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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

_________________

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended: April 1, 2005

OR

[   ] 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: 0-11634

STAAR SURGICAL COMPANY
(Exact name of registrant as specified in its charter)

1911 Walker Avenue, Monrovia, California,   91016
(Address of principal executive offices)                      (Zip Code)

(626) 303-7902
(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. YES [X] NO [   ]

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [   ]

The registrant has 24,790,638 shares of common stock, par value $0.01 per share, issued and outstanding as of May 10, 2005.

STAAR SURGICAL COMPANY

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)

See accompanying notes to the condensed consolidated financial statements.

1

STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

2

STAAR SURGICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See accompanying notes to the condensed consolidated financial statements.

3

STAAR SURGICAL COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 1, 2005

Note 1 — Significant Accounting Policies

Organization and Description of Business

        STAAR Surgical Company (the “Company”), a Delaware corporation, was incorporated in 1982 for the purpose of developing, producing, and marketing intraocular lenses (“IOLs”) and other products for minimally invasive ophthalmic surgery. The Company has evolved to become a developer, manufacturer and global distributor of products used by ophthalmologists and other eye care professionals to improve or correct vision in patients with cataracts, refractive conditions and glaucoma. Products sold by the Company for use in restoring vision adversely affected by cataracts include its line of silicone and Collamer IOLs; the Preloaded Injector, a three-piece silicone IOL preloaded into a single-use disposable injector; the SonicWAVE™ Phacoemulsification System; STAARVISC™ II, a viscoelastic material; and Cruise Control, a disposable filter which allows for a significantly faster, cleaner phacoemulsification procedure and is compatible with all phacoemulsification equipment utilizing Venturi and peristaltic pump technologies. Products sold by the Company for use in correcting refractive conditions such as myopia (near-sightedness), hyperopia (far-sightedness) and astigmatism include the VISIAN™ ICL (“ICL”) and the VISIAN™ TICL (“TICL”). The Company’s AquaFlow™ Collagen Glaucoma Drainage Device is surgically implanted in the outer tissues of the eye to create a space that allows increased drainage of intraocular fluid thereby reducing intraocular pressure, which otherwise may lead to deterioration of vision in patients with glaucoma. The Company also sells other instruments, devices and equipment that are manufactured either by the Company or by others in the ophthalmic products industry.

        The Company’s only significant subsidiary is STAAR Surgical AG, a wholly owned subsidiary formed in Switzerland to develop, manufacture and distribute certain of the Company’s products worldwide, including the ICL and the AquaFlow device. STAAR Surgical AG is the parent of a major European sales subsidiary that distributes both the Company’s products and products from various other manufacturers.

Canon Staar Joint Venture

        In 1988, the Company entered into a joint venture with Canon Inc. and Canon Sales Co., Inc. for the principal purpose of designing, manufacturing, and selling in Japan intraocular lenses and other ophthalmic products. The joint venture will market its products worldwide through Canon, Canon Sales or STAAR or such other distributors as the Board of Directors of the joint venture may approve. The terms of any distribution arrangement will require the unanimous approval of the Board of Directors of the joint venture. Each joint venture party is entitled to appoint one member of the Board of Directors of the joint venture. Certain matters require the unanimous approval of the directors. Upon the occurrence of certain events, including the merger, sale of substantially all of the assets or change in the management of one of the parties, any of the other parties may have the right to acquire the first party’s interest in the joint venture at book-value. The Company also granted to the joint venture a perpetual exclusive license under the Licensed Technology (as defined in the license agreement) to make and sell any products in Japan, and a perpetual non-exclusive license to sell products in the rest of the world subject to certain conditions specified in the joint venture agreement.

        In 2001, the parties entered into a settlement agreement whereby (i) they reconfirmed the joint venture agreement and the license agreement, (ii) they agreed that the Company would promptly commence the transfer of the Licensed Technology to the joint venture, (iii) the Company granted the joint venture an exclusive license to make any products in China and sell such products in Japan and China (subject to the existing rights of third parties), (iv) the Company agreed to provide the joint venture with raw materials, (v) the joint venture granted Canon Sales Co., Inc. the right to distribute its products in Japan on specified terms, and (iv) the parties settled certain patent disputes.

4

STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Basis of Presentation

        The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly owned and its majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Assets and liabilities of foreign subsidiaries are translated at rates of exchange in effect at the close of the period. Revenues and expenses are translated at the weighted average of exchange rates in effect during the period. The resulting translation gains and losses are deferred and are shown as a separate component of stockholders’ equity as accumulated other comprehensive income. During the three months ended April 1, 2005 and April 2, 2004, the net foreign currency translation loss was $312,000 and $139,000, respectively. Net foreign currency transaction gain for the three months ended April 1, 2005 and April 2, 2004 was $171,000 and $130,000, respectively.

        Investment in the Company’s joint venture with Canon Staar Co., Inc. is accounted for using the equity method of accounting.

        The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The financial statements for the three months ended April 1, 2005 and April 2, 2004, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial condition and results of operations. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

        The results of operations for the three months ended April 1, 2005 and April 2, 2004 are not necessarily indicative of the results to be expected for any other interim period or the entire year.

        Each of the Company’s reporting periods ends on the Friday nearest to the quarter ending date and generally consists of 13 weeks.

New Accounting Pronouncements

        In December 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment."  This statement is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board  ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"  and its related implementation guidance.  SFAS No. 123R addresses all forms of share-based payment ("SBP") awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights.  Under SFAS No. 123R, SBP awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest.  This statement is effective for public entities as of the beginning of the next fiscal year that begins after June 15, 2005.  The Company has not quantified the potential effect of adoption of SFAS No. 123R, but believes that the adoption of this statement will result in a decrease to earnings.

        In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"), Share-Based Payment, providing guidance on stock option valuation methods, the accounting for income tax effects of share-based payment arrangements upon adoption of  SFAS No. 123R, and the disclosures in  "Management's Discussion and Analysis of Financial Condition and Results of Operations" subsequent to the adoption.

Stock-based Compensation

        The Company has adopted the disclosure-only provisions of  SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based Compensation — Transition and Disclosure."  Under these provisions, the Company continues to measure the cost of stock-based compensation issued to employees using the intrinsic value method provided by APB Opinion No. 25, while disclosing the effect the fair-value method would have on net income (loss) on a pro forma basis. Under the intrinsic value method the Company has recognized no cost for options granted under its stock option plans because all options had an exercise price equal to the market value of the underlying common stock on the date of grant.

5

STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

        Pro forma net loss and loss per share for the three months ended April 1, 2005 and April 2, 2004, had the Company accounted for stock options issued to employees and others in accordance with the fair value method of SFAS No. 123, are as follows (in thousands, except per share data):

Note 2 — Geographic and Product Data

        The Company markets and sells its products in over 40 countries and has manufacturing sites in the United States and Switzerland. Other than the United States and Germany, the Company does not conduct business in any country in which its sales in that country exceed 5% of consolidated sales. Sales are attributed to countries based on location of customers. The composition of the Company’s sales to unaffiliated customers between those in the United States, Germany, and other locations for each year, is set forth below (in thousands).

6

STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

        The Company develops, manufactures and distributes medical devices used in minimally invasive ophthalmic surgery. Substantially, all of the Company’s revenues result from the sale of the Company’s medical devices. The Company distributes its medical devices in the cataract, refractive and glaucoma segments within ophthalmology. While the Company has expanded its marketing focus beyond the cataract market to include the refractive and glaucoma markets, the cataract market remains the Company’s primary source of revenues and, therefore, the Company operates as one business segment for financial reporting purposes.

        The Company sells its products internationally, which subjects the Company to several potential risks, including fluctuating exchange rates (to the extent the Company’s transactions are not in U.S. dollars), regulation of fund transfers by foreign governments, United States and foreign export and import duties and tariffs, and political instability.

Note 3 — Inventories

        Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market and consisted of the following at April 1, 2005 and December 31, 2004 (in thousands):

Note 4 — Goodwill and Other Intangible Assets

        Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. The Company adopted SFAS No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets,” on December 29, 2001.

        Goodwill, which has an indefinite life and was previously amortized on a straight-line basis over the periods benefited, is no longer amortized to earnings but instead is subject to periodic testing for impairment. Intangible assets determined to have definite lives are amortized over their remaining useful lives. Goodwill of a reporting unit is tested for impairment on an annual basis or between annual tests if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying amount. As provided under SFAS No. 142, an annual assessment of goodwill for possible impairment was completed during fiscal year 2004 and no impairment was identified. As of April 1, 2005, the carrying value of goodwill was $7.5 million.

        The Company has intangible assets consisting of patents and licenses, with a gross book value of $11.5 million and accumulated amortization of $6.2 million as of April 1, 2005. Amortization is computed on the straight-line basis over the estimated useful lives, which are based on legal and contractual provisions, and range from 10 to 20 years. Aggregate amortization expense for patents and licenses was approximately $120,000 and $204,000 for the three months ended April 1, 2005 and April 2, 2004, respectively.

        The following table shows the estimated amortization expense for these assets for each of the five succeeding years (in thousands):

7

STAAR SURGICAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued) 

Note 5 — Loss Per Share

        The Company presents loss per share data in accordance with the provision of SFAS No. 128, "Earnings per Share" which provides for the calculation of basic and diluted earnings per share. Loss per share of common stock is computed by using the weighted average number of common shares outstanding during the period. Common stock equivalents are not included in the determination of the weighted average number of shares outstanding, as they would be antidilutive. For the three months ended April 1, 2005 and April 2, 2004, respectively, 3,237,848 and 3,484,249 ooptions to purchase shares of the Company's common stock were excluded from the computation.

Note 6 — Supply Agreement

        In December 2000, the Company entered into a minimum purchase agreement with a manufacturer for the purchase of viscoelastic solution. In addition to the minimum purchase requirement, the Company is also obligated to pay an annual regulatory maintenance fee. The agreement contains provisions to increase the minimum annual purchases in the event that the seller gains regulatory approval of the product in other markets, as requested by the Company. Purchases under the agreement during the three months ended April 1, 2005 and April 2, 2004, were approximately $160,000 and $154,000, respectively.

        As of April 1, 2005, estimated annual purchase commitments are as follows (in thousands):

Note 7 — Subsequent Event

        On April 4, 2005, the Company completed a private placement of 4,100,000 shares of its Common Stock at a price of $3.50 per share, resulting in net proceeds of $13.5 million. The proceeds will be used to fund the Company’s working capital requirements.

STAAR SURGICAL COMPANY AND SUBSIDIARIES

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The matters addressed in this Item 2 that are not historical information constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and the Company can give no assurances that its expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond the control of the Company. These factors include, without limitation, those described below under the heading “Factors That May Affect Future Results of Operations.” The Company undertakes no obligation to update these forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect actual outcomes.

        The following discussion should be read in conjunction with the Company’s financial statements and the related notes provided under "Item 1— Financial Statements" above.

Overview

        STAAR Surgical Company develops, manufactures and distributes worldwide visual implants and other innovative ophthalmic products to improve or correct the vision of patients with cataracts, refractive conditions, and glaucoma. Originally incorporated in California in 1982, STAAR Surgical Company reincorporated in Delaware in 1986. Unless the context indicates otherwise “we,” “us,” the “Company,” and “STAAR” refer to STAAR Surgical Company and its consolidated subsidiaries.

        History

9

  STAAR SURGICAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

        Principal Products

        Cataract Surgery. The production and sale of IOLs for use in cataract surgery remains our core business. Our products for cataract surgery include the following:

        Sales of cataract surgery products accounted for approximately 89% of our total revenues for the quarter ended April 1, 2005 and 91% for the quarter ended April 2, 2004.

        Refractive Surgery. We have used our unique biocompatible Collamer material to develop and manufacture lenses to treat refractive disorders such as myopia (near-sightedness), hyperopia (far-sightedness) and astigmatism. These include the VISIAN™ ICL, or ICL®, and the Toric VISIAN™ TICL, or TICL®. Lenses of this type are generically called “phakic IOLs” or “phakic implants” because they work along with the patient’s natural lens, or phakos, rather than replacing it.

         The ICL and TICL have not yet been approved for use in the United States. The ICL is approved for use in the European Union and in Korea and Canada. The TICL completed enrollment in clinical trials in the United States in early 2005, and is approved for use in the European Union.

        Glaucoma Surgery. We have developed the AquaFlow™ Collagen Glaucoma Drainage Device, also referred to as the AquaFlow Device, as an alternative to current methods of treating open angle glaucoma. The AquaFlow Device is implanted in the sclera (the white of the eye), using a minimally invasive procedure, for the purpose of reducing intraocular pressure.

        Significant Factors Affecting Our Business and Recent Highlights

        STAAR's current strategy focuses on the following three principal goals:

       These three goals are interrelated: FDA compliance issues must be resolved before STAAR can introduce the ICL in the U.S., and to secure the reputation of our established cataract products. STAAR’s international business remains profitable, and STAAR has been successful in introducing new products like the ICL, TICL and the Preloaded Injector outside the U.S. Despite the importance of STAAR’s international business, STAAR is unlikely to achieve profitability on a consolidated basis without improved U.S. performance. In addition, STAAR management believes that the steady but slow growth of the ICL and TICL in international markets will accelerate if these products are introduced and gain acceptance in the U.S.

        10

STAAR SURGICAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) 

        FDA Compliance Issues      

        The Company received a Warning Letter issued by the FDA, dated December 22, 2003, which outlined deficiencies related to the manufacturing and quality assurance systems of its Monrovia, California facility.   As a follow-up to the Warning Letter, on September 23, 2004 the FDA completed a re-audit of the Company’s Monrovia, California manufacturing facility. At the conclusion of the audit, the FDA issued a form “FDA 483 Inspectional Observations,” containing 36 observations (the "483 Observations) that the FDA identified as deviating from FDA requirements in the areas of production and process controls, corrective and preventative action, quality system requirements, statistical techniques, complaint handling system, medical device reporting, design controls, acceptance criteria, and document controls and records.

        In response to these FDA actions, beginning in 2004, the Company has implemented a number of systemic changes intended to produce permanent improvements.  We separated our research and development function from our regulatory and compliance function to strengthen each of these areas, and hired Tom Paul, PhD, as Vice President, Research and Development and James Farnworth as Vice President, Regulatory and Quality Assurance.  The Company increased staffing and designated specific personnel to perform regulatory compliance, quality control, quality assurance and document control.  The resources for these efforts were initially provided by STAAR's 2003 private sale of Common Stock, the proceeds of which were originally intended to fund the launching and marketing of the ICL.

        The Company also engaged the services of Quintiles Consulting and King & Spalding, LLP as consultants to address the concerns identified by the FDA.  In addition to the global review provided by these consultants, the Company has engaged consultants qualified to advise in specific areas such as microbiology, environmental controls, complaints and medical device reports.

        The Company delivered its response to the 483 Observations to the FDA on November 5, 2004.  The Company identified six principal areas requiring long-term corrective actions and committed to taking all necessary actions.  Previously, on June 17, 2004, the FDA completed an audit of the Company's Nidau, Switzerland manufacturing facility.  The FDA did not observe any violations of quality system regulations during this audit.

        On January 27, 2005, STAAR and its representatives met with the FDA to update them on the corrective actions taken by STAAR in response to the 483 Observations.   During the meeting, the FDA gave no indication of the status of their review of the response or the nature or timing of future communications to the Company, or whether the FDA accepted the Company's identification of the six principal areas where long-term corrective action was necessary.  However, after the meeting the FDA confirmed with the Company’s regulatory counsel that seven of the original 36 observations, which concerned the stability of the Collamer material, “have been addressed to the FDA’s satisfaction.”

        The Company believes that it has completed  the necessary corrective actions on the six areas of the 483 Observations where long-term corrective action was required.  STAAR expects the FDA will conduct a re-audit of the manufacturing and quality assurance systems at its Monrovia facility in the near future, which would likely include an evaluation of STAAR’s corrective actions.  STAAR does not know when this re-audit will occur, and there can be no assurance that the FDA will find that STAAR has satisfactorily addressed the matters covered in the FDA’s observations.  There is also no assurance that the FDA will not make new observations in its re-audit.

        Until the FDA is satisfied with the adequacy of the Company’s corrective actions, it is unlikely to approve STAAR’s marketing of new products in the U.S.  The FDA may also take further actions which could include seizure of the Company’s products, injunction of the Monrovia facility to compel compliance (which may include suspension of production operations and/or recall of products), or other actions.   Such actions could have a material adverse effect on the Company’s established lines of business, results of operations and liquidity.

        The Company cannot predict whether the FDA will conclude that the Company’s corrective actions to date or those included in its response to the 483 Observations satisfactorily resolve its concerns. Nor can the Company predict the likelihood, nature of, or timing of any additional action by the FDA or the impact of any other FDA action on the Company’s established lines of business, results of operations or liquidity, or the approval of the ICL for the United States market.

         FDA Approval of the ICL and TICL         

         On October 3, 2003, the FDA Ophthalmic Devices Panel recommended that, with certain conditions, the FDA approve the ICL for use in correcting myopia in the range of -3 to -15 diopters and reducing myopia in the range of -15 to -20 diopters.   Based on those recommendations, U.S. approval of the ICL appeared likely in late 2003.  However, the FDA proceedings described above have delayed that approval.  STAAR has continued to devote a significant amount of its resources to developing and introducing the ICL.

        STAAR completed enrollment in clinical trials of the TICL in the U.S. in early 2005.

        Efforts to Reverse Decline in U.S. Cataract Business; Shifting R&D Focus.    

         Because of its significant investment in ICL technology, STAAR had limited resources for further developing its mature and well-accepted IOL products for cataract treatment. Nevertheless, in the fourth quarter of 2003, the Company introduced the first preloaded injector system which was developed by its joint venture company in Japan, Canon Staar. Management believes, however, that during the long process of developing and seeking approval for the ICL, STAAR overall failed to match some of its competitors’ improvements to IOL technology and standard lens delivery systems, resulting in a loss of U.S. market share.

         11

STAAR SURGICAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) 

          When approval of the ICL began to appear likely in late 2003, STAAR shifted the focus of its research and development to making STAAR’s IOL delivery systems more competitive. In 2004, the FDA's warning Letter and 483 Observations accelerated this shift by underscoring the need to invest in advancing the Company's IOL technology, in particular improving lens delivery systems. While some research and development expense in recent periods is directly attributable to the response to the FDA’s Warning Letter and 483 Observations, the bulk of the expense reflects a long-term commitment to invest in expanded research and development aimed at refining and improving our established product lines in addition to developing new products and materials.

        As described below, the initiative to improve IOL delivery technology resulted in progress towards the completion of an improved one-piece Collamer IOL injector, continuous improvement efforts to cartridge injector components for all lenses and a redesigned three-piece Collamer IOL injector. The continuous effort to improve cartridges resulted in intermittent supply problems, particularly during 2004.

       We decided to upgrade our three-piece Collamer lens design to coincide with the introduction of the first dedicated injector for this lens.   This decision and the need to revise our quality systems, have delayed the planned introduction of the lens.  We expect to introduce the three-piece Collamer Lens in the second fiscal quarter of 2005.

       STAAR’s executive management was completely replaced commencing in 2001. The new management team assumed control of a company with a long record of innovation in ophthalmology, but one that had failing financial results and was expending cash at a significant rate. STAAR was also embroiled in several legal actions which affected our cash reserves. The new management implemented significant restructuring and other cost-cutting measures in 2001 to conserve our cash resources. Despite these cutbacks, STAAR has continued to devote a significant amount of its resources to developing and introducing the ICL.

        Contraction of Silicone IOL Market. Our market share for silicone IOLs has steadily decreased over the last several years, as many surgeons now choose lenses made of acrylic material rather than silicone for their patients. Management believes that Collamer lens material will ultimately be competitive with acrylic, but to date sales of Collamer IOLs have only partially offset declining sales of silicone IOLs.

        Decline in U.S. Sales of IOLs. During the quarter ended April 1, 2005, decreasing sales of silicone IOLs were further intensified by the negative perception in the marketplace caused by the Warning Letters and recalls described below, resulting in a 5.4% decline in U.S. silicone IOL sales compared to the quarter ended April 2, 2004. The market’s reaction to the compliance issues, along with an interruption in the supply of cartridges, also resulted in a decline in sales of Collamer IOLs. In contrast to recent periods in which improving sales of Collamer IOLs partially offset declining sales of silicone IOLs, sales of Collamer IOLs declined 19.5% for the quarter ended April 1, 2005 compared to the quarter ended April 2, 2004, worsening overall results for the U.S. cataract business and resulting in an overall decline of  10.1% in U.S. sales for the quarter ended April 1, 2005 compared to the quarter ended April 2, 2004.

        Growth in International Sales of VISIAN ICLs and Preloaded Silicone IOLs. The decline in the U.S. cataract business during the first quarter of 2005 was offset in part by a 30.4% increase in international sales of the VISIAN ICL and TICL. In addition, our preloaded silicone lens injector system, newly launched in international markets, experienced strong sales. This growth in the business contributed to an increase in international sales of 8.3% for the quarter ended April 1, 2005 compared to the quarter ended April 2, 2004.

        Foreign Currency Fluctuations. Our products are sold in more than 40 countries. For the quarter ended April 1, 2005, sales from international operations were 63.6% of total sales. The results of operations and the financial position of certain of our offshore operations are reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk. For the quarter ended April 1, 2005, currency exchange rates had a favorable impact on product sales of approximately $312,000, and an adverse impact on our marketing and selling expenses of approximately $97,000.

        12 

STAAR SURGICAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) 

          Product Recalls. During 2004, we initiated several voluntary recalls of STAAR manufactured product including 33 lots of IOL cartridges, three lots of injectors, and 529 lenses. In an action considered a recall, but with no requirement for product to be returned to us, we issued letters to healthcare professionals advising them of the potential for a change in manifest refraction over time in rare cases involving the single-piece Collamer IOL. In 2005, we recalled one lot of Phaco tubing, manufactured by a third party, due to incorrect labeling.  While the direct costs associated with recalls have not been material, we believe recalls have harmed our reputation and adversely affected our revenues from product sales, although the impact cannot be quantified.

        Gross Profit. Our gross profit margin decreased to 47.2% for the quarter ended April 1, 2005 from 53.9% in the quarter ended April 2, 2004 and from 50.6% for fiscal 2004. Among the factors contributing to the decline in our gross profit margin were higher unit costs due to process changes and reduced volumes, and a shift in geographical and product mix.  Gross profit was not significantly impacted by changes in average selling prices.

        Research and Development.  We spent 9.4% of our revenue on research and development (which includes regulatory and quality assurance expenses) for the quarter ended April 1, 2005, and we expect to spend approximately 10% of our revenue on an annual basis in the future.

        Private Placement.  Due to the issues raised in the FDA’s Warning Letters and the delay in the FDA approval of the ICL, we sought additional cash to invest in research and development, regulatory and compliance, and manufacturing engineering and to support other operating activities. This was accomplished through the private placement of 4,100,000 shares of our Common Stock on April 4, 2005, which generated net proceeds of $13.5 million and 2,000,000 shares of our Common Stock on June 10, 2004 which generated net proceeds of $11.6 million.

        Cash Flow.  During the three months ended April 1, 2005, we used $2.6 million in cash for operating activities, and $1.1 million in payment of our notes payable, ending the first quarter of fiscal 2005 with $5.3 million in cash and cash equivalents and short-term investments compared to $9.3 million in cash and cash equivalents at the end of fiscal 2004. During the fourth quarter of 2004, we took steps to reduce operating expenses by reducing our reliance on outside consultants. This reduction in spending is expected to result in savings of approximately $1.0 million annually. In early February 2005, we implemented additional cost reduction strategies, including the reduction in size of our direct sales force, which are expected to result in another $1.0 million in annualized cost savings. We will continue to pursue other cost savings opportunities with the goal of realizing a total of $3.0 million in annual cost savings. We did not realize significant benefits from the cost reductions in the first quarter of 2005 and while the benefit of the cost reductions should be fully realized in the second quarter, a continued decline in U.S. sales could offset some of the savings for future periods. The Company expects operating losses and negative cash flows to continue until such time as the issues presented in the FDA Warning Letter dated December 22, 2003 and the 483 Observations are resolved and the ICL is approved for sale in the United States.

        Retention of Morgan Stanley.   Beginning in  December 2004, we have engaged Morgan Stanley to assist our Board of Directors in a review of the strategic and financial options available to us.

      Litigation.    During 2004, multiple class action lawsuits, which were subsequently consolidated, were filed against the Company and its Chief Executive Officer on behalf of all persons who acquired the Company’s securities during various periods between April 3, 2003 and September 28, 2004. See “Part II - Item 1. Legal Proceedings.”

       13

STAAR SURGICAL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Results of Operations

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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Sales

        Product sales for the first quarter ended April 1, 2005 increased to $13.7 million compared to the first quarter ended April 2, 2004 when they were $13.6 million. This $0.1 million or 0.8% increase in product sales was primarily due to the favorable impact of changes in currency exchange rates of approximately $300,000. Excluding the impact of exchange, product sales would have been $13.4 million or $200,000 below that of the first quarter of 2004. The primary reason for this decrease in product sales was a decrease in sales of the Company’s Collamer IOL and single and three-piece silicone IOLs due to a lack of competitiveness of the lens delivery system and believed contraction of this market segment, partially offset by increased sales of ICLs and preloaded injection systems in international markets.

Gross Profit Margin

        Gross profit margin was 47.2% for the quarter ended April 1, 2005 compared with 53.9% for the quarter ended April 2, 2004. The primary reason for the decrease in gross profit margin was due to higher unit costs as a result of manufacturing process changes and reduced volume, and a shift in geographic and product mix.

General and Administrative

        General and administrative expense for the quarter ended April 1, 2005 increased $281,000 or 13.6% over the quarter ended April 2, 2004. The increase is due to increased legal and professional fees, travel expenses, and insurance premiums.

Marketing and Selling

        Marketing and selling expense for the quarter ended April 1, 2005 decreased $84,000 or 1.7% over the quarter ended April 2, 2004, principally as a result of cost savings measures that were taken by the Company to improve cash flows. Decreased costs in the U.S. were partially offset by the unfavorable impact of exchange rates in international markets.  

Liquidity and Capital Resources

        Cash and cash equivalents and short-term investments at April 1, 2005 decreased by approximately $4.0 million relative to December 31, 2004.  During the first quarter of 2005, the Company used $2.6 million in cash from operating activities, of which $0.9 million was used for payments on accounts payable, and used $1.1 million in cash from financing activities for payments on the Company's Swiss credit facility.

        Accounts receivable at April 1, 2005 increased $168,000 relative to December 31, 2004. The increase in accounts receivable relates primarily to increased sales and the impact of foreign exchange. Day’s sales outstanding (DSO) were 42 days at April 1, 2005 compared to 41 days at December 31, 2004. The Company expects to maintain DSO within a range of 40 to 45 days during the course of the 2005 fiscal year.

        Inventories at April 1, 2005 decreased $625,000 relative to December 31, 2004 due to a decrease in inventory of silicone and Collamer IOLs and due to $127,000 in phacoemulsification equipment transfers to fixed assets to be used as loaner equipment and for demonstration purposes.

        Subsidiaries of the Company have foreign credit facilities with different banks to support operations in Switzerland and Germany.

        The Swiss credit agreement, as amended on August 2, 2004, provides for borrowings of up to 3.75 million Swiss Francs “CHF” (approximately $3.1 million based on the rate of exchange on April 1, 2005), and permits either fixed-term or current advances. The interest rate on current advances is 6.0% per annum at both April 1, 2005 and December 31, 2004, plus a commission rate of 0.25% payable quarterly. There were no current advances outstanding at April 1, 2005. The base interest rate for fixed-term advances follows Euromarket conditions for loans of a corresponding term and currency plus an individual margin (4.5% at April 1, 2005 and December 31, 2004, respectively). Borrowings outstanding under the note at April 1, 2005 and December 31, 2004, respectively,  were CHF 2.2 million (approximately $1.8 million based on the rate of exchange at April 1, 2005) and CHF 3.4 million (approximately $3.0 million based on the rate of exchange on December 31, 2004). The credit facility is secured by a general assignment of claims and includes positive and negative covenants which, among other things, require the maintenance of a minimum level of equity of at least $12.0 million and prevents the Swiss subsidiary from entering into other secured obligations or guaranteeing the obligations of others. The agreement also prohibits the sale or transfer of patents or licenses without the prior consent of the lender and the terms of intercompany receivables may not exceed 90 days.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

       The Swiss credit facility is divided into two parts: Part A provides for borrowings of up to CHF 3.0 million ($2.5 million based on the exchange rate on April 1, 2005) and does not have a termination date; Part B presently provides for borrowings of up to CHF 750,000 ($627,000 million based on the exchange rate on April 1, 2005). The loan amount under Part B of the agreement reduces by CHF 250,000 ($209,000 based on the exchange rate on April 1, 2005) semi-annually.

        The German credit agreement, entered into during fiscal year 2003, provides for borrowings of up to 210,000 EUR ($272,000 at the rate of exchange on April 1, 2005), at a rate of 8.5% per annum and renews automatically each November. The agreement prohibits our German subsidiary from paying dividends and is personally guaranteed by the president of the subsidiary. There were no borrowings outstanding as of April 1, 2005 and December 31, 2004.

        The Company was in compliance with the covenants of these credit facilities as of April 1, 2005.

        As of April 1, 2005, the Company had a current ratio of 2.5:1, net working capital of $17.1 million and net equity of $35.4 million compared to December 31, 2004 when the Company’s current ratio was 2.4:1, its net working capital was $19.1 million, and its net equity was $37.8 million.

        Due to a continued decline in U.S. sales, lower gross profit, and increased operating expenses the Company sustained significant losses and negative cash flows from operations for the year ended December 31, 2004. In order to fund its current operations including its research and development and regulatory and compliance efforts, the Company has relied on cash provided by private placements of its Common Stock, which generated net proceeds of $13.5 million on April 4, 2005 and $11.6 million on June 10, 2004. The Company believes that as a result of these financings, it currently has sufficient cash to meet its funding requirements over the next year. However, the Company expects operating losses and negative cash flows to continue until such time as the issues presented in the FDA Warning Letter dated December 22, 2003 and the 483 Observations are resolved and the ICL is approved for sale in the U.S. To reduce operating losses and negative cash flows for the year ended December 30, 2005, the Company expects to take the following actions: (1) continue to aggressively address the issues presented in the FDA Warning Letter of December 22, 2003 and the 483 Observations; (2) work closely with the independent sales force and ophthalmic community to reverse the negative perceptions and sales trends of the Company’s existing lines of business; (3) further reduce discretionary spending; and (4) explore other strategic and financial options. However, there can be no assurance that the Company will be successful in executing its strategies.

         The Company’s liquidity requirements arise from the funding of its working capital needs, primarily inventory, work-in-process and accounts receivable. The Company’s primary sources for working capital and capital expenditures are cash flow from operations, proceeds from the private placement of Common Stock, proceeds from option exercises, debt repayments by former officers, and borrowings under the Company’s foreign bank credit facilities. Any withdrawal of support from its banks could have serious consequences on the Company’s liquidity. The Company’s liquidity is dependent, in part, on customers paying within credit terms, and any extended delays in payments or changes in credit terms given to major customers may have an impact on the Company’s cash flow. In addition, any abnormal product returns or pricing adjustments may also affect the Company’s short-term funding.

        The business of the Company is subject to numerous risks and uncertainties that are beyond its control, including, but not limited to, those set forth above and in the other reports filed by the Company with the Securities and Exchange Commission. Such risks and uncertainties could have a material adverse effect on the Company’s business, financial condition, operating results and cash flows. See “Risk Factors.”

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Critical Accounting Policies

        The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, inventory reserves and income taxes, among others. Our estimates are based upon historical experiences, market trends and financial forecasts and projections, and upon various other assumptions that management believes to be reasonable under the circumstances and at that certain point in time. Actual results may differ, significantly at times, from these estimates under different assumptions or conditions.

        The Company believes the following represent its critical accounting policies.      

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Risk Factors

        Our short and long-term success is subject to many factors that are beyond our control. Stockholders and prospective stockholders in the Company should consider carefully the following risk factors, in addition to other information contained in this report. This Quarterly Report on Form l0-Q contains forward-looking statements, which are subject to a variety of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below.

Risks Related to Our Business

        We have a history of losses and anticipate future losses.

        We have reported losses in each of the last three fiscal years and have an accumulated deficit of $62.8 million as of April 1, 2005. There can be no assurance that we will report net income in any future period.

      We have only limited working capital.

        Our current sources of working capital are sufficient to satisfy our anticipated working capital requirements for fiscal 2005.  However, the issues resulting from the Warning Letter of December 22, 2003 and the 483 Observations raise uncertainties about the sufficiency of our working capital for future years and we may have to consider alternative sources of funding.  There can be no assurance as to the availability of such funding or the terms upon which it might be available.

      We have limited access to credit and could default of the terms of our loan agreements.

        As of April 1, 2005, we have outstanding balances on the credit facility of a European subsidiary of approximately $1.8 million, based on exchange rates on that date. If our losses continue, we risk defaulting on the terms of our credit facility, particularly as it relates to the maintenance of minimum levels of equity and the payment of intercompany receivables.

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      We have only limited access to financing.

        Because of our history of losses, there is substantial doubt about our ability to obtain adequate financing on satisfactory terms or at all. Any such financing may involve substantial dilution to existing shareholders.

      We have received 483 Inspectional Observations and Warning Letters from the FDA, which until resolved to the satisfaction of the
      FDA will continue to delay approval of the ICL and could limit our existing business in the United States.

        On December 29, 2003, we received a Warning Letter issued by the FDA. A copy of the Warning Letter is attached as Exhibit 99.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2004.

        We received a second Warning Letter from the FDA dated April 26, 2004, which outlined deficiencies noted in an audit by the FDA in December 2003.  We provided the FDA with our planned corrective actions to the issues raised, and in a letter dated July 1, 2004, the FDA responded that they found the corrective and preventative action plans described in our response as "adequate."

        On September 23, 2004, the FDA completed a re-audit of our Monrovia, California manufacturing facility. At the conclusion of the audit, the FDA issued a form “FDA 483 Inspectional Observations” described more fully in our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2004.

         The Warning Letters and 483 Observations have adversely affected our reputation in the ophthalmic industry and our product sales. Until the FDA is satisfied with our response, it is unlikely to grant us approval to market the ICL and the TICL in the United States and may place restrictions on our domestic lines of business.  See “Overview––Significant Factors Affecting Our Business and Recent Highlights ––FDA Compliance Issues.”

        Our success depends on the ICL, which has not been approved for use in the United States.

        We have devoted significant resources and management attention to the development and introduction of our ICL and TICL. Our management believes that the future success of STAAR depends on the approval of the ICL for sale in the United States by the FDA. The ICL is already approved for use in the European Union and Canada and in parts of Asia. The TICL is approved for use in the European Union. In October 2003, the FDA Ophthalmic Devices Panel recommended that the FDA approve, with conditions, specified uses of the ICL. The FDA has not yet acted on this recommendation, and it could decide to reject the Ophthalmic Devices Panel recommendations. Until the FDA is satisfied with our response to its Warning Letter dated December 22, 2003 and its 483 Observations issued on September 23, 2004, it is unlikely to grant us approval to market the ICL and the TICL in the United States. If the FDA does not grant approval of the ICL, or significantly delays its approval, whether because of the issues contained in the Warning Letter, the 483 Observations or otherwise, our prospects for success will be severely diminished.

      Our future success depends on the successful marketing of the ICL in the United States market.

        Even if it is approved by the FDA for sale in the United States, the ICL will not reach its full sales potential unless we successfully plan and execute its launch and marketing in the United States. This will present new challenges to our sales and marketing staff and to our independent manufacturers’ representatives. In countries where the ICL has been approved to date, our sales have grown steadily, but slowly. In the United States in particular, patients who might benefit from the ICL have already been exposed to a great deal of advertising and publicity about laser refractive surgery, but have little if any awareness of the ICL. As a result, we expect to make extensive use of advertising and promotion targeted to potential patients through providers, and to carefully manage the introduction of the ICL. We do not have significant resources and we cannot predict whether the particular marketing, advertising and promotion strategies we pursue will be as successful as we intend. If we do not successfully market the ICL in the United States, we will not achieve our planned profitability and growth.

      Our core domestic business has suffered declining sales, which sales of new products have only partially offset.

        STAAR pioneered the foldable IOL for use in cataract surgery, and the foldable silicone IOL remains our largest source of revenue. Since we introduced the product, however, competitors have introduced IOLs employing a variety of designs and materials. Over the years these products have gradually taken a larger share of the IOL market, while the market share for STAAR IOLs has decreased. In particular, many surgeons now choose lenses made of acrylic material rather than silicone for their typical patients. In an effort to maintain our competitive position we have introduced IOLs made of a biocompatible lens material, Collamer, and more recently a three-piece silicone IOL preloaded into a single-use disposable injector which is sold internationally.  Sales of these new products, however, have only partially offset declining sales of our silicone IOLs.

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      We depend on independent manufacturers’ representatives.

        In an effort to manage costs and bring our products to a wider market, we have entered into long-term agreements with certain independent regional manufacturers’ representatives, who introduce our products to eye surgeons and provide the training needed to begin using some of our products. Under our agreements with these representatives, each receives a commission on all of our sales within a specified region, including sales on products we sell into their territories without their assistance. Because they are independent contractors, we have a limited ability to manage these representatives or their employees. In addition, a representative may represent manufacturers other than STAAR, although not in competing products. We have been relying on the independent representatives to introduce our new products like Collamer IOLs, Toric IOLs and the AquaFlow Device, and we will rely on them, in part, to help introduce the ICL if it is approved. If our independent manufacturers’ representatives do not devote sufficient resources to marketing our products, or if they lack the skills or resources to market our new products, our new products will fail to reach their full sales potential and sales of our established products could decline.

      Product recalls have been costly and may be so in the future.

        Medical devices must be manufactured to the highest standards and tolerances, and often incorporate newly developed technology. Despite all efforts to achieve the highest level of quality control and advance testing, from time to time defects or technical flaws in our products may not come to light until after the products are sold or consigned. In those circumstances, we have previously made voluntary recalls of our products. During 2004, we initiated several voluntary recalls of STAAR manufactured product including 33 lots of IOL cartridges, three lots of injectors, and 529 lenses, and in February 2004, in an action considered a recall but with no requirement for product to be returned to us, we issued a letter to healthcare professionals advising them of the potential for a change in manifest refraction over time in rare cases involving the single-piece Collamer IOL. In 2005, we recalled one lot of Phaco tubing, manufactured by a third party, due to incorrect labeling.  Similar recalls could take place again. Courts or regulators can also impose mandatory recalls on us, even if we believe our products are safe and effective. Recalls can result in lost sales of the recalled products themselves, and can result in further lost sales while replacement products are manufactured, especially if the replacements must be redesigned. If recalled products have already been implanted, we may bear some or all of the cost of corrective surgery. Recalls may also damage our professional reputation and the reputation of our products. The inconvenience caused by recalls and related interruptions in supply, and the damage to our reputation, could cause some professionals to discontinue using our products.

         We could experience losses due to product liability claims.

        We have in the past been, and continue to be, subject to product liability claims. As part of our risk management policy, we have obtained third-party product liability insurance coverage. Product liability claims against us may exceed the coverage limits of our insurance policies or cause us to record a self-insured loss. A product liability claim in excess of applicable insurance could have a material adverse effect on our business, financial condition and results of operations. Even if any product liability loss is covered by an insurance policy, these policies have retentions or deductibles that provide that we will not receive insurance proceeds until the losses incurred exceed the amount of those retentions or deductibles. To the extent that any losses are below these retentions or deductibles, we will be responsible for paying these losses. The payment of retentions or deductibles for a significant amount of claims could have a material adverse effect on our business, financial condition, and results of operations.

        Any product liability claim would divert managerial and financial resources and could harm our reputation with customers. We cannot assure you that we will not have product liability claims in the future or that such claims would not have a material adverse effect on our business.

      We compete with much larger companies.

        Our competitors, including Alcon, Advanced Medical Optics, and Bausch & Lomb have much greater financial resources than we do and some of them have large international markets for a full suite of ophthalmic products. Their greater resources for research, development and marketing, and their greater capacity to offer comprehensive products and equipment to providers, make it difficult for us to compete. We have lost significant market share to some of our competitors.

      Most of our products have single-site manufacturing approvals, exposing us to risks of business interruption.

        We manufacture all of our products either at our facilities in California or at our facility in Switzerland. Most of our products are approved for manufacturing only at one of these sites. Before we can use a second manufacturing site for an implantable device we must obtain the approval of regulatory authorities. Because this process is expensive we have generally not sought approvals needed to manufacture at an additional site. If a natural disaster, fire, or other serious business interruption struck one of our manufacturing facilities, it could take a significant amount of time to validate a second site and replace lost product. We could lose customers to competitors, thereby reducing sales, profitability and market share.

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      The global nature of our business may result in fluctuations and declines in our sales and profits.

        Our products are sold in more than 40 countries. Sales from international operations make up a significant portion of our total sales. For the quarter ended April 1, 2005 sales from international operations were 63.6% of total sales. The results of operations and the financial position of certain of our offshore operations are reported in the relevant local currencies and then translated into United States dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to translation risk. In addition, we are exposed to transaction risk because some of our expenses are incurred in a different currency from the currency in which our revenues are received. Our most significant currency exposures are to the Euro, the Swiss Franc, and the Australian dollar. The exchange rates between these and other local currencies and the United States dollar may fluctuate substantially. We have not attempted to offset our exposure to these risks by investing in derivatives or engaging in other hedging transactions. Fluctuations in the value of the United States dollar against other currencies have not had a material adverse effect on our operating margins and profitability in the past.

        Economic, social and political conditions, laws, practices and local customs vary widely among the countries in which we sell our products. Our operations outside of the United States are subject to a number of risks and potential costs, including lower profit margins, less stringent protection of intellectual property and economic, political and social uncertainty in some countries, especially in emerging markets. Our continued success as a global company depends, in part, on our ability to develop and implement policies and strategies that are effective in anticipating and managing these and other risks in the countries where we do business. These and other risks may have a material adverse effect on our operations in any particular country and on our business as a whole. We price some of our products in U.S. dollars, and as a result changes in exchange rates can make our products more expensive in some offshore markets and reduce our revenues. Inflation in emerging markets also makes our products more expensive there and increases the credit risks to which we are exposed.

      We obtain some of the components of our products from a single source, and an interruption in the supply of those components could
      reduce our revenue.

        We obtain some of the components for our products from a single source. For example, only one supplier produces our viscoelastic product. Although we believe we could find alternate supplies for any of these components, the loss or interruption of any of these suppliers could increase costs, reducing our revenue and profitability, or harm our customer relations by delaying product deliveries.

      Our activities involve hazardous materials and emissions and may subject us to environmental liability.

        Our manufacturing, research and development practices involve the controlled use of hazardous materials. We are subject to federal, state and local laws and regulations in the various jurisdictions in which we have operations governing the use, manufacturing, storage, handling and disposal of these materials and certain waste products. Although we believe that our safety and environmental procedures for handling and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of accidental contamination or injury from these materials. Remedial environmental actions could require us to incur substantial unexpected costs, which would materially and adversely affect our results of operations. If we were involved in a major environmental accident or found to be in substantial non-compliance with applicable environmental laws, we could be held liable for damages or penalized with fines.

         We risk losses through litigation.

        Since September 1, 2004, multiple class action lawsuits have been filed in the United States District Courts for the Central District of California and the District of New Mexico against the Company and our Chief Executive Officer on behalf of all persons who acquired our securities during various periods between April 3, 2003 and September 28, 2004. On December 15, 2004, the Court ordered consolidation of the complaints that had been filed in the United States District Court for the Central District of California and directed that the plaintiffs file a consolidated complaint as soon as practicable. The New Mexico action was voluntarily dismissed on January 28, 2005.  The plaintiffs filed a consolidated amended complaint on April 29, 2005.  The amended complaint generally alleges that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by issuing false and misleading statements regarding intraocular lenses and implantable lenses, and failing timely to disclose significant problems with the lenses, as well as the existence of serious injuries and/or malfunctions attributable to the lenses, thereby artificially inflating the price of our Common Stock. The plaintiffs generally seek to recover compensatory damages, including interest. While we intend to vigorously defend the consolidated lawsuit, the lawsuit could  require significant attention of management and result in substantial costs and harm our reputation.

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        We are currently party to various claims and legal proceedings arising out of the normal course of our business. These claims and legal proceedings relate to contractual rights and obligations, employment matters, and claims of product liability. While we do not believe that any of the claims known to us is likely to have a material adverse effect on our financial condition or results of operations, new claims or unexpected results of existing claims could lead to significant financial harm.

      We depend on key employees.

        We depend on the continued service of our senior management and other key employees. The loss of a key employee could hurt our business. We could be particularly hurt if any key employee or employees went to work for competitors. Our future success depends on our ability to identify, attract, train and motivate other highly skilled personnel. Failure to do so may adversely affect future results.

      We have licensed our technology to our joint venture company and have granted certain rights to the partners that could be exercised
      in the event of a change in control of the Company.

        We have granted to the Canon Staar joint venture, a perpetual exclusive license under the Licensed Technology (as defined in the license agreement) to make and sell our products in Japan, and to make our products in China and to sell such products in Japan and China. In addition, we have granted Canon Staar a perpetual non-exclusive license under the Licensed Technology to sell our products in the rest of the world. Subject to the approval of the Board of Directors of the joint venture, such licenses may allow the Canon Staar joint venture to sell products in the rest of the world or grant others the right to do so. The term “Licensed Technology” includes any intellectual property owned or controlled by STAAR.

        Upon the occurrence of certain events, including the merger, sale of substantially all of the assets or change in the management of any party to the Canon Staar joint venture, any joint venture partner may have the right to acquire the first party’s interest in the joint venture at book value, without terminating the licenses under the Licensed Technology.

Risks Related to the Ophthalmic Products Industry

     If we fail to keep pace with advances in our industry or fail to persuade physicians to adopt the new products we introduce, customers
     may not buy our products and our revenue may decline.

        Constant development of new technologies and techniques, frequent new product introductions and strong price competition characterize the ophthalmic industry. The first company to introduce a new product or technique to market usually gains a significant competitive advantage. Our future growth depends, in part, on our ability to develop products to treat diseases and disorders of the eye that are more effective, safer, or incorporate emerging technologies better than our competitors’ products. Sales of our existing products may decline rapidly if one of our competitors introduces a substantially superior product, or if we announce a new product of our own. Similarly, if we fail to make sufficient investments in research and development or if we focus on technologies that do not lead to better products, our current and planned products could be surpassed by more effective or advanced products.

        In addition, we must manufacture these products economically and market them successfully by persuading a sufficient number of eye care professionals to use them. For example, glaucoma requires ongoing treatment over a long period of time; thus, many doctors are reluctant to switch a patient to a new treatment if the patient’s current treatment for glaucoma remains effective. This has been a challenge in selling our AquaFlow Device.

      Resources devoted to research and development may not yield new products that achieve commercial success.

        We spent 9.4% of our sales on research and development during the quarter ended April 1, 2005, and we expect to spend comparable amounts in the future periods. Development of new implantable technology, from discovery through testing and registration to initial product launch, is expensive and typically takes from three to seven years. Because of the complexities and uncertainties of ophthalmic research and development, products we are currently developing may not complete the development process or obtain the regulatory approvals required for us to market the products successfully. It is possible that few or none of the products currently under development will become commercially successful.

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      Failure of users of our products to obtain adequate reimbursement from third-party payors could limit market acceptance of
      our products, which could affect our sales and profits.

        Many of our products, in particular IOLs and products related to the treatment of glaucoma, are used in procedures that are typically covered by health insurance, HMO plans, Medicare or Medicaid. These third-party payors have recently been trying to contain costs by restricting the types of procedures they reimburse to those viewed as most cost-effective and capping or reducing reimbursement rates. These polices could adversely affect sales and prices of our products. Physicians, hospitals and other health care providers may be reluctant to purchase our products if third-party payors do not adequately reimburse them for the cost of our products and the use of our surgical equipment. For example:

      We are subject to extensive government regulation, which increases our costs and could prevent us from selling our products.

        Government regulations and agency oversight apply to every aspect of our business, including testing, manufacturing, safety and environmental controls, efficacy, labeling, advertising, promotion, record keeping, the sale and distribution of products and samples. We are also subject to government regulation over the prices we charge and the rebates we offer to customers. Complying with government regulation substantially increases the cost of developing, manufacturing and selling our products.

        In the United States, we must obtain approval from the FDA for each product that we market. Competing in the ophthalmic products industry requires us to continuously introduce new or improved products and processes, and to submit these to the FDA for approval. Obtaining FDA approval is a long and expensive process, and approval is never certain. In addition, our operations in the United States are subject to periodic inspection by the FDA. Such inspection may result in the FDA ordering changes in our business practices, which changes could be costly and have a material adverse effect on our business and results of operations. In particular, we received Warning Letters from the FDA on December 29, 2003 and April 26, 2004, and FDA 483 Inspectional Observations on September 23, 2004, requiring us to take corrective action as discussed elsewhere in this report.

        Products distributed outside of the United States are also subject to government regulation, which may be equally or more demanding. Our new products could take a significantly longer time than we expect to gain regulatory approval and may never gain approval. If a regulatory authority delays approval of a potentially significant product, the potential sales of the product and its value to us can be substantially reduced. Even if the FDA or another regulatory agency approves a product, the approval may limit the indicated uses of the product, or may otherwise limit our ability to promote, sell and distribute the product, or may require post-marketing studies. If we cannot obtain regulatory approval of our new products, or if the approval is too narrow, we will not be able to market these products, which would eliminate or reduce our potential sales and earnings.

      We depend on proprietary technologies, but may not be able to protect our intellectual property rights adequately.

        We have numerous patents and pending patent applications. We rely on a combination of contractual provisions, confidentiality procedures and patent, trademark, copyright and trade secrecy laws to protect the proprietary aspects of our technology. These legal measures afford limited protection and may not prevent our competitors from gaining access to our intellectual property and proprietary information. Any of our patents may be challenged, invalidated, circumvented or rendered unenforceable. Furthermore, we cannot be certain that any pending patent application held by us will result in an issued patent or that if patents are issued to us, the patents will provide meaningful protection against competitors or competitive technologies. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. Any

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litigation could result in substantial expense, may reduce our profits and may not adequately protect our intellectual property rights. In addition, we may be exposed to future litigation by third parties based on claims that our products infringe their intellectual property rights. This risk is exacerbated by the fact that the validity and breadth of claims covered by patents in our industry may involve complex legal issues that are not fully resolved.

        Any litigation or claims against us, whether or not successful, could result in substantial costs and harm our reputation. In addition, intellectual property litigation or claims could force us to do one or more of the following: to cease selling or using any of our products that incorporate the challenged intellectual property, which would adversely affect our revenue; to negotiate a license from the holder of the intellectual property right alleged to have been infringed, which license may not be available on reasonable terms, if at all; or to redesign our products to avoid infringing the intellectual property rights of a third party, which may be costly and time-consuming or impossible to accomplish.

         We may not successfully develop and launch replacements for our products that lose patent protection.

        Most of our products are covered by patents that give us a degree of market exclusivity during the term of the patent. We have also earned revenue in the past by licensing some of our patented technology to other ophthalmic companies. The legal life of a patent is 20 years from application. Patents covering our products will expire from this year through the next 20 years. Upon patent expiration, our competitors may introduce products using the same technology. As a result of this possible increase in competition, we may need to charge a lower price in order to maintain sales of our products, which could make these products less profitable. If we fail to develop and successfully launch new products prior to the expiration of patents for our existing products, our sales and profits with respect to those products could decline significantly. We may not be able to develop and successfully launch more advanced replacement products before these and other patents expire.

Risks Related to Ownership of Our Common Stock

      Our Certificate of Incorporation could delay or prevent an acquisition or sale of our company.

        Our Certificate of Incorporation empowers the Board of Directors to establish and issue a class of preferred stock, and to determine the rights, preferences and privileges of the preferred stock. We also have a Stockholders’ Rights Plan, which could discourage a third party from making an offer to acquire us. These provisions give the Board of Directors the ability to deter, discourage or make more difficult a change in control of our company, even if such a change in control would be in the interest of a significant number of our stockholders or if such a change in control would provide our stockholders with a substantial premium for their shares over the then-prevailing market price for the common stock.

      Our bylaws contain other provisions that could have an anti-takeover effect, including the following:

      Anti-takeover provisions of Delaware law could delay or prevent an acquisition of our company.

        We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock or preventing changes in our management.

      Future sales of our common stock could reduce our stock price.

        Our Board of Directors could issue additional shares of common or preferred stock to raise additional capital or for other corporate purposes without stockholder approval. In addition, the Board of Directors could designate and sell a class of preferred stock with preferential rights over the common stock with respect to dividends or other distributions. Sales of common or preferred stock could dilute the interest of existing stockholders and reduce the market price of our common stock. Even in the absence of such sales, the perception among investors that additional sales of equity securities may take place could reduce the market price of our common stock.

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STAAR SURGICAL COMPANY AND SUBSIDIARIES

      The market price of our common stock is likely to be volatile.

        Our stock price has fluctuated widely, ranging from $3.61 to $6.70 during the quarter ended April 1, 2005. Our stock price could continue to experience significant fluctuations in response to factors such as quarterly variations in operating results, operating results that vary from the expectations of securities analysts and investors, changes in financial estimates, changes in market valuations of competitors, announcements by us or our competitors of a material nature, additions or departures of key personnel, future sales of Common Stock and stock volume fluctuations. Also, general political and economic conditions such as recession or interest rate fluctuations may adversely affect the market price of our stock.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates. The Company manages its risks based on management’s judgment of the appropriate trade-off between risk, opportunity and costs. Management does not believe that these market risks are material to the results of operations or cash flows of the Company, and, accordingly, does not generally enter into interest rate or foreign exchange rate hedge instruments.

        Interest rate risk.    Our $1.8 million of debt is based on the borrowings of our international subsidiaries. The majority of our international borrowings bear an interest rate that is linked to Euro market conditions and, thus, our interest rate expense will fluctuate with changes in those conditions. If interest rates were to increase or decrease by 1% for the year, our annual interest rate expense would increase or decrease by approximately $18,000.

        Foreign currency risk.    Our international subsidiaries operate in and are net recipients of currencies other than the U.S. dollar and, as such, we benefit from a weaker dollar and are adversely affected by a stronger dollar relative to major currencies worldwide (primarily, the Euro and Australian dollar). Accordingly, changes in exchange rates, and particularly the strengthening of the US dollar, may negatively affect our consolidated sales and gross profit as expressed in U.S. dollars. Additionally, as of April 1, 2005, all of our debt is denominated in Swiss Francs and as such, we are subject to fluctuations of the Swiss Franc as compared to the U.S. dollar in converting the value of the debt in U.S. dollars. The U.S. dollar value of the debt is increased by a weaker dollar and decreased by a stronger dollar relative to the Swiss Franc.

        In the normal course of business, we also face risks that are either non-financial or non-quantifiable. Such risks include those set forth in “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations–Risks Factors”.

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STAAR SURGICAL COMPANY AND SUBSIDIARIES

ITEM 4.   CONTROLS AND PROCEDURES

       Attached as exhibits to this Quarterly Report on Form 10-Q are certifications of STAAR's Chief Executive Officer ("CEO") and Principal Accounting Officer ("PAO"), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act").  This "Controls and Procedures" section includes information concerning the controls and controls evaluation referred to in the certification.

Evaluation of Disclosure Controls and Procedures

        The Company’s management, with the participation of the CEO and PAO, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this Form 10-Q.   Based upon that evaluation, the CEO and the PAO concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.  "Disclosure controls and procedures" are controls and other procedures designed to ensure that information the Company is required to disclose in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information in accumulated and communicated to our management, including our CEO and PAO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

        There was no change in internal control over financial reporting during the fiscal quarter ended April 1, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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STAAR SURGICAL COMPANY AND SUBSIDIARIES

PART II – OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        We are currently party to various claims and legal proceedings arising out of the normal course of our business. These claims and legal proceedings relate to contractual rights and obligations, employment matters, and claims of product liability. We do not believe that any of the claims known to us is likely to have a material adverse effect on our financial condition or results of operations.

        Since September 1, 2004, multiple class action lawsuits have been filed in the United States District Courts for the Central District of California and the District of New Mexico against the Company and its Chief Executive Officer on behalf of all persons who acquired the Company’s securities during various periods between April 3, 2003 and September 28, 2004. On December 15, 2004, the Court ordered consolidation of the complaints that had been filed in the United States District Court for the Central District of California and directed that the plaintiffs file a consolidated complaint as soon as practicable. The New Mexico action was voluntarily dismissed on January 28, 2005. The plaintiffs filed a consolidated amended complaint on April 29, 2005.  The amended complaint generally alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by issuing false and misleading statements regarding intraocular lenses and implantable lenses, and failing timely to disclose significant problems with the lenses, as well as the existence of serious injuries and/or malfunctions attributable to the lenses, thereby artificially inflating the price of the Company’s Common Stock. The plaintiffs generally seek to recover compensatory damages, including interest. The Company intends to vigorously defend the consolidated lawsuits and will be filing a motion to dismiss the amended complaint.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

ITEM 5.   OTHER INFORMATION

ITEM 6.   EXHIBITS

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SIGNATURES

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

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