscopeMacular Holes
    
    Vitrectomy Procedure
    
    Visible
    
    EndoProbe*
 
 *
    
    Disposable single use products  DermatologyTreatments:Condition
    
    Procedure
    
    Console
    
    Delivery DevicesVascular Lesions
    
    Selective
Photothermolysis
    
    Visible
    
    DioLite HandpiecePigmented Lesions
    
    Selective
Photothermolysis
    
    Visible
    
    DioLite Handpiece
 9




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Research and Product Innovation
     Age-Related Macular Degeneration (AMD)  Wet Form.
 Age-Related Macular Degeneration  Dry Form .
 Glaucoma.
 Diabetic Retinopathy
 Ocular Tumors.
  10




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Customers and Customer Support
    Sales and Marketing
   11




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Operations
    12




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Competition
  Patents and Proprietary Rights
   13




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Government Regulation
       14




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15




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Reimbursement
  16




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Product Liability and Insurance
  Backlog
  Employees
  Available Information
 www.iridex.com
 17




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Item 1A. Risk Factors
 Factors That May Affect Future Results
  We do not believe that our current liquidity and capital resources will be sufficient to meet
our currently planned operating requirements for the next 12 months.
     18




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We Have More Indebtedness and Fewer Liquid Resources After the Acquisition of the Aesthetics
Business of Laserscope, Which Could Adversely Affect Our Cash Flows and Business.
  
    
    require us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, thereby reducing funds available for working capital, capital
expenditures, acquisitions and other purposes;
    
    making it more difficult for us to meet our payment and other obligations under our
outstanding debt;
    
    increase our vulnerability to, and limit our flexibility in planning for, adverse
economic and industry conditions;
 
    
    increase our sensitivity to interest rate increases on our indebtedness with
variable interest rates;
    
    result in an event of default if we fail to comply with the financial and other
restrictive covenants contained in our debt agreements, which event of default could
result in all of our debt becoming immediately due and payable;
    
    affect our credit
rating;
    
    limit our ability to obtain additional financing to fund future working capital,
capital expenditures, additional acquisitions and other general corporate
requirements;
    
    create competitive disadvantages compared to other companies with less
indebtedness; and
    
    limit our ability to apply proceeds from an offering or asset sale to purposes
other than the repayment of debt.
 Our Loan Agreements Contain Covenant Restrictions that May Limit Our Ability to Operate Our
Business and To Service Our Indebtedness, We Will Require a Significant Amount of Cash. Our Ability
to Generate Cash Flow Depends on Many Factors Beyond Our Control.
  19




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Although We Expect that Our Acquisition of the Aesthetics Business of Laserscope Will Result
in Benefits to the Company, the Company May Not Realize Those Benefits Because of Integration and
Other Challenges.
  
    
    coordinating marketing functions;
    
    transferring of the manufacturing of the Laserscope products
to the Company;
    
    unanticipated issues in integrating information, communications and other systems;
    
    unanticipated incompatibility of purchasing, logistics, marketing and
administration methods;
    
    greater than anticipated liabilities;
    
    retaining key employees;
 
    
    consolidating corporate and administrative infrastructures;
    
    the diversion of managements attention from ongoing business concerns;
    
    coordinating our current product and process development efforts with those of the
Aesthetics Business in a way which permits us to bring future new products to the
market in a timely and cost-effective manner; and
    
    coordinating geographically separate organizations.
   Failure to Remediate the Material Weaknesses in Our Disclosure Controls and Procedures in a
Timely Manner, or at All, Could Harm Our Operating Results or Cause Us to Fail to Meet Our
Regulatory or Reporting Obligations.
    20




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We Rely on Continued Market Acceptance of Our Existing Products and Any Decline in Sales of
Our Existing Products Would Adversely Affect Our Business and Results of Operations.
  §
    
    acceptance of product performance, features, ease of use, scalability and durability;§
    
    acceptance of the companys new marketing programs;
 §
    
    recommendations and opinions by ophthalmologists, dermatologists, other
clinicians, plastic surgeons and their associated opinion leaders, including study
outcomes;§
    
    price of our products and prices of competing products and technologies;§
    
    availability of competing products, technologies and alternative treatments; and§
    
    level of reimbursement for treatments administered with our products.
  If There is Not Sufficient Demand for the Procedures Performed with Our Products, Practitioner
Demand for Our Products Could be Inhibited, Resulting in Unfavorable Operating Results and Reduced
Growth Potential.
  
    
    evolving customer needs;
    
    the introduction of new products and technologies;
    
    evolving surgical practices;
    
    evolving industry standards;
    
    the cost of procedures performed using our products;
    
    the cost, safety and effectiveness of alternative treatments, including
treatments which are not based upon laser- or other light-based technologies and
treatments which use pharmaceutical products;
    
    the success of our sales and marketing efforts; and
    
    consumer confidence, which may be impacted by economic and political conditions.
  21




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Our Future Success Depends on Our Ability to Develop and Successfully Introduce New Products
and New Applications
  While We Devote Significant Resources to Research and Development, Our Research and
Development May Not Lead to New Products that Achieve Commercial Success.
  The Clinical Trial Process Required to Obtain Regulatory Approvals is Costly and Uncertain,
and Could Result in Delays in New Product Introductions or Even an Inability to Release a Product.
  We Face Strong Competition in Our Markets and Expect the Level of Competition to Grow in the
Foreseeable Future.
  22




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If We Cannot Increase Our Sales Volumes, Reduce Our Costs or Introduce Higher Margin Products
to Offset Anticipated Reductions in the Average Unit Price of Our Products, Our Operating Results
May Suffer.
  We Depend on Sales of Our Ophthalmology Products for a Significant Portion of Our Operating
Results
  We Depend on International Sales for a Significant Portion of Our Operating Results
  
    
    differing local product preferences and product requirements;
    
    cultural differences;
    
    changes in foreign medical reimbursement and coverage policies and programs;
    
    political and economic instability;
    
    impact of recessions in economies outside of the United States;
    
    difficulty in staffing and managing foreign operations;
    
    performance of our international channel of distributors;
    
    foreign certification requirements, including continued ability to use the CE
mark in Europe;
 23




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
    
    reduced or limited protections of intellectual property rights in jurisdictions
outside the United States;
    
    longer accounts receivable collection periods;
    
    fluctuations in foreign currency exchange rates;
    
    potentially adverse tax consequences; and
    
    multiple protectionist, adverse and changing foreign governmental laws and regulations.
   We Are Exposed to Risks Associated With Worldwide Economic Slowdowns and Related
Uncertainties.
  We Rely on Our Direct Sales Force and Network of International Distributors to Sell Our
Products and any Failure to Maintain Our Direct Sales Force and Distributor Relationships Could
Harm Our Business.
   24




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If We Lose Key Personnel or Fail to Integrate Replacement Personnel Successfully, Our Ability
to Manage Our Business Could Be Impaired
  If We Fail to Accurately Forecast Demand For Our Product and Component Requirements For the
Manufacture of Our Product, We Could Incur Additional Costs or Experience Manufacturing Delays and
May Experience Lost Sales or Significant Inventory Carrying Costs.
  We Depend on Sole Source or Limited Source Suppliers.
  §
    
    unavailability of, shortages or limitations on the ability to obtain supplies of
components in the quantities that we require;§
    
    delays in delivery or failure of suppliers to deliver critical components on the
dates we require;§
    
    failure of suppliers to manufacture components to our specifications, and
potentially reduced quality; and§
    
    inability to obtain components at acceptable prices.
 25




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.
 We Face Risks Associated with our Collaborative and OEM Relationships.
  We Face Manufacturing Risks
  We Depend on Collaborative Relationships to Develop, Introduce and Market New Products,
Product Enhancements and New Applications
  26




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If We Fail to Maintain Our Relationships With Health Care Providers, Customers May Not Buy Our
Products and Our Revenue and Profitability May Decline.
  Our Operating Results May Fluctuate from Quarter to Quarter and Year to Year
  
    
    general economic uncertainties and political concerns;
    
    the timing of the introduction and market acceptance of new products, product
enhancements and new applications;
    
    changes in demand for our existing line of dermatology and ophthalmic products;
    
    the cost and availability of components and subassemblies, including the ability of our
sole or limited source suppliers to deliver components at the times and prices that we
have planned;
    
    our ability to maintain sales volumes at a level sufficient to cover fixed
manufacturing and operating costs;
    
    fluctuations in our product mix between dermatology and ophthalmic products and foreign
and domestic sales;
    
    the effect of regulatory approvals and changes in domestic and foreign regulatory
requirements;
    
    introduction of new products, product enhancements and new applications by our
competitors, entry of new competitors into our markets, pricing pressures and other
competitive factors;
    
    our long and highly variable sales cycle;
    
    changes in the prices at which we can sell our products;
    
    changes in customers or potential customers budgets as a result of, among other
things, reimbursement policies of government programs and private insurers for treatments
that use our products; and
    
    increased product innovation costs.
  27




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Our Stock Price Has Been and May Continue to be Volatile and an Investment in Our Common Stock
Could Suffer a Decline in Value.
  Material Increases in Interest Rates May Harm Our Sales.
  We Are Subject To Government Regulation Which May Cause Us to Delay or Withdraw the
Introduction of New Products or New Applications for Our Products.
   28




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If We Fail to Comply With the FDAs Quality System Regulation and Laser Performance Standards,
Our Manufacturing Operations Could Be Halted, and Our Business Would Suffer.
  If We Modify One of Our FDA Approved Devices, We May Need to Seek Reapproval, Which, if Not
Granted, Would Prevent Us from Selling Our Modified Products or Cause Us to Redesign Our Products.
  We Rely on Patents and Proprietary Rights to Protect our Intellectual Property and Business
  29




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The Requirements of Complying with the Sarbanes-Oxley Act of 2002 Might Strain Our Resources,
Which May Adversely Affect Our Business and Financial Condition.
  30




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Because We Do Not Require Training for Users of Our Products, and Sell Our Products to
Non-physicians, There Exists an Increased Potential for Misuse of Our Products, Which Could Harm
Our Reputation and Our Business.
  Some of Our Laser Systems Are Complex in Design and May Contain Defects That Are Not Detected
Until Deployed By Our Customers, Which Could Increase Our Costs and Reduce Our Revenues.
   
    
    loss of customers;
    
    increased costs of product returns and warranty expenses;
    
    damage to our brand reputation;
    
    failure to attract new customers or achieve market acceptance;
    
    diversion of development and engineering resources; and
    
    legal actions by our customers.
  31




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Our Products Could Be Subject to Recalls Even After Receiving FDA Approval or Clearance. A
Recall Would Harm Our Reputation and Adversely Affect Our Operating Results.
  If We Fail to Manage Growth Effectively, Our Business Could Be Disrupted Which Could Harm Our
Operating Results.
  Our Manufacturing Capacity May Not Be Adequate to Meet the Demands of Our Business.
  If Product Liability Claims are Successfully Asserted Against Us, We may Incur Substantial
Liabilities That May Adversely Affect Our Business or Results of Operations.
  Our Operating Results May be Adversely Affected by Changes in Third Party Coverage and
Reimbursement Policies and any Uncertainty Regarding Healthcare Reform Measures.
  32




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The Successful Outcome of Clinical Trials and the Development of New Applications Using
Certain of Our Products will Accelerate Future Revenue Growth Rates.
  If Our Facilities Were To Experience Catastrophic Loss, Our Operations Would Be Seriously
Harmed.
  33




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Our Business is Subject to Environmental Regulations.
   Our Export Controls May Not be Adequate to Ensure Compliance With United States Export Laws,
Especially When We Sell Our Products to Distributors Over Which We Have Limited Control.
     34




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Item 2. Properties
   
 Item 3. Legal Proceedings
    35




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Synergetics, Inc. v. Peregrine Surgical, Ltd., Innovatech Surgical, Inc., and IRIDEX Corporation
 Synergetics, Inc. v. IRIDEX Corporation
  36




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Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters, and Issuer Purchases
of Equity Securities
 Market Information for Common Equity
  High
    
    
    LowFiscal 2006Fourth Quarter
    
    $
    11.65
    
    
    $
    8.03Third Quarter
    
    
    10.69
    
    
    
    7.20Second Quarter
    
    
    13.40
    
    
    
    9.75First Quarter
    
    
    13.34
    
    
    
    7.50Fiscal 2005Fourth Quarter
    
    $
    8.93
    
    
    $
    6.29Third Quarter
    
    
    8.80
    
    
    
    6.16Second Quarter
    
    
    6.53
    
    
    
    5.07First Quarter
    
    
    6.19
    
    
    
    4.21
  Dividend Policy
  37




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Securities Authorized for Issuance Under Equity Compensation Plans
  (a)
    
    
    (b)
    
    
    (c)Number of securitiesremaining available for futureNumber of securities to
    
    
    Weighted-average exercise
    
    
    issuance under equitybe issued upon exercise
    
    
    price of outstanding
    
    
    compensation plansof outstanding options,
    
    
    options, warrants and
    
    
    (excluding securitiesPlan category
    
    warrants and rights
    
    
    rights
    
    
    reflected in column (a))Equity compensation plans
approved by security holders
    
    
    1,822,466
    (1)
    
    $
    5.93
    
    
    
    471,621
    (2)Equity compensation plans not
approved by security holders
    
    
    309,104
    (3)
    
    
    6.42
    
    
    
    0Total
    
    
    2,131,570
    
    
    $
    6.00
    
    
    
    471,621
 
 (1)
    
    Includes 1,462,791 options to purchase shares outstanding under the 1998 Stock Plan, 97,500 options to purchase
shares outstanding under the 1995 Director Option Plan and 262,175, options to purchase shares outstanding
under the Amended and Restated 1989 Incentive Stock Plan.(2)
    
    Includes 458,673 options available for future issuance under the 1998 Stock Plan and 12,948 shares issuable
under the 2005 Employee Stock Purchase Plan.(3)
    
    Consists of three items. The first is a Stand-Alone Option granted to Barry G. Caldwell on July 5, 2005, entitling Mr.
Caldwell to purchase up to 234,104 shares of the Companys common stock at an exercise price of $6.07 per share, issued as a
stand-alone option, outside of the Companys existing stock plans and as a material inducement to Mr. Caldwell accepting
employment with the Company. The shares covered by the Stand-Alone Option vest over a four (4) year period, with
1/4th of the total number of shares subject to the Stand-Alone Option vesting on July 5, 2006 and 1/48th
of the total number of shares subject to the Stand-Alone Option vesting each full month thereafter, provided that Mr.
Caldwell continues to be a service provider to the Company on each such date.   38




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Item 6. Selected Financial Data
   Fiscal
    
    
    Fiscal
    
    
    Fiscal
    
    
    Fiscal
    
    
    FiscalYear
    
    
    Year
    
    
    Year
    
    
    Year
    
    
    Year2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Consolidated Statement of Operations
Data:Sales
    
    $
    35,904
    
    
    $
    37,029
    
    
    $
    32,810
    
    
    $
    31,699
    
    
    $
    30,634Cost of sales
    
    
    17,099
    
    
    
    18,854
    
    
    
    17,922
    
    
    
    17,628
    
    
    
    17,046Gross profit
    
    
    18,805
    
    
    
    18,175
    
    
    
    14,888
    
    
    
    14,071
    
    
    
    13,588Operating expenses:Research and development
    
    
    5,511
    
    
    
    4,195
    
    
    
    4,509
    
    
    
    4,032
    
    
    
    4,315Selling, general and administrative
    
    
    18,059
    
    
    
    12,171
    
    
    
    11,455
    
    
    
    10,087
    
    
    
    9,454Total operating expenses
    
    
    23,570
    
    
    
    16,366
    
    
    
    15,964
    
    
    
    14,119
    
    
    
    13,769(Loss) income from operations
    
    
    (4,765
    )
    
    
    1,809
    
    
    
    (1,076
    )
    
    
    (48
    )
    
    
    (181
    )Interest and other income, net
    
    
    733
    
    
    
    528
    
    
    
    319
    
    
    
    212
    
    
    
    122(Loss) income before income taxes
    
    
    (4,032
    )
    
    
    2,337
    
    
    
    (757
    )
    
    
    164
    
    
    
    (59
    )(Provision) benefit from income
taxes
    
    
    (1,721
    )
    
    
    (666
    )
    
    
    355
    
    
    
    207
    
    
    
    209Income (loss)
    
    $
    (5,753
    )
    
    $
    1,671
    
    
    $
    (402
    )
    
    $
    371
    
    
    $
    150Share Data (basic and diluted):Basic net income (loss) per common share
    
    $
    (0.75
    )
    
    $
    0.23
    
    
    $
    (0.06
    )
    
    $
    0.05
    
    
    $
    0.02Diluted net income (loss) per common
share
    
    $
    (0.75
    )
    
    $
    0.21
    
    
    $
    (0.06
    )
    
    $
    0.05
    
    
    $
    0.02Shares used in net income (loss) per
common share calculationBasic
    
    
    7,713
    
    
    
    7,405
    
    
    
    7,200
    
    
    
    6,933
    
    
    
    6,870Diluted
    
    
    7,713
    
    
    
    7,880
    
    
    
    7,200
    
    
    
    7,072
    
    
    
    6,928
  December
    
    December
    
    January
    
    January30,
    
    31,
    
    1,
    
    3,
    
    December 28,2006
    
    2005
    
    2005
    
    2004
    
    2002Consolidated Balance Sheet Data:Cash, cash equivalents and
available-for-sale securities
    
    $
    21,051
    
    
    $
    21,434
    
    
    $
    18,028
    
    
    $
    16,292
    
    
    $
    11,542Working capital
    
    
    29,846
    
    
    
    32,330
    
    
    
    25,342
    
    
    
    28,462
    
    
    
    28,072Total assets
    
    
    40,177
    
    
    
    41,104
    
    
    
    39,093
    
    
    
    35,839
    
    
    
    34,272Total stockholders equity
    
    
    32,157
    
    
    
    34,517
    
    
    
    31,783
    
    
    
    30,834
    
    
    
    30,198
 39




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
       Results of Operations
 Revenue:
 2006
    
    
    2005
    
    
    2004Revenue:Opthalmology  Domestic
    
    $
    18,184
    
    
    $
    17,762
    
    
    $
    16,443Opthalmology  International
    
    
    12,641
    
    
    
    12,900
    
    
    
    11,310Total Opthalmology
    
    
    30,826
    
    
    
    30,663
    
    
    
    27,753Dermatology  Domestic
    
    
    3,641
    
    
    
    4,951
    
    
    
    3,451Dermatology  International
    
    
    1,437
    
    
    
    1,415
    
    
    
    1,606Total Dermatology
    
    
    5,078
    
    
    
    6,366
    
    
    
    5,057Total Revenue
    
    $
    35,904
    
    
    $
    37,029
    
    
    $
    32,810
 40




---



##### Table of Contents



Ophthalmology and Dermatology Revenue
   Gross Margin
    Research and Development
   41




---



##### Table of Contents



Sales, General and Administrative
   Interest and Other income, net.
  Income Taxes
  Liquidity and Capital Resources
   42




---



##### Table of Contents



Payments Due by Period2011 andTotal
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    thereafterContractual ObligationsOperating Leases
    
    $
    983
    
    
    $
    438
    
    
    $
    451
    
    
    $
    94
    
    
    $
    0
    
    
    $
    0Unconditional Purchase
Obligations*
    
    $
    1,472
    
    
    $
    1,472
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Total Contractual Cash
Obligations
    
    $
    2,455
    
    
    $
    1,910
    
    
    $
    451
    
    
    $
    94
    
    
    $
    0
    
    
    $
    0
  43




---



##### Table of Contents



2007
    
    $
    3282008
    
    
    2242009
    
    
    1452010
    
    
    33$
    730
 Critical Accounting Policies
  
    
    Revenue Recognition
  
    
    Inventories
  
    
    Sales Returns Allowance and Allowance for Doubtful Accounts
   44




---



##### Table of Contents




    
    Warranty
  
    
    Income Taxes
  
    
    Accounting for Stock-Based Compensation
      45




---



##### Table of Contents



Recent Accounting Pronouncements
    
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
    
 Item 8. Financial Statements and Supplementary Data.
  46




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
     
 47




---



##### Table of Contents



IRIDEX Corporation
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share data)
 December
    
    
    December30,
    
    
    31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,051
    
    
    $
    12,655Available-for-sale securities
    
    
    
    
    
    
    8,779Accounts receivable, net of allowance for
doubtful accounts of $439 in 2006 and $559
in 2005
    
    
    6,052
    
    
    
    6,589Inventories, net
    
    
    9,499
    
    
    
    8,594Prepaids and other current assets
    
    
    1,264
    
    
    
    885Short term deferred income taxes
    
    
    
    
    
    
    1,415Total current assets
    
    
    37,866
    
    
    
    38,917Property and equipment, net
    
    
    1,087
    
    
    
    1,114Other long term assets
    
    
    1,224
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    1,073Total assets
    
    $
    40,177
    
    
    $
    41,104LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,830
    
    
    $
    1,094Accrued expenses
    
    
    4,775
    
    
    
    4,421Deferred revenue
    
    
    1,415
    
    
    
    1,072Total liabilities
    
    
    8,020
    
    
    
    6,587Commitments and contingencies (Note 5).Stockholders EquityConvertible Preferred Stock, $.01 par value:Authorized: 2,000,000 shares;Issued and outstanding: none
    
    
    
    
    
    
    Common Stock, $.01 par value:Authorized: 30,000,000 shares;Issued and outstanding: 7,841,781 shares in
2006 and 7,520,358 shares in 2005
    
    
    79
    
    
    
    76Additional paid-in capital
    
    
    29,697
    
    
    
    26,334Accumulated other comprehensive loss
    
    
    
    
    
    
    (27
    )Treasury stock, at cost
    
    
    (430
    )
    
    
    (430
    )Retained earnings
    
    
    2,811
    
    
    
    8,564Total stockholders equity
    
    
    32,157
    
    
    
    34,517Total liabilities and stockholders equity
    
    $
    40,177
    
    
    $
    41,104
  48




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##### Table of Contents



IRIDEX Corporation
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 30,
    
    
    December 31,
    
    
    January 1,2006
    
    
    2005
    
    
    2004Sales
    
    $
    35,904
    
    
    
    37,029
    
    
    $
    32,810Cost of sales
    
    
    17,099
    
    
    
    18,854
    
    
    
    17,922Gross profit
    
    
    18,805
    
    
    
    18,175
    
    
    
    14,888Operating expenses:Research and development
    
    
    5,511
    
    
    
    4,195
    
    
    
    4,509Sales, general and administrative
    
    
    18,059
    
    
    
    12,171
    
    
    
    11,455Total operating expenses
    
    
    23,570
    
    
    
    16,366
    
    
    
    15,964(Loss) income from operations
    
    
    (4,765
    )
    
    
    1,809
    
    
    
    (1,076
    )Interest and other income, net
    
    
    733
    
    
    
    528
    
    
    
    319(Loss) Income before income taxes
    
    
    (4,032
    )
    
    
    2,337
    
    
    
    (757
    )(Provision for) Benefit from income taxes
    
    
    (1,721
    )
    
    
    (666
    )
    
    
    355Net (loss) income
    
    $
    (5,753
    )
    
    
    1,671
    
    
    $
    (402
    )Basic (loss) net income per common share
    
    $
    (0.75
    )
    
    $
    0.23
    
    
    $
    (0.06
    )Diluted (loss) net income per common share
    
    $
    (0.75
    )
    
    $
    0.21
    
    
    $
    (0.06
    )Shares used in computing net (loss) income per share basic
    
    
    7,713
    
    
    
    7,405
    
    
    
    7,200Shares used in computing net (loss) income per common
share diluted
    
    
    7,713
    
    
    
    7,880
    
    
    
    7,200
  49




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##### Table of Contents



IRIDEX Corporation
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 (in thousands, except share data)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Treasury
    
    
    Comprehensive
    
    
    RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Income (Loss)
    
    
    Earnings
    
    
    TotalBalances, January
3, 2004
    
    
    6,987,033
    
    
    $
    70
    
    
    $
    23,900
    
    
    $
    (430
    )
    
    $
    (1
    )
    
    $
    7,295
    
    
    $
    30,834Issuance of Common
Stock under Stock
Option Plan
    
    
    294,852
    
    
    
    4
    
    
    
    1,081
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,085Issuance of Common
Stock under
Employee Stock
Purchase Plan
    
    
    26,972
    
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122Tax Benefit of
Employee Stock
Option Plan
    
    
    
    
    
    
    
    
    
    
    178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178Change in
unrealized gains on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    
    
    
    
    (34)
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (402
    )
    
    
    (402)
    )Balances, January
1, 2005
    
    
    7,308,857
    
    
    
    74
    
    
    
    25,281
    
    
    
    (430
    )
    
    
    (35
    )
    
    
    6,893
    
    
    
    31,783Issuance of Common
Stock under Stock
Option Plan
    
    
    183,873
    
    
    
    2
    
    
    
    661
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    663Issuance of Common
Stock under
Employee Stock
Purchase Plan
    
    
    27,628
    
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134Tax Benefit of
Employee Stock
Option Plan
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171Change in
unrealized gains on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Warrants issued for
services
    
    
    
    
    
    
    
    
    
    
    87
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,671
    
    
    
    1,671Balances, December
31, 2005
    
    
    7,520,358
    
    
    
    76
    
    
    $
    26,334
    
    
    
    (430
    )
    
    
    (27
    )
    
    
    8,564
    
    
    
    34,517Issuance of Common
Stock under Stock
Option Plan
    
    
    276,578
    
    
    
    3
    
    
    
    1,289
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,292Issuance of Common
Stock under
Employee Stock
Purchase Plan
    
    
    44,845
    
    
    
    
    
    
    
    295
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    295Employee
Stock-Based
Compensation
Expense
    
    
    
    
    
    
    
    
    
    
    1,779
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,779Change in
unrealized gains on
available-for-sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    27Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,753
    )
    
    
    (5,753
    )Balances, December
30, 2006
    
    
    7,841,781
    
    
    $
    79
    
    
    $
    29,697
    
    
    $
    (430
    )
    
    $
    
    
    
    $
    2,811
    
    
    $
    32,157
  50




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##### Table of Contents



IRIDEX Corporation
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 30,
    
    
    December 31,
    
    
    January 1,2006
    
    
    2005
    
    
    2005Operating activities:Net (loss) income
    
    $
    (5,753
    )
    
    $
    1,671
    
    
    $
    (402
    )Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Depreciation and amortization
    
    
    542
    
    
    
    435
    
    
    
    384Stock compensation cost recognized
    
    
    1,816
    
    
    
    
    
    
    
    Issuance of warrant
    
    
    
    
    
    
    87
    
    
    
    Provision for doubtful accounts
    
    
    141
    
    
    
    132
    
    
    
    376Provision for inventories
    
    
    (296
    )
    
    
    407
    
    
    
    694Deferred income taxes
    
    
    2,488
    
    
    
    585
    
    
    
    (579
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    396
    
    
    
    683
    
    
    
    (1,232
    )Inventories
    
    
    (609
    )
    
    
    (436
    )
    
    
    (895
    )Prepaids and other current assets
    
    
    (379
    )
    
    
    (71
    )
    
    
    120Other long term assets
    
    
    (154
    )
    
    
    
    
    
    
    Accounts payable
    
    
    (274
    )
    
    
    (139
    )
    
    
    204Accrued expenses
    
    
    354
    
    
    
    (746
    )
    
    
    1,787Deferred revenue
    
    
    343
    
    
    
    162
    
    
    
    314Net cash/(used) provided by operating activities
    
    
    (1,385
    )
    
    
    2,770
    
    
    
    771Investing activities:Purchases of available-for-sale securities
    
    
    (18,250
    )
    
    
    (8,770
    )
    
    
    (7,681
    )Proceeds from maturity of available-for-sale securities
    
    
    27,056
    
    
    
    7,646
    
    
    
    5,751Business acquisition cost
    
    
    (60
    )Acquisition of property and equipment
    
    
    (515
    )
    
    
    (340
    )
    
    
    (386
    )Net cash provided by (used in) investing activities
    
    
    8,231
    
    
    
    (1,464
    )
    
    
    (2,316
    )Cash flows from financing activities:Issuance of common stock under employee stock plans
    
    
    1,550
    
    
    
    968
    
    
    
    1,385Net cash provided by financing activities
    
    
    1,550
    
    
    
    968
    
    
    
    1,385Net increase (decrease) in cash and cash equivalents
    
    
    8,396
    
    
    
    2,274
    
    
    
    (160
    )Cash and cash equivalents, beginning of year
    
    
    12,655
    
    
    
    10,381
    
    
    
    10,541Cash and cash equivalents, end of year
    
    $
    21,051
    
    
    $
    12,655
    
    
    $
    10,381Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes
    
    $
    243
    
    
    $
    209
    
    
    $
    25
  51




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##### Table of Contents



IRIDEX Corporation
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (in thousands)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 30,
    
    
    December 31,
    
    
    January 1,2006
    
    
    2005
    
    
    2005Net (loss) income
    
    $
    (5,753
    )
    
    $
    1,671
    
    
    $
    (402
    )Changes in unrealized
losses on
available-for-sale
securities, net of tax
    
    
    27
    
    
    
    6
    
    
    
    (34
    )Comprehensive (loss) income
    
    $
    (5,726
    )
    
    $
    1,677
    
    
    $
    (436
    )
  IRIDEX Corporation
 
 Notes to Consolidated Financial Statements
 1. Business of the Company
 Description of Business
    52




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##### Table of Contents



2. Summary of Significant Accounting Policies
 
    
    Financial Statement Presentation
   
    
    Cash and Cash Equivalents
  
    
    Available-for-Sale Securities
  
    
    Sales Returns Allowance and Allowance for Doubtful Accounts
   
    
    Inventories
  53




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##### Table of Contents




    
    Property and Equipment
  
    
    Revenue Recognition
 
  
    
    Deferred Revenue
  Balance, January 1, 2005
    
    $
    910Additions to deferral
    
    
    1,451Revenue recognized
    
    
    (1,289
    )Balance, December 31, 2005
    
    $
    1,072Additions to deferral
    
    
    1,688Revenue recognized
    
    
    (1,345
    )Balance, December 30, 2006
    
    $
    1,415
 54




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##### Table of Contents




    
    Warranty
  Balance, January 1, 2005
    
    $
    933Accruals for warranties issued during the year
    
    
    1,163Settlements made in kind during the year
    
    
    (968
    )Balance, December 31, 2005
    
    $
    1,128Accruals for warranties issued during the year
    
    
    741Settlements made in kind during the year
    
    
    (1,003
    )Balance, December 30, 2006
    
    $
    866
 
    
    Research and Development
  
    
    Advertising
  
    
    Fair Value of Financial Instruments
  
    
    Income Taxes
  
    
    Accounting for Stock-Based Compensation
  55




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##### Table of Contents




    
    Concentration of Credit Risk and Other Risks and Uncertainties
    56




---



##### Table of Contents




    
    Reliance on Certain Suppliers
  
    
    Use of Estimates
  
    
    Net Income (loss) per Share
  
    
    Recent Accounting Pronouncements
    57




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##### Table of Contents



3. Balance Sheet Detail
 Available-for-sale securities (in thousands)
 Unrealized
    
    
    Estimated
    
    
    MaturityCost
    
    
    Gain (Loss)
    
    
    Fair Value
    
    
    DatesAs of December 31,
2005,
available-for-sale
securities
consisted of the
following:Corporate notes
    
    $
    5,442
    
    
    $
    (19
    )
    
    $
    5,423
    
    
    
    2/066/06Government agencies
    
    
    3,364
    
    
    
    (8
    )
    
    
    3,356
    
    
    
    1/063/06Total
    
    $
    8,806
    
    
    $
    (27
    )
    
    $
    8,779
   December 30,
    
    
    December 31,2006
    
    
    2005Inventories:Raw materials and work in process
    
    $
    4,000
    
    
    $
    5,191Finished goods
    
    
    5,499
    
    
    
    3,403Total inventories
    
    $
    9,499
    
    
    $
    8,594Property and Equipment:Equipment
    
    $
    5,344
    
    
    $
    4,937Leasehold improvements
    
    
    2,029
    
    
    
    1,921Less: accumulated depreciation and amortization
    
    
    (6,286
    )
    
    
    (5,744
    )Property and equipment, net
    
    $
    1,087
    
    
    $
    1,114
  Accrued Expenses:Accrued payroll, vacation and related expenses
    
    $
    1,517
    
    
    $
    1,671Accrued warranty
    
    
    866
    
    
    
    1,129Income taxes payable
    
    
    
    
    
    
    552Sales and use tax payable
    
    
    150
    
    
    
    220Other accrued expenses
    
    
    2,242
    
    
    
    849Total accrued expenses
    
    $
    4,775
    
    
    $
    4,421
 4. Bank Borrowings
  58




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##### Table of Contents



5. Commitments and Contingencies
 Lease Agreements
  in thousands)
 Fiscal Year
    
    Operating Lease Payments2007
    
    
    4382008
    
    
    4512009
    
    
    94$
    983
   2007
    
    $
    3282008
    
    
    2242009
    
    
    1452010
    
    
    33$
    730
 License Agreements
  Contingencies
     59




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##### Table of Contents



Synergetics, Inc. v. Peregrine Surgical, Ltd., Innovatech Surgical, Inc., and IRIDEX Corporation
 Synergetics, Inc. v. IRIDEX Corporation
    6. Stockholders Equity
 Convertible Preferred Stock
  Treasury Stock
  60




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##### Table of Contents



Stock Option Plans
 Amended and Restated 1989 Incentive Stock Plan
  1998 Stock Plan
  1995 Director Option Plan
  Stand-Alone Options
  61




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##### Table of Contents



2005 Employee Stock Purchase Plan
   Outstanding OptionsShares
    
    
    
    
    
    
    
    
    
    WeightedAvailable
    
    Number
    
    Aggregate
    
    Averagefor Grant
    
    of Shares
    
    Price
    
    Exercise PriceBalances, January 3, 2004
    
    
    313,212
    
    
    
    2,004,283
    
    
    
    9,835
    
    
    
    4.91Additional shares reserved
    
    
    270,000
    
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (214,750
    )
    
    
    214,750
    
    
    
    1,379
    
    
    
    6.42Options exercised
    
    
    
    
    
    
    (294,852
    )
    
    
    (1,085
    )
    
    
    3.68Options cancelled
    
    
    (15,000
    )Options terminated
    
    
    100,789
    
    
    
    (100,789
    )
    
    
    (701
    )
    
    
    6.95Balances, January 1, 2005
    
    
    454,251
    
    
    
    1,823,392
    
    
    
    9,428
    
    
    
    5.18Additional shares reserved
    
    
    434,104
    
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (622,050
    )
    
    
    622,050
    
    
    
    3,791
    
    
    
    6.09Warrants issued
    
    
    (25,000
    )
    
    
    25,000Options exercised
    
    
    
    
    
    
    (183,873
    )
    
    
    (663
    )
    
    
    3.60Options cancelled
    
    
    (78,355
    )Options terminated
    
    
    132,566
    
    
    
    (132,566
    )
    
    
    (866
    )
    
    
    6.53Balances, December 31, 2005
    
    
    295,516
    
    
    
    2,154,003
    
    
    
    11,690
    
    
    
    5.50Additional shares reserved
    
    
    435,000Options granted
    
    
    (300,650
    )
    
    
    300,650
    
    
    
    2,551
    
    
    
    8.48Options exercised
    
    
    
    
    
    
    (276,578
    )
    
    
    (1,291
    )
    
    
    4.67Options cancelled
    
    
    (4,750
    )Options terminated
    
    
    46,505
    
    
    
    (46,505
    )
    
    
    (311
    )
    
    
    6.69Balances, December 30, 2006
    
    
    471,621
    
    
    
    2,131,570
    
    
    $
    12,639
    
    
    $
    6.00
 62




---



##### Table of Contents



Options Outstanding
    
    Options Vested and ExercisableNumber of
    
    Weighted
    
    
    
    
    
    Number of
    
    
    
    
    
    WeightedShares
    
    Average
    
    Weighted
    
    Shares
    
    Weighted
    
    AverageOutstanding
    
    Remaining
    
    Average
    
    Exercisable at
    
    Average
    
    RemainingRange of Exercise
    
    at December
    
    Contractual
    
    Exercise
    
    December 30,
    
    Exercise
    
    ContractualPrices
    
    30, 2006
    
    Life (Years)
    
    Price
    
    2006
    
    Price
    
    Life (Years)$2.94- $3.50
    
    
    232,427
    
    
    
    6.12
    
    
    
    3.36
    
    
    
    211,551
    
    
    $
    3.36
    
    
    
    6.17$3.52 - $4.00
    
    
    287,758
    
    
    
    2.80
    
    
    
    3.87
    
    
    
    279,782
    
    
    $
    3.88
    
    
    
    2.72$4.01 - $5.08
    
    
    287,557
    
    
    
    5.51
    
    
    
    4.61
    
    
    
    212,117
    
    
    $
    4.51
    
    
    
    4.81$5.13 - $5.66
    
    
    217,865
    
    
    
    5.64
    
    
    
    5.46
    
    
    
    123,667
    
    
    $
    5.47
    
    
    
    4.30$5.69 - $6.00
    
    
    17,891
    
    
    
    7.31
    
    
    
    5.82
    
    
    
    5,905
    
    
    $
    5.76
    
    
    
    8.26$6.07 - $6.07
    
    
    325,000
    
    
    
    8.51
    
    
    
    6.07
    
    
    
    131,251
    
    
    $
    6.07
    
    
    
    7.18$6.19 - $7.84
    
    
    287,378
    
    
    
    6.71
    
    
    
    7.15
    
    
    
    110,494
    
    
    $
    6.96
    
    
    
    6.04$7.98 - $8.75
    
    
    243,894
    
    
    
    6.85
    
    
    
    8.34
    
    
    
    59,148
    
    
    $
    8.09
    
    
    
    6.90$8.88 - $10.86
    
    
    213,300
    
    
    
    3.30
    
    
    
    9.36
    
    
    
    175,970
    
    
    $
    9.08
    
    
    
    2.93$11.38 - $12.75
    
    
    18,500
    
    
    
    4.05
    
    
    
    12.28
    
    
    
    15,500
    
    
    $
    12.46
    
    
    
    3.50$2.94 - $12.75
    
    
    2,131,570
    
    
    
    6.01
    
    
    
    6.00
    
    
    
    1,325,385
    
    
    $
    5.52
    
    
    
    5.38
   Adoption of SFAS 123(R)
  63




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##### Table of Contents



Employee Stock Option Plan
    
    Employee Stock Purchase Plan2006
    
    2005
    
    2004
    
    2006
    
    2005
    
    2004Average risk free
interest rate
    
    
    4.80
    %
    
    
    4.40
    %
    
    
    3.50
    %
    
    
    4.43
    %
    
    
    4.20
    %
    
    
    2.56
    %Expected life (in
years)
    
    
    3.8
    
    
    5-7 years
    
    
    4.0
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average volatility
    
    
    50.0 - 60.0
    %
    
    
    77.0 -83.0
    %
    
    
    88.0
    %
    
    
    34.0-60.0
    %
    
    
    46.0
    %
    
    
    84.0
    %
   Year EndedDecember 30, 2006Cost of sales
    
    $
    122Research and development
    
    
    251Sales, general and administrative
    
    
    1,443$
    1,816
  64




---



##### Table of Contents



Year Ended
    
    
    Year EndedDecember 31, 2005
    
    
    January 1, 2005Net income (loss), as reported for prior periods
    
    $
    1,671
    
    
    $
    (402
    )Stock-based compensation expense related to
employee stock options and employee stock
purchases
    
    
    (966
    )
    
    
    (560
    )Pro forma net income
    
    $
    705
    
    
    $
    (962
    )Basic net income per share:As reported
    
    $
    0.23
    
    
    
    ($0.06
    )Pro forma
    
    $
    0.10
    
    
    
    ($0.13
    )Diluted net income per share:As reported
    
    $
    0.21
    
    
    
    ($0.06
    )Pro forma
    
    $
    0.09
    
    
    
    ($0.13
    )
  Weighted Average
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    Intrinsic ValueOutstanding at December 31, 2005
    
    
    2,154,003
    
    
    $
    5.50
    
    
    $
    14,518Options granted
    
    
    300,650
    
    
    
    8.48
    
    
    
    117Options exercised
    
    
    (276,578
    )
    
    
    4.67
    
    
    
    (1,162
    )Options forfeited/cancelled/expired
    
    
    (46,505
    )
    
    
    6.69
    
    
    
    (101
    )Outstanding at December 30, 2006
    
    
    2,131,570
    
    
    $
    5.53
    
    
    $
    13,372
    Year Ended December30, 2006Stock-based compensation expense by award type:Employee stock options granted
    
    $
    1,708Employee stock purchase plan
    
    
    108Total stock-based compensation
    
    
    1,816Total effect on stock-based compensation at the
Companys marginal tax rate
    
    
    (690
    )Effect on net income (loss)
    
    $
    1,126Effect on net income (loss) per share:Basic and diluted earnings per share
    
    
    ($0.15
    )
 65




---



##### Table of Contents



WeightedAverage GrantNumber of Shares
    
    Dated Fair ValueNon-vested at December 31, 2005
    
    
    893,119
    
    
    $
    5.72Granted
    
    
    300,650
    
    
    $
    4.38Vested
    
    
    (341,075
    )
    
    $
    3.98Cancelled/forfeited
    
    
    (46,505
    )
    
    $
    4.47Non-vested at December 30, 2006
    
    
    806,189
    
    
    $
    4.42
  7. Employee Benefit Plan
  8. Income Taxes
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 30,
    
    
    December 31,
    
    
    January 1,2006
    
    
    2005
    
    
    2005Current:Federal
    
    $
    (371
    )
    
    $
    59
    
    
    $
    212State
    
    
    
    
    
    
    31
    
    
    
    14(371
    )
    
    
    90
    
    
    
    226Deferred:Federal
    
    
    1,756
    
    
    
    451
    
    
    
    (519
    )State
    
    
    337
    
    
    
    125
    
    
    
    (62
    )2,093
    
    
    
    576
    
    
    
    (581
    )Income tax provision (benefit)
    
    $
    1,721
    
    
    $
    666
    
    
    $
    (355
    )
 66




---



##### Table of Contents



Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 30,
    
    
    December 31,
    
    
    January 1,2006
    
    
    2005
    
    
    2005Income tax provision at statutory rate
    
    
    34
    %
    
    
    34
    %
    
    
    34
    %State income taxes, net of federal benefit
    
    
    1
    %
    
    
    6
    %
    
    
    8
    %Tax exempt interest
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Nondeductible permanent differences
    
    
    (10
    %)
    
    
    1
    %
    
    
    (5
    %)Research and development credits
    
    
    2
    %
    
    
    (13
    %)
    
    
    12
    %Change in valuation allowance
    
    
    (73
    %)
    
    
    0
    %
    
    
    0
    %Other
    
    
    0
    %
    
    
    0
    %
    
    
    (2
    %)Effective tax rate
    
    
    (45
    %)
    
    
    28
    %
    
    
    47
    %
  December 30,
    
    
    December 31,2006
    
    
    2005Fixed assets
    
    $
    568
    
    
    $
    558Accrued liabilities
    
    
    530
    
    
    
    595Allowance for excess and obsolete inventories
    
    
    467
    
    
    
    599Research credit
    
    
    695
    
    
    
    514State tax
    
    
    2
    
    
    
    1Allowance for doubtful accounts
    
    
    167
    
    
    
    215Other
    
    
    299
    
    
    
    5Net operating loss
    
    
    160
    
    
    
    Net deferred tax asset
    
    $
    2,888
    
    
    $
    2,487Valuation Allowance
    
    
    (2,888
    )
    
    
    Net Deferred Tax Assets (Liability)
    
    $
    0
    
    
    $
    2,487
     9. Major Customers and Business Segments
   67




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##### Table of Contents



Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 30,
    
    
    December 30, ,
    
    
    January 1,2006
    
    
    2005
    
    
    2005United States
    
    $
    21,826
    
    
    $
    22,713
    
    
    $
    19,894Europe
    
    $
    7,787
    
    
    
    7,138
    
    
    
    6,498Rest of Americas
    
    $
    1,836
    
    
    
    1,703
    
    
    
    631Asia/Pacific Rim
    
    $
    4,455
    
    
    
    5,475
    
    
    
    5,787$
    35,904
    
    
    $
    37,029
    
    
    $
    32,810
   Year Ended December 30, 2006Ophthalmology
    
    
    DermatologyMedical Devices
    
    
    Medical Devices
    
    
    TotalSales
    
    $
    30,826
    
    
    $
    5,078
    
    
    $
    35,904Direct cost of goods sold
    
    $
    9,312
    
    
    $
    2,125
    
    
    $
    11,437Direct gross margin
    
    $
    21,514
    
    
    $
    2,953
    
    
    $
    24,467Total unallocated indirect costs
    
    
    
    
    
    
    
    
    
    $
    29,232Income from operations
    
    
    
    
    
    
    
    
    
    $
    (4,765
    )
 Year Ended December 31,2005Ophthalmology
    
    
    DermatologyMedical Devices
    
    
    Medical Devices
    
    
    TotalSales
    
    $
    30,663
    
    
    $
    6,366
    
    
    $
    37,029Direct cost of goods sold
    
    $
    10,374
    
    
    $
    3,138
    
    
    $
    13,512Direct gross margin
    
    $
    20,289
    
    
    $
    3,228
    
    
    $
    23,517Total unallocated indirect costs
    
    
    
    
    
    
    
    
    
    $
    21,708Loss from operations
    
    
    
    
    
    
    
    
    
    $
    1,809
 Year Ended January 1, 2005Ophthalmology
    
    
    DermatologyMedical Devices
    
    
    Medical Devices
    
    
    TotalSales
    
    $
    27,753
    
    
    $
    5,057
    
    
    $
    32,810Direct cost of goods sold
    
    $
    9,876
    
    
    $
    2,898
    
    
    $
    12,774Direct gross margin
    
    $
    17,877
    
    
    $
    2,159
    
    
    $
    20,036Total unallocated indirect costs
    
    
    
    
    
    
    
    
    
    $
    21,112Loss from operations
    
    
    
    
    
    
    
    
    
    $
    (1,076
    )
 68




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##### Table of Contents



10. Computation of Net Income Per Common Share and Per Diluted Common Share
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 30,
    
    
    December 31,
    
    
    January 1,2006
    
    
    2005
    
    
    2005Net (loss) income
    
    $
    (5,753
    )
    
    $
    1,671
    
    
    $
    (402
    )Denominator  Net income (loss) per common shareWeighted average common stock outstanding
    
    
    7,713
    
    
    
    7,405
    
    
    
    7,200Effect of dilutive securitiesWeighted average common stock options
    
    
    
    
    
    
    475Total weighted average stock and options outstanding
    
    
    7,713
    
    
    
    7,880
    
    
    
    7,200Net (loss) income per common share
    
    $
    (0.75
    )
    
    $
    0.23
    
    
    $
    (0.06
    )Diluted net (loss) income per common share
    
    $
    (0.75
    )
    
    $
    0.21
    
    
    $
    (0.06
    )
  11. Subsequent Events
 Credit Facility
  69




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##### Table of Contents



Completion of Acquisition
  70




---



##### Table of Contents



Stand-Alone Options
   12. Selected Quarterly Financial Data, (Unaudited)
 QuarterFirst
    
    Second
    
    Third
    
    Fourth(In thousands, except per share amounts)Year Ended December 30, 2006Sales
    
    $
    8,843
    
    
    $
    8,804
    
    
    $
    9,222
    
    
    $
    9,035Gross profit
    
    $
    4,262
    
    
    $
    4,659
    
    
    $
    4,872
    
    
    $
    5,012Net income (loss)
    
    $
    (303
    )
    
    $
    (534
    )
    
    $
    (1,143
    )
    
    $
    (3,773
    )Net income (loss) per common share
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.15
    )
    
    $
    (0.48
    )Diluted net income (loss) per common share
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.15
    )
    
    $
    (0.48
    )Year Ended December 31, 2005Sales
    
    $
    8,145
    
    
    $
    9,387
    
    
    $
    9,081
    
    
    $
    10,416Gross profit
    
    $
    3,678
    
    
    $
    4,545
    
    
    $
    4,879
    
    
    $
    5,073Net income (loss)
    
    $
    (20
    )
    
    $
    430
    
    
    $
    879
    )
    
    $
    381Net income (loss) per common share
    
    $
    (0.00
    )
    
    $
    0.06
    )
    
    $
    0.12
    )
    
    $
    0.05Diluted net income (loss) per common share
    
    $
    (0.00
    )
    
    $
    0.05
    )
    
    $
    0.11
    )
    
    $
    0.05
 71




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##### Table of Contents



Item 9. Changes in And Disagreements with Accountants On Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of disclosure controls and procedures
 a) Evaluation of disclosure controls and procedures.
      Plan for remediation of material weaknesses
  72




---



##### Table of Contents




    
    implementation of additional controls over the preparation and review of key spreadsheets;
    
    implementation of automated general ledger reports to replace existing key spreadsheets where possible;
    
    implementation of additional review procedures; and
    
    enhancement of the current capabilities of the finance function.
  (b) Changes in internal control over financial reporting
   
    
    reassignment of responsibilities for oversight of the sales function and
responsibilities for internal control over sales transactions;
    
    provision of additional training on a recurring basis for all domestic sales personnel
on revenue recognition policies and procedures;
    
    establishment of annual formal training for our customer service group on revenue
recognition policies and procedures;
    
    establishment of a checklist for use by our customer service group in processing revenue
transactions to verify proper recognition and establishment of a policy by which this
checklist is signed off by the preparer and at least one reviewer;
    
    establishment of internal audit procedures over all domestic laser sale transactions; and
    
    formalization over our sales returns process to include more thorough documentation,
review and approval for all returns.
   73




---



##### Table of Contents



Item 9B. Other Information
  
 PART III
  
 Item 10. Directors and Executive Officers of the Registrant
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services.
  74




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##### Table of Contents



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
  Page inForm 10-KReport1. Financial StatementsReport of Independent Registered Public Accounting Firm
    
    
    47Consolidated Balance Sheets as of December 30, 2006 and December 31, 2005
    
    
    48Consolidated Statements of Operations for the years ended December 30, 2006, December 31, 2005, and January 1, 2005
    
    
    49Consolidated Statements of Stockholders Equity for the years ended December 30, 2006, December 31, 2005, and January 1, 2005
    
    
    50Consolidated Statements of Cash Flows for the years ended December 30, 2006, December 31, 2005, and January 1, 2005
    
    
    51Consolidated Statements of Comprehensive Income (Loss) for the years ended December 30, 2006, December 31, 2005, and January 1, 2005
    
    
    52Notes to Consolidated Financial Statements
    
    
    522. Financial Statement ScheduleThe following financial statement schedule of IRIDEX Corporation for the years
ended December 30, 2006, December 31, 2005, and
January 1, 2005 is filed as part
of this Annual Report and should be read in conjunction with the Consolidated
Financial Statements of IRIDEX CorporationSchedule II  Valuation and Qualifying Accounts
    
    
    77
   Exhibits
    
    Exhibit Title2.1(9)
    
    Asset Purchase Agreement dated November 30, 2006 by and among American Medical Systems,
Inc., a Delaware corporation, Laserscope, a California corporation and a wholly owned
subsidiary of American Medical Systems, Inc. and IRIDEX Corporation.3.1(1)
    
    Amended and Restated Certificate of Incorporation of Registrant.3.2(2)
    
    Amended and Restated Bylaws of Registrant.10.1(1)
    
    Form of Indemnification Agreement with directors and officers.10.2(7)
    
    2005 Employee Stock Purchase Plan.10.3(5)
    
    Employment Agreement with Barry G. Caldwell dated July 5, 2005.10.4(6)
    
    Executive Transition Agreement entered into by and between the
Company and Theodore A. Boutacoff dated April 28, 2005.10.5(6)
    
    Amended and Restated Severance and Change of Control Agreement
entered into by and between the Company and Larry Tannenbaum on
April 29, 2005.10.6(4)
    
    Lease Agreement dated December 6, 1996 by and between Zappettini
Investment Co. and the Registrant, as amended.
 75




---



##### Table of Contents



Exhibits
    
    Exhibit Title10.7(3)
    
    1998 Stock Option Plan, as amended.10.8(8)
    
    2006 Incentive Program.21.1(1)
    
    Subsidiaries of Registrant.23.1
    
    Consent of Independent Registered Public Accounting Firm.24.1
    
    Power of Attorney (See page 78).31.1
    
    Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Incorporated by reference to the Exhibits filed with the Registration
Statement on Form SB-2 (No. 333-00320-LA) which was declared effective
on February 15, 1996.(2)
    
    Incorporated by reference to the Exhibits in Registrants Report on
Form 10-Q for the quarter ended October 3, 1998.(3)
    
    Incorporated by reference to the Exhibits in Registrants Proxy
Statement for the Companys 2006 Annual Meeting of Stockholders which
was filed May 5, 2006.(4)
    
    Incorporated by reference to the Exhibits in Registrants Report on
Form 10-Q for the quarter ended September 27, 2003.(5)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated July 5, 2005.(6)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated May 4, 2005.(7)
    
    Incorporated by reference to the Exhibits filed with the Registrants Proxy Statement for the
Companys 2004 Annual Meeting of Stockholders which was filed on April 30, 2004.(8)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated March 14, 2006.(9)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated December 6, 2006. Trademark Acknowledgments
  76




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##### Table of Contents



Schedule II
 IRIDEX CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
 Balance at
    
    Charged to
    
    
    
    
    
    BalanceBeginning of
    
    Costs and
    
    
    
    
    
    at End ofDescription
    
    The Period
    
    Expenses
    
    Deductions
    
    The PeriodBalance for the year ended January 1, 2005:Allowance for doubtful accounts receivable
    
    $
    120
    
    
    $
    376
    
    
    $
    (30
    )
    
    $
    466Provision for inventory
    
    $
    1,043
    
    
    $
    694
    
    
    $
    
    
    
    $
    1,737Balance for the year ended December 31, 2005:Allowance for doubtful accounts receivable
    
    $
    466
    
    
    $
    132
    
    
    $
    (39
    )
    
    $
    559Provision for inventory
    
    $
    1,737
    
    
    $
    407
    
    
    $
    (89
    
    
    $
    2,055Balance for the year ended December 30, 2006:Allowance for doubtful accounts receivable
    
    $
    559
    
    
    $
    141
    
    
    $
    (261
    )
    
    $
    439Provision for inventory
    
    $
    2,055
    
    
    $
    (296
    )
    
    $
    1
    
    
    $
    1,760
 77




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##### Table of Contents



SIGNATURES
 th
 IRIDEX CORPORATIONBy:
    /s/ Barry G. CaldwellBarry G. CaldwellPresident, Chief Executive Officer, and Director   /s/ Barry G. Caldwell
    
    President, Chief Executive Officer, and Director
    
    March 30, 2007(Barry G. Caldwell)
    
    (Principal Executive Officer)/s/ Meryl Rains
    
    Chief Financial Officer and Vice President
    
    March 30, 2007(Meryl Rains)
    
    (Principal Financial and Accounting Officer)Vice President, Corporate Business(James L. Donovan)
    
    Development and Director/s/ Robert K. Anderson
    
    Director
    
    March 30, 2007(Robert K. Anderson)/s/ Donald L. Hammond
    
    Director
    
    March 30, 2007(Donald L. Hammond)/s/ Sanford Fitch
    
    Director
    
    March 30, 2007(Sanford Fitch)/s/ Garrett A. Garrettson
    
    Director
    
    March 30, 2007(Garett A. Garrettson)/s/ Theodore A. Boutacoff
    
    Chairman of the Board
    
    March 30, 2007(Theodore A. Boutacoff)
 78




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##### Table of Contents



Exhibit Index
 Exhibits
    
    Exhibit Title2.1(9)
    
    Asset Purchase Agreement dated November 30, 2006 by and among American Medical Systems,
Inc., a Delaware corporation, Laserscope, a California corporation and a wholly owned
subsidiary of American Medical Systems, Inc. and IRIDEX Corporation.3.1(1)
    
    Amended and Restated Certificate of Incorporation of Registrant.3.2(2)
    
    Amended and Restated Bylaws of Registrant.10.1(1)
    
    Form of Indemnification Agreement with directors and officers.10.2(7)
    
    2005 Employee Stock Purchase Plan.10.3(5)
    
    Employment Agreement with Barry G. Caldwell dated July 5, 2005.10.4(6)
    
    Executive Transition Agreement entered into by and between the
Company and Theodore A. Boutacoff dated April 28, 2005.10.5(6)
    
    Amended and Restated Severance and Change of Control Agreement
entered into by and between the Company and Larry Tannenbaum on
April 29, 2005.10.6(4)
    
    Lease Agreement dated December 6, 1996 by and between Zappettini
Investment Co. and the Registrant, as amended.10.7(3)
    
    1998 Stock Option Plan, as amended.10.8(8)
    
    2006 Incentive Program.21.1(1)
    
    Subsidiaries of Registrant.23.1
    
    Consent of Independent Registered Public Accounting Firm.24.1
    
    Power of Attorney (See page 78).31.1
    
    Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Incorporated by reference to the Exhibits filed with the Registration
Statement on Form SB-2 (No. 333-00320-LA) which was declared effective
on February 15, 1996.(2)
    
    Incorporated by reference to the Exhibits in Registrants Report on
Form 10-Q for the quarter ended October 3, 1998.(3)
    
    Incorporated by reference to the Exhibits in Registrants Proxy
Statement for the Companys 2006 Annual Meeting of Stockholders which
was filed May 5, 2006.(4)
    
    Incorporated by reference to the Exhibits in Registrants Report on
Form 10-Q for the quarter ended September 27, 2003.(5)
    
    Incorporated by reference to the Exhibits filed with the Registrants
Report on Form 8-K dated July 5, 2005.(6)
    
    Incorporated by reference to the Exhibits filed with the Registrants
Report on Form 8-K dated May 4, 2005.(7)
    
    Incorporated by reference to the Exhibits filed with the Registrants Proxy Statement for
the Companys 2004 Annual Meeting of Stockholders which was filed on April 30, 2004.(8)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated March 14, 2006.(9)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated December 6, 2006.