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  July  3,  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  August  13,  2004  was  7,325,182.


<PAGE>
<TABLE>
<CAPTION>
                                         IRIDEX CORPORATION
                                         TABLE OF CONTENTS


                                                                                               Page
                                                                                               ----
PART I.     FINANCIAL INFORMATION
ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
<S>             <C>                                                                            <C>
                Condensed Consolidated Balance Sheets as of July 3, 2004
                and January 3, 2004                                                               3

                Condensed Consolidated Statements of Operations for the three
                and six months ended July 3, 2004 and June 28, 2003                               4

                Condensed Consolidated Statements of Cash Flows for the six
                months ended July 3, 2004 and June 28, 2003                                       5

                Condensed Consolidated Statements of Comprehensive Income(Loss)
                for the three and six months ended July 3, 2004 and
                June 28, 2003                                                                     6

                Notes to 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                                                                      26

ITEM 4.         CONTROLS AND PROCEDURES                                                          27

PART II.        OTHER INFORMATION

ITEM 1.         LEGAL PROCEEDINGS                                                                28

ITEM 2.         CHANGES IN SECURITIES AND USE OF PROCEEDS                                        28

ITEM 3.         DEFAULTS UPON SENIOR SECURITIES                                                  28

ITEM 4.         SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS                                28

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
</TABLE>


                                        2
<PAGE>
PART I.  FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
---------------------------------------------------

<TABLE>
<CAPTION>
                               IRIDEX CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                   (UNAUDITED)


                                                   JULY 3,    JANUARY 3,
                                                  ---------  ------------
                                                    2004         2004
                                                  ---------  ------------
                    ASSETS
                    ------
<S>                                               <C>        <C>
Current assets:
   Cash and cash equivalents . . . . . . . . . .  $  7,744   $    10,541
   Available-for-sale securities . . . . . . . .    10,736         5,751
   Accounts receivable, net. . . . . . . . . . .     5,926         6,548
   Inventories . . . . . . . . . . . . . . . . .     8,296         8,721
   Prepaids and other current assets . . . . . .       930           934
   Current deferred income taxes . . . . . . . .       972           972
                                                  ---------  ------------
      Total current assets . . . . . . . . . . .    34,604        33,467
   Property and equipment, net . . . . . . . . .       791           850
   Deferred income taxes . . . . . . . . . . . .     1,522         1,522
                                                  ---------  ------------
      Total assets . . . . . . . . . . . . . . .  $ 36,917   $    35,839
                                                  =========  ============

     LIABILITIES AND STOCKHOLDERS' EQUITY
     -------------------------------------
Current liabilities:
   Accounts payable. . . . . . . . . . . . . . .  $    939   $     1,029
   Accrued expenses. . . . . . . . . . . . . . .     3,452         3,380
   Deferred revenue. . . . . . . . . . . . . . .       726           596
                                                  ---------  ------------
      Total liabilities. . . . . . . . . . . . .     5,117         5,005
                                                  ---------  ------------
Stockholders' equity:
   Common stock. . . . . . . . . . . . . . . . .        73            70
   Additional paid-in capital. . . . . . . . . .    24,775        23,900
   Accumulated other comprehensive loss. . . . .       (29)           (1)
   Treasury stock. . . . . . . . . . . . . . . .      (430)         (430)
   Retained earnings . . . . . . . . . . . . . .     7,411         7,295
                                                  ---------  ------------
      Total stockholders' equity . . . . . . . .    31,800        30,834
                                                  ---------  ------------
      Total liabilities and stockholders' equity  $ 36,917   $    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        SIX MONTHS ENDED
                                                           JULY 3,      JUNE 28,    JULY 3,     JUNE 28,
                                                             2004         2003        2004        2003
                                                         ------------  ----------  ----------  ----------
<S>                                                      <C>           <C>         <C>         <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . .  $     8,109   $   7,435   $  15,501   $  14,661
Cost of sales . . . . . . . . . . . . . . . . . . . . .        4,302       4,315       8,479       8,303
                                                         ------------  ----------  ----------  ----------
        Gross profit. . . . . . . . . . . . . . . . . .        3,807       3,120       7,022       6,358
                                                         ------------  ----------  ----------  ----------

Operating expenses:
   Research and development . . . . . . . . . . . . . .        1,277       1,047       2,384       1,997
   Sales, general and administrative. . . . . . . . . .        2,404       2,564       4,597       5,028
                                                         ------------  ----------  ----------  ----------
Total operating expenses. . . . . . . . . . . . . . . .        3,681       3,611       6,981       7,025
                                                         ------------  ----------  ----------  ----------

Income (loss) from operations . . . . . . . . . . . . .          126        (491)         41        (667)
   Interest and other income, net . . . . . . . . . . .           69          51         129         105
                                                         ------------  ----------  ----------  ----------
Income (loss) before income taxes . . . . . . . . . . .          195        (440)        170        (562)
   (Provision for) benefit from income taxes. . . . . .          (62)        141         (54)        181
                                                         ------------  ----------  ----------  ----------
Net income (loss) . . . . . . . . . . . . . . . . . . .  $       133   $    (299)  $     116   $    (381)
                                                         ============  ==========  ==========  ==========

Net income (loss) per share - basic . . . . . . . . . .  $      0.02      ($0.04)  $    0.02      ($0.06)
                                                         ============  ==========  ==========  ==========
Net income (loss) per share - diluted . . . . . . . . .  $      0.02      ($0.04)  $    0.01      ($0.06)
                                                         ============  ==========  ==========  ==========

Shares used in computing net income (loss) per share -
   basic. . . . . . . . . . . . . . . . . . . . . . . .        7,192       6,919       7,134       6,916
                                                         ============  ==========  ==========  ==========
Shares used in computing net income (loss) per share -
   diluted. . . . . . . . . . . . . . . . . . . . . . .        7,786       6,919       7,735       6,916
                                                         ============  ==========  ==========  ==========
</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)


                                                                                                 SIX MONTHS ENDED
                                                                                               JULY 3,     JUNE 28,
                                                                                                 2004        2003
                                                                                              ----------  ----------
<S>                                                                                           <C>         <C>
Cash flows from operating activities:
   Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $     116   $    (381)
   Adjustments to reconcile net income (loss) to net cash provided by operating activities:
      Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . .        214         394
      Provision for inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       (150)        (66)
      Changes in operating assets and liabilities:
         Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        622       1,648
         Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        575         387
         Prepaids and other current assets . . . . . . . . . . . . . . . . . . . . . . . . .          4        (354)
         Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (90)        235
         Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         72        (112)
         Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        130           -
                                                                                              ----------  ----------
      Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . . .      1,493       1,751
                                                                                              ----------  ----------

Cash flows from investing activities:
   Purchases of available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . . .     (9,556)     (4,506)
   Proceeds from maturity of available-for-sale securities . . . . . . . . . . . . . . . . .      4,543       1,842
   Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .       (155)       (173)
                                                                                              ----------  ----------
      Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . .     (5,168)     (2,837)
                                                                                              ----------  ----------

Cash flows from financing activities:
   Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        878          21
                                                                                              ----------  ----------
      Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . . . .        878          21
                                                                                              ----------  ----------
      Net decrease in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . .     (2,797)     (1,065)

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

Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . .  $   7,744   $   8,121
                                                                                              ==========  ==========


      SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
         Change in unrealized losses on available-for-sale securities. . . . . . . . . . . .  $     (28)  $      (4)
</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        SIX MONTHS ENDED
                                                    JULY 3,      JUNE 28,    JULY 3,     JUNE 28,
                                                      2004         2003        2004        2003
                                                  ------------  ----------  ----------  ----------
<S>                                               <C>           <C>         <C>         <C>
Net income (loss). . . . . . . . . . . . . . . .  $       133   $    (299)  $     116   $    (381)
Other comprehensive loss:
     Change in unrealized loss on
          available-for-sale securities, net of
          tax. . . . . . . . . . . . . . . . . .          (14)         (1)        (19)         (3)
                                                  ------------  ----------  ----------  ----------

Comprehensive income (loss)                       $       119   $    (300)  $      97   $    (384)
                                                  ============  ==========  ==========  ==========
</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 July 3, 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  July  3,  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  six months ending July 3, 2004 and June 28, 2003 follows (in
thousands):


                                             Six Months Ended

                                      July 3, 2004    June 28, 2003

        Balance, beginning of period  $         596   $          393

        Additions to deferral                   489              316

        Revenue recognized                     (359)            (183)
                                      --------------  ---------------

        Balance, end of period        $         726   $          526
                                      ==============  ==============




                                        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  six  months ending July 3, 2004 and June 28, 2003
follows  (in  thousands):


                                            Six Months Ended

                                      July 3, 2004    June 28, 2003

        Balance, beginning of period  $         801   $          796

        Additions to deferral                   421              642

        Revenue recognized                     (455)            (721)
                                      --------------  ---------------

        Balance, end of period        $         767   $          717
                                      ==============  ===============


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 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                 Six Months Ended

                            July 3, 2004    June 28, 2003    July 3, 2004    June 28, 2003
<S>                        <C>             <C>              <C>             <C>

Net income (loss), as
reported                   $         133   $         (299)  $         116   $         (381)

Add:  Total stock based
compensation expense,
net of tax, determined
under fair value based
method for all awards to
employees                           (125)            (104)           (269)            (221)
                           --------------  ---------------  --------------  ---------------

Pro forma net income
(loss)                     $           8   $         (403)  $        (153)  $         (602)

Basic net income (loss)
per share:

As reported                $        0.02   $        (0.04)  $        0.02   $        (0.06)
                           ==============  ===============  ==============  ===============

Pro forma                  $        0.00   $        (0.06)  $       (0.02)  $        (0.09)
                           ==============  ===============  ==============  ===============

Diluted net income (loss)
per share:

As reported                $        0.02   $        (0.04)  $        0.01   $        (0.06)
                           ==============  ===============  ==============  ===============

Pro forma                  $        0.00   $        (0.06)  $       (0.02)  $        (0.09)
                           ==============  ===============  ==============  ===============
</TABLE>

     The  determination  of  fair  value  of  all options granted by the Company
includes  assumptions  on expected volatility, risk free interest rate, expected
term  and  expected  dividends.

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):

                                                       JULY 3,    JANUARY 3,
                                                        2004        2004
                                                      --------   -----------
Raw materials and work in progress . . . . . . . . .  $  4,414   $     4,426
Finished goods . . . . . . . . . . . . . . . . . . .     3,882         4,295
                                                      --------   -----------
Total inventories . . . . . . . . . . . . . . . . .   $  8,296   $     8,721
                                                      ========   ===========

4.   CONTINGENCIES

     From  time  to  time,  the Company may be engaged in certain administrative
proceedings,  incidental  to its normal business activities. Management believes
that liabilities resulting from such proceedings, or claims which are pending or
known  to  be threatened, are adequately covered by liability insurance and will
not  have  a  materials  adverse  effect  on the Company's financial position or
results  of  operations.


                                        9
<PAGE>
     In  addition,  the  Company  collects  certain  pass-through taxes from its
customers  in  those  jurisdictions in which it believes it has a requirement to
collect such taxes and remits the sales taxes that it collects to the applicable
taxing authorities. If a taxing authority were to determine that the Company had
failed  to  properly  collect sales taxes from its customers in that authority's
jurisdiction, the Company could be held liable for the amount of any uncollected
taxes  and  such amount could be material. Although no states have asserted that
the Company has failed to properly collect sales taxes from its customers in any
jurisdiction,  the Company is currently researching whether it has a requirement
to  collect  and  remit such sales taxes in any jurisdictions in which it is not
currently  doing  so.

5.   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.
Potential  common  stock consists of incremental common shares issuable upon the
exercise  of  stock  options.

     During  the  three  and  six months ended July 3, 2004, options to purchase
493,869  and  520,853 shares of common stock at weighted average exercise prices
of  $9.06  and  $8.98  per  share,  respectively, 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 and six months ended June 28, 2003, options to
purchase  1,837,487  shares  at  a weighted average exercise price of $5.27 were
outstanding,  but  were not included in the computations of diluted net loss per
share because their effect was antidilutive. These options could dilute earnings
per  share  in  future  periods.

6.   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 six months ended July
3,  2004  and  June  28,  2003  is  as  follows  (in  thousands):

<TABLE>
<CAPTION>
                           Three Months Ended July 3, 2004          Three Months Ended June 28, 2003

                        Ophthalmology   Dermatology     Total    Ophthalmology   Dermatology     Total
                           Medical        Medical                   Medical        Medical
                           Devices        Devices                   Devices        Devices
<S>                     <C>             <C>           <C>        <C>             <C>           <C>

Sales                   $        6,686  $      1,423  $  8,109   $        6,019  $      1,416  $   7,435

Direct Cost of Goods
Sold                             2,211           780     2,991            2,047           681      2,728
                        --------------  ------------  ---------  --------------  ------------  ----------

Direct Gross Margin              4,475           643     5,118            3,972           735      4,707

Total Unallocated
Costs                                                   (4,923)                                   (5,147)
                                                      ---------                                ----------

Pre-tax  income (loss)                                     195                                      (440)
                                                      =========                                ==========
</TABLE>


                                       10
<PAGE>
<TABLE>
<CAPTION>
                             Six Months Ended July 3, 2004            Six Months Ended June 28, 2003

                        Ophthalmology   Dermatology     Total    Ophthalmology   Dermatology     Total
                           Medical        Medical                   Medical        Medical
                           Devices        Devices                   Devices        Devices
<S>                     <C>             <C>           <C>        <C>             <C>           <C>

Sales                   $       12,930  $      2,571  $ 15,501   $       11,742  $      2,919  $  14,661

Direct Cost of Goods
Sold                             4,452         1,427     5,879            4,014         1,387      5,401
                        --------------  ------------  ---------  --------------  ------------  ----------

Direct Gross Margin              8,478         1,144     9,622            7,728         1,532      9,260

Total Unallocated
Costs                                                   (9,452)                                   (9,822)
                                                      ---------                                ----------

Pre-tax  income (loss)                                     170                                      (562)
                                                      =========                                ==========
</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      SIX MONTHS ENDED
                                             JULY 3,     JUNE 28,    JULY 3,    JUNE 28,
                                               2004        2003        2004       2003
                                            ----------  ----------  ----------  ---------
<S>                                         <C>         <C>         <C>         <C>
Sales. . . . . . . . . . . . . . . . . . .     100.0%      100.0%      100.0%     100.0%
Cost of sales. . . . . . . . . . . . . . .      53.1%       58.0%       54.7%      56.6%
                                            ----------  ----------  ----------  ---------
   Gross profit. . . . . . . . . . . . . .      46.9%       42.0%       45.3%      43.4%
                                            ----------  ----------  ----------  ---------
Operating expenses:
   Research and development. . . . . . . .      15.7%       14.1%       15.4%      13.6%
   Sales, general and administrative . . .      29.6%       34.5%       29.7%      34.3%
                                            ----------  ----------  ----------  ---------
      Total operating expenses . . . . . .      45.3%       48.6%       45.1%      47.9%
                                            ----------  ----------  ----------  ---------

Income (loss) from operations. . . . . . .       1.6%       (6.6%)       0.2%      (4.5%)
Interest and other income, net . . . . . .       0.9%        0.7%        0.8%       0.7%
                                            ----------  ----------  ----------  ---------
Income (loss) before income taxes. . . . .       2.5%       (5.9%)       1.0%      (3.8%)
Benefit from (provision for) income taxes.      (0.8%)       1.9%       (0.3%)      1.2%
                                            ----------  ----------  ----------  ---------
Net income (loss). . . . . . . . . . . . .       1.7%       (4.0%)       0.7%      (2.6%)
                                            ==========  ==========  ==========  =========
</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                          Six Months Ended
                      July 3, 2004          June 28, 2003         July 3, 2004          June 28, 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       $ 4,845        59.7%  $ 4,680        62.9%  $ 9,001        58.1%  $ 9,220        62.9%

    International    3,264        40.3%    2,755        37.1%    6,500        41.9%    5,441        37.1%
                   -------  -----------  -------  -----------  -------  -----------  -------  -----------

Total                8,109       100.0%    7,435       100.0%   15,501       100.0%   14,661       100.0%
                   =======  ===========  =======  ===========  =======  ===========  =======  ===========

Ophthalmology:

    Domestic         4,058        50.0%    3,628        48.8%    7,424        47.9%    7,050        48.1%

    International    2,628        32.4%    2,391        32.2%    5,506        35.5%    4,692        32.0%
                   -------  -----------  -------  -----------  -------  -----------  -------  -----------

Total                6,686        82.4%    6,019        81.0%   12,930        83.4%   11,742        80.1%
                   =======  ===========  =======  ===========  =======  ===========  =======  ===========

Dermatology:

    Domestic           787         9.7%    1,052        14.1%    1,577        10.2%    2,170        14.8%

    International      636         7.8%      364         4.9%      994         6.4%      749         5.1%
                   -------  -----------  -------  -----------  -------  -----------  -------  -----------

Total              $ 1,423        17.5%  $ 1,416        19.0%  $ 2,571        16.6%  $ 2,919        19.9%
                   =======  ===========  =======  ===========  =======  ===========  =======  ===========
</TABLE>

     Ophthalmology  Sales

     Ophthalmology  sales  increased  11.1% to $6.7 million for the three months
ended  July  3, 2004 from $6.0 million for the three months ended June 28, 2003.
For  the  six  months ended July 3, 2004, ophthalmology sales increased 10.1% to
$12.9 million from $11.7 million. For the three month period ended July 3, 2004,
domestic  ophthalmology  sales increased 11.9% to $4.1 million from $3.6 million
for  the  three  months  ended  June  28,  2003  due primarily to a $0.6 million
increase in unit sales of delivery devices and service revenue, offset by a $0.1
million  decrease  in unit sales of laser consoles. Domestic ophthalmology sales
increased  5.3%  for the six months ended July 3, 2004 to $7.4 million from $7.1
million  due  to  a  $0.8 million increase in unit sales of delivery devices and
service  revenue,  offset by a $0.5 million decrease in sales of laser consoles.
International  ophthalmology  sales increased 9.9% to $2.6 million for the three
months  ended July 3, 2004 from $2.4 million for the three months ended June 28,
2003.  The  increase in international ophthalmology sales during this period was
due  to  a  $0.2  million increase in unit sales of delivery devices and service
revenue.  Sales of laser consoles remained constant for this period. For the six
months  ended July 3, 2004, international ophthalmology sales increased 17.3% to
$5.5  million  from $4.7 million due to a $0.5 million increase in unit sales of
laser  consoles  and  a $0.3 million increase in unit sales of delivery devices.

     Dermatology  Sales

     Dermatology  sales  remained  constant at $1.4 million for the three months
ended  July  3,  2004  and  June 28, 2003. For the six months ended July 3, 2004
dermatology  sales  decreased  11.9%  to  $2.6  million  from


                                       13
<PAGE>
$2.9  million.  Domestic  dermatology  sales decreased 25.2% to $0.8 million for
the  three  month period ended July 3, 2004 from $1.1 million for the comparable
prior  year  three month period due primarily to a $0.2 million decrease in unit
sales  of  laser  consoles.  For  the  six  months  ended  July 3, 2004 domestic
dermatology  sales  decreased  27.3%  to $1.6 million from $2.2 million due to a
$0.7  million  decrease in unit sales of laser consoles offset by a $0.1 million
increase  in  domestic  dermatology  service revenue.  International dermatology
sales  increased  74.5%  to $0.6 million for the three months ended July 3, 2004
from $0.4 million for the three months ended June 28, 2003 due to a $0.2 million
increase  in  sales  of  laser consoles.  For the six months ended July 3, 2004,
international  dermatology  sales  increased  32.7%  to  $1.0  million from $0.7
million  due  to  a  $0.2 million increase in unit sales of laser consoles and a
$0.1  million  increase  in  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 increased by $0.7 million to $3.8 million
for  the three month periods ended July 3, 2004 compared to $3.1 million for the
three  months ended June 28, 2003. Gross profit as a percentage of sales for the
three months ended July 3, 2004 increased to 46.9% from 42.0% for the comparable
prior  year  three  month  period.  The total 4.9% increase in gross profit as a
percentage  of sales during this period included an increase of 2.7% relating to
lower  manufacturing overhead spending, a 1.7% increase associated with improved
efficiency  related  to higher quarterly revenues, an increase of 0.7% for lower
product  costs  including  warranty  charges,  an  increase of 0.3% for improved
average  selling  prices  offset  by  a  0.5%  decrease related to the impact of
product  mix.  For  the six months ended July 3, 2004, gross profit increased by
$0.7 million to $7.0 million from $6.4 million for the six months ended June 28,
2003.  Gross  profit  as  a percentage of sales for the six months ended July 3,
2004 increased to 45.3% from 43.4%. The total 1.9% increase in gross profit as a
percentage  of  sales  related  to  an increase of 1.0% associated with improved
efficiency  related  to  higher  quarterly  revenues,  an  increase  of 0.5% for
decreased  manufacturing  spending, and increase of 0.3% for lower product costs
including  warranty  charges  and  an  increase of 0.1% related to the impact of
product  mix.  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  21.9%  to  $1.3  million  for  the three months ended July 3, 2004 from $1.0
million  for  the  three  months  ended  June 28, 2003. Research and development
expenses  increased as a percentage of sales to 15.7% for the three months ended
July  3,  2004  from 14.1% 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 July 3, 2004 was due
primarily  to  $0.2  million  in  increased  research  and  development  project
spending.  For  the  six  months  ended  July  3,  2004 research and development
expenses  increased  19.3%  to $2.4 million from $2.0 million for the six months
ended  June 28, 2003. As a percentage of sales, research and development expense
increased  to 15.4% for the six months ended July 3, 2004 from 13.6% for the six
months  ended June 28, 2003. The increase in research and development expense in
absolute  dollars  and  as  a percentage of sales for the six month period ended
July  3,  2004  was  due  primarily  to  $0.4  million in increased research and
development  project  spending.


                                       14
<PAGE>
     Sales,  General  and  Administrative. Our sales, general and administrative
expenses  decreased  by  6.2% to $2.4 million for the three months ended July 3,
2004 from $2.6 million for the three months ended June 28, 2003. As a percentage
of  sales, sales, general and administrative expenses decreased to 29.6% for the
three  months  ended  July  3,  2004  from  34.5%  for the comparable prior year
three-month period. The decrease in sales, general and administrative expense in
absolute  dollars  and as a percentage of sales for the three month period ended
July  3,  2004  was  due  primarily  to  $0.2  million  in decreased spending on
marketing  programs and administrative consulting. For the six months ended July
3, 2004 sales, general and administrative expense decreased 8.6% to $4.6 million
from  $5.0  million  for  the six months ended June 28, 2003. As a percentage of
sales,  sales, general and administrative expense decreased to 29.7% for the six
months ended July 3, 2004 from 34.3% for the six months ended June 28, 2003. The
decrease in sales, general and administrative expense in absolute dollars and as
a  percentage  of  sales  for  the  six  month period ended July 3, 2004 was due
primarily  to  $0.4  million  in  decreased  spending  on marketing programs and
domestic  sales.

     Interest  and Other Income, net. For the three months ended July 3, 2004 we
had  net  other  income of $69,000 as compared with net other income of $ 51,000
for the three months ended June 28, 2003. For the six months ended July 3, 2004,
net other income was $129,000 as compared with $105,000 for the six months ended
June  28,  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 rate for both the three and six
month  periods  ending  July 3, 2004 and June 28, 2003 was 32%. The tax rate for
these  periods  was  lower than the Federal and State combined statutory rate of
40% because of certain tax benefits associated with tax credits for research and
development  activities.

LIQUIDITY  AND  CAPITAL  RESOURCES

     At  July  3,  2004, our primary sources of liquidity included cash and cash
equivalents  and  available-for-sale securities in the aggregate amount of $18.5
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
2004.  As  of  July  3,  2004,  no borrowings were outstanding under this credit
facility.  We  expect to renew the line of credit in October 2004, assuming that
the  terms  continue  to  be  acceptable.

     During  the  six  months  ended July 3, 2004, operating activities provided
$1.5  million  of  cash.  The  primary sources of cash from operating activities
included  a  decrease  in net accounts receivable of $0.6 million, a decrease in
net  inventory of $0.5 million, depreciation of $0.2 million, net income of $0.1
million, an increase in deferred revenue and accrued liabilities of $0.2 million
offset  by  uses  of  cash  which  included  a $0.1 million decrease in accounts
payable.  The  decrease in accounts receivable resulted primarily from continued
focus  on  collection  efforts.  The  decrease in inventory related primarily to
decreased  inventory  purchases  due  to an ongoing inventory reduction program.

     Investing  activities used $5.2 million in cash and cash equivalents during
the three months ended July 3, 2004, primarily due to net purchases of available
for  sale  securities  of  $5.0  million  and  purchases of fixed assets of $0.2
million.

     Net  cash provided by financing activities during the six months ended July
3,  2004  was $0.9 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


                                       15
<PAGE>
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  July  3,  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  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;


     -    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


                                       16
<PAGE>
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 Meditec, 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 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. These variables include 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.


                                       17
<PAGE>
     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 Risks of Manufacturing. 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  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  source.  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,  requiring  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


                                       18
<PAGE>
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 July 3, 2004, our
international  sales  were  $3.3  million or 40.3% 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  risks  including:


          -    Longer  accounts  receivable  collection  periods;


          -    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 July 3, 2004 our ophthalmology sales were $6.7 million or
82.5%  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


                                       19
<PAGE>
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 (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  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  national  level.

     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. We
believe  that  a favorable outcome from the TTT4CNV clinical trial will increase
laser  sales although this process may take a number of years. 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.
We believe that results of the TTT4CNV study for wet AMD will likely be released
during the fourth quarter of 2004. 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. We cannot assure
you that results from the TTT4CNV clinical trial will prove to be successful. If
the  future  results  of  the TTT4CNV clinical trial or any other clinical trial
regarding  our  products  fails  to  demonstrate improved outcomes of treatments


                                       20
<PAGE>
using  our  products,  our ability to generate revenues from new products or new
applications  using  our  products  would be adversely affected and our business
would  be  harmed.

     Our  Operating  Result  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.


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


                                       21
<PAGE>
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  July  3,  2004 our direct sales force consisted of 11 employees
with  3  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 initiated discussions with the FDA regarding patients treated per protocol
in  a  subset  of the Phase III clinical trials and in late March 2004 announced
that  it  had  submitted an NDA/PMA (New Drug Application/Premarket Approval) to
the  FDA seeking marketing approval of SnET2-PDT as a new treatment for patients
with  wet  AMD.  SnET2-PDT has been granted Fast Track product status by the FDA
and the FDA has designated the NDA/PMA as fileable. The Company is the exclusive
provider  of  the  OcuLight  664  activation  laser  used  in


                                       22
<PAGE>
this  application.  Approval by the FDA of the SnET2-PDT product may be obtained
by  October  2004.  Successful  commercialization  of  this product will depend,
among  other  things,  on  acceptance  of this product and Miravant's ability to
successfully  market  and  sell  this  therapy.

     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  two  foreign  patents on the technologies
related  to  our  products  and  processes.  We have approximately three pending
patent  applications  in  the  United  States  and  eight 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 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


                                       23
<PAGE>
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 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.

     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,


                                       24
<PAGE>
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 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.


                                       25
<PAGE>
     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 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 (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 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 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  July  3,  2004.


                                       26
<PAGE>
     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  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 the operating results
or  cash  flows  to  be affected to any significant degree by a sudden change in
market  interest  rates  on  its  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 is recorded,
processed,  summarized  and  reported  within  the time periods specified in the
Securities  and  Exchange  Commission  rules  and  forms.

(b)  CHANGES  IN  INTERNAL  CONTROLS

     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.


                                       27
<PAGE>
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
Our  Annual  Meeting  of Stockholders was held on June 2, 2004 in Mountain View,
California. Of the 7,283,757 shares outstanding as of the record date, 6,334,507
were  present  or represented by proxy at the meeting. The results of the voting
on  the  matters  submitted  to  the  stockholders  are  as  follows:


     1.   To  elect  six  (6)  directors  to serve for the ensuing year or until
          their  successors  are  duly  elected  and  qualified.

                      Name            Votes For      Votes Withheld
               ------------------     ---------      --------------

               Theodore Boutacoff     6,325,597          8,910
               James L. Donovan       6,325,597          8,910
               Donald L. Hammond      6,304,866          29,641
               Joshua Makower         6,296,397          38,110
               Robert K. Anderson     6,296,797          37,710
               Sanford Fitch          6,306,297          28,210


     2.   To  approve an amendment to the 1998 Stock Plan to increase the number
          of  shares of common stock reserved for issuance thereunder by 200,000
          shares,  from  1,500,000  shares  to  1,700,000.

               Votes for:               2,733,770

               Votes against:           1,395,563

               Votes abstaining:           69,500


     3.   To  approve the adoption of the Company's 2005 Employee Stock Purchase
          Plan  with  30,000  shares  of  common  stock  reserved  for  issuance
          thereunder.

               Votes for:               3,899,177
               Votes against:             230,956
               Votes abstaining:           68,700


     4.   To approve the amendment of the Company's 1995 Director Option Plan to
          increase  the  number  of shares of common stock reserved for issuance
          thereunder  by  40,000  shares, from 180,000 shares to 220,000 shares.


                                       28
<PAGE>
               Votes for:               3,817,706
               Votes against:             316,627
               Votes abstaining:           64,500


     5.   To ratify the appointment of PricewaterhouseCoopers LLP as independent
          accountants of the Company for the fiscal year ending January 1, 2005.

               Votes for:               6,233,272
               Votes against:             100,235
               Votes abstaining:            1,000


ITEM 5. OTHER INFORMATION
In  accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added  by  Section  202  of  the  Sarbanes-Oxley  Act of 2002, the Registrant is
responsible  for  disclosing  the  non-audit  services approved by the Company's
Audit  Committee  to  be  performed by PricewaterhouseCoopers LLP, the Company's
independent  auditor.  Non-audit  services  are  defined  in the law as services
other  than  those  provided  in  connection  with  an  audit or a review of the
financial  statements  of  the  Company.  The  additional  engagements  of
PricewaterhouseCoopers  LLP  for the matters listed below are each considered by
the  Company  to  be  audit-related  services  that  are  closely related to the
financial  audit process.  During the third quarter of 2003, the Audit Committee
approved  the  additional engagements of PricewaterhouseCoopers LLP for services
to  be  delivered over the next year in connection with preparation of state and
federal  income  tax  returns  and  review  of  the  Company's filings under the
Securities  Act  of  1933,  as  amended.

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  May  4,  2004  the  registrant  furnished  a Current Report on Form 8-K
reporting  under  Item  12 of Form 8-K that on May 4, 2004, the Company issued a
press  release  regarding the Company's financial results for the fiscal quarter
ended  April  3,  2004.
     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.


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.


                                       29
<PAGE>
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:  August 17, 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>