##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 Or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-27598
 IRIDEX CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    77-0210467(I.R.S. Employer
Identification Number)1212 Terra Bella Avenue 
Mountain View, California(Address of principal executive offices)
    
    94043-1824(Zip Code))
 Registrants telephone number, including area code: (650) 940-4700
 þ o
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
 PagePART
I FINANCIAL INFORMATIONItem
1. Condensed Consolidated Financial Statements (unaudited)
    
    
    
    1Condensed
Consolidated Balance Sheets
    
    
    
    1Condensed
Consolidated Statements of Operations
    
    
    
    2Condensed
Consolidated Statements of Cash Flows
    
    
    
    3Condensed
Consolidated Statements of Comprehensive Loss
    
    
    
    4Notes
to Unaudited Condensed Consolidated Financial Statements
    
    
    
    5Item
2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    
    15Item
3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    
    20Item
4. Controls and Procedures
    
    
    
    21PART
II. OTHER INFORMATIONItem
1. Legal Proceedings
    
    
    
    24Item
1A. Risk Factors
    
    
    
    24Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    
    45Item
3. Defaults Upon Senior Securities
    
    
    
    45Item
5. Other Information
    
    
    
    46Item
6. Exhibits
    
    
    
    46Signature
    
    
    
    47EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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##### Table of Contents



PART I            FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements (unaudted)
 
 IRIDEX Corporation
Condensed Consolidated Balance Sheets
(in thousands)
 March 31,
    
    
    December 30,2007 (1)
    
    
    2006(2)AssetsCurrent assets:Cash and cash equivalents
    
    $
    9,568
    
    
    $
    21,051Accounts receivable, net
    
    
    9,688
    
    
    
    6,052Inventories
    
    
    13,244
    
    
    
    9,499Prepaids and other current assets
    
    
    2,218
    
    
    
    1,264Total current assets
    
    $
    34,718
    
    
    $
    37,866Property and equipment, net
    
    
    1,789
    
    
    
    1,087Goodwill
    
    
    11,751
    
    
    
    Other intangible assets, net
    
    
    15,841
    
    
    
    Other long term assets
    
    
    324
    
    
    
    1,224Total assets
    
    $
    64,423
    
    
    $
    40,177Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    5,460
    
    
    $
    1,830Short term debt
    
    
    5,236
    
    
    
    Accrued compensation
    
    
    1,849
    
    
    
    1,517Accrued expenses
    
    
    9,686
    
    
    
    2,392Accrued warranty
    
    
    2,336
    
    
    
    866Deferred revenue
    
    
    3,685
    
    
    
    1,415Current portion of long term debt
    
    
    5,901
    
    
    
    Total liabilities
    
    $
    34,153
    
    
    $
    8,020Stockholders equity:Common stock
    
    
    83
    
    
    
    79Additional paid-in capital
    
    
    32,735
    
    
    
    29,697Accumulated other comprehensive loss
    
    
    (9
    )
    
    
    Treasury stock
    
    
    (430
    )
    
    
    (430
    )Retained earnings (accumulated deficit)
    
    
    (2,109
    )
    
    
    2,811Total stockholders equity
    
    
    30,270
    
    
    
    32,157Total liabilities and stockholders equity
    
    $
    64,423
    
    
    $
    40,177
 
 (1)
    
    Unaudited(2)
    
    Derived from the consolidated audited financial statements included in our report filed on
Form 10-K with the SEC for the year ended December 30, 2006.  -1-




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IRIDEX Corporation
Condensed Consolidated Statements of Operations
(Unaudited, in thousands except per share data)
 Three Months EndedMarch 31, 2007
    
    
    April 1, 2006Sales
    
    $
    12,566
    
    
    $
    8,843Cost of sales
    
    
    7,357
    
    
    
    4,581Gross profit
    
    
    5,209
    
    
    
    4,262Operating expenses:Research and development
    
    
    1,729
    
    
    
    1,121Selling, general and administrative
    
    
    8,274
    
    
    
    3,932Total operating expenses
    
    
    10,003
    
    
    
    5,053Loss from operations
    
    
    (4,794
    )
    
    
    (791
    )Interest and other income (expense), net
    
    
    (126
    )
    
    
    179Loss before income taxes
    
    
    (4,920
    )
    
    
    (612
    )Benefit from income taxes
    
    
    
    
    
    
    309Net loss
    
    $
    (4,920
    )
    
    $
    (303
    )Net loss per share  basic and diluted
    
    $
    (0.61
    )
    
    $
    (0.04
    )Shares used in computing net loss per share  basic and diluted
    
    
    8,080
    
    
    
    7,587
  -2-




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IRIDEX Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
 Three Months EndedMarch 31,
    
    
    April 1,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (4,920
    )
    
    $
    (303
    )Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:Depreciation and amortization
    
    
    802
    
    
    
    133Non-cash stock-based compensation
    
    
    356
    
    
    
    457Tax benefit from stock option exercises
    
    
    
    
    
    
    249Excess tax benefit related to stock-based compensation expense
    
    
    
    
    
    
    (124
    )Provision for (recoveries of) doubtful accounts
    
    
    
    
    
    
    (4
    )Provision for inventories
    
    
    285
    
    
    
    67Changes in operating assets and liabilities, net of assets and liabilities acquired:Accounts receivable
    
    
    1,687
    
    
    
    495Inventories
    
    
    (1,327
    )
    
    
    (257
    )Prepaids and other current assets
    
    
    36
    
    
    
    (205
    )Other long term assets
    
    
    (71
    )
    
    
    Accounts payable
    
    
    3,602
    
    
    
    15Accrued warranty
    
    
    (543
    )
    
    
    Accrued expenses
    
    
    880
    
    
    
    (1,153
    )Deferred revenue
    
    
    393
    
    
    
    (59
    )Net cash provided by (used in) operating activities
    
    $
    1,180
    
    
    $
    (689
    )Cash flows from investing activities:Purchases of available-for-sale securities
    
    $
    
    
    
    $
    (15,512
    )Proceeds from maturity of available-for-sale securities
    
    
    
    
    
    
    6,142Purchases of property and equipment
    
    
    (217
    )
    
    
    (69
    )Cash
received from acquisition
    
    
    5,246
    
    
    
    Cash
acquired in acquisition paid to seller
    
    
    (1,261
    )
    
    
    Acquisition of business
    
    
    (28,151
    )
    
    
    Net cash used in investing activities
    
    $
    (24,383
    )
    
    $
    (9,439
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    $
    672
    
    
    $
    605Excess tax benefit related to stock-based compensation expense
    
    
    
    
    
    
    124Proceeds of credit facility, net of issuance costs
    
    
    11,900
    
    
    
    Repayment of credit facility
    
    
    (863
    )
    
    
    Net cash provided by financing activities
    
    $
    11,709
    
    
    $
    729Effect of foreign exchange rate changes
    
    $
    11
    
    
    $
    Net decrease in cash and cash equivalents
    
    
    (11,483
    )
    
    
    (9,399
    )Cash and cash equivalents at beginning of period
    
    $
    21,051
    
    
    $
    12,655Cash and cash equivalents at end of period
    
    $
    9,568
    
    
    $
    3,256
  -3-




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IRIDEX Corporation
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited, in thousands)
 Three Months EndedMarch 31,
    
    
    April 1,2007
    
    
    2006Net loss
    
    $
    (4,920
    )
    
    $
    (303
    )Other comprehensive loss:Change in unrealized loss on available for sale securities, net of tax
    
    
    
    
    
    
    9Foreign currency translation adjustments
    
    
    (9
    )
    
    
    Comprehensive loss
    
    $
    (4,929
    )
    
    $
    (294
    )
  -4-




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IRIDEX Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
 1. Basis of Presentation
    2. Summary of Significant Accounting Policies
  -5-




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Revenue Recognition
   Valuation of Goodwill and Intangible Assets
   -6-




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Deferred Revenue
  Three Months EndedMarch 31,
    
    
    April 1,(in thousands)
    
    2007
    
    
    2006Balance, beginning of period
    
    $
    1,415
    
    
    $
    1,072Additions to deferral through acquisition
    
    
    1,870
    
    
    
    Additions to deferral
    
    
    1,976
    
    
    
    281Revenue recognized
    
    
    (1,576
    )
    
    
    (340
    )Balance, end of period
    
    $
    3,685
    
    
    $
    1,013
 Warranty
  Three Months EndedMarch 31,
    
    
    April 1,(in thousands)
    
    2007
    
    
    2006Balance, beginning of period
    
    $
    866
    
    
    $
    1,128Warranty accrual acquired through acquisition
    
    
    1,771
    
    
    
    Accruals for warranties issued during the period
    
    
    356
    
    
    
    222Settlements made in kind during the period
    
    
    (657
    )
    
    
    (344
    )Balance, end of period
    
    $
    2,336
    
    
    $
    1,006
 Accounting for Uncertainty in Income Taxes
  -7-




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3. Business Combination
   Cash paid on closing
    
    $
    26,000Issuance of common stock
    
    
    2,014Post Closing adjustment to purchase price
    
    
    (675
    )Acquisition costs
    
    
    2,976Total preliminary purchase price
    
    $
    30,315
    Accounts Receivable
    
    $
    5,309Finished Goods Inventory
    
    $
    2,691Other current assets
    
    $
    311Property and equipment
    
    $
    681Intangible assets
    
    $
    16,447Deferred Revenue
    
    $
    (1,870
    )Accrued Warranty
    
    $
    (1,771
    )Accrued Liabilities
    
    $
    (3,234
    )Fair value of net assets acquired
    
    $
    18,564Goodwill
    
    $
    11,751Total preliminary purchase price
    
    $
    30,315
 -8-




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Gross
    
    
    
    
    
    
    Net,Useful
    
    
    Annual
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingIntangible Asset Acquired
    
    Lives
    
    
    Amortization
    
    
    Value
    
    
    Amortization
    
    
    ValueGemini Handset  Core Technology
    
    10 Years
    
    $
    299
    
    
    $
    2,995
    
    
    $
    61
    
    
    $
    2,934Gemini  Current Technology
    
    4 Years
    
    
    1,282
    
    
    
    5,129
    
    
    
    260
    
    
    
    4,869Other Products  Current Technology
    
    1 Year
    
    
    341
    
    
    
    341
    
    
    
    69
    
    
    
    272Accessories  Current Technology
    
    4 Years
    
    
    15
    
    
    
    62
    
    
    
    3
    
    
    
    59Services  Contractual Customer
Relationships
    
    10 Years
    
    
    532
    
    
    
    5,318
    
    
    
    108
    
    
    
    5,210Contractual Distribution Agreement
    
    5 Years
    
    
    370
    
    
    
    1,848
    
    
    
    75
    
    
    
    1,773Trade Name
    
    5 Years
    
    
    151
    
    
    
    754
    
    
    
    30
    
    
    
    724$
    2,990
    
    
    $
    16,447
    
    
    $
    606
    
    
    $
    15,841
    2007
    
    $
    2,8492008
    
    $
    2,6662009
    
    $
    2,6492010
    
    $
    2,6492011
    
    $
    1,413Thereafter
    
    $
    4,221Total
    
    $
    16,447
 -9-




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4. Bank Borrowings
   -10-




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5. Inventories
   March 31,
    
    
    December 30,2007
    
    
    2006Raw materials and work in progress
    
    $
    5,455
    
    
    $
    4,000Finished goods
    
    
    7,789
    
    
    
    5,499Total inventories
    
    $
    13,244
    
    
    $
    9,499
 6. Contingencies
   -11-




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7. Computations of Net Loss Per Common Share
   8. Business Segments
   Three Months Ended March 31, 2007
    
    
    Three Months Ended April 1, 2006Ophthalmology
    
    
    Aesthetics
    
    
    
    
    
    
    Ophthalmology
    
    
    AestheticsMedical
    
    
    Medical
    
    
    
    
    
    
    Medical
    
    
    MedicalDevices
    
    
    Devices
    
    
    Total
    
    
    Devices
    
    
    Devices
    
    
    TotalSales
    
    $
    7,189
    
    
    $
    5,377
    
    
    $
    12,566
    
    
    $
    7,540
    
    
    $
    1,303
    
    
    $
    8,843Direct cost of goods sold
    
    
    2,144
    
    
    
    2,835
    
    
    
    4,979
    
    
    
    2,529
    
    
    
    683
    
    
    
    3,212Direct gross margin
    
    
    5,045
    
    
    
    2,542
    
    
    
    7,587
    
    
    
    5,011
    
    
    
    620
    
    
    
    5,631Total unallocated indirect costs
    
    
    
    
    
    
    
    
    
    
    (12,507
    )
    
    
    
    
    
    
    
    
    
    
    (6,243
    )Pre-tax income (loss)
    
    
    
    
    
    
    
    
    
    $
    (4,920
    )
    
    
    
    
    
    
    
    
    
    $
    (612
    )
   -12-




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9. Stock-based Compensation
 Stand-Alone Options
   Quarter EndedMarch 31,
    
    
    December 30,2007
    
    
    2006Cost of sales
    
    $
    26
    
    
    $
    36Research and development
    
    
    62
    
    
    
    48Sales, general and administrative
    
    
    268
    
    
    
    373$
    356
    
    
    $
    457
 10. Subsequent Events
    -13-




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11. Recent Accounting Pronouncements
  -14-




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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; 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; our ability to integrate the newly acquired aesthetics
business into our core business successfully and in a timely manner; the potential for production
cost decreases and higher gross margins; our ability to develop and introduce new products through
strategic alliances; our ability to reduce spending, including a reduction in the use of
contractors and consultants and a reduction in legal fees; expectations of revenue from the
settlement of litigation; levels of interest income and expense; general economic conditions;
levels of international sales and our current liquidity, ability to obtain additional financing and
impact of concern regarding our ability to continue as a going concern and effects of recent
accounting pronouncements on our financial position. 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 March 30, 2007 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
quarterly report on 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.
 Overview
    -15-




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Results of Operations
  Three Months EndedMarch 31,
    
    
    April 1,2007
    
    
    2006Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of Sales
    
    
    58.5
    %
    
    
    51.8
    %Gross Profit
    
    
    41.5
    %
    
    
    48.2
    %Operating Expenses:Research and development
    
    
    13.8
    %
    
    
    12.7
    %Sales, general and administrative
    
    
    65.8
    %
    
    
    44.4
    %Total operating expenses
    
    
    79.6
    %
    
    
    57.1
    %Loss from operations
    
    
    (38.1
    )%
    
    
    (8.9
    )%Interest and other expense, net
    
    
    (1.0
    )%
    
    
    2.0
    %Loss before income taxes
    
    
    (39.1
    )%
    
    
    (6.9
    )%Benefit from income taxes
    
    
    0.0
    %
    
    
    3.5
    %Net loss
    
    
    (39.1
    )%
    
    
    (3.4
    )%
  Three Months EndedMarch 31, 2007
    
    
    April 1, 2006Percentage of
    
    
    
    
    
    
    Percentage ofAmount
    
    
    total sales
    
    
    Amount
    
    
    total salesDomestic
    
    $
    6,675
    
    
    
    53.1
    %
    
    $
    5,130
    
    
    
    58.0
    %International
    
    
    5,891
    
    
    
    46.9
    %
    
    
    3,713
    
    
    
    42.0
    %Total
    
    
    12,566
    
    
    
    100.0
    %
    
    
    8,843
    
    
    
    100.0
    %Ophthalmology:Domestic
    
    
    4,007
    
    
    
    31.9
    %
    
    
    4,094
    
    
    
    46.3
    %International
    
    
    3,182
    
    
    
    25.3
    %
    
    
    3,446
    
    
    
    39.0
    %Total
    
    
    7,189
    
    
    
    57.2
    %
    
    
    7,540
    
    
    
    85.3
    %Aesthetics:Domestic
    
    
    2,668
    
    
    
    21.2
    %
    
    
    1,036
    
    
    
    11.7
    %International
    
    
    2,709
    
    
    
    21.6
    %
    
    
    267
    
    
    
    3.0
    %Total
    
    $
    5,377
    
    
    
    42.8
    %
    
    $
    1,303
    
    
    
    14.7
    %
 Ophthalmology and Aesthetics Sales Overview:
  -16-




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Ophthalmology Sales
  Aesthetic Sales
  Gross Margin
   -17-




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Research and Development
  Selling, General and Administrative
  Amortization of purchased intangibles
  Interest and Other (expense) income, net.
  -18-




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Income Taxes
  Liquidity and Capital Resources
   
    
    a $1.7 million decrease in accounts receivable;
    
    a $1.3 million increase in inventory;
    
    a $3.6 million increase in accounts payable, and
    
    a $0.9 million increase in accrued expenses.
     -19-




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Item 3. Quantitative and Qualitative Disclosure about Market Risk
 Quantitative Disclosures
  Interest Rate Risk
 -20-




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Qualitative Disclosures
 Interest Rate Risk.
  Currency Rate Risk.
  
 Item 4. Controls and Procedures
     -21-




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Plan for remediation of material weaknesses
  
    
    implementation of additional controls over the preparation and review of key
spreadsheets;
    
    implementation of automated general ledger reports to replace existing key
spreadsheets where possible;
    
    implementation of additional review procedures; and
    
    enhancement of the current capabilities of the finance function.
      -22-




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
    
 Item 1A. Risk Factors
 Factors That May Affect Future Results
  We do not believe that our current liquidity and capital resources will be sufficient to meet
our currently planned operating requirements for the next 12 months and we may not be able to
comply with the restrictive covenants contained in our loan agreements with Mid-Peninsula Bank,
part of Greater Bay Bank N.A., and the Export-Import Bank, despite recent amendments to such loan
agreements.
  -24-




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We Have More Indebtedness and Fewer Liquid Resources After the Acquisition of the Aesthetics
Business of Laserscope, Which Could Adversely Affect Our Cash Flows and Business.
  -26-




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
    
    require us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, thereby reducing funds available for working capital, capital
expenditures, acquisitions and other purposes;
    
    making it more difficult for us to meet our payment and other obligations under our
outstanding debt;
    
    increase our vulnerability to, and limit our flexibility in planning for, adverse
economic and industry conditions;
    
    increase our sensitivity to interest rate increases on our indebtedness with
variable interest rates;
    
    result in an event of default if we fail to comply with the financial and other
restrictive covenants contained in our debt agreements, which event of default could
result in all of our debt becoming immediately due and payable;
    
    affect our credit rating;
    
    limit our ability to obtain additional financing to fund future working capital,
capital expenditures, additional acquisitions and other general corporate requirements;
    
    create competitive disadvantages compared to other companies with less indebtedness;
and
    
    limit our ability to apply proceeds from an offering or asset sale to purposes other
than the repayment of debt.
  Our Loan Agreements Contain Covenant Restrictions that May Limit Our Ability to Operate Our
Business and To Service Our Indebtedness, We Will Require a Significant Amount of Cash. Our
Ability to Generate Cash Flow Depends on Many Factors Beyond Our Control.
  -27-




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Although We Expect that Our Acquisition of the Aesthetics Business of Laserscope Will Result
in Benefits to the Company, the Company May Not Realize Those Benefits Because of Integration and
Other Challenges.
  
    
    coordinating marketing functions;
    
    transferring of the manufacturing of the Laserscope products to the Company;
    
    unanticipated issues in integrating information, communications and other systems;
    
    unanticipated incompatibility of purchasing, logistics, marketing and administration methods;
    
    greater than anticipated liabilities;
    
    retaining key employees, including members of our aesthetics sales force;
    
    consolidating corporate and administrative infrastructures;
    
    the diversion of managements attention from ongoing business concerns;
    
    coordinating our current product and process development efforts with those of the
Aesthetics Business in a way which permits us to bring future new products to the
market in a timely and cost-effective manner; and
    
    coordinating geographically separate organizations.
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Failure to Remediate the Material Weaknesses in Our Disclosure Controls and Procedures in a
Timely Manner, or at All, Could Harm Our Operating Results or Cause Us to Fail to Meet Our
Regulatory or Reporting Obligations.
    The Requirements of Complying with the Sarbanes-Oxley Act of 2002 Might Strain Our Resources,
Which May Adversely Affect Our Business and Financial Condition.
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We Rely on Continued Market Acceptance of Our Existing Products and Any Decline in Sales of
Our Existing Products Would Adversely Affect Our Business and Results of Operations.
  
    
    acceptance of product performance, features, ease of use, scalability and durability;
    
    acceptance of the companys new marketing programs;
    
    recommendations and opinions by ophthalmologists, dermatologists, plastic surgeons,
other clinicians and their associated opinion leaders;
    
    clinical study outcomes;
    
    price of our products and prices of competing products and technologies;
    
    availability of competing products, technologies and alternative treatments; and
    
    level of reimbursement for treatments administered with our products.
  If There is Not Sufficient Demand for the Procedures Performed with Our Products, Practitioner
Demand for Our Products Could be Inhibited, Resulting in Unfavorable Operating Results and Reduced
Growth Potential.
  
    
    evolving customer needs;
    
    the introduction of new products and technologies;
    
    evolving surgical practices;
    
    evolving industry standards;
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
    
    the cost of procedures performed using our products;
    
    the cost, safety and effectiveness of alternative treatments, including treatments
which are not based upon laser- or other light-based technologies and treatments which
use pharmaceutical products;
    
    the success of our sales and marketing efforts; and
    
    consumer confidence, which may be impacted by economic and political conditions.
  Our Future Success Depends on Our Ability to Develop and Successfully Introduce New Products
and New Applications.
  While We Devote Significant Resources to Research and Development, Our Research and
Development May Not Lead to New Products that Achieve Commercial Success.
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The Clinical Trial Process Required to Obtain Regulatory Approvals is Costly and Uncertain,
and Could Result in Delays in New Product Introductions or Even an Inability to Release a Product.
  We Face Strong Competition in Our Markets and Expect the Level of Competition to Grow in the
Foreseeable Future.
  If We Cannot Increase Our Sales Volumes, Reduce Our Costs or Introduce Higher Margin Products
to Offset Anticipated Reductions in the Average Unit Price of Our Products, Our Operating Results
May Suffer.
  We Depend on Sales of Our Ophthalmology Products for a Significant Portion of Our Operating
Results.
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We Depend on International Sales for a Significant Portion of Our Operating Results.
  
    
    differing local product preferences and product requirements;
    
    cultural differences;
    
    changes in foreign medical reimbursement and coverage policies and programs;
    
    political and economic instability;
    
    impact of recessions in economies outside of the United States;
    
    difficulty in staffing and managing foreign operations;
    
    performance of our international distribution channels;
    
    foreign certification requirements, including continued ability to use the CE mark in Europe;
    
    reduced or limited protections of intellectual property rights in jurisdictions
outside the United States;
    
    longer accounts receivable collection periods;
    
    fluctuations in foreign currency exchange rates;
    
    potentially adverse tax consequences; and
    
    multiple protectionist, adverse and changing foreign governmental laws and regulations.
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We Are Exposed to Risks Associated With Worldwide Economic Slowdowns and Related
Uncertainties.
  We Rely on Our Direct Sales Force and Network of International Distributors to Sell Our
Products and any Failure to Maintain Our Direct Sales Force and Distributor Relationships Could
Harm Our Business.
   If We Lose Key Personnel or Fail to Integrate Replacement Personnel Successfully, Our Ability
to Manage Our Business Could Be Impaired.
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If We Fail to Accurately Forecast Demand For Our Product and Component Requirements For the
Manufacture of Our Product, We Could Incur Additional Costs or Experience Manufacturing Delays and
May Experience Lost Sales or Significant Inventory Carrying Costs.
  We Depend on Sole Source or Limited Source Suppliers.
  
    
    unavailability of, shortages or limitations on the ability to obtain supplies of
components in the quantities that we require;
    
    delays in delivery or failure of suppliers to deliver critical components on the
dates we require;
    
    failure of suppliers to manufacture components to our specifications, and
potentially reduced quality; and
    
    inability to obtain components at acceptable prices.
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We Face Risks Associated with our Collaborative and OEM Relationships.
  We Face Manufacturing Risks.
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We Depend on Collaborative Relationships to Produce, Develop, Introduce and Market New
Products, Product Enhancements and New Applications.
  If We Fail to Maintain Our Relationships With Health Care Providers, Customers May Not Buy Our
Products and Our Revenue and Profitability May Decline.
  Our Operating Results May Fluctuate from Quarter to Quarter and Year to Year.
  
    
    general economic uncertainties and political concerns;
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
    
    the timing of the introduction and market acceptance of new products, product
enhancements and new applications;
    
    changes in demand for our existing line of aesthetic 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 aesthetic and ophthalmic products and
foreign and domestic sales;
    
    the effect of regulatory approvals and changes in domestic and foreign regulatory
requirements;
    
    introduction of new products, product enhancements and new applications by our
competitors, entry of new competitors into our markets, pricing pressures and other
competitive factors;
    
    our long and highly variable sales cycle;
    
    changes in the prices at which we can sell our products;
    
    changes in customers or potential customers budgets as a result of, among other
things, reimbursement policies of government programs and private insurers for
treatments that use our products; and
    
    increased product innovation costs.
   Our Stock Price Has Been and May Continue to be Volatile and an Investment in Our Common Stock
Could Suffer a Decline in Value.
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Material Increases in Interest Rates May Harm Our Sales.
  We Are Subject To Government Regulation Which May Cause Us to Delay or Withdraw the
Introduction of New Products or New Applications for Our Products.
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If We Fail to Comply With the FDAs Quality System Regulation and Laser Performance Standards,
Our Manufacturing Operations Could Be Halted, and Our Business Would Suffer.
  If We Modify One of Our FDA Approved Devices, We May Need to Seek Reapproval, Which, if Not
Granted, Would Prevent Us from Selling Our Modified Products or Cause Us to Redesign Our Products.
  We Rely on Patents and Proprietary Rights to Protect our Intellectual Property and Business.
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Because We Do Not Require Training for Users of Our Products, and Sell Our Products to
Non-physicians, There Exists an Increased Potential for Misuse of Our Products, Which Could Harm
Our Reputation and Our Business.
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Some of Our Laser Systems Are Complex in Design and May Contain Defects That Are Not Detected
Until Deployed By Our Customers, Which Could Increase Our Costs and Reduce Our Revenues.
   
    
    loss of customers;
    
    increased costs of product returns and warranty expenses;
    
    damage to our brand reputation;
    
    failure to attract new customers or achieve market acceptance;
    
    diversion of development and engineering resources; and
    
    legal actions by our customers.
  Our Products Could Be Subject to Recalls Even After Receiving FDA Approval or Clearance. A
Recall Would Harm Our Reputation and Adversely Affect Our Operating Results.
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If We Fail to Manage Growth Effectively, Our Business Could Be Disrupted Which Could Harm Our
Operating Results.
  Our Manufacturing Capacity May Not Be Adequate to Meet the Demands of Our Business.
  If Product Liability Claims are Successfully Asserted Against Us, We may Incur Substantial
Liabilities That May Adversely Affect Our Business or Results of Operations.
  Our Operating Results May be Adversely Affected by Changes in Third Party Coverage and
Reimbursement Policies and any Uncertainty Regarding Healthcare Reform Measures.
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The Successful Outcome of Clinical Trials and the Development of New Applications Using
Certain of Our Products will Accelerate Future Revenue Growth Rates.
  If Our Facilities Were To Experience Catastrophic Loss, Our Operations Would Be Seriously
Harmed.
  Our Business is Subject to Environmental Regulations.
   Our Export Controls May Not be Adequate to Ensure Compliance With United States Export Laws,
Especially When We Sell Our Products to Distributors Over Which We Have Limited Control.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
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Item 5. Other Information
  
 Item 6. Exhibits
 10.1
    
    Amended and Restated 1998 Stock Plan31.1
    
    Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 Trademark Acknowledgments
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IRIDEX Corporation (Registrant)Date:
July 6, 2007
    
    By:
    
    /s/ MERYL RAINSMeryl RainsChief Financial Officer and Vice President, Administration(Principal Financial Officer,Chief Accounting Officer and Authorized Signatory)
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Index
 10.1
    
    Amended and Restated 1998 Stock Plan31.1
    
    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.