UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT  OF  1934

     For  the  quarterly  period  ended  October  2,  2004

[ ]  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 of                             (I.R.S. employer
   incorporation or organization)                            identification No.)

                            1212 TERRA BELLA AVENUE
                      MOUNTAIN VIEW, CALIFORNIA 94043-1824
          (Address of principal executive offices, including zip code)

                                 (650) 940-4700
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding  12  months  (or  for such shorter period that the registrant was
required  to  file  such  reports),  and  (2)  has  been  subject to such filing
requirements  for  the  past  90  days. Yes [X]  No [ ]

Indicate  by  check  mark  whether  the  registrant  is an accelerated filer (as
defined  in  Rule  12b-2  of  the  Exchange  Act). Yes [ ]  No [X]

                        APPLICABLE TO CORPORATE ISSUERS:

The  number of shares of common stock, $.01 par value, issued and outstanding as
of  November  10,  2004  was  7,374,641.


<PAGE>
                               IRIDEX CORPORATION

                                TABLE OF CONTENTS
                                                                            Page
                                                                            ----
PART I.  FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

              Condensed Consolidated Balance Sheets as of
              October 2, 2004 and January 3, 2004                              3

              Condensed Consolidated Statements of Operations for
              the three and nine months ended October 2, 2004
              and September 27, 2003                                           4

              Condensed Consolidated Statements of Cash Flows for
              the nine months  ended October 2, 2004 and
              September 27, 2003                                               5

              Condensed Consolidated Statements of Comprehensive
              Income (Loss) for the three and nine months
              ended October 2, 2004 and September 27, 2003                     6

              Notes to Unaudited Condensed Consolidated Financial Statements   7

ITEM 2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS                             12

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      27

ITEM 4.       CONTROLS AND PROCEDURES                                         28

PART II.      OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS                                               29

ITEM 2.       CHANGES IN SECURITIES AND USE OF PROCEEDS                       29

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES                                 29

ITEM 4.       SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS               29

ITEM 5.       OTHER INFORMATION                                               29

ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K                                29

SIGNATURE                                                                     30

CERTIFICATIONS                                                                31

Exhibit 31.1  Certification of Chief Executive Officer pursuant to
              Securities Exchange Act
              Rules 13a-14(a) and 15d-14(a)

Exhibit 31.2  Certification of Chief Financial Officer pursuant to
              Securities Exchange Act
              Rules 13a-14(a) and 15d-14(a)

Exhibit 32.1  Certification of Chief Executive Officer and Chief
              Financial Officer pursuant to
              18 U.S.C. Section 1350, as adopted pursuant to Section
              906 of the Sarbanes-Oxley Act of 2002


                                        2
<PAGE>
PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
---------------------------------------------------
<TABLE>
<CAPTION>
                               IRIDEX CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

                                                   OCTOBER 2,    JANUARY 3,
                                                      2004          2004
                                                  ------------  ------------
<S>                                               <C>           <C>
                          ASSETS
                          ------
Current assets:
    Cash and cash equivalents . . . . . . . . . . $     8,612   $    10,541
    Available-for-sale securities . . . . . . . .       9,511         5,751
    Accounts receivable, net. . . . . . . . . . .       6,516         6,548
    Inventories . . . . . . . . . . . . . . . . .       8,405         8,721
    Prepaids and other current assets . . . . . .         738           934
    Current deferred income taxes . . . . . . . .         972           972
                                                  ------------  ------------
      Total current assets. . . . . . . . . . . .      34,754        33,467
    Property and equipment, net . . . . . . . . .         772           850
    Deferred income taxes . . . . . . . . . . . .       2,129         1,522
                                                  ------------  ------------
      Total assets. . . . . . . . . . . . . . . . $    37,655   $    35,839
                                                  ============  ============

           LIABILITIES AND STOCKHOLDERS' EQUITY
           ------------------------------------
Current liabilities:
    Accounts payable. . . . . . . . . . . . . . . $       950   $     1,029
    Accrued expenses. . . . . . . . . . . . . . .       4,613         3,380
    Deferred revenue. . . . . . . . . . . . . . .         789           596
                                                  ------------  ------------
      Total liabilities . . . . . . . . . . . . .       6,352         5,005
                                                  ------------  ------------
    Stockholders' equity:
    Common stock. . . . . . . . . . . . . . . . .          74            70
    Additional paid-in capital. . . . . . . . . .      24,988        23,900
    Accumulated other comprehensive loss. . . . .         (20)           (1)
    Treasury stock. . . . . . . . . . . . . . . .        (430)         (430)
    Retained earnings . . . . . . . . . . . . . .       6,691         7,295
                                                  ------------  ------------
      Total stockholders' equity. . . . . . . . .      31,303        30,834
                                                  ------------  ------------
      Total liabilities and stockholders' equity. $    37,655   $    35,839
                                                  ============  ============
</TABLE>

    The accompanying notes are an integral part of these condensed consolidated
                              financial statements.


                                        3
<PAGE>
<TABLE>
<CAPTION>
                                                     IRIDEX CORPORATION
                                      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                        (UNAUDITED)

                                                                 THREE MONTHS ENDED               NINE MONTHS ENDED
                                                            OCTOBER 2,     SEPTEMBER 27,      OCTOBER 2,     SEPTEMBER 27,
                                                              2004             2003             2004             2003
                                                         ---------------  ---------------  ---------------  ---------------
<S>                                                      <C>              <C>              <C>              <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . .  $        8,178   $         8,267  $       23,679   $       22,928
Cost of sales . . . . . . . . . . . . . . . . . . . . .           4,708             4,678          13,187           12,981
                                                         ---------------  ---------------  ---------------  ---------------
      Gross profit. . . . . . . . . . . . . . . . . . .           3,470             3,589          10,492            9,947
                                                         ---------------  ---------------  ---------------  ---------------

Operating expenses:
    Research and development. . . . . . . . . . . . . .           1,025               975           3,409            2,972
    Sales, general and administrative . . . . . . . . .           3,855             2,402           8,452            7,430
                                                         ---------------  ---------------  ---------------  ---------------
Total operating expenses. . . . . . . . . . . . . . . .           4,880             3,377          11,861           10,402
                                                         ---------------  ---------------  ---------------  ---------------

Income (loss) from operations . . . . . . . . . . . . .          (1,410)              212          (1,369)            (455)
    Interest and other income, net. . . . . . . . . . .              83                49             212              154
                                                         ---------------  ---------------  ---------------  ---------------
Income (loss) before income taxes . . . . . . . . . . .          (1,327)              261          (1,157)            (301)
    Benefit from income taxes . . . . . . . . . . . . .             607                 -             553              181
                                                         ---------------  ---------------  ---------------  ---------------
Net income (loss) . . . . . . . . . . . . . . . . . . .  $         (720)  $           261  $         (604)  $         (120)
                                                         ===============  ===============  ===============  ===============

Net income (loss) per share - basic . . . . . . . . . .          ($0.10)  $          0.04          ($0.08)          ($0.02)
                                                         ===============  ===============  ===============  ===============
Net income (loss) per share - diluted . . . . . . . . .          ($0.10)  $          0.04          ($0.08)          ($0.02)
                                                         ===============  ===============  ===============  ===============

Shares used in computing net income (loss) per share -
    Basic . . . . . . . . . . . . . . . . . . . . . . .           7,244             6,933           7,171            6,922
                                                         ===============  ===============  ===============  ===============
Shares used in computing net income (loss) per share -
    diluted . . . . . . . . . . . . . . . . . . . . . .           7,244             7,043           7,171            6,922
                                                         ===============  ===============  ===============  ===============
</TABLE>

The  accompanying  notes  are  an  integral part of these condensed consolidated
financial  statements.


                                        4
<PAGE>
<TABLE>
<CAPTION>

                                                  IRIDEX CORPORATION
                                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (IN THOUSANDS)
                                                     (UNAUDITED)


                                                                                            NINE MONTHS ENDED
                                                                                        OCTOBER 2,     SEPTEMBER 27,
                                                                                          2004             2003
                                                                                     ---------------  ---------------
<S>                                                                                  <C>              <C>
Cash flows from operating activities:
    Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $         (604)  $         (120)
    Adjustments to reconcile net loss to net cash provided by operating activities:
      Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . .              296              561
      Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . . . .              287               35
      Provision for inventories. . . . . . . . . . . . . . . . . . . . . . . . . .              429              348
      Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . .             (607)               -
      Changes in operating assets and liabilities: . . . . . . . . . . . . . . . .
        Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . .             (255)           1,777
        Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             (113)             930
        Prepaids and other current assets. . . . . . . . . . . . . . . . . . . . .              196             (179)
        Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              (79)             219
        Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            1,233             (170)
        Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              193              184
                                                                                     ---------------  ---------------
    Net cash provided by operating activities. . . . . . . . . . . . . . . . . . .              976            3,585
                                                                                     ---------------  ---------------

Cash flows from investing activities:
    Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . .           (8,960)          (6,640)
    Proceeds from maturity of available-for-sale securities. . . . . . . . . . . .            5,181            1,850
    Acquisition of property and equipment. . . . . . . . . . . . . . . . . . . . .             (218)            (273)
                                                                                     ---------------  ---------------
      Net cash used in investing activities. . . . . . . . . . . . . . . . . . . .           (3,997)          (5,063)
                                                                                     ---------------  ---------------

Cash flows from financing activities:

    Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . .            1,092               92
                                                                                     ---------------  ---------------
      Net cash provided by financing activities. . . . . . . . . . . . . . . . . .            1,092               92
                                                                                     ---------------  ---------------
      Net decrease in cash and cash equivalents. . . . . . . . . . . . . . . . . .           (1,929)          (1,386)

Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . .           10,541            9,186
                                                                                     ---------------  ---------------

Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . .   $        8,612   $        7,800
                                                                                     ===============  ===============
</TABLE>

The  accompanying  notes  are  an  integral part of these condensed consolidated
financial  statements.


                                        5
<PAGE>
<TABLE>
<CAPTION>
                                               IRIDEX CORPORATION
                        CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                                 (IN THOUSANDS)
                                                   (UNAUDITED)

                                                     THREE MONTHS ENDED               NINE MONTHS ENDED
                                                 OCTOBER 2,    SEPTEMBER 27,       OCTOBER 2,     SEPTEMBER 27,
                                                   2004             2003             2004             2003
                                              ---------------  ---------------  ---------------  ---------------
<S>                                           <C>              <C>              <C>              <C>
Net income (loss). . . . . . . . . . . . . .  $         (720)  $           261  $         (604)  $         (120)
Other comprehensive gain (loss):
    Change in unrealized gain (loss) on
      available-for-sale securities, net of
      tax. . . . . . . . . . . . . . . . . .               9                 -             (19)              (4)
                                              ---------------  ---------------  ---------------  ---------------

Comprehensive income (loss). . . . . . . . .  $         (711)  $           261  $         (623)  $         (124)
                                              ===============  ===============  ===============  ===============
</TABLE>

    The accompanying notes are an integral part of these condensed consolidated
                              financial statements.


                                        6
<PAGE>
                               IRIDEX CORPORATION
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

     The  accompanying  unaudited condensed consolidated financial statements of
IRIDEX  Corporation  ("the  Company")  have  been  prepared  in  accordance with
generally  accepted  accounting  principles  in the United States of America for
interim  financial information and pursuant to the instructions to Form 10-Q and
Article  10-01  of  Regulation S-X.  Accordingly, they do not include all of the
information  and  footnotes required by accounting principles generally accepted
in  the  United  States  of  America  for complete financial statements.  In the
opinion  of  management,  all  adjustments,  consisting  of  normal  recurring
adjustments,  considered  necessary  for a fair presentation have been included.

      The  condensed  consolidated  financial  statements  should  be  read  in
conjunction  with  the  audited financial statements and notes thereto, together
with  management's discussion and analysis of financial condition and results of
operations,  contained  in  our Annual Report on Form 10-K, which was filed with
the  Securities  and  Exchange  Commission  on  April  2,  2004.  The results of
operations  for the three month period ended October 2, 2004 are not necessarily
indicative  of  the  results  for  the year ending January 1, 2005 or any future
interim  period.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The  Company's  significant accounting policies are disclosed in our Annual
Report  on Form 10-K for the year ended January 3, 2004 which was filed with the
Securities  and Exchange Commission on April 2, 2004.  The Company's significant
accounting  policies  have  not  materially  changed  as  of  October  2,  2004.

Deferred Revenue

     Deferred  revenue related to warranty contracts is recognized on a straight
line  basis  over  the period of the applicable contract.  Cost is recognized as
incurred.  A  reconciliation  of  changes  in  the  Company's  deferred  revenue
balances  for  the  nine  months  ending  October 2, 2004 and September 27, 2003
follows  (in  thousands):

<TABLE>
<CAPTION>
                                           Nine Months Ended

                              October 2, 2004   September 27, 2003

<S>                           <C>               <C>
Balance, beginning of period  $           596   $             392

Additions to deferral                     787                 505

Revenue recognized                       (594)               (321)
                              ----------------  ------------------

Balance, end of period        $           789   $             576
                              ================  ==================
</TABLE>


                                        7
<PAGE>
Warranty

     The  Company  accrues  for  an  estimated  warranty  cost  upon shipment of
products in accordance with Statement of Financial Accounting Standards ("SFAS")
No.  5, "Accounting for Contingencies."  Actual warranty costs incurred have not
materially  differed  from  those  accrued.  The  Company's  warranty  policy is
effective  for  shipped  products which are considered defective or fail to meet
the  product  specifications.  Warranty  costs are reflected in the statement of
operations as a cost of sales.  A reconciliation of the changes in the Company's
warranty  liability for the nine months ending October 2, 2004 and September 27,
2003  follows  (in  thousands):

<TABLE>
<CAPTION>
                                                              Nine Months Ended

                                                  October 2, 2004  September 27, 2003
<S>                                               <C>              <C>
Balance, beginning of period                      $          801   $             717

Accruals for warranties issued during the period             441                 483

Settlements made in kind during the period                  (393)               (513)
                                                  ---------------  ------------------

Balance, end of period                            $          849   $             687
                                                  ===============  ==================
</TABLE>


Accounting for Stock-Based Compensation

     The  Company  accounts  for  stock-based  compensation  arrangements  in
accordance  with  provisions  of Accounting Principles Board Opinion ("APB") No.
25,  "Accounting for Stock Issued to Employees" and complies with the disclosure
provisions  of  SFAS  No.  123,  "Accounting  for  Stock-Based Compensation," as
amended  by  SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and  Disclosure  -  an  Amendment  of  FASB  Statement  No.  123."

     Under  APB 25, compensation expense for stock option grants to employees is
based  on  the  difference,  if  any, on the date of the grant, between the fair
value  of the Company's stock and the option's exercise price.  SFAS 123 defines
a  "fair  value"  based  method  of  accounting  for an employee stock option or
similar  equity  investment.  The pro forma disclosure of the difference between
compensation expense included in net income (loss) and the related cost measured
by  the  fair  value  method  is  presented  below.

     The  following  table provides a reconciliation of net income (loss) to pro
forma  net  income  (loss)  as  if the fair value method had been applied to all
employee  awards  (in  thousands,  except  per  share  data):


                                        8
<PAGE>
<TABLE>
<CAPTION>
                                  Three Months Ended                 Nine Months Ended

                               October 2,    September 27,       October 2,    September 27,
                                2004             2003             2004             2003
                           ---------------  ---------------  ---------------  ---------------
<S>                        <C>              <C>              <C>              <C>
Net income (loss), as      $         (720)  $          261   $         (604)  $         (120)
reported

Add:  Total stock based              (152)             (83)            (418)            (304)
                           ---------------  ---------------  ---------------  ---------------
compensation expense,
net of tax, determined
under fair value based
method for all awards to
employees

Pro forma net income       $         (872)  $          178   $       (1,022)  $         (424)
(loss)

Basic net income (loss)
per share:

As reported                $        (0.10)  $         0.04   $        (0.08)  $        (0.02)
                           ===============  ===============  ===============  ===============

Pro forma                  $        (0.12)  $         0.03   $        (0.14)  $        (0.06)
                           ===============  ===============  ===============  ===============

Diluted net income (loss)
per share:

As reported                $        (0.10)  $         0.04   $        (0.08)  $        (0.02)
                           ===============  ===============  ===============  ===============

Pro forma                  $        (0.12)  $         0.03   $        (0.14)  $        (0.06)
                           ===============  ===============  ===============  ===============
</TABLE>

     The  determination  of  fair value of all options granted by the Company is
computed  based  on  the  following  assumptions:

<TABLE>
<CAPTION>
                                   Three Months Ended                     Nine Months Ended
-------------------------------------------------------------------------------------------------------
                       October 2, 2004    September 27, 2003     October 2, 2004    September 27, 2003
-------------------------------------------------------------------------------------------------------
<S>                  <C>                  <C>                  <C>                  <C>

Average risk free           4.25%               4.38%                 5.10%              3.92%
interest rate
-------------------------------------------------------------------------------------------------------
Expected life (in           2 yrs               2 yrs.                2 yrs.             2 yrs.
years)
-------------------------------------------------------------------------------------------------------
Dividend yield                 --                  --                    --                 --
-------------------------------------------------------------------------------------------------------
Average volatility          87.0%               84.0%                 87.0%               88.0%
-------------------------------------------------------------------------------------------------------
</TABLE>


                                        9
<PAGE>
3.  INVENTORIES

     Inventories  are  stated  at  the lower of cost or market. Cost is based on
actual  sales  computed  on  a  first  in,  first  out  basis. The components of
inventories  consist  of  the  following  (in  thousands):

<TABLE>
<CAPTION>
                                    OCTOBER 2   JANUARY 3,
                                       2004        2004
                                    ----------  -----------
<S>                                 <C>         <C>
Raw materials and work in progress. $    4,902  $     4,426
Finished goods. . . . . . . . . . .      3,503        4,295
                                    ----------  -----------
Total inventories . . . . . . . . . $    8,405  $     8,721
                                    ==========  ===========
</TABLE>

     In  the first nine months of 2004 and 2003, there were no significant sales
of  inventory previously written off. As a result, there has been no significant
impact  on gross margin associated with the sale of inventory previously written
off.

4.  COMPUTATIONS OF NET LOSS PER COMMON SHARE

     Basic  and diluted net income (loss) per share are computed by dividing net
income  (loss) for the period by the weighted average number of shares of common
stock  outstanding  during  the  period.  The  calculation of diluted net income
(loss)  per  share  includes  the dilutive effect of potentially dilutive common
stock provided the inclusion of such potential common stock is not antidilutive.
Potentially dilutive common stock consists of incremental common shares issuable
upon  the  exercise  of  stock  options.

     During  the  three  months  ended  September  27, 2003, options to purchase
1,238,594  shares  of  common stock at weighted average exercise prices of $5.89
per share were outstanding, but were not included in the computations of diluted
net  income  per  common share because the exercise price of the related options
exceeded  the average market price of the common shares. During the three months
ended  October  2,  2004,  options  to  purchase  1,861,275 shares at a weighted
average  exercise  price of $5.40 were outstanding, but were not included in the
computations  of  diluted  net  loss  per  share  because  their  effect  was
antidilutive.  During  the  nine  months ended October 2, 2004 and September 27,
2003  options  to  purchase  1,861,275  and  2,000,040 shares of common stock at
weighted  average  exercise  prices  of  $5.40  and  $5.25,  respectively,  were
outstanding,  but  were  not included in the computation of diluted net loss per
share  because  their  effect  was  antidilutive.  These  options  could  dilute
earnings  per  share  in  future  periods.

5.  BUSINESS SEGMENTS

     We  operate  in  two  reportable segments: the ophthalmology medical device
segment  and  the  dermatology  medical  device  segment.  In  both segments, we
develop,  manufacture  and  market medical devices.  Our revenues arise from the
sale  of  consoles,  delivery  devices,  disposables  and  service  and  support
activities.

     Information  on  reportable  segments  for  the three and nine months ended
October  2,  2004  and  September  27,  2003  is  as  follows  (in  thousands):


                                       10
<PAGE>
<TABLE>
<CAPTION>
                                  Three Months Ended October 2, 2004                Three Months Ended September 27,2003

                             Ophthalmology     Dermatology         Total        Ophthalmology     Dermatology         Total
                                Medical          Medical                           Medical          Medica
                                Devices          Devices                           Devices          Devices

<S>                         <C>              <C>              <C>              <C>              <C>              <C>
Sales                       $         7,193  $           985  $        8,178   $         6,897  $         1,370  $        8,267
Direct Cost of Goods
Sold                                  2,641              717           3,358             2,493              835           3,328
                            ---------------  ---------------  ---------------  ---------------  ---------------  ---------------

Direct Gross Margin                   4,552              268           4,820             4,404              535           4,939

Total Unallocated
Costs                                                                 (6,147)                                            (4,678)
                                                              ---------------                                    ---------------

Pre-tax  income (loss)                                        $       (1,327)                                    $          261
                                                              ===============                                    ===============

                                   Nine Months Ended October 2, 2004                 Nine Months Ended September 27, 2003

                             Ophthalmology     Dermatology         Total        Ophthalmology     Dermatology         Total
                                Medical          Medical                           Medical          Medical
                                Devices          Devices                           Devices          Devices

Sales                       $        20,122  $         3,557  $       23,679   $        18,640  $         4,288  $       22,928

Direct Cost of Goods
Sold                                  7,096            2,141           9,237             6,506            2,222           8,728
                            ---------------  ---------------  ---------------  ---------------  ---------------  ---------------

Direct Gross Margin                  13,026            1,416          14,442            12,134            2,066          14,200

Total Unallocated
Costs                                                                (15,599)                                           (14,501)
                                                              ---------------                                    ---------------

Pre-tax  loss                                                 $       (1,157)                                    $         (301)
                                                              ===============                                    ===============
</TABLE>

     Indirect  costs  of  manufacturing,  research and development, and selling,
general  and  administrative  costs  are  not  allocated  to  the  segments.

     The  Company's assets and liabilities are not evaluated on a segment basis.
Accordingly,  no  disclosure  on  segment  assets  and  liabilities is provided.


                                       11
<PAGE>
ITEM  2.

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This  Quarterly  Report  on  Form  10-Q  contains  trend analysis and other
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as  amended, such as statements relating to levels of future sales and operating
results,  actual  order rate and market acceptance of our products; expectations
for  future  sales growth, generally, including expectations of additional sales
from  our  new  products  and  new  applications  of  our existing products; the
potential for production cost decreases and higher gross margins; our ability to
develop and introduce new products through strategic alliances; favorable Center
for  Medicare  and Medicaid coverage decisions regarding AMD procedures that use
our products; results of clinical studies and risks associated with bringing new
products  to  market;  general  economic conditions; and levels of international
sales.  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, including as a result
of  the  factors  set  forth  under  "Factors  That  May Affect Future Operating
Results"  and  other risks detailed in our Annual Report on Form 10-K filed with
the  Securities  and Exchange Commission on April 2, 2004 and detailed from time
to  time  in our reports filed with the Securities and Exchange Commission.  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-Q.  We  undertake  no obligation to update such forward-looking statements to
reflect  events  or  circumstances  occurring  after  the  date  of this report.

RESULTS OF OPERATIONS

     The  following  table  sets forth certain operating data as a percentage of
sales  for  the  periods  indicated.

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED            NINE MONTHS ENDED
                                               OCTOBER 2,   SEPTEMBER 27,      OCTOBER 2,   SEPTEMBER 27,
                                                 2004            2003            2004            2003
                                            --------------  --------------  --------------  --------------
<S>                                         <C>             <C>             <C>             <C>
Sales . . . . . . . . . . . . . . . . . .           100.0%          100.0%          100.0%          100.0%
Cost of sales . . . . . . . . . . . . . .            57.6            56.6            55.7            56.6
                                            --------------  --------------  --------------  --------------
    Gross profit. . . . . . . . . . . . .            42.4            43.4            44.3            43.4
                                            --------------  --------------  --------------  --------------
Operating expenses:
    Research and development. . . . . . .            12.5            11.8            14.4            13.0
    Sales, general and administrative . .            47.2            29.0            35.7            32.4
                                            --------------  --------------  --------------  --------------
      Total operating expenses. . . . . .            59.7            40.8            50.1            45.4
                                            --------------  --------------  --------------  --------------

Income (loss) from operations . . . . . .           (17.2)            2.6            (5.8)           (2.0)
Interest and other income, net. . . . . .             1.0             0.6             0.9             0.7
                                            --------------  --------------  --------------  --------------
Income (loss) before income taxes . . . .           (16.2)            3.2            (4.9)           (1.3)
Benefit from (provision for) income taxes             7.4             0.0             2.3             0.8
                                            --------------  --------------  --------------  --------------
Net income (loss) . . . . . . . . . . . .           (8.8)%            3.2%          (2.6)%          (0.5)%
                                            ==============  ==============  ==============  ==============
</TABLE>

     The  following  table  sets  forth  for the periods indicated the amount of
sales  for  our  operating  segments  and  sales as a percentage of total sales.


                                       12
<PAGE>
<TABLE>
<CAPTION>
                                     Three Months Ended                                     Nine Months Ended

                        October 2, 2004             September 27, 2003          October 2, 2004             September 27, 2003

                      Amount      Percentage      Amount      Percentage      Amount      Percentage      Amount      Percentage
                                   of total                    of total                    of total                    of total
                                    sales                       sales                       sales                       sales

<S>                <C>           <C>           <C>           <C>           <C>           <C>           <C>           <C>
    Domestic       $      5,161         63.1%  $      5,222         63.2%  $     14,162         59.8%  $     14,442         63.0%

    International         3,017         36.9%         3,045         36.8%         9,517         40.2%         8,486         37.0%
                   ------------  ------------  ------------  ------------  ------------  ------------  ------------  ------------

Total              $      8,178        100.0%  $      8,267        100.0%  $     23,679        100.0%  $     22,928        100.0%
                   ============  ============  ============  ============  ============  ============  ============  ============

Ophthalmology:

    Domestic       $      4,541         55.5%  $      4,061         49.1%  $     11,964         50.5%  $     11,111         48.5%

    International         2,652         32.4%         2,836         34.3%         8,157         34.5%         7,529         32.8%
                   ------------  ------------  ------------  ------------  ------------  ------------  ------------  ------------

Total              $      7,193         87.9%  $      6,897         83.4%  $     20,121         85.0%  $     18,640         81.3%
                   ============  ============  ============  ============  ============  ============  ============  ============

Dermatology:
    Domestic       $        620          7.6%  $      1,161         14.1%  $      2,198          9.3%  $      3,331         14.5%

    International           365          4.5%           209          2.5%         1,360          5.7%           957          4.2%
                   ------------  ------------  ------------  ------------  ------------  ------------  ------------  ------------

Total              $        985         12.1%  $      1,370         16.6%  $      3,558         15.0%  $      4,288         18.7%
                   ============  ============  ============  ============  ============  ============  ============  ============
</TABLE>

     Ophthalmology Sales

     Ophthalmology  sales  increased  4.3%  to $7.2 million for the three months
ended October 2, 2004 from $6.9 million for the three months ended September 27,
2003.  For  the nine months ended October 2, 2004, ophthalmology sales increased
7.9%  to  $20.1  million  from  $18.6 million.  For the three month period ended
October  2,  2004,  domestic ophthalmology sales increased 11.8% to $4.5 million
from $4.1 million for the three months ended September 27, 2003 due primarily to
a  $0.4  million  increase  in unit sales of laser consoles and service revenue.
Domestic ophthalmology sales increased 7.7% for the nine months ended October 2,
2004  to $12.0 million from $11.1 million due to a $1.2 million increase in unit
sales of delivery devices and service revenue, offset by a $0.3 million decrease
in sales of laser consoles.  International ophthalmology sales decreased 6.5% to
$2.7  million  for  the three months ended October 2, 2004 from $2.8 million for
the  three  months  ended  September  27,  2003.  The  decrease in international
ophthalmology  sales  during  this  period was due to a $0.1 million decrease in
unit  sales  of delivery devices.  Sales of laser consoles remained constant for
this  period.  For  the  nine  months  ended  October  2,  2004,  international
ophthalmology  sales  increased  8.3% to $8.2 million from $7.5 million due to a
$0.7  million  increase  in  unit  sales  of laser consoles and service revenue.

     Dermatology Sales

     Dermatology  sales  decreased  28.1%  to  $1.0 million for the three months
ended October 2, 2004 from $1.4 million for the three months ended September 27,
2003.  For  the  nine  months  ended October 2, 2004 dermatology sales decreased
17.0%  to  $3.6  million  from  $  4.3  million.  Domestic  dermatology  sales


                                       13
<PAGE>
decreased 46.6% to $0.6 million for the three month period ended October 2, 2004
from $1.2 million for the comparable prior year three month period due primarily
to  a $0.6 million decrease in unit sales of laser consoles. For the nine months
ended October 2, 2004 domestic dermatology sales decreased 34.0% to $2.2 million
from $3.3 million due to a $1.2 million decrease in unit sales of laser consoles
offset  by  a  $0.1  million  increase  in domestic dermatology service revenue.
International  dermatology  sales  increased 75.0% to $0.4 million for the three
months  ended  October  2,  2004  from  $0.2  million for the three months ended
September 27, 2003 due to a $0.2 million increase in sales of laser consoles and
service  revenue.  For  the  nine  months  ended  October 2, 2004, international
dermatology  sales  increased  42.0%  to $1.4 million from $1.0 million due to a
$0.4  million  increase  in  unit  sales  of  laser  consoles  and international
dermatology  service  revenue.  Our dermatology product sales, both domestically
and  internationally,  continue  to  be  affected  by  economic  conditions.
Additionally  dermatology  procedures are typically elective procedures that are
deferred  by patients in difficult economic times. See "-Factors that May Affect
Future  Results  -  Our  Business  Has  Been Adversely Impacted by the Worldwide
Economic  Slowdown  and  Related  Uncertainties."

     Gross  Profit.  Our  gross profit decreased by $0.1 million to $3.5 million
for  the  three  month period ended October 2, 2004 compared to $3.6 million for
the  three  months  ended  September  27, 2003.  Gross profit as a percentage of
sales  for  the three months ended October 2, 2004 decreased to 42.4% from 43.4%
for  the  comparable  prior year three month period.  The total 1.0% decrease in
gross  profit as a percentage of sales during this period included a decrease of
2.8%  related  to  an  inventory reserve for saleable, but aging and potentially
excess  inventory partially associated with the Company's recent introduction of
new  products,  a  decrease of 0.5% for average selling prices and a decrease of
0.2%  related  to higher overhead costs offset by an increase of 2.2% related to
the impact of product mix and an increase of 0.3% related to lower product costs
including  other  inventory  reserve  and  warranty charges. For the nine months
ended  October  2, 2004, gross profit increased by $0.6 million to $10.5 million
from $9.9 million for the nine months ended September 27, 2003.  Gross profit as
a  percentage  of  sales  for the nine months ended October 2, 2004 increased to
44.3%  from  43.4%.  The  total 0.9% increase in gross profit as a percentage of
sales  related to an increase of 1.2% for the impact of product mix, an increase
of  1%  due to decreased overhead costs, an increase of 0.2% related to improved
average  selling  prices,  offset by a decrease of 1.0% for an inventory reserve
associated with the Company's recent introduction of new products and a decrease
of  0.5% for higher product costs including other inventory reserve and warranty
charges.  Although  increasing competition has continued to result in a downward
trend  in  average  selling  prices for some products, we intend to continue our
efforts  to reduce the cost of components and manufacturing and thereby mitigate
the impact of price reductions on our gross profit.  In addition, as we evaluate
gross margins on each of our product lines, we may choose to place greater focus
on  product  lines  with  better  margins.  See "-Factors That May Affect Future
Results - If We Cannot Increase Our Sales Volumes, Reduce Our Costs or Introduce
Higher  Margin  Products  to  Offset  Anticipated Reductions in the Average Unit
Selling Price of our Products, Our Operating Results May Suffer."  We expect our
gross  profit  margins  to  continue to fluctuate due to changes in the relative
proportions  of  domestic  and  international  sales,  mix  of sales of existing
products,  pricing, product costs and a variety of other factors.  See "-Factors
That  May  Affect  Future  Results  -  Our  Operating Results May Fluctuate from
Quarter  to  Quarter  and  Year  to  Year."

     Research  and Development.  Our research and development expenses increased
by  5.1%  to $1.03 million for the three months ended October 2, 2004 from $0.98
million for the three months ended September 27, 2003.  Research and development
expenses  increased as a percentage of sales to 12.5% for the three months ended
October  2,  2004  from  11.8% for the comparable prior year three month period.
The  increase  in  research and development expense in absolute dollars and as a
percentage  of  sales  for  the three month period ended October 2, 2004 was due
primarily  to  $0.05  million  in  increased  research  and  development project
spending.  For  the  nine  months ended October 2, 2004 research and development
expenses  increased  14.7% to $3.4 million from $3.0 million for the nine months
ended  September  27,  2003.  As a percentage of sales, research and development
expense  increased to 14.4% for the nine months ended


                                       14
<PAGE>
October  2,  2004  from  13.0% for the nine months ended September 27, 2003. The
increase  in  research  and  development  expense  in  absolute dollars and as a
percentage  of  sales  for  the  nine month period ended October 2, 2004 was due
primarily  to  $0.4  million  in  increased  research  and  development  project
materials  spending.

     Sales,  General  and  Administrative. Our sales, general and administrative
expenses  increased  by 60.5% to $3.9 million for the three months ended October
2,  2004  from  $2.4 million for the three months ended September 27, 2003. As a
percentage  of  sales,  sales,  general and administrative expenses increased to
47.2%  for  the three months ended October 2, 2004 from 29.0% for the comparable
prior year three month period. The increase in sales, general and administrative
expense  in  absolute  dollars  and as a percentage of sales for the three month
period  ended  October  2,  2004 was due primarily to a $1.2 million reserve for
sales  tax  and  a $0.3 million increase in the allowance for doubtful accounts.
The reserve for sales tax resulted from the completion of a comprehensive review
of  our  sales  tax practices. Historically we had been collecting and remitting
sales  tax  in  only  those  states where we believed we had nexus. Based on the
independent  review,  we  will  now  begin to collect and remit sales taxes from
customers  in  additional  states  and  will  attempt  to  enter  into voluntary
settlement  agreements with certain states for the payment of prior period sales
taxes  and  associated  interest.  As a result, we recorded a one time charge of
$1.2 million to establish a reserve for upaid sales taxes and interest. The $1.2
million,  which represents the current estimate of the amounts to be remitted to
these  states,  could differ materially from the actual amount recorded. For the
nine  months  ended  October  2,  2004 sales, general and administrative expense
increased  13.8%  to  $8.5  million  from $7.4 million for the nine months ended
September  27, 2003. As a percentage of sales, sales, general and administrative
expenses increased to 35.7% for the nine months ended October 2, 2004 from 32.4%
for the nine months ended September 27, 2003. The increase in sales, general and
administrative  expense in absolute dollars and as a percentage of sales for the
nine  month  period  ended  October  2, 2004 was due primarily to a $1.2 million
reserve  for sales tax and a $0.3 million increase in the allowance for doubtful
accounts  offset by $0.4 million in decreased spending on marketing programs and
domestic  sales.

     Interest  and Other Income, net. For the three months ended October 2, 2004
we  had net other income of $83,000 as compared with net other income of $49,000
for the three months ended September 27, 2003. For the nine months ended October
2,  2004,  net  other income was $212,000 as compared with $154,000 for the nine
months  ended  September  27,  2003. The change in net other income for both the
three  and six month periods was due primarily to an increase in interest income
associated  with  increased  cash,  cash  equivalents  and  available  for  sale
securities.

     Income  Taxes.  The effective income tax rates for the three and nine month
periods  ended  October  2,  2004  and September 27, 2003 were lower for periods
where  we  had pre-tax income and higher for periods where we had pre-tax losses
than  the  Federal and State combined statutory rate of 40% primarily because of
certain  tax  benefits  associated with tax credits for research and development
activities.  Based on our tax liability through October 2, 2004 a tax benefit of
$607,000  was  recorded  in  the  third  fiscal  quarter  of  2004.

     In  addition  to estimating our quarterly income tax provision (benefit) we
assess temporary differences resulting from differing treatment of items for tax
and  accounting  purposes  which  result in deferred tax assets and liabilities,
which  are  included in our balance sheet. Currently, we have determined that no
valuation  allowance  is  required against our deferred tax assets as it is more
likely  than  not  that  the  deferred  tax  assets  can  be  realized  based on
determination of our future taxable income. A valuation allowance is required to
reduce  our deferred tax assets to the amount that is more likely than not to be
realized.  However,  if  at  any  point  in  time, we determine that we will not
realize  all or a portion of our remaining deferred tax assets, we will increase
our  valuation  allowance  with  a  charge  to  income  tax expense. Significant
management  judgment  is required in determining our provision for income taxes,
our  deferred  tax  assets  and liabilities and any valuation allowance recorded
against  our  net  deferred  tax assets. In the event that actual results differ
from  these  estimates  or  we  adjust these estimates in future periods, we may


                                       15
<PAGE>
need  to  establish  a  valuation  allowance  which  could materially impact our
financial  position  and  results  of  operations.  Our  ability  to utilize our
deferred  tax  assets  and the continuing need for a related valuation allowance
are  monitored  on  an  ongoing  basis.

LIQUIDITY AND CAPITAL RESOURCES

     At October 2, 2004, our primary sources of liquidity included cash and cash
equivalents  and  available-for-sale securities in the aggregate amount of $18.1
million.  In  addition, we have available $4 million under our unsecured line of
credit  which  bears  interest  at  the bank's prime rate and expires in October
2005.  As  of  October 2, 2004, no borrowings were outstanding under this credit
facility.

     During the nine months ended October 2, 2004, operating activities provided
$1.0  million  of  cash.  The  primary sources of cash from operating activities
included  an  increase  in  accrued  expenses of $1.2 million, a decrease in net
inventory  of  $0.3  million,  depreciation of $0.3 million, an increase of $0.2
million  in  deferred revenue and a decrease in prepaid expenses of $0.2 million
offset  by  uses of cash which included a $0.6 million net loss and $0.6 million
increase  in  deferred  income  taxes. The increase in accrued expenses resulted
primarily  from  an accrual for a sales tax liability. The decrease in inventory
related  primarily  to  increased inventory reserves, in particular a reserve of
$0.3  million for saleable, but aging and potentially excess inventory partially
associated  with  the  Company's  recent  introduction  of  new  products.

     Investing  activities used $4.0 million in cash and cash equivalents during
the  three  months  ended  October  2,  2004,  primarily due to net purchases of
available  for  sale securities of $3.8 million and purchases of fixed assets of
$0.2  million.

     Net  cash  provided  by  financing  activities during the nine months ended
October 2, 2004 was $1.1 million which consisted of the issuance of common stock
under  employee  option  plans  and  the  employee  stock  purchase  plan.

     We believe that, based on current estimates, our cash, cash equivalents and
available-for-sale  securities  together with cash generated from operations and
our credit facility will be sufficient to meet our anticipated cash requirements
for  the next 12 months. Our liquidity could be negatively affected by a decline
in  demand  for  our  products, the need to invest in new product development or
reductions  in  spending by our customers as a result of the continuing economic
downturn  or  other  factors.  There can be no assurance that additional debt or
equity  financing  will  be  available  when  required  or, if available, can be
secured  on  terms  satisfactory  to  us.  See  "-Factors That May Affect Future
Results  -  We  May Need Additional Capital, which May Not Be Available, and Our
Ability  to  Grow  May  Be  Limited  as  a  Result."

     In  December  1998,  we instituted a stock repurchase program whereby up to
150,000  shares  of  our  common stock may be repurchased in the open market. We
plan  to  utilize all of the reacquired shares for reissuance in connection with
employee  stock  programs.  No  shares  were repurchased during the three months
ended  October  2, 2004. To date, we have purchased 103,000 shares of our common
stock  under  this  program.

CRITICAL ACCOUNTING POLICIES

     The  Company's  significant accounting policies are disclosed in our Annual
Report  on Form 10-K for the year ended January 3, 2004 which was filed with the
Securities  and  Exchange  Commission  on  April  2,  2004.

FACTORS THAT MAY AFFECT FUTURE RESULTS

     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.  We  currently  market


                                       16
<PAGE>
visible  and  infrared  light  semiconductor-based photocoagulator medical laser
systems  to  the  ophthalmic  market.  We also market visible and infrared light
semiconductor-based  photocoagulator  medical  laser  systems to the dermatology
market.  We believe that continued and increased sales, if any, of these medical
laser  systems  is  dependent  upon a number of factors including the following:

     -    Product  performance,  features,  ease  of  use,  scalability  and
          durability;

     -    Recommendations  and  opinions  by  ophthalmologists,  dermatologists,
          other  clinicians,  plastic  surgeons  and  their  associated  opinion
          leaders,  including  study  outcomes;

     -    Price  of  our  products  and  prices  of  competing  products  and
          technologies;

     -    Availability  of  competing  products,  technologies  and  alternative
          treatments;

     -    Willingness  of  ophthalmologists  and  dermatologists  to  convert to
          semiconductor-based  or  infrared  laser  systems  from  alternative
          technologies;  and

     -    Level  of reimbursement for treatments administered with our products.

In  addition,  we  derive  a meaningful portion of our revenues from the sale of
delivery  devices.  Our  ability  to increase revenues from the sale of delivery
devices  will  depend primarily upon the features, ease of use and prices of our
products,  including  the  relationship to prices of competing delivery devices.
The level of service revenues will depend on our quality of care, responsiveness
and  the  willingness  of  our  customers  to  request  our services rather than
purchase  competing  products  or  services.  Any  significant decline in market
acceptance  of  our  products  or  our  revenues derived from the sales of laser
consoles,  delivery  devices or services would have a material adverse effect on
our  business,  results  of  operations  and  financial  condition.

     We  Face  Strong  Competition  in  Our  Markets  and  Expect  the  Level of
Competition  to  Grow  in  the Foreseeable Future. Competition in the market for
devices  used for ophthalmic and dermatology treatment procedures is intense and
is expected to increase. Our competitive position depends on a number of factors
including  product  performance, characteristics and functionality, ease of use,
scalability, durability and cost. Our principal competitors in ophthalmology are
Lumenis  Ltd.,  Carl  Zeiss,  Inc.,  Alcon, Quantel and Nidek, Inc. All of these
companies  currently  offer  a  competitive  semiconductor-based laser system in
ophthalmology.  Our principal competitors in dermatology are Laserscope, Candela
Corporation,  Palomar  Technologies,  Lumenis  Ltd.  and  Cutera,  Inc.  Some
competitors  have  substantially  greater  financial,  engineering,  product
development,  manufacturing,  marketing and technical resources than we do. Some
companies  also  have  greater  name  recognition  than  we do and long-standing
customer  relationships.  In  addition  to  other  companies  that  manufacture
photocoagulators,  we compete with pharmaceuticals, other technologies and other
surgical techniques. Some medical companies, academic and research institutions,
or  others, may develop new technologies or therapies that are more effective in
treating  conditions  targeted  by  us or are less expensive than our current or
future  products.  Any such developments could have a material adverse effect on
our  business,  financial  condition  and  results  of  operations.

     Our  Future  Success  Depends  on  Our  Ability to Develop and Successfully
Introduce  New  Products  and  New Applications. Our future success is dependent
upon, among other factors, our ability to develop, obtain regulatory approval or
clearance of, manufacture and market new products. In October 2004, we announced


                                       17
<PAGE>
FDA  approval  for  two  new  laser products, the IQ810 in ophthalmology and the
VariLite  in  dermatology. In May 2004, we introduced a new type of illuminating
Endoprobe.  In June 2003 we began shipment of two new products; a 50 micron slit
lamp  adaptor and a 25 gauge single-use Endoprobe. In October 2002, we announced
the introduction of a number of new products, specifically the OcuLight Symphony
multi-wavelength laser delivery system, an expanded EndoProbe product line and a
5  mm  Large  Spot  Slit Lamp Adapter. We also announced the Millennium Endolase
module  in  2002,  which  we  manufacture  to  be  included  in  Bausch & Lomb's
Millennium Microsurgical System. Successful commercialization of these and other
new  products  and  new  applications  will require that we effectively transfer
production  processes  from  research  and  development  to  manufacturing  and
effectively  coordinate  with  our  suppliers. In addition, we must successfully
sell and achieve market acceptance of new products and applications and enhanced
versions  of  existing  products.  The  extent  of,  and  rate  at which, market
acceptance and penetration are achieved by future products is a function of many
variables,  which  include,  among  other  things,  price,  safety,  efficacy,
reliability,  marketing  and  sales efforts, the development of new applications
for  these products, the availability of third-party reimbursement of procedures
using our new products, the existence of competing products and general economic
conditions  affecting  purchasing  patterns.  Our ability to market and sell new
products  may  also  be  subject to government regulation, including approval or
clearance by the United States Food and Drug Administration, or FDA, and foreign
government  agencies.  Any  failure  in  our ability to successfully develop and
introduce  new  products  or  enhanced versions of existing products and achieve
market  acceptance  of  new  products and new applications could have a material
adverse  effect  on  our  operating  results and would cause our net revenues to
decline.

     Our Business Has Been Adversely Impacted By the Worldwide Economic Slowdown
and  Related  Uncertainties. The overall weak economic conditions worldwide have
resulted in reduced demand for some of our products, particularly demand for our
dermatology products. Political and social turmoil in various parts of the world
or  terrorist  acts  may  adversely  impact  global  economic  conditions. These
political,  social  and  economic  conditions and related economic uncertainties
make  it difficult for us, our customers and our distributors to forecast orders
and  sales  of  our  products and, accordingly, plan future business activities.
This  level of uncertainty strongly challenges our ability to operate profitably
or  grow our business. If economic or market conditions do not improve, this may
have  a  material adverse impact on our financial position, results of operation
and  cash  flows.

     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 have experienced
declines  in  the  average  unit price of our products and expect to continue to
suffer  from  declines in the future. The average unit price of our products may
decrease  in  the  future  in  response  to  changes in product mix, competitive
pricing  pressures,  new  product  introductions  by  our  competitors  or other
factors.  If  we  are  unable  to offset the anticipated decrease in our average
selling  prices  by  increasing  our  sales  volumes  or  through  new  product
introductions, our net revenues will decline. In addition, to maintain our gross
margins,  we  must continue to reduce the manufacturing cost of our products. If
we  cannot  maintain  our gross margins, our business could be seriously harmed,
particularly  if  the  average  selling  price  of  our  products  decreases
significantly  without  a  corresponding  increase  in  sales.

     We  Face  Manufacturing  Risks. The manufacture of our infrared and visible
light  photocoagulators and the related delivery devices is a highly complex and
precise  process.  We  assemble  critical  subassemblies  and  all  of our final
products  at  our  facility  in  Mountain  View,  California.  We may experience
manufacturing  difficulties,  quality  control  issues  or assembly constraints,
particularly  with  regard  to new products that we may introduce. We may not be
able  to  manufacture  sufficient  quantities of our products, which may require
that  we  qualify  other  manufacturers  for  our  products. Furthermore, we may
experience delays, disruptions, capacity constraints or quality control problems
in  our  manufacturing


                                       18
<PAGE>
operations  and,  as  a  result,  product  shipments  to  our customers could be
delayed,  which  would  negatively  impact  our  net  revenues.

     We  Depend  on  Sole  Source  or Limited Source Suppliers. We rely on third
parties to manufacture substantially all of the components used in our products,
including  optics,  laser  diodes and crystals. We have some long term or volume
purchase  agreements  with  our suppliers and currently purchase components on a
purchase  order  basis.  Some  of  our  suppliers  and manufacturers are sole or
limited  sources.  In  addition,  some  of  these suppliers are relatively small
private  companies  that may discontinue their operations at any time. There are
risks  associated  with  the  use  of  independent  manufacturers, including the
following:

     -    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.

     Our  business and operating results may suffer from the lack of alternative
sources  of  supply for critical sole and limited source components. The process
of  qualifying  suppliers  is  complex,  requires  extensive  testing  with  our
products,  and  may be lengthy, particularly as new products are introduced. New
suppliers  would  have  to be educated in our production processes. In addition,
the  use  of alternate components may require design alterations to our products
and  additional product testing under FDA and relevant foreign regulatory agency
guidelines,  which  may  delay sales and increase product costs. Any failures by
our  vendors  to adequately supply limited and sole source components may impair
our ability to offer our existing products, delay the submission of new products
for  regulatory  approval  and market introduction, materially harm our business
and  financial  condition and cause our stock price to decline. Establishing our
own  capabilities  to  manufacture these components would be expensive and could
significantly  decrease  our  profit  margins.  We  do  not  currently intend to
manufacture  any  of  these  components. Our business, results of operations and
financial  condition would be adversely affected if we are unable to continue to
obtain  components in the quantity and quality desired and at the prices we have
budgeted.

     We Depend on International Sales for a Significant Portion of Our Operating
Results.  We  derive,  and  expect to continue to derive, a large portion of our
revenue  from  international  sales. For the three months ended October 2, 2004,
our international sales were $3.0 million or 36.9% of total sales. We anticipate
that  international  sales will continue to account for a significant portion of
our  revenues  in the foreseeable future. None of our international revenues and
costs  has  been  denominated in foreign currencies. As a result, an increase in
the  value  of the U.S. dollar relative to foreign currencies makes our products
more  expensive and thus less competitive in foreign markets. The factors stated
above  could have a material adverse effect on our business, financial condition
or  results of operations. Our international operations and sales are subject to
a  number  of  other  risks  including:

     -    Longer  accounts  receivable  collection  periods;


                                       19
<PAGE>
     -    Impact  of  recessions  in  economies  outside  of  the United States;

     -    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;

     -    Potentially  adverse  tax  consequences;  and

     -    Multiple protectionist, adverse and changing foreign governmental laws
          and  regulations.

Any  one  or  more  of  these factors stated above could have a material adverse
effect  on  our  business,  financial  condition  or results of operations.  For
additional  discussion  about  our  foreign  currency  risks,  see  Item  3,
"Quantitative  and  Qualitative  Disclosures  about  Market  Risk."

     We  Depend on Sales of Our Ophthalmology Products for a Significant Portion
of  Our  Operating Results. We derive, and expect to continue to derive, a large
portion of our revenue and profits from sales of our ophthalmology products. For
the three months ended October 2, 2004 our ophthalmology sales were $7.2 million
or  88.0% of total sales. We anticipate that sales of our ophthalmology products
will  continue  to  account  for  a  significant  portion of our revenues in the
foreseeable  future as we continue to introduce new ophthalmology products, such
as  the 50 micron slit lamp adapter and our expanded EndoProbe product line, and
support  clinical  trials  in  the field of ophthalmology, including the TTT4CNV
clinical  trial  for  the  treatment  of  wet  AMD.

     Our  Operating  Results May be Adversely Affected by Changes in Third Party
Coverage  and  Reimbursement  Policies  and any Uncertainty Regarding Healthcare
Reform  Measures. Our ophthalmology products are typically purchased by doctors,
clinics,  hospitals and other users, which bill various third-party payers, such
as  governmental  programs  and  private  insurance  plans,  for the health care
services  provided  to  their  patients.  Third-party  payers  are  increasingly
scrutinizing  and  challenging  the  coverage  of  new products and the level of
reimbursement  for covered products. Doctors, clinics, hospitals and other users
of  our  products  may not obtain adequate reimbursement for use of our products
from  third-party  payers.  While we believe that the laser procedures using our
products  have  generally  been  reimbursed,  payers  may  deny  coverage  and
reimbursement  for  our  products  if  they  determine  that  the device was not
reasonable  and  necessary  for the purpose used, was investigational or was not
cost-effective. In addition, third party payers may not initiate coverage of new
procedures  using  our products for a significant period. In September 2000, the
Center  for  Medicare  and  Medicaid  Services,  or CMS, advised that claims for
reimbursement  for  certain age related macular degeneration, or AMD, procedures
which  use  our OcuLight SLx laser system, could be submitted for reimbursement,
with  coverage  and  payment  to  be determined by the local medical carriers at
their  discretion.  To  date  five  carriers representing 17 states have written
reimbursement  coverage  policies  on  Transpupillary Thermotherapy, or TTT. The
states  reimbursing  for  TTT are Alaska, Arizona, California, Colorado, Hawaii,
Iowa,  Idaho,  Mississippi,  North  Carolina,  North  Dakota,  Nevada,  Oregon,
Pennsylvania, South Dakota, Tennessee, Washington and Wyoming. Domestic sales of
the  OcuLight  SLx  laser  system  may  continue  to be limited until more local
medical  carriers  reimburse  for  performing  such  AMD procedures or until CMS
advises that claims for these procedures may be submitted directly to CMS at the


                                       20
<PAGE>
national  level.  The  clinical  results of the TTT4CNV trial and other clinical
trials  may  influence  the  individual  state  or CMS decision to reimburse for
certain  laser  procedures.

     Changes  in  government legislation or regulation or in private third-party
payers'  policies toward reimbursement for procedures employing our products may
prohibit  adequate  reimbursement.  There  have been a number of legislative and
regulatory  proposals  to  change  the  healthcare  system,  reduce the costs of
healthcare  and  change  medical  reimbursement  policies.  Doctors,  clinics,
hospitals  and  other users of our products may decline to purchase our products
to the extent there is uncertainty regarding reimbursement of medical procedures
using  our  products  and  any  healthcare  reform  measures.  Further  proposed
legislation,  regulation  and policy changes affecting third party reimbursement
are  likely.  We  are  unable to predict what legislation or regulation, if any,
relating  to  the health care industry or third-party coverage and reimbursement
may  be enacted in the future, or what effect such legislation or regulation may
have  on us. However, denial of coverage and reimbursement of our products would
have  a  material  adverse  effect  on  our  business, results of operations and
financial  condition.

     We  are  Dependent  on  the  Successful  Outcome  of Clinical Trials of Our
Products  and  New  Applications  Using Our Products. Our success will depend in
part  on  the  successful  outcome  of  clinical  trials of our products and new
applications  using  our  products.  Clinical  trials  are  long,  expensive and
uncertain  processes.  We  are  currently  supporting  several  ongoing clinical
trials, including, for example, the TTT4CNV clinical trial. The TTT4CNV clinical
trial  is  a  multi-center,  prospective,  double-masked,  placebo-controlled,
randomized  trial  conducted  at  22 centers in the United States. This clinical
trial  is a post marketing study performed within the FDA cleared indications of
the OcuLight SLx and is being conducted to determine whether TTT laser treatment
using  our  OcuLight  SLx infrared laser system and Large Spot Slit Lamp Adapter
can  reduce  the  risk  of  vision  loss for patients with wet AMD compared to a
randomized  control, which should reflect the natural history of the disease. In
March  2003,  we announced that the Executive Committee for the TTT4CNV clinical
trial accepted the recommendations of the independent Data and Safety Monitoring
Committee  that  an  adequate  number  of  patients  were  enrolled  to detect a
clinically relevant difference between outcomes in TTT-treated eyes and patients
not  being treated. In June 2003, we announced the publication of two additional
clinical  studies, which also support the effectiveness of TTT for the treatment
of  wet  age-related  macular  degeneration.  Both  studies  were  prospective,
non-randomized,  non-masked  case  series that were performed using our OcuLight
SLx  laser and Large Spot Size Slit Lamp Adapter. On October 22, 2004, Dr. Elias
Reichel, Study Chairman of the TTT4CNV Clinical Trial and Associate Professor of
Ophthalmology at the New England Eye Center, Tufts School of Medicine, presented
preliminary results from the TTT4CNV Clinical Trial for occult neovascular (wet)
AMD  at  the annual meeting of the American Academy of Ophthalmology. A total of
303  patients were enrolled in the study. Patients who were treated in the study
with the Transpupillary Thermotherapy (TTT) laser protocol were compared to sham
treatment.  The  results  for  the  intent-to-treat  population,  while trending
favorably,  showed that the primary visual outcome using TTT, as applied in this
trial,  did  not  result  in  a  significant beneficial effect relative to sham.
Additionally,  it  was  reported  that 11% of patients who were treated with TTT
compared  to  3%  of  patients  who received sham showed improvement (greater or
equal  to  2  lines  increase)  from  baseline  when evaluated at one year. This
secondary outcome was statistically significant. The Executive Committee for the
TTT4CNV  trial  intends to conduct further analysis of this subgroup of patients
whose  vision  improved as it may yield information regarding those patients who
respond  to  TTT.  Specifically  this  subgroup  of  patients  may  have certain
characteristics that result in a high likelihood of improvement or stabilization
over  time.  Safety  results  were  also  presented.  Some patients, both in the
treatment  and  sham  groups,  showed  severe  loss  of  vision at the one month
follow-up  visit. This occurred in 5% of TTT treated eyes compared to 1% of sham
eyes.  This  finding  was  not  statistically significant. There are a number of
questions  for  which  analysis  remains to be done. The Executive Committee had
little  time to review the outcome data prior to Dr. Reichel's presentation and,
as a result, careful inspection of baseline characteristics between groups and a
per protocol analysis that evaluates the subset of enrolled patients who met all
key  eligibility  criteria needs to be done. Data analysis will continue through
the  end  of  2004  and


                                       21
<PAGE>
into  the  first half of 2005. We cannot assure you that further analysis of the
TTT4CNV  clinical trial data will yield any additional statistically significant
identifiable  group  that  improved  from  the  TTT  treatment.  Even if further
analysis  yields favorable results, an increase in laser sales may take a number
of  years.  If  the  future  results  of the TTT4CNV clinical trial or any other
clinical  trial regarding our products fails to demonstrate improved outcomes of
treatments  using  our  products,  our  ability  to  generate  revenues from new
products  or  new  applications  using our products would be adversely affected.

     Our  Operating  Results  May  Fluctuate from Quarter to Quarter and Year to
Year.  Our  sales  and  operating results may vary significantly from quarter to
quarter  and from year to year in the future. Our operating results are affected
by  a  number  of  factors,  many  of  which  are  beyond  our  control. Factors
contributing  to  these  fluctuations  include  the  following:

     -    General  economic  uncertainties  and  political  concerns;

     -    The  timing of the introduction and market acceptance of new products,
          product  enhancements  and  new  applications;

     -    Changes  in demand for our existing line of dermatology and ophthalmic
          products;

     -    The  cost  and availability of components and subassemblies, including
          the  ability  of  our  sole  or  limited  source  suppliers to deliver
          components  at  the  times  and  prices  that  we  have  planned;

     -    Our  ability  to maintain sales volumes at a level sufficient to cover
          fixed  manufacturing  and  operating  costs;

     -    Fluctuations  in  our  product  mix between dermatology and ophthalmic
          products  and  foreign  and  domestic  sales;

     -    The effect of regulatory approvals and changes in domestic and foreign
          regulatory  requirements;

     -    Introduction  of  new  products,  product  enhancements  and  new
          applications  by  our  competitors,  entry of new competitors into our
          markets,  pricing  pressures  and  other  competitive  factors;

     -    Our  long  and  highly  variable  sales  cycle;

     -    Changes  in  the  prices  at  which  we  can  sell  our  products;

     -    Changes  in customers' or potential customers' budgets as a result of,
          among  other things, reimbursement policies of government programs and
          private  insurers  for  treatments  that  use  our  products;  and

     -    Increased  product  development  costs.


                                       22
<PAGE>
In  addition to these factors, our quarterly results have been, and are expected
to  continue  to  be,  affected  by  seasonal  factors.

Our  expense  levels  are  based,  in  part, on expected future sales.  If sales
levels  in  a  particular  quarter do not meet expectations, we may be unable to
adjust  operating  expenses  quickly  enough  to compensate for the shortfall of
sales, and our results of operations may be adversely affected.  In addition, we
have historically made a significant portion of each quarter's product shipments
near  the end of the quarter.  If that pattern continues, any delays in shipment
of  products  could  have a material adverse effect on results of operations for
such  quarter.  Due  to  these  and  other  factors,  we believe that quarter to
quarter  and  year  to year comparisons of our past operating results may not be
meaningful.  You  should  not  rely on our results for any quarter or year as an
indication  of our future performance.  Our operating results in future quarters
and  years  may be below expectations, which would likely cause the price of our
common  stock  to  fall.

     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.  Our ability to sell our
products  and  generate  revenue  depends upon our direct sales force within the
United States and relationships with independent distributors outside the United
States.  As  of October 2, 2004 our direct sales force consisted of 10 employees
with  6  additional  open  positions  and  we  maintained  relationships with 66
independent  distributors  internationally  selling  our  products  into  107
countries.  We  generally  grant  our distributors exclusive territories for the
sale  of our products in specified countries. The amount and timing of resources
dedicated  by  our  distributors  to the sales of our products is not within our
control.  Our international sales are entirely dependent on the efforts of these
third  parties.  If  any  distributor breaches or fails to generate sales of our
products,  we  may  be forced to replace the distributor and our ability to sell
our  products  into  that exclusive sales territory would be adversely affected.

We do not have any long-term employment contracts with the members of our direct
sales  force.  We may be unable to replace our direct sales force personnel with
individuals  of  equivalent  technical  expertise  and qualifications, which may
limit  our  revenues  and our ability to maintain market share.  The loss of the
services  of  these  key  personnel  would  harm  our  business.  Similarly, our
distributorship  agreements are generally terminable at will by either party and
distributors  may  terminate their relationships with us, which would affect our
international  sales  and  results  of  operations.

     We  Depend  on Collaborative Relationships to Develop, Introduce and Market
New  Products,  Product  Enhancements  and  New  Applications. We depend on both
clinical  and  commercial  collaborative  relationships.  We  have  entered into
collaborative  relationships  with  academic  medical  centers and physicians in
connection  with  the  research  and  development  and  clinical  testing of our
products.  Commercially,  we  currently collaborate with Bausch & Lomb to design
and  manufacture  a  solid-state green wavelength (532 nm) laser photocoagulator
module, called the Millennium Endolase module. The Millennium Endolase module is
designed  to be a component of Bausch & Lomb's ophthalmic surgical suite product
offering  and  is not expected to be sold as a stand-alone product. Sales of the
Millennium  Endolase  module  are  dependent upon the actual order rate from and
shipment  rate to Bausch & Lomb, which depends on the efforts of our partner and
is  beyond our control. We cannot assure you that our relationship with Bausch &
Lomb  will  result  in  further sales of our Millennium Endolase module. We also
collaborate  with  Miravant Medical Technologies, a maker of photodynamic drugs,
on a device that emits a laser beam to activate a photodynamic drug developed by
Miravant  for the treatment of wet AMD. In January 2002, Miravant announced that
the top line results of their Phase III clinical trial indicated that SnET2, the
photodynamic  drug  developed, did not meet the primary efficacy endpoint in the
study  population.  As  we  could  not  be assured that SnET2 would be timely or
successfully  pursued through clinical trials by Miravant, we charged to expense
in the fourth quarter of 2001, $0.3 million of inventory related to the OcuLight
664,  the  laser used by Miravant in the Phase III clinical trials. Miravant has
since  received  an


                                       23
<PAGE>
approvable  letter  from  the  FDA for SnET2 with conditions for final marketing
approval which includes a request for an additional confirmatory clinical trial.
We  are the exclusive provider of the OcuLight 664 activation laser used in this
application.  Successful  commercialization  of  this product will depend, among
other  things,  on the results of the confirmatory clinical trial, acceptance of
this  product  and  Miravant's  ability  to  successfully  market  and sell this
therapy.  The  failure  of  any  current  or  future  clinical  or  commercial
collaboration  relationships could have a material adverse effect on our ability
to  introduce  new  products or applications and therefore could have a material
adverse  effect  on our business, results of operations and financial condition.

     We  Face  Risks  Associated  with  our  Collaborative  Relationships.  Our
collaborators  may  not  pursue  further  development  and  commercialization of
products  resulting  from  collaborations  with  us or may not devote sufficient
resources to the marketing and sale of such products. Our reliance on others for
clinical  development, manufacturing and distribution of our products may result
in  unforeseen  problems.  Further,  our  collaborative  partners may develop or
pursue  alternative  technologies  either  on their own or in collaboration with
others. If a collaborator elects to terminate its agreement with us, our ability
to develop, introduce, market and sell the product may be significantly impaired
and  we  may  be forced to discontinue altogether the product resulting from the
collaboration.  We  may  not  be  able  to  negotiate  alternative collaboration
agreements  on acceptable terms, if at all. The failure of any current or future
collaboration  efforts  could  have  a material adverse effect on our ability to
introduce  new  products  or  applications  and  therefore could have a material
adverse  effect  on our business, results of operations and financial condition.

     We  Rely  on  Patents  and  Proprietary  Rights to Protect our Intellectual
Property  and  Business. Our success and ability to compete is dependent in part
upon  our  proprietary  information.  We rely on a combination of patents, trade
secrets,  copyright  and  trademark  laws,  nondisclosure  and other contractual
agreements  and  technical measures to protect our intellectual property rights.
We  file  patent applications to protect technology, inventions and improvements
that  are  significant  to  the development of our business. We have been issued
fifteen  United  States  patents  and  five  foreign patents on the technologies
related to our products and processes. We have approximately four pending patent
applications  in  the United States and five foreign pending patent applications
that  have  been filed. Our patent applications may not be approved. Any patents
granted now or in the future may offer only limited protection against potential
infringement and development by our competitors of competing products. Moreover,
our  competitors,  many  of  which  have  substantial  resources  and  have made
substantial  investments  in  competing  technologies, may seek to apply for and
obtain  patents  that will prevent, limit or interfere with our ability to make,
use  or  sell  our  products  either  in  the  United States or in international
markets.

     In  addition  to patents, we rely on trade secrets and proprietary know-how
which  we  seek  to protect, in part, through proprietary information agreements
with  employees,  consultants  and  other  parties.  Our proprietary information
agreements  with  our  employees  and  consultants  contain  industry  standard
provisions  requiring  such  individuals  to  assign  to  us  without additional
consideration  any  inventions  conceived  or  reduced to practice by them while
employed  or  retained  by  us,  subject  to  customary  exceptions. Proprietary
information  agreements  with employees, consultants and others may be breached,
and  we  may  not have adequate remedies for any breach. Also, our trade secrets
may  become  known  to  or  independently  developed  by  competitors.

     The  laser  and  medical  device  industry  is  characterized  by  frequent
litigation regarding patent and other intellectual property rights. Companies in
the  medical  device  industry have employed intellectual property litigation to
gain  a  competitive  advantage.  Numerous patents are held by others, including
academic  institutions  and  our competitors. Until recently patent applications
were maintained in secrecy in the United States until the patents issued. Patent
applications  filed  in  the United States after November 2000 generally will be
published  eighteen  months  after  the  filing  date.  However,  since  patent
applications  continue  to  be maintained in secrecy for at least some period of
time,  both  within  the  United  States  and  with  regards  to


                                       24
<PAGE>
international patent applications, we cannot assure you that our technology does
not  infringe any patents or patent applications held by third parties. We have,
from  time  to  time,  been  notified  of, or have otherwise been made aware of,
claims  that we may be infringing upon patents or other proprietary intellectual
property  owned  by  others.  If  it appears necessary or desirable, we may seek
licenses  under  such  patents  or  proprietary  intellectual property. Although
patent  holders  commonly  offer  such  licenses, licenses under such patents or
intellectual  property  may  not be offered or the terms of any offered licenses
may  not  be  reasonable.

     Any  claims,  with  or  without  merit,  and  regardless  of whether we are
successful  on  the merits, would be time-consuming, result in costly litigation
and  diversion  of  technical and management personnel, cause shipment delays or
require  us  to  develop  noninfringing  technology  or to enter into royalty or
licensing  agreements.  An adverse determination in a judicial or administrative
proceeding  and  failure  to  obtain  necessary  licenses  or  develop alternate
technologies could prevent us from manufacturing and selling our products, which
would  have a material adverse effect on our business, results of operations and
financial  condition.

     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.
The  medical  devices  that  we  market and manufacture are subject to extensive
regulation  by  the  FDA and by foreign and state governments. Under the Federal
Food,  Drug  and Cosmetic Act and the related regulations, the FDA regulates the
design, development, clinical testing, manufacture, labeling, sale, distribution
and promotion of medical devices. Before a new device can be introduced into the
market,  the  product  must undergo rigorous testing and an extensive regulatory
review  process  implemented  by  the  FDA  under  federal law. Unless otherwise
exempt,  a  device  manufacturer must obtain market clearance through either the
510(k)  premarket  notification  process  or  the  lengthier  premarket approval
application  (PMA)  process.  Depending upon the type, complexity and novelty of
the  device  and  the  nature  of the disease or disorder to be treated, the FDA
process can take several years, require extensive clinical testing and result in
significant  expenditures.  Even  if  regulatory  approval  is  obtained,  later
discovery  of previously unknown safety issues may result in restrictions on the
product,  including  withdrawal  of the product from the market. Other countries
also  have  extensive regulations regarding clinical trials and testing prior to
new  product  introductions.  Our  failure to obtain government approvals or any
delays  in receipt of such approvals would have a material adverse effect on our
business,  results  of  operations  and  financial  condition.

     The FDA imposes additional regulations on manufacturers of approved medical
devices.  We  are  required  to  comply  with  the  applicable  Quality  System
regulations  and  our  manufacturing  facilities are subject to ongoing periodic
inspections  by  the FDA and corresponding state agencies, including unannounced
inspections, and must be licensed as part of the product approval process before
being  utilized  for commercial manufacturing. Noncompliance with the applicable
requirements  can  result  in,  among  other  things,  fines, injunctions, civil
penalties,  recall  or  seizure  of  products,  total  or  partial suspension of
production, withdrawal of marketing approvals, and criminal prosecution. The FDA
also  has  the authority to request repair, replacement or refund of the cost of
any  device  we manufacture or distribute. Any of these actions by the FDA would
materially  and  adversely affect our ability to continue operating our business
and  the  results  of  our  operations.

     In  addition,  we  are also subject to varying product standards, packaging
requirements,  labeling  requirements,  tariff  regulations,  duties  and  tax
requirements.  As  a  result of our sales in Europe, we are required to have all
products  "CE"  marked,  an  international  symbol  affixed  to  all  products
demonstrating  compliance  with  the  European  Medical Device Directive and all
applicable  standards.  While  currently  all  of  our  released products are CE
marked, continued certification is based on the successful review of our quality
system  by  our  European  Registrar  during  their  annual  audit.  Any loss of
certification  would  have a material adverse effect on our business, results of
operations  and  financial  condition.


                                       25
<PAGE>
     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.  The  FDA  and  similar  governmental  authorities  in other
countries in which we market and sell our products have the authority to require
the  recall  of our products in the event of material deficiencies or defects in
design  or  manufacture.  A government mandated recall, or a voluntary recall by
us,  could  occur  as  a  result  of component failures, manufacturing errors or
design  defects,  including  defects  in  labeling.  A  recall  could  divert
management's  attention,  cause  us  to  incur  significant  expenses,  harm our
reputation  with  customers  and  negatively  affect  our  future  sales.

     If  we  modify  one  of our FDA approved or cleared devices, we may need to
seek  new  approvals  or clearances which, if not granted, would prevent us from
selling  our  modified  products.

     Any  modifications  to  an  FDA-approved  or  cleared  device  that  would
significantly  affect  its  safety  or  effectiveness or that would constitute a
major  change  in  its  intended  use  would  require  a new 510(k) clearance or
possibly  a  PMA  approval.  We  may  not  be  able  to obtain additional 510(k)
clearances  or  PMA  approvals  for  new  products  or  for modifications to, or
additional  intended  uses or indications for, our existing products in a timely
fashion, or at all. Delays in obtaining future clearances would adversely affect
our  ability  to introduce new or enhanced products in a timely manner, which in
turn would harm our revenue and future profitability. We have made modifications
to  our  devices  and  the  labeling  of  our  devices  in the past and may make
additional  modifications  in  the  future  that  we  believe do not or will not
require  additional  clearances  or approvals. If the FDA disagrees and requires
new  clearances or approvals for the modifications, we may be required to recall
and  stop marketing the modified devices, which could harm our operating results
and  require  us  to  redesign  or  relabel  our  products.

     If  Product  Liability  Claims are Successfully Asserted Against Us, We may
Incur  Substantial Liabilities That May Adversely Affect Our Business or Results
of  Operations. We may be subject to product liability claims from time to time.
Our  products  are  highly complex and some are used to treat extremely delicate
eye  tissue  and  skin  conditions  on  and  near  a patient's face. Although we
maintain  product  liability insurance with coverage limits of $11.0 million per
occurrence  and  an annual aggregate maximum of $12.0 million, our coverage from
our  insurance  policies  may  not  be  adequate. Product liability insurance is
expensive.  We  might  not  be able to obtain product liability insurance in the
future  on acceptable terms or in sufficient amounts to protect us, if at all. A
successful  claim  brought  against us in excess of our insurance coverage could
have  a  material  adverse  effect  on  our  business, results of operations and
financial  condition.

     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 use quarterly and annual forecasts based primarily
on  our  anticipated  product  orders  to  plan  our  manufacturing  efforts and
determine  our  requirements  for components and materials. It is very important
that  we  accurately  predict both the demand for our product and the lead times
required  to  obtain  the  necessary  components  and  materials. Lead times for
components  vary  significantly  and  depend  on numerous factors, including the
specific  supplier,  the  size  of  the order, contract terms and current market
demand  for  such  components. If we overestimate the demand for our product, we
may have excess inventory, which would increase our costs. Over the past several
quarters,  we  have  placed  a high priority on our asset management efforts to,
among  other  things,  reduce  overall  inventory  levels  and increase our cash
position.  If  we  underestimate  demand  for our product and, consequently, our
component  and  materials  requirements, we may have inadequate inventory, which
could  interrupt  our  manufacturing,  delay  delivery  of  our  product  to our
customers  and  result  in  the loss of customer sales. Any of these occurrences
would  negatively  impact  our  business  and  operating  results.

     If  We  Fail  to Manage Growth Effectively, Our Business Could Be Disrupted
Which Could Harm Our Operating Results. We have experienced, and may continue to
experience  growth  in our business. We have made and expect to continue to make
significant  investments  to  enable  our  future  growth  through,  among


                                       26
<PAGE>
other  things,  new product development and clinical trials for new applications
and  products.  We  must also be prepared to expand our work force and to train,
motivate  and  manage  additional employees as the need for additional personnel
arises.  Our  personnel, systems, procedures and controls may not be adequate to
support  our  future operations. Any failure to effectively manage future growth
could  have a material adverse effect on our business, results of operations and
financial  condition.

     If  Our  Facilities  Were  To  Experience Catastrophic Loss, Our Operations
Would  Be Seriously Harmed. Our facilities could be subject to catastrophic loss
such  as  fire,  flood  or  earthquake.  All  of  our  research  and development
activities,  manufacturing,  our  corporate  headquarters  and  other  critical
business  operations  are located near major earthquake faults in Mountain View,
California. Any such loss at any of our facilities could disrupt our operations,
delay  production,  shipments  and revenue and result in large expense to repair
and  replace  our  facilities.

     We May Need Additional Capital, which May Not Be Available, and Our Ability
to  Grow May be Limited as a Result. We believe that our existing cash balances,
available-for-sale  securities,  credit  facilities and cash flow expected to be
generated  from  future  operations  will  be  sufficient  to  meet  our capital
requirements  at  least through the next 12 months. However, we may be required,
or  could  elect, to seek additional funding prior to that time. The development
and  marketing  of  new  products  and  associated  support personnel requires a
significant  commitment  of  resources.  If  cash  from  available  sources  is
insufficient,  we  may  need  additional  capital, which may not be available on
favorable terms, if at all. If we cannot raise funds on acceptable terms, we may
not  be  able  to  develop  or  enhance  our  products, take advantage of future
opportunities,  fund potential acquisitions or respond to  competitive pressures
or unanticipated requirements. Any inability to raise additional capital when we
require  it  would  seriously  harm  our  business.

     Our  Stock Price Has Been and May Continue to be Volatile and an Investment
in  Our  Common  Stock Could Suffer a Decline in Value. The trading price of our
common  stock  has been subject to wide fluctuations in response to a variety of
factors, some of which are beyond our control, including quarterly variations in
our operating results, announcements by us or our competitors of new products or
of  significant  clinical  achievements,  changes  in market valuations of other
similar companies in our industry and general market conditions. We receive only
limited attention by securities analysts and may experience an imbalance between
supply  and  demand  for our common stock resulting from low trading volumes. In
addition,  the  stock  market has experienced extreme volatility in the last few
years  that has often been unrelated to the performance of particular companies.
These  broad  market  fluctuations could have a significant impact on the market
price  of  our  common  stock  regardless  of  our  performance.

Changes  in  Accounting Rules. We prepare our financial statements in conformity
with  accounting  principles generally accepted in the United States of America.
These  principles  are  subject to interpretation by the Securities and Exchange
Commission,  or  the  SEC,  and  various  bodies  formed to interpret and create
appropriate  accounting  policies.  A  change  in  these  policies  can  have  a
significant  effect  on  our  reported results and may even retroactively affect
previously  reported  transactions.  In  particular,  changes to FASB guidelines
relating  to  accounting  for  stock-based compensation, if enacted, will likely
increase our compensation expense, could make our net income less predictable in
any  given reporting period and could change the way we compensate our employees
or  cause  other  changes  in  the  way  we  conduct  our  business.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

QUANTITATIVE DISCLOSURES

     We  are  exposed  to  market  risks  inherent  in our operations, primarily
related  to  interest  rate  risk  and  currency  risk.  These  risks arise from
transactions  and  operations  entered  into  in  the  normal  course  of


                                       27
<PAGE>
business. We do not use derivatives to alter the interest characteristics of our
marketable securities or our debt instruments. We have no holdings of derivative
or  commodity  instruments.

     Interest  Rate Risk. We are subject to interest rate risks on cash and cash
equivalents,  available-for-sale  marketable securities and any future financing
requirements.  Interest  rate risks related to marketable securities are managed
by  managing  maturities  in  our  marketable  securities  portfolio. We have no
long-term  debt  as  of  October  2,  2004.

     The  fair  value of our investment portfolio or related income would not be
significantly  impacted  by  changes  in  interest  rates  since  the marketable
securities  maturities  do  not exceed a term of 12 - 14 months and the interest
rates  are  primarily  fixed.

QUALITATIVE DISCLOSURES

  Interest Rate Risk. Our primary interest rate risk exposures relate to:

     -    The  risk  that  available-for-sale  securities  will fall in value if
          market  interest  rates  increase.

     -    The  impact  of  interest  rate  movements  on  our  ability to obtain
          adequate  financing  to  fund  future  operations.

     We  have  the  ability  to  hold  at  least  a  portion of the fixed income
investments  until maturity and therefore would not expect our operating results
or  cash  flows  to  be affected to any significant degree by a sudden change in
market  interest  rates  on  our  short-  and  long-term  marketable  securities
portfolio.

  Management evaluates our financial position on an ongoing basis.

Currency Rate Risk.

     As  all  of  our sales transactions are denominated in U.S. currency, we do
not  hedge  any  balance  sheet  exposures  against  future movements in foreign
exchange rates. The exposure related to currency rate movements would not have a
material  impact  on  future  net  income  or  cash  flows.

ITEM 4.  CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

     Our  management,  with the participation of our Chief Executive Officer and
our  Chief  Financial  Officer,  evaluated  the  effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act  of  1934),  as of the end of the period covered by this Quarterly Report on
Form  10-Q.  Based on that evaluation, our Chief Executive Officer and our Chief
Financial  Officer  concluded  that  our  disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports that
we  file  or  submit  under the Securities Exchange Act of 1934 (i) is recorded,
processed,  summarized  and  reported  within  the time periods specified in the
Securities  and  Exchange Commission rules and forms and (ii) is accumulated and
communicated  to our management, including our Chief Executive Officer and Chief
Financial  Officer,  as appropriate to allow timely decisions regarding required
disclosure.

(b) CHANGES IN INTERNAL CONTROLS


                                       28
<PAGE>
     There  was  no change in our internal control over financial reporting that
occurred  during  the  period covered by this Quarterly Report on Form 10-Q that
has  materially  affected,  or  is  reasonably  likely to materially affect, our
internal  control  over  financial  reporting.



PART II.  OTHER INFORMATION

ITEM  1.  LEGAL PROCEEDINGS
      The Company is not subject to any material legal proceedings as of
      the date of this report.

ITEM  2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
None.

ITEM  3.  DEFAULTS UPON SENIOR SECURITIES
None.

ITEM  4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.

ITEM  5.  OTHER INFORMATION
None.

ITEM  6.  EXHIBITS AND REPORTS ON FORM 8-K
(a)  Exhibits

     31.1 Certification  of  Chief  Executive Officer pursuant to Section 302 of
          the  Sarbanes-Oxley  Act  of  2002.
     31.2 Certification  of  Chief  Financial Officer pursuant to Section 302 of
          the  Sarbanes-Oxley  Act  of  2002.
     32.1 Certification  of  Chief Executive Officer and Chief Financial Officer
          pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
          of  the  Sarbanes-Oxley  Act  of  2002.

(b)  Reports on Form 8-K

     On  July  27,  2004  the  registrant furnished a Current Report on Form 8-K
reporting  under Item 12 of Form 8-K that on July 27, 2004, the Company issued a
press  release  regarding the Company's financial results for the fiscal quarter
ended  July  3,  2004.

     On  September  22,  2004  the registrant filed a Current Report on Form 8-K
reporting  under  Item  5.02  of Form 8-K that effective September 22, 2004, the
registrant's  Board  of Electors elected Garret A. Garrettson as a new member of
the  registrant's  Board  of  Directors.

     On  October  19, 2004 the registrant furnished a Current Report on Form 8-K
reporting under Item 12 of From 8-K that on October 19, 2004, the Company issued
a press release regarding the Company's financial results for the fiscal quarter
ended  October  2,  2004.


                                       29
<PAGE>
TRADEMARK ACKNOWLEDGMENTS

IRIDEX,  the  IRIDEX  logo, IRIS Medical, OcuLight, SmartKey, EndoProbe and Apex
are  our  registered  trademarks.  IRIDERM,  G-Probe, DioPexy, DioVet, TruFocus,
TrueCW,  UltraView,  DioLite  532,  Long  Pulse,  MicroPulse,  ScanLite, ColdTip
(Handpiece),  VariSpot  (Handpiece),  TruView  and EasyFit product names are our
trademarks.  All  other trademarks or trade names appearing in the Form 10-Q are
the  property  of  their  respective  owners.



SIGNATURE

Pursuant  to  the  requirements  of  the  Securities  Exchange  Act of 1934, the
Registrant  has  duly  caused  this  report  to  be  signed on its behalf by the
undersigned  thereunto  duly  authorized.

                                     IRIDEX Corporation
                                     (Registrant)

     Date: November 16, 2004             By: /s/ Larry Tannenbaum
                                             ------------------------
                                             Larry Tannenbaum
                                             Chief Financial Officer and Vice
                                             President, Administration
                                             (Principal Financial,
                                             Principal Accounting Officer and
                                             Authorized Signatory)


                                       30
<PAGE>
                                  EXHIBIT INDEX
                                 --------------


31.1     Certification of Chief Executive Officer pursuant to Section 302 of the
         -----------------------------------------------------------------------
         Sarbanes-Oxley  Act  of  2002.
         ------------------------------

31.2     Certification  of  Chief  Financial  pursuant  to  Section  302  of the
         -----------------------------------------------------------------------
         Sarbanes-Oxley  Act  of  2002.
         ------------------------------

32.1     Certification  of  Chief  Executive Officer and Chief Financial Officer
         -----------------------------------------------------------------------
         pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
         -----------------------------------------------------------------------
         of the Sarbanes-Oxley  Act  of  2002.
         -------------------------------------


                                       31
<PAGE>