**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

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**FORM 10-Q**

**(Mark one)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended June 30, 2007**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from                        to                             .**

**Commissionfile number:    0-23633***    *

**1-800 CONTACTS, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                     |   | **87-0571643**                        |
|----------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |   |                                  |
|                             |   |                                  |

 

| **66 E. Wadsworth Park Drive,**           |   |       |
|-------------------------------------------|--------|------------|
| **Draper,  UT**                           |   | **84020**  |
| (Address of  principal executive offices) |   | (Zip Code) |

 

**(801) 316-5000**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.

x  Yes    o  No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer (asdefined in Rule 12b-2 of the Exchange Act).

| Large accelerated  filer  o |   | Accelerated  filer  x |   | Non-accelerated  filer  o |
|---------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

o  Yes    x  No

As of August 6, 2007, the Registrant had 14,082,594shares of Common Stock, par value $0.01 per share, outstanding.

 

 

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**1-800CONTACTS, INC.**

**INDEX**
|                                    | ** ** | ** **                                                                                                                       | ** ** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART  I. FINANCIAL INFORMATION** |       |                                                                                                                             |
| Item  1.                           |       | Financial  Statements (unaudited)                                                                                                |       |       |
|                               |       | Condensed Consolidated Balance Sheets as of December 30,  2006 and June 30, 2007                                       |       |       |
|                               |       | Condensed Consolidated Statements of Operations for  the Quarter and Two Quarters ended July 1, 2006 and June 30, 2007 |       |       |
|                               |       | Condensed Consolidated Statements of Cash Flows for  the Two Quarters ended July 1, 2006 and June 30, 2007             |       |       |
|                               |       | Notes to Condensed Consolidated Financial Statements                                                                             |       |       |
| Item 2.                            |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                      |       |       |
| Item 3.                            |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                 |       |       |
| Item 4.                            |       | Controls and Procedures                                                                                                          |       |       |
|                               |       |                                                                                                                             |       |       |
| **PART  II. OTHER INFORMATION**    |       |                                                                                                                             |
| Item  1.                           |       | Legal  Proceedings.                                                                                                              |       |       |
| Item 1A.                           |       | Risk Factors                                                                                                                     |       |       |
| 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                                                                                                               |       |       |
| Item 6.                            |       | Exhibits                                                                                                                         |       |       |

 

2

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**PART 1.FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**1-800 CONTACTS, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)(unaudited)**
| ** **                                             | ** ** | **December 30,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                             | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| **ASSETS**                                             | ** ** | ** **            | ** ** | ** **        | ** ** |
| CURRENT ASSETS:                                        |       |                  |       |              |       |
| Cash                                                   |       | $                     | 75         |              | $          | 5,560 |   |
| Marketable securities                                  |       | —                |       | 3,865             |       |
| Income tax receivable                                  |       | —                |       | 11,772            |       |
| Other  receivables                                     |       | 1,825                 |       | 2,155             |       |
| Inventories                                            |       | 12,689                |       | 14,446            |       |
| Deferred income  taxes                                 |       | 1,886                 |       | 2,849             |       |
| Current assets  of discontinued operations             |       | 19,682                |       | 4,648             |       |
| Other current  assets                                  |       | 1,009                 |       | 983               |       |
| Total current  assets                                  |       | 37,166                |       | 46,278            |       |
| PROPERTY AND EQUIPMENT,  net                           |       | 7,648                 |       | 7,147             |       |
| DEFERRED INCOME TAXES                                  |       | 898                   |       | 1,071             |       |
| GOODWILL                                               |       | 22,304                |       | 22,304            |       |
| DEFINITE-LIVED  INTANGIBLES, net                       |       | 2,644                 |       | 1,995             |       |
| LONG-TERM ASSETS OF  DISCONTINUED OPERATIONS           |       | 29,169                |       | —            |       |
| OTHER ASSETS                                           |       | 696                   |       | 830               |       |
| Total assets                                           |       | $                     | 100,525    |              | $          | 79,625 |   |
|                                                   |       |                  |       |              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**         |       |                  |       |              |       |
| CURRENT LIABILITIES:                                   |       |                  |       |              |       |
| Income taxes  payable                                  |       | 722                   |       | —            |       |
| Accounts payable                                       |       | 8,266                 |       | 13,816            |       |
| Accrued  liabilities                                   |       | 6,406                 |       | 8,426             |       |
| Unearned revenue                                       |       | 302                   |       | 95                |       |
| Current  liabilities of discontinued operations        |       | 11,898                |       | 5,232             |       |
| Total current  liabilities                             |       | 27,594                |       | 27,569            |       |
| LONG-TERM LIABILITIES:                                 |       |                  |       |              |       |
| Line of credit                                         |       | 29,970                |       | —            |       |
| Long-term  liabilities of discontinued operations      |       | 5,283                 |       | —            |       |
| Total long-term  liabilities                           |       | 35,253                |       | —            |       |
| STOCKHOLDERS’ EQUITY                              |       |                  |       |              |       |
| Common stock,  13,424 and 13,644 issued, respectively  |       | 134                   |       | 136               |       |
| Additional  paid-in capital                            |       | 51,047                |       | 54,703            |       |
| Treasury stock  at cost, 8 and 25 shares, respectively |       | (133                  | )          | (524              | )          |
| Accumulated  deficit                                   |       | (12,846               | )          | (2,221            | )          |
| Accumulated  other comprehensive loss                  |       | (524                  | )          | (38               | )          |
| Total  stockholders’ equity                       |       | 37,678                |       | 52,056            |       |
| Total liabilities and  stockholders’ equity       |       | $                     | 100,525    |              | $          | 79,625 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

3

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**1-800 CONTACTS, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)(unaudited)**
| ** **                                                                               | ** ** | **Quarter Ended** | ** ** | **Two Quarters Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------------|------------|
| ** **                                                                               | ** ** | **July 1,**       | ** ** | **June 30,**                | ** ** | **July 1,** | ** ** | **June 30,** | ** ** |
| ** **                                                                               | ** ** | **2006**               | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2007** | ** ** |
| NET SALES                                                                                |       | $                      | 57,734     |                             | $          | 63,373 |   | $ | 116,907 |   | $ | 125,202 |   |
| COST OF GOODS  SOLD                                                                      |       | 34,960                 |       | 36,962                           |       | 70,509 |   | 73,962 |   |
| Gross profit                                                                             |       | 22,774                 |       | 26,411                           |       | 46,398 |   | 51,240 |   |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES:                                           |       |                   |       |                             |       |   |   |   |   |
| Advertising                                                                              |       | 3,475                  |       | 4,721                            |       | 7,400 |   | 9,113 |   |
| Legal and professional                                                                   |       | 975                    |       | 2,386                            |       | 1,945 |   | 3,937 |   |
| Research and development                                                                 |       | —                 |       | —                           |       | 10 |   | — |   |
| Other selling, general and administrative                                                |       | 12,569                 |       | 12,559                           |       | 24,282 |   | 25,269 |   |
| Total selling, general and administrative expenses                                       |       | 17,019                 |       | 19,666                           |       | 33,637 |   | 38,319 |   |
| INCOME FROM  OPERATIONS                                                                  |       | 5,755                  |       | 6,745                            |       | 12,761 |   | 12,921 |   |
| OTHER EXPENSE,  net                                                                      |       | (319                   | )          | (392                             | )          | (638 | ) | (862 | ) |
|                                                                                     |       |                   |       |                             |       |   |   |   |   |
| INCOME BEFORE  PROVISION FOR INCOME TAXES AND DISCONTINUED OPERATIONS                    |       | 5,436                  |       | 6,353                            |       | 12,123 |   | 12,059 |   |
| PROVISION FOR  INCOME TAXES                                                              |       | (2,401                 | )          | (3,366                           | )          | (5,527 | ) | (5,789 | ) |
| INCOME FROM  CONTINUING OPERATIONS                                                       |       | $                      | 3,035      |                             | $          | 2,987 |   | $ | 6,596 |   | $ | 6,270 |   |
| DISCONTINUED  OPERATIONS:                                                                |       |                   |       |                             |       |   |   |   |   |
| Loss from discontinued operations (including loss on  disposal of $2.8 million for 2007) |       | (4,837                 | )          | (7,834                           | )          | (6,848 | ) | (11,892 | ) |
| Income tax benefit (expense)                                                             |       | (236                   | )          | 16,424                           |       | (605 | ) | 16,188 |   |
| Gain (loss) on discontinued operations                                                   |       | (5,073                 | )          | 8,590                            |       | (7,453 | ) | 4,296 |   |
| NET INCOME  (LOSS)                                                                       |       | $                      | (2,038     | )                                | $          | 11,577 |   | $ | (857 | ) | $ | 10,566 |   |
|                                                                                     |       |                   |       |                             |       |   |   |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING:                                                    |       |                   |       |                             |       |   |   |   |   |
| Basic                                                                                    |       | 13,360                 |       | 13,454                           |       | 13,352 |   | 13,437 |   |
| Diluted                                                                                  |       | 13,473                 |       | 13,637                           |       | 13,457 |   | 13,635 |   |
|                                                                                     |       |                   |       |                             |       |   |   |   |   |
| PER SHARE  INFORMATION:                                                                  |       |                   |       |                             |       |   |   |   |   |
| Basic net income (loss) per share:                                                       |       |                   |       |                             |       |   |   |   |   |
| Continuing operations                                                                    |       | $                      | 0.23       |                             | $          | 0.22 |   | $ | 0.49 |   | $ | 0.47 |   |
| Discontinued operations                                                                  |       | (0.38                  | )          | 0.64                             |       | (0.55 | ) | 0.32 |   |
|                                                                                     |       | $                      | (0.15      | )                                | $          | 0.86 |   | $ | (0.06 | ) | $ | 0.79 |   |
| Diluted net income (loss) per share:                                                     |       |                   |       |                             |       |   |   |   |   |
| Continuing operations                                                                    |       | $                      | 0.23       |                             | $          | 0.22 |   | $ | 0.49 |   | $ | 0.46 |   |
| Discontinued operations                                                                  |       | (0.38                  | )          | 0.63                             |       | (0.55 | ) | 0.31 |   |
|                                                                                     |       | $                      | (0.15      | )                                | $          | 0.85 |   | $ | (0.06 | ) | $ | 0.77 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

4

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**1-800 CONTACTS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)**
| ** **                                                                         | ** ** | **Two Quarters Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **July 1,**                 | ** ** | **June 30,** | ** ** |
| ** **                                                                         | ** ** | **2006**                         | ** ** | **2007** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                             |       |   |   |
| Net income (loss)                                                                  |       | $                                | (857       | ) | $ | 10,566 |   |
| Net (income) loss from discontinued operations, net  of tax                        |       | 7,453                            |       | (4,296 | ) |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                      |       | 2,736                            |       | 2,605 |   |
| Amortization of debt issuance costs and discounts                                  |       | 66                               |       | 53 |   |
| Stock-based compensation                                                           |       | 1,028                            |       | 1,765 |   |
| Tax benefits from share-based payment exercises                                    |       | (27                              | )          | (42 | ) |
| Loss on sale of property and equipment                                             |       | —                           |       | 5 |   |
| Deferred income taxes                                                              |       | (112                             | )          | 13 |   |
| Changes in operating assets and liabilities:                                       |       |                             |       |   |   |
| Accounts receivable, net                                                           |       | 4                                |       | 442 |   |
| Inventories, net                                                                   |       | 2,786                            |       | (1,489 | ) |
| Other current assets                                                               |       | (491                             | )          | (391 | ) |
| Income taxes payable (receivable)                                                  |       | 1,189                            |       | (13,542 | ) |
| Accounts payable                                                                   |       | 836                              |       | 5,447 |   |
| Accrued liabilities                                                                |       | 2,368                            |       | 1,744 |   |
| Unearned revenue                                                                   |       | 313                              |       | (621 | ) |
| Net cash provided by continuing operating activities                               |       | 17,292                           |       | 2,259 |   |
| Net cash provided by (used in) discontinued  operations                            |       | (8,853                           | )          | 9,996 |   |
| Net cash provided by operations                                                    |       | 8,439                            |       | 12,255 |   |
|                                                                               |       |                             |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                             |       |   |   |
| Purchase of property and equipment                                                 |       | (1,065                           | )          | (1,160 | ) |
| Purchase of definite-lived intangible assets                                       |       | —                           |       | (64 | ) |
| Deposits and other                                                                 |       | (631                             | )          | (36 | ) |
| Net cash used in continuing investing activities                                   |       | (1,696                           | )          | (1,260 | ) |
| Net cash provided by (used in) discontinued  investing activites                   |       | (2,653                           | )          | 31,851 |   |
| Net cash  provided by (used in) investing activities                               |       | $                                | (4,349     | ) | $ | 30,591 |   |

 

5

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**1-800 CONTACTS,INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(in thousands)(unaudited)**
| ** **                                              | ** ** | **Two Quarters Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **July 1,**                 | ** ** | **June 30,** | ** ** |
| ** **                                              | ** ** | **2006**                         | ** ** | **2007** | ** ** |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                  |       |                             |       |   |   |
| Proceeds from exercise of stock options                 |       | $                                | 105        |   | $ | 1,851 |   |
| Restricted stock grant                                  |       | —                           |       | 1 |   |
| Purchase of treasury stock                              |       | —                           |       | (391 | ) |
| Excess tax benefits from share-based payment  exercises |       | 27                               |       | 42 |   |
| Debt issuance costs                                     |       | —                           |       | (62 | ) |
| Net repayments on line of credit                        |       | (4,267                           | )          | (29,970 | ) |
| Net cash used in continuing financing activities        |       | (4,135                           | )          | (28,529 | ) |
| Net cash used in discontinued financing activities      |       | (1,020                           | )          | (7,266 | ) |
| Net cash used in financing activites                    |       | (5,155                           | )          | (35,795 | ) |
|                                                    |       |                             |       |   |   |
| EFFECT OF  FOREIGN EXCHANGE RATES ON CASH               |       | (327                             | )          | (150 | ) |
|                                                    |       |                             |       |   |   |
| NET INCREASE  (DECREASE) IN CASH                        |       | (1,392                           | )          | 6,901 |   |
| CASH AT  BEGINNING OF PERIOD                            |       | 1,481                            |       | 2,739 |   |
| CASH  RECLASSIFIED TO DISCONTINUED OPERATIONS           |       | (27                              | )          | (4,080 | ) |
| CASH AT END OF  PERIOD                                  |       | $                                | 62         |   | $ | 5,560 |   |
|                                                    |       |                             |       |   |   |
| SUPPLEMENTAL  CASH FLOW INFORMATION:                    |       |                             |       |   |   |
| Cash paid for interest                                  |       | $                                | 815        |   | $ | 563 |   |
| Cash paid for  income taxes                             |       | 5,045                            |       | 2,450 |   |

 

SUPPLEMENTALDISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Effective December 31,2006, we adopted the provisions of Financial Account Standards Board (FASB)issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”  As a result of the implementation of FIN 48,we recognized a $60 decrease to our liability for income taxes payable, and acorresponding decrease to our fiscal 2007 accumulated deficit beginningbalance.

On June 30, 2007, inconjunction with the sale of ClearLab’s manufacturing, distribution and relatedoperations, a portion of the consideration received included 1,007,220 sharesof Mi Gwang common stock valued at $4.2 million. The current portion of theinvestment ($3.9 million) has been designated as available for salesecurites.  The remainder of stock isincluded in other long term assets. 

See accompanyingnotes to condensed consolidated financial statements.

6

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**1-800CONTACTS, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

# **NOTE 1. PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

We have preparedthe accompanying condensed consolidated financial statements, without audit,pursuant to the rules and regulations of the Securities and Exchange Commission(the “SEC”).  Certain information anddisclosures normally included in financial statements prepared in accordancewith U.S. generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations. These condensed consolidated financial statements reflect alladjustments (consisting only of normal recurring adjustments), which in theopinion of management, are necessary to present fairly the results of ouroperations for the periods presented.  Itis suggested that these condensed consolidated financial statements be read inconjunction with the audited financial statements and the notes theretoincluded in our Annual Report on Form 10-K for the year ended December 30,2006.

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting period.  Actual results could differ from theseestimates.

During the secondquarter of fiscal 2007, we closed the transactions for the sale of our ClearLabbusiness.  As a result of this sale, weno longer have any international operations. Our international operations are reflected as discontinued operationsand, accordingly, are no longer reflected as a separate segment.  As of June 30, 2007, we have one reportablesegment; our domestic segment is represented by operations within the UnitedStates and is referred to as “U.S. Retail”. Results of operations, financial position and cash flows are separatelyreported for all periods presented.

**NOTE 2.    DISCONTINUED OPERATIONS**

During the secondquarter of fiscal 2007, we completed the sale of our ClearLab business.  We sold ClearLab’s flat pack technology andcertain other intellectual property and we sold ClearLab’s manufacturing,distribution and customer support operations in separate transactions asdetailed below.

On June 15, 2007,we transferred certain intellectual property and other assets related to our flatpack technology to Menicon Co., Ltd. (“Menicon”) pursuant to an Asset PurchaseAgreement dated May 24, 2007.  The assetstransferred to Menicon include patents and equipment.  The consideration included $23 million incash which was paid at closing; contingent consideration of $5 million, $3million of which is due upon Menicon’s launch of product sales in Japan usingthe flat pack technology and $2 million of which is due upon Menicon enteringinto a license agreement with a third party for sales of products using theflat pack technology in a market outside of Japan; and earn-out payments basedon a percentage of Menicon’s total sales of flat pack products and a percentageof the total consideration payable to Menicon pursuant to any license agreementfor the flat pack and certain other products. The term of the earn-out payments commences upon the commercial launchof flat pack products anywhere in the world and continues through the fifteenthanniversary of the launch of flat pack products in Japan.  As part of the agreement, we have terminatedour previous license agreement with Menicon.

OnJune 30, 2007, we transferred certain assets related to ClearLab’smanufacturing, distribution and related operations to a wholly-owned subsidiaryof Mi Gwang Contact Lens Co., Ltd., a Korean-based contact lens manufacturer (“MiGwang”) pursuant to a Purchase Agreement dated May 25, 2007.  The consideration included $9 million in cashwhich was paid at closing and 1,007,220 shares of Mi Gwang 

7

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common stock valued at$4.2 million as of June 30, 2007.  We arerestricted from trading 929,742 shares of the Mi Gwang stock until twelvemonths after the closing and are restricted from trading the remaining 77,478shares until eighteen months after the closing. The current portion of theinvestment has been designated as available-for-sale securities for purposes ofSFAS 115 “*Accounting for Certain Investments in Debt andEquity Securities.”*  Theremainder of the restricted stock will be accounted for by the cost method andis included in other assets.  Thepurchase price is subject to a post-closing adjustment of approximately $0.5million based on the closing net working capital of the divested business,payable in cash by Mi Gwang.

Wehave accounted for the sale of the ClearLab business in accordance with SFASNo. 144.  Accordingly, the results ofoperations for ClearLab for the quarter and two quarters ended July 1, 2006 andJune 30, 2007 have been removed from continuing operations and classified asdiscontinued operations.  The $2.8million loss on disposal has been included in net income (loss) fromdiscontinued operations.

We retainedcertain liabilities and have agreed to reimburse Mi Gwang for certainliabilities, including any remaining costs associated with the closure of theUnited Kingdom manufacturing operations and the consolidation in Singapore.

The followingtables summarize the financial position and operating results of ourdiscontinued international operations as of and for the quarter and two quartersended on the dates indicated (in thousands):
| ** **                                      | ** ** | **Quarter Ended**     | ** ** | **Two Quarters Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **July 1, 2006** | ** ** | **June 30, 2007**      | ** ** | **July 1, 2006** | ** ** | **June 30, 2007** | ** ** |
| **Discontinued operations**                     |       |                       |       |                             |       |   |   |   |   |
| Net Sales                                       |       | $                          | 5,421      |                             | $          | 5,787 |   | $ | 9,739 |   | $ | 11,379 |   |
| Cost of Goods Sold                              |       | (5,563                     | )          | (5,593                           | )          | (9,027 | ) | (11,642 | ) |
| Gross Profit                                    |       | (142                       | )          | 194                              |       | 712 |   | (263 | ) |
| Selling, General & Administrative Expenses  |       | (5,366                     | )          | (4,730                           | )          | (8,863 | ) | (8,452 | ) |
| Loss from Discontinued Operations               |       | (5,508                     | )          | (4,536                           | )          | (8,151 | ) | (8,715 | ) |
| Other Income (loss)                             |       | 671                        |       | (498                             | )          | 1,303 |   | (377 | ) |
| Loss on disposal                                |       | —                     |       | (2,800                           | )          | — |   | (2,800 | ) |
| Income tax benefit (expense)                    |       | (236                       | )          | 16,424                           |       | (605 | ) | 16,188 |   |
| Net  Income (Loss) from discontinued operations |       | $                          | (5,073     | )                                | $          | 8,590 |   | $ | (7,453 | ) | $ | 4,296 |   |

 

8

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***Prior to the sale, we had undergone an extensive review ofClearLab’s manufacturing operations. Based on this review, the board of directors authorized management toconsolidate ClearLab operations in Singapore and we completed the closure ofour manufacturing facility in the United Kingdom, other than lease termination commitmentsand disposal of surplus equipment, in the first quarter of fiscal 2007 prior tothe sale of ClearLab in the second quarter of fiscal 2007.***  During fiscal 2006 and the first two quarters of fiscal 2007, weexpensed approximately $1.0 million and $1.7 million, respectively, relating tothese activities.  As of June 30, 2007,we have accrued approximately $1.3 million for the estimated remaining expensesrelating to the sale and disposal of these assets.  The following is a rollforward of the accrualfor such items as of December 30, 2006 and June 30, 2007:

| Accrual at December 30, 2006 |   | $      | 1,020  |   |
|------------------------------|--------|--------|--------|--------|
| Additions                    |   | 1,510  |   |
| Payments                     |   | (1,270 | )      |
| Accrual  at June 30, 2007    |   | $      | 1,260  |   |

 

# **NOTE 3. INVENTORIES**

Inventories are recorded at the lower of cost (usingthe first-in, first-out method) or market value.  Inventories consisted of purchased contactlenses and accessories totaling $12.7 million and $14.4 million at December 30,2006 and June 30, 2007, respectively.

Provision is madeto reduce excess and obsolete inventories to their estimated net realizablevalues.  As of December 30, 2006 and June30, 2007, reserves for excess and obsolete inventories for continuing operationswere approximately $1.3 million and $0.8 million, respectively.

**NOTE4.  NET INCOME (LOSS) PER COMMON SHARE**

Basic net income (loss)per common share (“Basic EPS”) excludes dilution and is computed by dividingnet income (loss) by the weighted-average number of common shares outstandingduring the period.  Diluted net income(loss) per common share (“Diluted EPS”) reflects the potential dilution thatcould occur if stock options or other common stock equivalents were exercisedor converted into common stock using the treasury stock method.  The computation of Diluted EPS does notassume exercise or conversion of securities that would have an antidilutiveeffect on net income (loss) per common share. We have not reflected performance based unvested restricted stock awardsin Diluted EPS since the performance conditions were not satisfied as of June30, 2007.  For the quarter and two quarters ended July 1, 2006, options topurchase 76,653 and 86,527 shares of common stock, as well as 36,312  and 18,200 shares of unvested restrictedstock; respectively, were included in the computation of Diluted EPS for bothcontinuing operations and discontinued operations, although the effect isantidilutive for the discontinued operations and the consolidated operations.  For the quarter and two quarters ended June30, 2007, options to purchase 125,569 and 133,939 shares of common stock and57,569 and 63,700 shares of unvested restricted stock; respectively, wereincluded in the computation of Diluted EPS.

 

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** **

**Thefollowing is a reconciliation of the numerator and denominator used tocalculate Basic and Diluted EPS (in thousands, except per share amounts):**

 
| ** **                                                            | ** ** | **Quarters Ended**      | ** ** | **Two Quarters Ended** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **July 1,   2006** | ** ** | **June 30,   2007**    | ** ** | **July 1,   2006** | ** ** | **June 30,   2007** | ** ** |
| **Diluted earnings per share:**                                       |       |                         |       |                             |       |   |   |   |   |
| Weighted-average  shares for computation of basic earnings per share  |       | 13,360                       |       | 13,454                           |       | 13,352 |   | 13,437 |   |
| Dilutive effect of stock options and restricted stock                 |       | 113                          |       | 183                              |       | 105 |   | 198 |   |
| Weighted  average shares for computation of diluted earning per share |       | 13,473                       |       | 13,637                           |       | 13,457 |   | 13,635 |   |

 

**NOTE5.  COMPREHENSIVE INCOME (LOSS)**

Comprehensive loss forthe quarter and two quarters ended July 1, 2006 and June 30, 2007 consisted ofthe following components (in thousands):
| ** **                         | ** ** | **Quarter  Ended** | ** ** | **Two Quarters Ended** | ** ** |
|------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **July 1, 2006**   | ** ** | **June 30, 2007**      | ** ** | **July 1, 2006** | ** ** | **June 30, 2007** | ** ** |
| Net income  (loss)                 |       | $                            | (2,038     | )                                | $          | 11,577 |   | $ | (857 | ) | $ | 10,566 |   |
| Foreign currency  translation gain |       | 112                          |       | 551                              |       | 111 |   | 486 |   |
| Comprehensive gain  (loss)         |       | $                            | (1,926     | )                                | $          | 12,128 |   | $ | (746 | ) | $ | 11,052 |   |

 

The foreign currencytranslation gain resulted primarily from changes in exchange rates relative tothe U.S. dollar from the translation of our Singapore and United Kingdomsubsidiaries’ financial statements.

**NOTE6.  STOCK-BASED COMPENSATION**

We account for share-based compensation in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised2004), “Share-Based Payment,” (“SFAS No. 123R”), which requires stock-basedcompensation to be measured based on the fair value of the award on the date ofgrant and recognized over the period during which service is required inexchange for the award.

SFAS No. 123R applies to all of ouroutstanding unvested share-based payment awards as of January 1, 2006 and allawards made thereafter.  All of ourstock-based awards, which are stock options and restricted stock awards, areclassified as either equity instruments or liability-classified awards.  Compensation cost recognized in fiscal 2006and in fiscal 2007 for unvested options as of January 1, 2006 was based on thegrant-date fair value, using the Black-Scholes model, estimated in accordancewith the original provisions of SFAS No. 123.

Stock-based expense for the first two quarters offiscal 2006 and 2007 includes expense, recognized over the applicable vestingperiods, for new restricted stock share-based awards and for restricted stockand stock option share-based awards granted prior to, but not yet vested, as ofJanuary 1, 2006.  Stock-based compensation expense for employees and non-employeedirectors for the quarter and two quarters ended June 30, 2007 wereapproximately $1.0 million and $1.8 million, respectively.   Stock-based compensation expense foremployees and non-employee directors for the quarter and two quarters endedJuly 1, 2006 were approximately $0.7 million and $1.0 million,respectively.  The income tax deficitrelated to stock-based  compensationexpense during the quarter ended June 30, 2007, was approximately $4,000.  The net income tax benefit related tostock-based expense during two quarters ended June 30, 2007, was approximately$42,000.  The excess income tax benefitrelated to stock-based compensation expense during the quarter and two quartersended July 1, 2006, was approximately $1,000 and $27,000, respectively.

*** ***

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***Stock —Based Award Plans***

***Stock Options.***Wehave established a stock option plan that provides for the issuance of amaximum  of 1,940,000 shares of commonstock to officers, employees, directors and consultants. The plan allows forthe issuance of incentive stock options, nonqualified stock options andrestricted stock. Incentive and nonqualified stock options are granted at notless than 100 percent of the fair market value of the underlying commonstock on the date of grant. As of June 30, 2007, 300,491 shares were availablefor future granting.

Prior to theestablishment of the stock option plan, we issued nonqualified stock options tovarious key employees, a consultant and a director of the Company.

All options grantedthrough January 1, 2000 vest equally over a three-year period and expireten years from the date of grant.

Stockoptions remained outstanding under various plans as of January 1, 2006. Nostock options were granted from these plans during fiscal 2006 or the twoquarters ended June 30, 2007.  Our stockoption activity during the two quarters ended June 30, 2007 was as follows (inthousands, except option prices and years):
| ** **                                                    | ** ** | ** **         | ** ** | ** **   | ** ** | **Weighted**          | ** ** | ** **    | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|--------------|------------|-----------------------|------------|---------------|------------|
| ** **                                                    | ** ** | ** **         | ** ** | **Weighted** | ** ** | **Average**           | ** ** | ** **    | ** ** |
| ** **                                                    | ** ** | ** **         | ** ** | **Average**  | ** ** | **Remaining**         | ** ** | **Aggregate** | ** ** |
| ** **                                                    | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Contractual**       | ** ** | **Intrinsic** | ** ** |
| **Two Quarters Ended June 30, 2007** | ** ** | **Options**        | ** ** | **Price**    | ** ** | **Life (Years)** | ** ** | **Value**     | ** ** |
|                                                          |       |               |       |         |       |                  |       |          |       |
| Options outstanding at December 30, 2006                      |       | 1,125              |       | $            | 20.96      |                  |       |          |       |   |
| Exercised                                                     |       | (127               | )          | 14.57        |       |                  |       |          |       |
| Forfeited                                                     |       | (124               | )          | 34.65        |       |                  |       |          |       |
| Expired                                                       |       | (8                 | )          | 29.11        |       |                  |       |          |       |
| Options outstanding at June 30, 2007                          |       | 866                |       | $            | 19.75      |                  | 2.51       |          | $          | 5,005 |   |
|                                                          |       |               |       |         |       |                  |       |          |       |
| Options vested and expected to vest at June 30, 2007          |       | 859                |       | $            | 19.71      |                  | 2.51       |          | $          | 5,000 |   |
|                                                          |       |               |       |         |       |                  |       |          |       |
| Options  exercisable at June 30, 2007                         |       | 820                |       | $            | 19.46      |                  | 2.57       |          | $          | 4,973 |   |

 

Thetotal intrinsic value of options exercised during the two quarters ended July1, 2006 and June 30, 2007 totaled approximately $0.1 million and $1.1 million,respectively.

For the two quarters ended July 1, 2006 and June 30,2007, stock option expense was recognized on a straight-line basis over thefour year vesting period.  Approximately$0.2 million and $0.4 million, respectively, were charged to expense for thequarter and two quarters ended June 30, 2007. Approximately $0.3 million and $0.6 million, respectively, were chargedto expense in the quarter and two quarters ended July 1, 2006.  We have applied a weighted average forfeitureassumption of approximately 15% in the calculation of such expense in each ofthe two quarters ended June 30, 2006 and July 1, 2007.

As of July 1, 2006 and June 30, 2007, there wasapproximately $1.1 million and $0.1 million, respectively, of unrecognizedcompensation cost related to non-vested stock options, which is expected to berecognized in full by the end of fiscal 2007.

Cash received from option exercises during the twoquarters  ended July 1, 2006 and June 30,2007 was approximately $0.1 million and $1.8 million, respectively.  The total tax benefit related to stock-based

 

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compensation expenseduring the quarter and two quarters ended July 1, 2006 was approximately $1,000and $27,000, respectively and during the quarter and two quarters ended June30, 2007 was approximately $1,000 and $25,000, respectively. These amounts werecredited to additional paid-in capital.

***Restricted ShareAwards****.*During thefirst two quarters of fiscal 2006 and 2007, we granted 599,096 and 35,359shares of restricted common stock, respectively, to various employees andexecutives of the Company.  Therestricted stock grants were valued at the closing stock price on the date ofthe grant, which was $13.14 for the 2006 grants and ranged from $16.28 to$23.70 for the 2007 grants. The restricted stock grants include bothtime-vesting and performance-vesting restricted shares.  The time-vesting shares granted in 2006 vest20% per year, beginning November 30, 2006 and ending November 30, 2010.  All the restricted stock granted in the firstquarter of fiscal 2007 were time-vesting shares that vest 20% per vestingperiod; 20% of the 10,500 shares of restricted stock granted in the first halfof fiscal 2007 vested on February 25, 2007, and the balance of these vest 20%per year through February 25, 2011;  270shares of the restricted stock granted in the first quarter of fiscal 2007 vest20% per year beginning January 25, 2008 and ending January 25, 2012;   and the remaining 14,684 shares of therestricted stock granted in the first quarter of fiscal 2007 vest 20% per yearbeginning February 25, 2008 and ending February 25, 2012.  9,905 shares of restricted stock were grantedduring the second quarter of fiscal 2007. These grants included both time-vesting and performance-vesting restrictedshares.  Of the 9,905 shares granted,7,500 were performance-vesting.  Theremaining 2,405 shares of time-vesting restricted stock vest 20% per year.  All performance-vesting shares vest uponachievement of certain operational milestones - such as obtaining sources for “doctorsonly” lenses on competitive terms, development of certain contact lens productsand the achievement of an eight quarter cumulative financial target of at least$81 million consolidated earnings before taxes by or before the end of fiscal2010.   Both the time-vesting andthe performance-vesting shares of restricted stock are subject to variouschange in control provisions involving us and our subsidiaries that will likelyresult in the accelerated vesting of unvested shares as well as conversion ofunvested restricted shares  into a cashamount at the time of the change in control.

During the first quarterof fiscal 2006 we also granted 50,000 shares of restricted common stock to ourfive non-employee directors.  Thesegrants vest equally over a three-year period; the vesting of these awards willbe accelerated upon a change in control of the Company.  The restricted share grants were also valuedat the closing stock price on the date of the grant which was $13.14.  An additional 2,500 shares of restrictedcommon stock were granted to one non-employee director during the first quarterof fiscal 2006.  This restricted sharegrant was valued at the closing stock price on the date of the grant, which was$13.28, and all of these shares vested on July 28, 2006.

Our activity relating torestricted share awards during the first two quarters of fiscal 2007 was asfollows (in thousands, except fair values):
| **Two Quarters Ended June 30, 2007** | ** ** | **Number of Restricted  Share Awards** | ** ** | **Weighted Average  Grant Date Fair  Value Per Award** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| Unvested at  December 30, 2006                                |       | 562                                                   |       | $                                                                               | 14.20      |   |
| Granted                                                       |       | 35                                                    |       | 18.02                                                                           |       |
| Vested                                                        |       | (94                                                   | )          | 15.79                                                                           |       |
| Forfeited and  expired                                        |       | (43                                                   | )          | 23.16                                                                           |       |
| Converted to  cash                                            |       | (12                                                   | )          | 13.14                                                                           |       |
| Unvested at June 30,  2007                                    |       | 448                                                   |       | $                                                                               | 13.26      |   |

 

The sale of theClearLab business triggered a change in control provision in one individual’srestricted stock agreements, effective June 30, 2007.  As a result of thechange in control provisions, vesting was accelerated from five to two yearsand approximately 12,000 previously unvested shares of our restricted commonstock were classified as liability-classified awards.  The total amountdue under this award is approximately $287,000, or $23.46 per share.  Theamount of previously recognized expense for these awards of approximately$15,000 was reclassified from additional paid-in-capital to accruedexpenses.  The remaining expense for these shares will be recognized 

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quarterly as the awardvests.  The total amount due will be paid out in equal quarterlyinstallments over the two-year period commencing on June 30, 2007.

For the first two quarters ended July 1, 2006 and June30, 2007, approximately $0.4 million and $1.4 million, respectively, werecharged to expense relating to the amortization of the time-vested restrictedshare awards. At June 30, 2007, unrecognized compensation expense, includingestimated forfeitures related to time-vested restricted share awards totaledapproximately $2.7 million and will be recognized over a weighted averageperiod of approximately 3.3 years, respectively.  The fair value of restricted share awardsthat vested during the quarter and two quarters ended July 1, 2006 totaledapproximately $26,000 and $82,000, respectively.  The fair value of restricted share awardsthat vested during the quarter and two quarters ended June 30, 2007 totaledapproximately $1.2 million and $1.6 million, respectively. Total tax benefitgenerated from vested restricted share awards for the two quarters ended June30, 2007 was approximately $21,000, which was credited to additional paid-incapital.  There was no tax benefitgenerated from vested restricted share awards for the quarter ended June 30,2007.

Expenserelated to performance-vesting shares  ofrestricted stock will be recognized once it is determined “probable” that theoperational milestones will be met.  Atthe time the achievement of these operational milestones are considered “probable”,we will record a cumulative catch-up for the amount of expense that should havebeen recognized from the date of the grant to the date it was determinedachievement was probable and recognize the remaining expense on a straight-linebasis through the estimated date of achievement.  Total gross compensation expense, excludingany estimate of forfeitures related to the outstanding performance-vestingshares of restricted stock, will be approximately $2.8 million.  As of June 30, 2007, we do not believe thatthe achievement of the operational milestones is probable.

OnJune 3, 2007, we entered into a definitive agreement and plan of merger withAlta Parent Corp. and Alta Acquisition Corp., affiliates of Fenway Partners CapitalFund III, L.P (the “Merger Agreement”).  See “Note 11. Proposed Merger.” Upon completion of the transactions contemplated by the MergerAgreement, outstanding stock options, vested and unvested, will be canceled andoption holders will receive the excess, if any, of $24.25 per share over theoption exercise price for each share subject to the option.  In addition, restricted stock that is vestedand restricted stock that is unvested but which will vest as a result of thetransactions contemplated by the Merger Agreement will be canceled and holderswill receive $24.25 per share.  Anyunvested shares of restricted stock that do not vest as a result of thetransactions contemplated by the Merger Agreement will be canceled and holderswill receive $24.25 per share at such times as are set forth in the applicablerestricted stock grant agreements.

**NOTE7.  DEBT OBLIGATIONS**

We have a loan agreementwith a U.S. bank providing for a revolving credit facility that matures on June1, 2009.  The loan agreement provides forborrowings of up to $40 million and for letters of credit up to a maximum of$15 million outstanding or payable at any time. The amount of any lettersof credit outstanding is deducted from the amount available for borrowing.  There were outstanding letters of credit of$1.5 million as of June 30, 2007 that reduce the total amount available underthe loan agreement to $38.5 million.  Wemay reduce the maximum available advance amount or terminate the loan at anytime.

Outstanding borrowings onthe revolving credit facility bear interest at a floating rate equal to thelender’s prime interest rate plus a margin, or the lender’s LIBOR rate plus amargin. The interest rate is adjusted quarterly and ranges between prime minus0.75 percent and prime minus 1.25 percent or between the applicableLIBOR rate plus 1.75 percent and the applicable LIBOR rate plus2.25 percent, depending on our maximum leverage ratio, as defined in theloan agreement. As of June 30, 2007, the prime rate margin is minus 1.00 percentand the LIBOR rate margin is 2.00 percent. Interest is payable monthly. Asof June 30, 2007, we have no outstanding borrowings on our revolving creditfacility. We used the proceeds from the sale of our international operationsand certain intellectual property and other assets related to ClearLab’s flatpack technology to repay the borrowings on our revolving credit facility. Thefacility requires the quarterly payment of an unused credit fee which rangesfrom 0.25 percent to 0.38 percent, depending on our maximum leverageratio.

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If there are outstandingbalances on the revolving credit facility, they are secured by substantiallyall of our U.S. assets, subsidiary debt instruments, 100 percent ownershipinterests in all domestic subsidiaries and 65 percent ownership interestsin foreign subsidiaries owned directly by us. The loan agreement includesvarious financial covenants including a capital expenditure limit, a maximumleverage ratio and a minimum fixed charge coverage ratio. The loan agreement doesnot permit us or our subsidiaries to dissolve, sell, dispose or merge all oftheir assets or acquire all of the assets of any entity without the writtenconsent of the U.S. bank, unless the transaction meets the definition of a “PermittedAcquisition Basket,” as defined in the loan agreement. The loan agreement alsoplaces a limit on the amount we can loan to any entity, outside the normalcourse of business. Additionally, the loan agreement allows us to declare orpay cash dividends, to repurchase our stock or to perform other similar equitytransactions if such transactions would not exceed $15 million in any fiscalyear and subject to other terms. This agreement defines several customaryevents of default including any material adverse change or any event thatoccurs which may cause a material adverse change in our or our subsidiaries’condition.

**NOTE8.  COMMITMENTS AND CONTINGENCIES**

***Legaland Regulatory Matters***

The sale and delivery ofcontact lenses are governed by both federal and state laws and regulations,including the federal Fairness to Contact Lens Consumers Act (“FCLCA”). TheFCLCA requires a seller, prior to selling contact lenses to a consumer, toeither (i) obtain an actual copy of the consumer’s prescription or (ii) verifythe consumer’s prescription by direct communication with the customer’sprescriber. Consistent with this requirement, we require all customers toprovide either a valid copy of their prescription or the contact informationfor their prescriber so that we can verify their prescription by directcommunication with their prescriber. If we do not have a valid copy of thecustomer’s prescription, we directly communicate to the customer’s prescriberthe precise prescription information received from the customer and, in accordancewith the FCLCA, inform the prescriber that we will proceed with the sale basedon this prescription information unless the prescriber advises us within eightbusiness hours that such prescription information is expired or otherwiseinvalid. If the prescriber properly advises us within this time period that thecustomer’s prescription is expired or otherwise invalid, we cancel the customer’sorder. On the other hand, if the prescriber either advises us that theprescription is valid or fails to respond properly within the required timeperiod, we complete the sale based on the prescription information communicatedto the prescriber, as expressly permitted by the FCLCA. We retain copies of thewritten prescriptions that we receive and maintain records of ourcommunications with the customer’s prescriber. The FCLCA provides for severalmeans of direct communication with eye care practitioners, and we may alter ourprescription verification procedures from time to time in keeping with theFCLCA and FTC guidelines.

We are involved in legalproceedings generally incidental to our business. It is the opinion ofmanagement, after discussion with legal counsel, that the ultimate dispositionsof all of these matters will not have a material impact on our financial position,liquidity, or results of operations.

***AdvertisingCommitments***

Asof June 30, 2007, we had entered into certain noncancelable commitments withvarious advertising companies that will require us to pay approximately $7.7million during the remainder of 2007. With respect to additional commitmentsand contingencies, reference should be made to our consolidated financialstatements and disclosures thereto included in our Form 10-K for thefiscal year ended December 30, 2006.

**NOTE9.  INCOME TAXES**

On December 31, 2006, we adopted the provisions of FASB InterpretationNo. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which clarifiesthe accounting for uncertainty in income tax positions. This interpretationrequires us to recognize in the consolidated financial statements only thosetax positions determined to be more-likely-than-not of being sustained uponexamination, based on the technical merits of the positions as of the reportingdate.  If a tax position is notconsidered more-likely-

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than-not to be sustainedbased solely on its technical merits, no benefits of the position arerecognized. This is a different standard for recognition than was previouslyrequired. The more-likely-than-not threshold must continue to be met in eachreporting period to support continued recognition of a benefit.   At adoption, companies must adjust theirfinancial statements to reflect only those tax positions that aremore-likely-than-not to be sustained as of the adoption date. Any necessaryadjustment is recorded directly to opening retained earnings in the period ofadoption and reported as a change in accounting principle.  As a result of the adoption of FIN-48, werecognized a decrease of $60,000 in the liability recorded for unrecognized taxbenefits, which was accounted for as a decrease to the Fiscal 2007 beginningaccumulated deficit balance. We do not have any unrecognized tax benefits that,if recognized, would affect our effective tax rate. We recognize interest andpotential penalties accrued related to unrecognized tax benefits in ourprovision for income taxes. We had approximately $63,000 accrued for thepayment of interest as of June 30, 2007, which is netted against the income taxreceivable on the balance sheet.

We have not beennotified of intent to audit, nor are we currently undergoing an income taxaudit in any jurisdiction. The tax years that remain subject to examination bysignificant jurisdiction are as follows: 

| U.S. Federal |   | 2003 through the current period |
|--------------|--------|---------------------------------|
| Utah         |   | 2003 through the current period |
| Singapore    |   | 2002 through the current period |

 

**NOTE 10.RECENTLY ISSUED ACCOUNTING STANDARDS**

On February 15,2007, the Financial Accounting Standards Board issued SFAS No.159, “The FairValue Option for Financial Assets and Financial Liabilities” (“FAS 159”).  FAS 159 allows companies to elect to followfair value accounting for certain financial assets and liabilities in an effortto mitigate volatility in earnings without having to apply complex hedgeaccounting provisions.  FAS 159 isapplicable only to certain financial instruments and is effective for fiscalyears beginning after November 15, 2007, the fiscal year beginning December 30,2007 for the Company.  We have not yetcompleted our assessment of what impact, if any, the adoption of FAS 159 willhave on our financial statements.

InSeptember 2006, the FASB issued Statement of Financial Accounting StandardNo. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 provides adefinition of fair value, establishes acceptable methods of measuring fairvalue and expands disclosures for fair value measurements required under otheraccounting pronouncements, but does not change existing guidance as to whetheror not an instrument is carried at fair value. FAS 157 is effective for fiscalyears beginning after November 15, 2007, the fiscal year beginning December 30,2007 for the Company.  We have not yetcompleted our assessment of what impact, if any, the adoption of FAS 157will have on our financial statements.

**NOTE11.  PROPOSED MERGER**

On June 3, 2007,we entered into a definitive agreement and plan of merger with Alta ParentCorp. (“Parent”) and Alta Acquisition Corp. (“Acquisition”), affiliates ofFenway Partners Capital Fund III, L.P. (the “Merger Agreement”).  The Merger Agreement provides that, upon theterms and subject to the conditions set forth in the Merger Agreement,Acquisition will merge with and into the Company, with the Company as thesurviving corporation of the merger (the “Merger”).  As a result of the Merger, the Company willbecome a wholly owned subsidiary of Parent and each outstanding share of theCompany’s common stock (other than dissenting shares) will be converted intothe right to receive $24.25 in cash, without interest.  Options to acquire common stock, whethervested or unvested, will be canceled and option holders will receive the excess,if any, of $24.25 per share over the option exercise price for each sharesubject to the option, less any applicable withholding taxes.  In addition, restricted stock that is vestedand restricted stock that is unvested but whose vesting will accelerate as aresult of the transactions contemplated by the Merger Agreement will becanceled and holders will receive $24.25 per share, less any applicablewithholding taxes.  Any unvested sharesof restricted stock that do not vest as a result of the transactionscontemplated by the Merger Agreement will be canceled and holders will receive$24.25 per 

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share at such times asare set forth in the applicable restricted stock grant agreements. Atransactions committee comprised of independent directors and our board ofdirectors approved the Merger Agreement, and our board of directors recommendedthat stockholders vote to approve and adopt the Merger Agreement.

Certain members ofour senior management and board of directors, investment funds affiliated withone of our directors and investment funds affiliated with one of ourunaffiliated stockholders will exchange some of their equity interests in theCompany for equity interests in a newly formed Delaware limited partnershipholding all of the capital stock of Parent.

We may terminatethe Merger Agreement if we receive a takeover proposal that our board ofdirectors determines in good faith constitutes a superior proposal and itsfailure to terminate the Merger Agreement would be inconsistent with itsfiduciary duties. In connection with such a termination, or if the MergerAgreement is terminated under certain other specified circumstances, we mustpay Parent a termination fee equal to $10,330,550.

If the MergerAgreement is terminated by us under certain specified circumstances (includingbecause Parent and Acquisition fail to obtain the proceeds of debt financingarrangements), Parent will be required to pay or cause to be paid to us a feeof $10,330,550, except such fee will be increased to $13,774,000 in the eventthat Parent or Acquisition willfully breaches any of its representations,warranties, covenants or other agreements set forth in the Merger Agreement.

Fenway PartnersCapital Fund III, L.P. has delivered to us a guaranty of Parent’s obligation topay such termination fee under the Merger Agreement, up to a maximum amountequal to $13,774,000. Consummation of the Merger is subject to customaryclosing conditions, including approval of the Merger Agreement by ourstockholders and the absence of certain legal impediments to the consummationof the Merger.  As previously announced,we will hold a special meeting of stockholders on September 6, 2007.  Holders of record as of August 6, 2007 willbe entitled to vote on the Merger Agreement. If approval of the Merger is obtained at the special meeting, we expectthe Merger to close promptly thereafter. The Merger is not subject to a financing condition.  At the effective time of the Merger, we willcease to be an independent public company, and our common stock will no longerbe traded on the Nasdaq Global Market.

On June 3, 2007,Parent and Acquisition entered into a support agreement with Jonathan C. Coon,our Chairman and Chief Executive Officer, John F. Nichols, our Vice President,Trade Relations and one of our directors, and investment funds affiliated withFrank LaGrange Johnson, one of our directors, who collectively have the powerto vote approximately 40% of the fully diluted shares of our common stock.  Pursuant to and subject to the terms of thesupport agreement, these stockholders have agreed to vote their shares in favorof the Merger and not to transfer such shares prior to the completion of theMerger.

 

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**Item 2.**    ***Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

**Overview**

Weare a direct marketer of replacement contact lenses. We sell all of the popularbrands of contact lenses, including those manufactured by Johnson & JohnsonVision Care, CIBA Vision, Bausch & Lomb and CooperVision.  Prior to June 30, 2007, we were also amanufacturer, developer and distributor of our own branded and private labelcontact lenses through our ClearLab operations in Singapore and the UnitedKingdom.  As discussed below, we havesold ClearLab, our international contact lens development, manufacturing anddistribution business.

***Discontinued Operationsand Reduction in Indebtedness***.  During the second quarter of fiscal 2007, wefinalized the transactions for the sale of our ClearLab business.  In separate transactions as detailed below,we sold ClearLab’s flat pack technology and certain other intellectual propertyand ClearLab’s manufacturing, distribution and customer supportoperations.  We used the proceeds fromthe completed transactions to repay all of our indebtedness.

On June 15, 2007,we transferred certain intellectual property and other assets related to ourflat pack technology to Menicon Co., Ltd. (“Menicon”) pursuant to an Asset PurchaseAgreement dated May 24, 2007.  The assetstransferred to Menicon include patents and equipment.  The consideration included $23 million incash which was paid at closing; deferred consideration of $5 million, $3million of which is due upon Menicon’s launch of product sales in Japan usingthe flat pack technology and $2 million of which is due upon Menicon enteringinto a license agreement with a third party for sales of products using theflat pack technology in a market outside of Japan; and earn-out payments basedon a percentage of Menicon’s total sales of flat pack products and a percentageof the total consideration payable to Menicon pursuant to any license agreementfor the flat pack and certain other products. The term of the earn-out payments commences upon the commercial launchof flat pack products anywhere in the world and continues through the fifteenthanniversary of the launch of flat pack products in Japan.  As part of the agreement, we have terminatedour previous license agreement with Menicon.

OnJune 30, 2007, we transferred certain assets related to ClearLab’smanufacturing, distribution and related operations to a wholly-owned subsidiaryof Mi Gwang Contact Lens Co., Ltd., a Korean-based contact lens manufacturer (“MiGwang”) pursuant to a Purchase Agreement dated May 25, 2007.  The consideration included $9 million in cashwhich was paid at closing and 1,007,220 shares of Mi Gwang common stock valuedat $4.2 million as of June 30, 2007.  Weare restricted from trading 929,742 shares of the Mi Gwang common stock untiltwelve months after the date of closing and are restricted from trading theremaining 77,478 shares until eighteen months after the date of closing. Thecommon stock that is subject to the one-year restriction has been designated asavailable-for-sale securities for purposes of SFAS No. 115 “*Accounting for Certain Investments in Debt and Equity Securities.”*  The remainder of the common stock isaccounted for under the cost method and is included in other assets.  The purchase price is subject to apost-closing adjustment of approximately $0.5 million based on the closing networking capital of the divested business, payable in cash by Mi Gwang.

Priorto the sale, we were consolidating ClearLab operations in Singapore and we completedthe UK site closure, except for lease termination commitments and disposal ofsurplus equipment, in the first quarter of fiscal 2007.  During fiscal 2006 and the first two quartersof fiscal 2007, we expensed approximately $1.0 million and $1.7 million,respectively, relating to these activities. As of June 30, 2007, we have accrued approximately $1.3 million for theestimated remaining expenses relating to the sale and disposal of these assets.

* *Thefollowing is an estimate of total costs we expect in conjunction with theclosure of the U.K site described above:

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| **Description of Costs**           | ** **   | **Estimated Amount** | ** **  |
|----------------------------------------------|--------------|---------------------------|-------------|
| ** **                                   | ** **   | **(in thousands)**   | ** **  |
| Severance/retention  costs (a)               |         | $                         | 1,200       |   |
| Termination of  lease commitments (b)        |         | 1,200                     |        |
| Asset impairment  (c)                        |         | 3,605                     |        |
| Costs to  relocate equipment to Singapore(b) |         | 125                       |        |
| Other expenses  (b)                          |         | 100                       |        |
| ***Total  estimated costs***                 | *** *** | ***$***                   | ***6,230*** | *** *** |

 

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(a)      Approximately $1,040 and$160 of these charges were included in our financial results for the fourthquarter of fiscal 2006 and the first two quarters of fiscal 2007, respectively.

(b)     These charges were includedin our financial results during the second quarter of fiscal 2007.

(c)      These charges were includedin our fiscal 2006 financial results. The asset impairment charge related to certain manufacturing and officeequipment that was not relocated to Singapore, as well as leaseholdimprovements.

As of June 30, 2007, wehave incurred cash expenditures associated with the closure and consolidationand disposal of ClearLab UK of approximately $1.3 million and anticipate futurecash expenditures of approximately $1.5 million.  These estimated future cash expendituresinclude the repayment of approximately $0.2 million of a regional developmentgrant that is not included in the above table, as the repayment will not havean impact in our statement of operations.

***MergerAgreement.***  On June3, 2007, we entered into a definitive agreement and plan of merger with AltaParent Corp. (“Parent”) and Alta Acquisition Corp. (“Acquisition”), affiliatesof Fenway Partners Capital Fund III, L.P. (the “Merger Agreement”).  The Merger Agreement provides that, upon theterms and subject to the conditions set forth in the Merger Agreement,Acquisition will merge with and into the Company, with the Company as thesurviving corporation of the merger (the “Merger”).  As a result of the Merger, the Company willbecome a wholly owned subsidiary of Parent and each outstanding share of theCompany’s common stock (other than dissenting shares) will be converted intothe right to receive $24.25 in cash, without interest.  Options to acquire common stock, whethervested or unvested, will be canceled and option holders will receive theexcess, if any, of $24.25 per share over the option exercise price for eachshare subject to the option, less any applicable withholding taxes.  In addition, restricted stock that is vestedand restricted stock that is unvested but whose vesting will accelerate as aresult of the transactions contemplated by the Merger Agreement will becanceled and holders will receive $24.25 per share, less any applicablewithholding taxes.  Any unvested sharesof restricted stock that do not vest as a result of the transactionscontemplated by the Merger Agreement will be canceled and holders will receive$24.25 per share at such times as are set forth in the applicable restrictedstock grant agreements.

A transactionscommittee comprised of independent directors and our board of directorsapproved the Merger Agreement, and our board of directors recommended thatstockholders vote to approve and adopt the Merger Agreement.

Certain members ofour senior management and board of directors, investment funds affiliated withone of our directors and investment funds affiliated with one of our unaffiliatedstockholders will exchange some of their equity interests in the Company forequity interests in a newly formed Delaware limited partnership holding all ofthe capital stock of Parent.

We may terminatethe Merger Agreement if we receive a takeover proposal that our board ofdirectors determines in good faith constitutes a superior proposal and itsfailure to terminate the Merger Agreement would be inconsistent with itsfiduciary duties. In connection with such a termination, or if the MergerAgreement is terminated under certain other specified circumstances, we mustpay Parent a termination fee equal to $10,330,550.

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If the MergerAgreement is terminated by us under certain specified circumstances (includingbecause Parent and Acquisition fail to obtain the proceeds of debt financingarrangements), Parent will be required to pay or cause to be paid to us a feeof $10,330,550, except such fee will be increased to $13,774,000 in the eventthat Parent or Acquisition willfully breaches any of its representations,warranties, covenants or other agreements set forth in the Merger Agreement.

Fenway PartnersCapital Fund III, L.P. has delivered to us a guaranty of Parent’s obligation topay such termination fee under the Merger Agreement, up to a maximum amountequal to $13,774,000. Consummation of the Merger is subject to customaryclosing conditions, including approval of the Merger Agreement by ourstockholders and the absence of certain legal impediments to the consummationof the Merger.  As previously announced,we will hold a special meeting of stockholders on September 6, 2007.  Holders of record as of August 6, 2007 willbe entitled to vote on the Merger Agreement. If approval of the Merger is obtained at the special meeting, we expectthe Merger to close promptly thereafter. The Merger is not subject to a financing condition.  At the effective time of the Merger, we willcease to be an independent public company, and our common stock will no longerbe traded on the Nasdaq Global Market.

On June 3, 2007,Parent and Acquisition entered into a support agreement with Jonathan C. Coon,our Chairman and Chief Executive Officer, John F. Nichols, our Vice President,Trade Relations and one of our directors, and investment funds affiliated withFrank LaGrange Johnson, one of our directors, who collectively have the powerto vote approximately 40% of the fully diluted shares of our common stock.  Pursuant to and subject to the terms of thesupport agreement, these stockholders have agreed to vote their shares in favorof the Merger and not to transfer such shares prior to the completion of theMerger.

***Supplier Agreements.******  ***On January 31, 2007, we announced that we had recently signed long-term supplyagreements with the three largest contact lens manufacturers/suppliers.  We have purchased directly from the fourthlargest manufacturer/supplier without a written agreement since 2001 and basedon our longstanding relationship and recent discussions with this supplier, wedo not expect this direct relationship to change.  During the latter part of fiscal 2004, wedecided to suspend sales of a specific brand of lens, as we were unable toobtain sufficient quantities of this lens from anyone other than themanufacturer, who refused to sell us this lens. With the signing of the long-term supply agreements, we recently beganto sell this lens again in 2007, as well as other lenses previously notavailable to us.

We also have agreementswith certain manufacturers/suppliers for improved pricing and marketingsupport. This support has come and will continue to come in the form ofcooperative marketing and rebate programs designed to promote the manufacturer’sproducts and build sales. As part of our ongoing relationship with oursuppliers, we periodically review our specific marketing plan and negotiate ourcooperative marketing programs and product pricing.

# **RegulatoryConsiderations**

***Fairnessto Contact Lens Consumer Act. *** In November 2003, Congress passed the Fairnessto Contact Lens Consumers Act (“FCLCA”), which establishes a national uniformstandard for both eye care practitioners and direct marketers with regard toreleasing and verifying consumer contact lens prescriptions as well as otherrequirements relating to the sale of contact lenses.  The FCLCA became effective February 4, 2004,and now requires all eye care practitioners to give patients a copy of theirprescription as soon as they have been fitted for contact lenses, whether thepatients ask for it or not.  It alsodirects contact lens sellers to contact eye care practitioners to requestverification of consumer prescriptions before shipping all orders (if theprescription is not already on file), and it provides that a practitioner’sfailure to respond within eight business hours shall result in the prescriptionbeing presumed valid, thereby eliminating the ability of eye care practitionersto impede sales by direct marketers simply by ignoring or refusing to respondto their requests to verify prescriptions. The FCLCA also provides that prescriptions will be valid for a minimumof at least one year (absent some special medical reason justifying a shorterperiod). In addition, the FCLCA directed the Federal Trade Commission (“FTC”)to conduct a study examining the strength of competition in the market forcontact lenses and to submit a report to Congress 

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within twelve months ofthe FCLCA effective date. The FTC completed and published this study onFebruary 15, 2005, with no recommendations for further changes in federal law.

To satisfy theprescription verification requirement of the FCLCA, a contact lens seller musteither obtain a copy of the prescription or verify the prescription by directcommunication with the prescriber. Consistent with this requirement, we requireall customers to provide either a valid copy of their prescription or thecontact information for their prescriber so that we can verify their prescription.  If we do not have a valid copy of thecustomer’s prescription, we directly communicate to the customer’s prescriberthe precise prescription information received from the customer and inform theprescriber that we will proceed with the sale based on this prescriptioninformation unless the prescriber advises us within eight business hours thatsuch prescription information is expired or otherwise invalid.  If the prescriber properly advises us withinthis time period that the customer’s prescription is expired or otherwiseinvalid, we will cancel the customer’s order. On the other hand, if the prescriber either advises us that theprescription is valid or fails to respond properly within the required timeperiod, we will complete the sale based on the prescription informationcommunicated to the prescriber, as expressly permitted by the FCLCA.  We retain copies of the written prescriptionsthat we receive and maintain records of our communications with the customer’sprescriber.  The FCLCA provides forseveral means of direct communication with eye care practitioners, and we mayalter our prescription verification procedures from time to time in keepingwith the FCLCA and FTC guidelines.

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**Resultsof Operations**

Our fiscal year consists of a 52/53-week period endingon the Saturday nearest to December 31. Fiscal 2007 is a 52-week year and willend on December 29, 2007.

During the second quarter of fiscal 2007, we closedthe transactions for the sale of our ClearLab business.  As a result of this sale, we no longer haveany international operations.  Ourinternational operations are reflected as discontinued operations and,accordingly, are no longer reflected as a separate segment.  As of June 30, 2007, we have one reportablesegment represented by operations within the United States and referred to as “U.S.Retail.”  Our international ClearLaboperations are reflected as discontinued operations and, accordingly, are nolonger reflected as a separate segment. Unless specifically indicated otherwise, all amounts and percentagespresented in the notes below are exclusive of discontinued operations.

The followingtable presents our results of continuing operations expressed as a percentageof net sales for the periods indicated. All results of operations related to ClearLab have been classified as “Income(Loss) from discontinued operations” in the accompanying financial statementsand are therefore excluded in the following discussion and analysis of resultsof operations for the quarter ended and the two quarters ended July 1, 2006 andJune 30, 2007.
| ** **                                            | ** ** | **Quarter Ended** | ** ** | **Two Quarters Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **July 1,**       | ** ** | **June 30,**                | ** ** | **July 1,** | ** ** | **June 30,** | ** ** |
| ** **                                            | ** ** | **2006**               | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2007** | ** ** |
| NET SALES                                             |       | 100.0                  | %          | 100.0                            | %          | 100.0 | % | 100.0 | % |
| COST OF GOODS  SOLD                                   |       | 60.6                   |       | 58.3                             |       | 60.3 |   | 59.1 |   |
| Gross profit                                          |       | 39.4                   |       | 41.7                             |       | 39.7 |   | 40.9 |   |
|                                                  |       |                   |       |                             |       |   |   |   |   |
| SELLING, GENERAL  & ADMINISTRATIVE EXPENSES:      |       |                   |       |                             |       |   |   |   |   |
| Advertising                                           |       | 6.0                    |       | 7.5                              |       | 6.3 |   | 7.3 |   |
| Legal and professional                                |       | 1.7                    |       | 3.8                              |       | 1.7 |   | 3.1 |   |
| Other selling, general & administrative           |       | 21.8                   |       | 19.8                             |       | 20.8 |   | 20.2 |   |
| Total selling,  general & administrative expenses |       | 29.5                   |       | 31.1                             |       | 28.8 |   | 30.6 |   |
| INCOME FROM  OPERATIONS                               |       | 9.9                    |       | 10.6                             |       | 10.9 |   | 10.3 |   |
| OTHER EXPENSE,  net                                   |       | (0.5                   | )          | (0.6                             | )          | (0.5 | ) | (0.7 | ) |
| INCOME BEFORE  PROVISION FOR INCOME TAXES             |       | 9.4                    |       | 10.0                             |       | 10.4 |   | 9.6 |   |
| PROVISION FOR  INCOME TAXES                           |       | (4.2                   | )          | (5.3                             | )          | (4.7 | ) | (4.6 | ) |
| NET INCOME FROM CONTINUING  OPERATIONS                |       | 5.2                    | %          | 4.7                              | %          | 5.7 | % | 5.0 | % |

 

***Net sales***. Net sales for the quarter ended June 30, 2007 increased 9.8% to $63.4 millionfrom $57.7 million for the quarter ended July 1, 2006.  For the two quarters ended June 30, 2007, netsales increased 7.1% to $125.2 million from $116.9 million for the two quartersended July 1, 2006.  Net sales for thetwo periods increased primarily due to an increase in average order size.

During the quarter andtwo quarters ended June 30, 2007 we expensed approximately $4.7 million and$9.1 million, respectively, on advertising. During the quarter and two quarters ended July 1, 2006 we expensed approximately$3.5 million and $7.4 million, respectively, on advertising.  Our increase in advertising for the first twoquarters of fiscal 2007 from first two quarters of fiscal 2006 is consistentwith our strategy to spend more on advertising in fiscal 2007.  During fiscal 2006 we focused on addressingthe threat of ‘doctors only’ lenses and as a result, we reduced advertisingspending for the entire year.

 

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We decided during thefourth quarter of fiscal 2004 to suspend sales of a specific brand of lens, aswe were unable to obtain sufficient quantities of this lens from anyone otherthan the manufacturer, who refused to sell us this lens.  Sales of this product representedapproximately 2.5% of our U.S. retail net sales prior to the supplyconstraints. During the first fiscal quarter of 2007, we signed long-termsupply agreements with our three largest contact lens suppliers.  As such, we no longer face supply constraintsrelated to the above mentioned lens and began selling this lens, as well asother lenses previously not available to us.

In January of fiscal 2007, one of our largestsuppliers announced manufacturing difficulties with one of our top selling lenses,representing approximately 4% of our U.S. retail net sales in the second halfof fiscal 2006.  Net sales for the twoquarters ended June 30, 2007 were negatively impacted by this supplyconstraint.  During the second quarter offiscal 2007, the supplier was able to begin providing a majority of theselenses to us at near normal levels.

***Gross profit.*** Gross profit as a percentage of net sales increased to 41.7% for thequarter ended June 30, 2007 from 39.4% for the quarter ended July 1, 2006.  For the two quarters ended June 30, 2007,gross profit from continuing operations as a percentage of net sales increasedto 40.9% from 39.7% for the two quarters ended July 1, 2006.  This improvement in U.S. Retail gross profitfrom the prior fiscal year for both periods was mainly the result of increasingretail prices on certain products during the fourth quarter of fiscal 2006 anda reduction in shipping charges, partially offset by increases in select productcosts.

***Advertising expense. ***Advertisingexpense for the quarter ended June 30, 2007 increased to $4.7 million from $3.5million for the quarter ended July 1, 2006. As a percentage of net sales, advertising expense for the second quarterof fiscal 2007 increased to 7.5% from 6.0% for the second quarter of fiscal2006.  For the two quarters ended June30, 2007, advertising expense increased to 7.3% from 6.3% for the first twoquarters of fiscal 2006. We expect to increase advertising expense to anaggregate of approximately $20 million for fiscal 2007 from$13.6 million in fiscal 2006. Our experience has been that incrementalincreases in advertising expenditures have a direct impact on the growth of netsales not only in the current period but also in future periods.

We expense alladvertising costs when the advertising first takes place. As a result,quarter-to-quarter comparisons are impacted within and between quarters by thetiming of television, radio and Internet advertisements and by the mailing ofour printed advertisements. The volume of mailings and other advertising mayvary in different quarters and from year to year depending on our assessment ofprevailing market opportunities.

***Legaland professional fees. ***Legaland professional fees for the quarter ended June 30, 2007 increased$1.4 million to $2.4 million, compared to $1.0 million for the secondquarter ended July 1, 2006.  As apercentage of net sales, legal and professional fees increased to 3.8% for thesecond quarter of fiscal 2007 from 1.7% for the second quarter of fiscal2006.  For the two quarters ended June30, 2007, legal and professional fees increased by $2.0 million to $3.9million, compared to $1.9 million for the two quarters ended July 1, 2006.  As a percentage of net sales, legal andprofessional fees increased to 3.1% for the first two quarters of fiscal 2007compared to 1.7% for the first two quarters of fiscal 2006.  A majority of the increase during the quarterand first two quarters of fiscal 2007 related to fees associated with the U.S.Retail strategic review and the merger agreement discussed above.

***Other selling, general and administrative expenses.***  Other selling, general and administrativeexpenses for the quarter ended June 30, 2007 remained relatively consistentwith the quarter ended July 1, 2006. However, as a percentage of net sales, other selling, general andadministrative expenses for the second quarter of fiscal 2007 decreased to19.8%, compared to 21.8% for the second quarter of fiscal 2006. As a percentageof net sales, other selling, general and administrative expenses for the twoquarters ended June 30, 2007 decreased to 20.2%, compared to 20.8% for the twoquarters ended July 1, 2006, however, such expenses increased  by approximately $1.0 million for the sameperiod.    The majority of the increasein selling, general and administrative expenses for U.S. Retail from the prioryear related to planned increases in employee costs to support currentoperations, planned 

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software andfacilities maintenance/support costs and increased depreciation costsassociated with equipment purchased to strengthen our technologyinfrastructure.

***Other income (expense), net.***  For the quarter and two quarters ended June30, 2007, we had other expense of $0.4 million and $0.9 million, respectively,compared to other expense for the quarter and two quarters ended July 1, 2006of $0.3 million and $0.6 million, respectively. Other expense consisted mainly of interest expense, resulting from useof the revolving credit facility.

***Incometaxes.*** Historically, we have been taxed in threeseparate jurisdictions - U.S., Singapore and the United Kingdom.  Due to the sale of Clearlab’s manufacturing,distribution and other operations located in the United Kingdom through a saleof the stock of our United Kingdom subsidiaries, we are no longer subject totax  in the United Kingdom as of June 30,2007. Our effective U.S. income tax rate on income from continuing operationsfor the two quarters ended June 30, 2007 was approximately 48% as compared withthe approximate 46% reported on income from continuing operations for the twoquarters ended July 1, 2006. The increase in the effective U.S. income tax rateprimarily results from the increase in permanent nondeductible expenses. Duringthe first two quarters  of fiscal 2007,we recorded a valuation allowance for the full amount of losses from operationsand other deferred income tax assets in excess of taxable temporary differencesin Singapore as it is more likely than not that these deferred tax assets willnot be realized. Our effective income tax rates may change as facts andcircumstances change.

On December 31,2006, we adopted the provisions of FASB Interpretation No. 48, Accounting forUncertainty in Income Taxes (“FIN 48”), which clarifies the accounting foruncertainty in income tax positions. This interpretation requires us torecognize in the consolidated financial statements only those tax positionsdetermined to be more-likely-than-not of being sustained upon examination,based on the technical merits of the positions as of the reporting date.  If a tax position is not consideredmore-likely-than-not to be sustained based solely on its technical merits, nobenefits of the position are recognized. This is a different standard forrecognition than was previously required. The more-likely-than-not thresholdmust continue to be met in each reporting period to support continuedrecognition of a benefit.   At adoption,companies must adjust their financial statements to reflect only those taxpositions that are more-likely-than-not to be sustained as of the adoptiondate. Any necessary adjustment is recorded directly to opening retainedearnings in the period of adoption and reported as a change in accountingprinciple.  As a result of the adoptionof FIN 48, we recognized a decrease of $60,000 in the liability recorded forunrecognized tax benefits, which was accounted for as a decrease to the fiscal2007 beginning accumulated deficit balance. We do not have any unrecognized tax benefits that, if recognized, wouldaffect our effective tax rate. We recognize interest and potential penaltiesaccrued related to unrecognized tax benefits in our provision for income taxes.We had approximately $63,000 accrued for the payment of interest as of June 30,2007, which is netted against the income tax receivable on the balance sheet.

We have not beennotified of intent to audit, nor are we currently undergoing an income taxaudit in any jurisdiction. The tax years that remain subject to examination bysignificant jurisdiction are as follows:

| U.S. Federal |   | 2003 through the current period |
|--------------|--------|---------------------------------|
| Utah         |   | 2003 through the current period |
| Singapore    |   | 2002 through the current period |

 

***DiscontinuedOperations. *** During the second quarter of fiscal 2007, wecompleted the sale of our ClearLab business. In separate transactions, we sold ClearLab’s flat pack technology andcertain other intellectual property and ClearLab’s manufacturing, distributionand customer support operations.  We usedthe proceeds from the completed transactions to repay all of ourindebtedness.  In accordance with SFAS144, the results of operations of ClearLab are presented as discontinuedoperations and financial results of prior periods have been reclassified toconform to this new presentation.

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Income fromdiscontinued operations totaled $8.6 million for the quarter ended June 30,2007.  This amount included a tax benefitof $16.4 million in the U.S. as a result of us, for tax purposes, writing offas bad debt outstanding balances owed to us by ClearLab and taking a worthlessstock deduction on our investment in ClearLab. Excluding this tax benefit, loss from discontinued operations was $7.8million for the quarter ended June 30, 2007. For the quarter ended July 1, 2006, loss from discontinued operationswas $5.1 million.

For the two quartersended June 30, 2007, income including a year-to-date tax benefit of $16.2million from discontinued operations totaled $4.3 million.  Excluding the tax benefit, loss fromdiscontinued operations was $11.9 million. For the two quarters end July 1, 2006, loss from discontinued operationswas $7.5 million.

These results ofdiscontinued operations included restructuring charges which ClearLab recordedof $1.4 million and $1.5 million, respectively, during the quarter and twoquarters ended June 30, 2007 for costs related to the closure of our UnitedKingdom manufacturing operations and consolidation of such operations intoSingapore.

**Liquidity and Capital Resources**

       Our principal sources of liquidity havebeen cash provided by operating activities, proceeds from debt financings andin the second quarter of fiscal 2007, the sale of our ClearLab operations.  Our principal uses of cash have been to meetdebt service requirements, finance acquisitions, finance capital expenditures,fund working capital needs and repurchase common stock.  We anticipate that these uses will continueto be the principal demands of cash in the future.  As of June 30, 2007, we had net workingcapital from continuing operations of approximately $19.3 million, compared to$1.8 million as of December 30, 2006.

Webelieve that our cash on hand, together with cash generated from operatingactivities and the borrowings available through our revolving credit facility,will be sufficient to support planned operations through the foreseeable future.

Duringthe second quarter of fiscal 2007, we completed the sale of our ClearLabbusiness.  In separate transactions, wesold ClearLab’s flat pack technology and certain other intellectual propertyand we sold ClearLab’s manufacturing, distribution and customer supportoperations.  We received considerationfrom these transactions of approximately $32 million in cash and 1,007,220shares of restricted Mi Gwang capital stock valued at $4.2 million as of June30, 2007.  We are restricted from trading929,742 shares of the Mi Gwang stock until twelve months after the closing andare restricted from trading the remaining 77,478 shares until eighteen monthsafter the closing. We have used the proceeds from these transactions to repayall of our indebtedness.

Asof June 30, 2007, we have incurred cash expenditures associated with theclosure and consolidation and disposal of ClearLab UK of approximately $1.3million and anticipate future cash expenditures of approximately $1.5 million.

As a result of regulatory requirements, our liquidity,capital resources and results of operations may be negatively impacted in thefuture if we incur increased costs (including legal fees) or fines, areprohibited from selling our products or experience losses of a substantialportion of our customers for whom we are unable to obtain or verify aprescription due to the requirements of the FCLCA.

**Modified Loan Agreement**

We have a loan agreementwith a U.S. bank providing for a revolving credit facility that matures on June1, 2009.  The loan agreement provides forborrowings of up to $40 million and for letters of credit up to a maximum of$15 million outstanding or payable at any time. The amount of any lettersof credit outstanding is deducted from the amount available for borrowing.  There were outstanding letters of credit of$1.5 million as of June 30, 2007 that reduce the total amount available underthe loan agreement to $38.5.

 

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million.  We mayreduce the maximum available advance amount or terminate the loan at any time.

Outstanding borrowings onthe revolving credit facility bear interest at a floating rate equal to thelender’s prime interest rate plus a margin, or the lender’s LIBOR rate plus amargin. The interest rate is adjusted quarterly and ranges between prime minus0.75 percent and prime minus 1.25 percent or between the applicableLIBOR rate plus 1.75 percent and the applicable LIBOR rate plus2.25 percent, depending on our maximum leverage ratio, as defined in theloan agreement. As of June 30, 2007, the prime rate margin is minus 1.00percent and the LIBOR rate margin is 2.00 percent. Interest is payablemonthly. As of June 30, 2007, we have no outstanding borrowings on ourrevolving credit facility. We used the proceeds from the sale of our internationaloperations and certain intellectual property and other assets related toClearLab’s flat pack technology to repay the borrowings on our revolving creditfacility. The revolving facility requires the quarterly payment of an unusedcredit fee which ranges from 0.25 percent to 0.38 percent, dependingon our maximum leverage ratio.

If there are outstandingbalances on the revolving credit facility, they are secured by substantiallyall of our U.S. assets, subsidiary debt instruments, 100 percent ownershipinterests in all domestic subsidiaries and 65 percent ownership interestsin foreign subsidiaries owned directly by us. The loan agreement includesvarious financial covenants including a capital expenditure limit, a maximumleverage ratio and a minimum fixed charge coverage ratio. The loan agreementdoes not permit us or our subsidiaries to dissolve, sell, dispose or merge allof their assets or acquire all of the assets of any entity without the writtenconsent of the U.S. bank, unless the transaction meets the definition of a “PermittedAcquisition Basket,” as defined in the loan agreement. The loan agreement alsoplaces a limit on the amount we can loan to any entity, outside the normalcourse of business. Additionally, the loan agreement allows us to declare orpay cash dividends, to repurchase our stock or to perform other similar equitytransactions if such transactions would not exceed $15 million in any fiscalyear and subject to other terms. This loan agreement defines several customaryevents of default including any material adverse change or any event thatoccurs which may cause a material adverse change in our or our subsidiaries’condition.

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***Cash flows from operating activities of continuing operations.***  For the two quarters ended June 30, 2007 and July1, 2006, net cash provided by operating activities was approximately $12.3million and $8.4 million, respectively. Of the 2007 amount, $2.3 million was provided by continuingoperations.  During the fiscal 2007period, cash provided by continuing operating activities was primarily fromoperating income adjusted for non-cash items (such as depreciation,amortization and stock compensation), and increases in accounts payable and accrued liabilities.  These increases to cash were partially offsetby a gross tax benefit (receivable) of approximately $17.0  million in the U.S. as a result of us, fortax purposes, writing off as bad debt outstanding balances owed to us byClearLab and taking a worthless stock deduction on our investment inClearLab.   Additionally, the increasesto cash were offset by increases to inventories and other current assets, aswell as decreases in unearned revenue. During the fiscal 2006 period, cashprovided by operating activities was primarily from operating  income adjusted for non-cash items such asdepreciation, amortization and stock compensation, increases in the income taxpayable and accrued liabilities as well as decreases in other current assetsand inventories.  The increase in cashwas partially offset by decreases in accounts payable and unearned revenue aswell as the adjustment to net income for the foreign currency exchange gain.

***Cash flows from investing activities of continuingoperations.***  Cashprovided by investing activities for the two quarters ended June 30, 2007 wasapproximately $30.6 million, as compared to cash used for investing activitiesof approximately $4.3 million for the two quarters ended July 1, 2006.  Of the 2007 amount, approximately $1.3million of cash was used by investing activities of continuing operations.  A majority of this amount was due to capitalexpenditures for infrastructure improvements and management informationsystems.   Cash provided by investingactivities of discontinued operations for the 2007 period related to the sellingof our ClearLab business.  Cash used forinvesting activities from continuing operations for the 2006 period relatedmainly to the purchase of property and equipment.

***Cash flows from financing activities of continuingoperations.***  Duringthe two quarters ended June 30, 2007 and July 1, 2006, net cash used infinancing activities was approximately $35.8 million and $5.2 million,respectively.  In the first two quartersof 2007, we had net repayments on our revolving credit facility ofapproximately $30.0 million and repurchased treasury shares for income taxwithholding relating to the vesting of employees restricted stock in the amountof $0.4 million.  In the first twoquarters of 2006, we had net repayments on our revolving credit facility ofapproximately $4.3 million.  In both thefirst two quarters of fiscal 2007 and 2006, these amounts were partially offsetby proceeds from the exercise of common stock options.

**Contractual Obligations andCommitments**

Subsequent toDecember 30, 2006, other than the repayment of all outstanding debt, asdescribed above, there have been no material changes to our contractualobligations and commitments, outside the normal course of business.

**Critical Accounting Policies**

Accountingpolices that require significant judgments and estimates include revenuerecognition (including sales returns and allowances and customer rebates);realizability of inventories; realizability of deferred income tax assets;assessment of realizability of long-lived assets; stock-based compensation; andlegal and regulatory contingencies.  Adescription of our significant accounting policies is included in the notes tothe consolidated financial statements included in our Form 10-K for the fiscalyear ended December 30, 2006.  Judgmentsand estimates are based on historical experience as well as relevant facts andcircumstances known at each reporting date. Actual results may differ from these estimates.

Salesare generally recognized when products are shipped and the customer takesownership and assumes risk of loss, collection of the related receivable isreasonably assured, the persuasive evidence of an arrangement exists and thesales price is fixed or determinable. U.S. Retail net sales consist of product sales less a provision forsales returns and allowances and estimated customer rebates.  We accrue an estimated amount for unclaimedcustomer rebates and sales returns and allowances based on historical

 

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information, adjusted foreconomic trends.  To the extent actualrebates, returns and allowances vary from historical experience revisions tothe allowances may be required.

In assessing therealizability of inventories, we make judgments as to future demandrequirements and product expiration dates. Our inventory requirements change based on projected customer demand,which changes due to fluctuations in market conditions and product life cycles.

We havesignificant long-lived tangible and intangible assets consisting primarily ofproperty and equipment, goodwill and definite-lived intangibles.  These assets are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountsof such assets may not be recoverable. In addition, we perform an impairment test related to goodwill at leastannually.  An impairment analysis relatedto long-lived tangible and definite-lived intangible assets requires theassessment of expected future undiscounted cash flows over the remaining usefullife of the asset.  An impairmentanalysis of goodwill requires the use of a fair-value based analysis.  All of the goodwill and a significant portionof the other long-lived assets remaining in our continued operations weregenerated from our acquisitions of Lens1st/Lens Express.  We recorded no impairment charges during thefirst two quarters ended of fiscal 2007.

Deferred incometax assets are assessed for recoverability and valuation allowances areprovided as necessary to reduce deferred income tax assets to amounts expectedto be realized.  Should expectations oftaxable income change in future periods, it may become necessary to change thevaluation allowance, which could affect our results of operations in the periodsuch determination is made.  We record anincome tax provision or benefit at a rate that is based on expected results forthe fiscal year.  If future changes inmarket conditions cause actual results to be more or less favorable,adjustments to the effective income tax rate on a quarterly basis could berequired.

We recordliabilities for legal and regulatory matters when the contingency is bothprobable and reasonably estimable.  Weare involved in several legal and regulatory matters.  We believe, after consultation with legal counsel,that the ultimate dispositions of these matters will not have a material impacton our financial position, liquidity or results of operations.  However, there can be no assurance that wewill be successful in our efforts to satisfactorily resolve these matters andthe ultimate outcome could result in a material negative impact on ourfinancial position, liquidity or results of operations.

We account forshare-based compensation in accordance with SFAS No. 123R, which requiresstock-based compensation to be measured based on the fair value of the award onthe date of grant and recognized over the period during which service isrequired in exchange for the award.  Under the fair value recognition provisions of SFAS No. 123R, werecognize stock-based compensation net of an estimated forfeiture rate and onlyrecognize compensation cost for those shares expected to vest over therequisite service period of the award. We estimate the value of stock option awards on the date of grant usinga Black-Scholes pricing model. Calculating the fair value of share-basedpayment awards requires the input of highly subjective assumptions, includingthe expected term of the share-based payment awards and expected stock pricevolatility.  The expected term representsthe average time that options that vest are expected to be outstanding.  The expected volatility rates are estimatedbased on a weighted average of the historical volatilities of our common stock.  The assumptions used in calculating the fairvalue of share-based payment awards represent our best estimates, but theseestimates involve inherent uncertainties and the application of our judgment.As a result, if factors change and we use different assumptions, thestock-based compensation expense could be materially different in the future.In addition, we are required to estimate the expected forfeiture rate and onlyrecognize expense for those shares expected to vest. If our actual forfeiturerate is materially different from our estimate, the stock-based compensationexpense could be significantly different from what we have recorded in thecurrent period.

Effective December31, 2006, we adopted the provisions of the SEC Staff Accounting BulletinNo. 108, “Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements” (“SAB 108”).SAB 108 provides guidance on how prior year misstatements should be takeninto consideration when quantifying misstatements in current year financialstatements for purposes of determining whether the current year’s financialstatements are materially misstated. SAB 108 

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permits registrants torecord the cumulative effect of initial adoption by recording the necessary “correcting”adjustments to the carrying values of assets and liabilities as of thebeginning of that year with the offsetting adjustment recorded to the openingbalance of retained earnings only if material under the dual method.   Adoption of SAB 108 had no impact on our consolidatedfinancial statements in the current period.

Effective December31, 2006, we adopted the provisions of Financial Accounting Standards Board(FASB) issued Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes,” which defines the threshold for recognizing the benefits of tax returnpositions in the financial statements as more-likely-than-not to be sustainedby the taxing authority. A tax position that meets the more-likely-than-notcriterion shall be measured at the largest amount of benefit that is more than50% likely of being realized upon ultimate settlement. InterpretationNo. 48 applies to all tax positions accounted for under SFAS No. 109,“Accounting for Income Taxes.”  Uponadoption, we have adjusted the financial statements to reflect only those taxpositions that are more-likely-than-not to be sustained as of the adoptiondate. Any adjustment has been recorded directly to the beginning retainedearnings/accumulated deficit balance in the period of adoption and reported asa change in accounting principle.  As aresult of the implementation of FIN 48, we recognized a $60,000 decrease to ourliability for income taxes payable, and a corresponding decrease to our 2007beginning balance of accumulated deficit.

Effective December31, 2006, we adopted Emerging Issues Task Force (“EITF”) Issue No. 06-03 (“EITF06-03”), “How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross versusNet Presentation).”  EITF 06-03 providesthat the presentation of taxes assessed by a governmental authority that isdirectly imposed on a revenue-producing transaction between a seller and acustomer on either a gross basis (included in revenues and costs) or on a netbasis (excluded from revenues) is an accounting policy decision that should bedisclosed.

**CautionaryStatement Concerning Forward-Looking Statements**

This QuarterlyReport on Form 10-Q contains a number of statements about our future businessprospects which are forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995.  These forward-looking statements include allstatements which are not purely historical and include, but are not necessarilylimited to:

·                  Any statementsrelating in any way to our anticipated merger with an affiliate of FenwayPartners Capital Fund III, L.P., including but not limited to the timing ofsuch merger, shareholder approval of such merger, the terms upon which it maybe accomplished, or potential termination fees payable to or by us if themerger is not consummated;

·                  Any statementsrelating in any way to the possibility of our receipt of deferred considerationor earn-out payments pursuant to the Asset Purchase Agreement with Menicon Co.,Ltd. dated May 24, 2007;

·                  Any statementsrelating to our perception of the contact lens market and anticipated trends inthat market in any of the countries in which we do business;

·                  Any statementsrelating to our relationships with our suppliers, our anticipated ability toprocure products, or the terms under which we may procure its products;

·                  Any statementsrelating to sales, usage, or trends in the contact lens industry and market;

·                  Any statementsrelating to our anticipated business operations, inventory levels, ability tohandle specific call volumes, ability to fill and timely ship orders, orsimilar statements;

·                  Any statementsrelating to our anticipated results of operations, including but not limited toanticipated sales, revenues, earnings, tax benefits, payments due pursuant toapplicable license agreements, or similar matters; and

·                  Any statementsrelating to expectations with respect to legal and legislative initiatives in2007 and beyond.

Without limitingthe foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “intends,”“future,” “would,” “could,” “might,” “should,” “may”, “will”, and similarexpressions, including any expressions of our plans, intentions, or goals, areintended to identify forward-looking statements, although not allforward-looking statements contain these words.

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There are a number of important factors that could cause actual eventsor our actual results to differ materially from those indicated by suchforward-looking statements. These factors include, without limitation, thoseset forth under the captions “Risk Factors,” “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” “CriticalAccounting Policies,” and “Quantitative and Qualitative Disclosures about MarketRisk” included this Quarterly Report on Form 10-Q and factors set forth under “RiskFactors” in our Annual Report on Form 10-K for the fiscal year ended December30, 2006.  The factors discussed hereindo not reflect the potential future impact of any mergers, acquisitions ordispositions.  In addition, anyforward-looking statements represent our estimates only as of the day thisQuarterly Report on Form 10-Q was first filed with the Securities and ExchangeCommission and we specifically disclaim any obligation to update forwardlooking statements, even if our estimates change.

**Item 3.****          *****Quantitativeand Qualitative Disclosures about Market Risk***

***Interest Rate Risk.*** Our revolving credit facility bears interest at a variable rate based onthe U.S. prime rate or LIBOR.  As of June30, 2007, we had no outstanding borrowings on the revolving creditfacility.  We currently have no otherdebt obligations.

***Foreign CurrencyRisk.***  We faceforeign currency risks primarily as a result of our Singapore intercompany balances,which are denominated in U.S. dollars, between the U.S. and Singaporeentities.  The functional currency of ourSingapore entity is the Singapore dollar. Fluctuations in exchange rates between the U.S. dollar and the Singaporedollar could lead to currency exchange losses or gains on the intercompanybalances and transactions denominated in currencies other than the functionalcurrency.  During the second quarter offiscal 2007, we closed the transactions for the sale of our ClearLab business,as discussed above.  As a result of thissale, our international operations are reflected as discontinued operationsand, accordingly all foreign currency transaction gains or losses are reportedin income (loss) from discontinued operations within our statement ofoperations.

We have not entered into any foreign currencyderivative financial instruments; however, we may choose to do so in the futurein an effort to manage or hedge our foreign currency risk.

***Investment in Restricted Stock. *** Pursuant to the Purchase Agreement dated May25, 2007 with Mi Gwang, we received 1,007,220 shares of restricted Mi Gwangcapital stock valued at $4.2 million as of June 30, 2007.  We are restricted from trading 929,742 sharesof the Mi Gwang stock until twelve months after the closing and are restrictedfrom trading the remaining 77,478 shares until eighteen months after theclosing.  Mi Gwang stock is publiclytraded on the Korean Stock Exchange and accordingly the trading price of thestock could decline due to market fluctuations and other changes beyond ourcontrol, we may lose all or part of our investment. We are also exposed tocertain levels of market risk with this investment, including changes inforeign currency exchange rates.  Marketrisk is the potential loss arising from adverse exchanges in market rates andprices, such as foreign currency exchange rates.

**Item 4.****       *****Controls and Procedures***

Our ChiefExecutive Officer and Chief Financial Officer, after evaluating theeffectiveness of our disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by thisreport (the “Evaluation Date”), have concluded that, as of the Evaluation Date,our disclosure controls and procedures were adequate and effective to ensurethat material information relating to us and our consolidated subsidiarieswould be made known to them by others within those entities.

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There were nosignificant changes in our internal controls over financial reporting or inother factors that have materially affected, or are reasonably likely tomaterially affect, our internal controls over financial reporting subsequent tothe Evaluation Date.  As a result, nocorrective actions were taken.

Our management,including the Chief Executive Officer and Chief Financial Officer, does notexpect that our disclosure controls and procedures or our internal controlsover financial reporting will prevent all error and all fraud.  A control system, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the control system are met.  Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits of controlsmust be considered relative to their costs. Because of inherent limitations in all control systems, no evaluation ofcontrols can provide absolute assurance that all control issues and instancesof fraud, if any, have been detected.

 

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**PART II.                OTHERINFORMATION**

**Item 1.                    *Legal Proceedings***

From time to time we are involved in legal matters generally incidentalto our business. It is the opinion of our management, after discussion withlegal counsel, that except for legal and professional fees that we incur fromtime to time, the ultimate dispositions of all of these matters will not have amaterial impact on our financial position, liquidity or results of ouroperations. However, there can be no assurance that we will be successful in ourefforts to satisfactorily resolve these matters, and the ultimate outcome couldresult in a material negative impact on our financial position, liquidity orresults of operations.

**Item 1A.                 *Risk Factors***

Other than theadditional risk factors set forth below, there are no material changes from therisk factors previously disclosed in our Annual Report on Form 10-K for thefiscal year ended December 30, 2006.

***Failure to complete the proposed mergercould adversely affect us. ***OnJune 3, 2007, we entered into a definitive agreement and plan of merger withAlta Parent Corp. and Alta Acquisition Corp., affiliates of Fenway PartnersCapital Fund III, L.P.  We can provide noassurance that the merger agreement and the merger will be approved by ourstockholders or that the other conditions of the merger will be satisfied orthat the merger will be consummated.  Ifthe merger is not consummated, the trading price of our common stock coulddecline significantly.

**Item 2.                    *Unregistered Sales of Equity Securities and Use of Proceeds***

None.

**Item 3.                    *Defaults Upon Senior Securities***

None.

**Item 4.                    *Submission of Matters to a Vote of Security Holders***

**Theannual meeting of stockholders of the Company was held on May 18, 2007.  The stockholders approved the followingmatters:**

·                  Theelection as directors of Jonathan C. Coon, Bradley T. Knight and Frank LaGrangeJohnson to serve until the annual meeting of stockholders in 2010 and untiltheir respective successors are elected and qualified.

 

|                        | ** ** | **Votes  Cast** | ** ** |
|------------------------|------------|---------------------------|------------|
| ** **             | ** ** | **For**                   | ** ** | **Withheld** | ** ** |
| Jonathan C. Coon       |       | 12,805,535                |       | 54,482 |   |
| Bradley T.  Knight     |       | 12,689,107                |       | 170,910 |   |
| Frank LaGrange Johnson |       | 12,741,179                |       | 118,838 |   |

 

As of the date of the annual meeting of stockholders, ourother directors included the following persons: (i) Thomas H. Boggs, Jr., John F. Nichols and Garth T. Vincent whocontinue to serve as directors for terms expiring at the annual meeting ofstockholders in 2008; and (ii) E. Dean Butler and Stephen L. Key whocontinue to serve as directors for terms expiring at the annual meeting ofstockholders in 2009.

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·                  Ratificationof appointment of KPMG LLP as independent auditors to audit the Company’s booksand accounts for the fiscal year ending December 29, 2007.

| Votes Cast:     | ** ** |
|----------------------|------------|
| For                  |       | 12,853,866 |   |
| Against or  Withheld |       | 6,151 |   |
| Abstentions          |       | 0 |   |

 

**Item 5.                    *Other Information***

None.

**Item 6.                    *Exhibits***

***               *(A)Exhibits**
| Exhibit No. | ** ** | **Description  of Exhibit** |
|-------------|------------|-----------------------------|
|        | 2.1        |                        |   | Agreement and Plan of Merger, dated as of June 3,  2007, among Alta Parent Corp., Alta Acquisition Corp. and the Company  (incorporated by reference to the Company’s Current Report on Form 8-K (File  No. 000-23633) filed on June 4, 2007). |
|        | 2.2        |                        |   | Asset Purchase Agreement, dated as of May 24, 2007,  among the Company, ClearLab International, Pte. Ltd., Stephen D. Newman and  Menicon Co., Ltd. *+ |
|        | 2.3        |                        |   | Purchase Agreement, dated as of May 25, 2007, among  the Company, ClearLab International, Pte. Ltd., Mi Gwang Contact Lens Co.,  Ltd and ClearLab SG Pte Ltd. *+ |
|        | 31.1       |                        |   | Certification Required Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
|        | 31.2       |                        |   | Certification Required Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
|        | 32.1       |                        |   | Certification Required Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |
|        | 32.2       |                        |   | Certification Required Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |

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*                    Certainconfidential portions have been omitted pursuant to a confidential treatmentrequest filed separately with the Securities and Exchange Commission.

+                    TheCompany agrees to furnish supplementally a copy of any omitted schedule to theSecurities and Exchange Commission upon request.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                        | ** ** | **1-800 CONTACTS, INC.** |   |                    |
|------------------------|------------|--------------------------|--------|-------------------------|
|                   | ** ** | ** **               |   | ** **              |   |   |
| Dated: August 14, 2007 | ** ** | By:                      |   | /s/ Jonathan C. Coon    |   |   |
|                   |       | Name:                    |   | Jonathan C. Coon        |   |   |
|                   |       | Title:                   |   | Chief Executive Officer |   |   |
|                   |       |                     |   |                    |   |   |
|                   |       | By:                      |   | /s/ Robert G. Hunter    |   |   |
|                   |       | Name:                    |   | Robert G. Hunter        |   |   |
|                   |       | Title:                   |   | Chief Financial Officer |   |   |

 

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