UNITED ~~STATES SECURITIES~~ ~~AND EXCHANGE COMMISSION~~STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

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 July 3, 2004
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

(Mark one)

~~1-800~~x QUARTERLY ~~CONTACTS,~~REPORT ~~INC. (Exact~~PURSUANT ~~name~~TO ofSECTION ~~registrant~~13 asOR ~~specified~~15(d) inOF ~~its~~THE ~~charter)~~SECURITIES EXCHANGE ACT OF 1934

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

For the quarterly period ended March 31, 2007

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

1-800 CONTACTS, INC.

(Exact name of registrant as specified in its charter)

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

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

(801) 316-5000

(Registrant’s telephone number, including area code)

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 x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange ~~act~~Act).

ýLarge ~~Yes~~ accelerated filer o Accelerated Nofiler x Non-accelerated filer o

AsIndicate ofby ~~August~~check 6,mark ~~2004,~~whether the ~~Registrant~~registrant ~~had~~is ~~13,286,621~~a ~~shares~~shell ofcompany ~~Common~~(as ~~Stock,~~defined ~~par~~in ~~value~~Rule ~~$0.01~~12b-2 ~~per~~of the ~~share,~~Exchange ~~outstanding~~Act).

o Yes x No

As of May 3, 2007, the Registrant had 14,009,591 shares of Common Stock, par value $0.01 per share, outstanding.

1-800 CONTACTS, INC.

INDEX

PART I.		FINANCIAL INFORMATION
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of January 3, 2004 and July 3, 2004
		Condensed Consolidated Balance Sheets as of December 30, 2006 and March 31, 2007
		Condensed Consolidated Statements of Operations for the Quarter and Two Quarters Ended June 28, 2003 and July 3, 2004
		Condensed Consolidated Statements of Operations for the Quarter Ended April 1, 2006 and March 31, 2007
		Condensed Consolidated Statements of Cash Flows for the Two Quarters Ended June 28, 2003 and July 3, 2004
		Condensed Consolidated Statements of Cash Flows for the Quarter Ended April 1, 2006 and March 31, 2007
		Notes to Condensed Consolidated Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
PART II.		OTHER INFORMATION
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings
Item 2.		Changes in Securities and Use of Proceeds
Item 1A.		Risk Factors
Item 3.		Defaults upon Senior Securities
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 4.		Submission of Matters to a Vote of Security Holders
Item 3.		Defaults Upon Senior Securities
Item 5.		Other Information.
Item 4.		Submission of Matters to a Vote of Security Holders
Item 6.		Exhibits and Reports on Form 8-K
Item 5.		Other Information
Item 6.		Exhibits

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

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

	January 3, 2004			July 3, 2004
ASSETS
CURRENT ASSETS:
Cash	$	1,075		$	330
Accounts receivable, net	944			1,210
Inventories, net	24,127			25,166
Prepaid income taxes	797			193
Deferred income taxes	548			900
Other current assets	1,752			3,448
Total current assets	29,243			31,247
PROPERTY, PLANT AND EQUIPMENT, net	13,183			17,346
DEFERRED INCOME TAXES	710			922
GOODWILL	33,853			33,768
DEFINITE-LIVED INTANGIBLE ASSETS, net	9,207			16,325
OTHER ASSETS	735			973
Total assets	$	86,931		$	100,581
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	3,381		$	1,253
Current portion of capital lease obligations	191			158
Accounts payable	8,558			8,549
Accrued liabilities	4,847			6,922
Total current liabilities	16,977			16,882
LONG-TERM LIABILITIES:
Line of credit	—			17,420
Long-term debt, less current portion	14,683			8,566
Capital lease obligations, less current portion	64			56
Deferred income tax liabilities	—			2,545
Total long-term liabilities	14,747			28,587
STOCKHOLDERS’ EQUITY
Common stock, 13,113 and 13,287 issued, respectively	131			133
Additional paid-in capital	42,346			45,773
Retained earnings	12,834			9,480
Accumulated other comprehensive loss	(104		)	(274		)
Total stockholders’ equity	55,207			55,112
Total liabilities and stockholders’ equity	$	86,931		$	100,581

CONDENSED CONSOLIDATED BALANCE SHEETS

~~See~~(in ~~accompanying notes to condensed consolidated financial statements.~~thousands)

3(unaudited)

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

	December 30,			March 31,
	2006			2007
ASSETS
CURRENT ASSETS:
Cash	$	2,737		$	616
Accounts receivable, net	3,577			3,711
Other receivables	1,825			1,885
Inventories	24,325			23,738
Deferred income taxes	1,886			1,766
Other current assets	2,816			1,465
Total current assets	37,166			33,181
PROPERTY AND EQUIPMENT, net	27,555			26,425
DEFERRED INCOME TAXES	898			920
GOODWILL	22,304			22,304
DEFINITE-LIVED INTANGIBLES, net	11,500			10,969
OTHER ASSETS	1,102			912
Total assets	$	100,525		$	94,711

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	2,633			2,476
Current portion of capital lease obligations	57			27
Income taxes payable	722			2,428
Accounts payable	10,821			11,057
Accrued liabilities	10,013			8,770
Unearned revenue	3,348			2,167
Total current liabilities	27,594			26,925
LONG-TERM LIABILITIES:
Line of credit	29,970			26,144
Long-term debt, net of current portion	4,404			3,934
Capital lease obligations, net of current portion	35			29
Other long-term liabilities	844			226
Total long-term liabilities	35,253			30,333
STOCKHOLDERS’ EQUITY:
Common stock, 13,424 and 13,443 issued, respectively	134			135
Additional paid-in capital	51,047			51,842
Treasury stock at cost, 8 and 9 shares, respectively	(133		)	(137		)
Accumulated deficit	(12,846		)	(13,798		)
Accumulated other comprehensive loss	(524		)	(589		)
Total stockholders’ equity	37,678			37,453
Total liabilities and stockholders’ equity	$	100,525		$	94,711

	Quarter Ended						Two Quarters Ended
	June 28, 2003			July 3, 2004			June 28, 2003			July 3, 2004
NET SALES	$	46,354		$	49,971		$	93,016		$	100,820
COST OF GOODS SOLD	28,580			30,698			59,140			62,251
Gross profit	17,774			19,273			33,876			38,569
OPERATING EXPENSES:
Advertising	3,586			7,224			7,380			16,039
Legal and professional	1,755			1,341			3,376			3,181
Research and development	197			443			2,000			1,335
Purchased in-process research and development	—			—			—			83
Other operating	10,104			10,766			18,753			20,648
Total operating expenses	15,642			19,774			31,509			41,286
INCOME (LOSS) FROM OPERATIONS	2,132			(501		)	2,367			(2,717		)
OTHER EXPENSE, net	(323		)	(699		)	(823		)	(1,055		)
INCOME (LOSS) BEFORE BENEFIT (PROVISION) FOR INCOME TAXES	1,809			(1,200		)	1,544			(3,772		)
BENEFIT (PROVISION) FOR INCOME TAXES	(1,249		)	52			(1,472		)	418
NET INCOME (LOSS)	$	560		$	(1,148	)	$	72		$	(3,354	)
PER SHARE INFORMATION:
Basic and diluted net income (loss) per common share	$	0.04		$	(0.09	)	$	0.01		$	(0.25	)

See accompanying notes to condensed consolidated financial statements.

~~See accompanying notes to condensed consolidated financial statements.~~3

41-800 CONTACTS, INC.

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

	Two Quarters Ended
	June 28, 2003			July 3, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	72		$	(3,354	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	3,008			3,606
Amortization of debt issuance costs and discounts	96			197
Purchased in-process research and development	—			83
Unrealized foreign currency exchange loss	77			85
Loss on sale of property and equipment	6			73
Stock-based compensation	731			—
Deferred income taxes, net of effects of acquisition	(59		)	(1,101		)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(992		)	(275		)
Inventories	10,510			(706		)
Other current assets	(356		)	(1,382		)
Accounts payable	(3,115		)	(786		)
Accrued liabilities	664			1,463
Income taxes payable / prepaid income taxes	1,180			682
Unearned revenue	92			(1		)
Net cash provided by (used in) operating activities	11,914			(1,416		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(1,655		)	(3,406		)
Proceeds from sale of property and equipment	33			4
Purchase of intangible assets	(28		)	(1,011		)
Cash paid for acquisitions	(7,012		)	(3,776		)
Deposits and other	(55		)	(186		)
Net cash used in investing activities	$	(8,717	)	$	(8,375	)

(in thousands, except per share amounts)

5(unaudited)

	Two Quarters Ended
	Quarter Ended
	June 28, 2003			July 3, 2004
	April 1,			March 31,
CASH FLOWS FROM FINANCING ACTIVITIES:
	2006			2007
Proceeds from exercise of common stock options	$	715		$	138
NET SALES	$	63,491		$	67,421
Restricted stock grants	—			6
COST OF GOODS SOLD	39,013			43,049
Net (repayments) borrowings on line of credit	(1,931		)	17,420
Gross profit	24,478			24,372
Debt issuance costs	—			(193		)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Principal payments on capital lease obligations	(206		)	(165		)
Advertising	3,983			4,421
Principal payments on long-term debt	(1,311		)	(8,240		)
Legal and professional	1,125			1,630
Net cash provided by (used in) financing activities	(2,733		)	8,966
Research and development	1,328			1,251
EFFECT OF FOREIGN EXCHANGE RATES ON CASH	(1		)	80
Restructuring charges	—			110
NET (DECREASE) INCREASE IN CASH	463			(745		)
Other selling, general and administrative	13,679			14,963
CASH AT BEGINNING OF PERIOD	259			1,075
Total selling, general and administrative expenses	20,115			22,375
CASH AT END OF PERIOD	$	722		$	330
INCOME FROM OPERATIONS	4,363			1,997
SUPPLEMENTAL CASH FLOW INFORMATION:
OTHER INCOME (EXPENSE), net	313			(350		)
Cash paid for interest	$	560		$	641
INCOME BEFORE PROVISION FOR INCOME TAXES	4,676			1,647
Cash paid for income taxes	350			—
PROVISION FOR INCOME TAXES	(3,495		)	(2,659		)
NET INCOME (LOSS)	$	1,181		$	(1,012	)
PER SHARE INFORMATION:
Basic and diluted net income (loss) per common share	$	0.09		$	(0.08	)

~~SUPPLEMENTAL~~See ~~DISCLOSURES~~accompanying notes OFto ~~NONCASH~~condensed ~~INVESTING~~consolidated ~~AND~~financial ~~FINANCING ACTIVITIES:~~statements.

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 $7,012, common stock with a fair value of $19,859 and assumed operating liabilities of $4~~,099.~~

~~During~~1-800 ~~the second quarter of 2003~~CONTACTS, ~~the performance guarantee was met relating to 700,000 shares of the Company’s restricted common stock held in escrow as partial consideration for the July 2002 acquisition of ClearLab~~INC. The Company recorded additional purchase consideration of approximately $16,980 for these shares. The Company recorded this as goodwill, net of a contingent consideration liability recorded at the purchase date. The amount of goodwill as of June 28, 2003 was $11,205 (see Note 6).

~~During~~CONDENSED ~~the~~CONSOLIDATED ~~first quarter of 2004, the Company purchased the stock of~~STATEMENTS ~~VisionTec~~OF ~~(subsequently~~CASH ~~renamed ClearLab UK, Ltd.). The purchase consideration included cash of $3,776 and common stock with a fair value of $3,200 (see Note 6).~~FLOWS

~~See~~(in ~~accompanying notes to condensed consolidated financial statements.~~thousands)

6(unaudited)

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

	Quarter Ended
	April 1,			March 31,
	2006			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,181		$	(1,012	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	2,298			2,511
Amortization of debt issuance costs and discounts	56			52
Foreign currency exchange gain	(732		)	(212		)
Stock-based compensation	367			723
Tax benefits from share-based payment exercises	(27		)	(45		)
Loss on sale of property and equipment	2			22
Deferred income taxes	(216		)	98
Changes in operating assets and liabilities:
Accounts receivable, net	623			79
Inventories, net	40			666
Other receivables	174			(60		)
Other current assets	1,619			1,335
Income taxes payable	3,551			1,811
Accounts payable	2,182			23
Accrued liabilities	1,528			(1,257		)
Unearned revenue	164			(1,199		)
Net cash provided by operating activities	12,810			3,535

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(2,658		)	(1,067		)
Purchase of definite-lived intangible assets	—			(64		)
Deposits and other	(106		)	47
Net cash used in investing activities	$	(2,764	)	$	(1,084	)

	Quarter Ended
	April 1,			March 31,
	2006			2007
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	$	97		$	28
Purchase of treasury stock	—			(4		)
Excess tax benefits from share-based payment exercises	27			45
Net repayments on line of credit	(10,684		)	(3,826		)
Principal payments on capital lease obligations	(46		)	(37		)
Principal payments on long-term debt	(464		)	(711		)
Net cash used in financing activities	(11,070		)	(4,505		)
EFFECT OF FOREIGN EXCHANGE RATES ON CASH	(50		)	(67		)

NET DECREASE IN CASH	(1,074		)	(2,121		)
CASH AT BEGINNING OF PERIOD	1,481			2,737
CASH AT END OF PERIOD	$	407		$	616

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	430		$	537
Cash paid for income taxes	150			750

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

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

See accompanying notes to condensed consolidated financial statements.

1-800 CONTACTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~The~~We ~~accompanying~~have prepared 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 (the “SEC”). Certain information ~~and~~ and disclosures normally included in financial statements prepared in ~~accordance~~ 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 our 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~~our ~~Company’s~~ Annual Report on Form 10-K for the year ended ~~January~~December 330, ~~2004~~2006.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

NOTE 2. INVENTORIES

Inventories are recorded at the lower of cost (using the first-in, first-out method) or market value. Elements of cost in our manufactured inventories generally include raw materials, direct labor, manufacturing overhead and freight-in. Inventories consisted of the following (in thousands):

	January 3, 2004		July 3, 2004
	December 30,		March 31,
Purchased contact lenses	$	20,943	$	20,438
	2006		2007
Purchased contact lenses and accessories	$	12,689	$	13,011
Manufactured inventories:
Raw materials	~~429~~801		~~636~~522
Work in process	~~2,681~~985		~~3,831~~933
Finished goods contact lenses	749,850		~~261~~9,272
Total	$	24,~~127~~325	$	2523,~~166~~738

Provision is made to reduce excess and obsolete inventories to their estimated net realizable values. As of ~~January~~December 330, ~~2004~~2006 and ~~July~~ 3March 31, ~~2004~~2007, reserves for excess and obsolete inventories were approximately $~~623,000~~1.2 million and $10.7 million,~~098,000,~~ respectively.

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 using the treasury stock method. 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 and two quarters ended July 3~~ Additionally, ~~2004,~~we ~~options~~have tonot ~~purchase~~reflected ~~1,415,875 and 1,408,178~~performance ~~shares~~based ofunvested ~~common~~ stock, ~~respectively,~~awards ~~were~~in ~~not~~Diluted ~~included~~EPS insince the ~~computation~~performance ofconditions ~~Diluted~~were ~~EPS~~not ~~because~~satisfied ~~the~~as ~~effect~~of ~~would~~March be31, ~~antidilutive~~2007. For the ~~quarter and two~~ quarters ended ~~June~~April 1, 282006 and March 31, ~~2003~~2007, options to purchase ~~611~~690,~~448~~134 and ~~909~~1,~~465~~118,198 shares of common ~~stock, respectively, were not included in the computation of Diluted EPS because the effect would be antidilutive.~~

stock, respectively, as well as 32,041 and 564,525 shares of unvested common stock, respectively, were not included in the computation of Diluted EPS because the effect would be antidilutive.

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 June 28, 2003					Quarter Ended July 3, 2004
	Quarter Ended April 1, 2006					Quarter Ended March 31, 2007
	Net Income		Shares	Per-Share Amount		Net (Loss)			Shares	Per-Share Amount
Basic EPS	$	~~560~~1,181	1213,~~552~~345	$	0.0409	$	(1,~~148~~012	)	13,~~286~~420	$	(0.0908	)
Effect of stock options	—		~~210~~96	—		—			——	—
Diluted EPS	$	560	12,762	$	0.04	$	(1,148	)	13,286	$	(0.09	)
Effect of unvested stock awards			——						——
Diluted EPS	$	1,181	13,441	$	0.09	$	(1,012	)	13,420	$	(0.08	)

	Two Quarters Ended June 28, 2003					Two Quarters Ended July 3, 2004
	Net Income		Shares	Per-Share Amount		Net Loss			Shares	Per-Share Amount
Basic EPS	$	72	12,269	$	0.01	$	(3,354	)	13,237	$	(0.25	)
Effect of stock options	—		224	—		—			—	—
Diluted EPS	$	72	12,493	$	0.01	$	(3,354	)	13,237	$	(0.25	)

NOTE 4. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) for the ~~quarter and two~~ quarters ended ~~June~~April 281, ~~2003~~2006 and ~~July~~March 331, ~~2004~~2007 consists of the following components (in thousands):

	Quarter Ended						~~Two Quarters Ended~~
	June 28, 2003			July 3, 2004			June 28, 2003			July 3, 2004
	April 1, 2006			March 31, 2007
Net income (loss)	$	~~560~~1,181		$	(1,~~148~~012	)	$	72		$	~~(3,354~~	)
Foreign currency translation loss	(442		)	(147		)	(302		)	(170		)
Foreign currency translation	(1		)	(65		)
Comprehensive income (loss)	$	~~118~~1,180		$	(1,~~295~~077	)	$	~~(230~~	)	$	~~(3,524~~	)

The foreign currency translation loss results primarily from changes in exchange rates relative to the U.S. dollar from the translation of ~~the~~our ~~Company’s~~ Singapore and United Kingdom subsidiaries’ financial statements.

NOTE 5. STOCK-BASED COMPENSATION

~~The~~We ~~Company~~account ~~applies~~for ~~Accounting~~share-based ~~Principles~~compensation ~~Board~~in accordance ~~Opinion~~with ~~No.~~Statement ~~25,~~of “Financial Accounting ~~for~~Standards ~~Stock~~(“SFAS”) ~~Issued~~No. to123 ~~Employees~~(Revised 2004),” ~~and~~“Share-Based ~~related interpretations~~Payment,” ~~and~~(“SFAS ~~uses~~No. ~~the~~123R”), ~~intrinsic~~which ~~method~~requires ~~of accounting for its~~ stock-based ~~option~~compensation ~~grants~~ to ~~employees~~be ~~and~~measured ~~directors. No~~based ~~compensation~~on ~~expense~~the ~~has~~fair ~~been~~value ~~recognized~~of ~~for~~the ~~stock~~award ~~option~~on ~~awards~~the date of ~~granted~~grant atand orrecognized ~~above~~over ~~fair~~the ~~market~~period ~~value~~during ofwhich ~~the~~service ~~stock~~is onrequired ~~the~~in exchange ~~date~~for ofthe ~~grant~~award.

~~Under Statement of Financial Accounting Standards (“~~SFAS”) No. ~~123,~~123R ~~“Accounting~~applies ~~for~~to ~~Stock-Based~~all ~~Compensation,”~~of ~~compensation~~our ~~expense~~outstanding isunvested ~~recognized~~share-based ~~for~~payment ~~the~~awards ~~fair market value of each option~~ as ~~estimated on the date~~ of ~~grant~~January ~~using the Black-Scholes option-pricing model. SFAS No. 148~~1, ~~“Accounting~~2006 ~~for~~and ~~Stock-Based~~all ~~Compensation~~awards –made ~~Transition and Disclosure,” amends SFAS No~~thereafter. All ~~123, to provide alternative methods~~ of ~~transition for a voluntary change to the fair market~~our ~~value~~ stock-based ~~method~~awards, ofwhich ~~accounting~~are ~~for~~ stock~~-based~~ ~~employee~~options ~~compensation. In~~and ~~addition,~~restricted ~~SFAS~~stock ~~No.~~awards, ~~148 amends the~~are ~~disclosure~~classified ~~requirements~~as ofequity ~~SFAS No~~instruments. Compensation cost ~~123~~recognized toin ~~require~~fiscal ~~new~~2006 ~~prominent~~and ~~disclosures~~ in ~~both~~ ~~annual~~fiscal ~~and~~2007 ~~interim~~for ~~financial~~unvested ~~statements~~options ~~about~~as ~~the~~of January ~~method~~1, of2006 ~~accounting~~was ~~for stock-~~based ~~employee~~on ~~compensation~~the ~~and~~grant-date ~~the~~fair ~~effect~~value, ofusing the ~~method used on reported~~Black-Scholes ~~results.~~model, ~~The~~estimated ~~Company~~in ~~has~~accordance ~~elected~~with ~~to adopt~~ the ~~“disclosure~~original ~~only”~~ provisions of SFAS No. ~~148~~123.

Stock-based expense for the first quarter of fiscal 2006 and 2007 includes expense, recognized over the applicable vesting periods, for new restricted stock share-based awards and for restricted stock and stock option share-based awards granted prior to, but not yet vested, as of January 1, 2006. Stock-based compensation expense for employees and non-employee directors for the first quarter of fiscal 2006 and 2007 totaled approximately $0.4 million and $0.7 million, respectively. The excess income tax benefit related to stock-based expense during the first quarter of fiscal 2006 and 2007 was approximately $27,000 and $45,000, respectively.

~~If compensation expense for all stock options had been~~Stock–Based ~~determined~~Award ~~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):~~Plans

	Quarter Ended
	June 28, 2003			July 3, 2004
Net income (loss):
As reported	$	560		$	(1,148	)
Fair-value based compensation, net of tax	(258		)	(412		)
Pro forma	$	302		$	(1,560	)
Basic and diluted net income(loss) per common share:
As reported	$	0.04		$	(0.09	)
Pro forma	$	0.02		$	(0.12	)

Stock Options. We have established a stock option plan that provides for the issuance of a maximum 1,940,000 shares of common stock to officers, employees, directors and consultants. The plan allows for the issuance of both incentive stock options, nonqualified stock options and restricted stock. Incentive and nonqualified stock options are granted at not less than 100 percent of the fair market value of the underlying common stock on the date of grant. As of March 31, 2007, 137,604 shares are available for future granting.

	Two Quarters Ended
	June 28, 2003			July 3, 2004
Net income (loss):
As reported	$	72		$	(3,354	)
Fair-value based compensation, net of tax	(539		)	(828		)
Pro forma	$	(467	)	$	(4,182	)
Basic and diluted net income (loss) per common share:
As reported	$	0.01		$	(0.25	)
Pro forma	$	(0.04	)	$	(0.32	)

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

~~The~~All ~~weighted~~options ~~average~~granted ~~per~~through ~~share~~January 1, ~~fair~~2000 ~~value~~vest equally over a three-year period and expire ten years from the date of grant. The stock options ~~granted~~issued ~~during~~as a portion of the ~~quarters~~consideration ~~ended~~for ~~June 28,~~the ~~2003~~assignment of certain technologies and intellectual ~~July~~property 3,in ~~2004~~conjunction ~~and~~with the ~~two~~acquisition ~~quarters~~of ~~ended~~ClearLab International ~~June~~in ~~28,~~2002 ~~2003~~ and ~~July~~other 3,options issued to the chief technology officer ~~2004~~of ~~was~~ClearLab ~~$14.28~~International ~~and~~vest ~~$9.43~~equally at the end of the third, fourth and fifth ~~$13.85~~years and ~~$12.04,~~expire ~~respectively. The~~ten ~~fair~~years ~~value~~from ofthe ~~each~~date ~~option~~of grant. All ~~has~~other ~~been estimated~~options ongranted ~~the~~subsequent ~~grant~~to January 1, ~~date~~2000, ~~using~~vest ~~the~~equally ~~Black-Scholes~~over ~~option~~a four-~~pricing~~year ~~model~~period ~~with~~and expire between ~~the~~five ~~following~~and ~~weighted~~ten ~~average~~years ~~assumptions:~~from the date of grant.

	Quarter Ended				Two Quarters Ended
	June 28, 2003		July 3, 2004		June 28, 2003		July 3, 2004
Risk-free interest rate	2.2	%	3.6	%	2.6	%	3.1	%
Expected dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Volatility	76.1	%	67.0	%	77.0	%	67.8	%
Expected life	5 years		5 years		5 years		5 years

Stock options remained outstanding under various plans as of January 1, 2006. No stock options were granted from these plans during fiscal 2006 or the first quarter of fiscal 2007. Our stock option activity during the first quarter of fiscal 2007 is as follows (in thousands, except option prices and years):

NOTE 6. RECENT ACQUISITIONS

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
Quarter Ended March 31, 2007	Options		Price		Life (Years)	Value
Options outstanding at December 30, 2006	1,125		$	20.96
Exercised	(5	)	5.32
Forfeited	—		—
Expired	(2	)	32.95

Options outstanding at March 31, 2007	1,118		$	20.97	3.30	$	2,707

Options vested and expected to vest at March 31, 2007	1,106		$	20.89	3.30	$	2,707

Options exercisable at March 31, 2007	1,034		$	20.38	3.32	$	2,707

~~VisionTec~~The ~~(subsequently~~total ~~renamed~~intrinsic ~~ClearLab~~value ~~UK)~~of options exercised total approximately $0.1 million during both quarters ended April 1, 2006 and March 31, 2007.

OnFor ~~March 13, 2003,~~ the ~~Company~~quarters ~~signed~~ended aApril ~~letter of intent with VisionTec~~1, a2006 ~~developer~~ and ~~manufacturer~~March ~~of contact lenses based in~~31, ~~the United Kingdom~~2007, ~~and~~stock ~~certain~~option ofexpense ~~its~~was ~~shareholders. The~~recognized ~~Company~~on ~~agreed to pay VisionTec~~ a ~~non~~ straight-~~refundable~~line ~~sum~~basis ~~equal~~over ~~to $1.5 million to be used by~~ the ~~entity for research~~ ~~and~~four ~~development~~year ~~activities~~vesting ~~relating to contact lenses~~period. OfApproximately $0.3 ~~the~~and ~~total,~~ $0.72 million was ~~paid~~charged onto ~~March 14,~~expense ~~2003,~~in ~~and~~ the ~~remaining~~first ~~$0.8~~quarter ~~million~~of ~~was~~fiscal 2006 ~~paid~~and ~~on June 13~~2007, ~~2003~~respectively. In ~~addition,~~We ~~the~~have ~~Company~~applied ~~was granted~~ a ~~six-month~~ ~~option~~weighted toaverage ~~either:~~forfeiture ~~(1)~~assumption of ~~acquire~~approximately ~~all~~15% ofin the ~~shares~~calculation of ~~common~~such ~~stock~~expense ~~of the~~in ~~entity; or (2) acquire from~~ the ~~entity~~quarters aended April ~~worldwide license to manufacture~~1, ~~market,~~ ~~sell~~2006 orand ~~otherwise~~March ~~use or exploit specific technology developed by the entity. As consideration for this option~~31, ~~the Company~~2007.

As of March 31, 2007, there was approximately $0.3 million of unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately one year.

~~paid~~Cash ~~$0.1~~received ~~million~~from tooption exercises ~~VisionTec~~during onthe ~~March~~first ~~14,~~quarter ~~2003. In~~of ~~the~~fiscal ~~event~~2006 ~~that~~was ~~the~~approximately ~~Company did not~~$0.1 ~~exercise~~million, whereas the cash received from option toexercises ~~purchase~~during the ~~shares~~first quarter of ~~VisionTec,~~fiscal ~~the~~2007 ~~Company~~was ~~agreed~~approximately ~~to pay~~$28,000. ~~the~~The ~~entity~~total antax ~~additional~~benefit generated ~~$0.8~~from ~~million. The~~options ~~Company~~granted ~~also~~prior ~~reimbursed~~to ~~VisionTec~~January ~~and~~1, ~~its~~2006, ~~shareholders~~which ~~approximately~~were exercised ~~$0.2~~during ~~million~~the ~~for~~first ~~legal~~quarter ~~and~~of ~~financial~~fiscal ~~expenses~~2007, ~~incurred~~was byapproximately ~~the~~$24,000 ~~entity~~which inwas ~~connection~~credited ~~with~~to ~~the~~additional ~~agreement~~paid-in capital.

OnRestricted ~~September~~Share ~~12,~~Awards. ~~2003,~~ During the ~~Company~~first ~~exercised~~quarter ~~the option~~of tofiscal ~~acquire~~2006 ~~all~~and of2007 ~~the~~we ~~shares~~granted 599,096 and 25,454 shares of restricted common stock, respectively, to various employees and executives of ~~VisionTec~~the Company. ~~During~~The restricted share grants were valued at the ~~period~~closing ~~between~~stock ~~September~~price 12on the date of the grant, ~~2003~~which was $13.14 for the 2006 grants and ranged from $16.28 to $17.10 for the ~~closing~~2007 grants. ofThe restricted share grants include both time-vesting and performance-vesting restricted shares. The time-vesting shares for the ~~acquisition~~2006 ongrants ~~February~~vest 2420% per year, ~~2004~~beginning November 30, ~~the~~2006 ~~Company~~and ~~continued~~ending November 30, 2010. toAll ~~pay~~the ~~certain~~2007 ~~fees~~grants were time-vesting shares and ~~expenses~~vest 20% per vesting period; 10,500 of the ~~entity~~2007 ~~related~~grants toincluded provisions that vested 20% of the ~~entity’s~~shares ~~research~~on February 25, 2007 and ~~development~~then ~~activities. The~~the ~~Company paid~~remaining ~~approximately~~unvested ~~$2.1~~portion ~~million~~of tothe ~~VisionTec~~shares ~~from~~vest 20% ~~September~~per 12year through February 25, ~~2003~~2011; ~~through~~270 of the 2007 grants vest 20% per year beginning January 325, ~~2004~~2008 and ~~$0.5~~ending ~~million~~January ~~from~~25, ~~January~~2012; 3and the remaining 14,684 ~~2004~~grants ~~through~~made during 2007 vest 20% per year beginning February 2425, 2008 ~~2004~~and ending February 25, ~~for~~2012. All first quarter fiscal 2006 performance-vesting shares vest upon achievement of certain operational milestones - such ~~research~~as ~~and~~obtaining sources for “doctors only” lenses on competitive terms, development ~~activities~~of certain contact lens products and the achievement of an eight quarter cumulative financial target of at least $81 million consolidated earnings before taxes by or before the end of fiscal 2010. Both the time-vesting and the performance-vesting shares are subject to various change in control provisions involving us and our subsidiaries that may result in the accelerated vesting of unvested shares as well as conversion of unvested shares into a cash amount at the time of the change in control.

InDuring ~~connection~~the ~~with~~first ~~the~~quarter ~~agreement,~~of ~~and~~fiscal ~~the~~2006 ~~transactions~~we ~~discussed~~also ~~above~~granted 50,000 ~~the~~shares ~~Company~~of ~~expensed~~restricted common stock to our five non-employee directors. These grants vest equally over a three-year period; the vesting of these ~~total~~awards will be accelerated upon a change in control of ~~approximately~~the $3Company.9 The ~~million~~restricted ~~from~~share ~~March~~grants ~~13,~~were ~~2003~~also ~~through~~valued at ~~January~~the 3,closing ~~2004 (inclusive~~stock price on the date of the grant which was $013.14. An additional 2,500 ~~million~~shares inof ~~costs)~~restricted common ~~related~~stock were granted to ~~these~~one ~~research~~non-employee ~~and development~~director ~~initiatives~~during ~~and~~the $0first quarter of fiscal 2006.5 This ~~million~~restricted inshare grant was valued at the ~~first~~closing ~~quarter~~stock price on the date of ~~fiscal~~the ~~2004~~grant, ~~ended~~which was ~~April~~$13.28; 3and all shares vested on July 28, ~~2004~~2006.

OnOur ~~February 24,~~activity ~~2004,~~relating ~~the~~to ~~Company~~restricted ~~completed~~share ~~the~~awards ~~acquisition~~during ~~of all of~~ the ~~outstanding~~first ~~stock~~quarter of ~~VisionTec~~ ~~(subsequently~~fiscal ~~renamed~~2006 ~~ClearLab UK).~~ and ~~The~~2007 ~~consideration~~was ~~paid~~as ~~included~~follows ~~approximately $3.8 million in cash~~ (~~including $0.6 million~~ in ~~transaction costs) and 155~~thousands,~~084~~ ~~shares~~except ~~of the Company’s common stock with a~~ fair ~~value of approximately $3.2 million. In addition, the Company has agreed to pay a per unit royalty on the sale of contact lenses to the former shareholders of VisionTec for a period of ten years.~~values):

The Company filed a registration statement with the Securities and Exchange Commission (“SEC”) covering the resale of the 155,084 shares by the former stockholders of VisionTec.

	Number of Restricted		Weighted Average Grant Date Fair
Quarter Ended March 31, 2007	Share Awards		Value Per Award
Unvested at December 30, 2006	562		$	14.20
Granted	26		17.09
Vested	(23	)	15.18
Forfeited and expired	—		—
Unvested at March 31, 2007	565		$	14.29

~~The~~For ~~following~~the ~~sets~~first ~~forth~~quarter of fiscal 2006 and 2007, approximately $0.1 million and $0.5 million, respectively, were charged to expense relating to the ~~consideration~~amortization ~~paid~~of bythe time-vested restricted share awards. At March 31, 2007, unrecognized compensation expense, including estimated forfeitures related to time-vested restricted share awards totaled approximately $3.9 million and will be recognized over a weighted average period of approximately 3.0 years, respectively. The fair value of restricted share awards that vested during the quarters ended April 1, 2006 and March 31, ~~Company~~2007 ~~(in~~totaled ~~thousands~~approximately $0.1 million and $0.4 million, ~~except~~respectively. Total tax benefit generated from vested restricted share ~~amounts):~~awards for the quarter ended March 31, 2007 was approximately $21,000 which was credited to additional paid-in capital.

Cash	$	3,200
Restricted shares (155,084 shares at $20.634 per share)	3,200
Acquisition expenses	576
Total purchase consideration	$	6,976

Expense related to performance-vesting shares will be recognized once it is determined “probable” that the operational milestones will be met. At the time the achievement of these operational milestones are considered “probable”, we will record a cumulative catch-up for the amount of expense that should have been recognized from the date of the grant to the date it was determined achievement was probable and recognize the remaining expense on

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

Current assets	$	629
Property, equipment and other long-term assets	2,914
Core technologies	4,791
Patent	3,355
Purchased in-process research and development	83
Current liabilities	(1,523		)
Deferred income tax liability	(3,273		)
Total	$	6,976

Core technologies and patents are definite-lived intangible assets that are being amortized over twelve years.

NOTE 7. COMMON STOCK TRANSACTIONS

During the two quarters ended July 3, 2004, employees exercised stock options to purchase 18,892 shares of common stock for a total of approximately $138,000. The Company recorded an increase in additional paid-in capital of approximately $85,000 as a result of the income tax benefit related to these stock option exercises.

~~During~~a ~~the~~straight-line ~~two~~basis through ~~quarters~~the ~~ended~~estimated ~~July~~date 3,of ~~2004~~achievement. Total gross compensation expense, ~~the~~excluding ~~Company~~any ~~granted~~estimate ~~nonqualified~~of ~~stock~~forfeitures ~~options~~related to ~~purchase~~the ~~128,478~~outstanding performance-vesting shares, ofwill ~~common~~be ~~stock~~approximately to$3.0 ~~employees and directors of the Company~~million. ~~The~~As ~~exercise price~~ of ~~the options~~March ~~was~~31, ~~$22.00 per share~~2007, ~~which~~we ~~was~~do not ~~less~~believe ~~than~~ that the ~~quoted~~achievement ~~fair~~of ~~market value at~~ the ~~grant~~operational ~~date.~~milestones ~~The~~is ~~options vest equally over a four-year period and expire in five years~~probable.

~~On February 24,~~NOTE ~~2004, the Company completed the acquisition of ClearLab UK and issued 155,084 shares of the Company’s common stock with a fair value of approximately $3.2 million (see Note~~ 6). ~~The~~DEBT ~~restricted stock was registered with the Securities and Exchange Commission (“SEC”) on Form S-3 effective June 18, 2004.~~OBLIGATIONS

~~NOTE~~We 8have a loan agreement with a U.S. bank providing for a revolving credit facility that matures on June 1, 2009. ~~DEBT~~The ~~OBLIGATIONS~~loan agreement provides for borrowings of up to $40 million and for letters of credit up to a maximum of $15 million outstanding or payable at any time. The amount of any letters of credit outstanding is deducted from the amount available for borrowing. There were outstanding letters of credit of $1.5 million as of March 31, 2007 that reduce the total amount available under the loan agreement to $38.5 million. We may reduce the maximum available advance amount or terminate the loan at any time.

~~Effective February~~Outstanding ~~27, 2004, the Company executed a restated loan agreement with its existing U.S. bank, providing for a revolving credit facility for~~ borrowings ~~of up to $28 million through June 1, 2004, and reducing thereafter~~ on the first day of each September, December, March and June by $0.4 million until the maturity date of February 27, 2007. Additionally, the agreement provides for letters of credit up to a maximum of $15 million outstanding or payable at any time. The executed restated loan agreement specifies that if the maximum leverage ratio, as defined in the restated loan agreement, is greater than 2.5, then the amounts outstanding on the revolving credit facility together with the amount of all outstanding letters of credit can at no time exceed the Company’s book value of inventory. As of July 3, 2004, the Company was subject to this restriction and could only borrow up to the $25.2 million book value of its inventory. Outstanding borrowings on the revolving credit facility bear interest at a floating rate equal to the lender’s prime interest rate plus a margin or the lender’s LIBOR rate plus a margin. The ~~restated loan agreement originally specified that~~ interest ~~based on the lender’s prime~~ rate is ~~the prime~~adjusted ~~rate~~quarterly ~~plus 0.75 percent until July 31, 2004,~~ and ~~thereafter~~ranges ~~is adjusted quarterly, ranging~~ between prime ~~plus~~minus 0.0 75 percent and prime ~~plus~~minus 1.25 percent~~, depending~~ onor ~~the~~between ~~Company’s maximum leverage ratio. The restated loan agreement also originally~~the ~~specified~~applicable ~~that interest based on the lender’s~~ LIBOR rate ~~is the LIBOR rate for the applicable period~~ plus 21.75 percent ~~until July 31, 2004,~~ and ~~thereafter~~the ~~is adjusted~~applicable ~~quarterly, ranging between~~ LIBOR ~~plus~~rate plus 2.~~0 percent and LIBOR plus 3.~~25 percent, depending on ~~the~~our ~~Company’s~~ maximum leverage ratio~~. On June 25~~, ~~2004, the restated loan agreement was modified to stipulate that until the maximum leverage ratio,~~ as defined in ~~the~~ ~~restated loan~~ the agreement,. isAs ~~less~~of ~~than~~March or31, ~~equal to 3.0~~2007, the ~~LIBOR~~prime rate ~~applicable~~ margin ~~will~~is beminus 31.2500 percent and the ~~prime~~LIBOR rate ~~applicable~~ margin ~~will~~ beis 12.25 00 percent. As ~~of July 3, 2004, the Company was subject to these specifications.~~ Interest is payable monthly. As As of ~~July~~March 331, ~~2004~~2007, ~~the~~our ~~Company’s~~ outstanding borrowings on the credit facility, including bank overdrafts, were $1726.4 1 million~~. Of~~ ~~this amount, $12.0 million bore interest at the lender’s LIBOR rate plus 3.25 percent (4.54% at July 3, 2004)~~ and ~~the remaining $5.4 million~~ bore interest at the lender’s prime rate ~~plus~~ minus 1.25 00 percent (57.5025% at ~~July~~March 331, ~~2004~~2007). The facility requires the quarterly payment of an unused credit fee, which isranges ~~also determined by the Company’s~~from ~~maximum leverage ratio. The unused credit fee is payable quarterly at~~ 0.5 25 percent ~~until~~to ~~July 31, 2004. Thereafter, the unused credit fee is adjusted quarterly, ranging from~~ 0.38 percent ~~to 0.5 percent~~, depending on ~~the~~our ~~Company’s~~ maximum leverage ratio.

~~All outstanding~~Outstanding balances on ~~this~~the credit facility are secured by substantially all of ~~the Company’s~~our U.S. assets, subsidiary debt instruments, 100 percent ownership interests in all domestic subsidiaries and 65 percent ownership interests in ~~foreign~~ foreign subsidiaries ~~directly~~ owned directly by ~~the Company~~us. The ~~new~~ loan agreement includes various financial covenants including a capital expenditure limit, a maximum leverage ratio, and a minimum ~~working capital requirement, a minimum~~ fixed charge coverage ratio ~~and a minimum net worth requirement~~. The ~~new~~ loan agreement does not permit ~~the~~us ~~Company~~ or ~~its~~our subsidiaries to dissolve, sell, dispose or merge all of their assets or acquire all of the assets of any entity without the written consent of the U.S. bank, unless the transaction meets the definition of a “Permitted Acquisition Basket”,” as defined in the agreement. The ~~new~~ loan agreement also places a limit on the amount ~~the~~we ~~Company~~ can loan to any entity, outside the normal course of business. Additionally, the loan agreement ~~does~~allows ~~not~~us ~~permit the Company~~ to declare or pay ~~any~~ cash dividends, to repurchase ~~its~~our stock or to perform other similar equity transactions if such transactions ~~prior~~would tonot ~~December~~exceed ~~31,~~$15 ~~2005;~~million ~~thereafter,~~in ~~such~~any fiscal ~~transactions~~year ~~are~~and subject to other terms. This agreement defines several ~~customary~~ customary events of default including any material adverse change or any event ~~that~~ that occurs which may cause a material adverse change in ~~the~~our ~~Company’s~~ or ~~its~~ our subsidiaries’ condition.

As of March 31, 2007, we had a term loan payable to a Singapore bank with a principal balance of SGD$2,707,000 (USD$1,785,000) that bears interest at 6.75% and is secured by substantially all of the assets of ClearLab International. Interest payments are due monthly. Principal payments are due in monthly installments through December 2007. This note also contains various financial covenants including minimums on net worth and shareholders’ funds. 1-800 CONTACTS, INC. has guaranteed this term loan.

As of March 31, 2007, we also had a note payable to the former parent of ClearLab International with a principal balance of SGD$6,771,000 (USD$4,463,000) 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.

As of March 31, 2007, we had an unsecured, non-interest bearing note to ClearLab International’s chief technology officer with a principal balance of SGD$246,000 (USD$162,000). The note payable is discounted at 7%. Payments are due in equal monthly installments through July 2007.

Cross default clauses exist such that if we were in default on our U.S. debt, we would also be in default on our Singapore debt. If we were in default on our Singapore bank term loan, we would also be in default on our note payable to the former parent of ClearLab International and our loan agreement with our U.S. bank.

~~The~~NOTE ~~June 25, 2004 modification to the restated loan agreement also modified the maximum leverage ratio financial covenant~~7. As STRATEGIC ofREVIEW ~~July~~AND ~~3, 2004, the Company was in compliance with all applicable covenants, as modified and clarified by the U.S. bank.~~RESTRUCTURINGS

~~The~~On ~~Company’s~~July ~~Singapore~~26, ~~bank~~2006 ClearLab ~~term~~introduced ~~loan~~its ~~contains~~AquaSoft Singles product. We engaged an investment banking firm to ~~various~~evaluate ~~financial~~a ~~covenants~~broad ~~including~~range ~~minimums~~of strategic alternatives in an effort to capitalize on the ~~net~~value ~~worth~~of ClearLab and ~~shareholders’~~this new product. Based on this review, we have ~~funds~~committed to a separation of ClearLab from the U.S. Retail business and are currently assessing various strategic options. This separation will likely be accomplished in two separate transactions — one for the flat pack technology and intellectual property and one for ClearLab’s Singapore ~~operations~~operation. As ofsuch, ~~July~~we 3,announced ~~2004~~on May 8, ~~the~~2007 ~~Company~~that ~~was~~we inhave ~~compliance~~entered ~~with~~into ~~all~~a ~~applicable~~Memorandum ~~covenants~~of Understanding (“MOU”) to sell ClearLab’s Singapore operation to Mi Gwang Contact Lens Co., Ltd., a Korean based contact lens manufacturer. The MOU includes a $1 million break-~~800~~up ~~CONTACTS,~~fee that ~~INC~~is applicable if either party does not execute a purchase agreement. ~~has~~We expect ~~guaranteed~~to ~~this~~execute ~~term~~the purchase agreement and close the transaction during the ~~loan~~second quarter of fiscal 2007. We are still assessing various strategic options for the intellectual property and flat pack technology.

~~Cross~~We ~~default~~have ~~clauses~~also undergone ~~exist~~an ~~such~~extensive ~~that~~review ifof ~~the~~ClearLab’s ~~Company were~~manufacturing inoperations. Based ~~default~~ on ~~its~~this ~~U.S. debt~~review, we made the ~~Company~~decision ~~would~~to consolidate ~~also~~ClearLab beoperations in ~~default~~Singapore onand ~~its~~are proceeding with the ~~Singapore~~closure ~~debt~~and consolidation. IfWe substantially completed the ~~Company~~UK ~~were~~site inclosure (except for ongoing lease ~~default~~commitments onand ~~its~~disposal ~~Singapore~~of ~~bank~~surplus ~~term~~equipment) ~~loan,~~in the ~~Company~~first ~~would~~fiscal ~~also~~quarter beof 2007, inand ~~default on~~anticipate ~~its~~that ~~note~~all ~~payable~~ongoing obligations relating to the ~~parent~~UK ofoperations (including ~~IGEL~~lease commitments and ~~its~~disposal ~~restated~~of ~~loan~~surplus ~~agreement~~equipment) ~~with~~will cease no ~~its~~later Uthan the end of 2007.S. ~~bank~~We anticipate that all manufacturing activity will be consolidated in Singapore by the end of the third fiscal quarter of 2007.

~~NOTE~~During ~~9. COMMITMENTS~~fiscal ~~AND~~2006 ~~CONTINGENCIES~~and the first quarter of fiscal 2007, we expensed $1,040,000 and $110,000, respectively, relating to these activities.

~~Legal~~Of ~~Matters~~these expensed amounts, the following amounts were accrued as of December 30, 2006 and March 31, 2007:

The sale and delivery of contact lenses are governed by both Federal and state laws and regulations, including the recently enacted federal Fairness to Contact Lens Consumer Act (“FCLCA”). The FCLCA requires that contact lenses only be sold to consumers based on a valid prescription. Satisfying this prescription requirement obligates the seller either to obtain a copy of the prescription itself or to verify the prescription by direct communication with the customer’s prescriber. Consistent with this requirement, the Company’s current operating practice is to require all customers to provide either a valid copy of their prescription or the contact information for their prescribers so that the Company can verify their prescriptions by direct communication with their prescribers. If the Company does not have a valid copy of the customer’s prescription, the Company directly communicates to the customer’s prescriber the precise prescription information received from the customer and informs the prescriber that it will proceed with the sale based on this prescription information unless the prescriber advises it within eight business hours that such prescription information is expired or otherwise invalid. If the prescriber properly advises the Company within this time period that the customer’s prescription is expired or otherwise invalid, the Company’s practice is to cancel the customer’s order. On the other hand, if the prescriber either advises the Company that the prescription is valid or fails to properly respond within the communicated time period, the Company’s practice is to complete the sale based on the prescription information communicated to the prescriber, as expressly permitted by the FCLCA. The Company retains copies of the written prescriptions that it receives and maintains records of its communications with its customers’ prescribers.

Accrual at December 30, 2006	$	1,020
Additions	110
Payments	(1,095		)
Accrual at March 31, 2007	$	35

OnWe ~~April~~announced ~~7, 1999, the Kansas Board of Examiners~~ in ~~Optometry (“KBEO”) commenced a civil action against~~ the ~~Company~~first inquarter ~~the District Court~~ of ~~Shawnee~~fiscal ~~County,~~2007 ~~Kansas. The complaint was amended on May 28, 1999, and alleges~~ that ~~“on~~our ~~one~~strategic orreview ~~more~~to ~~occasions”~~determine ~~the~~how 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, and does not seek monetary damages. The Company filed an answer to ~~the amended~~ ~~complaint~~maximize ~~denying~~value ~~all~~through material allegations, and setting forth several affirmative defenses. The Company has vigorously defended this lawsuit, which has now been pending for over five (5) years. In June, 2002, the court granted a ~~summary judgment~~ClearLab ~~motion~~separation ~~in favor of the KBEO. However, the court made no findings of any violations of Kansas law, and based its decision on a Kansas optometry law that~~ has been ~~repealed~~broadened ~~and amended by the Kansas legislature. The Company appealed this decision, and on November 7, 2003, the Kansas Court of Appeals reversed the trial court’s order, and remanded the case back~~ to ~~the trial~~include ~~court for further proceedings. Thus, as~~ a ~~result of the Appellate court’s~~ ~~order,~~strategic ~~there~~review ~~was no injunction against the Company as~~ of ~~November 7, 2003. Following receipt of~~ the ~~Appellate Court’s order, the parties each submitted proposed orders to the trial court~~U. The KBEO asked the court to re-enter summary judgment in its favor, and to reinstate the injunction, and the Company asked the court to dismiss the case, based either on the lack of any basis for injunctive relief, or because the case is now moot based on changes to Kansas law which took effect while the case was pending on appeal, or based on the recent passage of the FCLCA which took effect on February 4, 2004. By order dated April 30, 2004, the trial court reinstated the injunction prohibiting the Company from selling contact lenses without a valid prescription under K.S.A. ~~65-1504b~~Retail ~~unless~~business and ~~until a determination is made that the Fairness to Contact Lens Consumers Act (“FCLCA”) preempts its enforcement.~~ ~~The~~we ~~Company~~are ~~has~~currently ~~filed~~progressing awith ~~motion asking the Court to clarify~~this ~~its injunction, to provide that Defendant~~review.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Legal and Regulatory Matters

The sale and delivery of contact lenses are governed by both federal and state laws and regulations, including the federal Fairness to Contact Lens Consumers Act (“FCLCA”). The FCLCA requires a seller, prior to selling contact lenses to a consumer, to either (i) obtain an actual copy of the consumer’s prescription or (ii) verify the consumer’s prescription by direct communication with the customer’s prescriber. Consistent with this requirement, our current operating practice is to require all customers to provide either a valid copy of their prescription or the contact information for their prescriber so that we can verify their prescription by direct communication with their prescriber. If we do not have a valid copy of the customer’s prescription, we directly communicate to the customer’s prescriber the precise prescription information received from the customer and, in accordance with the FCLCA, informs the prescriber that we will proceed with the sale based on this prescription information unless the prescriber advises us within eight business hours that such prescription information is expired or otherwise invalid. If the prescriber properly advises us within this time period that the customer’s prescription is expired or otherwise invalid, our practice is to cancel the customer’s order. On the other hand, if the prescriber either advises us that the prescription is valid or fails to respond properly within the required time period, our practice is to complete the sale based on the prescription information communicated to the prescriber, as expressly permitted by the FCLCA. We

isretain ~~required~~copies toof ~~comply with~~ the ~~prescription verification requirements~~ ~~set~~written ~~forth~~prescriptions inthat ~~the~~we ~~new~~receive ~~federal~~and ~~law~~maintain inrecords ~~order~~of toour communications ~~obtain~~with athe ~~valid~~customer’s ~~prescription as required by K~~prescriber.~~S.A.~~ ~~65-1504b~~The ~~or,~~FCLCA ~~alternatively,~~provides tofor ~~amend~~several means orof ~~alter~~direct ~~its~~communication ~~Order~~with ~~deny plaintiff’s~~eye ~~motion~~care ~~for summary judgment~~practitioners, ~~granting~~and ~~summary~~we ~~judgment~~may toalter ~~defendant~~our ~~and~~prescription ~~entering~~verification anprocedures ~~order~~from ~~denying~~time ~~the~~to ~~requested~~time ~~injunctive relief, based~~ in ~~part~~keeping ~~on the~~with ~~preemptive effect of~~ the ~~FCLCA. This~~ ~~motion~~FCLCA ~~remains~~and ~~pending~~FTC guidelines.

~~Since~~We ~~the~~are ~~FCLCA~~involved in ~~was~~legal ~~enacted~~proceedings ~~last~~generally ~~year,~~incidental ~~the Company has continued~~ to ~~adhere~~our ~~to the prescription verification procedures set forth in this new federal law~~business. To ~~the~~It ~~extent K.S.A.~~is ~~65-1504 continues to have any application at all,~~ the ~~Company~~opinion ~~believes that by complying with the FCLCA it does not run afoul~~ of ~~K.S.A. 65-1504~~ ~~and~~management, ~~therefore~~after ~~intends~~discussion towith ~~continue~~legal ~~adhering~~counsel, tothat the ~~prescription~~ultimate ~~verification~~dispositions ~~procedures~~of ~~set~~all ~~forth~~of inthese ~~the~~matters ~~FCLCA. On~~will ~~June~~not ~~29,~~have ~~2004, the FTC issued~~ a ~~rule~~material ~~confirming~~impact ~~that~~on ~~the~~our ~~FCLCA preempts state laws that purport to require~~financial ~~stricter prescription verification procedures or that are otherwise inconsistent with the FCLCA. Accordingly~~position, ~~the Company does not believe that K.S.A. 65-1504 does or can require it to change its existing business practices in any way. However~~liquidity, ~~should any claim~~ or ~~interpretation regarding~~results ~~K.S.A.~~of ~~65-1504 be advanced to the contrary, the Company is prepared to vigorously contest any such claim or interpretation~~operations.

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 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.

Advertising Commitments

As of ~~July~~March 331, ~~2004~~2007, ~~the~~we ~~Company~~ had entered into certain noncancelable commitments with ~~various~~ various advertising companies that will require ~~the~~us ~~Company~~ to pay approximately $76.53 million ~~for advertising~~ during the remainder of ~~2004~~2007.

~~Purchase~~NOTE ~~Commitments~~9. SEGMENT INFORMATION

AsWe ofhave ~~July~~two ~~3, 2004,~~operating segments. These operating segments represent the components of our Company ~~had~~for ~~entered~~which ~~into~~separate ~~certain~~financial ~~noncancelable~~information ~~commitments~~is ~~with~~available and athey are evaluated regularly by management in determination of resource ~~certain~~allocation ~~supplier~~and ~~that~~performance ~~will~~assessment. ~~require~~Our U.S. Retail segment includes the operations ~~Company~~of to1-800 ~~purchase~~CONTACTS, ~~approximately~~a $8direct marketer of replacement contact lenses.5 ~~million~~Our ofInternational ~~inventory~~segment ~~during~~includes the ~~third~~operations ~~quarter~~of ClearLab International and ClearLab UK, developers, marketers, manufacturers and distributors of ~~fiscal~~contact lenses ~~2004~~and includes revenue from the Japanese license and royalty agreement. Operating segment information for the first quarter ended April 1, 2006 and March 31, 2007 is as follows (in thousands):

Quarter Ended April 1, 2006	U.S. Retail		International			Eliminations		Total
Net sales	$	59,173	$	4,318		$	—	$	63,491
Gross profit	23,624		638			216		24,478
Research and development	10		1,318			—		1,328
Other selling, general and administrative expense	11,713		1,966			—		13,679
Income (loss) from operations	$	7,006	$	(2,859	)	$	216	$	4,363

Quarter Ended March 31, 2007	U.S. Retail		International			Eliminations		Total
Net sales	$	61,829	$	5,592		$	—	$	67,421
Gross profit (loss)	24,829		(457		)	—		24,372
Research and development	—		1,251			—		1,251
Restructuring charges	—		110			—		110
Other selling, general and administrative expense	12,710		2,253			—		14,963
Income (loss) from operations	$	6,176	$	(4,179	)	—		$	1,997

~~NOTE~~The ~~10. SEGMENT~~following ~~INFORMATION~~reconciles total segment income from operations to income before provision for income taxes for the quarters ended April 1, 2006 and March 31, 2007 as follows (in thousands):

As a result of the acquisition of IGEL (ClearLab International) in the third quarter of fiscal 2002 and the recently acquired VisionTec (ClearLab UK), 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. Retail segment includes the operations of 1-800 CONTACTS and the operations from the Lens Express and Lens 1st acquisitions. The Company’s International segment includes the operations of ClearLab International and ClearLab UK, both of which are developers and manufacturers of contact lenses. Operating segment information for the quarter and two quarters ended June 28, 2003 and July 3, 2004 are as follows (in thousands):

	Quarter Ended
	April 1, 2006			March 31, 2007
Income from operations	$	4,363		$	1,997
Interest expense	(412		)	(558		)
Foreign currency exchange transaction gain, net	732			212
Other expense, net	(7		)	(4		)
Income before provision for income taxes	$	4,676		$	1,647

	Quarter Ended
	June 28, 2003							July 3, 2004
	U.S. Retail		International			Total		U.S. Retail		International			Total
Net sales	$	44,701	$	1,653		$	46,354	$	48,742	$	1,229		$	49,971
Gross profit (loss)	17,045		729			17,774		19,825		(552		)	19,273
Research and development	147		50			197		—		443			443
Other operating expense	8,592		1,512			10,104		9,606		1,160			10,766
Income (loss) from operations	3,055		(923		)	2,132		1,835		(2,336		)	(501		)

	Two Quarters Ended
	June 28, 2003							July 3, 2004
	U.S. Retail		International			Total		U.S. Retail		International			Total
Net sales	$	89,832	$	3,184		$	93,016	$	98,193	$	2,627		$	100,820
Gross profit (loss)	32,793		1,083			33,876		38,755		(186		)	38,569
Research and development	1,909		91			2,000		536		799			1,335
Purchased in-process research and development	—		—			—		—		83			83
Other operating expense	16,617		2,136			18,753		18,575		2,073			20,648
Income (loss) from operations	3,666		(1,299		)	2,367		686		(3,403		)	(2,717		)

Identifiable segment assets are as follows (in thousands):

	January 3, 2004						July 3, 2004
Fiscal Year Ended December 30, 2006	U.S. Retail		International		Total
	U.S. Retail		International		Total		U.S. Retail		International		Total
Long-lived assets, net	$	32,596	$	28,763	$	61,359
Long-lived assets, net	$	30,615	$	25,628	$	56,243	$	30,728	$	36,711	$	67,439
Total assets	$	50,933	$	49,592	$	100,525
Total assets	56,274		30,657		86,931		57,173		43,408		100,581

NOTE 11. VENDOR REBATE AND INCENTIVE ARRANGEMENTS

Quarter Ended March 31, 2007	U.S. Retail		International		Total
Long-lived assets, net	$	31,889	$	27,809	$	59,698
Total assets	$	50,957	$	43,754	$	94,711

~~The~~NOTE ~~Company enters into arrangements to receive cash consideration from certain of its vendors~~10. ~~The~~ACCOUNTING ~~arrangements~~FOR ~~include~~UNCERTAINTY ~~manufacturer~~IN ~~rebates~~INCOME and cooperative marketing program reimbursements. Cash consideration from some vendor agreements are dependent upon reaching minimum purchase thresholds. The Company evaluates the likelihood of reaching purchase thresholds using past experience and current year forecasts. When rebates can be reasonably estimated, the Company records a portion of the rebate as it makes progress towards the purchase threshold. In accordance with EITF 02-16, it is generally presumed that amounts received from vendors are a reduction of the prices paid for their products. Therefore, that cash consideration is reflected as a reduction of cost of goods sold if the inventory has been sold by the Company or a reduction of inventory if the product inventory is still on hand at the reporting date. When the Company receives reimbursements for specific, incremental, identifiable advertising costs incurred for advertising the vendors’ products, the cash consideration received is recorded as a reduction to advertising expense in the Company’s consolidated statements of operations.TAXES

On December 31, 2006, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This interpretation requires us to recognize in the consolidated financial statements only those tax positions determined to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions as of the reporting date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are recognized. This is a different standard for recognition than was previously required. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment is recorded directly to opening retained earnings in the period of adoption and reported as a change in accounting principle. As a result of the adoption of FIN-48, we recognized a decrease of $60,000 in the liability recorded for unrecognized tax benefits, which was accounted for as a decrease to the Fiscal 2007 beginning accumulated deficit balance. We do not have any unrecognized tax benefits that, if recognized, would affect our effective tax rate. We recognize interest and potential penalties accrued related to unrecognized tax benefits in our provision for income taxes. We had approximately $54,000 accrued for the payment of interest as of March 31, 2007, which is classified as current income taxes payable on the balance sheet.

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

U.S. Federal		2003 through the current period
Utah		2003 through the current period
United Kingdom		2004 through the current period
Singapore		2002 through the current period

NOTE 11. RECENTLY ISSUED ACCOUNTING STANDARDS

On February 15, 2007, the Financial Accounting Standards Board issued SFAS No.159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 allows companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. FAS 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007, the fiscal year beginning December 30, 2007 for the Company. We have not yet completed our assessment of what impact, if any, the adoption of FAS 159 will have on our financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 provides a definition of fair value, establishes acceptable methods of measuring fair value and expands disclosures for fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. FAS 157 is effective for fiscal years beginning after November 15, 2007, the fiscal year beginning December 30, 2007 for the Company. We do not expect the adoption of FAS 157 to have a material impact on our financial statements.

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

Overview

~~The~~We ~~Company~~are is a ~~leading~~ direct marketer of replacement contact lenses and also ~~conducts~~a ~~contact lens manufacturing~~manufacturer, ~~development,~~developer and ~~distribution~~distributor of our own branded and private label contact lenses through our operations in Singapore and the United Kingdom. ~~The~~Our ~~Company~~U.S. ~~sells~~Retail operations sells all of the popular brands of ~~contact~~contacts lenses, including those manufactured by Johnson & Johnson Vision Care, CIBA Vision, Bausch & Lomb, ~~Ocular~~and CooperVision. ClearLab is our ~~Sciences~~international contact lens development, manufacturing and ~~CooperVision~~distribution business.

~~International Operations (ClearLab).~~ On July 2426, ~~2002,~~2006 ~~the~~ClearLab ~~Company~~introduced ~~completed~~its ~~the~~AquaSoft Singles ~~acquisition~~product. We engaged an investment banking firm to evaluate a broad range of ~~certain~~strategic ~~net~~alternatives in an ~~assets~~effort ~~and~~to capitalize on the ~~majority~~value of ~~the~~ClearLab ~~business~~and ~~operations~~this ofnew ~~IGEL~~product. ~~(subsequently~~Based on ~~renamed~~this ~~ClearLab International)~~review, awe ~~developer~~have ~~and~~committed ~~manufacturer~~to a separation of ~~contact~~ClearLab ~~lenses~~from the U.S. Retail ~~based~~business inand ~~Singapore~~are currently assessing various strategic options. ~~ClearLab~~This ~~International~~separation iswill ~~the~~likely ~~principal~~be ~~marketing~~accomplished ~~organization~~in two separate transactions — one for the ~~Company’s~~flat ~~international~~pack ~~wholesale~~technology ~~manufacturing~~ and ~~distribution~~intellectual ~~business~~property and one for ClearLab’s Singapore operation. As such, ~~focusing~~we announced on ~~the~~May ~~marketing~~8, of2007 ~~contact~~that ~~lens~~we have ~~products~~entered into a Memorandum of Understanding (“MOU”) to sell ClearLab’s ~~major~~Singapore ~~retailers~~operation ~~and~~to ~~distributors,~~Mi asGwang ~~well~~Contact asLens ~~providing~~Co., ~~contract~~Ltd., ~~manufacturing capacity~~a ~~for~~Korean ~~other~~based contact lens ~~manufacturers~~manufacturer. ~~ClearLab~~The ~~International~~MOU includes a $1 ~~manufactures~~million break-up fee that is applicable if either party does not execute a purchase ~~wide~~agreement. ~~range~~We ofexpect ~~frequent~~to ~~replacement~~execute ~~spherical~~the purchase agreement and ~~toric~~close ~~lenses~~the ~~and~~transaction isduring ~~focused~~the onsecond ~~developing~~quarter ~~new~~of ~~lens~~fiscal ~~materials~~2007. We are still assessing various strategic options for the intellectual property and flat pack technology.

OnWe ~~February~~have ~~24, 2004,~~also ~~the~~undergone ~~Company~~an ~~acquired~~extensive ~~VisionTec,~~review ~~a developer and manufacturer~~ of ~~daily~~ClearLab’s ~~contact~~manufacturing ~~lenses based in the United Kingdom~~operations. ~~VisionTec~~Based ~~has~~on ~~developed a~~this ~~method~~review, ~~for~~we ~~low~~made ~~cost,~~the ~~high~~decision ~~quality~~to ~~production~~consolidate ofClearLab ~~daily~~operations ~~disposable~~in ~~contact lenses~~Singapore ~~using~~and aare ~~unique~~proceeding ~~proprietary~~with ~~material~~the closure and consolidation. ~~VisionTec~~We ~~has~~substantially ~~subsequently~~completed ~~been renamed~~the ~~ClearLab~~ UK ~~Ltd~~site closure (~~“ClearLab~~except ~~UK”). The~~for ~~business~~ongoing ~~operates~~lease ascommitments ~~a research~~ and ~~development~~disposal ~~and manufacturing affiliate~~ of ~~ClearLab International.~~surplus ~~The~~equipment) ~~Company~~in ~~has~~the ~~recently~~first ~~completed~~fiscal ~~the~~quarter ~~testing~~ of ~~ClearLab~~2007, ~~UK’s manufacturing~~and ~~capabilities,~~anticipate ~~began~~that ~~shipping~~all ~~its~~ongoing obligations ~~daily~~relating ~~disposable~~to ~~contact~~the ~~lenses, and~~UK isoperations ~~currently~~(including ~~expanding~~lease ~~its~~commitments ~~production~~and disposal ~~capabilities. The~~of ~~Company~~surplus equipment) will ~~increase~~cease ~~its~~no ~~product offerings~~later tothan the ~~international~~end ~~markets~~of ~~throughout~~2007. ~~the~~We anticipate ~~remainder~~that ofall ~~fiscal~~manufacturing ~~2004 from~~activity ~~its~~will ~~production~~be ~~facilities~~consolidated in Singapore ~~and~~by the end of the Uthird fiscal quarter of 2007.K.

~~ClearLab International’s~~The ~~and~~following ~~ClearLab~~is ~~UK’s~~an ~~development~~estimate ~~and~~of ~~manufacturing~~total ~~capabilities also~~costs ~~provide~~we ~~the~~expect in ~~Company~~conjunction with ~~greater~~the ~~access~~closure toof ~~future contact lens products for~~ the U.S.K ~~retail~~site ~~market. This~~described is critical to the Company’s strategy should the Company’s access to contact lenses from the major contact lens manufacturers be disrupted, curtailed or otherwise negatively impacted, or if the manufacturers do not provide the Company with contact lenses at competitive pricing and with competitive marketing support.above:

Johnson & Johnson Vision Care Agreement. In December 2002, the Company announced that it had reached an agreement with Johnson & Johnson Vision Care to become an authorized retailer of Johnson & Johnson Vision Care contact lenses. The Company modified its operating systems in connection with this agreement. The Company implemented new prescription verification procedures for Johnson & Johnson Vision Care 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 Johnson & Johnson Vision Care during March 2003.

Description of Costs	Estimated Amount
	(in thousands)
Severance/retention costs (a)	$	1,195
Termination of lease commitments (b)	1,000 — 2,500
Asset impairment (c)	3,605
Costs to relocate equipment to Singapore (b)	125
Other expenses (b)	75
*Total estimated costs*	$	*6,000 — $7,500*

~~This~~(a) Approximately ~~direct relationship~~$1,040 ~~with Johnson & Johnson Vision Care has lowered the Company’s product acquisition costs~~ and ~~allowed it to offer rebates and other incentives~~ ~~not~~$110 ~~previously~~of ~~available~~these tocharges ~~its~~were ~~customers~~included ~~who~~in ~~wear~~our ~~Johnson~~financial &results ~~Johnson~~for ~~Vision Care~~the ~~lenses. The Company has also been able to reduce its inventory investment~~fourth byquarter ~~purchasing a more balanced mix~~ of ~~products~~fiscal at2006 ~~lower~~and ~~prices~~the ~~than~~first itquarter ~~has historically~~of ~~been~~fiscal ~~able~~2007, ~~to obtain through indirect sources~~respectively. ~~This agreement also resolved long-standing disputes.~~

~~Cole National Marketing Agreement. On June 30, 2003, the Company and Cole National Corporation~~ (~~“Cole”~~b) We ~~announced~~expect ~~that~~to ~~they~~incur ~~had signed an agreement under~~these ~~which~~charges ~~the~~during ~~Company’s customers can receive discounted eye exams and value pricing on eyeglasses, sunglasses and other vision products that~~ the ~~Company does~~balance ~~not sell from a network~~ of ~~doctors contracted with Cole Managed Vision and associated with more than 1,500 Pearle Vision, Pearle VisionCare, Sears Optical and Target Optical stores in the U.S. During the second quarter of~~ fiscal ~~2004, the Company and Cole extended this agreement through March 31, 2005~~2007. Under this agreement, Cole is offering its network of doctors to the Company to be used for contacts lens exam referrals and the Company retains the contact lens business of customers referred to Cole stores.

16(c) These charges were included in our fiscal 2006 financial results. The asset impairment charge related to certain manufacturing and office equipment that will not be relocated to Singapore, as well as leasehold improvements.

As part of the agreement, the Company and Cole have also worked together on a variety of cross-marketing programs and promotions of their respective products in select test markets. The goal of these cross-marketing programs is to find other ways that the Company and Cole can help create value together.16

~~Lens~~As ~~Express~~of ~~/ Lens~~March ~~1st. On January 30~~31, ~~2003~~2007, ~~the~~we ~~Company~~have incurred cash ~~acquired~~expenditures ~~certain~~associated ~~assets~~with ~~and~~the ~~assumed~~closure ~~certain~~and ~~liabilities~~consolidation of ~~Lens~~ClearLab ~~Express~~UK ~~LLC and~~of ~~Camelot~~approximately ~~Ventures/CJ, L~~$1.~~L.C.~~1 ~~d/b/a~~million ~~Lens~~and ~~1st~~anticipate ~~(collectively,~~future ~~the “Seller”),~~cash ~~two~~expenditures ~~leading~~of approximately U$1.S.9 ~~mail~~million ~~order~~to ~~contact lens retailers~~$3.4 ~~The assets~~million. ~~acquired~~These ~~included~~estimated ~~databases,~~future ~~customer~~cash ~~information,~~expenditures ~~web~~include ~~sites~~the ~~and~~repayment ~~Internet~~of ~~addresses~~approximately ~~or domain names, telephone numbers, certain specified contracts and intellectual property rights~~$0.6 Inmillion ~~addition, acquired assets included certain property, equipment, inventories, receivables and prepaid expenses. With the exception~~ of ~~specifically~~a ~~identified~~regional ~~liabilities,~~development ~~the~~grant ~~Company~~that ~~did~~is not ~~assume the liabilities of the Seller. The liabilities assumed by the Company~~ included ~~certain~~in of the ~~Seller’s~~above ~~identified contracts~~table, ~~accounts~~as ~~payable,~~the ~~accrued liabilities,~~repayment ~~certain~~will ~~customer~~not ~~program~~have ~~obligations~~an ~~and~~impact ~~severance~~in ~~obligations~~our asstatement of ~~January 30, 2003~~operations.

~~During~~We announced in the first quarter of fiscal ~~2004,~~2007 ~~the~~that our ~~Company~~strategic review to determine how to maximize value through a ClearLab ~~completed~~separation ~~the~~has ~~consolidation~~been ofbroadened to include a ~~majority~~strategic review of the ~~operating~~U.S. ~~facilities acquired~~Retail ~~from~~business ~~Lens~~and ~~1st~~we ~~into~~are ~~its~~currently ~~principal~~progressing ~~operating~~with ~~facilities~~this ~~in Utah~~review.

Supplier Agreements. On January ~~During~~31, 2007, we announced that we had recently signed long-term supply agreements with the ~~latter~~three ~~part~~largest ofcontact ~~2003,~~lens manufacturers/suppliers. We have purchased directly from the ~~Company~~fourth ~~reached~~largest ~~agreements~~manufacturer/supplier ~~with~~without ~~its~~a ~~top~~written ~~three~~agreement ~~vendors~~since ~~for~~2001 ~~improved~~and ~~pricing~~based on our longstanding relationship and recent discussions with this supplier, we ~~marketing~~do ~~support~~not expect this direct relationship to change. ~~This~~During ~~support~~the ~~will~~latter part of fiscal 2004, we ~~come~~decided into ~~the~~suspend ~~form~~sales of ~~cooperative~~a ~~marketing~~specific ~~and~~brand ~~rebate~~of ~~programs~~lens, ~~designed~~as we were unable to ~~promote~~obtain ~~the~~sufficient quantities of this lens from anyone other than the manufacturer’s, ~~products~~who ~~and~~refused ~~build~~to ~~sales~~sell us this lens. As With ~~part~~the signing of ~~its~~the ~~ongoing~~long-term ~~relationship~~supply ~~with~~agreements, ~~its~~we recently began ~~suppliers,~~to ~~the~~sell ~~Company~~this ~~periodically~~lens ~~reviews~~again ~~its~~in ~~specific~~2007, ~~marketing~~as ~~plans~~well ~~and negotiates~~as ~~cooperative~~other ~~marketing~~lenses ~~programs~~previously ~~with~~not available ~~these~~to ~~vendors~~us.

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

Japanese License and Royalty Agreement. In December 2004, we signed an agreement which grants Menicon Co., LTD (Menicon), Japan’s largest independent contact lens manufacturer, exclusive rights to develop, manufacture and market certain disposable contact lenses and related intellectual property in Japan. Under the terms of the agreement, Menicon licenses from us different types of intellectual property, including contact lens material, manufacturing technology and related knowledge. As of March 31, 2007, we have received a total of $12 million under the agreement to date, including $3 million in milestone payments.

We recognize the guaranteed portion of the license fees, and any milestone payments from this agreement on a straight-line basis, limited by the amount of cash received, over the period of our continued involvement in meeting our obligations, which is estimated to be through December 2007. Approximately $1.5 million in license fee revenue was recognized in the first fiscal quarter of 2006, whereas approximately $1.0 million in license fee revenue was recognized in the first fiscal quarter of 2007.

Doctor Referral Network. We are currently expanding our national doctor referral network with select independent practitioners and optical retail chains and currently have nearly 1,000 locations. Under this referral program, when a current or potential customer needs a new contact lens prescription, we are able to facilitate the process of obtaining an eye examination through this network of providers. This process minimizes the interruptions in product consumption for the consumer and improves our ability to capture new customers and retain current customers.

Regulatory Considerations

Fairness to Contact Lens Consumer Act. In November 2003, Congress passed the ~~Fairness~~ Fairness to Contact Lens ~~Consumer~~Consumers Act (“FCLCA”), which establishes a national ~~uniform~~ uniform standard for both eye care practitioners and direct marketers with regard to releasing and verifying consumer contact lens prescriptions as well as other requirements relating to the sale of contact lenses. The FCLCA became effective February 4, 2004, and now requires all eye care practitioners to give patients a copy of their prescription as soon as they have been fitted for contact lenses, whether the patients ask for it or not. It also ~~requires~~directs ~~all~~contact lens sellers to contact eye care practitioners to ~~respond~~request verification toof ~~direct~~consumer ~~marketers’~~prescriptions ~~requests~~before toshipping all orders (if the ~~verify~~prescription ~~consumer~~is ~~prescriptions~~not already on file), and it provides that ~~their~~a practitioner’s failure to respond within eight business hours shall result in the prescription being presumed valid, thereby eliminating the ability of eye care practitioners to impede sales by direct marketers simply by ignoring or refusing to respond to their requests to verify prescriptions. The FCLCA also provides that prescriptions will be valid for a minimum of at least one year (absent some special medical reason justifying a shorter period) and that the time for expiration shall not begin to run until the eye care practitioner has given the patient a copy of his or her prescription. It also directs the Federal Trade Commission (“FTC”) to promulgate implementing rules and to conduct a study examining the strength of competition in the market for contact lenses and to submit a report to Congress within twelve months of the FCLCA effective date. This FTC study will specifically address, among other things, the use of doctor exclusive brands (i.e., contact lenses available only for sale from an eye care practitioner) and other practices that impede competition.

The FCLCA also requires that contact lenses only be sold to consumers based on a valid prescription. Satisfying this prescription requirement obligates the seller either to obtain a copy of the prescription itself or to verify the prescription by direct communication with the customer’s prescriber. Consistent with this requirement, the Company’s current operating practice is to require all customers to provide either a valid copy of their prescription or the contact information for their prescriber so that the Company can verify their prescription by direct communication with their prescriber. If the Company does not have a valid copy of the customer’s prescription, the Company directly communicates to the customer’s prescriber the precise prescription information received from the customer and informs the prescriber that it will proceed with the sale based on this prescription information unless the prescriber advises it within eight business hours that such prescription information is expired or otherwise invalid. If the prescriber properly advises the Company within this time period that the customer’s prescription is expired or otherwise invalid, the Company’s practice is to cancel the customer’s order. On the other hand, if the prescriber either advises the Company that the prescription is valid or fails to respond properly within the required time period, the Company’s practice is to complete the sale based on the prescription information communicated to

~~the~~by ignoring ~~prescriber,~~or asrefusing ~~expressly~~to ~~permitted~~respond byto ~~the~~their ~~FCLCA~~requests to verify prescriptions. The ~~Company~~FCLCA ~~retains~~also ~~copies~~provides that prescriptions will be valid for a minimum of at least one year (absent some special medical reason justifying a shorter period). It also directed the ~~written~~Federal Trade Commission (“FTC”) to conduct a study examining ~~prescriptions~~the ~~that~~strength itof ~~receives~~competition in the market for contact lenses and ~~maintains~~to ~~records~~submit a report to Congress within twelve months of ~~its~~the ~~communications~~FCLCA effective date. The FTC completed and published this study on February 15, 2005, with no ~~the~~recommendations ~~customer’s~~for ~~prescriber~~further changes in federal law.

~~Net~~To ~~sales~~satisfy ~~for~~the ~~fiscal~~prescription ~~2003~~verification ~~and~~requirement of the ~~first~~FCLCA, ~~two~~a ~~quarters~~ contact lens seller must either obtain a copy of ~~fiscal~~the prescription ~~2004~~or ~~were~~verify ~~negatively~~the ~~impacted~~prescription by ~~canceled~~direct ~~orders~~communication ~~due~~with to the prescriber. ~~Company’s~~Consistent with this requirement, we require all customers to ~~implementation~~provide either a valid copy of ~~its~~their prescription ~~verification~~or ~~procedures,~~the ~~including,~~contact ~~most~~information ~~significantly,~~for ~~those~~their ~~implemented~~prescriber asso ~~part~~that ofwe ~~the~~can ~~Johnson~~verify &their ~~Johnson~~prescription. If ~~Vision Care~~we ~~agreement~~do innot ~~2003,~~have ~~and~~a valid copy of the customer’s ~~revisions~~prescription, we directly communicate to the ~~Company~~customer’s ~~prescription~~prescriber ~~verification~~the ~~procedures~~precise ~~instituted~~prescription oninformation ~~February~~received 4,from ~~2004~~the incustomer ~~response~~and toinforms the ~~FCLCA.~~prescriber ~~The~~that ~~Company~~we iswill ~~taking~~proceed ~~steps~~with tothe ~~recover~~sale ~~these~~based ~~canceled~~on ~~orders~~this ~~principally~~prescription byinformation ~~offering~~unless tothe ~~its~~prescriber ~~customers~~advises ~~who~~us dowithin ~~not~~eight ~~hold~~business ahours ~~valid~~that such prescription ~~for~~information ~~contact~~is expired or otherwise invalid. If the prescriber properly advises us within ~~lenses~~this ~~referrals~~time ~~for~~period ~~contact~~that ~~lens~~the ~~exams~~customer’s toprescription ais ~~Cole~~expired ~~doctor~~or ~~under~~otherwise invalid, we will cancel the ~~Cole~~customer’s ~~agreement~~order. ~~The~~ On ~~Company~~the other hand, if the prescriber either advises us that the prescription is ~~uncertain~~valid asor fails to ~~the~~respond ~~ultimate impact~~properly ~~its~~within ~~revised~~the ~~prescription~~required ~~verification~~time period, ~~procedures~~we will ~~have~~complete the sale based on ~~future~~the ~~net~~prescription information ~~sales,~~communicated ~~and~~to the ~~Company~~prescriber, isas ~~uncertain~~expressly aspermitted toby the ~~number~~FCLCA. We retain copies of ~~canceled~~the ~~orders~~written ~~that~~prescriptions ~~can~~that ~~subsequently~~we bereceive ~~recovered~~and ~~through~~maintain ~~its~~records ~~doctor~~of ~~network~~our ~~referral~~communications ~~program~~with the customer’s prescriber. The FCLCA provides for several means of direct communication with eye care practitioners, and we may ~~Cole~~alter our prescription verification procedures from time to time in keeping with the FCLCA and FTC guidelines.

Results of Operations

~~The~~Our ~~Company’s~~ fiscal year consists of a 52/53-week period ending on the Saturday nearest to December 31. Fiscal ~~2004~~2007 is a 52-week year and will end on ~~January~~December 129, ~~2005~~2007.

~~The~~We ~~following table~~have ~~presents~~two ~~the~~operating ~~Company’s~~segments ~~results~~referred ofto below. Our domestic segment is represented by operations within ~~expressed~~the U.S. and we refer to it as a“U.S. ~~percentage~~Retail,” ofwhereas our international ~~net~~segment ~~sales~~is ~~for~~represented by operations in both Singapore and the ~~periods~~U.K. ~~indicated:~~and we refer to this segment as “ClearLab.”

	Quarter Ended				Two Quarters Ended
	June 28, 2003		July 3, 2004		June 28, 2003		July 3, 2004
NET SALES	100.0	%	100.0	%	100.0	%	100.0	%
COST OF GOODS SOLD	61.7		61.4		63.6		61.7
Gross profit	38.3		38.6		36.4		38.3
OPERATING EXPENSES:
Advertising	7.7		14.5		7.9		15.9
Legal and professional	3.8		2.7		3.6		3.2
Research and development	0.4		0.9		2.2		1.3
Purchased in-process research and development	—		—		—		0.1
Other operating	21.8		21.5		20.2		20.5
Total operating expenses	33.7		39.6		33.9		41.0
INCOME (LOSS) FROM OPERATIONS	4.6		(1.0	)	2.5		(2.7	)
OTHER EXPENSE, net	(0.7	)	(1.4	)	(0.9	)	(1.0	)
INCOME (LOSS) BEFORE BENEFIT (PROVISION) FOR INCOME TAXES	3.9		(2.4	)	1.6		(3.7	)
BENEFIT (PROVISION) FOR INCOME TAXES	(2.7	)	0.1		(1.5	)	0.4
NET INCOME (LOSS)	1.2	%	(2.3	)%	0.1	%	(3.3	)%

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

Net sales. Net sales for the quarter ended July 3, 2004 increased 7.8% to $50.0 million from $46.4 million for the quarter ended June 28, 2003. For the two quarters ended July 3, 2004, net sales increased 8.4% to $100.8 million from $93.0 million for the two quarters ended June 28, 2003. Net sales for the Company’s U.S. Retail operations, for the second quarter of fiscal 2004 and the first two quarters of fiscal 2004 were $48.8 million and $98.2 million, respectively. The increase in net sales is mainly due to increased advertising and manufacturer rebate programs instituted during the prior quarter for select products, as well as a current quarter retail price increase principally on phone orders. Net sales were negatively impacted by more than $10 million due to a substantial increase in the number and percentage of orders the Company canceled as a result of the prescription verification procedures implemented as part of the Johnson & Johnson Vision Care agreement during the period February through April 2003 and the revisions to the Company’s prescription verification procedures instituted on February 4, 2004 in compliance with the FCLCA (see “Federal Regulation”). The Company’s cancellation rate for the first two quarters of fiscal 2004 was approximately 20%, which is approximately 70% greater than the Company’s cancellation rate for the first two quarters of fiscal 2003.

	Quarter Ended
	April 1,		March 31,
	2006		2007
NET SALES	100.0	%	100.0	%
COST OF GOODS SOLD	61.4		63.9
Gross profit	38.6		36.1

SELLING, GENERAL & ADMINISTRATIVE EXPENSES:
Advertising	6.3		6.6
Legal and professional	1.8		2.4
Research and development	2.1		1.9
Restructuring charges	—		0.2
Other selling, general & administrative	21.5		22.1
Total selling, general & administrative expenses	31.7		33.2
INCOME FROM OPERATIONS	6.9		2.9
OTHER INCOME (EXPENSE), net	0.5		(0.5	)

INCOME BEFORE PROVISION FOR INCOME TAXES	7.4		2.4
PROVISION FOR INCOME TAXES	(5.5	)	(3.9	)
NET INCOME (LOSS)	1.9	%	(1.5	)%

~~The~~Net ~~Company has~~sales. ~~taken~~Net ~~steps~~sales tofor ~~minimize~~the ~~these~~quarter ~~canceled~~ended ~~orders~~March 31, ~~including~~2007 ~~continued~~increased ~~development of~~6.2% ato ~~doctor network through the Cole agreement and the establishment of a~~$67.4 ~~doctor~~million ~~network~~from ~~department~~$63.5 tomillion ~~help~~for ~~obtain~~ the ~~necessary~~quarter ~~prescription~~ended ~~information that~~April is1, ~~required~~2006. Net tosales ~~complete~~for anour ~~order~~U. ~~The~~S. ~~Company~~Retail isoperations ~~uncertain of~~ for the ~~ultimate~~first ~~long-term~~quarter ~~impact~~of ~~that~~fiscal ~~these prescription~~2007 ~~verification~~were ~~procedures~~$61.8 ~~required~~million bycompared ~~the~~to ~~FCLCA~~$59.2 ~~and the Company’s~~million ~~efforts~~for ~~to recover~~ the ~~canceled~~first ~~sales~~quarter ~~will~~of ~~have~~fiscal on2006. U.S. ~~future~~Retail net sales, ~~however, it~~increased ~~does~~primarily ~~believe~~due ~~that~~to ~~the~~an ~~cancellation~~increase ~~percentage has peaked and will decline~~ in average ~~the~~order ~~third fiscal quarter of 2004~~size.

During the quarter ended March 31, 2007, we expensed approximately $4.4 million on advertising compared to $4.0 million for the quarter ended April 1, 2006. Our increase in advertising spending for the first quarter of fiscal 2007 from first quarter of fiscal 2006 is consistent with our strategy to spend more on advertising in fiscal 2007. During fiscal 2006 we focused on addressing the threat of ‘doctors only’ lenses and as a result, we cut advertising spending for the entire year.

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

In January of fiscal 2007, one of our largest suppliers announced manufacturing difficulties with one of our top selling lenses, representing approximately 4% of our U.S. retail net sales in the second half of fiscal

2006. Net sales for the quarter ~~Company’s~~ended ~~international~~March ~~operations (ClearLab)~~31, ~~for~~2007 ~~the~~were ~~second~~negatively ~~quarter~~impacted ofby ~~fiscal 2004~~this ~~and~~supply ~~the~~constraint. Subsequent ~~first~~to ~~two~~the ~~quarters~~end of ~~fiscal~~the ~~2004~~first ~~were~~quarter ~~$1.2 million and $2.6~~of ~~million~~fiscal 2007, ~~respectively. Net~~the ~~sales~~supplier ~~for ClearLab~~was ~~for~~able ~~the~~to ~~second~~begin ~~quarter~~providing ~~and~~some ~~first~~of ~~two~~these ~~quarters~~lenses ofto us ~~fiscal~~at ~~2003~~near ~~were~~normal ~~$1.7 million~~levels; ~~and~~however, ~~$3.1~~they ~~million,~~continue ~~respectively.~~to ~~The~~experience ~~Company~~difficulties providing ~~expects~~other ~~ClearLab~~lenses ~~sales~~and ~~to increase~~cannot ~~internationally~~guarantee ~~during~~when ~~the~~these ~~second~~production ~~half~~issues ofwill be ~~fiscal~~completely ~~2004~~resolved.

~~Gross~~Net ~~profit. Gross profit as a percentage of net~~ sales ~~increased to 38.6%~~ for ~~the quarter~~ClearLab ~~ended July 3, 2004 from 38.3%~~ for the quarter ended ~~June~~March 2831, ~~2003. For the first two quarters ended July 3,~~ ~~2004,~~2007 ~~gross profit as a percentage of net sales~~ increased ~~to 38~~29.35% ~~from~~to 36$5.~~4% for~~6 ~~the~~million ~~two~~from ~~quarters ended June 28, 2003~~$4. ~~During~~3 ~~the~~million ~~first~~for ~~two quarters of fiscal 2004,~~ the majority of the gross profit improvement was due to the Company’s U.S. Retail operations continuing to realize the expected benefits of a decrease in wholesale prices paid for Johnson & Johnson Vision Care products as well as a current quarter ~~retail~~ended ~~price~~April ~~increase principally on phone orders. During March 2003~~1, ~~the Company began buying directly from Johnson & Johnson Vision Care~~2006. ~~The~~ClearLab’s ~~Company~~results ~~did not~~for ~~realize~~ the ~~full benefits of purchasing from Johnson & Johnson Vision Care during the~~ first quarter of fiscal ~~2003~~2007 ~~due~~include to$1.0 ~~significant~~million ~~amounts~~in oflicense ~~Johnson &~~fees ~~Johnson Vision Care inventory held by the Company prior to making direct purchases~~ from ~~them. During the latter~~our ~~part~~Japanese oflicense ~~2003, the Company reached~~ agreement ~~with~~compared ~~Johnson & Johnson Vision Care for additional pricing improvements. The Company expects gross profit as a percentage of net sales for its U.S. Retail operations~~ to ~~remain relatively constant during the remainder of fiscal 2004~~$1. ~~During~~5 ~~the~~million ~~second~~in ~~quarter of fiscal 2004,~~ the ~~Company recognized a negative gross margin at ClearLab due to the start-up nature of its U.K. operations which were acquired during the latter part of the~~ first quarter of fiscal ~~2004~~2006. ~~The~~ClearLab’s ~~Company~~sales ~~expects this trend to reverse and~~increased ~~expects~~primarily tofrom ~~record~~an aincrease ~~positive~~in ~~gross margin during the second half of fiscal 2004 as ClearLab~~ sales ~~increase~~demand ~~internationally~~in Europe.

~~Advertising expense~~Gross profit. ~~Advertising~~ ~~expense~~Consolidated ~~for~~gross ~~the~~profit ~~quarter~~as ~~ended~~a ~~July~~percentage 3,of ~~2004~~net ~~was~~sales $7decreased to 36.21% ~~million~~for the quarter ended March 31, an2007 ~~increase~~from ~~of $3~~38.6% ~~million~~for ~~from~~ the quarter ended April ~~June 28~~1, ~~2003~~2006. AsGross aprofit as a percentage of net sales, ~~advertising expense~~for our U.S. Retail operations increased to 1440.52% ~~for~~ in the ~~second~~first quarter of fiscal ~~2004~~2007 from 739.79% ~~for~~ in the ~~second~~first quarter of fiscal ~~2003~~ 2006. ~~For the~~We ~~two~~expect ~~quarters~~the ~~ended July 3, 2004, advertising expense was $16~~U.~~0 million, an increase of $8~~S.7 ~~million~~Retail ~~from the two quarters ended June 28, 2003. A majority of the increase was for the~~gross ~~Company’s~~profit ~~television~~margin ~~advertising~~to ~~campaign. The~~vary ~~Company~~somewhat ~~expects~~from ~~total~~quarter ~~advertising~~to ~~expense~~quarter ~~incurred~~but ~~will~~to be approximately 40% ~~$26 million~~ for ~~all of~~ fiscal ~~2004~~2007. ~~However,~~This ifimprovement ~~opportunities present themselves,~~in ~~the~~U.S. ~~Company~~Retail ~~may~~gross ~~increase~~profit ~~advertising~~from ~~spending~~the ~~above~~prior ~~currently~~fiscal ~~planned~~year ~~levels. The~~was ~~Company’s~~mainly ~~experience~~the ~~has~~result ~~been that increases~~of inhigher ~~advertising~~retail ~~expenditures~~prices ~~have~~on acertain ~~direct~~products ~~impact~~during on the ~~growth~~fourth quarter of ~~net~~fiscal 2006, ~~sales~~partially ~~not only~~offset inby ~~the~~increases ~~current~~in ~~period~~select ~~but~~product ~~also~~costs inand ~~future~~shipping ~~periods~~rates.

~~The~~Gross ~~Company expenses~~profit ~~all~~(loss) ~~advertising~~as ~~costs~~a percentage ~~when~~of ~~the~~net ~~advertising~~sales ~~first~~for ~~takes~~ClearLab ~~place~~was (8. As2)% afor ~~result,~~the first quarter~~-to-quarter~~ ~~comparisons~~of fiscal ~~are~~2007, ~~impacted~~including ~~within~~recognized ~~and~~license ~~between~~fee ~~quarters~~revenue byfrom our Japanese license agreement, compared to 14.8% for the ~~timing~~first quarter of ~~television,~~fiscal ~~radio~~2006. ~~and~~Excluding ~~Internet~~approximately ~~advertisements~~$1.0 ~~and~~million byof the ~~mailing~~license offee ~~the~~revenue ~~Company’s~~in ~~printed advertisements.~~the ~~The~~first ~~volume~~quarter of fiscal ~~mailings~~2007 and ~~other~~$1.5 ~~advertising~~million ~~may~~of ~~vary~~the license fee revenue in the first quarter of ~~different~~fiscal ~~quarters~~2006, ~~and~~gross ~~from~~profit ~~year~~(loss) toas ~~year~~a ~~depending~~percentage onof ~~the~~net ~~Company’s~~sales ~~assessment~~for ClearLab was (31.7)% for the first quarter of ~~prevailing~~fiscal ~~market~~2007 ~~opportunities~~compared to (30.6)% for the first quarter of fiscal 2006.

~~Legal~~Advertising ~~and professional fees~~expense. Advertising ~~Legal~~expense ~~and professional fees~~ for the quarter ended ~~July~~March 331, ~~2004~~2007 ~~decreased~~ increased to $04.4 million to from $14.30 million, orfor ~~23.6%, from~~ the first quarter ended ~~June~~April 281, ~~2003~~ 2006. As a percentage of net sales, advertising ~~legal~~expense ~~and professional fees decreased to 2.7%~~ for the ~~second~~first quarter of fiscal ~~2004~~ 2007 increased to 6.6% from 36.83% for the ~~second~~first quarter of fiscal ~~2003~~2006. ~~For~~ ~~the~~We ~~two~~expect ~~quarters~~to ~~ended~~increase ~~July~~advertising 3,expense ~~2004,~~to ~~legal~~an ~~and~~aggregate ~~professional~~of ~~fees~~approximately ~~decreased~~ $018.20 million to $319.20 million, orfor ~~5.8%,~~fiscal 2007 from ~~the~~$13.6 ~~two~~million ~~quarters~~in ~~ended~~fiscal ~~June~~2006. ~~28,~~Our ~~2003. As~~experience ahas ~~percentage~~been ofthat ~~net~~incremental increases ~~sales,~~in ~~legal~~advertising ~~and~~expenditures ~~professional~~have ~~fees~~a ~~decreased~~direct ~~to 3.2%~~impact ~~for~~on the ~~first~~growth ~~two quarters~~ of ~~fiscal~~net sales ~~2004~~not ~~from~~only ~~3.6%~~in ~~for~~ the ~~first~~current ~~two quarters~~period ofbut ~~fiscal~~also ~~2003~~in future periods.

~~During~~We ~~the~~expense ~~quarter, the Company invested in legal and professional fees~~all ~~for~~advertising ~~support~~costs ofwhen ~~its~~the ~~doctor~~advertising ~~network,~~first antakes ~~international~~place. ~~tax~~As ~~structuring~~a ~~project~~result, ~~Sarbanes~~quarter-~~Oxley~~to-quarter ~~compliance~~comparisons ~~efforts~~are ~~and~~impacted ~~other~~within ~~initiatives. Although~~and ~~the~~between ~~Fairness~~quarters toby ~~Contact Lens Consumer Act (“FCLCA”) became effective~~the ~~February~~timing 4,of ~~2004~~television, ~~the~~radio ~~Company~~and ~~invested~~Internet ~~considerable~~advertisements ~~effort~~and ~~during~~by the ~~first~~mailing of ~~fiscal~~our ~~quarter~~printed ofadvertisements. ~~2004~~The ~~preparing~~volume ~~comments~~of ~~for~~mailings ~~the~~and ~~Federal~~other ~~Trade~~advertising ~~Commission~~may vary ~~(“FTC”)~~in ~~relating~~different toquarters ~~final~~and ~~rules~~from ~~associated~~year ~~with~~to ~~the~~year ~~FCLCA. The~~depending ~~Company~~on ~~submitted~~our ~~its~~assessment ~~comments~~of prevailing tomarket ~~the proposed~~opportunities.

Legal and professional fees. Legal and professional fees for the quarter ended March 31, 2007 increased $0.5 million from the quarter ended April 1, 2006. As a percentage of net sales, legal and professional fees increased to 2.4% for the first quarter of fiscal 2007 from 1.8% for the first quarter of fiscal 2006. A majority of the increase during the first quarter of fiscal 2007 related to accounting and legal fees associated with the strategic reviews of ClearLab and the U.S. Retail business.

Research and development expenses. Research and development expenses for the quarter ended March 31, 2007 remained constant with expenses for the quarter ended April 1, 2006 at approximately $1.3 million. However, as a percentage of net sales, research and development expenses decreased to 1.9% of net sales for the quarter ended March 31, 2007 from 2.1% of net sales in the quarter ended April 1, 2006. During the first quarter of fiscal 2007, we continued to fund research and development efforts for the continued development of our intellectual property in ClearLab.

Restructuring charges. ClearLab recorded $0.1 million during the first quarter of fiscal 2007 for severance and retention costs related to the closure of our United Kingdom manufacturing operations and consolidation of such operations into Singapore.

~~rules~~Other selling, ~~during~~general and administrative expenses. Other selling, general and administrative expenses for the quarter ended March 31, 2007 increased approximately $1.3 million, or ~~first~~9.4%, ~~fiscal~~to $15.0 million from the quarter ofended ~~2004~~April 1, 2006. ~~The~~As a percentage of net sales other selling, ~~Company~~general ~~expects~~and administrative expenses for the first quarter of fiscal 2007 also increased to ~~reduce~~22.1% ~~expenditures~~from on21.5% ~~legal~~for ~~and~~the ~~professional~~first ~~fees~~quarter byof fiscal 2006. The first quarter of fiscal 2007 results include approximately $2.0.2 million inof ~~fiscal~~expense related ~~2004~~to ~~versus~~stock ~~expenditures~~options ingranted prior to fiscal ~~2003~~ 2006 and approximately $0. ~~The~~5 million ~~Company~~of ~~will~~expense ~~continue~~related to ~~focus~~restricted stock. ~~its~~The ~~efforts~~first onquarter ~~compliance~~of ~~with~~fiscal ~~federal~~2006 ~~rules~~results ~~and~~include ~~regulations~~approximately $0. ~~However,~~3 million ~~legal~~of ~~and~~expense ~~professional~~related ~~fees~~to ~~are subject~~stock options granted prior to ~~change~~fiscal as2006 ~~circumstances~~and approximately ~~warrant~~$0.1 million of expense related to restricted stock grants.

~~Research and~~Our ~~development expenses~~U. S. Retail other ~~Research~~selling, general and ~~development~~administrative expenses ~~for the quarter ended July 3, 2004~~ increased toby approximately $01.4 0 million, orfor ~~0.9%~~the first quarter of ~~net~~fiscal ~~sales,~~2007 from ~~$0.2~~the ~~million,~~first orquarter ~~0.4%~~ of fiscal ~~net~~2006; ~~sales~~additionally, ~~from~~such ~~the~~expenses ~~quarter~~also ~~ended~~increased ~~June~~as ~~28,~~a ~~2003. For~~percentage ~~the~~of ~~two~~net ~~quarters~~sales ~~ended~~to 20.6% ~~July~~from 319.8%, ~~2004~~respectively, ~~research~~ ~~and~~for ~~development~~the ~~expenses~~same ~~were $1~~period.3 The ~~million,~~majority ~~or 1.3%~~ of ~~net~~the ~~sales. The~~increase ~~Company’s~~for U.S. Retail ~~operations funded~~ ~~$0.5~~from ~~million during~~ the ~~first~~prior ~~fiscal~~year ~~quarter~~related ofto ~~2004~~planned ~~for~~increases ~~research~~in ~~and development~~employee ~~activities~~costs. These ~~performed~~increases byinclude ~~VisionTec~~restricted ~~prior~~stock ~~to the Company’s acquisition~~and ofstock ~~the~~option ~~entity~~expense, onas ~~February~~discussed 24above, ~~2004. During~~as ~~the~~well ~~first~~as ~~two~~employee ~~quarters~~costs ofto ~~fiscal~~support current ~~2003~~operations. Additionally, the remaining ~~Company’s~~portion ~~U.S.~~of ~~Retail operations~~the ~~expensed~~increase ~~approximately~~in ~~$2.0~~other ~~million~~selling, ~~for~~general ~~research~~ and ~~development~~administrative ~~activities~~expenses ~~performed~~related ~~by VisionTec. The Company expects~~ to ~~incur~~planned ~~total~~software ~~consolidated research~~ and ~~development~~facilities ~~expenses~~maintenance/support costs ofand ~~approximately~~increased $2depreciation ~~million~~costs inassociated ~~fiscal~~with ~~2004,~~equipment ~~the~~purchased ~~majority of which is related~~ to ~~ClearLab’s~~strengthen ~~operations~~our technology infrastructure.

~~Other~~ClearLab’s ~~operating~~other ~~expenses. Other operating expenses for the quarter~~selling, ~~ended~~general ~~July~~and 3,administrative ~~2004~~expenses increased by approximately $0.73 million, ~~or 6.6%, from the quarter ended June 28, 2003. As a percentage of net sales, other operating expenses decreased to 21.5%~~ for the ~~second~~first quarter of fiscal ~~2004~~ 2007 from ~~21.8% for~~ the ~~second~~first quarter of fiscal ~~2003~~ 2006. ~~The~~A ~~Company’s~~majority ~~U.S.~~of ~~Retail other operating~~ClearLab’s expenses increased by approximately $1.0 million for the quarter ended July 3, 2004 from the quarter ended June 28, 2003 as the Company added to its management team and created new functions within the organization including the doctor referral network department. The increase ~~includes~~is ~~just~~attributed ~~over $0.1 million for recruiting costs relating~~ to ~~key information~~an ~~technology and marketing positions. The~~ increase ~~also~~in ~~includes an additional $0.3 million for severance and other~~ employee costs, ~~related~~specifically, to the accelerated ~~elimination~~vesting of ~~one~~restricted ~~senior~~stock ~~operating position.~~from ~~The~~revised ~~increase~~stock ~~for~~agreements ~~the quarter in U.S. Retail other operating expenses~~entered ~~was~~into ~~offset~~during bythe afourth ~~decrease~~quarter of ~~$0.3~~fiscal ~~million in other operating expenses from ClearLab~~2006.

Other income (expense), net. For the ~~two~~quarter ~~quarters~~ ended ~~July~~March 331, ~~2004~~2007, ~~other~~we ~~operating expenses~~had ~~increased~~other ~~$1.9~~expense ~~million~~of to $20(0.64) million. ~~Other~~compared ~~operating~~to ~~expenses~~other income for the ~~Company's~~ ~~U.S.~~quarter ~~Retail~~ended April ~~operations~~1, ~~increased~~2006 byof $2.0.3 million. AFor ~~majority~~the first quarter of ~~this~~fiscal ~~increase~~2006 ~~related~~and to2007, ~~the continued~~other ~~enhancement~~income (expense) consisted mainly of ~~its~~interest ~~operating~~expense, ~~infrastructure~~resulting ~~and~~from ~~management~~use ~~team~~of tothe revolving credit facility and ~~meet~~foreign ~~the~~exchange ~~demands~~transaction ofgains. ~~the~~Interest ~~business~~expense ~~and~~for the ~~requirements~~first quarter of fiscal ~~the~~2007 ~~FCLCA. The~~increased ~~Company~~to ~~also~~$0.6 million ~~incurred~~compared ~~approximately~~to $0.2 4 million in ~~costs related to~~ the first ~~consolidation~~quarter of ~~the~~fiscal ~~operations~~2006. ofWe ~~Lens~~recorded ~~1st from~~a ~~Michigan~~foreign toexchange ~~Utah. The~~transaction ~~increase in~~gain ~~U.S.~~of ~~Retail~~approximately ~~was~~$0.2 million ~~offset~~and by a ~~decrease~~gain of approximately $0.17 million during inthe ~~other~~quarters ~~operating~~ended March 31, 2007 and April 1, 2006, respectively. These exchange gains relate primarily to ~~expenses~~intercompany ~~from~~loans to ClearLab.

~~The~~Income ~~Company~~taxes. We ~~expects~~are ~~other~~taxed ~~operating~~in ~~expenses~~three toseparate ~~fluctuate~~jurisdictions as- U.S., aSingapore and the United Kingdom. ~~percentage~~Our ofeffective ~~net~~U.S. ~~sales~~income tax rate for the quarter ended March 31, 2007 is approximately 41% as compared with the ~~Company~~45% ~~continues~~reported tofor ~~grow~~the ~~and~~quarter ~~expand~~ended April ~~its~~1, 2006. The decrease in the effective U.S. income tax rate primarily ~~and~~results ~~international~~from ~~operations.~~the decrease in permanent nondeductible expenses, including those relating to our lobbying efforts.

~~Other expense,~~In ~~net. Other expense increased to approximately $0.7 million and $1.1 million for~~ the ~~quarter and two quarters ended July 3, 2004, respectively, from approximately $0.3 million and $0.8 million for the quarter and two quarters ended June 28, 2003, respectively. For the~~ first quarter of fiscal ~~2004, other expense consisted mainly of interest~~ ~~expense~~2007, ~~offset~~we ~~slightly~~recorded bya anvaluation ~~unrealized~~allowance ~~foreign~~for ~~exchange~~the ~~transaction~~full ~~gain~~amount of ~~$0.1~~ ~~million. For~~losses ~~the two quarters ended~~from ~~July~~operations 3,and ~~2004,~~ other ~~expense~~deferred ~~consisted~~income ~~mainly~~tax ofassets ~~interest~~in ~~expense~~excess ~~and~~of ~~an unrealized~~taxable ~~foreign exchange transaction loss.~~ temporary ~~The~~differences ~~interest~~in ~~expense~~Singapore ~~resulted from the use of the revolving credit facility~~ and ~~debt related to~~ the ~~acquisition of VisionTec (ClearLab UK, Ltd~~U.~~) and ClearLab International~~K. ~~The unrealized foreign exchange transaction loss of approximately $0.1 million for the two quarters ended July 3~~, ~~2004,~~as ~~related primarily~~it tois ~~intercompany~~more ~~loans~~likely tothan ~~ClearLab.~~not ~~For~~that ~~the first two quarters of~~these ~~fiscal~~deferred ~~2003,~~tax ~~other~~assets ~~expense~~will ~~consisted~~not ~~mainly~~be ~~of interest expense and unrealized foreign exchange transaction losses incurred by the Company~~realized. ~~The unrealized foreign exchange transaction losses related primarily to the intercompany loan to ClearLab International.~~

~~Income taxes. The~~We ~~Company is~~expect ~~taxed~~that inour ~~three~~fiscal ~~jurisdictions~~2007 —effective ~~U.S.,~~income ~~Singapore~~tax ~~and~~rates will approximate 41% for the ~~United~~U.S. ~~Kingdom~~operations. ~~The~~ ~~Company’s~~For ~~effective~~the U.SK. ~~income~~and ~~tax~~Singapore ~~rate~~operations, ~~for~~we ~~the~~expect ~~first~~that ~~two~~the ~~quarters~~effective ~~ended~~tax ~~July~~rate 3,will ~~2004~~be ~~was 39~~0% ~~compared~~with tothe ~~42%~~exception ~~for~~of the ~~two~~Japanese ~~quarters~~withholding ~~ended~~tax ~~June~~on ~~28,~~license ~~2003~~payments made to ClearLab International. ~~The~~ ~~Company~~Our ~~records~~effective ~~quarterly~~income tax rates may change as facts and circumstances change.

On December 31, 2006, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This interpretation requires us to recognize in the consolidated financial statements only those tax positions determined to be more-likely-than-not of being sustained upon examination, based on the technical merits of the positions as of the reporting date. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are recognized. This is a different standard for recognition than was previously required. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment is recorded directly to opening retained earnings in the period of adoption and reported as a change in accounting principle. As a result of the adoption of FIN 48, we recognized a decrease of $60,000 in the liability recorded for unrecognized tax

~~income~~benefits, ~~taxes at the~~which ~~effective~~was ~~tax~~accounted ~~rate expected~~ for ~~the~~as ~~year. The~~a decrease into the ~~effective~~fiscal ~~income~~2007 ~~tax~~beginning ~~rate primarily results from the~~accumulated ~~estimated~~deficit ~~annual~~balance. We ~~decrease~~do innot ~~permanent~~have ~~nondeductible expenses; including those~~any ~~relating~~unrecognized totax ~~the~~benefits ~~Company’s~~that, ~~lobbying~~if ~~efforts. During the first two quarters of fiscal 2004~~recognized, ~~the~~would ~~Company~~affect ~~did~~our ~~not~~effective ~~record~~tax arate. ~~tax~~We ~~benefit~~recognize ~~for~~interest ~~the~~and ~~loss~~potential ~~from~~penalties ~~the~~accrued ~~operations~~related ~~of ClearLab International due~~ to ~~the~~unrecognized ~~uncertainty with respect to the realization of a~~ tax ~~benefit~~benefits in ~~Singapore. As~~ ofour ~~the~~provision ~~second quarter of fiscal 2004, the Company provided a valuation allowance~~ for ~~the full amount of the deferred~~ income ~~tax~~taxes. ~~assets~~We ~~in Singapore.~~ had ~~For~~approximately ~~the first two quarters of fiscal 2004~~$54,000 ~~the~~accrued ~~Company recorded a tax benefit~~ for the ~~loss~~payment ~~from operations~~ of ~~ClearLab~~interest ~~UK using an effective tax rate of 27%. The Company did not provide a valuation allowance for the deferred income tax assets in the United Kingdom because the deferred tax liabilities recorded~~ as of ~~the~~March ~~date of acquisition of ClearLab UK were in excess of the deferred tax assets generated by the loss from operations during the first half of 2004~~31, 2007, which ~~operating~~is ~~loss~~classified ~~can~~as ~~be carried~~current ~~forward indefinitely. The Company’s estimated effective U.S. and United Kingdom~~ income ~~tax~~taxes ~~rates~~payable ~~may change~~on asthe ~~facts~~balance ~~and circumstances change~~sheet.

~~Liquidity~~We ~~and~~have ~~Capital~~not ~~Resources~~been notified of intent to audit, nor are we currently undergoing an income tax audit in any jurisdiction. The tax years that remain subject to examination by significant jurisdiction are as follows:

The Company’s principal sources of liquidity have been cash provided by operating activities and proceeds from debt financings. The Company’s principal uses of cash have been to meet debt service requirements, finance acquisitions, finance capital expenditures, fund working capital needs and repurchase common stock. The Company anticipates that, with the exception of repurchases of common stock, these uses will continue to be the principal demands on its cash in the future.

U.S. Federal	2003 through the current period
Utah	2003 through the current period
United Kingdom	2004 through the current period
Singapore	2002 through the current period

The Company believes that its cash on hand, together with cash generated from operating activities and the borrowings available through the credit facility, will be sufficient to support planned operations through the foreseeable future. Should the Company’s plans or expectations change, the Company may be required to seek additional sources of funds 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 condition, liquidity and results of operations.

As a result of 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 or experiences losses 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 regulatory agencies.

Acquisition of VisionTec (ClearLab UK) - During fiscal 2003, the Company paid $3.9 million for research and development activities performed by ClearLab UK on the Company’s behalf and an additional $0.5 million in January 2004. On February 24, 2004, the Company acquired all of the stock of ClearLab UK. The consideration paid included approximately $3.8 million in cash (including $0.6 million in transaction costs) and 155,084 shares of the Company’s common stock with a fair value of approximately $3.2 million. In addition, the Company has agreed to pay a per unit royalty to the former shareholders of ClearLab UK for a period of ten years. The Company financed the cash portion of this acquisition with its revolving credit facility from its U.S. bank.

The Company will continue to pursue research and development activities at ClearLab UK. ClearLab UK began to manufacture products in a test environment in late 2003, and the Company will continue to expand its manufacturing capabilities during the remainder of fiscal 2004 to market the ClearLab UK products internationally.

Renewed Loan Agreement - Effective February 27, 2004, the Company executed a restated loan agreement with its existing U.S. bank, providing for a revolving credit facility for borrowings of up to $28 million through June 1, 2004, and reducing thereafter on the first day of each September, December, March and June by $0.4 million until the maturity date of February 27, 2007. Additionally, the agreement provides for letters of credit up to a maximum of $15 million outstanding or payable at any time. The executed restated loan agreement specifies that if the maximum leverage ratio, as defined in the restated loan agreement, is greater than 2.5, then the amounts

~~outstanding~~Liquidity on the revolving credit facility together with the amount of all outstanding letters of credit can at no time exceed the Company’s book value of inventory. As of July 3, 2004, the Company was subject to this restriction and ~~could~~Capital only borrow up to the $25.2 million book value of its inventory. Outstanding borrowings on the revolving credit facility bear interest at a floating rate equal to the lender’s prime interest rate plus a margin or the lender’s LIBOR rate plus a margin. The restated loan agreement originally specified that interest based on the lender’s prime rate is the prime rate plus 0.75 percent until July 31, 2004, and thereafter is adjusted quarterly, ranging between prime plus 0.0 percent and prime plus 1.25 percent, depending on the Company’s maximum leverage ratio. The restated loan agreement also originally specified that interest based on the lender’s LIBOR rate is the LIBOR rate for the applicable period plus 2.75 percent until July 31, 2004, and thereafter is adjusted quarterly, ranging between LIBOR plus 2.0 percent and LIBOR plus 3.25 percent, depending on the Company’s maximum leverage ratio. On June 25, 2004, the restated loan agreement was modified to stipulate that until the maximum leverage ratio, as defined in the restated loan agreement, is less than or equal to 3.0, the LIBOR rate applicable margin will be 3.25 percent and the prime rate applicable margin will be 1.25 percent. As of July 3, 2004, the Company was subject to these specifications. Interest is payable monthly. As of July 3, 2004, the Company’s outstanding borrowings on the credit facility, including bank overdrafts, were $17.4 million. Of this amount, $12.0 million bore interest at the lender’s LIBOR rate plus 3.25 percent (4.54% at July 3, 2004) and the remaining $5.4 million bore interest at the lender’s prime rate plus 1.25 percent (5.50% at July 3, 2004). The facility requires the payment of an unused credit fee, which is also determined by the Company’s maximum leverage ratio. The unused credit fee is payable quarterly at 0.5 percent until July 31, 2004. Thereafter, the unused credit fee is adjusted quarterly, ranging from 0.38 percent to 0.5 percent, depending on the Company’s maximum leverage ratio.Resources

~~All~~Our ~~outstanding balances~~principal onsources ~~this credit facility are secured by substantially all~~ of ~~the~~ ~~Company’s~~liquidity ~~U.S.~~have ~~assets,~~been ~~subsidiary~~cash ~~debt~~provided ~~instruments,~~by ~~100~~operating ~~percent~~activities ~~ownership interests in all domestic subsidiaries~~ and 65proceeds ~~percent ownership interests in~~from ~~foreign~~debt ~~subsidiaries directly owned by the Company~~financings. ~~The~~ Our ~~new~~principal ~~loan~~uses of ~~agreement~~cash ~~includes~~have ~~various~~been ~~financial~~to ~~covenants~~meet ~~including~~debt aservice ~~capital expenditure limit~~requirements, afinance ~~maximum~~acquisitions, ~~leverage~~finance capital ~~ratio~~expenditures, afund ~~minimum~~ working capital ~~requirement,~~needs ~~a minimum fixed charge coverage ratio~~ and arepurchase ~~minimum net worth requirement.~~ common ~~The~~stock. We ~~new~~anticipate ~~loan~~that ~~agreement~~these ~~does~~uses will ~~not~~continue ~~permit the Company or its subsidiaries~~ to ~~dissolve,~~ ~~sell,~~be ~~dispose or merge all of their assets or acquire all of~~ the ~~assets~~ ofprincipal ~~any~~demands ~~entity without the written consent~~ of ~~the~~cash ~~U.S. bank, unless the transaction meets the definition of a “Permitted Acquisition Basket”, as defined~~ in the ~~agreement~~future. ~~The~~As ~~new~~of ~~loan~~March ~~agreement also places a limit on the amount the Company can loan to any entity~~31, ~~outside the normal course of business. Additionally~~2007, ~~the~~we ~~agreement~~had ~~does~~net ~~not permit the Company to~~working ~~declare~~capital orof ~~pay~~approximately ~~any~~$6.3 ~~cash dividends~~million, tocompared ~~repurchase its stock or~~ to ~~perform other similar equity transactions prior to December 31, 2005; thereafter, such transactions are subject to other terms~~$9. ~~This~~6 ~~agreement~~million ~~defines~~as ~~several customary events~~ of ~~default including any material adverse change or any event~~December ~~that~~30, ~~occurs which may cause a material adverse change in the Company’s or its subsidiaries’ condition~~2006.

~~The~~We ~~June~~believe 25that our cash on hand, ~~2004 modification~~together towith cash generated from operating activities and the ~~restated~~borrowings ~~loan~~available ~~agreement~~through ~~also~~our ~~modified~~credit ~~the~~facility, ~~maximum~~will ~~leverage~~be sufficient to ~~ratio~~support ~~financial~~planned ~~covenant~~operations through the foreseeable future. AsWe ofannounced on July 326, 2006 that we had ~~2004~~engaged an investment bank to assist in performing a strategic review of ClearLab. In order to fully commercialize our products, particularly the ~~Company~~AquaSoft ~~was~~Singles inproduct, ~~compliance~~we anticipate ~~with~~that ~~all~~ClearLab ~~applicable~~will ~~covenants~~require assignificant ~~modified~~additional funding over the foreseeable future, which may not be available through our cash flows from operations, and ~~clarified~~will bylikely require us to secure alternative funding. Based on this review, we have committed to a separation of ClearLab from the U.S. ~~bank~~Retail business and are currently assessing various strategic options. This separation will likely be accomplished in two separate transactions — one for the flat pack technology and intellectual property and one for ClearLab’s Singapore operation. As such, we announced on May 8, 2007 that we have entered into a Memorandum of Understanding (“MOU”) to sell ClearLab’s Singapore operation to Mi Gwang Contact Lens Co., Ltd., a Korean based contact lens manufacturer. The MOU includes a $1 million break-up fee that is applicable if either party does not execute a purchase agreement.

~~Cash~~We have ~~flows~~also ~~from~~undergone ~~operating~~an ~~activities~~extensive review of ClearLab’s manufacturing operations. ~~For~~Based on this review, we made the ~~two~~decision ~~quarters~~to ~~ended~~consolidate ~~July~~ClearLab 3,operations ~~2004~~in Singapore and are ~~June~~proceeding ~~28,~~with ~~2003,~~the ~~net~~closure ~~cash~~and consolidation. We substantially completed the UK site closure (~~used~~except for ongoing lease commitments and disposal of surplus equipment) in the first fiscal quarter of 2007, and anticipate that all ongoing obligations relating to the UK operations (including lease commitments and disposal of surplus equipment) ~~provided~~will cease no later than the end of 2007. We anticipate that all manufacturing activity will be consolidated in Singapore by ~~operating~~the ~~activities~~end ~~was~~of the third fiscal quarter of 2007. During the first quarter of fiscal 2007, we used approximately ($1.41 million) in cash related to these consolidation efforts and anticipate the additional use of approximately $111.9 million, ~~respectively~~to $3. In4 million ~~the~~in ~~fiscal~~cash ~~2004~~related ~~period,~~to ~~cash~~these ~~was~~closure ~~used~~and consolidation efforts during the ~~primarily~~remainder ~~for~~of ~~increases~~fiscal in2007. Should ~~inventories~~our plans or expectations change, ~~other~~related ~~current~~to ~~assets~~ClearLab or otherwise, ~~accounts receivable~~we ~~and~~may be required to ~~fund~~seek ~~the~~additional ~~net~~sources ~~loss,~~of ~~partially~~funds ~~offset~~and bythere ancan ~~increase~~be inno ~~accrued~~assurance that ~~liabilities~~such ~~and~~funds ~~accounts~~will ~~payable~~be available on satisfactory terms. InFailure ~~the fiscal~~to ~~2003~~obtain ~~period,~~such ~~cash~~financing ~~was~~could ~~provided~~delay or ~~primarily~~prevent byour ~~net~~planned ~~income~~growth, and acould ~~decrease~~adversely ~~in inventories~~affect ~~partially~~our ~~offset~~business, financial bycondition, aliquidity ~~decrease~~and inresults ~~accounts~~of ~~payable~~operations.

~~Cash~~As ~~flows~~a ~~from~~result ~~investing~~of ~~activities. The~~regulatory ~~Company used approximately $8.4 million and $8.7 million for investing activities in the two quarters ended July 3~~requirements, ~~2004~~ ~~and~~our ~~June 28~~liquidity, ~~2003, respectively. In~~ ~~the~~capital ~~fiscal~~resources ~~2004~~and ~~period,~~results ~~the~~of ~~Company~~operations ~~paid~~may ~~approximately~~be ~~$3.8~~negatively ~~million~~impacted in ~~cash~~the ~~(including~~future ~~$0.6~~if ~~million~~we inincur ~~transaction~~increased costs) in(including ~~connection~~legal ~~with~~fees) ~~the~~or ~~acquisition of~~fines, ~~VisionTec. The Company also purchased~~are ~~approximately~~prohibited ~~$1.0~~from ~~million~~selling ofour ~~intangible~~products ~~assets~~or ~~during~~experiences ~~the~~losses ~~fiscal~~of ~~2004~~a substantial ~~period. In~~portion ~~the~~of ~~fiscal~~our ~~2003~~customers ~~period,~~for ~~the Company~~whom ~~paid~~we ~~approximately~~are ~~$7.0 million~~unable into ~~cash~~obtain ~~(including~~or ~~$0.4~~verify ~~million in~~a ~~transaction~~prescription ~~costs)~~due into ~~connection with~~ the ~~acquisition~~requirements of ~~Lens~~the ~~Express and Lens 1st~~FCLCA.

~~Capital~~Modified ~~expenditures~~Loan ~~for infrastructure improvements for the first two quarters ended July 3, 2004 and June 28, 2003 were approximately $3.4 million and $1.7 million, respectively. Of those amounts, approximately $2.2~~Agreement

We have a loan agreement with a U.S. bank providing for a revolving credit facility that matures on June 1, 2009. The loan agreement provides for borrowings of up to $40 million and for letters of credit up to a maximum of $15 million outstanding or payable at any time. The amount of any letters of credit outstanding is deducted from the amount available for borrowing. There were outstanding letters of credit of $1.5 million as of March 31, 2007 that reduce the total amount available under the loan agreement to $38.5 million. We may reduce the maximum available advance amount or terminate the loan at any time.

Outstanding borrowings on the revolving credit facility bear interest at a floating rate equal to the lender’s prime interest rate plus a margin or the lender’s LIBOR rate plus a margin. The interest rate is adjusted quarterly and ranges between prime minus 0.75 percent and prime minus 1.25 percent or between the applicable LIBOR rate plus 1.75 percent and the applicable LIBOR rate plus 2.25 percent, depending on our maximum leverage ratio, as defined in the agreement. As of March 31, 2007, the prime rate margin is minus 1.00 percent and the LIBOR rate margin

~~million~~is ~~and $0~~2.600 percent. ~~million~~Interest ~~related~~is topayable ~~the ClearLab operations, respectively~~monthly. ~~The~~ ~~Company anticipates~~As ~~funding~~of ~~approximately~~March ~~$1.5~~31, ~~million~~2007, ~~for~~our ~~each~~outstanding ~~remaining~~borrowings ~~quarter~~on inthe ~~fiscal~~credit ~~2004~~facility, including ~~for~~bank ~~property~~overdrafts, ~~and~~were ~~equipment at its ClearLab operations~~$26. ~~These~~1 million ~~funds~~and ~~will~~bore ~~primarily~~interest byat ~~used for~~ the lender’s ~~expansion~~prime ofrate ~~its~~minus ~~daily~~1.00 percent ~~lens~~(7.25% ~~capacity~~at inMarch ~~response~~31, ~~to demand~~2007). The ~~Company also anticipates additional~~facility ~~capital~~requires ~~expenditures throughout~~ the ~~remainder~~quarterly payment of ~~fiscal~~an ~~2004~~unused ~~for~~credit ~~infrastructure as~~fee itwhich ~~continues~~ranges from 0.25 percent to ~~expand and improve operating facilities~~0.38 percent, ~~telecommunications systems~~depending ~~and~~on ~~management~~our ~~information~~maximum ~~systems in order to handle future U.S~~leverage ~~operations~~ratio.

~~Financing~~Outstanding ~~activities. During~~balances on the ~~two~~credit ~~quarters~~facility ~~ended~~are ~~July~~secured 3by substantially all of our U.S. assets, subsidiary ~~2004~~debt instruments, 100 percent ownership interests in all domestic subsidiaries and ~~June~~65 percent ~~28,~~ownership ~~2003,~~interests ~~net~~in ~~cash~~foreign subsidiaries ~~provided~~owned directly by ~~(used~~us. ~~in)~~The ~~financing~~loan ~~activities~~agreement ~~was~~includes various ~~approximately~~financial ~~$9.0~~covenants ~~million~~including a capital expenditure limit, a maximum leverage ratio and ~~($2~~a minimum fixed charge coverage ratio.7 ~~million)~~The loan agreement does not permit us or our subsidiaries to dissolve, ~~respectively. In~~sell, dispose or merge all of their assets or acquire all of the ~~fiscal~~assets ~~2004~~of ~~period,~~any entity without the ~~Company~~written ~~had~~consent ~~net~~of ~~borrowings~~the onU.S. ~~its~~bank, ~~credit~~unless ~~facility~~the transaction meets the definition of ~~approximately~~a ~~$17~~“Permitted Acquisition Basket,” as defined in the agreement.4 ~~million~~The ~~and~~loan ~~made~~agreement also ~~principal~~places ~~payments~~a limit on ~~debt~~the ~~obligations~~amount ~~and~~we ~~capital~~can ~~lease~~loan ~~obligations~~to ofany entity, outside the normal ~~approximately~~course ~~$8.4~~of ~~million~~business. In Additionally, the loan agreement allows us to declare or ~~fiscal~~pay ~~2003~~cash ~~period~~dividends, ~~the~~to ~~Company~~repurchase ~~had~~our ~~net~~stock ~~repayments~~or onto ~~its~~perform ~~credit~~other ~~facility~~similar ofequity ~~approximately~~transactions if such transactions would not exceed $~~1.9~~15 million in any fiscal year and ~~made~~subject ~~principal~~to ~~payments~~other onterms. ~~debt~~This ~~obligations~~agreement ~~and capital~~defines ~~lease~~several ~~obligations~~customary events of ~~approximately~~default ~~$1.5~~including ~~million. In~~any ~~both~~material ~~fiscal~~adverse ~~periods,~~change ~~these~~or ~~amounts~~any ~~were~~event that ~~offset~~occurs bywhich ~~proceeds~~may ~~from~~cause ~~the~~a ~~exercise~~material ofadverse ~~common~~change ~~stock~~in ~~options~~our or our subsidiaries’ condition.

~~The~~Other Company’s Board of Directors 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 July 3, 2004. 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. From inception of its authorized repurchase programs through July 3, 2004, the Company had repurchased 1,706,500 shares for a total cost of approximately $22.1 million. No shares were repurchased by the Company during fiscal 2003 or the first two quarters of fiscal 2004 and the Company is currently prohibited by its restated loan agreement from purchasing any additional shares until January 1, 2006. A majority of the repurchased shares were used to acquire ClearLab International and Lens 1st/Lens Express.Debt

AtAs ~~July~~of 3March 31, ~~2004~~2007, ~~the~~we ~~Company~~ had ana ~~unsecured,~~term ~~non-interest~~loan ~~bearing~~payable ~~note~~ to ~~ClearLab~~a ~~International’s~~Singapore ~~chief~~bank ~~technology officer~~ with a principal balance of SGD$2,~~313~~707,000 (USD$1,~~348~~785,000). ~~The~~that ~~note~~bears ~~payable~~interest at 6.75% and is ~~discounted~~secured atby 7%substantially all of the assets of ClearLab International. ~~Payments~~Interest payments are due inmonthly. Principal ~~equal~~payments are due in monthly installments through ~~July~~December 2007. This note also contains various financial covenants including minimums on net worth and shareholders’ funds. 1-800 CONTACTS, INC. has guaranteed this term loan.

AtAs ~~July~~of 3March 31, ~~2004~~2007, ~~the~~ ~~Company~~we also had a ~~term~~note ~~loan~~ payable to athe ~~Singapore~~former ~~bank~~parent of ClearLab International with a principal balance of SGD$86,~~110~~771,000 (USD$4,~~727~~463,000) that bears interest at 6~~.75~~% and ~~is secured~~has bya ~~substantially~~subordinated ~~all~~position ofto the ~~assets~~term ofloan ~~ClearLab~~payable ~~International~~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 ~~2003~~2008 through December ~~2007~~2009. ~~This note also contains various financial covenants including minimums on net worth and shareholders’ funds.~~ ~~As of July 3, 2004, the Company was in compliance these covenants.~~ 1-800 CONTACTS, INC. has guaranteed this ~~term loan~~note.

AtAs ~~July~~of 3March 31, ~~2004~~2007, ~~the~~ ~~Company~~we ~~also~~ had aan ~~note~~unsecured, ~~payable~~non-interest bearing note to ~~the~~ClearLab ~~former~~International’s ~~parent~~chief oftechnology ~~ClearLab International~~officer with a principal balance of SGD$6246,~~892,~~000 (USD$4162,~~017,~~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 ~~payments~~ are due ~~monthly. Principal payments are due~~ in equal monthly installments ~~from January 2008~~ through ~~December~~July ~~2009~~2007. ~~1-800 CONTACTS, INC. has guaranteed this note.~~

Cross default clauses exist such that if ~~the~~we ~~Company~~ were in default on ~~its~~our U.S. debt, ~~the Company~~we would also be in default on ~~its~~our Singapore debt. If ~~the~~we ~~Company~~ were in default on ~~its~~ our Singapore bank term loan, ~~the~~we ~~Company~~ would also be in default on ~~its~~the note ~~Payable~~ payable to the former parent of ~~IGEL~~ClearLab International and ~~its~~the ~~restated~~ loan agreement with ~~its~~the U.S. bank. As of March 31, 2007, we were in compliance with all of the restrictive covenants in the loan agreements.

The Company leases various manufacturing and other equipment from financing companies under capital lease arrangements. All of the equipment is maintained at the Singapore and United Kingdom facilities. The majority of the leases were assumed in connection with the Company’s acquisition of ClearLab International and VisionTec (ClearLab UK, Ltd.). As of July 3, 2004, the present value of future minimum lease payments was approximately USD$0.2 million with a majority of payments scheduled through fiscal 2004.

Cash flows from operating activities. For the quarters ended March 31, 2007 and April 1, 2006, net cash provided by operating activities was approximately $3.5 million and $12.8 million, respectively. In the first quarter of fiscal 2007, cash provided by operating activities was primarily from operating income adjusted for non-cash items (such as depreciation, amortization and stock compensation), increases in income tax payable as well as decreases in other current assets and inventories. These increases to cash were partially offset by a decrease in accrued liabilities and unearned revenue. In the first quarter of fiscal 2006, cash provided by operating activities was primarily from operating income adjusted for non-cash items (such as depreciation, amortization and stock compensation), increases in income tax payable, accounts payable and accrued liabilities as well as decreases in other current assets and accounts receivable.

Cash flows from investing activities. We used approximately $1.1 million and $2.8 million for investing activities in the quarters ended March 31, 2007 and April 1, 2006, respectively. Capital expenditures for infrastructure improvements for the quarters ended March 31, 2007 and April 1, 2006 were approximately $1.1 million and $2.7 million, respectively. Of these amounts, approximately $0.6 million and $2.0 million relate to purchases made at ClearLab, respectively. We anticipate additional capital expenditures in fiscal 2007 for infrastructure as we continue to expand and improve operating facilities, telecommunications systems and management information systems in order to handle future operations of our U.S. Retail operations.

Cash flows from financing activities. During the quarters ended March 31, 2007 and April 1, 2006, net cash used in financing activities was approximately $4.5 million and $11.1 million, respectively. In the first quarter of 2007, we had net repayments on our credit facility of approximately $3.8 million and made principal payments on debt obligations and capital lease obligations of approximately $0.7 million. In the first quarter of 2006, we had net repayments on our credit facility of approximately $10.7 million and made principal payments on debt obligations and capital lease obligations of approximately $0.5 million. In both the first quarter of fiscal 2007 and 2006, these amounts were partially offset by proceeds from the exercise of common stock options.

We lease various manufacturing and other equipment from financing companies under capital lease arrangements. All of the equipment is maintained at the Singapore and United Kingdom facilities. The majority of the leases were assumed in connection with our acquisitions of ClearLab International and ClearLab UK. As of March 31, 2007, the present value of future minimum lease payments was approximately $0.1 million with payments scheduled through fiscal 2009.

Contractual Obligations and Commitments

Subsequent to ~~January~~December 330, ~~2004~~2006, there have been no material changes to ~~the~~ ~~Company’s~~our contractual obligations and commitments, outside the ~~normal~~ normal course of business~~, other than the renewed loan agreement with the Company’s existing U~~.~~S. bank.~~

Critical Accounting Policies

Accounting ~~polices~~ polices that require significant judgments and estimates include revenue ~~recognition~~ recognition (including sales returns and allowances and customer rebates); realizability of inventories; realizability of deferred income tax assets; ~~accounting for business~~ ~~combinations including~~ assessment of realizability of long-lived assets; stock-based compensation; and legal and regulatory contingencies. A description of ~~the~~our ~~Company’s~~ significant accounting policies is included in the notes to the consolidated financial statements included in ~~the~~our ~~Company’s~~ Form 10-K for the fiscal year ended ~~January~~ 3December 30, ~~2004~~2006. Judgments and estimates are based on historical experience as well as relevant facts and ~~circumstances~~ circumstances known at each reporting date. ~~Actual~~ Actual results may differ from these estimates.

Sales are generally recognized when products are shipped and the customer takes ownership and assumes risk of loss, collection of the related receivable is ~~probable~~reasonably assured, the persuasive evidence of an arrangement exists and the sales price is fixed or determinable. ~~Net~~U.S. Retail net sales consist of ~~product~~ product sales less ~~provisions~~a provision for sales returns and allowances and estimated ~~customer~~ customer rebates. ~~The~~We ~~Company~~accrue ~~accrues~~ an estimated amount for unclaimed customer rebates and sales returns and allowances based on historical information, adjusted for ~~current~~ economic trends. To the extent actual rebates, returns and allowances vary from historical experience; revisions to the allowances may be required. ClearLab net sales consist of product sales less a provision for sales returns and allowances. We provide our customers with standard industry payment terms and perform ongoing credit evaluations of our customers and provide for doubtful accounts to the extent determined necessary based on historical data and current economic

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 fluctuations in market conditions and product life cycles.

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. In addition, the Company performs an impairment test related to goodwill at least annually. An impairment analysis related to long-lived tangible and definite-lived intangible assets requires the assessment of expected future undiscounted cash flows over the remaining useful life of the asset. An impairment analysis of goodwill requires the use of a fair-value based analysis. As of July 3, 2004, the Company determined that no impairment existed. All of the goodwill and a significant portion of the other long-lived assets were generated from the Company’s recent acquisitions of ClearLab International, ClearLab UK, Ltd., 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~~trends. ClearLab ~~Statements~~net sales also include license fees from our Japanese license agreement. Cash payments received from this license are recognized systematically over the periods that we earn the fees.

~~Except~~In ~~for~~assessing the ~~historical~~realizability ~~information~~of ~~contained herein~~inventories, ~~the~~we ~~matters~~make ~~discussed~~judgments inas ~~this~~to ~~Form~~future ~~10-Q~~demand ~~are~~requirements ~~forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,~~ and ~~Section~~product ~~27A~~expiration ~~of the Securities Act of 1933, as amended~~dates. ~~These~~ ~~forward-looking~~Our ~~statements~~inventory ~~involve~~requirements ~~risks~~change ~~and~~based ~~uncertainties and often depend~~ on ~~assumptions,~~ ~~data~~projected orcustomer ~~methods that may be incorrect or imprecise. The Company’s future operating results may differ materially from the results discussed in~~demand, ~~or implied by, forward-looking~~ ~~statements~~which ~~made~~changes bydue ~~the Company. Factors that may cause such differences include, but are not limited~~ to, ~~those discussed~~fluctuations ~~below and the other risks detailed~~ in ~~the~~market ~~Company’s~~conditions ~~other reports filed with the Securities~~ and ~~Exchange~~product ~~Commission. Words~~life ~~such as “believes,” “anticipates,” “expects,” “future,” “intends,” “would,” “may,” and similar expressions are intended to identify forward-looking statements~~cycles. ~~The Company undertakes no obligation to revise any of these forward-looking statements to reflect events or circumstances after the date hereof.~~

~~Factors~~We ~~that~~have significant ~~may~~long-lived tangible and intangible assets consisting primarily of ~~affect~~property, ~~future~~plant ~~results~~and ~~include~~equipment, ~~but~~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 ~~limited~~be recoverable. In addition, we perform an impairment test related to goodwill at least annually. An impairment analysis related to long-lived tangible and definite-lived intangible assets requires the assessment ~~following:~~of expected future undiscounted cash flows over the remaining useful life of the asset. An impairment analysis of goodwill requires the use of a fair-value based analysis. All of the goodwill and a significant portion of the other long-lived assets were generated from our acquisitions of ClearLab International, ClearLab UK and Lens1st/Lens Express. We recorded no impairment charges during the first quarter of fiscal 2007.

~~• The~~Deferred income ~~Company~~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 ~~encounter~~become ~~unforeseen~~necessary ~~difficulties~~to change the valuation allowance, which could affect our results of operations in ~~managing~~the ~~its~~period such determination is made. We record an income tax provision or benefit at a rate that is based on expected results for the fiscal year. If future ~~growth;~~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.

~~• A~~We record ~~significant~~liabilities ~~portion~~for oflegal and regulatory matters when the ~~Company’s~~contingency ~~sales~~is ~~may~~both probable beand ~~found~~reasonably estimable. We are involved in several legal and regulatory matters. We believe, after consultation with legal counsel, that the ultimate dispositions of these matters will not have a material impact on our financial position, liquidity or results of operations. However, there can be no assurance that we will be successful in our efforts to ~~comply~~satisfactorily ~~with~~resolve ~~state~~these ~~laws~~matters and ~~regulations~~the ~~concerning~~ultimate ~~the~~outcome ~~delivery~~could ~~and~~result ~~sale~~in ofa ~~contact~~material ~~lenses;~~negative impact on our financial position, liquidity or results of operations.

~~• Because~~We account for share-based compensation in accordance with SFAS No. 123R, which requires stock-based compensation to be measured based on the ~~Company~~fair ~~does~~value ~~not~~of ~~manufacture~~the ~~most~~award on the date of grant and recognized over the ~~contact~~period ~~lenses~~during ~~that~~which itservice ~~sells~~is required in exchange for the award. Under the fair value recognition provisions of SFAS No. 123R, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest over the ~~Company~~requisite ~~cannot~~service ~~ensure~~period of the award. We generally recognized compensation expense for restricted stock awards and, when we granted options with an exercise price below the market price on the date of grant. We estimate the value of stock option awards on the date of grant using a Black-Scholes pricing model. Calculating the fair value of share-based payment awards requires the input of highly subjective assumptions, including the expected term of the share-based payment awards and expected stock price volatility. The expected term represents the average time that ~~all~~options that vest are expected to be outstanding. The expected volatility rates are estimated based on a weighted average of the ~~contact~~historical ~~lenses~~volatilities of itour ~~sells~~common ~~meet~~stock. The ~~all~~assumptions used ~~federal~~in calculating the fair value of share-based payment awards represent our ~~regulatory~~best ~~requirements;~~estimates, but these estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use different assumptions, the stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period.

~~• It~~Effective December is31, ~~possible~~2006, ~~that~~we adopted the ~~FDA~~provisions ~~could~~of ~~consider~~the ~~certain~~SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the ~~contact~~current ~~lenses~~year’s financial statements are materially misstated. SAB 108 permits registrants to record the ~~Company~~cumulative ~~sells~~effect of initial adoption by recording the necessary “correcting” adjustments to bethe ~~misbranded;~~carrying values of

• The Company currently purchases a portion of its products from unauthorized distributors and is not an authorized distributor for some of the products that it sells;

• The Company obtains a large percentage of its inventory from a limited number of suppliers, with a single manufacturer accounting for 46 percent, 35 percent and 23 percent of the Company’s inventory purchases in fiscal 2001, 2002 and 2003, respectively. In addition, the Company’s top three suppliers accounted for 70 percent, 63 percent and 59 percent of the Company’s inventory purchased in fiscal 2001, 2002 and 2003, respectively;

• The Company may continue to incur significant legal and professional fees related to its legal matters and its efforts to proactively influence the industry on behalf of itself and consumers;

• The Company’s quarterly results are likely to vary based upon the level of sales and marketing activity in any particular quarter;

• The Company is dependent on its telephone, Internet and management information systems for the sale and distribution of contact lenses;

• The retail sale of contact lenses is highly competitive and certain of the Company’s competitors are large, national optical chains that have greater resources than the Company;

• The demand for contact lenses could be substantially reduced if alternative technologies to permanently correct vision gain in popularity;

• The Company does not have any property rights in the 1-800 CONTACTS telephone number or the Internet addresses that it uses;

• Increases in the cost of shipping, postage or credit card processing could harm the Company’s business;

~~• The~~assets and liabilities as ~~Company’s~~of ~~business~~the ~~could~~beginning beof ~~harmed~~that ifyear itwith isthe ~~required~~offsetting adjustment recorded to ~~collect~~the opening ~~state~~balance ~~sales~~of ~~tax on~~retained earnings only if material under the ~~sale~~dual method. Adoption of ~~all~~SAB ~~products;~~108 had no impact on our consolidated financial statements in the current period.

~~• The~~Effective December ~~Company~~31, ~~faces~~2006, anwe ~~inherent~~adopted ~~risk~~the provisions of ~~exposure~~Financial toAccounting ~~product~~Standards ~~liability~~Board (FASB) ~~claims~~issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax return ~~event~~positions in the financial statements as more-likely-than-not to be sustained by the taxing authority. A tax position that meets the ~~use~~more-likely-than-not criterion shall be measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. Interpretation No. 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” Upon adoption, we have adjusted the ~~products~~financial itstatements ~~manufacturers~~to orreflect ~~sells~~only ~~results~~those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any adjustment has been recorded directly to the beginning retained earnings/accumulated deficit balance in the period of adoption and reported as ~~personal~~a ~~injury;~~change in accounting principle. As a result of the implementation of FIN 48, we recognized a $60,000 decrease to our liability for income taxes payable, and a corresponding decrease to our 2007 beginning balance of accumulated deficit.

~~• The~~Effective December ~~Company~~31, ~~conducts~~2006, ~~its~~we ~~retail~~adopted ~~operations~~Emerging ~~through~~Issues Task Force (“EITF”) Issue No. 06-03 (“EITF 06-03”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” EITF 06-03 provides that the presentation of taxes assessed by a ~~single~~governmental ~~distribution~~authority ~~facility;~~that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. Adoption of EITF 06-03 did not have a material impact on our consolidated financial statements in the current period.

~~• The Company’s success is dependent, in~~Cautionary ~~part,~~Statement onConcerning ~~continued~~Forward-Looking ~~use of the Internet;~~Statements

~~• Government~~This Quarterly ~~regulation~~Report ~~and~~on ~~legal~~Form ~~uncertainties~~10-Q ~~relating~~contains toa ~~the~~number ~~Internet~~of ~~and~~statements ~~online~~about ~~commerce~~our future business ~~could~~prospects ~~negatively~~which ~~impact~~are forward-looking statements within the ~~Company’s~~meaning ~~business~~of ~~operations;~~the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all statements which are not purely historical and include, but are not necessarily limited to:

~~• Changing~~· Any statements ~~technology~~relating ~~could~~in ~~adversely~~any ~~affect~~way to the ~~operation~~planned separation of ClearLab from the ~~Company’s~~U.S. ~~website~~retail business, including but not limited to the timing of such separation or the terms upon which such separation may be accomplished;

~~• The~~· Any statements ~~Company~~relating ~~may~~in ~~not~~any beway ~~able~~ to ~~develop~~our ~~and~~ongoing ~~manufacture~~strategic areview ~~viable,~~of ~~high~~the ~~quality contact~~U.S. ~~lens for sale to consumers that meets all federal regulatory~~retail ~~requirements~~business;

~~• The~~· Any statements ~~Company~~relating ~~may~~to ~~not~~our beperception ~~able~~of tothe ~~fully~~contact ~~integrate~~lens ~~the~~market ~~operations~~and ofanticipated ~~its~~trends ~~acquisitions~~in ~~into~~that ~~its~~market in any of the countries in which we do business;

~~• Consumer~~· Any statements ~~acceptance~~relating ofto ~~the~~our ~~Company’s~~relationships ~~manufactured~~with ~~products~~our ~~may~~suppliers, ~~not~~our ~~meet~~anticipated ~~the~~ability ~~Company’s~~to ~~expectations~~procure products, or the terms under which we may procure its products;

~~• The~~· Any statements ~~Company’s~~relating ~~intellectual~~to ~~property~~sales, ~~rights~~usage, ~~may~~or betrends ~~challenged~~in the contact lens industry and market;

~~• The~~· Any statements ~~Company~~relating ~~may~~to ~~encounter~~our ~~legal~~anticipated business operations, ~~regulatory~~inventory levels, ability to handle specific call volumes, ability to fill and ~~government~~timely ~~agency~~ship ~~oversight~~orders, ~~risks~~or ~~with~~similar ~~foreign operations~~statements;

~~• The~~· Any statements ~~Company~~relating ~~may~~to ~~not~~our beanticipated ~~able~~results toof ~~establish~~operations, aincluding ~~sufficient~~but ~~network~~not oflimited ~~eye care~~to ~~practitioners~~anticipated tosales, ~~prescribe~~revenues, ~~the~~earnings, ~~products~~tax ~~manufactured~~benefits, bypayments ~~the~~due ~~Company~~pursuant to applicable license agreements, or similar matters; and

~~• The~~· Any statements ~~Company~~relating ~~may~~to ~~not~~expectations bewith ~~able~~respect to ~~adequately~~legal ~~manage~~and ~~its~~legislative ~~foreign~~initiatives ~~currency~~in 2007 ~~risk;~~and beyond.

~~• The~~Without limiting ~~Company~~the ~~may~~foregoing, ~~incur~~the ~~unforeseen~~words ~~costs~~“believes,” or“anticipates,” ~~not~~“plans,” ~~realize~~“expects,” ~~all~~“intends,” “future,” of“would,” ~~the~~“could,” ~~anticipated~~“might,” “should,” “may”, and similar expressions, ~~benefits~~including ~~from~~any ~~its~~expressions ~~relationships~~of ~~with~~our ~~Johnson~~plans, &intentions, ~~Johnson~~or ~~Vision~~goals, ~~Care~~are intended to identify forward-looking statements, ~~CIBA~~although not all forward-looking ~~Vision~~statements ~~and~~contain ~~Cole~~these words.

• The Company may be required to reduce the carrying value of its intangible assets if events and circumstances indicate the remaining balance of intangible assets may not be recoverable; and

• The Company may incur an increase in order cancellations due to the prescription verification requirements of the Fairness to Contact Lens Consumers Act.

~~Item~~There are a number of important factors that could cause actual events 3or our actual results to differ materially from those indicated by such forward-looking statements. ~~Quantitative~~ These factors include, without limitation, those set forth under the captions “Application of Critical Accounting Policies,” “Liquidity and ~~Qualitative~~Capital Resources,” “Factors Affecting Future Operating Results” and “Quantitative and Qualitative Disclosures ~~About~~about Market Risk” included this Quarterly Report on Form 10-Q. The factors discussed herein do not reflect the potential future impact of any mergers, acquisitions or dispositions. In addition, any forward-looking statements represent our estimates only as of the day this Report was first filed with the Securities and Exchange Commission and we specifically disclaim any obligation to update forward looking statements, even if our estimates change.

~~Interest~~Item ~~Rate Risk. As of July~~ 3~~, 2004, the Company was exposed to changes in interest rates relating to its renewed credit facility and other debt obligations~~. ~~The~~ ~~renewed~~Quantitative credit facility bears 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, were approximately $17.4 million as of July 3, 2004. The remainder of the Company’s interest bearing debt obligations, including capital lease obligations, is denominated in Singapore dollars and ~~British~~Qualitative ~~Pounds~~Disclosures ~~and~~about ~~bear~~Market ~~interest at a fixed rate. As of July 3, 2004, the face amounts of the outstanding borrowings on these fixed rate debt obligations were approximately $9.0 million.~~Risk

~~Foreign~~Interest ~~Currency~~ Rate Risk. ~~The~~As ~~Company faces foreign currency risks primarily as a result~~ of ~~its~~March ~~acquired~~31, ~~Singapore operations~~2007, ~~its~~we ~~recently~~were ~~acquired~~exposed ~~United~~to ~~Kingdom~~changes in ~~operations~~interest ~~and~~rates ~~the intercompany~~relating ~~balances~~to ~~between~~our ~~its~~revolving ~~U.S.~~credit facility and ~~these~~other ~~international operations~~debt obligations. The ~~functional~~revolving ~~currency of the Company’s~~credit ~~Singapore~~facility ~~operations~~bears isinterest ~~the~~at ~~Singapore~~a ~~dollar,~~variable ~~however,~~rate ~~most~~based ofon the ~~sales~~U.S. ofprime ~~the~~rate or ~~Singapore~~LIBOR. ~~operations~~Our ~~and~~outstanding ~~some~~borrowings ofon the ~~expenses~~credit ~~are~~facility, ~~denominated~~including ~~in U.S.~~bank ~~dollars. The~~overdrafts, ~~Company~~were ~~has debt and other long-term obligations of~~ approximately $1026.31 million ~~that~~as ~~are~~of ~~denominated~~March ~~in Singapore~~31, ~~dollars~~2007. ~~and~~The remainder ~~mature~~of ~~over~~our ~~the~~interest ~~next~~bearing ~~six~~debt ~~years. Fluctuations~~obligations, inincluding ~~exchange~~capital ~~rates between the~~lease ~~U.S.~~obligations, ~~dollar~~is ~~and~~denominated ~~the~~in Singapore ~~dollar~~dollars ~~could~~and ~~lead~~British topounds ~~additional~~and ~~currency exchange~~bears ~~losses~~interest orat ~~gains~~a onfixed ~~the~~rate. As ~~intercompany~~of ~~balances and transactions denominated in~~March ~~currencies~~31, ~~other~~2007, ~~than~~ the ~~functional~~face ~~currency. If~~amounts ~~the~~of ~~U.S. dollar weakens relative to~~ the ~~Singapore~~outstanding ~~dollar,~~borrowings ~~additional funds~~on ~~may be required to meet~~ these ~~obligations~~fixed ~~if the~~ rate debt ~~cannot~~obligations ~~be adequately~~were ~~serviced~~approximately ~~from~~$6.4 ~~the Singapore operations~~million. ~~From~~If ~~the~~interest ~~date~~rates ofwere ~~the~~to ~~ClearLab~~change ~~International acquisition,~~by ~~July~~a ~~24,~~full percentage ~~2002~~point, ~~through~~the ~~August~~net 6,impact ~~2004~~on ~~the~~interest ~~exchange~~expense ~~rate~~would ~~has fluctuated~~be approximately 1 $0.3 ~~percent~~million ~~(weakening~~per ~~of the U~~year.~~S. dollar).~~

~~The~~Foreign ~~functional~~Currency Risk. We face foreign currency risks primarily as a result of ~~the~~our ~~Company’s~~Singapore and United Kingdom operations and the intercompany balances, which are denominated in U.S. dollars, between the U.S. and these international operations. The functional currency of our Singapore operations is the ~~British~~Singapore ~~pound~~dollar. We have debt and other long-term obligations of approximately $6.5 million that are denominated in Singapore dollars and mature over the next three years. 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. Fluctuations in exchange rates between the U.S. dollar and the ~~British pound~~Singapore dollar could lead to additional currency exchange losses or gains on ~~any~~the intercompany balances and transactions denominated in currencies other than the functional currency. For the first quarter of fiscal 2007, we recorded approximately $0.3 million of foreign currency transaction gains on the intercompany balances between the U.S. and Singapore operations. A portion of the intercompany balances between the U.S. and Singapore operations is considered to be permanently invested and thus a corresponding portion of the first quarter of fiscal 2007 foreign currency transaction gains, not included in the amount shown above, are flowing through other comprehensive income in the equity section, rather than through other income in our statement of operations. We recorded no foreign currency transaction gains or losses on sales with external parties. From the date of the ClearLab UK International acquisition, ~~February~~July 24, ~~2004~~2002, through ~~August~~May 63, ~~2004~~2007, the exchange rate ~~has~~ has fluctuated approximately 214.35 percent (~~strengthening~~weakening of the U.S. dollar). If the Singapore dollar were to weaken against the U.S. dollar by 10 percent, we would record a $4.4 million dollar foreign currency loss on the intercompany balances that exist as of March 31, 2007.

The ~~Company~~functional ~~has~~currency of our United Kingdom ~~not~~operations ~~entered~~is ~~into~~the ~~any~~British pound. Fluctuations in exchange rates between the U.S. dollar and the British pound could lead to additional currency exchange losses or gains on intercompany balances and transactions denominated in currencies other than the functional currency. For the first quarter of fiscal 2007, we recorded an immaterial amount of foreign currency transaction ~~derivative~~gains ~~financial~~on ~~instruments~~the intercompany balances between the U.S. and United Kingdom operations; and recorded approximately $0.1 million of foreign currency ~~however~~transactions losses on sales with external parties. From the date of the ClearLab UK acquisition, February it24, ~~may~~2004, ~~choose~~through toMay do3, so2007, inthe exchange rate has fluctuated approximately 6.8 percent (weakening of the ~~future~~U.S. indollar). If anthe ~~effort~~British topound ~~manage~~were orto ~~hedge~~weaken against ~~its~~the ~~foreign~~U.S. dollar by 10 percent, we would record a $1.9 million dollar foreign currency ~~risk~~loss on the intercompany balances that exist as of March 31, 2007.

~~Item~~We ~~4. Controls~~have ~~and~~not ~~Procedures~~entered into any foreign currency derivative financial instruments; however, we may choose to do so in the future in an effort to manage or hedge our foreign currency risk.

(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 the end of the period covered by this 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.28

~~(b)~~Item ~~Changes in internal controls~~4. ~~There~~ ~~were~~Controls ~~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.Procedures

28Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”), have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate and effective to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

~~PART~~There IIwere no significant changes in our internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting subsequent to the Evaluation Date. ~~OTHER~~ As ~~INFORMATION~~a result, no corrective actions were taken.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~See~~From ~~notes~~time to ~~condensed~~time we ~~consolidated~~are involved in legal matters generally incidental to our business. It is the opinion of our management, after discussion with legal counsel, that except for legal and professional fees that we incur from time to time, the ultimate dispositions of all of these matters will not have a material impact on our financial position, liquidity or results of our operations. However, there can ~~statements~~be no assurance that we will be successful in our efforts to satisfactorily resolve these matters, and the ultimate outcome could result in a material negative impact on our financial position, liquidity or results of operations.

Item 21A. ~~Changes~~Risk ~~in Securities and Use of Proceeds~~Factors

~~None~~Other than the additional risk factor set forth below, there are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

~~Item~~Our efforts 3.and ~~Defaults~~progress ~~upon~~towards ~~Senior~~selling ~~Securities~~our ClearLab operations and intellectual property may not result in transactions on favorable terms for us, or at all.

~~None~~While we have expended significant efforts, and made progress, toward the separation of our ClearLab operations from our U.S. Retail operations, including our announcement that we have entered into a Memorandum of Understanding with Mi Gwang Contact Lens Co., Ltd. for the sale of ClearLab’s Singapore manufacturing operations, our efforts and progress may not result in transactions that are on favorable terms to us, or at all. We do not have a definitive purchase agreement executed for any of ClearLab’s assets. If we are unable to ultimately enter into transactions that sell or otherwise separate ClearLab’s assets from our U.S. Retail operations on favorable terms, we will not realize benefits from the significant amounts of time, effort and funds that we have expended, we may continue to suffer losses from ClearLab’s operations that materially affect our overall financial results and condition, and we may be required to obtain unfavorable financing for ClearLab.

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

None.

Item 3. Defaults Upon Senior Securities

None.

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

~~The annual meeting of stockholders of the Company was held on May 21, 2004~~None. ~~The stockholders approved the following matters:~~

• The election as directors of Jonathan C. Coon, Bradley T. Knight and Jason S. Subotky to serve until the annual meeting of stockholders in 2007 and until their respective successors are elected and qualified.

	Votes Cast
	For	Against
Jonathan C. Coon	10,400,856	3,835
Bradley T. Knight	10,306,056	98,635
Jason S. Subotky	10,400,856	3,835

The other directors of the Company include the following persons: (i) Thomas H. Boggs, Jr., John F. Nichols and Garth T. Vincent, who are serving until the annual meeting of stockholders in 2005; and (ii) E. Dean Butler and Stephen A. Yacktman who are serving until the annual meeting of stockholders in 2006.

• Approval of amendment and restatement of the Company’s Amended and Restated 1998 Incentive Stock Option Plan to increase the amount of shares that may be issued under the plan and to allow for the use of restricted stock grants.

Votes Cast:
For		5,452,359
Against		1,547,529
Abstained		769,950
Unvoted		3,195,450

• Ratification of appointment of KPMG LLP as independent auditors to audit the Company’s books and accounts for the fiscal year ending January 1, 2005.

Votes Cast:
For		10,618,019
Against		9,726
Abstained		183
Unvoted		—

Item 5. Other Information

~~From time to time the Company receives notices, inquiries, or other correspondence from states or other regulatory bodies charged with overseeing the sale of contact lenses~~None. 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~~30

~~(A)~~ Item 6. Exhibits

Exhibit No.		Description of Exhibit
31.1		Certification Required Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.
31.2		Certification Required Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification Required Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification Required Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(A) Exhibits

(B) Reports on Form 8-K

Exhibit No.		Description of Exhibit
31.1		Certification Required Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification Required Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification Required Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification Required Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~• Current Report on Form 8-K filed May 4, 2004, filing of Press Release Announcing Operating and Financial Results for the first quarter ended April 3, 2004.~~31

30SIGNATURES

~~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.

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 10, 2007	By:	/s/ Jonathan C. Coon
		Name:	Jonathan C. Coon
		Title:	Chief Executive Officer

	By:	/s/ Robert G. Hunter
		Name:	Robert G. Hunter
		Title:	Chief Financial Officer

	1-800 CONTACTS, INC.
Dated: August 12, 2004	By:	/s/ Jonathan C. Coon
	Name:	Jonathan C. Coon
	Title:	Chief Executive Officer
	By:	/s/ Brian W. Bethers
	Name:	Brian W. Bethers
	Title:	President and Chief Financial Officer

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