This Quarterly Report on Form 10-Q contains trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as statements relating to levels of future sales and operating results; gross margins; managing cash flows; general economic conditions and levels of international sales, and our current and future liquidity and capital requirements; and levels of future investment in research and development efforts. In some cases, forward-looking statements can be identified by terminology, such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential," "continue," or the negative of such terms or other comparable terminology. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements, including as a result of the factors set forth under "Factors That May Affect Future Operating Results" and other risks detailed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2009 and detailed from time to time in our reports filed with the Securities and Exchange Commission. The reader is cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this quarterly report on Form 10-Q. We undertake no obligation to update such forward-looking statements to reflect events or circumstances occurring after the date of this report.

Overview

IRIDEX Corporation is a leading worldwide provider of therapeutic-based laser systems, consumable laser probes and delivery devices used to treat eye diseases in ophthalmology and skin conditions in aesthetics.

Our products are sold in the United States (U.S.) predominantly through a direct sales force and internationally through approximately 100 independent distributors into 107 countries except for our aesthetics products which are sold, marketed and serviced directly in France.

We manage and evaluate our business in two segments - ophthalmology and aesthetics. We further break down these segments by geography - Domestic (U.S.) and International (the rest of the world). In addition, within ophthalmology, we review trends by laser system sales (consoles and delivery devices) and recurring sales (consumables, service and support).

Our ophthalmology revenues arise primarily from the sale of our IRIS Medical OcuLight and IQ 810 laser systems, consumables and revenues from service and support activities. Our current family of OcuLight systems includes the OcuLight TX, the OcuLight Symphony (Laser Delivery System), OcuLight SL, OcuLight SLx, OcuLight GL and OcuLight GLx laser photocoagulation systems as well as the IRIS Medical IQ 810 laser system. We also produce the Millennium Endolase module which is sold exclusively to Bausch & Lomb and incorporated into their Millennium Microsurgical System.

Our aesthetics revenues arise primarily from the sales of our aesthetics systems including: the Gemini, Venus-i, Lyra-i and Aura-i Laser Systems, the VersaStat 10 mm, VersaStat- i, and Dermastat handpieces along with an articulated arm for the Venus- i Laser System, as well as our VariLite and DioLite XP laser systems.

Sales to international distributors are made on open credit terms or letters of credit and are currently denominated in United States dollars and accordingly, are not subject to risks associated with international monetary conditions and currency fluctuations. Sales of aesthetics products to end customers from our French subsidiary are denominated in Euros.

Cost of revenues consists primarily of the cost of purchasing components and sub-systems, assembling, packaging, shipping and testing components at our facility, direct labor and associated overhead, amortization of intangible assets, and our U.S. field service organization which supports our aesthetics products domestically.

Research and development expenses consist primarily of personnel costs, materials to support new product development and research support provided to clinicians at medical institutions developing new applications which utilize our products. Research and development costs have been expensed as incurred.

Sales and marketing expenses consist primarily of personnel costs, sales commissions, travel expenses and advertising and promotional expenses.

General and administrative expenses consist primarily of personnel costs, legal and accounting fees, insurance and other expenses not allocated to other departments.

Results of Operations

The following table sets forth certain operating data as a percentage of
revenues for the periods included.



                                                 Three Months Ended
                                               April 4,      March 29,
                                                 2009          2008
             Revenues                             100.0 %        100.0 %
             Cost of revenues                      53.0 %         58.1 %

             Gross Margin                          47.0 %         41.9 %
             Operating expenses:
             Research and development               7.8 %          8.9 %
             Sales and marketing                   21.9 %         22.8 %
             General and administrative            13.9 %         16.6 %

             Total operating expenses              43.6 %         48.3 %

             Income (loss) from operations          3.4 %         (6.4 )%
             Interest and other expense, net       (1.3 )%        (1.4 )%

             Income (loss) before income tax        2.1 %         (7.8 )%
             Provision for income taxes              -  %           -  %

             Net income (loss)                      2.1 %         (7.8 )%

Revenues.

Total revenue decreased by 6.4% to $10.7 million for the three months ended April 4, 2009 from $11.5 million for the three months ended March 29, 2008. Ophthalmology revenues remained constant and the decrease is directly attributable to the reduction in aesthetics revenues. The decline in revenue was primarily due to the global economic environment which significantly affected demand for our aesthetic products during the first quarter ended April 4, 2009.

Ophthalmology revenues in total remained constant. Ophthalmology recurring revenues consisting of consumables and service increased $0.3 million, or 6.7%, from $4.1 million to $4.4 million. Domestic ophthalmology systems decreased $0.4 million, or 31.6%, from $1.2 million to $0.8 million. We believe the reduction was caused by customers delaying capital equipment expenditures in the quarter due to the uncertain economic circumstances. International ophthalmology systems increased $0.1 million, or 7.1%, from $1.8 million to $1.9 million. OEM revenues remained constant at $0.4 million. OEM revenues are generated from a long standing relationship and the demand for this product is dependent on the OEM's market demand.

Aesthetics revenues in total decreased $0.8 million or 18.9%, from $4.0 million to $3.2 million. Service revenues decreased $0.2 million or 11.2%, from $1.8 million to $1.6 million. International aesthetics system revenues decreased $1.1 million or 59.5%, from $1.9 million to $0.8 million and domestic aesthetics system revenues increased $0.6 million or 300.8%, from $0.2 million to $0.8 million. Aesthetics systems revenues fluctuate period to period due to the timing of individual deals because of the relatively high price and low volume of systems being sold. This effect is magnified for international sales where distributors often place multiple system orders at one time.

Gross profit and gross margin.

Gross profit for the quarter ended April 4, 2009 was $5.0 million compared with $4.8 million for the comparable quarter of the prior year, an increase of $0.2 million even though revenues decreased by $0.7 million. This was because gross margins improved to 47.0% of revenues for the quarter ended April 4, 2009 compared with 41.9% of revenues for the same quarter a year earlier.

We are no longer incurring amortization expenses related to intangible assets that were previously being charged to cost of revenues which positively impacted margins by 4.0%. Manufacturing and service expenses declined but due to a proportionally bigger reduction in revenues negatively impacted margins by 0.5%. Other manufacturing expenses including inventory reserve adjustments also declined, resulting in an improvement to margins of 0.4% and a reduction in direct costs as a percentage of revenues improved margins by 1.2%. Gross margins as a percentage of sales will continue to fluctuate due to changes in the relative proportions of domestic and international sales, the product mix of sales, costs associated with future product introductions and total unit volume changes that lead to greater or lesser production efficiencies and a variety of other factors. See Item 1A. "Risk Factors - Factors That May Affect Future Results - "Our Operating Results May Fluctuate from Quarter to Quarter and Year to Year."

Research and development.

Research and development (R&D) expenses decreased by $0.2 million or 18%, to $0.8 million from $1.0 million for the quarter ended April 4, 2009 compared to the same period of the prior year. R&D expenses benefited from transferring $0.1 million of previously expensed project materials into inventory in connection with a project completion. In the future, with increasing profitability, we expect to target our research and development spending level to approximate 10% of our revenues to maintain a consistent level of new product introductions.

Sales and marketing.

Sales and marketing expenses decreased by $0.2 million or 10.0% to $2.4 million from $2.6 million for the quarter ended April 4, 2009 compared to the same period of the prior year. The decrease in sales and marketing spending is primarily attributable to decreases in amortization of intangible assets and lower commission expenses as a result of lowers sales.

General and administrative.

General and administrative expenses decreased by $0.4 million or 21.6%, to $1.5 million from $1.9 million for the quarter ended April 4, 2009 compared to the same period of the prior year. The decrease in general and administrative spending is primarily attributable to decreases in consulting and temporary help of $0.3 million and accounting and other public company expenses of $0.1.

Interest and other expense, net.

Interest and other expense consist primarily of $0.1 million of interest expense and $0.1 million in foreign exchange losses for the quarter ended April 4, 2009, compared with $0.3 million of interest expense and $0.1 million in foreign exchange gains for the quarter ended March 29, 2008. The interest expense relates to the bank debt outstanding in the respective periods offset by interest earned on cash deposits.

Income Taxes.

Significant components affecting the effective tax rate include pre-tax net profit, changes in valuation allowance, federal and state R&D tax credits, income from tax-exempt securities, the state composite tax rate and recognition of certain deferred tax assets subject to valuation allowance. The Company recorded $0 income tax provision for both the three months ended April 4, 2009 and March 29, 2008.

Liquidity and Capital Resources.

Liquidity is our ability to generate sufficient cash flows from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate financing or to raise capital.

As of April 4, 2009, we had cash and cash equivalents of $5.7 million and working capital of $9.8 million. For the three months ended April 4, 2009, net cash provided by operating activities was $0.9 million.

The Company has historically required, and continues to require, debt to fund its operations. Management believes that the Company's current cash and cash equivalents and its credit facility with Wells Fargo Bank - See Note 5 of Notes to Consolidated Financial Statements in this report for more information regarding the credit facility - provides sufficient liquidity to operate for the next 12 months and that the covenants contained in the Wells Fargo Bank credit facility are reasonable and management expects to be able to meet those covenants based on its operating plan for 2009. If the Company is not able to perform in accordance with its operating plan for 2009 and fails to maintain compliance with its debt covenants, Wells Fargo Bank would be entitled to exercise its remedies under this credit facility which include declaring all outstanding obligations due and payable, and disposing of the collateral if obligations are not paid. As of April 4, 2009 the Company was in compliance with the debt covenants on the credit facility.