Use these links to rapidly review the document1-800 CONTACTS, INC. INDEX

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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FORM 10-Q

|(Mark one)                                                                                   |                                                                                         
|-------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                                                            | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended March 29, 2003                                               
|o                                                                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to           
                  .

Commission file number:            0-23633

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1-800 CONTACTS, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of incorporation or organization)                   |  | 87-0571643(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------------------------- |  | ----------------------------------------------
|66 E. Wadsworth Park Drive, 3rd Floor
Draper, UT(Address of principal executive offices) |  | 84020(Zip Code)                               
|(801) 924-9800(Registrant's telephone number, including area code)                      

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

ý Yes    o No

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange act).

o Yes    ý No

As
of May 6, 2003, the Registrant had 13,069,112 shares of Common Stock, par value $0.01 per share, outstanding.

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1-800 CONTACTS, INC.  INDEX



|                              |  |                                                                                                         
|----------------------------- |  | --------------------------------------------------------------------------------------------------------
|PART I. FINANCIAL INFORMATION
|Item 1.                       |  | Financial Statements                                                                                    
|                              |  | Condensed Consolidated Balance Sheets as of December 28, 2002 and March 29, 2003                        
|                              |  | Condensed Consolidated Statements of Operations for the Quarters Ended March 30, 2002 and March 29, 2003
|                              |  | Condensed Consolidated Statements of Cash Flows for the Quarters Ended March 30, 2002 and March 29, 2003
|                              |  | 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 2.                       |  | Changes in 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 and Reports on Form 8-K                                                                        

2

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

1-800 CONTACTS, INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED BALANCE SHEETS  (in thousands)  (unaudited)

|                                      |                                                             | December 28,
2002                          |        | March 29,
2003 |       
|------------------------------------- | ----------------------------------------------------------- | ------------------------------------------ | ------ | -------------- | ------
|ASSETS                                |                                                            
|CURRENT ASSETS:                       |                                                             |                                            |        |                |       
|                                      | Cash                                                        |                                            | $      | 259            |       
|                                      | Accounts receivable                                         |                                            |        | 655            |       
|                                      | Inventories, net                                            |                                            |        | 37,785         |       
|                                      | Prepaid income taxes                                        |                                            |        | 769            |       
|                                      | Deferred income taxes                                       |                                            |        | 756            |       
|                                      | Other current assets                                        |                                            |        | 1,095          |       
|                                      |                                                             |                                            |        |                |       
|                                      |                                                             | Total current assets                       |        |                | 41,319
|PROPERTY AND EQUIPMENT, net           |                                                             |                                            | 12,862 |                |       
|DEFERRED INCOME TAXES                 |                                                             |                                            | 365    |                |       
|GOODWILL                              |                                                             |                                            |       |                |       
|DEFINITE-LIVED INTANGIBLE ASSETS, net |                                                             |                                            | 7,089  |                |       
|OTHER ASSETS                          |                                                             |                                            | 369    |                |       
|                                      |                                                             |                                            |        |                |       
|                                      |                                                             | Total assets                               |        | $              | 62,004
|                                      |                                                             |                                            |        |                |       
|LIABILITIES AND STOCKHOLDERS' EQUITY  |                                                            
|CURRENT LIABILITIES:                  |                                                             |                                            |        |                |       
|                                      | Line of credit                                              |                                            | $      | 5,770          |       
|                                      | Current portion of long-term debt                           |                                            |        | 2,853          |       
|                                      | Current portion of capital lease obligations                |                                            |        | 372            |       
|                                      | Accounts payable                                            |                                            |        | 8,597          |       
|                                      | Accrued liabilities                                         |                                            |        | 3,327          |       
|                                      | Unearned revenue                                            |                                            |        | 403            |       
|                                      |                                                             |                                            |        |                |       
|                                      |                                                             | Total current liabilities                  |        |                | 21,322
|                                      |                                                             |                                            |        |                |       
|LONG-TERM LIABILITIES:                |                                                             |                                            |        |                |       
|                                      | Long-term debt, less current portion                        |                                            |        | 17,365         |       
|                                      | Capital lease obligations, less current portion             |                                            |        | 250            |       
|                                      | Liability related to contingent consideration               |                                            |        | 5,470          |       
|                                      |                                                             |                                            |        |                |       
|                                      |                                                             | Total long-term liabilities                |        |                | 23,085
|                                      |                                                             |                                            |        |                |       
|STOCKHOLDERS' EQUITY:                 |                                                             |                                            |        |                |       
|                                      | Common stock, 12,861 and 13,050 issued, respectively        |                                            |        | 129            |       
|                                      | Additional paid-in capital                                  |                                            |        | 24,013         |       
|                                      | Retained earnings                                           |                                            |        | 14,272         |       
|                                      | Treasury stock, at cost, 1,473 and 700 shares, respectively |                                            |        | (20,739        | )     
|                                      | Accumulated other comprehensive income (loss)               |                                            |        | (78            | )     
|                                      |                                                             |                                            |        |                |       
|                                      |                                                             | Total stockholders' equity                 |        |                | 17,597
|                                      |                                                             |                                            |        |                |       
|                                      |                                                             | Total liabilities and stockholders' equity |        | $              | 62,004
|                                      |                                                             |                                            |        |                |       

See accompanying notes to condensed consolidated financial statements.

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1-800 CONTACTS, INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share amounts)  (unaudited)

|                                                |                                                    | Quarter Ended                                      |       
|----------------------------------------------- | -------------------------------------------------- | -------------------------------------------------- | ------
|
|NET SALES                                       |                                                    | $                                                  | 41,581
|COST OF GOODS SOLD                              |                                                    |                                                    | 28,894
|                                                |                                                    |                                                    |       
|                                                | Gross profit                                       |                                                    |       
|                                                |                                                    |                                                    |       
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:   |                                                    |                                                    |       
|                                                | Advertising expense                                |                                                    |       
|                                                | Legal and professional fees                        |                                                    |       
|                                                | Research and development expenses                  |                                                    |       
|                                                | Other selling, general and administrative expenses |                                                    |       
|                                                |                                                    |                                                    |       
|                                                |                                                    | Total selling, general and administrative expenses |       
|                                                |                                                    |                                                    |       
|INCOME FROM OPERATIONS                          |                                                    |                                                    | 3,317 
|OTHER EXPENSE, net                              |                                                    |                                                    | (130  
|                                                |                                                    |                                                    |       
|INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES |                                                    |                                                    | 3,187 
|PROVISION FOR INCOME TAXES                      |                                                    |                                                    | (1,247
|                                                |                                                    |                                                    |       
|NET INCOME (LOSS)                               |                                                    | $                                                  | 1,940 
|                                                |                                                    |                                                    |       
|PER SHARE INFORMATION:                          |                                                    |                                                    |       
|                                                | Basic net income (loss) per common share           |                                                    | $     
|                                                |                                                    |                                                    |       
|                                                | Diluted net income (loss) per common share         |                                                    | $     
|                                                |                                                    |                                                    |       

See
accompanying notes to condensed consolidated financial statements.

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1-800 CONTACTS, INC. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)  (unaudited)

|                                         |                                                                                          | Quarter Ended                                                               |                                            
|---------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:    |                                                                                          |                                                                             |                                            
|                                         | Net income (loss)                                                                        |                                                                             | $                                          
|                                         | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                                             |                                            
|                                         |                                                                                          | Depreciation and amortization                                               |                                            
|                                         |                                                                                          | Amortization of debt issuance costs and discounts                           |                                            
|                                         |                                                                                          | Unrealized foreign currency exchange loss                                   |                                            
|                                         |                                                                                          | Loss on sale of property and equipment                                      |                                            
|                                         |                                                                                          | Deferred income taxes                                                       |                                            
|                                         |                                                                                          | Changes in operating assets and liabilities, net of effects of acquisition: |                                            
|                                         |                                                                                          |                                                                             | Inventories                                
|                                         |                                                                                          |                                                                             | Other current assets                       
|                                         |                                                                                          |                                                                             | Accounts receivable                        
|                                         |                                                                                          |                                                                             | Accounts payable                           
|                                         |                                                                                          |                                                                             | Accrued liabilities                        
|                                         |                                                                                          |                                                                             | Income taxes payable / prepaid income taxes
|                                         |                                                                                          |                                                                             | Unearned revenue                           
|                                         |                                                                                          |                                                                             |                                            
|                                         |                                                                                          |                                                                             |                                            
|                                         |                                                                                          |                                                                             |                                            
|CASH FLOWS FROM INVESTING ACTIVITIES:    |                                                                                          |                                                                             |                                            
|                                         | Purchase of property and equipment                                                       |                                                                             |                                            
|                                         | Proceeds from sale of property and equipment                                             |                                                                             |                                            
|                                         | Purchase of intangible assets                                                            |                                                                             |                                            
|                                         | Cash paid for acquisition                                                                |                                                                             |                                            
|                                         | Deposits and other                                                                       |                                                                             |                                            
|                                         |                                                                                          |                                                                             |                                            
|                                         |                                                                                          |                                                                             |                                            
|                                         |                                                                                          |                                                                             |                                            
|CASH FLOWS FROM FINANCING ACTIVITIES:    |                                                                                          |                                                                             |                                            
|                                         | Common stock repurchases                                                                 |                                                                             |                                            
|                                         | Proceeds from exercise of common stock options                                           |                                                                             |                                            
|                                         | Net borrowings on line of credit                                                         |                                                                             |                                            
|                                         | Principal payments on capital lease obligations                                          |                                                                             |                                            
|                                         | Principal payments on long-term debt                                                     |                                                                             |                                            
|                                         |                                                                                          |                                                                             |                                            
|                                         |                                                                                          |                                                                             |                                            
|                                         |                                                                                          |                                                                             |                                            
|EFFECT OF FOREIGN EXCHANGE RATES ON CASH |                                                                                          |                                                                             | 1                                          
|                                         |                                                                                          |                                                                             |                                            
|NET INCREASE IN CASH                     |                                                                                          |                                                                             | 39                                         
|CASH AT BEGINNING OF PERIOD              |                                                                                          |                                                                             | 36                                         
|                                         |                                                                                          |                                                                             |                                            
|CASH AT END OF PERIOD                    |                                                                                          | $                                                                           | 75                                         
|                                         |                                                                                          |                                                                             |                                            
|SUPPLEMENTAL CASH FLOW INFORMATION:      |                                                                                          |                                                                             |                                            
|                                         | Cash paid for interest                                                                   |                                                                             | $                                          
|                                         | Cash paid for income taxes                                                               |                                                                             |                                            

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

During
the first quarter of 2003, the Company purchased certain assets and assumed certain liabilities of Lens Express and Lens 1st. The purchase consideration included cash of $6,904, common stock
with a fair value of $19,859 and assumed operating liabilities of $4,099 (see Note 6).

See
accompanying notes to condensed consolidated financial statements.

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

NOTE 1.    PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring
adjustments), which in the opinion of management, are necessary to present fairly the results of operations of the Company for the periods presented. It is suggested that these condensed consolidated
financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended
December 28, 2002.

The
results of operations for the 2003 interim period are not necessarily indicative results that may be expected for the full fiscal 2003 year.

NOTE 2.    INVENTORIES

Inventories are recorded at the lower of cost (using the first-in, first-out method) or market. Inventories as of December 28, 2002
and March 29, 2003 consisted of the following (in thousands):

December 28,
2002

March 29,
2003Purchased contact lenses

$
36,571

$
33,690Manufactured inventories:Raw materials


109


90Work in process


210


359Finished goods contact lenses


895


756Total

$
37,785

$
34,895


NOTE 3.    NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share ("Basic EPS") excludes dilution and is computed by dividing net income (loss) by the weighted-average number of common
shares outstanding during the period. Diluted net income (loss) per common share ("Diluted EPS") reflects the potential dilution that could occur if stock options or other common stock equivalents
were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an antidilutive effect on net income (loss) per
common share. For the quarter ended March 30, 2002, options to purchase 459,157 shares of common stock were not included in the computation of Diluted EPS because the exercise prices of the
options were greater than the average market price of the common shares. For the quarter ended March 29, 2003, options to purchase 1,207,482 shares were not included in the computation of
Diluted EPS because their effect would be anti-dilutive, thereby decreasing the loss per common share. For the quarter ended March 29, 2003, Basic and Diluted EPS do not include the
impact of 700,000 shares of restricted stock held in escrow since the necessary conditions for the release of those shares have not been satisfied (see Note 6).

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The
following is a reconciliation of the numerator and denominator used to calculate Basic and Diluted EPS (in thousands, except per share amounts):

|                        |  | Quarter Ended March 30, 2002 |       | Quarter Ended March 29, 2003 |       
|----------------------- |  | ---------------------------- | ----- | ---------------------------- | ------
|
|Basic EPS               |  | $                            | 1,940 |                              | 11,521
|Effect of stock options |  |                              |       |                              | 101   
|                        |  |                              |       |                              |       
|Diluted EPS             |  | $                            | 1,940 |                              | 11,622
|                        |  |                              |       |                              |       

NOTE 4.    COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) for the quarters ended March 30, 2002 and March 29, 2003 consists of the following components (in thousands):

Quarter EndedMarch 30, 2002

March 29, 2003Net income (loss)

$
1,940

$
(488
)Foreign currency translation gain





140Comprehensive income (loss)

$
1,940

$
(348
)


The
foreign currency translation gain results primarily from changes in exchange rates relative to the U.S. dollar from the translation of the Company's Singapore subsidiary financial
statements.

NOTE 5.    STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations and uses the
intrinsic method of accounting for its stock option grants to employees and directors. Accordingly, no compensation expense has been recognized for these stock option grants. Under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," compensation cost is recognized for the fair market value of each option as estimated on the date of
grant using the Black-Scholes option-pricing model.

SFAS
No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure," amends SFAS No. 123, to provide alternative methods of transition for a
voluntary change to the fair market value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123
to require new prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported
results. The Company has elected to adopt the "disclosure only" provisions of SFAS No. 148.

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If
compensation expense for all stock options had been determined consistent with SFAS No. 123, the Company's net income (loss) and basic and diluted net income (loss) per common
share would have been as follows (in thousands, except per share amounts):

Quarter EndedMarch 30,
2002

March 29,
2003Net income (loss):As reported

$
1,940

$
(488
)Fair-value based compensation, net of tax


(197
)

(278
)Pro forma

$
1,743

$
(766
)Basic net income (loss) per common share:As reported

$
0.17

$
(0.04
)Pro forma

$
0.15

$
(0.06
)Diluted net income (loss) per common share:As reported

$
0.17

$
(0.04
)Pro forma

$
0.15

$
(0.06
)


The
weighted average per share fair value of options granted during the quarters ended March 30, 2002 and March 29, 2003 was $7.47 and $11.98, respectively. The fair value
of each option grant has been estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:

Quarter EndedMarch 30,
2002

March 29,
2003Risk-free interest rate

4.0
%
2.9
%Expected dividend yield

0.0
%
0.0
%Volatility

75
%
78
%Expected life

5 years

5 years


NOTE 6.    RECENT ACQUISITIONS

IGEL (ClearLab)

On July 24, 2002, the Company completed the acquisition of certain net assets and the majority of the business operations of IGEL, a developer and contract
manufacturer of contact lenses based in Singapore. The acquisition was effected through a wholly owned subsidiary of the Company, IGEL Acquisition Co. Pte Ltd (subsequently renamed ClearLab
Pte Ltd), and included the purchase of assets of Igel C.M. Laboratory Pte Ltd and International Vision Laboratories Pte Ltd, both subsidiaries of Igel Visioncare Pte Ltd,
as well as certain other assets from Sinduchajana Sulistyo and Stephen D. Newman. The assets acquired included principally the long-term leasehold interests in the land and building where
the manufacturing facility is located, as well as equipment, inventories, and certain intellectual property rights, including patents key to the operation of the acquired business. ClearLab is in the
process of designing and developing a new brand of contact lens that will provide the Company increased control of production and inventory and the flexibility to make a variety of offers to its
customers to enhance its capability to provide high quality, cost-effective products. The Company accounted for this transaction under the purchase method in accordance with SFAS
No. 141. The

8

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results
of operations of ClearLab are included in the consolidated results of the Company from the date of the acquisition.

The
consideration paid by the Company consisted of approximately $6.6 million in cash (which includes $1.2 million in transaction costs), $8.9 million in assumed
building and business loans to be paid over the next 7 years, $0.7 million in assumed capital lease obligations, a non-interest bearing note payable of $2.1 million to
be paid over the next 5 years, 700,000 shares of restricted common stock of the Company, and 270,000 common stock options of the Company in three tranches of 90,000 each with exercise prices of
$15, $25 and $35 per share, respectively. The 700,000 shares of restricted common stock are held in escrow, subject to a performance guarantee, and vest over a two-year schedule with no
shares released from escrow for a minimum of one year. The Company obtained a $10 million, five-year term loan from a U.S. bank to provide partial financing for this asset purchase.
The parent company also executed guarantees for the building and business loans assumed in the transaction.

Lens Express and Lens 1st

On January 30, 2003, the Company completed the acquisition of certain assets and the assumption of certain liabilities of Lens Express LLC and Camelot
Ventures/CJ, L.L.C. d/b/a Lens 1st (collectively, the "Seller"), two leading U.S. mail order contact lens retailers. The assets acquired included databases, customer information, web
sites and Internet addresses or domain names, telephone numbers, certain specified contracts and intellectual property rights. In addition, acquired assets included certain property, equipment,
inventories, receivables and prepaid expenses. With the exception of specifically identified liabilities, the Company did not assume the liabilities of the Seller. The liabilities assumed by
the Company included certain of the Seller's identified contracts, accounts payable, accrued liabilities, certain customer program obligations and severance obligations as of January 30, 2003.

The
consideration paid by the Company consisted of approximately $6.9 million in cash (including $0.4 million in transaction costs), 900,000 shares of restricted common
stock of the Company with a fair value of $19.9 million and the assumption of approximately $4.1 million of the aforementioned liabilities. The 900,000 shares of restricted common stock
are subject to a lock-up period of 12 months after the acquisition date of January 30, 2003, established under the terms of a lock-up agreement. In connection
with the acquisition, the Company entered into a registration rights agreement pursuant to which the Company granted the Seller certain piggyback registration rights with respect to the 900,000 shares
of restricted common stock. The following sets forth the consideration paid by the Company (in thousands, except per share amounts):

Cash

$
6,500Restricted shares (900 shares at $22.07 per share)


19,859Acquisition expenses


404Accounts payable


3,575Accrued expenses


524Total purchase consideration

$
30,862


For
purposes of computing the purchase price, the value of the restricted common stock was determined by taking the average closing price of the Company's common stock as quoted on
NASDAQ for the two days before, the day of and the two days following the announcement of the

9

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signing
of a letter of intent to acquire Lens Express and Lens 1st. This average price was then reduced by a 15 percent discount due to the restriction provisions associated with
the common shares issued.

The
following table sets forth the allocation of the purchase price to the tangible and intangible assets acquired (in thousands):

Accounts receivable

$
178Inventories


2,740Other assets


76Property and equipment


572Customer list


5,100Goodwill


22,196Total

$
30,862


The
unaudited pro forma information below sets forth summary results of operations as if the acquisitions of ClearLab and Lens Express and Lens 1st had taken place at the
beginning of 2002, after giving effect to certain adjustments, including amortization of intangibles, depreciation, interest expense and other adjustments directly attributable to the transaction. The
following pro forma information has been prepared for comparative purposes only and does not purport to be indicative of what would have occurred had the acquisitions occurred at the beginning of
fiscal 2002 or of results which may occur in the future (in thousands, except per share amounts):

Quarter EndedMarch 30,
2002

March 29,
2003Net sales

$
54,314

$
50,072Net loss


(321
)

(374
)Net loss per common share:Basic

$
(0.03
)
$
(0.03
)Diluted

$
(0.03
)
$
(0.03
)


NOTE 7.    COMMON STOCK TRANSACTIONS

During the quarter ended March 29, 2003, employees exercised stock options to purchase 62,048 shares of common stock for a total of approximately $439,000.
The Company recorded an increase in additional paid-in capital of approximately $270,000 for the income tax benefit related to these stock option exercises.

During
the quarter ended March 29, 2003, the Company granted nonqualified stock options to purchase 112,953 shares of common stock to employees and directors of the Company. The
exercise prices of the options range from $18.30 to $27.50 per share, which were not less than the quoted fair market values at the grant date. The options vest equally over a four-year
period and expire in five to seven years.

The
Company's Board of Directors has authorized the repurchase of up to 3,000,000 shares of the Company's common stock. A purchase of the full 3,000,000 shares would equal approximately
23 percent of the total shares issued as of March 29, 2003. The repurchase of common stock is subject to market conditions and is accomplished through periodic purchases at prevailing
prices on the open market, by block purchases or in privately negotiated transactions. The repurchased shares are retained as treasury stock to be used for corporate purposes. From inception of its
authorized repurchase

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programs
through March 29, 2003, the Company had repurchased 1,706,500 shares for a total cost of approximately $22.1 million.

During
the quarter ended March 29, 2003, the Company issued 900,000 shares of restricted common stock as a portion of the consideration for the acquisition of Lens Express and
Lens 1st (see Note 6). Of the 900,000 shares, 772,655 were issued from treasury stock. The 900,000 shares of restricted common stock are subject to a lock-up period of
12 months after the acquisition date of
January 30, 2003. In connection with the acquisition, the Company entered into a registration rights agreement pursuant to which the Company granted the Seller certain piggyback registration
rights with respect to the 900,000 shares of restricted common stock.

NOTE 8.    DEBT OBLIGATIONS

Effective July 22, 2002, the Company entered into a new loan agreement, providing for both a $10 million term loan and a revolving credit facility
for borrowings up to $20 million. The amounts outstanding on both the term loan and the revolving credit facility are limited to a percentage of eligible inventory. As of the effective date,
the percentage was 75% and is reduced by 1.25% each calendar quarter beginning September 30, 2002 until the percentage is 50%. The percentage as of March 29, 2003 was 72.50%. The
outstanding borrowings are secured by substantially all of the Company's U.S. assets including a portion of the Company's common stock ownership in ClearLab. The agreement contains various financial
covenants including a capital expenditure limit, a minimum working capital requirement, a leverage ratio and a minimum net income requirement. Also, if the Company were unable to cure a default on its
Singapore debt within 30 days of occurrence, the Company would be in default on this debt. As of December 28, 2002, the Company was not in compliance with the minimum net income covenant
or the leverage ratio covenant. However, the Company obtained waivers through April 30, 2004. These waivers also established certain new financial covenants. The Company was in compliance with
these modified covenants and all other applicable covenants as of March 29, 2003.

Outstanding
borrowings on the revolving credit facility bear interest at a floating rate equal to the lender's prime interest rate plus 0.25 percent (4.50 percent at
March 29, 3003) or 2.75 percent above the lender's LIBOR for the applicable period. As of March 29, 2003, the interest rate on the outstanding borrowings was based on the lender's
prime interest rate plus 0.25 percent. Interest is payable monthly. The credit facility also includes an unused credit fee equal to one-eighth of one percent, payable quarterly. As
of March 29, 2003, the remaining availability on the credit facility was $6.9 million. The credit facility was scheduled to expire on April 30, 2003, however, the Company obtained
an extension of the maturity date to July 30, 2003. The Company is in the process of renewing the credit facility. The Company expects that the credit facility will be renewed prior to the
expiration of the extension; however, there can be no assurance that the facility will be renewed with similar terms.

As
of March 29, 2003, the U.S. bank term loan interest rate was fixed at the 180-day LIBOR rate plus 3% (4.34% at March 29, 2003) until April 3, 2003 at
which time the rate was fixed at 4.29% through June 3, 2003.

The
Company's Singapore bank term loan contains various financial covenants including minimums on net worth and shareholders' funds. As of December 28, 2002, the Company was not
in compliance with the net worth and shareholders' funds covenants. However, the Company obtained waivers through April 30, 2004.

11

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Cross
default clauses exist such that if the Company were in default on its U.S. debt, the Company would also be in default on its Singapore debt. If the Company were in default on its
Singapore bank term loan, the Company would also be in default on its note payable to the parent of IGEL.

NOTE 9.    LEGAL MATTERS

On April 7, 1999, the Kansas Board of Examiners in Optometry ("KBEO") commenced a civil action against the Company. The action was filed in the District
Court of Shawnee County, Kansas, Division 6. The complaint was amended on May 28, 1999. The amended complaint alleges that "on one or more occasions" the Company sold contact lenses in the
state of Kansas without receipt of a prescription. The amended complaint seeks an order enjoining the Company from further engaging in the alleged activity. The amended complaint does not seek
monetary damages. The Company filed an answer to the amended complaint and, at the request of the Court, filed a motion for summary judgment. In November 2000, the Court issued an order denying
the summary judgment motion, finding that there were factual issues regarding whether the KBEO can meet the requirements necessary to obtain injunctive relief, and whether the Kansas law violates the
Commerce Clause of the United States Constitution. On June 18, 2002, the court granted a summary judgment motion in favor of the KBEO. However, the court made no findings of any violations of
Kansas law. Further, the court based its decision on a Kansas optometry law that has been repealed and amended by the Kansas legislature. To preserve the issues for appeal, the Company filed a motion
to alter or amend judgment, asking the court to reverse its decision, and to enter summary judgment in favor of defendant, or to dismiss the KBEO's lawsuit as moot based on the new law. The court
denied the motion on September 12, 2002, finding that no new evidence had been presented to persuade the court to change its prior ruling. The court made no new findings of fact and did not
change its conclusions of law. On October 11, 2002, the Company filed its Notice of Appeal, and its Docketing Statement was filed on October 30, 2002. On February 7, 2003 the
Company filed its opening appellate brief. KBEO has requested, and the appellate court has granted, two requests for additional time to file its response brief. KBEO's response is now due on
May 11, 2003 and the Company's reply will be due on June 11, 2003. After the briefs have all been submitted, the court will either issue its ruling or schedule an oral argument.

From
time to time the Company is involved in other legal matters generally incidental to its business.

It
is the opinion of management, after consultation with legal counsel, that, except for legal and professional fees that the Company incurs from time to time, the ultimate dispositions
of all of these
matters will not have a material impact on the financial position, liquidity, or results of operations of the Company. However, there can be no assurance that the Company will be successful in its
efforts to satisfactorily resolve these matters and the ultimate outcome could result in a material negative impact on the Company's financial position, liquidity, or results of operations.

NOTE 10.    RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. A
liability is incurred when an event obligates a company to transfer or use assets (i.e., when an event leaves the company little or no discretion to avoid transferring or using the assets in the
future). Under previous accounting rules, if a company's management approved an exit plan, the company generally could record the costs of that plan as a liability on the approval

12

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date,
even if the company did not incur the costs until a later date. Under SFAS No. 146, some of those costs might qualify for immediate recognition, others might be spread over one or more
quarters, and still others might not be recorded until incurred in a much later period. SFAS No. 146 became effective for periods after December 31, 2002 prospectively. The Company
adopted this statement during the first quarter of 2003. There was no impact on the financial statements of the Company.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosurean amendment to FASB Statement
No. 123, Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-
based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. The Company has elected to continue using the intrinsic method of accounting for employee stock-based compensation and has adopted the interim disclosure
provisions.

In
November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN No. 45 requires recognition of an initial
liability for the fair value of an obligation assumed by issuing a guarantee. Guarantees are required to be disclosed in the notes to the financial statements for periods ending after
December 15, 2002. For certain guarantees issued after December 31, 2002, the fair value of the obligation must be reported on the balance sheet. The adoption of this interpretation had
no impact on the financial statements of the Company.

In
January 2003, the FASB issued Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," which
addresses the consolidation by business enterprises of variable interest entities as defined therein and applies immediately to variable interests in variable interest entities created or obtained
after January 31, 2003. The adoption of this interpretation had no impact on the Company's financial statements.

NOTE 11.    COMMITMENTS AND CONTINGENCIES

Letter of Intent.On March 13, 2003, the Company signed a letter of intent with a developer
and manufacturer of contact lenses, and certain of its shareholders. The Company agreed to pay the developer and manufacturer of contact lenses a non-refundable sum equal to
$1.5 million to be used by the entity for research and development activities relating to contact lenses. Of the total, $700,000 was paid on March 14, 2003 and the remaining $800,000 is
due three months after the execution date of the letter of intent. Due to the fact that the Company is contractually committed to these payments and the contact lens developer has no substantive
operations, the entire amount of these payments has been expensed as research and development. In the event that the contact lens technologies are successfully commercialized, the Company will have
the right to acquire contact lens products based on the developed technologies on terms no less favorable than those granted or available to any other customer, licensee or other third party. In
addition, the Company was granted a six-month option to either: (1) acquire all of the shares of common stock of the entity; or, (2) acquire from the entity a worldwide
license to manufacture, market, sell or otherwise use or exploit specific technology developed by the entity. As consideration for this option, the Company paid $100,000 to the entity on
March 14, 2003, which was also expensed as research and development. In the event that the Company does not exercise the option to purchase the shares of the entity, the Company agreed to pay
the entity an additional $800,000 at the end of the option period. The Company has also agreed to reimburse the entity and its shareholders in an amount not to exceed $161,000 for any legal and
financial expenses

13

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reasonably
incurred by the entity in connection with the transactions contemplated by the letter of intent.

In
connection with the agreement, and the transactions discussed above, the Company expensed a total of approximately $1.8 million during the first quarter of fiscal 2003
(inclusive of the $161,000 in costs) related to these research and development initiatives. The Company funded these payments from its revolving credit facility.

Advertising Commitments

As of March 29, 2003, the Company had entered into certain noncancelable commitments with various advertising companies that will require the Company to
pay approximately $6.0 million for advertising during the remainder of 2003.

NOTE 12.    SEGMENT INFORMATION

As a result of the acquisition of IGEL (ClearLab) in the third quarter of fiscal 2002, the Company has two operating segments. These operating segments represent
components of the Company for which separate financial information is available and evaluated regularly by management in determining resource allocation and performance assessment. The Company's U.S.
segment includes the operations of 1-800 CONTACTS and the operations from the Lens Express and Lens 1st acquisitions. The Company's Singapore segment includes the operations
of ClearLab, a developer and contract manufacturer of contact lenses. Operating segment information for the first quarter ended March 29, 2003 is as follows (in thousands):

U.S.

Singapore

TotalNet sales

$
45,131

$
1,531

$
46,662Gross profit


15,748


354


16,102Income (loss) from operations


611


(376
)

235


Identifiable
segment assets as of March 29, 2003 are as follows (in thousands):

U.S.

Singapore

TotalLong-lived assets, net

$
33,078

$
13,757

$
46,835Total assets


70,763


17,025


87,788


14

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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company is a leading direct marketer of replacement contact lenses and also conducts contact lens manufacturing operations in Singapore. The Company was
formed in February 1995 and is the successor to the mail order business founded by the Company's Vice President of Trade Relations in March 1991. The Company's net sales grew rapidly
from $3.6 million in fiscal 1996 to $169.0 million in fiscal 2001. During fiscal 2002, net sales declined slightly to $168.6 million. During the first quarter of 2003, net sales
increased to $46.7 million from $41.6 million in the first quarter of fiscal 2002.

IGEL (ClearLab).On July 24, 2002, the Company completed the acquisition of certain net assets
and the majority of the business operations of IGEL, a developer and contract manufacturer of contact lenses based in Singapore. The acquisition was effected through a wholly owned subsidiary of the
Company, IGEL Acquisition Co. Pte Ltd (subsequently renamed ClearLab Pte Ltd). The results of operations of ClearLab are included in the consolidated results of the Company from the date
of the acquisition.

ClearLab
currently manufactures injection cast molded soft contacts lenses on a contract basis for various contact lens manufacturers. ClearLab also manufactures and distributes branded
and private label contact lenses via distributors and other sales channels. ClearLab currently has the capacity to produce in excess of 40 million lenses annually, which is enough to service
approximately one million two-week disposable contact lens wearers. ClearLab is in the process of designing and developing a new brand of contact lens that is expected to provide the
Company increased control of production and inventory and the flexibility to make a variety of offers to its customers to enhance its capability to provide high quality, cost-effective
products.

Based
on previous conducted test marketing, the Company believes that its customers are receptive to an offer from the Company to try both a new product and a new eye care practitioner.
The Company expects to begin marketing lenses made by ClearLab to its customers in the second quarter of fiscal 2003.

Vistakon Agreement.In December 2002, the Company announced that it had reached an agreement
with Johnson & Johnson's eye care division, Vistakon, to become an authorized retailer of Vistakon contact lenses. The Company has modified its operating systems in connection with this
agreement. The Company implemented new procedures for Vistakon by geographic region based on time zone. The Company began this implementation in February 2003 and completed it in
April 2003. The Company began buying direct from Vistakon during March 2003.

The
Company expects that this direct relationship with Vistakon will lower the Company's product acquisition costs and allow it to offer rebates and other incentives not previously
available to its customers who wear Vistakon lenses. The Company expects that it will also enable the Company to reduce its inventory investment by purchasing a more balanced mix of products at lower
prices than it has historically been able to obtain through indirect sources. This agreement also resolves long-standing disputes.

Lens Express / Lens 1st.On January 30, 2003, the Company completed the acquisition of certain
assets and the assumption of certain liabilities of Lens Express LLC and Camelot Ventures/CJ, L.L.C. d/b/a Lens 1st (collectively, the "Seller"), two leading U.S. mail order contact lens
retailers. The assets acquired included databases, customer information, web sites and Internet addresses or domain names, telephone numbers, certain specified contracts and intellectual property
rights. In addition, acquired assets included certain property, equipment, inventories, receivables and prepaid expenses. With the exception of specifically identified liabilities, the Company did not
assume the liabilities of the Seller. The liabilities assumed by the Company included certain of the Seller's identified contracts, accounts

15

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payable,
accrued liabilities, certain customer program obligations and severance obligations as of January 30, 2003.

The
consideration paid by the Company consisted of approximately $6.9 million in cash (including $0.4 million in transaction costs), 900,000 shares of restricted Common
Stock of the Company with a fair value of $19.9 million and the assumption of approximately $4.1 million of the aforementioned liabilities. The 900,000 shares of restricted Common Stock
are subject to a lock-up period of 12 months after the acquisition date of January 30, 2003. In connection with the acquisition, the Company entered into a registration
rights agreement granting the Seller certain piggyback registration rights with respect to the 900,000 shares of restricted Common Stock. The Company funded the cash consideration portion of the asset
purchase from its revolving credit facility.

Letter of Intent.On March 13, 2003, the Company signed a letter of intent with a developer
and manufacturer of contact lenses, and certain of its shareholders. The Company agreed to pay the developer and manufacturer of contact lenses a non-refundable sum equal to
$1.5 million to be used by the entity for research and development activities relating to contact lenses. Of the total, $700,000 was paid on March 14, 2003 and the remaining $800,000 is
due three months after the execution date of the letter of intent. Due to the fact that the Company is contractually committed to
these payments and the contact lens developer has no substantive operations, the entire amount of these payments has been expensed as research and development. In the event that the contact lens
technologies are successfully commercialized, the Company will have the right to acquire contact lens products based on the developed technologies on terms no less favorable than those granted or
available to any other customer, licensee or other third party. In addition, the Company was granted a six-month option to either: (1) acquire all of the shares of common stock of
the entity; or, (2) acquire from the entity a worldwide license to manufacture, market, sell or otherwise use or exploit specific technology developed by the entity. As consideration for this
option, the Company paid $100,000 to the entity on March 14, 2003, which was also expensed as research and development. In the event that the Company does not exercise the option to purchase
the shares of the entity, the Company agreed to pay the entity an additional $800,000 at the end of the option period. The Company has also agreed to reimburse the entity and its shareholders in an
amount not to exceed $161,000 for any legal and financial expenses reasonably incurred by the entity in connection with the transactions contemplated by the letter of intent.

In
connection with the agreement, and the transactions discussed above, the Company expensed a total of approximately $1.8 million during the first quarter of fiscal 2003
(inclusive of the $161,000 in costs) related to these research and development initiatives. The Company funded these payments from its revolving credit facility.

Regulatory Considerations

The sale and delivery of contact lenses are governed by both federal and state laws and regulations. The Company sells to customers in all 50 states, and each
sale is likely to be subject to the laws of the state where the customer is located. In some states, the Company operates according to agreements it has entered into with local regulatory authorities
or medical boards or agencies. The Company's current general operating practice is to obtain a copy of the customer's prescription or to passively verify each customer's prescription with his/her eye
care practitioner. If the customer does not have a copy of his/her prescription, the Company asks the customer for his/her exact prescription specifications and then directly contacts the customer's
eye care practitioner to passively verify the customer's prescription. The Company directly communicates to the eye care practitioner the prescription specifications received from the customer and
informs the eye care practitioner that it will proceed to complete the sale based on such information unless the eye care practitioner advises it that such information is expired or incorrect. If the
eye care practitioner does not advise the Company that such information is expired or incorrect within a minimum period, the Company's general practice is to

16

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complete
the sale and ship the lenses based on the information communicated to the eye care practitioner. If the Company is unable to obtain a copy of the customer's prescription or passively verify
the prescription with the customer's eye care practitioner, the Company's policy is not to proceed with the sale. The Company retains copies of the written prescriptions that it receives and maintains
records of its communications with the customer's prescriber.

The
Company has modified its operating systems to give eye care practitioners a minimum of eight business hours to respond to its prescription verification requests for Vistakon
products. Eye care practitioners have the option of receiving these requests by fax. If the eye care practitioner notifies the Company within this time period that the customer's prescription is
expired or otherwise invalid, the Company will not ship the order. Absent such notification from the eye care practitioner, the Company will proceed with the sale based on the prescription that was
communicated to the eye care practitioner. This system applies to Vistakon orders nationwide with the exception of a few states where the Company has pre-existing agreements to employ more
stringent procedures.

Results of Operations

The Company's fiscal year consists of a 52/53-week period ending on the Saturday nearest to December 31. Fiscal 2003 is a 53-week
year and will end on January 3, 2004. The fourth quarter of fiscal 2003 will consist of 14 weeks.

The
following table presents the Company's results of operations expressed as a percentage of net sales for the periods indicated:

Quarter EndedMarch 30,
2002

March 29,
2003NET SALES

100.0
%
100.0
%COST OF GOODS SOLD

69.5

65.5Gross profit

30.5

34.5SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:Advertising expense

6.5

8.1Legal and professional fees

3.0

3.5Research and development expenses



3.9Other selling, general and administrative expenses

13.0

18.5Total selling, general and administrative expenses

22.5

34.0INCOME FROM OPERATIONS

8.0

0.5OTHER EXPENSE, net

(0.3
)
(1.1
)INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES

7.7

(0.6
)PROVISION FOR INCOME TAXES

(3.0
)
(0.5
)NET INCOME (LOSS)

4.7
%
(1.1
)%


Net sales.Net sales for the quarter ended March 29, 2003 increased 12% to
$46.7 million from $41.6 million for the quarter ended March 30, 2002. Net sales (excluding ClearLab) for the first quarter of fiscal 2003 were $45.1 million. The increase
in sales is mainly due to the acquisition of Lens Express and Lens 1st on January 30, 2003. The Company expects to realize $30-$35 million in incremental net
sales from customers of these operations in the twelve months following the closing of this acquisition. Net sales for the first quarter of fiscal 2003 were negatively impacted by canceled orders due
to the

17

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prescription
verification procedures implemented as part of the Vistakon agreement. The Company is taking steps to recover these canceled orders in the future but is uncertain of the ultimate impact
these procedures from the Vistakon agreement will have on future net sales.

Gross profit.Gross profit as a percentage of net sales increased to 34.5% for the quarter ended
March 29, 2003 from 30.5% for the quarter ended March 30, 2002. During the first quarter of fiscal 2003, the Company realized the benefits of a decrease in wholesale prices paid for
Vistakon products. During March 2003, the Company began buying directly from Vistakon. The Company did not realize the full benefits of purchasing from Vistakon during the first quarter of
fiscal 2003 due to the amount of Vistakon inventory on hand at the time the Company began purchasing directly from Vistakon. The Company expects gross profit as a percentage of net sales to continue
favorable trends as the Company
continues to purchase product directly from Vistakon. During the first quarter of fiscal 2003, Vistakon products accounted for about 40% of the Company's net sales.

Advertising expense.Advertising expense for the quarter ended March 29, 2003 increased
$1.1 million, or 40%, from the quarter ended March 30, 2002. As a percentage of net sales, advertising expense increased to 8.1% for the first quarter of fiscal 2003 from 6.5% for the
first quarter of fiscal 2002. Currently, the Company plans on spending about $20 million on advertising during fiscal 2003. However, if opportunities present themselves, the Company may
increase advertising spending above currently planned levels. The Company's experience has been that increases in advertising expenditures have a direct impact on the growth of net sales.

The
Company expenses all advertising costs when the advertising first takes place. As a result, quarter-to-quarter comparisons are impacted within and between
quarters by the timing of television, radio and Internet advertisements and by the mailing of the Company's printed advertisements. The volume of mailings and other advertising may vary in different
quarters and from year to year depending on the Company's assessment of prevailing market opportunities.

Legal and professional fees.Legal and professional fees for the quarter ended March 29, 2003
increased $0.4 million, or 29%, from the quarter ended March 30, 2002. As a percentage of net sales, legal and professional fees increased to 3.5% for the first quarter of fiscal 2003
from 3.0% for the first quarter of fiscal 2002. During the first quarter of fiscal 2003, the Company incurred significant legal and professional fees related to its legal matters and its increased
efforts, including significant lobbying activities, to overcome the anticompetitive barriers in the industry on behalf of itself and consumers. The Company expects to continue to incur significant
legal and professional fees as it continues this proactive approach although it expects these amounts to decrease in future quarters of fiscal 2003.

Research and development expenses.Research and development expenses for the quarter ended
March 29, 2003 were $1.8 million, or 3.9% of net sales. The Company did not have any research and development expenses in the quarter ended March 30, 2002. The majority of this
amount relates to outsourced research and development activities with a developer and manufacturer of contact lenses. The Company will record an additional $800,000 in research and development
expenses in the third quarter of fiscal 2003 if the Company does not exercise its option to purchase shares of this developer and manufacturer of contact lenses. The Company will also continue to
incur research and development costs relating to ClearLab's development of a new brand of contact lens.

Other selling, general and administrative expenses.Other selling, general and administrative
expenses for the quarter ended March 29, 2003 increased $3.3 million, or 60%, from the quarter ended March 30, 2002. As a percentage of net sales, other selling, general and
administrative expenses increased to 18.5% for the first quarter of fiscal 2003 from 13.0% for the first quarter of fiscal 2002. ClearLab accounted for about $0.6 million of the increase for
the first quarter of fiscal 2003. The Company also incurred approximately $0.3 million in integration costs related to the acquisition of Lens Express and Lens 1st and
$0.3 million in incremental amortization related to the acquired Lens

18

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Express
and Lens 1st customer database intangible assets. The Company incurred approximately $0.2 million related to a former executive officer's severance agreement and
approximately $0.2 million in recruiting expenses due to executive management searches. The Company's other operating and payroll costs also increased as the Company enhanced its operating
infrastructure and its management team to meet the demands of the business.

Other expense, net.Other expense increased to approximately $500,000 for the quarter ended
March 29, 2003 from approximately $130,000 for the quarter ended March 30, 2002. For the first quarter of fiscal 2003, other expense consisted mainly of interest expense, resulting from
the increased use of the revolving credit facility and debt related to the acquisition of IGEL. In addition, during the first quarter of fiscal 2003, the Company recorded an unrealized foreign
exchange loss of approximately $137,000, relating primarily to an intercompany loan to ClearLab. For the first quarter of fiscal 2002, other expense consisted mainly of interest expense.

Income taxes.The Company recorded an effective income tax rate (excluding ClearLab) for the quarter
ended March 29, 2003 of 42.0% compared to 39.1% for the quarter ended March 30, 2002. The Company records quarterly income taxes at the effective tax rate expected for the year. The
increase in the effective income tax rate results from the estimated annual increase in nondeductible expenses, including those relating to the Company's lobbying efforts. ClearLab is taxed separately
in its tax jurisdiction of Singapore. During the first quarter of fiscal 2003, the Company did not record a tax benefit for the loss from ClearLab's operations due to the uncertainty with respect to
the realization of a tax benefit in Singapore. As of March 29, 2003, the Company provided a valuation allowance for the full amount of the deferred income tax assets in Singapore. The Company
anticipates that its fiscal 2003 effective income tax rate will be approximately 42% for its U.S. operations and that no tax benefit will be recorded for ClearLab's operations. If future changes cause
actual results for the year to be more or less favorable than those expected, adjustments to the effective income tax rate could be required.

Liquidity and Capital Resources

Operating activities.For the quarters ended March 29, 2003 and March 30, 2002, net
cash provided by operating activities was approximately $6.0 million and $1.6 million, respectively. In the fiscal 2003 period, cash was provided primarily by a decrease in inventories
and an increase in accrued liabilities partially offset by a decrease in accounts payable. In the fiscal 2002 period, cash was provided primarily by net income and increases in accounts payable and
income taxes payable partially offset by an increase in inventories. In order to ensure sufficient supply of inventory, the Company generally carries a higher level of inventory than if it were able
to purchase directly from all contact lens manufacturers.

Investing activities.The Company used approximately $8.0 million and $0.5 million for
investing activities in the quarters ended March 29, 2003 and March 30, 2002, respectively. The Company paid approximately $6.9 million in cash (including $0.4 million in
transaction costs) in connection with the acquisition of Lens Express and Lens 1st. The remaining consideration consisted of 900,000 shares of restricted Common Stock of the Company and
the assumption of approximately $4.1 million of current liabilities.

Capital
expenditures for infrastructure improvements for the fiscal 2003 and 2002 periods were approximately $0.7 million and $0.5 million, respectively. Of the fiscal 2003
amount, approximately $0.3 million related to the Singapore operations. The Company anticipates additional capital expenditures in fiscal 2003 for infrastructure as it continues to expand and
improve operating facilities, telecommunications systems and management information systems in order to handle future operations of both its U.S. and Singapore operations.

19

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Financing activities.During the quarters ended March 29, 2003 and March 30, 2002, net
cash provided by (used in) financing activities was approximately $2.4 million and ($1.1) million. During the fiscal 2003 period, the Company had net borrowings on its credit facility of
approximately $2.8 million and made principal payments on debt obligations and capital lease obligations of approximately $0.9 million. During the fiscal 2002 period, the Company
repurchased a total of 200,000 shares of its common stock for a total cost of approximately $2.2 million and had net borrowings on its credit facility of approximately $1.1 million. In
both the fiscal 2003 and 2002 periods, these amounts were offset by proceeds from the exercise of common stock options.

The
Company's Board of Directors has authorized the repurchase of up to 3,000,000 shares of the Company's Common Stock. A purchase of the full 3,000,000 shares would equal approximately
23 percent of the total shares issued as of March 29, 2003. The repurchase of common stock is subject to market conditions and is accomplished through periodic purchases at prevailing
prices on the open market, by block purchases or in privately negotiated transactions. The repurchased shares are retained as treasury stock to be used for corporate purposes. From inception of its
authorized repurchase programs through March 29, 2003, the Company had repurchased 1,706,500 shares for a total cost of approximately $22.1 million.

Effective
July 22, 2002, the Company entered into a new loan agreement, providing for both a $10 million term loan and a revolving credit facility for borrowings up to
$20 million. The amounts outstanding on both the term loan and the revolving credit facility are limited to a percentage of eligible inventory. As of the effective date, the percentage was 75%
and is reduced by 1.25% each calendar quarter beginning September 30, 2002 until the percentage is 50%. The percentage as of March 29, 2003 was 72.50%. The outstanding borrowings are
secured by substantially all of the Company's U.S. assets including a portion of the Company's common stock ownership in ClearLab. The agreement contains various financial covenants including a
capital expenditure limit, a minimum working capital requirement, a leverage ratio and a minimum net income requirement. Also, if the Company were unable to cure a default on its Singapore debt within
30 days of occurrence, the Company would be in default on this debt. As of December 28, 2002, the Company was not in compliance with the minimum net income covenant or the leverage ratio
covenant. However, the Company obtained waivers through April 30, 2004. These waivers also established certain new financial covenants. The Company was in compliance with these modified
covenants and all other applicable covenants as of March 29, 2003.

The
U.S. Bank term loan bears interest at a floating rate equal to the bank's prime interest rate plus 0.50 percent or 3.0 percent above the bank's LIBOR for the applicable
period. As of March 29, 2003, the U.S. bank term loan interest rate was fixed at the 180-day LIBOR rate plus 3% (4.34% at March 29, 2003) until April 3, 2003 at which
time the rate was fixed at 4.29% through June 3, 2003. Interest is payable monthly. Principal payments are due quarterly until maturity on June 30, 2007. As of March 29, 2003, the
Company's outstanding balance on the term loan was approximately $9.1 million.

Outstanding
borrowings on the revolving credit facility bear interest at a floating rate equal to the lender's prime interest rate plus 0.25 percent (4.50 percent at
March 29, 2003) or 2.75 percent above the lender's LIBOR for the applicable period. As of March 29, 2003, the interest rate on the outstanding borrowings was based on the lender's
prime interest rate plus 0.25 percent. Interest is payable monthly. The credit facility also includes an unused credit fee equal to one-eighth of one percent, payable quarterly. As
of March 29, 2003, the remaining availability on the credit facility was $6.9 million. The credit facility was scheduled to expire on April 30, 2003, however the Company obtained
an extension of the maturity date to July 30, 2003. The Company is in the process of renewing the credit facility. The Company expects that the credit facility will be renewed prior to the
expiration of the extension; however, there can be no assurance that the facility will be renewed with similar terms.

20

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At
March 29, 2003, the Company had an unsecured, non-interest bearing note to ClearLab's president and chief technology officer with a principal balance of
SGD$3,250,000 (USD$1,835,000). The note payable is discounted at 7%. Payments are due in equal monthly installments through July 2007.

At
March 29, 2003, the Company had a term loan payable to a Singapore bank with a principal balance of SGD$8,655,000 (USD$4,886,000) that bears interest at 6.75% and is secured by
substantially all of the assets of ClearLab. Interest payments are due monthly. Principal payments are due in monthly installments from January 2003 through December 2007. This note also
contains various financial covenants including minimums on net worth and shareholders' funds. As of December 28, 2002, the Company was not in compliance with the net worth and shareholders'
funds covenants. However, the Company obtained waivers through April 30, 2004. 1-800 CONTACTS, INC. has guaranteed this term loan.

At
March 29, 2003, the Company also had a note payable to the parent of IGEL with a principal balance of SGD$6,892,000 (USD$3,891,000) that bears interest at 6% and has a
subordinated position to the term loan payable to the Singapore bank. The note payable is discounted at 7%. Interest payments are due monthly. Principal payments are due in monthly installments from
January 2008 through December 2009. 1-800 CONTACTS, INC. has guaranteed this note.

Cross
default clauses exist such that if the Company were in default on its U.S. debt, the Company would also be in default on its Singapore debt. If the Company were in default on its
Singapore bank term loan, the Company would also be in default on its note payable to the parent of IGEL.

The
Company leases various manufacturing and other equipment from financing companies under capital lease arrangements. All of the equipment is maintained at the Singapore facility. The
majority of the leases were assumed in connection with the Company's acquisition of IGEL. As of March 29, 2003, the present value of future minimum lease payments was approximately SGD$889,000
(USD$502,000) with a majority of payments scheduled through fiscal 2004.

On
March 13, 2003, the Company signed a letter of intent to pay a non-refundable sum equal to $1.5 million to be used by the entity for research and development
activities relating to contact lenses. Of the amount, $700,000 was paid on March 14, 2003 and the remaining $800,000 is due three months after the execution date of the letter of intent. In
addition, the Company was granted a six-month option to acquire this entity or acquire a worldwide license for $100,000. In the event that the Company does not exercise the option to
acquire the entity, the Company agreed to pay an additional $800,000. The Company has also agreed to reimburse the entity and its shareholders in an amount not to exceed $161,000 for legal and
financial expenses reasonably incurred by the entity in connection with the transactions contemplated by the letter of intent. During the first quarter of fiscal 2003, the Company paid $800,000
related to this agreement which includes the $100,000 payment for the option. The Company expects to fund any future amounts payable under this arrangement through borrowings under its revolving
credit facility.

The
Company believes that its cash on hand, together with cash generated from operations and the borrowings available through the credit facility, will be sufficient to support current
operations through the next year. The Company may be required to seek additional sources of funds for accelerated growth or continued growth beyond that point, and there can be no assurance that such
funds will be available on satisfactory terms. Failure to obtain such financing could delay or prevent the Company's
planned growth, which could adversely affect the Company's business, financial position, liquidity, and results of operations.

As
a result of state regulatory requirements, the Company's liquidity, capital resources, and results of operations may be negatively impacted in the future if the Company incurs
increased costs (including legal fees) or fines, is prohibited from selling its products in a particular state(s) or experiences losses

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of
a substantial portion of the Company's customers for whom the Company is unable to obtain or verify a prescription due to the enforcement of requirements by state regulatory agencies.

Contractual Obligations and Commitments

Subsequent to December 28, 2002 there have been no material changes to the Company's contractual obligations and commitments, outside the normal course of
business, other than the letter of intent signed on March 13, 2003. The letter of intent, as described above, committed the Company to pay a non-refundable sum equal to
$1.5 million to be used by the entity for research and development activities relating to contact lenses. Of the $1.5 million, $800,000 is due three months after the execution date of
the letter of intent. The Company has also agreed to reimburse the entity and its shareholders in an amount not to exceed $161,000 for legal and financial expenses reasonably incurred by the entity in
connection with the transactions contemplated by the letter of intent.

Recently Issued Accounting Standards

In July 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. A
liability is incurred when an event obligates a company to transfer or use assets (i.e., when an event leaves the company little or no discretion to avoid transferring or using the assets in the
future). Under previous accounting rules, if a company's management approved an exit plan, the company generally could record the costs of that plan as a liability on the approval date, even if the
company did not incur the costs until a later date. Under SFAS No. 146, some of those costs might qualify for immediate recognition, others might be spread over one or more quarters, and still
others might not be recorded until incurred in a much later period. SFAS No. 146 became effective for periods after December 31, 2002 prospectively. The Company adopted this statement
during the first quarter of 2003. There was no impact on the financial statements of the Company.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosurean amendment to FASB Statement
No. 123, Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-
based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. The Company has elected to continue using the intrinsic method of accounting for employee stock-based compensation and has adopted the interim disclosure
provisions.

In
November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN No. 45 requires recognition of an initial
liability for the fair value of an obligation assumed by issuing a guarantee. Guarantees are required to be disclosed in the notes to the financial statements for periods ending after
December 15, 2002. For certain guarantees issued after December 31, 2002, the fair value of the obligation must be reported on the balance sheet. The adoption of this interpretation had
no impact on the financial statements of the Company.

In
January 2003, the FASB issued Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," which
addresses the consolidation by business enterprises of variable interest entities as defined therein and applies immediately to variable interests in variable interest entities created or obtained
after January 31, 2003. The adoption of this interpretation had no impact on the Company's financial statements.

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Critical Accounting Policies

Accounting polices that require significant judgments and estimates include revenue recognition (including sales returns and allowances); excess and obsolete
inventories; realizability of long-lived assets (including intangible assets); realizability of deferred income tax assets; accounting for the acquisition of Lens Express and Lens 1st;
stock-based compensation; and legal and regulatory contingencies. Judgments and estimates are based on historical experience as well as relevant facts and circumstances known at each reporting date.
Actual results may differ from these estimates.

Sales
are generally recognized at the time of shipment to the customer. Net sales consist of product sales less provisions for sales returns and allowances, which provisions are made at
the time of sale. The Company accrues an estimated amount for sales returns and allowances based on historical information, adjusted for current economic trends. To the extent actual returns and
allowances vary from historical experience, revisions to the allowances may be required.

In
assessing the realizability of inventories, the Company makes judgments as to future demand requirements and product expiration dates. The inventory requirements change based on
projected customer demand, which changes due to market conditions and product life cycle changes.

The
Company has significant long-lived tangible and intangible assets consisting of property, plant and equipment, goodwill and definite-lived intangibles. These assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. An impairment analysis requires the use of expected future
undiscounted cash flows over the remaining useful life of the asset. As of March 29, 2003, the Company determined that no impairment existed. A significant portion of the total
long-lived assets were generated from the Company's recent acquisitions of IGEL (ClearLab) and Lens Express and Lens 1st. If forecasts and assumptions used to support the realizability of
long-lived assets change in the future, significant impairment charges could result that would adversely affect the Company's results of operations and financial position.

Deferred
income tax assets are assessed for recoverability and valuation allowances are provided as necessary to reduce deferred income tax assets to amounts expected to be realized.
Should expectations of taxable income change in future periods, it may become necessary to change the valuation allowance, which could affect the Company's results of operations in the period such
determination is made. The Company records an income tax provision or benefit at a rate that is based on expected results for the fiscal year. If future changes in market conditions cause actual
results to be more or less favorable, adjustments to the effective income tax rate on a quarterly basis could be required.

The
Company records liabilities for legal and regulatory matters when the contingency is both probable and reasonably estimable. The Company is involved in several legal and regulatory
matters. The Company, after consultation with legal counsel, believes that the ultimate dispositions of these matters will not have a material impact on its financial position, liquidity, or results
of operations. However, there can be no assurance that the Company will be successful in its efforts to satisfactorily resolve these matters and the ultimate outcome could result in a material
negative impact on the Company's financial position, liquidity, or results of operations.

Forward-Looking Statements

Except for the historical information contained herein, the matters discussed in this Form 10-Q are forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements involve risks and
uncertainties and often depend on assumptions, data or methods that may be incorrect or imprecise. The Company's future operating results may differ materially from the results discussed in, or
implied by, forward-looking statements made by the Company. Factors that may

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cause
such differences include, but are not limited to, those discussed below and the other risks detailed in the Company's other reports filed with the Securities and Exchange Commission. The words
such as "believes," "anticipates," "expects," "future," "intends," "would," "may," and similar expressions are intended to identify forward-looking statements. The Company undertakes no obligation to
revise any of these forward-looking statements to reflect events or circumstances after the date hereof.

Factors That May Affect Future Results



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Item 3.Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk.As of March 29, 2003, the Company was exposed to changes in interest rates
relating to its revolving credit facility and other debt obligations. The revolving credit facility and U.S. bank term loan bear interest at a variable rate based on the U.S. prime rate or LIBOR. The
Company's outstanding borrowings on the credit facility, including bank overdrafts, and U.S. bank term loan were approximately $17.6 million as of March 29, 2003. The remainder of the
Company's interest bearing debt obligations, including capital lease obligations, is denominated in Singapore dollars and bears interest at
a fixed rate. As of March 29, 2003, the face amounts of the outstanding borrowings on these fixed rate debt obligations were approximately $9.3 million. If interest rates were to change
by one full percentage point, the net impact on interest expense would be approximately $0.2 million per year.

Foreign Currency Risk.The Company faces foreign currency risks primarily as a result of its recently
acquired Singapore operations and the intercompany balances between its U.S. and Singapore operations. The functional currency of the Company's Singapore operations is the Singapore dollar, however,
most of the sales of the Singapore operations and some of the expenses are denominated in U.S. dollars. The Company has debt and other long-term obligations of approximately
$11.1 million that are denominated in Singapore dollars and mature over the next seven years. For the first quarter ended March 29, 2003, the Company recorded a foreign currency
transaction loss of approximately $137,000. Fluctuations in exchange rates between the U.S. dollar and the Singapore dollar could lead to additional currency exchange losses or gains on the
intercompany balances and transactions denominated in currencies other than the functional currency. If the U.S. dollar weakens relative to the Singapore dollar, additional funds may be required to
meet these obligations if the debt cannot be adequately serviced from the Singapore operations. The exchange rate between the U.S. dollar and the Singapore dollar has remained constant from
December 29, 2002 through May 6, 2003. From the date of acquisition, July 24, 2002, through May 6, 2003 the exchange rate has fluctuated approximately

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0.5 percent
(strengthening of the U.S. dollar). If the Singapore dollar weakens against the U.S. dollar by an additional 10 percent, the Company would record an additional $809,000
foreign currency loss on the intercompany balances that exist as of March 29, 2003. The Company has not entered into any foreign currency derivative financial instruments; however, it may
choose to do so in the future in an effort to manage or hedge its foreign currency risk.

Item 4.Controls and Procedures

(a)    Evaluation of disclosure controls and procedures.The Company's Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) as of a date within 90 days of filing date of the quarterly report (the "Evaluation Date"), have concluded that, as of the Evaluation Date, the Company's disclosure controls
and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.

(b)    Changes in internal controls.There were no significant changes in the Company's
internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures
subsequent to the Evaluation Date, nor were there any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no
corrective actions were taken.

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

See notes to condensed consolidated financial statements.

Item 2.Changes in Securities and Use of Proceeds

On January 30, 2003, the Company completed the acquisition of certain assets and the assumption of certain liabilities of Lens Express LLC and Camelot
Ventures/CJ, L.L.C. d/b/a Lens 1st (collectively, the "Seller"), two leading U.S. mail order contact lens retailers. The assets acquired included databases, customer information, web
sites and Internet addresses or domain names, telephone numbers, certain specified contracts and intellectual property rights. In addition, acquired assets included certain property, equipment,
inventories, receivables and prepaid expenses. With the exception of specifically identified liabilities, the Company did not assume the liabilities of the Seller. The liabilities assumed by the
Company included certain of the Seller's identified contracts, accounts payable, accrued liabilities, certain customer program obligations and severance obligations as of January 30, 2003.

The
consideration paid by the Company consisted of approximately $6.9 million in cash (including $0.4 million in transaction costs), 900,000 shares of restricted common
stock of the Company with a fair value of $19.9 million and the assumption of approximately $4.1 million of the aforementioned liabilities. The 900,000 shares of restricted common stock
are subject to a lock-up period of 12 months after the acquisition date of January 30, 2003, established under the terms of a lock-up agreement by and among the
Company, the Seller and David Katzman and Daniel Gilbert (Katzman and Gilbert, collectively, the "Shareholders"). In connection with the acquisition, the Company entered into a registration rights
granting the Seller certain piggyback registration rights with respect to the 900,000 shares of restricted common stock.

The
shares were issued in reliance upon the exemption from registration provided in Section 4(2) of the Securities Act of 1933, as amended. In that regard, each of the sellers
represented to the

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Company
that it was an "accredited investor" as defined in Rule 501(a) of Regulation D promulgated under the Securities Act.

Item 3.Defaults upon Senior Securities

None.

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

None.

Item 5.Other Information

From time to time the Company receives notices, inquiries or other correspondence from states or its regulatory bodies charged with overseeing the sale of contact
lenses. The Company's practice is to review such notices with legal counsel to determine the appropriate response on a case-by-case basis. It is the opinion of management,
after discussion with legal counsel, that the Company is taking the appropriate steps to address the various notices received.

Item 6.Exhibits and Reports on Form 8-K

(A)  Exhibits

|Exhibit No. |  | Description of Exhibit                                                                                                                                    
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Asset Purchase Agreement, dated January 30, 2003.(1)                                                                                                      
|4.1         |  | Registration Rights Agreement, dated January 30, 2003.                                                                                                    
|10.1        |  | Employment Agreement between the Company and R. Joe Zeidner.                                                                                              
|10.2        |  | Employment Agreement between the Company and S. Todd Witzel.                                                                                              
|10.3        |  | Severance Agreement and General Release between the Company and Scott S. Tanner.                                                                          
|10.4        |  | Seventh Amendment to Lease between the Company and Draper Land Limited Partnership No. 2, dated March 31, 2003, with respect to the Company's call center.
|99.1        |  | Certification Required Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                         
|99.2        |  | Certification Required Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                         

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(B)  Reports on Form 8-K

Current
Report on Form 8-K filed February 14, 2003, Acquisition of Assets.

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SIGNATURES

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

|                    |  | 1-800 CONTACTS, INC.
|------------------- |  | --------------------
|Dated: May 13, 2003 |  | By:                 
|                    |  | Name:               
|                    |  | Title:              
|                    |  | By:                 
|                    |  | Name:               
|                    |  | Title:              

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CERTIFICATION PURSUANT TO  18 U.S.C. SECTION 1350,  AS ADOPTED PURSUANT TO  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I,
Jonathan C. Coon, certify that:

|Dated: May 13, 2003 |  | /s/JONATHAN C. COONPresident and Chief Executive Officer
|------------------- |  | --------------------------------------------------------

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CERTIFICATION PURSUANT TO  18 U.S.C. SECTION 1350,  AS ADOPTED PURSUANT TO  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I,
Robert G. Hunter, certify that:

|Dated: May 13, 2003 |  | /s/ROBERT G. HUNTERVice President, Finance and Interim Chief Financial Officer
|------------------- |  | ------------------------------------------------------------------------------

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