##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q/A
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended April 1, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Transition period from                                                 to
 Commission
File Number: 0-27598
 IRIDEX CORPORATION
  Delaware
    
    77-0210467(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. employer
identification No.)
 1212 Terra Bella Avenue
Mountain View, California 94043-1824
 (650) 940-4700
 o þ
  o o þ
 o þ




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##### 



IRIDEX Corporation
 Table of Contents
  
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements(unaudited)Condensed Consolidated Balance Sheets as of April 1, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the three months ended April 1, 2006 and April 2, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended April 1, 2006 and April 2, 2005
    
    
    5Condensed Consolidated Statements of Comprehensive Loss for the three months ended April 1, 2006 and April 2, 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    27Item 1A.
    
    Risk Factors
    
    
    27Item 2.
    
    Unregistered
Sales and Equity Securities and Use of Proceeds
    
    
    37Item 3.
    
    Defaults Upon Senior Securities
    
    
    37Item 4.
    
    Submission of
Matters to a Vote of Security Holders
    
    
    37Item 5.
    
    Other Information
    
    
    37Item 6.
    
    Exhibits
    
    
    38Signature
    
    
    39
  2




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##### Table of Contents



Part I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 IRIDEX Corporation
 
 Condensed Consolidated Balance Sheets
 (in thousands)
 (unaudited)
 April 1,
    
    
    December 31,2006
    
    
    2005(restated)AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,256
    
    
    $
    12,655Available-for-sale securities
    
    
    18,166
    
    
    
    8,779Accounts receivable, net
    
    
    6,098
    
    
    
    6,589Inventories
    
    
    8,771
    
    
    
    8,594Prepaids and other current assets
    
    
    1,090
    
    
    
    885Current deferred income taxes
    
    
    1,415
    
    
    
    1,415Total current assets
    
    
    38,796
    
    
    
    38,917Property and equipment, net
    
    
    1,063
    
    
    
    1,114Deferred income taxes
    
    
    1,073
    
    
    
    1,073Total assets
    
    $
    40,932
    
    
    $
    41,104Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    1,109
    
    
    $
    1,094Accrued expenses
    
    
    3,268
    
    
    
    4,421Deferred revenue
    
    
    1,013
    
    
    
    1,072Total liabilities
    
    
    5,390
    
    
    
    6,587Contingencies (Note 5)Stockholders equity:Common stock
    
    
    78
    
    
    
    76Additional paid-in capital
    
    
    27,643
    
    
    
    26,334Accumulated other comprehensive loss
    
    
    (10
    )
    
    
    (27
    )Treasury stock
    
    
    (430
    )
    
    
    (430
    )Retained earnings
    
    
    8,261
    
    
    
    8,564Total stockholders equity
    
    
    35,542
    
    
    
    34,517Total liabilities and stockholders equity
    
    $
    40,932
    
    
    $
    41,104
  3




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##### Table of Contents



IRIDEX Corporation
 
 Condensed Consolidated Statements of Operations
 (in thousands, except per share data)
 (unaudited)
 Three Months EndedApril 1,
    
    
    April 2,2006
    
    
    2005(restated)Sales
    
    $
    8,843
    
    
    $
    8,145Cost of sales
    
    
    4,581
    
    
    
    4,467Gross profit
    
    
    4,262
    
    
    
    3,678Operating expenses:Research and development
    
    
    1,121
    
    
    
    1,039Sales, general and administrative
    
    
    3,932
    
    
    
    2,797Total operating expenses
    
    
    5,053
    
    
    
    3,836Loss from operations
    
    
    (791
    )
    
    
    (158
    )Interest and other income, net
    
    
    179
    
    
    
    126Loss before income taxes
    
    
    (612
    )
    
    
    (32
    )Benefit from income taxes
    
    
    309
    
    
    
    12Net loss
    
    $
    (303
    )
    
    $
    (20
    )Net loss per share  basic and diluted
    
    ($
    0.04
    )
    
    ($
    0.00
    )Shares used in computing net loss per share 
basic and diluted
    
    
    7,587
    
    
    
    7,317
  4




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##### Table of Contents



IRIDEX Corporation
 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 (unaudited)
 Three Months EndedApril 1,
    
    
    April 2,2006
    
    
    2005(restated)Cash flows from operating activities:Net loss
    
    $
    (303
    )
    
    $
    (20
    )Adjustments to reconcile net loss to
net cash used in operating activities:
    
    
    
    
    
    
    Depreciation and amortization
    
    
    133
    
    
    
    113Stock-based compensation
    
    
    457
    
    
    
    Tax benefit from stock option exercises
    
    
    249
    
    
    
    Excess tax benefit related to stock-based compensation
expense
    
    
    (124
    )
    
    
    Provision
for doubtful accounts
    
    
    (4
    )
    
    
    (5
    )Provision
for excess and obsolete inventories
    
    
    67
    
    
    
    57Changes in operating assets and liabilities:Accounts receivable
    
    
    495
    
    
    
    561Inventories
    
    
    (257
    )
    
    
    (646
    )Prepaids and other current assets
    
    
    (205
    )
    
    
    (264
    )Accounts payable
    
    
    15
    
    
    
    (54
    )Accrued expenses
    
    
    (1,153
    )
    
    
    (1,109
    )Deferred revenue
    
    
    (59
    )
    
    
    52Net cash used in operating activities
    
    
    (689
    )
    
    
    (1,315
    )Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (15,512
    )
    
    
    (7,151
    )Proceeds from maturity of available-for-sale securities
    
    
    6,142
    
    
    
    4,331Acquisition of property and equipment
    
    
    (69
    )
    
    
    (115
    )Net cash used in investing activities
    
    
    (9,439
    )
    
    
    (2,935
    )Cash flows from financing activities:Issuance of common stock
    
    
    605
    
    
    
    71Excess tax benefit related to stock-based compensation expense
    
    
    124
    
    
    
    Net cash provided by financing activities
    
    
    729
    
    
    
    71Net decrease in cash and cash equivalents
    
    
    (9,399
    )
    
    
    (4,179
    )Cash and cash equivalents at beginning of period
    
    
    12,655
    
    
    
    10,381Cash and cash equivalents at end of period
    
    $
    3,256
    
    
    $
    6,202
  5




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##### Table of Contents



IRIDEX Corporation
 
 Condensed Consolidated Statements of Comprehensive Loss
 (in thousands)
 (unaudited)
 Three Months EndedApril 1,
    
    
    April 2,2006
    
    
    2005(restated)Net loss
    
    $
    (303
    )
    
    $
    (20
    )Other comprehensive income (loss):Change in unrealized gain (loss) on
available-for-sale
securities, net of tax
    
    
    9
    
    
    
    (16
    )Comprehensive loss
    
    $
    (294
    )
    
    $
    (36
    )
  6




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##### Table of Contents



IRIDEX Corporation
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1. Basis of Presentation
   2. Restatement
    
    
    Recognition of $101,000 of revenue related to sales in which the customer was
provided non-standard return rights. The Company also adjusted $64,000 of associated
cost of sales and related commissions of $6,000;
    
    Failure to defer revenue of $48,000 related to sales in which title transfer did
not occur prior to the end of the reporting period. The Company also adjusted $20,000
of associated cost of sales and related commissions of $3,000; and
    
    Failure to defer revenue of $18,000 related to the fair value of an undelivered
elements under sales arrangements with a multiple-elements. No adjustment to cost of
sales or operating expenses was required for this transaction.
    
    Tax benefit and accruals for income tax payable increased by $35,000 as a result of
the adjustments detailed above.
 7




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Condensed Consolidated Balance Sheet April 1, 2006As restated
    
    Adjustment
    
    As previously reportedAccounts receivable, net
    
    $
    6,098
    
    
    
    ($149
    )
    
    $
    6,247Inventories
    
    
    8,771
    
    
    
    84
    
    
    
    8,687Total current assets
    
    
    38,796
    
    
    
    (65
    )
    
    
    38,861Total assets
    
    
    40,932
    
    
    
    (65
    )
    
    
    40,997Accrued liabilities
    
    
    3,268
    
    
    
    (44
    )
    
    
    3,312Deferred revenue
    
    
    1,013
    
    
    
    18
    
    
    
    995Total liabilities
    
    
    5,390
    
    
    
    (26
    )
    
    
    5,416Retained earnings
    
    
    8,261
    
    
    
    (39
    )
    
    
    8,300Total stockholders equity
    
    
    35,542
    
    
    
    (39
    )
    
    
    35,581
 Condensed Consolidated Statement of Operationsfor the three months ended April 1, 2006As restated
    
    Adjustment
    
    As previously reportedSales
    
    $
    8,843
    
    
    
    ($167
    )
    
    $
    9,010Cost of sales
    
    
    4,581
    
    
    
    (84
    )
    
    
    4,665Gross profit
    
    
    4,262
    
    
    
    (83
    )
    
    
    4,345Loss from operations
    
    
    (791
    )
    
    
    (74
    )
    
    
    (717
    )Benefit from income taxes
    
    
    309
    
    
    
    35
    
    
    
    274Net loss
    
    
    (303
    )
    
    
    (39
    )
    
    
    (264
    )Net loss per share, basic
and diluted
    
    
    ($0.04
    )
    
    
    (0.01
    )
    
    
    ($0.03
    )
  8




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3. Summary of Significant Accounting Policies
  Revenue Recognition
    Three Months EndedApril 1, 2006
    
    
    April 2, 2005(restated)Balance, beginning of period
    
    $
    1,072
    
    
    $
    910Additions to deferral
    
    
    281
    
    
    
    397Revenue recognized
    
    
    (340
    )
    
    
    (345
    )Balance, end of period
    
    $
    1,013
    
    
    $
    962
   9




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##### Table of Contents



Three Months EndedApril 1, 2006
    
    
    April 2, 2005Balance, beginning of period
    
    $
    1,128
    
    
    $
    933Accruals for warranties issued during the period
    
    
    222
    
    
    
    167Settlements made in kind during the period
    
    
    (344
    )
    
    
    (144
    )Balance, end of period
    
    $
    1,006
    
    
    $
    956
 4. Inventories
  April 1,
    
    
    December 31,2006
    
    
    2005(restated)Raw materials and work in progress
    
    $
    5,808
    
    
    $
    5,191Finished goods
    
    
    2,963
    
    
    
    3,403Total inventories
    
    $
    8,771
    
    
    $
    8,594
 5. Contingencies
     10




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6. Computations of Net Loss Per Common Share
   7. Business Segments
   Three Months Ended April 1, 2006
    
    Three Months Ended April 2, 2005Dermatology
    
    Total
    
    Ophthalmology
    
    Dermatology
    
    TotalOphthalmology
    
    Medical
    
    
    
    Medical
    
    MedicalMedical Devices
    
    Devices
    
    
    
    
    
    Devices
    
    Devices(restated)
    
    (restated)Sales
    
    $
    7,540
    
    
    $
    1,303
    
    
    $
    8,843
    
    
    $
    6,193
    
    
    $
    1,952
    
    
    $
    8,145Direct cost of sales
    
    
    2,529
    
    
    
    683
    
    
    
    3,212
    
    
    
    2,099
    
    
    
    996
    
    
    
    3,095Direct gross margin
    
    
    5,011
    
    
    
    620
    
    
    
    5,631
    
    
    
    4,094
    
    
    
    956
    
    
    
    5,050Total unallocated costs
    
    
    
    
    
    
    
    
    
    
    (6,243
    )
    
    
    
    
    
    
    
    
    
    
    (5,082
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    $
    (612
    )
    
    
    
    
    
    
    
    
    
    $
    (32
    )
 11




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##### Table of Contents



8. Stockbased Compensation
 Employee Stock Purchase Plan
  Stock Option Plans
 Amended and Restated 1989 Incentive Stock P lan
  1998 Stock Plan
  12




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##### Table of Contents



1995 Director Option Plan
    Stand-Alone Options
   Stock-Based Compensation
   13




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##### Table of Contents



Employee Stock Option Plan
    
    Employee Stock Purchase PlanThree Months Ended
    
    Three Months Ended
    
    Three Months Ended
    
    Three Months EndedApril 1, 2006
    
    April 2, 2005
    
    April 1, 2006
    
    April 2, 2005Average risk free interest rate
    
    
    4.50
    %
    
    
    3.38
    %
    
    
    4.60
    %
    
    
    2.50
    %Expected life (in years)
    
    
    3.6
    
    
    
    3
    
    
    
    0.5
    
    
    
    0.5Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average volatility
    
    
    50.0
    %
    
    
    86.0
    %
    
    
    45.0
    %
    
    
    85.0
    %
   Cost of sales
    
    $
    36Research and development
    
    
    48Sales, general and administrative
    
    
    373$
    457
   14




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##### Table of Contents



Three Months Ended April 2, 2005Net loss, as reported for prior periods
    
    $
    (20
    )Stock-based compensation expense
related to employee stock options and
employee stock purchases
    
    
    (125
    )Pro forma net loss
    
    $
    (145
    )Basic and diluted net loss per share:As reported
    
    $
    (0.00
    )Pro forma
    
    $
    (0.02
    )
   Weighted Average
    
    
    Aggregate IntrinsicShares
    
    
    Exercise Price
    
    
    ValueOutstanding at December 31, 2005
    
    
    2,154,003
    
    
    $
    5.50
    
    
    $
    14,518Options granted
    
    
    102,500
    
    
    
    8.18
    
    
    
    416Options exercised
    
    
    (115,590
    )
    
    
    4.19
    
    
    
    (930
    )Options forfeited/cancelled/expired
    
    
    (9,609
    )
    
    
    6.04
    
    
    
    (59
    )Outstanding at April 1, 2006
    
    
    2,131,304
    
    
    
    5.70
    
    
    $
    13,945
    15




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##### Table of Contents



Three MonthsEnded April 1,2006Stock-based compensation expense by award type:Employee stock options granted
    
    $
    447Employee stock purchase plan
    
    
    10Total stock-based compensation
    
    
    457Total effect on stock-based compensation at the Companys
marginal tax rate
    
    
    (183
    )Effect on net loss
    
    $
    274Effect on net loss per share:Basic and diluted
    
    $
    (0.04
    )
  Weighted AverageGrant Dated FairNumber of Shares
    
    ValueNon-vested at December 31, 2005
    
    
    893,119
    
    
    $
    5.72Granted
    
    
    102,500
    
    
    
    8.18Vested
    
    
    (56,515
    )
    
    
    4.60Cancelled/forfeited
    
    
    (9,609
    )
    
    
    6.04Non-vested at April 1, 2006
    
    
    929,495
    
    
    
    6.06
  16




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Options Outstanding
    
    
    Options Vested and ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average
    
    
    Weighted
    
    
    Number of
    
    
    Weighted
    
    
    AverageShares
    
    
    Remaining
    
    
    Average
    
    
    Shares
    
    
    Average
    
    
    RemainingRange of
    
    Outstanding at
    
    
    Contractual
    
    
    Exercise
    
    
    Exercisable at
    
    
    Exercise
    
    
    ContractualExercise Prices
    
    April 1, 2006
    
    
    Life (Years)
    
    
    Price
    
    
    April 1, 2006
    
    
    Price
    
    
    Life (Years)$2.94 - $3.50
    
    
    260,530
    
    
    
    6.93
    
    
    $
    3.36
    
    
    
    189,314
    
    
    $
    3.38
    
    
    
    6.81$3.52 - $4.00
    
    
    352,796
    
    
    
    3.51
    
    
    $
    3.87
    
    
    
    333,453
    
    
    $
    3.88
    
    
    
    4.36$4.01- $5.00
    
    
    221,020
    
    
    
    5.24
    
    
    $
    4.42
    
    
    
    181,643
    
    
    $
    4.41
    
    
    
    6.21$5.08 - $5.50
    
    
    224,709
    
    
    
    6.79
    
    
    $
    5.24
    
    
    
    87,375
    
    
    $
    5.27
    
    
    
    6.22$5.56 - $6.00
    
    
    118,750
    
    
    
    8.36
    
    
    $
    5.64
    
    
    
    45,705
    
    
    $
    5.61
    
    
    
    8.60$6.07 - $6.07
    
    
    325,000
    
    
    
    9.26
    
    
    $
    6.07
    
    
    
    25,000
    
    
    $
    6.07
    
    
    
    9.26$6.19 - $7.63
    
    
    228,799
    
    
    
    6.77
    
    
    $
    6.84
    
    
    
    111,508
    
    
    $
    7.05
    
    
    
    7.79$7.98 - $8.88
    
    
    264,950
    
    
    
    6.16
    
    
    $
    8.40
    
    
    
    97,748
    
    
    $
    8.72
    
    
    
    5.70$9.00 - $12.75
    
    
    131,000
    
    
    
    4.34
    
    
    $
    9.65
    
    
    
    126,313
    
    
    $
    9.68
    
    
    
    4.04$14.88 - $14.88
    
    
    3,750
    
    
    
    0.25
    
    
    $
    14.88
    
    
    
    3,750
    
    
    $
    14.88
    
    
    
    0.25$2.94 - $14.88
    
    
    2,131,304
    
    
    
    6.29
    
    
    $
    5.70
    
    
    
    1,201,809
    
    
    $
    5.41
  9. Recent Accounting Pronouncements
    17




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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 This Quarterly Report on Form 10-Q/A 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 age related macular degeneration (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 3, 2006 and detailed from time to time
in our reports filed with the Securities and Exchange Commission. The reader is cautioned not to
place undue reliance on these forward-looking statements, which reflect managements analysis only
as of the date of this Quarterly Report on Form 10-Q/A . We undertake no obligation to update such
forward-looking statements to reflect events or circumstances occurring after the date of this
report.
 Restatement
    
    
    Recognition of $101,000 of revenue related to sales in which the customer was
provided non-standard return rights. The Company also adjusted $64,000 of associated
cost of sales and related commissions of $6,000;
    
    Failure to defer revenue of $48,000 related to sales in which title transfer did
not occur prior to the end of the reporting period. The Company also adjusted $20,000
of associated cost of sales and related commissions of $3,000; and
    
    Failure to defer revenue of $18,000 related to the fair value of an undelivered
elements under sales arrangements with a multiple-elements. No adjustment to cost of
sales or operating expenses was required for this transaction.
    
    Tax benefit and accruals for income tax payable increased by $35,000 as a result of
the adjustments detailed above.
 18




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##### Table of Contents



Overview
   Results of Operations
  Three Months EndedApril 1,
    
    April 2,2006
    
    2005(restated)Sales
    
    
    100.0
    %
    
    
    100.0
    %Loss from operations
    
    
    (8.9
    )%
    
    
    (1.9
    )%Loss from operations excluding stock-based
compensation expense
    
    
    (3.8
    %)
    
    
    (1.9
    )%Net loss
    
    
    (3.4
    )%
    
    
    (0.3
    )%Net profit/(loss) excluding stock-based
compensation expense
    
    
    1.7
    %
    
    
    (0.3
    )%
 19




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Three Months EndedApril 1, 2006
    
    
    April 2, 2005Percentage of
    
    
    
    
    
    
    Percentage ofAmount
    
    

total sales
    
    
    Amount
    
    

total sales(restated)
    
    
    (restated)Domestic
    
    $
    5,130
    
    
    
    58.0
    %
    
    $
    4,925
    
    
    
    60.5
    %International
    
    
    3,713
    
    
    
    42.0
    %
    
    
    3,220
    
    
    
    39.5
    %Total
    
    
    8,843
    
    
    
    100.0
    %
    
    
    8,145
    
    
    
    100.0
    %Ophthalmology:Domestic
    
    
    4,094
    
    
    
    46.3
    %
    
    
    3,413
    
    
    
    41.9
    %International
    
    
    3,446
    
    
    
    39.0
    %
    
    
    2,780
    
    
    
    34.1
    %Total
    
    
    7,540
    
    
    
    85.3
    %
    
    
    6,193
    
    
    
    76.0
    %Dermatology:Domestic
    
    
    1,036
    
    
    
    11.7
    %
    
    
    1,512
    
    
    
    18.6
    %International
    
    
    267
    
    
    
    3.0
    %
    
    
    440
    
    
    
    5.4
    %Total
    
    $
    1,303
    
    
    
    14.7
    %
    
    $
    1,952
    
    
    
    24.0
    %Total recurring revenue
    
    $
    3,780
    
    
    
    42.7
    %
    
    $
    3,096
    
    
    
    38.0
    %Total non-recurring revenue
    
    $
    5,063
    
    
    
    57.3
    %
    
    $
    5,049
    
    
    
    62.0
    %
 Ophthalmology and Dermatology Sales Overview
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Ophthalmology Sales
  Dermatology Sales
  Gross Margin
 Three Months EndedApril 1,
    
    April 2,2006
    
    2005(restated)Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    51.8
    %
    
    
    54.8
    %Gross profit
    
    
    48.2
    %
    
    
    45.2
    %Gross profit excluding stock-based
compensation expense
    
    
    48.6
    %
    
    
    45.2
    %
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Research and Development
 Three Months EndedApril 1,
    
    April 2,2006
    
    2005(restated)Research and development expense as a percentage of total revenue
    
    
    12.7
    %
    
    
    12.8
    %Research and development expense as a percentage of total
revenue excluding stock-based compensation expense
    
    
    12.1
    %
    
    
    12.8
    %
  Selling, General and Administrative
 Three Months EndedApril 1,
    
    April 2,2006
    
    2005(restated)Selling, general and administrative expense as a percentage of total revenue
    
    
    44.4
    %
    
    
    34.3
    %Selling, general and administrative expense as a percentage of total
revenue excluding stock-based compensation expense
    
    
    40.3
    %
    
    
    34.3
    %
  Interest and Other Income, net.
 Income
Taxes
 Liquidity and Capital Resources
  22




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Accounting Policies
    23




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Item 3. Quantitative and Qualitative Disclosure about Market Risk
 Quantitative Disclosures
  Interest Rate Risk
  Qualitative Disclosures
 Interest Rate Risk
 
    
    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.
   Currency Rate Risk.
 
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
 a) Evaluation of disclosure controls and procedures.
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Plan for remediation of material weaknesses.
   
    
    implementation of additional controls over the preparation and review of key
spreadsheets;
    
    implementation of automated general ledger reports to replace existing key spreadsheets
where possible;
    
    correction of a system-generated custom report to include additional information
necessary to prepare accurate financial information;
    
    implementation of additional review procedures; and.
    
    enhancement of the current capabilities of the finance function.
  
    
    reassignment of responsibilities for oversight of the sales function and
responsibilities for internal control over sales transactions;
    
    provision of additional training on a recurring basis for all domestic sales personnel
on revenue recognition policies and procedures;
    
    establishment of annual formal training for our customer service group on revenue
recognition policies and procedures;
    
    establishment of a checklist for use by our customer service group in processing
revenue transactions to verify proper recognition of revenue and establishment of a procedure by which the checklist is signed off by the preparer and
at least one reviewer;
    
    establishment of internal audit procedures over all domestic laser sale transactions;
and
    
    formalization of our sales returns process to include more thorough documentation,
review and approval for all returns.
   b) Changes in internal control over financial reporting
  26




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
 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.
 
    
    Acceptance of product performance, features, ease of use, scalability and durability;
    
    Acceptance of the companys new marketing programs;
    
    Recommendations and opinions by ophthalmologists, dermatologists, other
clinicians, plastic surgeons and their associated opinion leaders, including study
outcomes;
    
    Price of our products and prices of competing products and technologies;
    
    Availability of competing products, technologies and alternative treatments; and
    
    Level of reimbursement for treatments administered with our products.
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We Face Strong Competition in Our Markets and Expect the Level of Competition to Grow in the
Foreseeable Future.
 Our Future Success Depends on Our Ability to Develop and Successfully Introduce New Products
and New Applications
 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.
 28




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We Depend on Sales of Our Ophthalmology Products for a Significant Portion of Our Operating
Results
 We Depend on International Sales for a Significant Portion of Our Operating Results
 
    
    Impact of recessions in economies outside of the United States;
    
    Performance of our international channel of distributors;
    
    Foreign certification requirements, including continued ability to use the
CE mark in Europe;
    
    Reduced or limited protections of intellectual property rights in
jurisdictions outside the United States;
    
    Longer accounts receivable collection periods;
    
    Potentially adverse tax consequences; and
    
    Multiple protectionist, adverse and changing foreign governmental laws and
regulations.
  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.
  29




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Failure to Remediate the Material Weaknesses in Our Disclosure Controls and Procedures in
a Timely Manner, or At All, Could Harm Our Operating Results or Cause Us to Fail to Meet Our
Regulatory or Reporting Obligations.
   If We Lose Key Personnel or Fail to Integrate Replacement Personnel Successfully, Our Ability
to Manage Our Business Could Be Impaired
 We Face Manufacturing Risks
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If We Fail to Accurately Forecast Demand For Our Product and Component Requirements For the
Manufacture of Our Product, We Could Incur Additional Costs or Experience Manufacturing Delays and
May Experience Lost Sales or Significant Inventory Carrying Costs.
 We Depend on Sole Source or Limited Source Suppliers.
 
    
    Unavailability of, shortages or limitations on the ability to obtain supplies of
components in the quantities that we require;
    
    Delays in delivery or failure of suppliers to deliver critical components on the
dates we require;
    
    Failure of suppliers to manufacture components to our specifications, and
potentially reduced quality; and
    
    Inability to obtain components at acceptable prices.
 .
 Our Operating Results May Fluctuate from Quarter to Quarter and Year to Year
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
    
    General economic uncertainties and political concerns;
    
    The timing of the introduction and market acceptance of new products, product
enhancements and new applications;
    
    Changes in demand for our existing line of dermatology and ophthalmic products;
    
    The cost and availability of components and subassemblies, including the ability of our
sole or limited source suppliers to deliver components at the times and prices that we have
planned;
    
    Our ability to maintain sales volumes at a level sufficient to cover fixed manufacturing
and operating costs;
    
    Fluctuations in our product mix between dermatology and ophthalmic products and foreign
and domestic sales;
    
    The effect of regulatory approvals and changes in domestic and foreign regulatory
requirements;
    
    Introduction of new products, product enhancements and new applications by our
competitors, entry of new competitors into our markets, pricing pressures and other
competitive factors;
    
    Our long and highly variable sales cycle;
    
    Changes in the prices at which we can sell our products;
    
    Changes in customers or potential customers budgets as a result of, among other
things, reimbursement policies of government programs and private insurers for treatments
that use our products; and
    
    Increased product innovation costs.
   Our Stock Price Has Been and May Continue to be Volatile and an Investment in Our Common Stock
Could Suffer a Decline in Value.
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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.
   We Depend on Collaborative Relationships to Develop, Introduce and Market New Products,
Product Enhancements and New Applications
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We Face Risks Associated with our Collaborative and OEM Relationships.
 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.
   We Rely on Patents and Proprietary Rights to Protect our Intellectual Property and Business
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The Requirements of Complying with the Sarbanes-Oxley Act of 2002 Might Strain Our Resources,
Which May Adversely Affect Our Business and Financial Condition
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Our Operating Results May be Adversely Affected by Changes in Third Party Coverage and
Reimbursement Policies and any Uncertainty Regarding Healthcare Reform Measures.
  If Product Liability Claims are Successfully Asserted Against Us, We may Incur Substantial
Liabilities That May Adversely Affect Our Business or Results of Operations.
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If We Fail to Manage Growth Effectively, Our Business Could Be Disrupted Which Could Harm Our
Operating Results.
 If Our Facilities Were To Experience Catastrophic Loss, Our Operations Would Be Seriously
Harmed.
 We May Need Additional Capital, which May Not Be Available, and Our Ability to Grow May be
Limited as a Result.
 The Successful Outcome of Clinical Trials and the Development of New Applications Using
Certain of Our Products will Accelerate Future Revenue Growth Rates.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4.
Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  37




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Item 6. 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 pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 Trademark Acknowledgments
  38




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SIGNATURE
  IRIDEX Corporation(Registrant)Date: December 22, 2006
    By:
    /s/   Larry TannenbaumLarry TannenbaumChief Financial Officer and Vice President, Administration
(Principal Financial, Principal Accounting
 Officer and Authorized Signatory) 39




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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 Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.