The matters addressed in Management's Discussion and Analysis of Financial Condition and Results of Operations that are not historical information constitute "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. Readers can recognize forward-looking statements by the use of words like "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "will," "target," "forecast" and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign exchange rates, the outcome of contingencies, such as legal proceedings, and financial results.

Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and the Company can give no assurance that its expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond the control of the Company. These factors include, without limitation, those described in this Annual Report in "Item 1A - Risk Factors." The Company undertakes no obligation to update these forward-looking statements after the date of this report to reflect future events or circumstances or to reflect actual outcomes.

The following discussion should be read in conjunction with the audited consolidated financial statements of STAAR, including the related notes, provided in this report.

Overview

Strategy

STAAR's strategy is to be valued as a leading global provider of innovative intraocular lens system technologies. STAAR employs a commercialization strategy that focuses on achieving sustainable profitable growth.

Performance Against 2012 Key Operational Metrics

Two principal strategic goals guided STAAR's key operational metrics in 2012: to lay the groundwork for further growth and to achieve and maintain profitability. In pursuit of these goals, STAAR aligned its business initiatives during 2012 along five key operational metrics that it used to gauge its performance during the year. Based on performance relative to our targets, on August 1, 2012, STAAR decreased the targets for three of the five metrics, and in final form they are as follows:

· Increase total revenue by high single digits for the full year.

· As discussed below in "Results of Operations," our total revenue increased by 2% in 2012.

· Grow ICL sales by 25% for the second half of 2012 and 20% for the full year.

· As discussed below in "Results of Operations," ICL sales grew 6% for the second half of 2012 and 9% for the year.

· Increase gross profit margins to achieve a level of 71% for the full year.

· As discussed below in "Results of Operations," gross profit margins increased from 67.5% in 2011 to 69.4% in 2012.

· Achieve profitability in three quarters of 2012.

· As discussed below in "Results of Operations," we achieved profitability on a GAAP basis only in the first quarter of 2012.

· Manage the manufacturing consolidation with no material disruption to customer supply requirements.

· Our consolidation efforts proceeded according to our plans and we expect this to continue during 2013. As a result of certain consolidation-related expenses being pulled forward from 2013, spending levels were higher than projected for the year ended December 28, 2012.

Other Highlights

General

In 2012, STAAR increased its investment in the future by increasing research and development expense by 10% over prior year to 10% of net sales. We expect this investment to result in revenue-enhancing, patent-protected next-generation products. STAAR also increased its investment in its sales and marketing teams by hiring 17 new sales and marketing employees domestically and throughout our top eleven global refractive markets. The new marketing employees are focusing on enhancing global consumer awareness initiatives for the ICL product line, expanding social media messaging, including a redesigned web site, increasing support for ICL awareness campaigns and added consumer marketing in the Asia Pacific region. These new hires, along with their increased marketing activities, resulted in a 20% increase in sales and marketing expense. In addition, during 2012 STAAR transitioned its sales efforts in Spain from a distributor to direct sales model and incurred approximately $1.2 million in transition expenses related to this change. STAAR also increased its manufacturing consolidation efforts in 2012 in preparation of transferring Swiss and Japanese manufacturing activities to our Monrovia facility. These non-recurring consolidation and facility expansion efforts increased our expenses by $1.6 million over consolidation efforts in 2011.

Global Visian ICL and TICL Sales

STAAR is the only company with approval to sell a posterior segment phakic IOL, known as the ICL. In 2012, sales of the ICL products represented approximately 55% of STAAR's business. STAAR continues to focus its ICL marketing and sales efforts in the top eleven refractive markets, based on the success of this strategy from 2010 through 2012. These markets include the U.S., Japan, Korea, China, India, Spain, Middle East, Germany, Italy, U.K., and Latin America.

In September 2011, STAAR launched the V4c model of the ICL with CentraFLOW technology, the KS-AquaPort™ in countries that recognize the CE Mark. The CentraFLOW technology uses a proprietary port in the center of the ICL optic of a size intended to optimize the flow of fluid within the eye, and eliminates the need for the surgeon to perform a YAG peripheral iridotomy procedure days before the ICL implant or a surgical iridotomy at time of implant. By simplifying the procedure and increasing patient comfort, the ICL with CentraFLOW technology makes the superior visual outcomes of the ICL available through a surgical implantation experience closer to LASIK, which should attract new surgeons and patients to the product.

The launch of ICLV4c follows the September 2010 introduction of the ICLV4b model, which offers an expanded range of correction, in territories that recognize the CE Mark. The expanded range includes ICLs with lower levels of myopia correction in quarter-diopter increments, Toric hyperopic ICLs to treat astigmatism and far-sightedness, and Toric ICLs in the low to zero range of myopia to treat patients primarily affected by astigmatism. These product line extensions more than double the number of patients who could benefit from products in Europe and other territories that accept the CE Mark.

STAAR believes that increased regulatory approval of the ICL with CentraFLOW technology beyond countries that recognize the CE Mark, such as Korea, India and Latin America, will improved the competitiveness of the ICL product line and help move STAAR closer to its goal of positioning the ICL and TICL throughout the world as primary choices for refractive surgery. ICL products now address, in countries where approved, all degrees of refractive error that can be treated with laser eye surgery, as well as moderate and severe errors beyond the effective range of laser eye surgery.

In some key markets of the Asia Pacific region, as well as the U.S., STAAR has not yet introduced the ICLV4b model. In those countries, STAAR is seeking approval of the ICL with CentraFLOW technology and plans to move directly to that model as quickly as regulatory timelines allow.

STAAR's ability to maintain or accelerate the rate of growth in ICL sales will partly depend on continued improvement in worldwide economic conditions and progress with regulatory agencies. ICL surgery is a relatively expensive elective procedure and is seldom reimbursed by insurers or government agencies. STAAR believes that the global recession reduced overall demand for refractive surgery particularly in the U.S., and it has been reported that consumer spending and consumer confidence has not returned to pre-recession levels.

We consider ICL sales growth in the U.S. market important because of the size of the U.S. refractive surgery market and the perceived worldwide leadership of the U.S. in adopting innovative medical technologies. The ICL was approved by the FDA for treatment of myopia on December 22, 2005. STAAR submitted a Pre-Market Approval Application supplement for the Toric ICL to the FDA on April 28, 2006, and that application remains open and pending (See, Item 1, "Regulatory Requirements in the United States, Status of TICL Submission."). On October 9, 2012, STAAR submitted to the FDA a 180 day PMA Supplement regarding the ICL with CentraFLOW technology. After discussion with the FDA, we agreed to resubmit the Supplement as a pre-submission prior to submitting a revised PMA Supplement.

Spain has long been a large ICL market in Europe for STAAR. Because STAAR believes the potential of the Spanish market has not been fully realized, STAAR decided to shift from its independent distributor to a direct sales model when the distributor's contract expires in 2013. In the second quarter of 2012, STAAR had an opportunity to negotiate an early transition to the direct model, with the existing distributor to provide transitional services and ongoing logistics support for a fee. While the transition caused a short-term decline in revenues as the independent distributor ceased purchasing inventory and STAAR bought back the existing distributor inventory, STAAR believes that future revenues from Spain will increase through enhanced direct marketing efforts and by selling directly to customers. Additional transition expenses will be incurred during the transitional period until March 2013 and logistic expenses to our former distributor through the first quarter of 2015. The on-going weakness and uncertainty in the Spanish economy may affect the magnitude and timing of these future benefits.

Since 2011, STAAR experienced noteworthy growth in market penetration in China and Korea. However, in February 2012, it was widely reported throughout the Asia Pacific region that Dr. Ray Tsai, a prominent ophthalmologist in Taiwan questioned the safety of LASIK surgery, and would no longer perform the procedure. We believe this negative publicity decreased patient interest in China in LASIK as well as all other refractive surgeries. In addition, economic concerns in Korea as well as price competition among LASIK procedure centers adversely impacted our sales in Korea. Our distributor adjusted inventory levels. We expect sales to increase in China and Korea in 2013. While no assurance can be given regarding 2013 sales, through the first two months of 2013, our sales in Korea increased 60% over the first two months of 2012.

Global IOL Sales.

STAAR pioneered the development of folding lenses for use in cataract surgery, and IOLs represented approximately 41% of STAAR's business in 2012.

In September 2011, STAAR launched its nanoFLEX Collamer Single Piece IOL which can be injected through a 2.2 mm incision with the nanoPOINT™ Injector System, in the territories that recognize the CE Mark. STAAR received CE Mark approval to market its nanoFLEX toric IOL in November 2011, and expects to begin marketing the lens in 2013. nanoFLEX is STAAR's largest selling IOL product in U.S. markets and STAAR believes the lens can receive broad commercial acceptance outside the U.S. STAAR hopes that the biocompatibility and outstanding optical properties of Collamer, with which surgeons have become acquainted through the ICL, will build interest in the nanoFLEX IOL worldwide. Availability of the toric version of the lens, which corrects pre-existing astigmatism at the time of cataract surgery, is expected to increase interest in the nanoFLEX technology outside the U.S.

In May, 2012, STAAR included in its Annual Report to the FDA notification of changes to the lens length and haptic design for the nanoFLEX IOL. On September 25, 2012, the FDA responded that we should submit these changes as a PMA Supplement. On November 19, 2012, STAAR amended its Annual Report to not include the modified nanoFLEX. The Company is assessing its options regarding the modified nanoFLEX IOL in the U.S., while it continues to sell the current version.

STAAR has marketed its silicone toric IOL since 1998 and believes that the addition of the nanoFLEX toric will make the product line more competitive with acrylic toric IOLs now in the market. Among other things, the nanoFLEX toric features an aspheric optic, and we believe the bio-adhesive nature of the Collamer material will provide excellent rotational stability, a key characteristic for toric lenses.

In the fourth quarter of 2012, STAAR launched in Japan and select markets in Europe a hydrophobic acrylic Preloaded IOL, featuring the popular single-piece IOL format, known as the KS-SP. The market favorably received the KS-SP and we received higher demand than originally forecasted. Due to manufacturing capacity constraints occurring at our third-party acrylic lens supplier, we currently are experiencing a backlog for the KS-SP, as well as the KS-X. The supplier cannot estimate whether or when their expanding manufacturing capabilities will be able to meet our increasing supply requirements. While we are exploring supply alternatives, there is no guaranty we will identify and validate an alternative supplier.

Among STAAR's initiatives to grow its IOL business are the following:

· we plan to introduce a preloaded injector for the nanoFLEX and nanoFLEX toric;

· we are seeking approval to introduce the silicone Preloaded IOL in the U.S. market to enhance our U.S. IOL offering and help STAAR maintain or increase its market share in the hospital-based segment;

· we plan to seek further approvals for the nanoFLEX and nanoFLEX Toric in an effort to build a global product franchise for Collamer IOLs; and

· we are researching presbyopia-correcting designs that leverage the unique optical properties of the Collamer material.

STAAR cautions that the successful development and introduction of new products is subject to risks and uncertainties, including the risk of unexpected delays and, in some cases, approval of regulatory authorities.

Manufacturing Consolidation Project and Tax Strategy. During 2012 STAAR devoted significant resources to two initiatives: a project to consolidate global manufacturing, and development of a strategy to optimize our global organization for tax purposes. The goal of these strategies is to further improve upon gross profit margin by streamlining operations, thereby reducing costs and to increase profits in the U.S. to enable the Company to utilize its $122.5 million in net operating loss carryforwards, and at the same time, reduce income taxes in foreign jurisdictions where it pays tax.

STAAR currently manufactures its products in four facilities worldwide. It has developed a plan to methodically consolidate its manufacturing in a single site at its Monrovia, California location by the end of 2013, which is expected subsequently to yield significant savings in cost of goods and to lower our global administrative and regulatory costs.

By December 2012, all non-sterile IOLs were manufactured in the U.S., whereas they were previously manufactured in Japan. In December 2012, the Company began the first manufacturing ICLs in the U.S., whereas they were previously exclusively manufactured in Switzerland. While some U.S. manufactured IOLs were sold in December 2012, sales of U.S.-manufactured IOLs and ICLs will comprise a larger portion of our sales in 2013. This project, which is subject to significant risks, is further described under "Risk Factors, "Our manufacturing consolidation plan exposes us to risk."

STAAR expects its manufacturing consolidation initiatives to cost approximately $6 million over a three-year period, of which it spent approximately $2.6 million during 2012. Expenditures to date have largely consisted of severance, employee costs, professional fees to advisors and consultants and accruals for asset retirement obligations. Additionally, we expect to spend approximately $2.4 million in capital expenditures to consolidate our manufacturing.

In August 2012, STAAR entered into an eight year lease of an approximately 26,000 square foot building immediately adjacent to our current facility in Monrovia, California. The new building, which is accessible from the current facility via two hallways, will allow the Company to accommodate the needs associated with our previously announced manufacturing consolidation to Monrovia, as well as provide space for additional growth. The Company estimates the annualized cost of the new facility will increase Selling, General and Administrative expenses by approximately $625,000.

In addition, as STAAR's profitability grows, its liability for income taxes in various jurisdictions has also increased. STAAR has developed a strategy to minimize its future tax liabilities as its business grows. Among other things, STAAR seeks to utilize the approximately $122.5 million in net operating losses that it has accumulated in the U.S.

However, we cannot assure that we will achieve the expected benefits of these initiatives. Among other things, costs could exceed current estimates, product manufacturing transfers can result in delays or supply interruptions, changes in tax laws could reduce or eliminate expected benefits of some or our tax strategies, and future profit margins can be affected by a variety of factors unrelated to our level of manufacturing efficiency.

Backlog. The ICL is manufactured to precisely address refractive prescriptions across a broad range of correction, resulting in a large number of Stock Keeping Units (SKUs). The challenge of maintaining inventory in all models, can result in a backlog in customer orders. While the dollar amount of backlog orders is not currently significant in relation to our total annual sales, unexpectedly large orders for ICLs could increase our backlog. STAAR believes it has sufficient capacity to ramp up production levels to meet demand and that any backlogs will be temporary. However, delays in filling orders can result in lost sales if alternative refractive treatments are available to the patient. Because Toric ICLs treat an even greater variety of refractive errors and at times must be custom made for the patient, they are accustomed to a special order procedure and do not expect immediate delivery of Toric ICLs from inventory. In connection with our manufacturing consolidation project, we have built a safety stock of inventory of our primary products within the ICL and IOL product lines.

Our pre-loaded single piece acrylic IOL is currently experiencing backlogs due to high demand and manufacturing capacity constraints occurring at our third-party acrylic lens vendor. Although the supplier is working to resolve the issue, they cannot estimate whether or when their manufacturing capabilities will be able to meet our increasing supply needs. While we are exploring supply alternatives, there is no guaranty we will identify and validate an alternative supplier.

Status of U.S. TICL Submission.

As discussed above under the caption "Business - Regulatory Matters," STAAR submitted a Pre-Market Approval Application (PMA) supplement for the TICL to the FDA on April 28, 2006, which the agency has designated as a panel-track supplement. On November 29, 2011, STAAR received a letter of deficiency from FDA further questioning the clinical data, specifically the inclusion of patient data that was obtained outside the study windows, requesting additional information on the lens design and a validation report for the Toric ICL power calculation software. After further interactions with the FDA throughout 2012, on November 15, 2012, STAAR submitted (1) clinical data showing no statistical difference in the clinical outcomes with or without the patient data that was obtained outside the study windows, (2) engineering data regarding the lens design, and (3) a validation report for the Toric ICL power calculation software. The U.S. represents the largest refractive procedure market and STAAR will continue to seek approval. STAAR cannot predict when, or if, the FDA may grant approval of the Toric ICL.

Financing Strategy

On December 28, 2012, in response to an offer made by the bank, STAAR Japan amended its existing line of credit agreement with Mizuho Bank. The amended agreement authorizes the Company to increase its borrowings from up to 300,000,000 Yen (approximately $3.5 million based on the exchange rate on December 28, 2012), at an interest rate equal to the Tokyo short-term prime interest rate (approximately 1.475% as of December 28, 2012) plus 1.125%, for a total effective rate of 2.6%, to a new limit of 500,000,000 Yen (approximately $5.9 million based on the exchange rate on December 28, 2012), at a lower interest rate equal to the Tokyo short-term prime interest rate (approximately 1.475% as of December 28, 2012). The credit facility may be renewed for an agreed upon term (the current line expires on March 28, 2013). The credit facility is not collateralized. The Company had 200,000,000 Yen outstanding on the line of credit as of December 30, 2011 and December 31, 2010 (approximately $2.4 million based on the foreign exchange rates on December 28, 2012), and increased its amount outstanding on the line of credit to 500,000,000 Yen (approximately $5.9 million based on the exchange rate on December 28, 2012) on December 28, 2012. In 2012, the Company paid approximately $65,000 in interest expense related to its borrowings from Mizuho and the Company expects its interest expense on the bank line to remain approximately the same in 2013. While there are no assurances, the Company believes the credit line will be renewed in fiscal 2013, similar to the renewals that have occurred since 2007.

Results of Operations

The following table sets forth the percentage of total sales represented by certain items reflected in the Company's consolidated statement of operations for the period indicated and the percentage increase or decrease in such items over the prior period.

                                           Percentage of Net Sales                     Percentage Change
                                   December        December        December
                                     28,             30,             31,           2012 vs.          2011 vs.
                                     2012            2011            2010            2011              2010
Net sales                              100.0 %         100.0 %         100.0 %            1.6 %           14.2 %
Cost of sales                           30.6 %          32.5 %          36.2 %           (4.4 )%           2.6 %
Gross profit                            69.4 %          67.5 %          63.8 %            4.5 %           20.8 %
General and administrative              23.7 %          23.8 %          26.9 %            1.5 %            6.1 %
Marketing and selling                   33.4 %          28.2 %          31.3 %           20.1 %            3.2 %
Research and development                10.1 %           9.3 %          10.4 %            9.8 %            2.5 %
Other general and
administrative expenses                  4.1 %           1.7 %             -                *                -
Operating income (loss)                 (1.9 )%          4.4 %          (4.7 )%             *                - *
Total other expense, net                 1.1 %          (0.1 )%         (2.0 )%             *            (92.7 )%
Income (loss) before income
taxes                                   (0.8 )%          4.3 %          (6.7 )%             *                - *
Provision for income taxes               2.0 %           2.2 %           0.8 %           (8.3 )%             - *
Income (loss) from continuing
operations                              (2.8 )%          2.1 %          (7.5 )%             *                - *
Income from discontinued
operations, net of income taxes          0.0 %           0.0 %           7.6 %            0.0 %              - *
Net income (loss)                       (2.8 )%          2.1 %           0.1 %              *                - *

* Denotes change is greater than 100%

The following table presents our net sales, by product, for the fiscal years presented (dollars in thousands):

                           % of                     % of                     % of
                           Total        2012        Total        2011        Total        2010
     IOL                     40.7 %   $ 25,971        43.9 %   $ 27,547        50.1 %   $ 27,550
     ICL                     55.0 %     35,080        51.1 %     32,074        44.2 %     24,300
     Core Product Sales      95.7 %     61,051        95.0 %     59,621        94.3 %     51,850
     Other                    4.3 %      2,732         5.0 %      3,144         5.7 %      3,108
     Total Sales            100.0 %   $ 63,783       100.0 %   $ 62,765       100.0 %   $ 54,958

Net sales for 2012 were $63.8 million, a 1.6% increase over the $62.8 million reported in fiscal 2011. The increase in net sales was due to a 9.4% increase in ICL sales, which was largely offset by a 5.7% decrease in IOL sales and a 13.2% decrease in other product sales. Changes in foreign currency did not materially impact our net sales for the year.

Net sales for 2011 were $62.8 million, a 14.2% increase over the $55.0 million reported in fiscal 2010. The increase in net sales was due to 15% increase in our core product sales (IOL and ICL). Core products represented 95.0% and 94.3% of the Company's total sales in fiscal year 2011 and 2010, respectively. Changes in foreign currency favorably impacted our net sales in 2011 by $1.7 million.

Total IOL sales were $26.0 million for fiscal 2012, a 5.7% decrease from fiscal 2011 sales of $27.5 million. The primary reason for the decrease was a 25% decrease in U.S. IOL sales volume. The effect of the decrease in unit volume was partially offset by an 11% increase in average selling prices. Preloaded IOL sales in international markets decreased 1%, despite a 5% increase in unit volume, because of a 6% decline in average selling prices due to a mix shift to Preloaded Acrylic IOLs which have lower average selling prices than most other IOL models. IOL sales represented 41% of the Company's total sales in fiscal 2012. Preloaded IOL sales represented 76% of total IOL sales in fiscal 2012.

Total IOL sales were $27.5 million for fiscal 2011 and 2010, respectively. Increased sales of preloaded acrylic IOLs in China and Germany and Toric IOLs in the U.S. were offset by decreased Collamer and silicone IOL sales. Although IOL sales were essentially flat year over year, IOL margins were up 3% due to improved average selling prices, costs, and geographic mix. As an example, sales of our largest selling IOL, the Preloaded silicone IOL, were down 1% year over year. However, Preloaded IOL gross profit was up 3% due to higher sales in Japan where margins are high and lower sales in Europe where margins are low. IOL sales represented 43.9% and 50.1% of the Company's total sales in fiscal 2011 and 2010, respectively. Preloaded IOL sales represented 72% of total IOL sales in fiscal 2011, compared with 69% in fiscal 2010.

Total ICL sales for 2012 were $35.1 million, a 9.4% increase over the $32.1 million in fiscal 2011. Unit volume increased 3% and average selling prices increased 6%. ICL sales growth was lower than anticipated due to an 18% decrease in ICL sales in Korea as the distributor adjusted its inventories levels. Outside of Korea, ICL sales grew 18%. The Company expects that ICL sales in Korea will return to growth in 2013. ICL sales represented 55% of our total sales for fiscal 2012. Toric ICL sales represented 49% of total ICL sales, where approved.

Total ICL sales for 2011 were $32.1 million, a 32% increase over the $24.3 million reported in fiscal 2010. The increase in ICL sales resulted from a 35% increase in sales in our then top ten refractive markets which comprised 85% of . . .