Annual Report 2002 IRIDEX Corporation is a worldwide leader in developing, manufacturing, marketing and selling innovative and cost-effective medical laser systems for ophthalmology and aesthetics. The Company has the largest global installed base of solid-state lasers and focuses on developing laser products that are clinically effective, reliable, portable, versatile, and affordable. IRIDEX was founded in 1989 as IRIS Medical Instruments, Inc. and went public as IRIDEX Corporation (NASDAQ/NMS: IRIX) in 1996. IRIDEX products are sold in the U.S. through a direct sales force and internationally through a network of 66 independ- ent distributors into 107 countries. Letter to Shareholders | They include: (1) careful management of expenses and assets by scrutinizing all expenses and by reducing inventory and accounts receivable levels; (2) systematically improving gross margins by obtaining a premium for our products and by operating more efficiently; and (3) primarily operating our business to achieve earnings growth in preference to revenue growth. We obtain a premium for our products by satisfying our customers with the highest value proposition of products and services, by providing Despite the continuing challenging global economic ness improvements in 2002 and a return to prof- environment, IRIDEX experienced favorable busi- itability for the year. This positive outcome during a very difficult year is a result of several proactive efforts taken by IRIDEX: • New Product Introduction—In October, we introduced the OcuLight Symphony Laser Delivery System, the first system to combine the clinical versatility and convenience of 532 nm, 810 nm and large spot 810 nm into one laser delivery device indicated for retinal photocoagulation and glaucoma procedures. • New Collaboration—In the fourth quarter, we introduced the Millennium Endolase module in collaboration with Bausch & Lomb, which is integrated into the Bausch & Lomb Millennium Microsurgical System used in the operating room. • Formation of Global Customer Care Group (GCCG)— Early in the year, we introduced GCCG to provide a higher value proposition for our customers. Satisfied customers equate to ongoing business and referrals to peers leading to increased market share and market leadership. Due to the importance of customer relationships, we chose to highlight our commitment to service in the pages that follow. • Downsizing for efficiency—In order to better align our oper- ations with the current economic environment and improve efficiency, we made the difficult decision to complete the first reduction in workforce in our history. As a result, our number of employees was reduced by 12% to more closely match our actual sales. the best customer service in the industry, by providing complete system solutions for our customers, and by introducing a mix of new products and applications that provide us with meaningful incremental earnings growth. Our longer term strategies are designed to drive market growth in segments of the market where we have strength. An example is continued development of Minimum Intensity Photocoagulation (MIP) protocols. MIP is a laser treatment approach pioneered by IRIDEX that uses our OcuLight SLx infrared laser to maximize preservation of sensitive retinal tissues while stimulating a thera- peutic effect. We believe maintaining leadership in MIP will allow us to make a substantial contribution towards the treatment of serious eye diseases such as age-related macular degeneration and diabetic retinopathy. We feel a combination of these strategies will enable us to expand the market opportunity for our products and to provide a better long-term value for our customers, their patients and our investors. Thank you for your continued trust and support. Sincerely, Looking forward, our strategies can be divided into shorter term and longer term strategies. Our shorter term strategies react to the current economic conditions and are operationally focused. Theodore A. Boutacoff President & CEO IRIDEX Corporation | Annual Report 2002 page | 1 | Global Customer Care countries around the world. One way we differentiate our IRIDEX has over 6,000 laser systems located in over 107 products from our competitors is by providing excellent customer care globally—an attribute valued by our customers. engineers to improve existing products and be aware of customer issues in the design of new products. We believe that excellent customer care can only be attained if every interaction with a company results in a satisfying experience for the customer. Excellent customer care is rarely confined to one individual or IRIDEX continuously strives to provide unparalleled customer group. It must be part of the fabric of the entire organization. It focus throughout our entire organization. Our commitment to must be part of the company culture. Customers today are much excellent customer care has helped IRIDEX capture and maintain more discriminating and much more involved in the process of market leadership. Satisfied customers continue to purchase purchasing and maintaining a product, so their interaction with equipment through us, refer peers to us for laser equipment, and a company typically involves a number of individuals in a num- become valuable references who strengthen our market position. ber of departments. Before purchasing a product, a customer may search for information on the company website and contact its sales and marketing personnel. After completing the purchase there may be interaction with customer service and technical service. Excellent customer care also results in improvements in product quality. Customer feedback is more readily transferred in an open communication environment, making all necessary departments aware of customer issues. This allows design In 2002, we formed the Global Customer Care Group (GCCG) to focus on continual improvement in the services provided to IRIDEX customers. The GCCG is comprised of all internal departments that interact with our customers: Customer Service, Technical Service and Shipping and Receiving. By combining these departments into one customer-focused group, our goals of continuing improvements in quality, service and customer response are easier to attain. We would like to commend you as a truly outstanding company. We have been extremely pleased with our laser in the management of our patients. Moreover, we have been especially pleased with the outstanding service and follow-up that your company provides. page | 2 —Keith McKenzie, MD Santa Cruz, CA I can say that we have been extremely pleased with the product, service and all of the people we have contact with at IRIDEX. IRIDEX has set a standard of customer care and service that other companies will have a hard time matching. —Thomas Wassel Winter Haven, FL Of course, the desire to provide excellent customer care starts with day. IRIDEX also has 24-hour, 7-day a week technical service IRIDEX employees. Our employees are oriented to our philoso- coverage, so a service engineer is always available to assist new phy that the customer comes first at all times. When a customer customers. Both of these commitments to satisfying the customer calls, a polite, knowledgeable company representative is there to were implemented in the year we were founded, 1989, and set us assist the customer and satisfy their needs. apart from other companies. Even today, many competitors cannot GCCG department managers are in constant communication with match this commitment to excellent customer care. each other concerning day-to-day activities relating to individual Moving forward in 2003 and beyond, the GCCG will continue customers’ requirements to make certain that the customers’ expectations of IRIDEX products, service and support are met or to develop and implement ideas on how to better serve IRIDEX customers, and build upon the customer loyalty already established. exceeded. Through this constant communication and feedback, Web-based order processing and in-house customer training any problems or issues can be quickly identified and resolved programs are being developed based upon feedback from our before impacting the customer. customers about their needs. By always striving to improve our Our Technical Service department pioneered new concepts in performance and service to the customer, we will never become customer care, early in our history, by providing loaner products complacent and lose the focus that helped IRIDEX achieve while the customer’s unit is being repaired, and we continue to market leadership. offer that service today. Our investment in loaner equipment ensures the downtime experienced by the customer is minimized, and that they are typically up and running by the next business IRIDEX Corporation | Annual Report 2002 page | 3 | Financial Highlights sales | $ in millions 32.8 30.6 26.4 27.3 22.3 sales, general and administrative expenses | $ in millions 10.7 10.3 9.5 9.2 8.4 2002 sales | in percent 36% international 64% domestic income (loss) from continuing operations | $ in millions 2.1 1.4 1.1 0.2 (0.6) 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 (Dollar and share amounts in thousands except per share data) FOR THE FISCAL YEAR Sales Operating income (loss) Income (loss) from continuing operations Diluted net income (loss) from continuing 1998 1999 2000 2001 2002 $22,338 966 $ $ 1,108 $26,391 $ 1,573 $ 1,447 $32,838 $ 2,320 $ 2,080 $27,275 $ (1,989) $ (601) $30,634 $ (181) 150 $ operations per common share Shares used in per share computations $ 0.16 6,765 $ 0.21 6,849 $ 0.29 7,285 $ (0.09) 6,757 $ 0.02 6,928 END OF FISCAL YEAR Working capital Total assets Total shareholders’ equity $23,450 $28,377 $25,885 $23,842 $32,763 $27,504 $27,005 $35,025 $30,500 $26,374 $33,788 $29,833 $26,981 $34,272 $30,198 page | 4 Board of Directors John M. Nehra Chairman of the Board Managing General Partner Catalyst Ventures Special Partner New Enterprise Associates Theodore A. Boutacoff President and Chief Executive Officer IRIDEX Corporation Robert K. Anderson Co-Founder, Former Chairman and Chief Executive Officer Valleylab, Inc. Chairman Meritech, Inc. James L. Donovan Vice President, Corporate Business Development IRIDEX Corporation Donald L. Hammond, D.Sc. Former Director Hewlett-Packard Laboratories Joshua Makower, M.D. Chairman of the Board and Chief Technical Officer TransVascular, Inc. Corporate Information | Annual Meeting IRIDEX Corporation’s 2003 annual meeting of stockhold- ers will be held on Wednesday, June 4, 2003 at 2:00 p.m. Pacific Time at 1212 Terra Bella Avenue, Mountain View, California 94043. Corporate Headquarters IRIDEX Corporation 1212 Terra Bella Avenue Mountain View, California 94043 Telephone: 650-940-4700 Facsimile: 650-940-4710 Corporate Counsel Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304-1050 Independent Accountants PricewaterhouseCoopers LLP Ten Almaden Boulevard, Suite 1600 San Jose, California 95113 Transfer Agent and Registrar EquiServe P.O. Box 43023 Providence, Rhode Island 02940-3023 Investor Relations Telephone: 816-843-4299 Internet Address: www.equiserve.com Executive Officers Investor Relations Theodore A. Boutacoff President and Chief Executive Officer Eduardo Arias Senior Vice President, International Sales and Business Development James L. Donovan Vice President, Corporate Business Development Robert Kamenski Vice President, Administration and Chief Financial Officer Timothy Powers Vice President, Operations Publications of interest to current and potential IRIDEX investors are available without charge upon request. These include the annual report, quarterly earnings releases, and Forms 10-K and 10-Q filed with the Securities and Exchange Commission. In addition, the Company main- tains certain financial information on the IRIDEX website at www.iridex.com. Please direct inquiries to: Investor Relations IRIDEX Corporation 1212 Terra Bella Avenue Mountain View, California 94043 Telephone: 650-940-4700 m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b d e n g i s e D