##### Table of Contents



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 29, 2007
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the transition period from to .
 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
  Large accelerated filer: o
    
    Accelerated filer: o
    
    Non-accelerated filer: o
    
    Smaller reporting company: þ(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




---



##### 



Page No.Part IItem 1. Business
    
    
    3Item 1A Risk Factors
    
    
    15Item 1B Unresolved Staff Comments
    
    
    28Item 2. Properties
    
    
    28Item 3. Legal Proceedings
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Part IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    30Item 6. Selected Financial Data
    
    
    31Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    41Item 8. Financial Statements and Supplementary Data
    
    
    41Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    70Item 9A. Controls and Procedures
    
    
    70Item 9B. Other Information
    
    
    73Part IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    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 and Director Independence
    
    
    74Item 14. Principal Accountant Fees and Services
    
    
    74Part IVItem 15. Exhibits, Financial Statement Schedules
    
    
    75Signatures
    
    
    79EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



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; ability to pay our obligations in a timely manner and manage cash flow; 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 and integration of the Laserscope aesthetics business;
leveraging our core business and increasing recurring revenues; broadening our product lines
through product innovation and new treatments; our marketing programs and trends in healthcare; our
ability to take advantage of economies-of-scale in product development and manufacturing; 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 and the status of our regulatory clearance; risks associated with bringing new
products to market, general economic conditions and levels of international sales, our current
liquidity, ability to obtain additional financing if necessary and concerns 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 Item 1A. Risk Factors, 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
   -i -i -i L i, i
  3




---



##### Table of Contents



The IRIDEX Strategy
  1.
    
    Return operating stability to the Companyby carefully managing cash, balancing our
expenses to our expected revenues and making our results of operations more predictable.
Our initial focus is to be cash flow positive and to eliminate debt acquired in the
Laserscope acquisition, after which the cash flow being generated will put us in a strong
position to take advantage of new opportunities.2.
    
    Improve the operating efficiency of the aesthetics businessand maximize the potential
benefits from the Laserscope acquisition, optimize our worldwide aesthetic sales channels
and service support, and complete the manufacturing integration of the Laserscope aesthetic
products.3.
    
    Focus on our customersby providing value. To accomplish this we will strive to
provide: products that solve their problems and satisfy their needs, are well designed, use
appropriate technologies and are easy for physicians and other providers to use; products
that are well validated to perform as intended and provide patient benefits; products that
are well manufactured with high quality and with high reliability; knowledgeable,
professional and clinically astute sales representatives; and unparalleled customer
service.4.
    
    Focus on growth of recurring revenuesby introduction of new disposable products and
new sales/service programs for the retina and glaucoma markets in ophthalmology and other
markets such as ENT. Our recurring revenue includes the sale of our disposable, single use
laser probes, EndoProbe and G-Probes, as well as the repair, servicing and extended service
contracts for our laser systems.5.
    
    Introduce new equipment productsthrough internal development and/or acquisition, which
either encourage replacement of the existing installed base, or expand the installed base
by performing new procedures or capabilities. We intend to continue our investment in
research and development to improve the performance of our systems and broaden our product
offerings by developing innovative technologies which can address the customer needs of the
ophthalmic and aesthetic markets.
 We Depend on
Collaborative Relationships to Develop, Introduce and Market New Products, Product Enhancements and
New Applications
 4




---



##### Table of Contents



Ophthalmic Products
  Consoles:
 Infrared Photocoagulator Consoles.
 Visible (or Green) Photocoagulator Consoles.
 Combination Infrared/Visible Photocoagulator Consoles.
 Ophthalmic Delivery Devices
  TruFocus Laser Indirect Ophthalmoscope (LIO).
 Slit Lamp Adapter (SLA).
 Operating Microscope Adapter.
 EndoProbe.
 5




---



##### Table of Contents



G-Probe.
 DioPexy Probe.
 Ophthalmology Treatments:
 Procedure
    
    Console
    
    Delivery DevicesAge-related Macular
    
    Retinal
    
    Infrared & Visible
    
    Slit Lamp AdapterDegeneration
    
    PhotocoagulationDiabetic RetinopathyMacular Edema
    
    Grid Retinal
    
    Infrared & Visible
    
    Slit Lamp Adapter &Photocoagulation
    
    
    
    Operating MicroscopeAdapter,Focal Retinal
    
    Visible
    
    Slit Lamp AdapterPhotocoagulationProliferative
    
    Pan-Retinal
    
    Infrared & Visible
    
    Slit Lamp Adapter,Photocoagulation
    
    
    
    OperatingVitrectomy
    
    
    
    Microscope Adapter,Procedure
    
    
    
    LaserIndirectOphthalmoscope,EndoProbe*GlaucomaPrimary Open-Angle
    
    Trabeculoplasty
    
    Infrared & Visible
    
    Slit Lamp AdapterAngle-closure
    
    Iridotomy
    
    Infrared & Visible
    
    Slit Lamp AdapterUncontrolled Glaucoma
    
    Transscleral
    
    Infrared
    
    G-Probe*CyclophotocoagulationRetinal Tears and
    
    Retinopexy Retinal
    
    Infrared & Visible
    
    Slit Lamp Adapter,Detachments
    
    Photocoagulation
    
    
    
    Laser IndirectVitrectomy
    
    
    
    Ophthalmoscope,Procedure
    
    
    
    Operating MicroscopeAdapter, EndoProbe*Transscleral Retinal
    
    Infrared
    
    DioPexy ProbePhotocoagulationRetinopathy of Prematurity
    
    Retinal
    
    Infrared
    
    Laser IndirectPhotocoagulation
    
    
    
    OphthalmoscopeOcular Tumors
    
    Retinal
    
    Infrared
    
    Slit Lamp Adapter,Photocoagulation
    
    
    
    Operating MicroscopeAdapter, Laser IndirectOphthalmoscopeMacular Holes
    
    Vitrectomy Procedure
    
    Visible
    
    EndoProbe*
 
 *
    
    Disposable single use products 6




---



##### Table of Contents



Aesthetics
Products
  Consoles
 Combination Infrared/Visible wavelength laser consoles: This includes the Gemini and
VariLite.
   Visible (or Green) Consoles: i .
 Infrared Consoles: This includes the Lyra-i and Venus-i Laser System.
 The Lyra-i uses a
 -i
 Aesthetics Delivery Devices:
 -i i -i i
 Dermastat Handpieces. i
 DioLite Handpieces.
 VariLite Handpiece.
 ScanLite Scanner
 7




---



##### Table of Contents



Condition
    
    Procedure
    
    Console
    
    Delivery DevicesVascular Lesions
    
    Selective Photothermolysis
    
    Visible
    
    DioLite HandpiecePigmented Lesions
    
    
    
    
    
    Versastat-iCutaneous Lesions
    
    
    
    
    
    Versastat 10 mmAcne
    
    
    
    
    
    DermastatSkin Rejuvenation
    
    
    
    
    
    ScanLiteHair Reduction
    
    
    
    
    
    VariLite HandpieceLeg Veins
    
    Selective Photothermolysis
    
    Infrared
    
    Versastat-iHair Reduction
    
    
    
    
    
    Versastat 10 mmWrinkle Reduction
    
    Skin Resurfacing
    
    Infrared
    
    Articulated ArmScars
Acne Scar Reduction
 Research and Development
     While We Devote Significant Resources to Research and
Development, Our Research and Development May Not Lead to New Products that Achieve Commercial
Success
 Customers and Customer Support
  8




---



##### Table of Contents



Sales and Marketing
   We Depend on International Sales for a Significant Portion of Our
Operating Results.
    9




---



##### Table of Contents



Operations
   We
Depend on Sole Source or Limited Source Suppliers.
 We Are Subject to Government Regulations Which May Cause Us to
Delay or Withdraw the Introduction of New Products or New Applications for Our Products.
 Competition
    We
Face Strong Competition in Our Markets and Expect the Level of Competition to Grow in the Foreseeable Future.
 10




---



##### Table of Contents



Patents and Proprietary Rights
   We
Rely on Patents and Proprietary Rights to Protect our Intellectual Property and Business.
 Government Regulation
     11




---



##### Table of Contents



12




---



##### Table of Contents



Reimbursement
   13




---



##### Table of Contents



Our Operating Results May be Adversely Affected by Changes in
Third Party Coverage and Reimbursement Policies and any Uncertainty Regarding Healthcare Reform
Measures.
  Backlog
  Employees
  Available Information
 www.IRIDEX.com
 14




---



##### Table of Contents



Item 1A. Risk Factors
 Factors That May Affect Future Results
  We believe there is significant risk as to whether our current liquidity and capital
resources will be sufficient to meet our currently planned operating requirements for the next 12
months.
   We Have More Indebtedness and Fewer Liquid Resources After the Acquisition of the Aesthetics
Business of Laserscope, Which Does 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 and obligations, thereby reducing funds available for working capital, capital
expenditures, acquisitions and other purposes;
    
    make it more difficult for us to meet our payments and other obligations to other
3rd parties;
    
    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.
 15




---



##### Table of Contents



The
Company May Not Realize Those Anticipated Benefits of Our Acquisition
of the Aesthetics Business of Laserscope.
   If There is Not Sufficient Demand for the Aesthetics 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.
  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.
    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;
    
    recommendations and opinions by ophthalmologists, dermatologists, plastic surgeons,
other clinicians, and their associated opinion leaders;
    
    clinical 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.
 16




---



##### Table of Contents



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.
  17




---



##### Table of Contents



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.
    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 Rely on Patents and Proprietary Rights to Protect our Intellectual Property and Business
  18




---



##### Table of Contents



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;
 19




---



##### Table of Contents




    
    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;
    
    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.
   If We Lose Key Personnel or Fail to Integrate Replacement Personnel Successfully, Our Ability
to Manage Our Business Could Be Impaired
  20




---



##### Table of Contents



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.
 .
 21




---



##### Table of Contents



We Face Risks Associated with Our Collaborative and OEM Relationships.
  We Depend on Collaborative Relationships to Develop, Introduce and Market New Products,
Product Enhancements and New Applications
  If We Fail to Maintain Our Relationships With Health Care Providers, Customers May Not Buy Our
Products and Our Revenue and Profitability May Decline.
  We Face Manufacturing Risks
  22




---



##### Table of Contents



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 ophthalmic and aesthetics products;
    
    the cost and availability of components and subassemblies, including the willingness
and ability of our sole or limited source suppliers to timely 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 ophthalmic and aesthetics products and foreign
and domestic sales;
    
    our ability to address our current liquidity issues;
    
    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.
   23




---



##### Table of Contents



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.
    24




---



##### Table of Contents



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.
  The Requirements of Complying with the Sarbanes-Oxley Act of 2002 Might Strain Our Resources,
Which May Adversely Affect Our Business and Financial Condition.
  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.
  25




---



##### Table of Contents



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.
  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.
  26




---



##### Table of Contents



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.
   If Our Facilities Were To Experience Catastrophic Loss, Our Operations Would Be Seriously
Harmed.
  Our Business is Subject to Environmental Regulations.
   27




---



##### Table of Contents



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.
     
 Item 1. B Unresolved Staff Comments
  
 Item 2. Properties
   28




---



##### Table of Contents



Item 3. Legal Proceedings
   
 Item 4. Submission of Matters to a Vote of Security Holders
  29




---



##### Table of Contents



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
  Fiscal 2007
    
    High
    
    LowFourth Quarter
    
    $
    5.36
    
    
    $
    2.20Third Quarter
    
    
    5.44
    
    
    
    2.32Second Quarter
    
    
    8.90
    
    
    
    4.75First Quarter
    
    
    10.70
    
    
    
    8.50Fiscal 2006Fourth Quarter
    
    $
    11.65
    
    
    $
    8.03Third Quarter
    
    
    10.69
    
    
    
    7.20Second Quarter
    
    
    13.40
    
    
    
    9.75First Quarter
    
    
    13.34
    
    
    
    7.50
  Dividend Policy
  Recent Sales of Unregistered Securities
    30




---



##### Table of Contents



Item 6. Selected Financial Data
   Fiscal
    
    
    Fiscal
    
    
    Fiscal
    
    
    Fiscal
    
    
    FiscalYear
    
    
    Year
    
    
    Year
    
    
    Year
    
    
    Year2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Consolidated Statement of Operations Data:Sales
    
    $
    55,532
    
    
    $
    35,904
    
    
    $
    37,029
    
    
    $
    32,810
    
    
    $
    31,699Cost of sales
    
    
    31,248
    
    
    
    17,099
    
    
    
    18,854
    
    
    
    17,922
    
    
    
    17,628Gross profit
    
    
    24,284
    
    
    
    18,805
    
    
    
    18,175
    
    
    
    14,888
    
    
    
    14,071Operating expenses:Research and development
    
    
    5,779
    
    
    
    5,511
    
    
    
    4,195
    
    
    
    4,509
    
    
    
    4,032Selling, general and administrative
    
    
    27,930
    
    
    
    18,059
    
    
    
    12,171
    
    
    
    11,455
    
    
    
    10,087Impairment of goodwill and intangibles assets
    
    
    14,690
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    48,399
    
    
    
    23,570
    
    
    
    16,366
    
    
    
    15,964
    
    
    
    14,119(Loss) income from operations
    
    
    (24,115
    )
    
    
    (4,765
    )
    
    
    1,809
    
    
    
    (1,076
    )
    
    
    (48
    )Legal
settlement
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest and
other (expense) income, net
    
    
    (644
    )
    
    
    733
    
    
    
    528
    
    
    
    319
    
    
    
    212(Loss) income before income taxes
    
    
    (22,259
    )
    
    
    (4,032
    )
    
    
    2,337
    
    
    
    (757
    )
    
    
    164(Provision) benefit from income taxes
    
    
    (13
    )
    
    
    (1,721
    )
    
    
    (666
    )
    
    
    355
    
    
    
    207Net income
(loss)
    
    $
    (22,272
    )
    
    $
    (5,753
    )
    
    $
    1,671
    
    
    $
    (402
    )
    
    $
    371Share Data (basic and diluted):Basic net income (loss) per common share
    
    $
    (2.69
    )
    
    $
    (0.75
    )
    
    $
    0.23
    
    
    $
    (0.06
    )
    
    $
    0.05Diluted net income (loss) per common share
    
    $
    (2.69
    )
    
    $
    (0.75
    )
    
    $
    0.21
    
    
    $
    (0.06
    )
    
    $
    0.05Shares used in net income (loss) per common share calculation
Basic
    
    
    8,293
    
    
    
    7,713
    
    
    
    7,405
    
    
    
    7,200
    
    
    
    6,933
 31




---



##### Table of Contents



December 29,
    
    December 30,
    
    December 31,
    
    January 1,
    
    January 3,2007
    
    2006
    
    2005
    
    2004
    
    2003Consolidated Balance Sheet Data:Cash, cash equivalents and available-for-sale securities
    
    $
    5,809
    
    
    $
    21,051
    
    
    $
    21,434
    
    
    $
    18,028
    
    
    $
    16,292Working capital
    
    
    7,659
    
    
    
    29,846
    
    
    
    32,330
    
    
    
    25,342
    
    
    
    28,462Total assets
    
    
    46,654
    
    
    
    40,177
    
    
    
    41,104
    
    
    
    39,093
    
    
    
    35,839Total stockholders equity
    
    
    18,810
    
    
    
    32,157
    
    
    
    34,517
    
    
    
    31,783
    
    
    
    30,834
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
     -i -i i i, i
     32




---



##### Table of Contents



Results of Operations  2007, 2006 and 2005
  Percentage of RevenueYears EndedDec 29, 2007
    
    Dec 30, 2006
    
    Dec 31, 2005Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    56.3
    
    
    
    47.6
    
    
    
    50.9Gross margin
    
    
    43.7
    
    
    
    52.4
    
    
    
    49.1Operating expenses:Research and development
    
    
    10.4
    
    
    
    15.3
    
    
    
    11.3Selling, general and administrative
    
    
    50.3
    
    
    
    50.3
    
    
    
    32.9Impairment of goodwill and intangible assets
    
    
    26.5
    
    
    
    
    
    
    
    Total operating expense
    
    
    87.2
    
    
    
    65.6
    
    
    
    44.2(Loss) income from operations
    
    
    (43.4
    )
    
    
    (13.3
    )
    
    
    4.9Legal
settlement
    
    
    4.5
    
    
    
    
    
    
    
    Interest and
other (expense) income, net
    
    
    (1.2
    )
    
    
    2.1
    
    
    
    1.4Income
(loss) before income taxes
    
    
    (40.1
    )
    
    
    (11.2
    )
    
    
    6.3(Provision) for income taxes
    
    
    (0.0
    )
    
    
    (4.8
    )
    
    
    (1.8
    )Net (loss)
income
    
    
    (40.1
    )
    
    
    (16.0
    )
    
    
    4.5
 Acquisitions.
  Impairment of Goodwill and Intangible Assets.
 The Company May Not Realize Those Anticipated Benefits
Of Our Acquisition Of The Aesthetics Business Of Laserscope
 33




---



##### Table of Contents



Revenues.
    Gross Profit
      Our Operating Results May Fluctuate from Quarter to Quarter and
Year to Year.
 Research and Development
  Sales, General and Administrative
  34




---



##### Table of Contents



Interest and Other income, net.
  Income Taxes.
  Revenues.
  Gross Profit
  Research and Development
  35




---



##### Table of Contents



Sales, General and Administrative
  Interest and Other income, net.
  Income Taxes.
  Liquidity and Capital Resources
 Comparison of 2007 to 2006.
      36




---



##### Table of Contents



Comparison of 2006 to 2005.
   Payments Due by Period2012 andTotal
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    thereafterContractual ObligationsTerm Loan Principal Payments*
    
    $
    5,016
    
    
    $
    1,180
    
    
    $
    1,180
    
    
    $
    1,180
    
    
    $
    1,180
    
    
    $
    296Balance on revolving credit facility
    
    
    4,863
    
    
    
    4,863
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Operating Leases Payments
    
    
    965
    
    
    
    616
    
    
    
    234
    
    
    
    73
    
    
    
    42
    
    
    
    0AMS Settlement
    
    
    4,767
    
    
    
    4,767
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Unconditional Purchase Obligations to AMS**
    
    
    1,312
    
    
    
    1,312
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total Contractual Cash Obligations
    
    $
    16,923
    
    
    $
    12,738
    
    
    $
    1,414
    
    
    $
    1,253
    
    
    $
    1,222
    
    
    $
    296
 
 *
    
    See Note 16 of Notes to Consolidated Financial Statements in Part II of this report for more
information regarding the new credit facility and how this impacts Term Loan Principal Payments for
the future periods disclosed above.**
    
    Related to the AMS Settlement Agreement reached in August 2007, we have agreed to purchase up to
$1.3 million worth of certain inventory from AMS to be delivered and paid in 2008. Critical Accounting Policies
  Revenue Recognition
  37




---



##### Table of Contents



Inventories.
  Sales Returns Allowance and Allowance for Doubtful Accounts.
   Warranty.
  Valuation of Goodwill and Intangible Assets.
   38




---



##### Table of Contents



Income Taxes.
  Accounting for Uncertainty in Income Taxes.
  Accounting for Stock-Based Compensation
   39




---



##### Table of Contents



Recent Accounting Pronouncements
      40




---



##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
   
 Item 8. Financial Statements and Supplementary Data.
  41




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       
 42




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
     
 43




---



##### Table of Contents



IRIDEX
Corporation
 
 CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 December
    
    
    December29,
    
    
    30,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,809
    
    
    $
    21,051Restricted Cash
    
    
    3,800
    
    
    
    Accounts receivable, net of allowance for doubtful accounts of $700 in 2007 and $439 in 2006
    
    
    8,876
    
    
    
    6,052Inventories, net
    
    
    15,967
    
    
    
    9,499Prepaids and other current assets
    
    
    1,051
    
    
    
    1,264Total current assets
    
    
    35,503
    
    
    
    37,866Property and equipment, net
    
    
    1,621
    
    
    
    1,087Goodwill
    
    
    3,239
    
    
    
    Other intangible assets, net
    
    
    5,944
    
    
    
    Other long term assets
    
    
    347
    
    
    
    1,224Total assets
    
    $
    46,654
    
    
    $
    40,177LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,887
    
    
    $
    1,830Bank line of credit
    
    
    4,863
    
    
    
    Accrued compensation
    
    
    2,024
    
    
    
    1,517Accrued expenses
    
    
    7,809
    
    
    
    2,392Accrued warranty
    
    
    1,895
    
    
    
    866Deferred revenue
    
    
    3,350
    
    
    
    1,415Bank term loan-current portion
    
    
    5,016
    
    
    
    Total liabilities
    
    
    27,844
    
    
    
    8,020Commitments and contingencies (Note 10).Stockholders EquityConvertible Preferred Stock, $.01 par value:Authorized: 2,000,000 shares;Issued and outstanding: 500,000 shares in 2007 and 0 shares in 2006
    
    
    5
    
    
    
    Common Stock, $.01 par value:Authorized: 30,000,000 shares;Issued and outstanding: 8,824,301 shares in 2007 and 7,841,781 shares in 2006
    
    
    89
    
    
    
    79Additional paid-in capital
    
    
    38,695
    
    
    
    29,697Accumulated other comprehensive loss
    
    
    (88
    )
    
    
    Treasury stock, at cost
    
    
    (430
    )
    
    
    (430
    )(Accumulated deficit) retained earnings
    
    
    (19,461
    )
    
    
    2,811Total stockholders equity
    
    
    18,810
    
    
    
    32,157Total liabilities and stockholders equity
    
    $
    46,654
    
    
    $
    40,177
  44




---



##### Table of Contents



IRIDEX Corporation
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 29,
    
    
    December 30,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Revenues
    
    $
    55,532
    
    
    $
    35,904
    
    
    $
    37,029Cost of goods sold
    
    
    31,248
    
    
    
    17,099
    
    
    
    18,854Gross profit
    
    
    24,284
    
    
    
    18,805
    
    
    
    18,175Operating expenses:Research and development
    
    
    5,779
    
    
    
    5,511
    
    
    
    4,195Sales, general and administrative
    
    
    27,930
    
    
    
    18,059
    
    
    
    12,171Impairment of goodwill and intangible assets
    
    
    14,690
    
    
    
    
    
    
    
    Total operating expenses
    
    
    48,399
    
    
    
    23,570
    
    
    
    16,366(Loss) income from operations
    
    
    (24,115
    )
    
    
    (4,765
    )
    
    
    1,809Legal
settlement
    
    
    2,500
    
    
    
    
    
    
    
    Interest and
other (expense) income, net
    
    
    (644
    )
    
    
    733
    
    
    
    528(Loss) Income before income taxes
    
    
    (22,259
    )
    
    
    (4,032
    )
    
    
    2,337(Provision for) income taxes
    
    
    (13
    )
    
    
    (1,721
    )
    
    
    (666
    )Net (loss) income
    
    $
    (22,272
    )
    
    $
    (5,753
    )
    
    
    1,671Basic net (loss) income per common share
    
    $
    (2.69
    )
    
    $
    (0.75
    )
    
    $
    0.23Diluted net (loss) income per common share
    
    $
    (2.69
    )
    
    $
    (0.75
    )
    
    $
    0.21Shares used in computing net (loss) income per share basic
    
    
    8,293
    
    
    
    7,713
    
    
    
    7,405Shares used in computing net (loss) income per common share diluted
    
    
    8,293
    
    
    
    7,713
    
    
    
    7,880
 IRIDEX Corporation
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 29,
    
    
    December 30,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Net (loss) income
    
    $
    (22,272
    )
    
    $
    (5,753
    )
    
    $
    1,671Changes in unrealized losses on available-for-sale securities, net of tax
    
    
    
    
    
    
    27
    
    
    
    6Foreign currency translation adjustments
    
    
    (88
    )
    
    
    
    
    
    
    Comprehensive (loss) income
    
    $
    (22,360
    )
    
    $
    (5,726
    )
    
    $
    1,677
  45




---



##### Table of Contents



IRIDEX Corporation
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands, except share data)
 AccumulatedConvertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    OtherPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Treasury
    
    
    Comprehensive
    
    
    RetainedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Income (Loss)
    
    
    Earnings
    
    
    TotalBalances, 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
    
    
    $
    32,157Issuance of Common Stock
under Stock Option Plan
    
    
    
    
    
    
    
    
    
    
    156,137
    
    
    
    2
    
    
    
    783
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    785Issuance of Common Stock in
connection with Laserscope
Acquisition
    
    
    
    
    
    
    
    
    
    
    213,435
    
    
    
    2
    
    
    
    2,012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,014Issuance of Common Stock
under Employee Stock
Purchase Plan
    
    
    
    
    
    
    
    
    
    
    12,948
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90Employee Stock-Based
Compensation Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,230
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,230Issuance
of PreferredStock in
private placement, net of issuance cost of $112(see Note 11)
    
    
    500,000
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    2,586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,591
 46




---



##### Table of Contents



AccumulatedConvertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    OtherPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Treasury
    
    
    Comprehensive
    
    
    RetainedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Income (Loss)
    
    
    Earnings
    
    
    TotalCommon stock warrants,
$0.01 per share, in
connection with private
placement (see Note 11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,297
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,297Exercise of common stock
warrants, $0.01 per share
    
    
    
    
    
    
    
    
    
    
    600,000
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Accumulated other
comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88
    )
    
    
    
    
    
    
    (88
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,272
    )
    
    
    (22,272
    )Balances, December 29, 2007
    
    
    500,000
    
    
    $
    5
    
    
    
    8,824,301
    
    
    $
    89
    
    
    $
    38,695
    
    
    $
    (430
    )
    
    $
    (88
    )
    
    $
    (19,461
    )
    
    $
    18,810
  47




---



##### Table of Contents



IRIDEX Corporation
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 29,
    
    
    December 30,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Operating activities:Net (loss) income
    
    $
    (22,272
    )
    
    $
    (5,753
    )
    
    $
    1,671Adjustments
to reconcile net (loss) income to net cash (used in) provided
by operating activities:Depreciation and amortization
    
    
    3,818
    
    
    
    542
    
    
    
    435Impairment of goodwill and intangible assets
    
    
    14,690
    
    
    
    
    
    
    
    Stock compensation cost recognized
    
    
    1,230
    
    
    
    1,816
    
    
    
    Issuance of warrant
    
    
    
    
    
    
    
    
    
    
    87Provision for doubtful accounts
    
    
    140
    
    
    
    141
    
    
    
    132Provision for inventories
    
    
    3,017
    
    
    
    (296
    )
    
    
    407Deferred income taxes
    
    
    
    
    
    
    2,488
    
    
    
    585Changes in
operating assets and liabilities, net of assets and liabilities
acquired:Accounts receivable
    
    
    2,211
    
    
    
    396
    
    
    
    683Inventories
    
    
    (6,676
    )
    
    
    (609
    )
    
    
    (436
    )Prepaids and other current assets
    
    
    608
    
    
    
    (379
    )
    
    
    (71
    )Other long term assets
    
    
    (194
    )
    
    
    (154
    )
    
    
    Accounts payable
    
    
    282
    
    
    
    (274
    )
    
    
    (139
    )Accrued compensation
    
    
    (640
    )
    
    
    (154
    )
    
    
    571Accrued expenses
    
    
    3,782
    
    
    
    771
    
    
    
    (1,513
    )Accrued warranty
    
    
    (742
    )
    
    
    (263
    )
    
    
    196Deferred revenue
    
    
    224
    
    
    
    343
    
    
    
    162Net cash (used in) provided by operating activities
    
    
    (522
    )
    
    
    (1,385
    )
    
    
    2,770Investing activities:Purchases of available-for-sale securities
    
    
    
    
    
    
    (18,250
    )
    
    
    (8,770
    )Proceeds from maturity of available-for-sale securities
    
    
    
    
    
    
    27,056
    
    
    
    7,646Business acquisition cost
    
    
    (25,530
    )
    
    
    (60
    )
    
    
    Acquisition of property and equipment
    
    
    (776
    )
    
    
    (515
    )
    
    
    (340
    )Purchases of
intangible assets
    
    
    (171
    )
    
    
    
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (26,477
    )
    
    
    8,231
    
    
    
    (1,464
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    881
    
    
    
    1,550
    
    
    
    968Proceeds
from issuance of preferred stock and warrants, net of offering costs
    
    
    4,888
    
    
    
    
    
    
    
    Proceeds of credit facility, net of issuing costs
    
    
    11,900
    
    
    
    
    
    
    
    Repayment of credit facility
    
    
    (2,021
    )
    
    
    
    
    
    
    Restricted cash
    
    
    (3,800
    )
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    11,848
    
    
    
    1,550
    
    
    
    968Effect of foreign exchange rate changes
    
    
    (91
    )
    
    
    
    
    
    
    Net (decrease) increase in cash and cash equivalents
    
    
    (15,242
    )
    
    
    8,396
    
    
    
    2,274Cash and cash equivalents, beginning of year
    
    
    21,051
    
    
    
    12,655
    
    
    
    10,381Cash and cash equivalents, end of year
    
    $
    5,809
    
    
    $
    21,051
    
    
    $
    12,655Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes
    
    $
    4
    
    
    $
    243
    
    
    $
    209Interest paid
    
    $
    855
    
    
    $
    1
    
    
    $
    Stock issued in acquisition
    
    $
    2,014
    
    
    $
    
    
    
    $
    
  48




---



##### Table of Contents



IRIDEX Corporation
 
 Notes to Consolidated Financial Statements
 1. Business of the Company
 Description of Business and Going Concern.
     2. Summary of Significant Accounting Policies
 Financial Statement Presentation.
   Use of Estimates
  49




---



##### Table of Contents



Cash and Cash Equivalents
  Fair Value of Financial Instruments.
  Sales Returns Allowance and Allowance for Doubtful Accounts.
   Inventories.
  Property and Equipment.
  Valuation of Goodwill and Intangible Assets
  50




---



##### Table of Contents



Revenue Recognition
   51




---



##### Table of Contents



Deferred Revenue.
  Balance, December 31, 2005
    
    $
    1,072Additions to deferral
    
    
    1,688Revenue recognized
    
    
    (1,345
    )Balance, December 30, 2006
    
    $
    1,415Additions to deferral through acquisition
    
    
    1,711Additions to deferral
    
    
    7,919Revenue recognized
    
    
    (7,695
    )Balance, December 29, 2007
    
    $
    3,350
 Warranty
  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
    
    $
    866Warranty accrual acquired through acquisition
    
    
    1,771Reduction to
warranty accrual during the year
    
    
    (224
    )Settlements made in kind during the year
    
    
    (518
    )Balance, December 29, 2007
    
    $
    1,895
 Research and Development
  Advertising
  52




---



##### Table of Contents



Income Taxes.
  Accounting for Uncertainty in Income Taxes
  Accounting for Stock-Based Compensation
     53




---



##### Table of Contents



Concentration of Credit Risk and Other Risks and Uncertainties
    Reliance on Certain Suppliers.
  Net Income (loss) per Share
  Recent Accounting Pronouncements.
  54




---



##### Table of Contents



3. Business Combination
   (in thousands)Cash paid on closing
    
    $
    26,000Issuance of common stock
    
    
    2,014Post closing adjustment to purchase price
    
    
    (2,766
    )Acquisition costs
    
    
    3,366Total purchase price
    
    $
    28,614
    (in thousands)Accounts Receivable
    
    $
    5,174Finished Goods Inventory
    
    
    2,809Other current assets
    
    
    395Property and equipment
    
    
    681Intangible assets
    
    
    16,447Deferred Revenue
    
    
    (1,711
    )Accrued Warranty
    
    
    (1,771
    )Accrued Liabilities
    
    
    (3,557
    )Fair value of net assets acquired
    
    
    18,467Goodwill
    
    
    10,147Total purchase price
    
    $
    28,614
  55




---



##### Table of Contents



December 29,
    
    
    December 30,(in thousands, except for loss per share)
    
    2007
    
    
    2006Revenue
    
    $
    55,532
    
    
    $
    68,220Impairment of goodwill and intangible assets
    
    $
    14,690
    
    
    $
    Net loss
    
    $
    (22,272
    )
    
    $
    (12,249
    )Pro Forma
basic and diluted loss per share
    
    $
    (2.69
    )
    
    $
    (1.55
    )Shares used in computing pro forma basic and diluted (loss) per share
    
    
    8,293
    
    
    
    7,926
  4. Inventories
  December 29,
    
    
    December 30,2007
    
    
    2006Raw materials and work in process
    
    $
    9,450
    
    
    $
    4,000Finished goods
    
    
    6,517
    
    
    
    5,499Total inventories
    
    $
    15,967
    
    
    $
    9,499
 5. Property and Equipment
  December 29,
    
    
    December 30,2007
    
    
    2006Equipment
    
    $
    6,818
    
    
    $
    5,344Leasehold improvements
    
    
    2,230
    
    
    
    2,029Less: accumulated depreciation and amortization
    
    
    (7,427
    )
    
    
    (6,286
    )Property and equipment, net
    
    $
    1,621
    
    
    $
    1,087
  6. Goodwill
  December 29,2007Balance, beginning of period
    
    $
    Goodwill as a result of acquisition
    
    
    10,147Impairment of goodwill
    
    
    (6,908
    )Balance, end of period
    
    $
    3,239
 56




---



##### Table of Contents



7. Intangible Assets
  GrossGross
    
    
    
    
    
    
    
    
    
    
    Carrying
    
    
    Net
    
    
    Useful LivesUseful
    
    
    Annual
    
    
    Carrying
    
    
    Accumulated
    
    
    Impairment
    
    
    Value after
    
    
    Carrying
    
    
    Remaining afterLives
    
    
    Amortization
    
    
    Value
    
    
    Amortization
    
    
    Charge
    
    
    Impairment
    
    
    Value
    
    
    ImpairmentGemini Handset  Core Technology
    
    10 Years
    
    $
    299
    
    
    $
    2,995
    
    
    $
    285
    
    
    $
    2,002
    
    
    $
    993
    
    
    $
    708
    
    
    4 YearsGemini  Current Technology
    
    4 Years
    
    
    1,282
    
    
    
    5,129
    
    
    
    1,222
    
    
    
    2,255
    
    
    
    2,874
    
    
    
    1,652
    
    
    1 YearOther Products  Current Technology
    
    1 Year
    
    
    341
    
    
    
    341
    
    
    
    325
    
    
    
    16
    
    
    
    325
    
    
    
    
    
    
    
    Accessories  Current Technology
    
    4 Years
    
    
    15
    
    
    
    62
    
    
    
    15
    
    
    
    47
    
    
    
    15
    
    
    
    
    
    
    
    Services  Contractual Customer
Relationships
    
    10 Years
    
    
    532
    
    
    
    5,318
    
    
    
    507
    
    
    
    1,893
    
    
    
    3,425
    
    
    
    2,918
    
    
    9 YearsContractual Distribution Agreement
    
    5 Years
    
    
    370
    
    
    
    1,848
    
    
    
    352
    
    
    
    1,496
    
    
    
    352
    
    
    
    
    
    
    
    Trade Name
    
    5 Years
    
    
    151
    
    
    
    754
    
    
    
    143
    
    
    
    73
    
    
    
    681
    
    
    
    538
    
    
    4 YearsOther (non
Laserscope related)
    
    3 Years
    
    
    57
    
    
    
    171
    
    
    
    43
    
    
    
    
    
    
    
    171
    
    
    
    128
    
    
    2 Years$
    3,047
    
    
    $
    16,618
    
    
    $
    2,892
    
    
    $
    7,782
    
    
    $
    8,836
    
    
    $
    5,944
    (in thousands)2008
    
    $
    2,3452009
    
    
    6932010
    
    
    6502011
    
    
    6362012
    
    
    324Thereafter
    
    
    1,296Total
    
    $
    5,944
 8. Accrued Expenses
  December 29,
    
    
    December 30,2007
    
    
    2006Income taxes payable
    
    $
    203
    
    
    $
    Sales and use tax payable
    
    
    213
    
    
    
    150AMS Settlement
    
    
    4,767
    
    
    
    Other accrued expenses
    
    
    2,626
    
    
    
    2,242Total accrued expenses
    
    $
    7,809
    
    
    $
    2,392
 57




---



##### Table of Contents



9. Bank Borrowings
    in thousands)
 Fiscal Year
    
    Principal Payments2008
    
    $
    1,1802009
    
    
    1,1802010
    
    
    1,1802011
    
    
    1,1802012
    
    
    296Total future principal payments
    
    $
    5,016
   10. Commitments and Contingencies
 Lease Agreements.
  58




---



##### Table of Contents



in thousands)
 Fiscal Year
    
    Operating Lease Payments2008
    
    $
    6162009
    
    
    2342010
    
    
    732011
    
    
    422012
    
    
    Total future minimum lease payments
    
    $
    965
 License Agreements.
  AMS Settlement.
      59




---



##### Table of Contents



Contingencies.
   Indemnification Arrangements
    60




---



##### Table of Contents



11. Stockholders Equity
 Convertible Preferred Stock
      Stock Option Plans
 Amended and Restated 1989 Incentive Stock Plan.
  1998 Stock Plan.
  61




---



##### Table of Contents



1995 Director Option Plan.
  Stand-Alone Options.
      2005 Employee Stock Purchase Plan.
  62




---



##### Table of Contents



Outstanding OptionsShares
    
    
    
    
    
    
    
    
    
    WeightedAvailable
    
    Number
    
    Aggregate
    
    Averagefor Grant
    
    of Shares
    
    Price
    
    Exercise PriceBalances, 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
    )
    
    
    25,000
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    (183,873
    )
    
    
    (663
    )
    
    
    3.60Options cancelled
    
    
    132,566
    
    
    
    (132,566
    )
    
    
    (866
    )
    
    
    6.53Options expired
    
    
    (78,355
    )
    
    
    
    
    
    
    
    
    
    
    Balances, December 31, 2005
    
    
    295,516
    
    
    
    2,154,003
    
    
    
    11,690
    
    
    
    5.50Additional shares reserved
    
    
    435,000
    
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (300,650
    )
    
    
    300,650
    
    
    
    2,551
    
    
    
    8.48Options exercised
    
    
    
    
    
    
    (276,578
    )
    
    
    (1,291
    )
    
    
    4.67Options cancelled
    
    
    46,505
    
    
    
    (46,505
    )
    
    
    (311
    )
    
    
    6.69Options expired
    
    
    (4,750
    )
    
    
    
    
    
    
    
    
    
    
    Balances, December 30, 2006
    
    
    471,621
    
    
    
    2,131,570
    
    
    
    12,639
    
    
    
    6.00Additional shares reserved
    
    
    148,670
    
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (468,600
    )
    
    
    468,600
    
    
    
    3,824
    
    
    
    8.16Options exercised
    
    
    
    
    
    
    (156,137
    )
    
    
    (785
    )
    
    
    5.03Options cancelled
    
    
    584,496
    
    
    
    (584,496
    )
    
    
    (4,516
    )
    
    
    7.73Options expired
    
    
    (132,550
    )
    
    
    
    
    
    
    
    
    
    
    Balances, December 29, 2007
    
    
    603,637
    
    
    
    1,859,537
    
    
    
    11,162
    
    
    
    6.09
  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 29,
    
    
    Exercise
    
    
    ContractualPrices
    
    29 2007
    
    
    Life (Years)
    
    
    Price
    
    
    2007
    
    
    Price
    
    
    Life (Years)$2.46- $3.41
    
    
    184,785
    
    
    
    4.08
    
    
    
    3.17
    
    
    
    150,385
    
    
    $
    3.29
    
    
    
    5.44$3.50 - $4.00
    
    
    251,432
    
    
    
    2.55
    
    
    
    3.76
    
    
    
    251,432
    
    
    $
    3.76
    
    
    
    2.88$4.01 - $4.88
    
    
    203,249
    
    
    
    3.38
    
    
    
    4.43
    
    
    
    169,811
    
    
    $
    4.40
    
    
    
    3.11$5.08 - $5.56
    
    
    241,589
    
    
    
    6.26
    
    
    
    5.33
    
    
    
    197,533
    
    
    $
    5.35
    
    
    
    6.57$5.65 - $6.07
    
    
    235,705
    
    
    
    1.75
    
    
    
    6.01
    
    
    
    229,969
    
    
    $
    6.02
    
    
    
    6.96$6.19 - $7.63
    
    
    194,972
    
    
    
    5.03
    
    
    
    6.84
    
    
    
    127,864
    
    
    $
    6.86
    
    
    
    5.37$7.84 - $8.26
    
    
    239,861
    
    
    
    4.63
    
    
    
    8.05
    
    
    
    104,754
    
    
    $
    8.07
    
    
    
    6.00$8.56 - $10.06
    
    
    290,894
    
    
    
    4.38
    
    
    
    9.41
    
    
    
    140,187
    
    
    $
    9.01
    
    
    
    3.51$10.25 - $10.86
    
    
    13,300
    
    
    
    3.64
    
    
    
    10.58
    
    
    
    10,713
    
    
    $
    10.53
    
    
    
    3.21$12.75 - $12.75
    
    
    3,750
    
    
    
    2.51
    
    
    
    12.75
    
    
    
    3,750
    
    
    $
    12.75
    
    
    
    2.51$2.46 - $12.75
    
    
    1,859,537
    
    
    
    4.03
    
    
    
    6.09
    
    
    
    1,386,398
    
    
    $
    5.60
    
    
    
    4.92
  63




---



##### Table of Contents



Adoption of SFAS 123(R).
    Employee Stock Option Plan
    
    Employee Stock Purchase Plan2007
    
    2006
    
    2005
    
    2007
    
    2006
    
    2005Average risk free
interest rate
    
    
    4.4
    %
    
    
    4.80
    %
    
    
    4.40
    %
    
    
    4.9
    %
    
    
    4.43
    %
    
    
    4.20
    %Expected life (in years)
    
    
    4.6 years
    
    
    
    3.8 years
    
    
    
    5-7 years
    
    
    
    .12
    
    
    
    0.5
    
    
    
    0.5Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average volatility
    
    
    59.0 - 65.0
    %
    
    
    50.0 - 60.0
    %
    
    
    77.0 - 83.0
    %
    
    
    36
    %
    
    
    34.0 - 60.0
    %
    
    
    46.0
    %
   Year Ended
    
    
    Year EndedDecember 29, 2007
    
    
    December 30, 2006Cost of sales
    
    $
    141
    
    
    $
    122Research and development
    
    
    182
    
    
    
    251Sales, general and administrative
    
    
    907
    
    
    
    1,443$
    1,230
    
    
    $
    1,816
  64




---



##### Table of Contents



Year EndedDecember 31, 2005Net income
    
    $
    1,671Stock-based compensation expense related to employee
stock options and employee stock purchases
    
    
    (966
    )Pro forma net income
    
    $
    705Basic net income per share:As reported
    
    $
    0.23Pro forma
    
    $
    0.10Diluted net income per share:As reported
    
    $
    0.21Pro forma
    
    $
    0.09
  Weighted Average
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    Intrinsic ValueOutstanding at December 30, 2006
    
    
    2,131,570
    
    
    $
    6.00
    
    
    $
    13,372Options granted
    
    
    468,600
    
    
    
    8.16Options exercised
    
    
    (156,137
    )
    
    
    5.03Options forfeited/cancelled/ expired
    
    
    (584,496
    )
    
    
    7.73Outstanding at December 29, 2007
    
    
    1,859,537
    
    
    $
    6.09
    
    
    $
    
    Year Ended
    
    
    Year EndedDecember 29, 2007
    
    
    December 30, 2006Stock-based compensation expense by award type:Employee stock options granted
    
    $
    1,218
    
    
    $
    1,708Employee stock purchase plan
    
    
    12
    
    
    
    108Total stock-based compensation
    
    
    1,230
    
    
    
    1,816Total effect on stock-based compensation at the Companys marginal tax rate
    
    
    (467
    )
    
    
    (690
    )Effect on net income (loss)
    
    $
    763
    
    
    $
    1,126Effect on net income (loss) per share:Basic and diluted earnings per share
    
    $
    0.09
    
    
    $
    0.15
  WeightedAverage GrantNumber of Shares
    
    Dated Fair ValueNon-vested at December 30, 2006
    
    
    806,189
    
    
    $
    4.42Granted
    
    
    468,600
    
    
    
    4.32Vested
    
    
    (217,150
    )
    
    
    5.67Cancelled/forfeited
    
    
    (584,496
    )
    
    
    7.73Non-vested at December 29, 2007
    
    
    473,143
    
    
    
    7.50
 65




---



##### Table of Contents



12. Employee Benefit Plan
  13. Income Taxes
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 29,
    
    
    December 30,
    
    
    December 31,2007
    
    
    2006
    
    
    2005United States
    
    $
    (20,772
    )
    
    $
    (4,032
    )
    
    $
    2,337Foreign
    
    
    (1,487
    )
    
    
    
    
    
    
    Total
    
    $
    (22,259
    )
    
    $
    (4,032
    )
    
    $
    2,337
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 29,
    
    
    December 30,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    4
    
    
    $
    (371
    )
    
    $
    59State
    
    
    9
    
    
    
    
    
    
    
    3113
    
    
    
    (371
    )
    
    
    90Deferred:Federal
    
    
    
    
    
    
    1,756
    
    
    
    451State
    
    
    
    
    
    
    337
    
    
    
    125
    
    
    
    2,093
    
    
    
    576Income tax provision (benefit)
    
    $
    13
    
    
    $
    1,721
    
    
    $
    666
  Year Ended
    
    Year Ended
    
    Year EndedDecember 29,
    
    December 30,
    
    December 31,2007
    
    2006
    
    2005Income tax provision at statutory rate
    
    
    34
    %
    
    
    34
    %
    
    
    34
    %State income taxes, net of federal benefit
    
    
    4
    %
    
    
    1
    %
    
    
    6
    %Tax exempt interest
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Nondeductible permanent differences
    
    
    (1
    %)
    
    
    (10
    %)
    
    
    1
    %Research and development credits
    
    
    0
    %
    
    
    2
    %
    
    
    (13
    %)Change in valuation allowance
    
    
    (35
    %)
    
    
    (73
    %)
    
    
    0
    %Foreign Rate Differential
    
    
    (2
    %)
    
    
    0
    %
    
    
    0
    %Effective tax rate
    
    
    (0
    %)
    
    
    (45
    %)
    
    
    28
    %
 66




---



##### Table of Contents



December 29,
    
    
    December 30,2007
    
    
    2006Accruals and Reserves
    
    $
    1,989
    
    
    $
    1,150Deferred Revenue
    
    
    72
    
    
    
    26Fixed assets
    
    
    616
    
    
    
    544Intangibles
    
    
    6,386
    
    
    
    24Stock Compensation
    
    
    525
    
    
    
    287Net operating loss
    
    
    293
    
    
    
    160R&D Credits and Other Tax Credits
    
    
    821
    
    
    
    695Other Credits
    
    
    0
    
    
    
    0Other
    
    
    12
    
    
    
    2Net deferred tax asset
    
    $
    10,714
    
    
    $
    2,888Valuation Allowance
    
    
    (10,714
    )
    
    
    (2,888
    )Net Deferred Tax Assets (Liability)
    
    $
    0
    
    
    $
    0
         67




---



##### Table of Contents



Year EndedDecember 29,2007Balance at January 1, 2007 (In Thousands)
    
    $
    518Additions Based upon tax positions related to the current year
    
    
    32Reductions resulting in lapse of statute of limitations Settlements
    
    
    Balance at December 31, 2007
    
    $
    550
    14. Major Customers and Business Segments
    Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 29,
    
    
    December 30,
    
    
    December 31,2007
    
    
    2006
    
    
    2005United States
    
    $
    29,931
    
    
    $
    21,826
    
    
    $
    22,713Europe
    
    
    15,077
    
    
    
    7,787
    
    
    
    7,138Rest of Americas
    
    
    1,959
    
    
    
    1,836
    
    
    
    1,703Asia/Pacific Rim
    
    
    8,565
    
    
    
    4,455
    
    
    
    5,475$
    55,532
    
    
    $
    35,904
    
    
    $
    37,029
   Year Ended December 29, 2007Ophthalmology
    
    
    Aesthetics
    
    
    TotalSales
    
    $
    32,347
    
    
    $
    23,185
    
    
    $
    55,532Direct cost of goods sold
    
    
    9,721
    
    
    
    11,151
    
    
    
    20,872Direct gross
profit
    
    $
    22,626
    
    
    
    12,034
    
    
    
    34,660Impairment of goodwill and intangible assets
    
    
    
    
    
    $
    14,690
    
    
    
    14,690Total unallocated indirect costs
    
    
    
    
    
    
    
    
    
    
    44,085Loss from operations
    
    
    
    
    
    
    
    
    
    $
    (24,115
    )
 Year Ended December 30, 2006Ophthalmology
    
    
    Aesthetics
    
    
    TotalSales
    
    $
    30,826
    
    
    $
    5,078
    
    
    $
    35,904Direct cost of goods sold
    
    
    9,312
    
    
    
    2,125
    
    
    
    11,437Direct gross profit
    
    $
    21,514
    
    
    $
    2,953
    
    
    
    24,467Total unallocated indirect costs
    
    
    
    
    
    
    
    
    
    
    29,232Loss from operations
    
    
    
    
    
    
    
    
    
    $
    (4,765
    )
 68




---



##### Table of Contents



Year Ended December 31,2005Ophthalmology
    
    
    Aesthetics
    
    
    TotalSales
    
    $
    30,663
    
    
    $
    6,366
    
    
    $
    37,029Direct cost of goods sold
    
    
    10,374
    
    
    
    3,138
    
    
    
    13,512Direct gross profit
    
    $
    20,289
    
    
    $
    3,228
    
    
    
    23,517Total unallocated indirect costs
    
    
    
    
    
    
    
    
    
    
    21,708Income from operations
    
    
    
    
    
    
    
    
    
    $
    1,809
  15.
Computation of Basic Net Income (Loss) Per Common Share and Diluted
Net Income (Loss) Per Common Share
  Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 29,
    
    
    December 30,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Net (loss) income
    
    $
    (22,272
    )
    
    $
    (5,753
    )
    
    $
    1,671Denominator  Net income (loss) per common shareWeighted average common stock outstanding
    
    
    8,293
    
    
    
    7,713
    
    
    
    7,405Effect of dilutive securitiesWeighted average common stock options
    
    
    
    
    
    
    
    
    
    
    475Total weighted average stock and options outstanding
    
    
    8,293
    
    
    
    7,713
    
    
    
    7,880Net (loss) income per common share
    
    $
    (2.69
    )
    
    $
    (0.75
    )
    
    $
    0.23Diluted net (loss) income per common share
    
    $
    (2.69
    )
    
    $
    (0.75
    )
    
    $
    0.21
  16. Subsequent Events
 Credit Facility.
  69




---



##### Table of Contents



17. Selected Quarterly Financial Data, (Unaudited)
 QuarterFirst
    
    Second
    
    Third
    
    Fourth(In thousands, except per share amounts)Year Ended December 29, 2007Sales
    
    $
    12,566
    
    
    $
    15,249
    
    
    $
    13,575
    
    
    $
    14,142Gross profit
    
    $
    5,209
    
    
    $
    6,584
    
    
    $
    6,185
    
    
    $
    6,306Net loss
    
    $
    (4,920
    )
    
    $
    (343
    )
    
    $
    (1,238
    )
    
    $
    (15,771
    )Net loss per common share
    
    $
    (0.61
    )
    
    $
    (0.04
    )
    
    $
    (0.15
    )
    
    $
    (1.82
    )Basic and
diluted net loss per common share
    
    $
    (0.61
    )
    
    $
    (0.04
    )
    
    $
    (0.15
    )
    
    $
    (1.82
    )Year Ended December 30, 2006Sales
    
    $
    8,843
    
    
    $
    8,804
    
    
    $
    9,222
    
    
    $
    9,035Gross profit
    
    $
    4,262
    
    
    $
    4,659
    
    
    $
    4,872
    
    
    $
    5,012Net loss
    
    $
    (303
    )
    
    $
    (534
    )
    
    $
    (1,143
    )
    
    $
    (3,773
    )Net loss per common share
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.15
    )
    
    $
    (0.48
    )Basic and diluted net loss per common share
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.15
    )
    
    $
    (0.48
    )
 
 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
   70




---



##### Table of Contents



Plan
for Remediation of Material Weakness.
  
    
    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.
     71




---



##### Table of Contents



(b) Changes in Internal Controls.
  (c) Report of Management on Internal Control over Financial Reporting.
  
    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in
accordance with authorization of management and directors of the company; and
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a material effect on
the financial statements.
     Internal ControlIntegrated Framework.
 72




---



##### Table of Contents



Item 9B. Other Information
  73




---



##### Table of Contents



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




---



##### 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
    
    42Report
of Independent Registered Public Accounting Firm
    
    43Consolidated Balance
Sheets as of December 29, 2007 and December 30, 2006
    
    44Consolidated
Statements of Operations for the years ended
December 29, 2007, December 30, 2006 and December 31, 2005
    
    45Consolidated Statements of
Stockholders Equity for the years ended
December 29, 2007, December 30, 2006 and December 31, 2005
    
    46Consolidated Statements of
Cash Flows for the years ended December 29, 2007,
December 30, 2006 and December 31, 2005
    
    48Consolidated Statements of
Comprehensive Income (Loss) for the years ended
December 29, 2007, December 30, 2006 and December 31, 2005
    
    45Notes to Consolidated Financial Statements
    
    492. Financial Statement ScheduleThe following financial statement
schedule of IRIDEX Corporation for the
years ended December 29, 2007, December 30, 2006, and December 31, 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
    
    78
   Exhibits
    
    Exhibit Title2.1(8)
    
    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.4.2(12)
    
    Certificate of Designation, Preferences, and Rights of Series A Preferred Stock.4.3(12)
    
    Form of Common Stock Purchase Warrant.4.4(12)
    
    Investor Rights Agreement by and between the Company, BlueLine Capital Partners, LP; BlueLine Capital Partners
III, LP and BlueLine Capital Partners II, LP, dated August 31, 2007.10.1(1)
    
    Form of Indemnification Agreement with directors and officers.10.2(6)
    
    2005 Employee Stock Purchase Plan.10.3(5)
    
    Amended and Restated Severance and Change of Control Agreement entered into by and between the Company and
Larry Tannenbaum on April 29, 2005.10.4(4)
    
    Lease Agreement dated December 6, 1996 by and between Zappettini Investment Co. and the Registrant, as amended.10.5(3)
    
    Amended and Restated 1998 Stock Plan.10.6(7)
    
    2006 Incentive Program.10.7(9)
    
    Business Loan and Security Agreement dated January 16, 2007 by and among IRIDEX Corporation and Mid-Peninsula
Bank, part of Greater Bay Bank N.A.10.8(9)
    
    Export-Import Bank Loan and Security Agreement dated January 16, 2007 by and among IRIDEX Corporation and
Mid-Peninsula Bank, part of Greater Bay Bank N.A.
 75




---



##### Table of Contents



Exhibits
    
    Exhibit Title10.9(9)
    
    Borrower Agreement dated January 16, 2007 by IRIDEX Corporation in favor of Export-Import Bank of the United
States and Mid-Peninsula Bank, part of Greater Bay Bank N.A.10.10(3)
    
    Settlement Agreement dated April 6, 2007 by and among Synergetics, Inc., Synergetics USA, Inc. and IRIDEX
Corporation.10.11(10)
    
    First Amendment to the Business Loan and Security Agreement dated April 19, 2007 by and between IRIDEX
Corporation and Mid-Peninsula Bank, part of Greater Bay Bank N.A.10.12(10)
    
    First Amendment to the Export-Import Bank Loan and Security Agreement dated April 19, 2007 by and between
IRIDEX Corporation and Mid-Peninsula Bank, part of Greater Bay Bank N.A.10.13(13)
    
    Letter Agreement, dated June 27, 2007, 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, as amended.10.14(12)
    
    Securities Purchase Agreement dated August 31, 2007 by and among BlueLine Capital Partners, LP; BlueLine
Capital Partners III, LP; BlueLine Capital Partners II, LP and IRIDEX Corporation.10.15(13)
    
    Patent, Trademark and Copyright Security Agreement by and between the Company and Mid-Peninsula Bank, dated
July 31, 2007.10.16(13)
    
    Separation Agreement and Release dated October 16, 2007 by and between Barry Caldwell and IRIDEX Corporation.10.17(13)
    
    Consulting Agreement by and between the Company and James D. Pardee, dated July 31, 2007.10.18(13)
    
    Subordination Agreement by and between the Company, Mid-Peninsula Bank, American Medical Systems, Inc. and
Laserscope, dated August 14, 2007.10.19(13)
    
    Security Agreement made by the Company in favor of each of American Medical Systems, Inc. and Laserscope,
dated August 14, 2007.16.1(11)
    
    Letter from PricewaterhouseCoopers LLP to the Securities and Exchange Commission, dated as of August 29, 2007.21.1(1)
    
    Subsidiaries of Registrant.23.1
    
    Consent of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting Firm.23.2
    
    Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.24.1
    
    Power of Attorney (See page 79).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 8-K dated November
21, 2007.(3)
    
    Incorporated by reference to the Exhibits in Registrants. Report on Form 10-Q for the
quarter ended June 30, 2007.(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 May 4, 2005.(6)
    
    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.(7)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated March 14, 2006.(8)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated December 6, 2006.(9)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated January 16, 2007.(10)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated April 24,2007.(11)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated August 29, 2007.(12)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated September 7, 2007.(13)
    
    Incorporated by reference to the Exhibits in Registrants Report on Form 10-Q for the quarter
ended September 29, 2007. 76




---



##### Table of Contents



Trademark Acknowledgments
  77




---



##### Table of Contents



Schedule II
 IRIDEX CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
 Balance at
    
    
    
    
    
    
    
    
    
    BalanceBeginning of
    
    
    
    
    
    
    
    
    
    at End ofDescription
    
    The Period
    
    Additions
    
    Deductions
    
    The PeriodBalance 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
    
    
    $
    1,760Balance for the year ended December 29, 2007:Allowance for doubtful accounts receivable-(1)
    
    $
    439
    
    
    $
    470
    
    
    $
    (209
    )
    
    $
    700Provision for inventory-(2)
    
    $
    1,760
    
    
    $
    3,147
    
    
    $
    (277
    )
    
    $
    4,630
 
 (1)
    
    Additions amount includes 330 thousand from the acquisition
of the aesthetics business of Laserscope from AMS.(2)
    
    Additions amount includes 130 thousand from the acquisition of the aesthetics business of Laserscope from AMS. 78




---



##### Table of Contents



SIGNATURES
 th
 IRIDEX CORPORATIONBy:
    /s/ Theodore A. BoutacoffTheodore A. BoutacoffPresident, Chief Executive Officer, and Chairman   /s/ Theodore A. Boutacoff
    
    President, Chief Executive Officer, and Chairman(Theodore A. Boutacoff)
    
    (Principal Executive Officer)/s/ James H. Mackaness
    
    Chief Financial Officer(James H. Mackaness)
    
    (Principal Financial and Accounting Officer)/s/ James L. Donovan
    
    Vice President, Corporate Business(James L. Donovan)
    
    Development and Director/s/ James B. Hawkins
    
    Director(James B. Hawkins)/s/ Donald L. Hammond
    
    Director(Donald L. Hammond)/s/ Sanford Fitch
(Sanford Fitch)
    
    Director/s/ Garrett A. Garrettson
    
    Director(Garrett A. Garrettson)/s/ William M. Moore
    
    Director(William M. Moore)
 79




---



##### Table of Contents



Exhibit Index
 Exhibits
    
    Exhibit Title2.1(8)
    
    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.4.2(12)
    
    Certificate of Designation, Preferences, and Rights of Series A Preferred Stock.4.3(12)
    
    Form of Common Stock Purchase Warrant.4.4(12)
    
    Investor Rights Agreement by and between the Company, BlueLine Capital Partners, LP; BlueLine Capital Partners
III, LP and BlueLine Capital Partners II, LP, dated August 31, 2007.10.1(1)
    
    Form of Indemnification Agreement with directors and officers.10.2(6)
    
    2005 Employee Stock Purchase Plan.10.3(5)
    
    Amended and Restated Severance and Change of Control Agreement entered into by and between the Company and
Larry Tannenbaum on April 29, 2005.10.4(4)
    
    Lease Agreement dated December 6, 1996 by and between Zappettini Investment Co. and the Registrant, as amended.10.5(3)
    
    Amended and Restated 1998 Stock Plan.10.6(7)
    
    2006 Incentive Program.10.7(9)
    
    Business Loan and Security Agreement dated January 16, 2007 by and among IRIDEX Corporation and Mid-Peninsula
Bank, part of Greater Bay Bank N.A.10.8(9)
    
    Export-Import Bank Loan and Security Agreement dated January 16, 2007 by and among IRIDEX Corporation and
Mid-Peninsula Bank, part of Greater Bay Bank N.A.10.9(9)
    
    Borrower Agreement dated January 16, 2007 by IRIDEX Corporation in favor of Export-Import Bank of the United
States and Mid-Peninsula Bank, part of Greater Bay Bank N.A.10.10(3)
    
    Settlement Agreement dated April 6, 2007 by and among Synergetics, Inc., Synergetics USA, Inc. and IRIDEX
Corporation.10.11(10)
    
    First Amendment to the Business Loan and Security Agreement dated April 19, 2007 by and between IRIDEX
Corporation and Mid-Peninsula Bank, part of Greater Bay Bank N.A.10.12(10)
    
    First Amendment to the Export-Import Bank Loan and Security Agreement dated April 19, 2007 by and between
IRIDEX Corporation and Mid-Peninsula Bank, part of Greater Bay Bank N.A.10.13(13)
    
    Letter Agreement, dated June 27, 2007, 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, as amended.10.14(12)
    
    Securities Purchase Agreement dated August 31, 2007 by and among BlueLine Capital Partners, LP; BlueLine
Capital Partners III, LP; BlueLine Capital Partners II, LP and IRIDEX Corporation.10.15(13)
    
    Patent, Trademark and Copyright Security Agreement by and between the Company and Mid-Peninsula Bank, dated
July 31, 2007.10.16(13)
    
    Separation Agreement and Release dated October 16, 2007 by and between Barry Caldwell and IRIDEX Corporation.10.17(13)
    
    Consulting Agreement by and between the Company and James D. Pardee, dated July 31, 2007.10.18(13)
    
    Subordination Agreement by and between the Company, Mid-Peninsula Bank, American Medical Systems, Inc. and
Laserscope, dated August 14, 2007.10.19(13)
    
    Security Agreement made by the Company in favor of each of American Medical Systems, Inc. and Laserscope,
dated August 14, 2007.




---



##### Table of Contents



Exhibits
    
    Exhibit Title16.1(11)
    
    Letter from PricewaterhouseCoopers LLP to the Securities and Exchange Commission, dated as of August 29, 2007.21.1(1)
    
    Subsidiaries of Registrant.23.1
    
    Consent of Burr, Pilger & Mayer
LLP, Independent Registered Public Accounting Firm.23.2
    
    Consent of PricewaterhouseCoopers
LLP, Independent Registered Public Accounting Firm.24.1
    
    Power of Attorney (See page 79).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 8-K for dated
November 21, 2007.(3)
    
    Incorporated by reference to the Exhibits in Registrants Report on Form 10-Q for the quarter
ended June 30, 2007.(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 May 4, 2005.(6)
    
    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.(7)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated March 14, 2006.(8)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated December 6, 2006.(9)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated January 16, 2007.(10)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated April 24, 2007.(11)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated August 29, 2007.(12)
    
    Incorporated by reference to the Exhibits filed with the Registrants Report on Form 8-K
dated September 7, 2007.(13)
    
    Incorporated by reference to the Exhibits in Registrants Report on Form 10-Q for the quarter
ended September 29, 2007.