1 800 contacts inc (form: 10-k, filing date:...

Business Address13751 S WADSWORTH PARKDR SUITE D-140DRAPER UT 840208015728225

Mailing Address13751 S WADSWORTH PARKDR SUITE D-140DRAPER UT 84020

SECURITIES AND EXCHANGE COMMISSION

FORM 10-KAnnual report pursuant to section 13 and 15(d)

Filing Date: 2004-03-18 | Period of Report: 2004-01-03SEC Accession No. 0001104659-04-007882

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FILER1 800 CONTACTS INCCIK:1050122| IRS No.: 870571643 | State of Incorp.:DE | Fiscal Year End: 1231Type: 10-K | Act: 34 | File No.: 000-23633 | Film No.: 04677763SIC: 5961 Catalog & mail-order houses

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UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

ýý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the fiscal year ended January 3, 2004 or

oo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 0-23633

1-800 CONTACTS, INC.(Exact name of registrant as specified in its charter)

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

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

Registrant�s telephone number, including area code: (801) 924-9800

Securities registered pursuant to Section 12(b) of the Act: Not applicable

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

ý Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will notbe contained, to the best of the registrant�s knowledge, in definitive proxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).ý Yes o No



The aggregate market value of voting common equity held by non-affiliates of the registrant as of June 28, 2003 at a closing saleprice of $25.00 as reported by the Nasdaq National Market (�Nasdaq�) was approximately $173.0 million. Shares held by each officer anddirector and by each person who owns or may be deemed to own 10% or more of the outstanding Common Stock have been excluded sincesuch persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for otherpurposes.

As of March 3, 2004, the Registrant had 13,114,777 shares of Common Stock, par value $0.01 per share, outstanding.

Documents Incorporated by Reference

Portions of the Registrant�s Proxy Statement to be used in connection with the solicitation of proxies for the Annual Meeting ofStockholders to be held on May 21, 2004 (the �Proxy Statement�) are incorporated by reference in Part III of this Annual Report on Form10-K (the �Form 10-K�).

1-800 CONTACTS, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersItem 4A. Executive Officers of the Registrant

PART IIItem 5. Market for Registrant�s Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Management�s Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureItem 9A. Controls and Procedures

PART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and Services

PART IVItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

PART I



Item 1. Business.

Overview

1-800 CONTACTS, INC. (the �Company�) was incorporated under the laws of the State of Utah in February 1995 and wasreincorporated under the laws of the State of Delaware in February 1998 in conjunction with its initial public offering of common stock. TheCompany�s principal executive office is located at 66 E. Wadsworth Park Drive, Draper, Utah 84020, and its telephone number is (801)924-9800. The Company maintains various websites on the Internet, including, �www.1800contacts.com�, �www.contacts.com� and�www.contactlenses.com�. The Company provides on these websites, free of charge, periodic and current reports as soon as is reasonablypracticable after such material is filed with or furnished to the SEC.

The Company is the leading direct marketer of replacement contact lenses. The Company recently announced that it had shipped itsten millionth order to more than 5 million customers since inception. Through its easy-to-remember, toll-free telephone number, �1-800CONTACTS� (1-800-266-8228), and through its Internet addresses, the Company sells all of the popular brands of contact lenses, includingthose manufactured by Johnson & Johnson Vision Care, CIBA Vision, Bausch & Lomb, Ocular Sciences and CooperVision. The Company�shigh volume, cost-efficient operations, supported by its proprietary management information systems, enable it to offer consumers anattractive alternative for obtaining replacement contact lenses in terms of convenience, price, speed of delivery and customer service. As aresult of its extensive inventory of more than 35,000 SKUs, the Company generally ships approximately 95% of its orders within one businessday of receipt and verification of prescriptions.

The Company�s Internet sales channel continued to grow in fiscal 2003 and enhances the Company�s ability to cost effectively serveits customers. The Company�s Internet sales accounted for approximately half of its total revenue during 2003. Its online presence enablesthe Company to operate more efficiently by substantially reducing the payroll and long distance costs associated with telephone orders. Thisincreased efficiency allows the Company to offer Internet customers free shipping in addition to other services such as e-mail shippingconfirmation, online order tracking and e-mail correspondence.

The Company markets its products through a national advertising campaign that aims to increase recognition of the 1-800CONTACTS brand name, increase traffic on its website, add new customers, continue to build strong customer loyalty and maximize repeatpurchases. As compared to other direct marketers of replacement contact lenses, the Company believes that its toll-free telephone number andInternet addresses afford it a significant competitive advantage in generating consumer awareness and repeat business. The Company spentapproximately $20.2 million on advertising in fiscal 2003 and has invested more than $130 million in its national advertising campaign overthe last several years. The Company�s experience has been that increases in advertising expenditures have a direct impact on the growth ofnet sales.

On July 24, 2002, the Company completed the acquisition of certain net assets and the majority of the business operations of IGEL, adeveloper and manufacturer of contact lenses based in Singapore. The acquisition was effected through a wholly owned subsidiary of theCompany, IGEL Acquisition Co. Pte Ltd (subsequently renamed ClearLab Pte Ltd). Subsequent to year-end, ClearLab Pte Ltd has beenrenamed ClearLab International. ClearLab International will be the principal marketing organization for the Company�s internationalwholesale manufacturing business, focusing on the marketing of contact lens products to major retailers and distributors, as well as providingcontract manufacturing capacity for other contact lens manufacturers. ClearLab International manufactures a wide range of frequentreplacement spherical and toric lenses and is focused on developing new lens materials.

On February 24, 2004, the Company acquired VisionTec, a developer and manufacturer of daily contact lenses based in the UnitedKingdom. VisionTec has developed a method for low cost, high quality production of daily

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disposable contact lenses using a unique proprietary material. VisionTec has subsequently been renamed ClearLab UK Ltd (�ClearLabUK�). The business will operate as a manufacturing affiliate of ClearLab International. The Company has recently completed the testing of



its manufacturing capabilities for ClearLab UK�s daily products and is currently expanding its production capabilities. The Company willincrease its product offerings to the international markets in fiscal 2004, as it begins to market the products.

ClearLab International�s and ClearLab UK�s development and manufacturing capabilities also provide the Company with greateraccess to future contact lens products for the U.S. retail market. This is critical to the Company�s strategy should the Company�s access tocontact lenses from the major contact lens manufacturers be disrupted, curtailed or otherwise negatively impacted, or if the manufacturers donot provide the Company with contact lenses at competitive pricing and with competitive marketing support.

For more information regarding recent transactions by the Company, see �Management�s Discussion and Analysis of FinancialCondition and Results of Operations � Recent Transactions.��

Industry Overview

Industry analysts estimate that over 50% of the United States population needs some form of corrective eyewear. Contact lenses area convenient, cost-effective alternative to eyeglasses. The number of contact lens wearers is expected to increase as technology furtherimproves the convenience, comfort and fit of contact lenses. As a result, the contact lens market is large and growing. The growth in thedisposable market is largely due to the shift in the contact lens market away from traditional soft lenses, which generally are replaced on anannual basis, to disposable lenses, which are generally replaced on a daily, weekly, or bi-weekly basis.

Traditionally, contact lenses were sold to consumers almost exclusively by either ophthalmologists or optometrists (referred to hereincollectively as �eye care practitioners�). Eye care practitioners would typically supply a patient with his or her initial pair of contact lenses inconnection with providing the patient an eye examination and subsequently provide replacement lenses. Because the initial fitting of contactlenses requires a prescription written by an eye care practitioner, the initial sale of contact lenses still takes place primarily in this manner.Over the last two decades, however, a number of alternative sellers of replacement contact lenses have emerged, including direct marketers.

The Company believes that increased consumer awareness of the benefits of the direct marketing of contact lenses will lead to furthergrowth of this method of buying and selling contact lenses. Purchasing replacement contact lenses from a direct marketer offers theconvenience of shopping at home, rapid home delivery, quick and easy telephone or Internet ordering and competitive pricing. In addition,the growth in popularity of disposable contact lenses, which require patients to purchase replacement lenses more frequently, has contributedto the growth of the direct marketing channel. The direct marketing industry continues to grow as many retail customers have migratedtowards the convenience and service offered by home shopping. The Company expects the direct marketing segment of the contact lensindustry to grow in tandem with the growth in the direct marketing industry as a whole. Penetration of mail order direct marketing in thecontact lens segment of the market remains in the single digit percentage points. This lags in comparison to the penetration of directmarketing of other prescription items such as pharmaceuticals. The company remains optimistic that there is great potential for growth as thecontact lens segment enjoys the same growth that the corresponding pharmaceutical market has experienced.

The Company believes that the growth and acceptance of the Internet presents significant opportunities for direct marketers ofcontact lenses such as the Company. The factors driving this growth include the increasing number and decreasing cost of personal computersin homes and offices, technological innovations providing easier, faster and cheaper access to the Internet, the proliferation of content andservices being provided on the Internet and the increasing use of the Internet by businesses and consumers as a medium for conductingbusiness.

The Internet possesses a number of unique and commercially powerful characteristics that differentiate it from traditional media:users communicate or access information without geographic limitations; users access

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dynamic and interactive content on a real-time basis; and users communicate and interact instantaneously. The Internet has created a dynamicand particularly attractive medium for commerce; empowering customers to gather more comparative purchasing data than is feasible with



traditional commerce systems, to shop in a more convenient manner and to interact with sellers in many new ways. The Company believesthat the Internet provides a convenient and efficient medium for the sale of replacement contact lenses.

Historically, sales of contact lenses by direct marketers have been impeded by eye care practitioners and contact lens manufacturers.Many eye care practitioners have been reluctant to provide patients with a copy of their prescription or to release such information to directmarketers upon request, thereby limiting a patient�s choice to purchase lenses from a direct marketer. Until recently, substantially all of themajor manufacturers of contact lenses refused to sell contact lenses directly to direct marketing companies and sought to prohibit theirdistributors from doing so. These traditional barriers to the direct marketing of contact lenses have been reduced and may be completelyeliminated in the future. For example, Congress recently passed the Fairness to Contact Lens Consumers Act (�FCLCA�), requiring all eyecare practitioners to give patients a copy of their prescription as soon as they have been fitted, whether they ask for it or not. The FCLCA alsorequires all eye care practitioners to respond to direct marketers� requests to verify patient prescriptions and provides that their failure torespond within eight business hours shall result in the prescription being presumed valid, thereby eliminating the ability of eye carepractitioners to impede sales by direct marketers simply by ignoring or refusing to respond to their requests to verify prescriptions. Theregulatory body which oversees the necessity of vigorous competition in the market � the Federal Trade Commission (�FTC�) has been taskedby Congress to study and report its findings on the overall competitiveness of the contact lens market and any recommendations it may have toimprove competition. This study and findings may lead to even further pro-consumer initiatives on which the Company may capitalize.Likewise, nearly all of the manufacturers are now subject to legal injunctions requiring them to sell contact lenses to direct marketers undercertain conditions or have specific agreements with the Company to supply it contact lenses. See �Purchasing and Principal Suppliers� and�Government Regulation.�

Product Offerings

Contact lenses can be divided into two categories: soft lenses and hard lenses (primarily rigid gas permeable). There are threeprincipal wearing regimes for soft contact lenses: conventional, disposable and planned replacement. Conventional lenses are designed to beworn indefinitely but are typically replaced after 12 to 24 months. Disposable soft contact lenses were introduced in the late 1980s based onthe concept that changing lenses on a more regular basis was important to comfort, convenience, maintaining healthy eyes and patientcompliance. Disposable lenses are changed as often as daily and up to every two weeks, depending on the product. Planned replacementlenses are designed to be changed as often as every two weeks and up to every three months.

The Company has access to all of the major brands and product types in the industry, including spherical, toric, multifocal andcolored lenses either directly from the manufacturer or through distributors. The Company�s sales by brand and product type arerepresentative of the industry.

The Company maintains the World�s largest inventory of contact lenses. Given the proliferation of SKUs in the industry vianumerous brands, colored and specialty lenses, the Company�s substantial inventory provides contact lens wearers with ready access to theirlenses.

The Company is a direct marketer of replacement contact lenses and does not provide eye examinations or related services to itscustomers. The Company offers substantially all of the soft and hard contact lenses produced by the leading contact lens manufacturers,including Johnson & Johnson Vision Care, CIBA Vision, Bausch & Lomb, Ocular Sciences and CooperVision. The Company stocks a largeinventory of lenses from which it can ship approximately 95% of its orders within one business day of receipt and verification ofprescriptions. The Company believes that its large inventory of contact lenses provides it with a competitive advantage over eye carepractitioners, optical chains and discount stores and serves as an effective barrier to entry to potential entrants in direct marketing of contactlenses.

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The Company purchases products directly from certain manufacturers, including Johnson & Johnson Vision Care, CIBA Vision,Bausch & Lomb, and CooperVision. See �Purchasing and Principal Suppliers.� The Company�s products are delivered in the same sterile,safety sealed containers in which the lenses were packaged by the manufacturer. From time to time, the Company purchases contact lenses



that were labeled as �samples� by the manufacturer. Such lenses are sometimes offered by the Company to customers as part of promotionalprograms at reduced prices.

The Company�s wholly owned subsidiary, ClearLab International, manufactures injection cast molded soft contact lenses on acontract basis for various contact lens manufacturers. ClearLab International also manufactures and distributes branded and private labelcontact lenses via distributors and other sales channels internationally. ClearLab International produces a wide range of frequent replacementspherical and toric lenses and is focused on developing new lens materials.

On February 24, 2004, the Company completed the acquisition of VisionTec (now known as ClearLab UK), a developer andmanufacturer of daily contact lenses based in the United Kingdom. ClearLab UK has developed a method for low cost, high qualityproduction of daily disposable contact lenses using a unique proprietary material. The business will operate as a manufacturing affiliate ofClearLab International. The Company has recently completed the testing of its manufacturing capabilities for ClearLab UK�s daily productsand is currently expanding its production capabilities. The Company will increase its product offerings to the international markets in fiscal2004, as it begins to market the products.

Based on previously conducted test marketing, the Company believes that its customers are receptive to an offer from the Companyto try both a new product and a new eye care practitioner. The Company believes that a more active role in the product/provider decision mayhelp it address the policies of certain manufacturers that continue to refuse to sell certain brands to the Company and seek to sell these samebrands exclusively to eye care practitioners. The Company also believes that by educating consumers as to specific eye care practitioners�anti-consumer activities - and as appropriate, recommending more consumer focused eye care practitioners - that it can influence the consumerdecision making process which will directly affect overall practices in the industry. The Company�s first preference is to sell to the customerthe lens she is already wearing. In cases where manufacturers or eye care practitioners stand in the way of the customer�s choice to purchasefrom the Company, the Company will be able to offer the customer the opportunity to try an alternative eye care provider and an alternativeproduct.

The Company also offers certain products related to contact lenses including solutions and lens cases for storing contact lenses. TheCompany offers solutions produced by CIBA Vision and purchased directly from CIBA Vision. The lens cases are produced by andpurchased from an outside party on a contract basis.

Customers and Marketing

The Company�s direct marketing customers are located principally throughout the United States. The percentage of the Company�scustomers that are located in each state is approximately equal to the percentage of the United States population, which resides in such state,with the largest concentration of the Company�s customers residing in California. The Company strives to deliver a high level of customerservice in an effort to maintain and expand its loyal customer base. The Company utilizes a focused marketing strategy that is designed toenhance the awareness and value of its brand. The Company continually researches and analyzes new ways in which to advertise its products.After identifying an attractive potential new advertisement or advertising medium, the Company commits to such advertising for an initial testperiod. After the initial test period, the Company continues to closely monitor its advertising in order to identify and react to trends andpatterns as appropriate.

The majority of contact lens wearers are between the ages of 14 and 49. Approximately two-thirds of contact lens wearers arewomen and contact lens wearers generally have higher incomes than eyeglass wearers do. Through its national advertising campaign, theCompany is able to target its advertising to contact lens wearers in these key demographic groups, as well as certain other persons based onother important demographics.

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During 2003, the Company spent approximately $20.2 million on advertising and intends to increase advertising spending in fiscal2004 as it continues its nationwide advertising campaign. The Company�s advertising campaign targets both its traditional telephone



customers and its online customers and is designed to drive new and repeat purchases. In addition, the Company intends to continue its directmarketing campaign to its more than 5 million customers through the U.S. mail and e-mail.

A brief description of the principal components of the Company�s national advertising campaign is set forth below:

Broadcast. The Company utilizes a nationwide broadcast advertising campaign with significant purchases on both cable and networktelevision. The Company�s television ads typically focus on making the process of replacing contact lenses easier for consumers by rapidlydelivering to customers the same contact lenses offered by eye care practitioners and by streamlining an otherwise complicated process ofordering prescription medical devices from an alternative seller. The Company believes that its easy-to-remember phone number and Internetaddresses make television a particularly effective marketing vehicle and that television advertising will continue to be the key to buildingawareness for its 1-800 CONTACTS brand name.

Internet. The Company uses the Internet as a means of marketing in an effort to drive new and repeat traffic. The Company usesemails as an effective tool to provide reminders to existing customers when it is time to reorder. The Company continues to seekopportunities to expand its presence within highly trafficked content sites.

Direct-Mailing. The Company uses direct-mail to advertise its products to selected groups of consumers. The Company utilizesmailing lists obtained from both private and public sources to target its advertisements specifically to contact lens wearers.

Cooperative Mailings. The Company advertises its products in cooperative mail programs sponsored by the leading cooperative mailcompanies in the United States. This advertising medium permits the Company to target consumers in specific zip codes according to age,income and other important demographics.

ClearLab International markets its products internationally and is expected to market ClearLab UK products in 2004. Based onprevious test marketing, the Company believes that its customers are receptive to an offer from the Company to try both a new product and anew eye care practitioner. The Company believes that a more active role in the product/provider decision may help it address the policies ofcertain manufacturers that continue to refuse to sell their brands to the Company and seek to sell their brands exclusively to eye carepractitioners. The Company also believes that by educating consumers as to specific eye care practitioners� anti-consumer activities - and asappropriate, recommending more consumer focused eye care practitioners - that it can influence the consumer decision making process whichwill directly affect overall practices in the industry. The Company�s first preference is to sell to the customer the lens she is already wearing.In cases where manufacturers or eye care practitioners stand in the way of the customer�s choice to purchase from the Company, theCompany will be able to offer the customer the opportunity to try an alternative eye care provider and an alternative product.

ClearLab International�s customers include various international contact lens manufacturers and distributors. ClearLab Internationalcurrently manufactures frequent replacement disposable lenses for one of the leading contact lens manufacturers.

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Operations

Direct Marketing

The primary components of the Company�s direct marketing operations include its teleservices, order entry, Internet order taking,prescription verification, doctor referral network, customer service and distribution and fulfillment.

Teleservices, Order Entry, Internet Order Taking and Customer Service. The Company provides its customers with toll-freetelephone access to its Customer Service Representatives (�CSRs�). The Company�s call center generally operates from 6:00 a.m. to 10:00p.m. (MST) Monday through Thursday, 6:00 a.m. to 9:00 p.m. (MST) on Friday, 7:00 a.m. to 9:00 p.m. (MST) on Saturday and 8:00 a.m. to4:00 p.m. (MST) on Sunday. Customers may place orders via the Internet 24 hours a day, 7 days a week. Potential customers may also obtainproduct, pricing or other information over the Internet or through an interactive voice response system. The Company�s orders are receivedby phone, Internet, mail, facsimile and electronic mail. CSRs process orders directly into the Company�s proprietary managementinformation systems, which provide customer order history and information, product specifications, product availability, expected shippingdate and order number. CSRs are provided with a sales script and are trained to provide information about promotional items. Additionally,



CSRs are trained to provide customer service and are authorized to resolve all customer service issues, including accepting returns and issuingrefunds, as appropriate.

The Company believes its customers are particularly sensitive to the way merchants and salespeople communicate with them. TheCompany strives to hire energetic, service-oriented CSRs who can understand and relate to customers. CSRs participate in an extensivetraining program. The Company also has a quality assurance department. This department monitors and reviews the CSRs� performance andcoaches the CSRs as necessary.

The Company continually upgrades and enhances its management information systems. The Company believes its managementinformation systems have the capacity to handle up to 30,000 calls per day. The Company�s CSRs currently handle approximately 8,000 callsper day.

Prescription Verification. The sale and delivery of contact lenses are governed by both federal and state laws and regulations,including the recently enacted federal Fairness to Contact Lens Consumer Act (�FCLCA�). The FCLCA requires that contact lenses only besold to consumers based on a valid prescription. Satisfying this prescription requirement obligates the seller either to obtain a copy of theprescription itself or to verify the prescription by direct communication with the customer�s prescriber. Consistent with this requirement, theCompany�s current operating practice is to require all customers to provide either a valid copy of their prescription or the contact informationfor their prescriber so that the Company can verify their prescription by direct communication with their prescriber. If the Company does nothave a valid copy of the customer�s prescription, the Company directly communicates to the customer�s prescriber the precise prescriptioninformation received from the customer and informs the prescriber that it will proceed with the sale based on this prescription informationunless the prescriber advises it within eight business hours that such prescription information is expired or otherwise invalid. If the prescriberproperly advises the Company within this time period that the customer�s prescription is expired or otherwise invalid, the Company�s practiceis to cancel the customer�s order. On the other hand, if the prescriber either advises the Company that the prescription is valid or fails toproperly respond within the communicated time period, the Company�s practice is to complete the sale based on the prescription informationcommunicated to the prescriber, as expressly permitted by the FCLCA. The Company retains copies of the written prescriptions that itreceives and maintains records of its communications with the customer�s prescriber. The Company believes that it is complying with theregulations of the new federal Act. See �Government Regulation�.

Internet. The Company�s principal websites, www.contacts.com and www.1800contacts.com, provide customers with a quick,efficient and cost-effective source for obtaining replacement contact lenses 24 hours a day, 7 days a week. The Company is continuallyupgrading the content and functionality of its website. The website allows customers to easily browse and purchase substantially all of theCompany�s products, promotes brand loyalty and

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encourages repeat purchases by providing an inviting customer experience. The Company has designed its website to be fast, secure and easyto use and to enable its customers to purchase products with minimal effort. The Company also offers Internet customers services such as freeshipping, shipping confirmation and online order tracking. During the call center�s operating hours, the Company offers service and supportto its Internet customers over the telephone. The Company also provides e-mail support to customers 24 hours a day, 7 days a week. TheCompany�s website allows customers to dispense with providing personal profile information after their initial order. The website haspermitted the Company to expand its customer base through better service while reducing transaction costs.

The Company�s online service automates the processing of customer orders, interacts with the management information systems andallows the Company to gather, store and use customer and transaction information in a comprehensive and cost-efficient manner. TheCompany�s website contains customized software applications that interface with the Company�s management information systems.

The Company maintains a database containing information compiled from customer profiles, shopping patterns, sales data and eyecare practitioner prescribing habits. The Company analyzes information in this database to develop targeted marketing programs and providepersonalized and enhanced customer service. This database is scaleable to permit large transaction volumes. The Company�s systemssupport automated e-mail communications with customers to facilitate confirmations of orders, provide customer support, obtain customerfeedback and engage in targeted marketing programs.



The Company uses a combination of proprietary and industry-standard encryption and authentication measures designed to protect acustomer�s information. The Company maintains an Internet firewall to protect its internal systems and all credit card and other customerinformation.

Doctor Referral Network. The company has a referral agreement with Cole National and select independent practitioners nationally.When a customer�s prescription is found to be invalid or expired, the Company can now facilitate the process of obtaining an eyeexamination. This process minimizes the interruptions in product consumption for the consumer and improves the Company�s ability toretain its customers.

Distribution and Fulfillment. Approximately 95% of the Company�s orders are shipped within one business day of receipt andverification of prescriptions. Customers generally receive orders within one to five business days after shipping, depending upon the methodof delivery chosen by the customer. A shipping and handling fee is generally charged on each customer order, except those orders receivedvia the Internet and those received by mail with an enclosed check. Customers have the option of having their order delivered by overnightcourier for an additional charge. The Company�s management information systems automatically determine the anticipated delivery date foreach order.

The Company uses an integrated packing and shipping system via a direct connection to the Company�s management informationsystems. This system monitors the in-stock status of each item ordered, processes the order and generates warehouse selection tickets andpacking slips for order fulfillment operations. The Company�s management information systems are specifically designed with a number ofquality control features to help ensure the accuracy of each order.

The Company�s distribution center is approximately 84,000 square feet and is strategically located near the Salt Lake City, Utahinternational airport.

Customer Service

On June 30, 2003, the Company and Cole National Corporation (�Cole�) announced that they had signed an agreement under whichthe Company�s customers can receive discounted eye exams and value pricing on eyeglasses, sunglasses and other vision products that theCompany does not sell from a network of doctors contracted with Cole Managed Vision and associated with more than 1,500 Pearle Vision,Pearle VisionCare, Sears Optical and Target

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Optical stores in the U.S. Cole will offer its network of doctors for at least one year. The Company will retain the contact lens business ofcustomers referred to Cole stores.

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

The Company believes this is a unique offering for Internet, phone or mail order companies, allowing it to recapture customer ordersthat would otherwise need to be cancelled under Federal law.

Manufacturing

Prior to the acquisition of ClearLab UK, all of ClearLab International�s products were manufactured in one production facilitylocated in Singapore. See �Properties.� This facility currently has the capacity to produce in excess of 40 million lenses annually and isoperating at approximately 40 to 45 percent of capacity. ClearLab International manufactures its soft contact lenses by way of injection castmolding of plastic molds in which it doses various polymers. This process yields dry lenses which are then hydrated to their final wet state inorder to become a complete lens. ClearLab International also has the ability to wet cast mold lenses. In wet cast molding, the lenses areformed fully hydrated. With the acquisition of ClearLab UK, the Company has added an additional production facility in the UK. TheCompany will have the capability to develop and manufacture daily contact lenses in this facility using a unique proprietary process.



Management Information Systems

The Company has developed proprietary management information systems that integrate the Company�s order entry and orderfulfillment operations. The Company is continually upgrading and enhancing these systems and believes that these systems enable it tooperate efficiently and provide enhanced customer service. The key features of these management information systems are their ability to: (i)process numerous types of orders, including telephone, Internet and others; (ii) continually monitor and track the Company�s inventory levelsfor substantially all of its products; (iii) rapidly process credit card orders; (iv) increase the speed of the shipping process with integrated andautomated shipping functions; (v) increase accuracy through the scanning of each order prior to shipment to ensure it contains the correctquantity and type of lenses and (vi) communicate directly with eye care provider�s offices to accurately verify contact lens prescriptions.

The management information systems provide the Company�s CSR with real-time product availability information for substantiallyall of its products through a direct connection with the Company�s distribution center, whereupon information is immediately updated aslenses are shipped. In addition, Internet customers can obtain real-time product availability information for many products. The managementinformation systems also have an integrated direct connection for processing credit card payments which allows the CSR to ensure that a validcard number and authorization have been received in approximately five seconds while the CSR is on the phone with the customer. CSRs alsohave access to records of all prior contact with a customer, including the customer�s address, prescription information, order history andpayment history and notes of any prior contact with the customer made by phone, Internet, e-mail, mail or fax. Based on product availabilityprovided by the management information systems, the CSR provides the customer with an estimated date of delivery of their lenses. If acustomer�s order will not be shipped by the promised delivery date, the management information systems notify the CSR who entered theorder and provide any information explaining the delay, and the CSR contacts the customer to inform them of the delay.

After an order has been entered into the management information systems either by a CSR or directly by a customer through thecompany�s order entry system on its internet website, it is sent through the Company�s verification process to attempt to confirm the validityof the prescription. Once it is verified or the verification hold time has elapsed (see Government Regulations section) it is sent to theCompany�s distribution center via a direct connection. If the prescription is expired or determined to be invalid during the verificationprocess, the order is then cancelled and the customer�s information is made available to the Company�s national doctor network departmentto

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inform the customer of the cancellation. At this time one of the Company�s doctor network specialists offers to assist the customer byreferring the customer to a Cole National or independent doctor within its national doctor referral network, which includes independent eyecare practitioners as well as those participating in the Cole agreement, and provides the customer with promotional offers which includes anoffer for a discounted eye exam.

After the distribution center receives an order, the invoice for the order is printed and the customer�s credit card is charged, ifapplicable. The invoice for each order contains the type and quantity of the lenses, as well as a shipping label for the order. Tracking,manifesting, billing and other shipping functions are integrated into the Company�s management information systems so that all necessary barcodes and tracking information for shipment via independent couriers are printed directly on the Company�s shipping label, and separatelabeling or a separate computer is not needed to ship packages via independent couriers.

After the invoice for an order is printed at the Company�s distribution center, the order is pulled from inventory and scanned toensure that the prescription and quantity of each item matches the order in the Company�s management information systems. Audible noticesinform the shipping agent of any errors in the order. After the order has been scanned for accuracy, the management information systemsupdate the Company�s inventory level. Then the order is placed in a box folded by the Company�s automated box folder and is sent to anautomatic sealer. After the package leaves the sealer, another scanner reads the bar code on the shipping label to determine which method ofshipment is being used, adds the package to the appropriate carrier�s manifest and directs the appropriate hydraulic diverter to push thepackage into the appropriate carrier�s shipping bin.



The Company has installed a battery powered back-up system capable of supporting its entire call center, computer room and phoneswitch. This system is further protected by a generator capable of supporting the Company�s call center operations for a period of five days.All critical data is simultaneously written to a series of back-up drives throughout the day and at the end of the day the Company�s data istransmitted to various offsite locations as well as an onsite fireproof safe. There can be no assurance that the Company�s back-up system willbe sufficient to prevent an interruption in the Company�s operations in the event of disruption in the Company�s management informationsystems, and an extended disruption in the management information systems could adversely affect the Company�s business, financialcondition and results of operations.

Purchasing and Principal Suppliers

Until recently, substantially all of the major manufacturers of contact lenses refused to sell lenses to direct marketers, including theCompany, and sought to prohibit their distributors from doing so. After opening direct accounts with Ciba Vision and Bausch and Lomb, theCompany began buying directly from Johnson & Johnson Vision Care during March 2003. Currently, Ocular Sciences is the only remainingmajor manufacturer who refuses to sell directly to the Company. Historically, the Company has purchased a substantial portion of its productsfrom unauthorized distributors, but currently the Company purchases the majority of its products directly from the manufacturers with theexception of all Ocular Sciences products and select CooperVision products. The purchases from unauthorized distributors are expected todecrease in the future as the Company expands its purchasing relationships in the industry and as Federal regulatory authorities analyze thebusiness practices of manufacturers which refuse to sell to direct marketing companies.

As a result of some manufacturers� refusal to sell to the Company, the Company is not an authorized dealer for some of the productsit sells. In addition, the Company believes that the price which it pays for certain products is sometimes higher than those paid by eye carepractitioners, retail chains and mass merchandisers, who are able to buy directly from the manufacturers of such lenses and who benefit frombeing allowed to participate in cooperative advertising funds, coupon, sample, rebate and other marketing and promotional programs.Although the Company has been able to obtain most contact lens brands at competitive prices in sufficient quantities on a regular basis, therecan be no assurance that the Company will not encounter difficulties in the future. The inability of the Company to obtain sufficient quantitiesof contact lenses at competitive prices would have a material adverse effect on the Company�s business, financial condition and results ofoperations.

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Although the Company seeks to reduce its reliance on any one supplier by establishing relationships with a number of distributors,manufacturers and other sources, the Company acquired from a single distributor approximately 46 percent, 35 percent and 23 percent of itscontact lenses purchased in fiscal 2001, 2002 and 2003, respectively. The Company�s top three suppliers accounted for approximately 70percent, 63 percent and 59 percent of the Company�s inventory purchased in fiscal 2001, 2002 and 2003, respectively. The Companycontinually seeks to establish new relationships with potential suppliers in order to obtain adequate inventory at competitive prices. In theevent that these suppliers could no longer supply the Company with contact lenses, there can be no assurance that the Company could secureother adequate sources of supply, or that such supply could be obtained on terms no less favorable to the Company than its current supply,which could adversely affect the Company by increasing its costs or, in the event adequate replacement supply cannot be secured, reducing itsnet sales. In that regard, the Company does not have any contracts with manufacturers or distributors of contact lenses which provide for anabsolute guarantee of supply to the Company.

During the latter part of 2003, the Company reached agreements with its top three vendors for improved pricing and marketingsupport. This support will come in the form of cooperative marketing and proprietary rebate programs designed to promote themanufacturer�s products and build sales. The Company believes it is one of the largest U.S. customers for the three largest contact lensmanufacturers.

ClearLab International has developed a new brand of contact lenses that is expected to provide the Company increased control ofinventory and the flexibility with which to make a variety of offers to its customers and to enhance its capability to provide high quality, cost-effective products. These manufacturing capabilities also provide the Company with greater access to contact lens products for futuredistribution in the U.S. should the Company�s access to contact lenses from the major contact lens manufacturers be disrupted, curtailed or



otherwise negatively impacted, or if the manufacturers do not provide the Company with contact lenses at competitive pricing and withcompetitive marketing support.

Competition

The retail sale of contact lenses is a highly competitive and fragmented industry. Traditionally, contact lenses were sold to customersalmost exclusively by eye care practitioners in connection with providing them an eye examination. Competition for patients and the revenuerelated to providing contact lenses to those customers significantly increased as optical chains and large discount retailers began providingoptical services and has further intensified with the entry of direct marketers such as the Company. The Company believes that the eye careprofession suffers from a surplus of eye care practitioners and that the resulting competitive pressure has been exacerbated by the increasedprevalence of retail optical chains, mass merchandisers and direct marketers. Consequently, the competition amongst eye care practitioners toacquire customers and the competition to provide replacement lenses to such customers has intensified. To a lesser extent, the Company alsocompetes with manufacturers of eyeglasses and providers of other vision correction, including refractive surgical procedures.

The Company�s principal competitors include ophthalmologists and optometrists in private practice. The Company also competeswith national optical chains, such as Cole Vision, LensCrafters and National Vision Association and mass merchandisers, such as Wal-Mart,Sam�s Club and Costco. In addition, the Company competes with other direct marketers of contact lenses. The Company may face increasedcompetition in the future from new entrants in the direct marketing business, which may include national optical chains and massmerchandisers, some of which may have significantly greater resources than the Company.

The Company believes that many of its competitors, including most eye care practitioners, national optical chains and massmerchandisers, have direct supply arrangements with contact lens manufacturers which in some cases afford those competitors with betterpricing terms, access to supply and other sales and marketing programs. In addition, some of the competitors are significantly larger in overallrevenues and have significantly greater resources than the Company. The Company believes that the principal elements of competition in theindustry include price, product availability, customer service and consumer awareness.

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In addition, the manufacturing of contact lenses is highly competitive. With respect to its manufacturing operations, the Companyfaces competition from other contact lens manufacturers such as Johnson & Johnson Vision Care, CIBA Vision, Bausch & Lomb, OcularSciences and CooperVision. Most of the Company�s competitors have substantially greater resources to invest in product development andcustomer support, and greater access to financial and other resources than the Company.

Government Regulation

Direct Marketing

Federal Regulation

Contact lenses are regulated by the Food and Drug Administration (�FDA�) as �medical devices.� The FDA classifies medicaldevices as Class I, Class II or Class III and regulates them to varying degrees, with Class I medical devices subject to the least amount ofregulation and Class III medical devices subject to the most stringent regulations. Rigid gas permeable and soft contact lenses are classified asClass II medical devices if intended only for daily wear and as Class III medical devices if intended for extended wear. These regulationsgenerally apply only to the manufacturing of contact lenses, and therefore do not directly impact the direct marketing operations of theCompany. Federal regulations also require the labels on �medical devices� to contain adequate instructions for their safe and proper use.However, there is an exemption from this requirement for medical devices the use of which is not safe except under the supervision of apractitioner licensed by law to direct the use of such device. Devices which fall within this exception must contain as part of their labeling thestatement �Caution: Federal law restricts this device to sale by or on the order of (physician or other licensed practitioner),� theblank to be filled in with the word physician or other practitioner authorized by the law of the state in which the practitioner practices to use ororder the use of the device. The FDA considers contact lenses to qualify for this labeling exemption; however, a device bearing this legend



that is dispensed without a prescription may be considered misbranded by the FDA. Potential penalties for misbranding include warningletters from the FDA, seizure, injunction, civil penalties, or prosecution. To date, the FDA has not taken any such action against theCompany.

In November 2003, Congress passed the Fairness to Contact Lens Consumer Act (�FCLCA�) which establishes a national uniformstandard for both eye care practitioners and direct marketers with regard to releasing and verifying consumer contact lens prescriptions as wellas other requirements relating to the sale of contact lenses. The FCLCA became effective February 4, 2004, and now requires all eye carepractitioners to give patients a copy of their prescription as soon as they have been fitted for contact lenses, whether the patients ask for it ornot. It also requires all eye care practitioners to respond to direct marketers� requests to verify consumer prescriptions and provides that theirfailure to respond within eight business hours shall result in the prescription being presumed valid, thereby eliminating the ability of eye carepractitioners to impede sales by direct marketers simply by ignoring or refusing to respond to their requests to verify prescriptions TheFCLCA also provides that prescriptions will be valid for a minimum of at least one year (absent some special medical reason justifying ashorter period) and that the time for expiration shall not begin to run until the eye care practitioner has given the patient a copy of his or herprescription. It also directs the Federal Trade Commission (�FTC�) to promulgate implementing rules and to conduct a study examining thestrength of competition in the market for contact lenses and to submit a report to Congress within twelve months. This FTC study willspecifically address, among other things, the use of doctor exclusive brands (i.e., contact lenses available only for sale from an eye carepractitioner) and other practices that impede competition.

The FCLCA also requires that contact lenses only be sold to consumers based on a valid prescription. Satisfying this prescriptionrequirement obligates the seller either to obtain a copy of the prescription itself or to verify the prescription by direct communication with thecustomer�s prescriber. Consistent with this requirement, the Company�s current operating practice is to require all customers to provideeither a valid copy of their prescription or the contact information for their prescriber so that the Company can verify their prescription bydirect communication with their prescriber. If the Company does not have a valid copy of the customer�s prescription, the Company directlycommunicates to the customer�s prescriber the precise prescription information received from the customer and

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informs the prescriber that it will proceed with the sale based on this prescription information unless the prescriber advises it within eightbusiness hours that such prescription information is expired or otherwise invalid. If the prescriber properly advises the Company within thistime period that the customer�s prescription is expired or otherwise invalid, the Company�s practice is to cancel the customer�s order. On theother hand, if the prescriber either advises the Company that the prescription is valid or fails to respond properly within the required timeperiod, the Company�s practice is to complete the sale based on the prescription information communicated to the prescriber, as expresslypermitted by the FCLCA. The Company retains copies of the written prescriptions that it receives and maintains records of itscommunications with the customer�s prescriber.

The Company believes that the FCLCA eliminates much of the previous legal risk and uncertainty associated with numerousdiffering and often ambiguous or archaic state laws and regulations that had previously governed the sale of contact lenses. In addition, as eyecare practitioners begin to automatically release contact lens prescriptions to their patients (as required by the FCLCA) the Company expectsthat it will be easier for consumers to send a copy of their prescription to the Company and that more consumers will become aware of theiroption to purchase contact lenses from the Company rather than their prescriber. At the same time, the Company anticipates that its adherenceto the FCLCA�s new requirements nationwide will result in it canceling a greater portion of its customers� orders due to their prescriptionsbeing expired or otherwise invalid. The Company�s net sales for fiscal 2003 were negatively impacted by canceled orders due to theprescription verification procedures implemented as part of its agreement with Johnson & Johnson Vision Care (the �Johnson & JohnsonVision Care Agreement�). Since the FCLCA�s prescription verification requirements closely resemble those of its Johnson & Johnson VisionCare Agreement, the Company expects that there will be a similar impact on its non-Johnson & Johnson Vision Care orders.

State Regulation

Although the FCLCA overrides state laws or regulations that purport to impose stricter prescription verification procedures on directmarketers or that otherwise conflict with the general purposes and objectives of the FCLCA, the sale and delivery of contact lenses toconsumers may also be subject to limited regulation by the state where the customer is located. For example, a substantial number of states



require that contact lenses only be sold by persons licensed or registered to do so under that state�s laws. A dispenser may be required to belicensed as an eye care professional (i.e., optometrist, ophthalmologist or optician) or to be licensed or registered as a contact lens sellerdepending on the requirements of the particular state in which the customer is located. Such state laws or regulations may or may not runafoul of the FCLCA or other federal or constitutional requirements depending on their particular provisions. Neither the Company nor any ofits employees is a licensed eye care professional in many of the states in which the Company does business.

Any action brought against the Company based on its failure to comply with applicable state laws and regulations could result insignificant fines to the Company, the Company being prohibited from making sales in a particular state, the Company being required tocomply with such laws or could constitute a misdemeanor. Such required compliance could result in: (i) increased costs to the Company; (ii)the inability to sell to customers at all in a particular state if the Company cannot comply with such state�s laws and (iii) misdemeanorpenalties and civil fines. The occurrence of any of the above results could have a material adverse effect on the Company�s ability to sellcontact lenses and to continue to operate profitably. The Company has not obtained an opinion of counsel with regard to its compliance withall applicable state laws and regulations or the enforceability of such state laws and regulations, and information contained herein regardingthe Company�s compliance with applicable state laws and regulations should not be construed as being based on an opinion of counsel. TheCompany has in the past, and intends in the future, to vigorously defend any actions brought against it.

From time to time the Company receives notices, inquiries or other correspondence from states or their regulatory bodies chargedwith overseeing the sale of contact lenses. The Company�s practice is to review such notices with legal counsel to determine the appropriateresponse on a case-by-case basis.

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It is the opinion of management, after discussion with legal counsel, that the Company has formulated an appropriate policy, and asneeded, takes appropriate steps to address the various notices it has received or may in the future receive. See �Legal Proceedings� for formalcomplaints filed against the Company concerning its business practices.

Manufacturing

The Company�s products are generally regulated in the United States and in foreign countries as �medical devices.� As amanufacturer of medical devices, the Company is subject to regulation in the United States by the FDA and corresponding state and foreignregulatory agencies where the Company sells products. These regulations generally govern the introduction of new medical devices, themaintenance of certain records, the labeling of devices and other matters. The regulatory environment in which the Company operates can beexpensive, time-consuming and uncertain.

FDA Regulation

Pursuant to the Federal Food, Drug, and Cosmetic Act (�FDC Act�), and implementing regulations, the FDA regulates the testing,manufacturing, labeling, distribution, and promotion of medical devices. Noncompliance with applicable requirements can result in, amongother things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of product distribution, failure of thegovernment to grant premarket clearance or approval for devices, withdrawal of marketing clearances or approvals, and criminal prosecution.The FDA also has the authority to request the recall, repair, replacement or refund of the cost of any device manufactured or distributed by theCompany.

Under the FDC Act, clearance or approval by the FDA is required prior to the commercialization of a medical device. The FDAclassifies medical devices as Class I, Class II or Class III, depending on the nature of the medical device and the existence in the market of anysimilar devices. The nature of the clearance or approval procedures is dependent on the classification of the medical device in question. ClassI medical devices are subject to general controls, including labeling, premarket notification and adherence to the FDA�s quality systemsregulations governing all medical device manufacturing. Class II medical devices are subject to general and special controls, includingperformance standards, postmarket surveillance, patient registries and FDA guidelines. Class III medical devices are those which mustreceive premarket approval by the FDA to ensure their safety and effectiveness, are generally life-sustaining, life-supporting devices orimplantable devices or new devices which have been found not to be substantially equivalent to currently marketed medical devices.



Before a new device can be introduced into the U.S. market, it must receive from the FDA premarket notification clearance underSection 510(k) of the FDC Act or premarket approval pursuant to the more costly and time-consuming premarket approval application (PMA)procedure. The FDA grants a 510(k) clearance if the submitted information establishes that the proposed device is �substantially equivalent�to a legally marketed Class I or Class II medical device or a Class III medical device for which the FDA has not called for PMAs. For anydevices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, orconstitute a major change in the intended use of the device, will require new 510(k) submissions. While less expensive and time-consumingthan obtaining PMA clearance, securing 510(k) clearance may involve the submission of a substantive review of six months or more. Anyproducts manufactured or distributed pursuant to 510(k) clearance are subject to pervasive and continuing regulation by the FDA, includingrecord keeping requirements and reporting of adverse experience with the use of the device.

Most of Clearlab International�s products have 510(k) clearance and any new products under development, including ClearLabUK�s, to be marketed in the United States will undergo clinical studies to support a 510(k) or PMA. There is no certainty that clinicalstudies involving new products will be completed in a timely manner or that the data and information obtained will be sufficient to support thefiling of a PMA or 510(k) clearance. The Company cannot assure that it will be able to obtain necessary clearances and approvals to marketnew devices or any other

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products under development on a timely basis, if at all, and delays in receipt or failure to receive such clearances or approvals, the loss ofpreviously received clearances, or failure to comply with existing or future regulatory requirements could have a material adverse effect on theCompany�s business, financial condition and results of operations.

As a manufacturer of medical devices, ClearLab International is required to register with the FDA and comply with the FDA�s Codeof Federal regulations quality system requirements. These regulations require that ClearLab International manufacture products and maintainmanufacturing, testing and control activities records in a prescribed manner, and maintain careful records of, and control over, device designdevelopment. Further, ClearLab International and the Company are required to comply with FDA requirements for labeling and promotingproducts. ClearLab International is subject to periodic inspections by the FDA and can be subjected to a number of regulatory actions if theFDA finds ClearLab International to be not in compliance with applicable laws and regulations. If the FDA believes that ClearLabInternational may not be operating in compliance with applicable laws and regulations, it can record its observations on a Form FDA 483;place ClearLab International under observation and re-inspect the facilities; institute proceedings to issue a warning letter apprising ofviolative conduct; detain or seize products; mandate a recall; enjoin future violations; and assess civil and criminal penalties against ClearLabInternational, its officers or its employees. In addition, in appropriate circumstances, the FDA could withdraw clearances or approvals.Failure to comply with regulatory requirements or any adverse regulatory action could have a material adverse affect on ClearLabInternational and the Company.

Manufacturers of medical devices for marketing in the United States also must comply with medical device reporting (�MDR�)requirements that companies report to the FDA any incident in which its product may have caused or contributed to a death or serious injury,or in which its product malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or seriousinjury. Labeling and promotional activities are subject to scrutiny by the FDA. Current FDA enforcement policy prohibits the marketing ofapproved medical devices for unapproved uses.

ClearLab International is subject to routine inspection by the FDA for compliance with quality systems requirements, MDRrequirements, and other applicable regulations. The Company cannot assure that it will not incur significant costs to comply with laws andregulations in the future or that laws and regulations will not have a material adverse effect upon the Company�s business, financial conditionor results of operation. The Company believes that all of its products offered for sale have received all required FDA approvals or clearance,and that it is in substantial compliance with FDA regulations, including quality systems and MDR requirements.

International Regulation



ClearLab International�s products also are subject to regulation in other countries in which its products are sold. The laws andregulations of such countries range from comprehensive medical device approval procedures such as those described above to simple requestsfor product data or certifications. The number and scope of these laws and regulations are increasing. In particular, medical devices in the EUare subject to the EU�s medical devices directive (the �Directive�).

Under the system established by the Directive, all medical devices other than active implants and in vitro diagnostic productscurrently must qualify for CE marking. �CE marking� means the manufacturer certifies that its product bearing the CE mark satisfies allrequirements essential for the product to be considered safe and fit for its intended purpose.

In order to qualify for CE marking, the manufacturer must comply with the �Essential Requirements� of the Directive, relating to thesafety and performance of the product. In order to demonstrate compliance, a manufacturer is required to undergo a conformity assessment,which includes assessment of the manufacturer�s quality assurance system by self-selected certification organizations referred to as a�Notified Body.� After all necessary conformity assessment tests have been completed to the satisfaction of the Notified Body and themanufacturer is convinced that it is in full compliance with the Directive, CE marking may be affixed on the products concerned. ClearLab

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International has undergone such conformity assessment and has received CE marking authorization for all products that it currently marketsin the EU.

Although member countries must accept for marketing medical devices bearing a CE marking without imposing further requirementsrelated to product safety and performance, each country may require the use of its own language or labels and instructions for use. �NationalCompetent Authorities� who are required to enforce compliance with the requirements of the Directive, can restrict, prohibit and recall CE-marked products if they are unsafe. Such a decision must be confirmed by the European Commission in order to be valid. Member countriescan impose additional requirements as long as they do not violate the Directive or constitute technical barriers to trade.

Additional approvals from foreign regulatory authorities may be required for international sale of the Company�s products in non-EUcountries. Failure to comply with applicable regulatory requirements can result in the loss of previously received approvals and othersanctions and could have a material adverse effect on the Company�s business, financial condition and results of operations.

Intellectual Property

The Company conducts its business under the trade name and service marks �1-800 CONTACTS.� The Company has taken steps toregister and protect these marks and believes that such marks have significant value and are an important factor in the marketing of itsproducts. To this end, the Company has secured trademark registration for the �1-800 CONTACTS� name. The Company owns the right touse the 1-800 CONTACTS telephone number. However, under applicable FCC rules and regulations, the Company does not have and cannotacquire any property rights to the telephone number. The Company does not expect to lose the right to use the 1-800 CONTACTS number;however, there can be no assurance in this regard. The loss of the right to use the 1-800 CONTACTS number would have a material adverseeffect on the Company�s business, financial condition and results of operations. In addition, the Company has obtained the rights tointernational equivalents for the 1-800 CONTACTS phone number; however, like the 1-800 CONTACTS number, the Company does nothave and cannot acquire any property rights in these telephone numbers.

The Company also has obtained the rights to various Internet addresses, including but not limited to www.1800contacts.com,www.contacts.com and www.contactlenses.com. As with phone numbers, the Company does not have and cannot acquire any property rightsin Internet addresses. The Company does not expect to lose the ability to use the Internet addresses; however, there can be no assurance in thisregard and such loss would have a material adverse effect on the Company�s business, financial position and results of operations.

The Company has certain intellectual property rights, including patents important to the operations of ClearLab International andClearLab UK and various other patent applications relating to contact lenses and the manufacturing of contact lenses.



Employees

As of January 3, 2004, the Company had 819 full-time and part-time employees, including 600 in the United States and 219 inSingapore. None of the Company�s employees are covered by a collective bargaining agreement. The Company believes its relationship withits employees to be good.

Item 2. Properties.

The Company�s headquarters and call center operations are located in approximately 77,000 square feet of leased space located inDraper, Utah, a suburb of Salt Lake City. The operating leases relating to these facilities expire in 2009.

The Company�s distribution center is approximately 84,000 square feet and is located near the Salt Lake

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City, Utah international airport. The operating lease term for the distribution center has been extended through December 2005.

The ClearLab International manufacturing facility is located in Singapore. All manufacturing activities are conducted inapproximately 110,000 square feet of space at this location of which approximately half is used for operations. ClearLab International leases aportion of the building to other tenants. The Company has a leasehold interest in the building with approximately 17 years remaining.

Item 3. Legal Proceedings.

On April 7, 1999, the Kansas Board of Examiners in Optometry (�KBEO�) commenced a civil action against the Company. Theaction was filed in the District Court of Shawnee County, Kansas, Division 6. The complaint was amended on May 28, 1999. The amendedcomplaint alleges that �on one or more occasions� the Company sold contact lenses in the state of Kansas without receipt of a prescription.The amended complaint seeks an order enjoining the Company from further engaging in the alleged activity. The amended complaint doesnot seek monetary damages. The Company filed an answer to the amended complaint and, at the request of the Court, filed a motion forsummary judgment. In November 2000, the Court issued an order denying the summary judgment motion, finding that there were factualissues regarding whether the KBEO can meet the requirements necessary to obtain injunctive relief, and whether the Kansas law violates theCommerce Clause of the United States Constitution. On June 18, 2002, the court granted a summary judgment motion in favor of the KBEO.However, the court made no findings of any violations of Kansas law. Further, the court based its decision on a Kansas optometry law thathas been repealed and amended by the Kansas legislature. To preserve the issues for appeal, on July 2, 2002, the Company filed a motion toalter or amend judgment, asking the court to reverse its decision, and to enter summary judgment in favor of defendant, or to dismiss theKBEO�s lawsuit as moot based on the new law. The court denied the motion on September 12, 2002, finding that no new evidence had beenpresented to persuade the court to change its prior ruling. The court made no new findings of fact and did not change its conclusions of law.On October 11, 2002, the Company filed its Notice of Appeal with the Kansas Court of Appeals; the Docketing Statement was filed onOctober 30, 2002. All pleadings were timely filed and an oral argument was held on August 27, 2003. On November 7, 2003, the KansasCourt of Appeals reversed the trial court�s order that entered summary judgment in favor of the Board. The Appellate court remanded thecase back to the trial court for further proceedings. Thus, as a result of the Appellate court�s order, there is no injunction against theCompany, and the matter is again pending before the trial court. The parties have each submitted proposed orders to the trial court. TheBoard has asked the court to re-enter summary judgment in its favor, and to reinstate the injunction. The Company has asked the court todismiss the case, based either on the lack of any basis for injunctive relief, or because the case is now moot based on changes to Kansas lawwhich took effect while the case was pending on appeal, or based on the recent passage of the FCLCA which took effect on February 4, 2004.As of the date of this summary, the trial court has made no ruling, and the case remains pending.

From time to time the Company is involved in other legal matters generally incidental to its business.

It is the opinion of management, after discussion with legal counsel that, except for legal and professional fees that the Companyincurs from time to time, the ultimate dispositions of all of these matters will not have a material impact on the financial position, liquidity or



results of operations of the Company. However, there can be no assurance that the Company will be successful in its efforts to satisfactorilyresolve these matters and the ultimate outcome could result in a material negative impact on the Company�s financial position, liquidity orresults of operations.

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

No matters were submitted to a vote of the Company�s security holders in the fourth quarter of fiscal 2003.

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Item 4A. Executive Officers of the Registrant.

The information under this Item is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K. Executive officers of theCompany are elected by and serve at the discretion of the Board of Directors.

Name Age Position

Jonathan C. Coon 34 Chief Executive Officer and DirectorBrian W. Bethers 44 President and Chief Financial OfficerJohn F. Nichols 43 Vice President, Trade Relations and DirectorKevin K. McCallum 42 Senior Vice President, Marketing and SalesRobert G. Hunter 37 Vice President, Finance and TreasurerR. Joe Zeidner 38 Chief Legal Officer and SecretaryS. Todd Witzel 33 Chief Information OfficerGraham Mullis 41 President and Managing Director of ClearLab InternationalDavid M. Saylor 44 Vice President, OperationsSteve Newman 47 Chief Technology Officer of ClearLab International

Jonathan C. Coon is a co-founder of the Company and has served as Chief Executive Officer and Director of the Company since itsfounding in 1995. Mr. Coon received his Bachelor�s Degree from Brigham Young University in 1994. Mr. Coon has over ten years ofexperience in the contact lens distribution industry.

Brian W. Bethers is President and Chief Financial Officer of the Company. He joined the company in 2003 from TAC Worldwide, aprivately held technology staffing company in Dedham, Massachusetts where he served as Chief Financial Officer. Prior to TAC Worldwide,Mr. Bethers was Chief Financial Officer of SupplierMarket.com, where he led the company�s financial expansion and SEC registration for anIPO prior to the company�s sale to Ariba Corporation in 2000. Prior to this, Mr. Bethers was Chief Financial Officer of Host MarriottServices. He led the company�s listing on the New York Stock Exchange in 1995 and sale in 1999. Mr. Bethers previously spent ten years atMarriott Corporation in various finance and development positions. He received both a Bachelor of Arts degree and MBA from BrighamYoung University.

John F. Nichols is a co-founder of the Company and currently serves as Vice President, Trade Relations and Director. Prior to hiscurrent position, Mr. Nichols served as Vice President, Sales until March 2003. Mr. Nichols is a certified optician in the State of Californiaand was the owner of the Discount Lens Club from 1991 until February 1995. Mr. Nichols worked with Bausch & Lomb as a Senior SalesRepresentative from 1989 to 1991.

Kevin K. McCallum has served as Senior Vice President, Marketing and Sales of the Company since 2003. Prior to his currentposition, Mr. McCallum served as Vice President, Marketing of the Company since March 2000. Prior to joining the Company, Mr.McCallum, a 9-year veteran of Procter & Gamble from 1991 to 2000, served as a Director of Marketing for several of Procter & Gamble�sglobal laundry and cleaning brands. Prior thereto, Mr. McCallum served as a line officer in the U.S. Navy from 1984 to 1989. Mr. McCallumreceived a Bachelor�s Degree from the United States Naval Academy and an MBA from the Georgia Institute of Technology.

Robert G. Hunter has served as Vice President, Finance of the Company since 2000. Prior to the arrival of Mr. Bethers in 2003, Mr.Hunter served as Interim Chief Financial Officer for six months. Prior to becoming Vice President, Finance, Mr. Hunter served as theCorporate Controller since November 1997. Before joining the Company, Mr. Hunter served as an auditor with Hawkins, Cloward & SimisterLC from November 1993 to 1997 and with Arthur Andersen LLP from April 1992 to November 1993. Mr. Hunter is a Certified Public



Accountant. Mr. Hunter graduated summa cum laude with a Bachelor�s Degree from Brigham Young University, where he also earned aMasters of Accountancy Degree.

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R. Joe Zeidner has served as Vice President, Legal Affairs and Chief Legal Officer of the Company since 2003. Mr. Zeidner hasserved as the General Counsel of the Company since September 2000 and as the Corporate Secretary since February 2001. Prior to joining theCompany, Mr. Zeidner served as regulatory General Counsel of Pharmanex, Inc., a Utah-based vitamin and supplement manufacturer anddistributor, from 1998 to 2000. Prior to that, Mr. Zeidner served as Northeast Asia General Counsel of Nu Skin Japan and Nu Skin Korea andworked at Pfizer pharmaceutical from 1989 to 1991. Mr. Zeidner received a Bachelor�s degree in Japanese and Communications fromBrigham Young University and a law degree from the J. Reuben Clark School at Brigham Young University.

S. Todd Witzel has served as Chief Information Officer of the Company since 2003. Prior to his current position, Mr. Witzel servedas both the Director of Information Technology and the Manager, Management Information Systems since joining the Company inNovember 1996. Before joining the Company, Mr. Witzel worked as a computer programmer for Access Software from 1992 to 1996.

Graham Mullis has served as President and Managing Director of ClearLab International since 2002. He also serves as Director ofClearlab Pte Ltd. He has more than 10 years experience in leading medical device businesses and 8 years in the contact lens industry. He wasthe Managing Director of Biocompatibles Hydron, and sold the business to CooperVision for $125 million. He launched the Proclear� rangeof contact lenses at Biocompatibles, which is now a major product line for CooperVision , the fourth largest contact lens manufacturer in theworld. He is leading the expansion of 1-800 CONTACTS overseas as well as leading Clearlab International. He has a bachelor�s degree inBiochemistry & Physiology from Southampton University and an MBA from Warwick Business School.

David Saylor has served as Vice President of Operations since June 2003. Mr. Saylor joined the Company in 2003 from Sloan ValveCompany, a privately held plumbing products manufacturer located in Franklin Park, Illinois, where he was Director of Operations.Previously, Mr. Saylor was Plant Manager for TRW Automotive, Jackson Michigan Plant, where he led a five-year expansion of that brakemanufacturing facility, adoption of JIT/Lean Manufacturing and QS9000 quality certification. Prior to this, Mr. Saylor was Director ofProgram Management for VarityKelsey-Hayes. Mr. Saylor�s experience includes 13 years of operations and manufacturing management andnearly 10 years in engineering. He received a Bachelor of Science, Metallurgical Engineering from Michigan Technological University in1984.

Steve Newman is serving as Chief Technology Officer of Clearlab International. He has more than 25 years experience in the contactlens industry, specifically in the area of manufacturing and lens design. He holds numerous patents in the area of toricidal and sphericalcontact lens designs and their manufacturing methods. Prior to joining Clearlab International he was R&D Manager for Hydron Pty LtdAustralia, Director of Capricornia Australia, and recently Chief Executive Officer for Igel Visioncare Pte Ltd. He will lead all of the researchand development activities for the Company.

There are no family relationships between any executive officer or director of the Company.

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PART II

Item 5. Market for Registrant��s Common Equity and Related Stockholder Matters.

Market Information

The Common Stock is traded on the Nasdaq National Market (�Nasdaq�) under the symbol �CTAC.� The Common Stockcommenced trading on February 10, 1998. The following table sets forth the high and low closing sale prices per share for the Common Stockas reported by the Nasdaq for the periods presented:



High Low

Fiscal Year ended December 28, 2002:First Quarter $ 12.48 $ 10.26Second Quarter 15.25 10.90Third Quarter 13.55 7.95Fourth Quarter 27.28 8.31

Fiscal Year ended January 3, 2004:First Quarter 28.56 17.26Second Quarter 26.58 20.19Third Quarter 24.61 18.70Fourth Quarter 23.00 19.67

Holders

As of March 3, 2004, there were approximately 81 holders of record of Common Stock. The Company believes that it has asignificantly larger number of beneficial holders of Common Stock.

Dividends

The Company anticipates that all of its future earnings will be retained to finance the expansion of its business. Any futuredetermination to pay dividends will be at the discretion of the Company�s Board of Directors and will depend upon, among other factors, theCompany�s results of operations, financial condition, capital requirements and contractual restrictions. In addition, the Company�s revolvingcredit facility prohibits the Company from paying any cash dividends on its Common Stock.

21

Recent Sales of Unregistered Securities

On July 24, 2002, the Company acquired certain net assets and the majority of the business operations of IGEL, a developer andcontract manufacturer of contact lenses based in Singapore. The acquisition was effected through a wholly owned subsidiary of the Company,IGEL Acquisition Co. Pte Ltd (subsequently renamed ClearLab International), and included the purchase of assets of Igel C.M. Laboratory PteLtd and International Vision Laboratories Pte Ltd, both subsidiaries of Igel Visioncare Pte Ltd, as well as certain other assets fromSinduchajana Sulistyo and Stephen D. Newman. The assets acquired included principally the long-term leasehold interests in the land andbuilding where the manufacturing facility is located, as well as equipment, inventories, and certain intellectual property rights, includingpatents key to the operation of the acquired business.

The consideration paid by the Company consisted of approximately $6.6 million in cash (which includes $1.2 million in transactioncosts), $8.9 million in assumed building and business loans to be paid over 7 years from the acquisition date, $0.7 million in assumed capitallease obligations, a non-interest bearing note payable of $2.1 million to be paid over 5 years from the acquisition date, 700,000 shares ofrestricted common stock of the Company, and 270,000 common stock options of the Company in three tranches of 90,000 each with exerciseprices of $15, $25 and $35 per share, respectively.

The 700,000 shares of restricted common stock were placed in escrow, subject to a performance guarantee, and vest over a two-yearschedule with no shares released from escrow for a minimum of one year from the acquisition date. On June 6, 2003, the performanceguarantee was met relating to these shares and 175,000 shares were released on July 24, 2003, and 437,500 shares were released onJanuary 24, 2004. The remaining 87,500 shares held in escrow will be released on July 24, 2004.

On January 30, 2003, the Company completed the acquisition of certain assets and the assumption of certain liabilities of LensExpress LLC and Camelot Ventures/CJ, L.L.C. d/b/a Lens 1st (collectively, the �Seller�), two leading U.S. mail order contact lens retailers.



The assets acquired included databases, customer information, web sites and Internet addresses or domain names, telephone numbers, certainspecified contracts and intellectual property rights. In addition, acquired assets included certain property, equipment, inventories, receivablesand prepaid expenses. With the exception of specifically identified liabilities, the Company did not assume the liabilities of the Seller. Theliabilities assumed by the Company included certain of the Seller�s identified contracts, accounts payable, accrued liabilities, certain customerprogram obligations and severance obligations as of January 30, 2003. The consideration paid by the Company consisted of approximately$7.0 million in cash (including $0.5 million in transaction costs), 900,000 shares of restricted common stock of the Company with a fair valueof $19.9 million and the assumption of approximately $4.1 million of the aforementioned liabilities. The 900,000 shares of restricted commonstock are subject to a lock-up period of 12 months after the acquisition date of January 30, 2003. In connection with the acquisition, theCompany entered into a registration rights agreement pursuant to which the Company granted the Seller certain piggyback registration rightswith respect to the 900,000 shares of restricted common stock.

The shares and options related to these transactions were issued in reliance upon the exemption from registration provided inSection 4(2) of the Securities Act of 1933, as amended. In that regard, each of the sellers represented to the Company that he/it was an�accredited investor� as defined in Rule 501(a) of Regulation D promulgated under the Securities Act.

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Item 6. Selected Financial Data.

The financial data as of and for the years ended January 1, 2000 (�fiscal 1999�), December 30, 2000 (�fiscal 2000�), December 29,2001 (�fiscal 2001�), December 28, 2002 (�fiscal 2002�) and January 3, 2004 (�fiscal 2003) have been derived from the consolidatedfinancial statements of the Company. The selected financial data should be read in conjunction with the consolidated financial statements andthe notes thereto of the Company and �Management�s Discussion and Analysis of Financial Condition and Results of Operations.�

Fiscal Year

1999 2000 2001 2002 2003

(in thousands, except per share amounts)

Statement of Operations Data:Net sales $ 98,525 $ 144,971 $ 169,036 $ 168,580 $ 187,303Cost of goods sold 59,416 86,367 103,093 118,181 116,873Gross profit 39,109 58,604 65,943 50,399 70,430Advertising expense 20,238 25,603 26,850 12,642 20,191Legal and professional fees 454 870 2,838 4,738 6,352Research and development � � � 247 4,625Purchased in-process research and development � � � 7,789 �

Other operating expenses 11,548 15,251 19,874 23,870 37,615Total operating expenses 32,240 41,724 49,562 49,286 68,783Income from operations 6,869 16,880 16,381 1,113 1,647Other income (expense), net (41) 198 (252) (1,186) (1,167)Income (loss) before provision for income taxes 6,828 17,078 16,129 (73) 480Provision for income taxes (701) (6,604) (6,265) (3,931) (1,918)Net income (loss) $ 6,127 $ 10,474 $ 9,864 $ (4,004) $ (1,438)

Basic net income (loss) per common share(1) $ 0.49 $ 0.88 $ 0.85 $ (0.35) $ (0.11)

Diluted net income (loss) per common share(1) $ 0.48 $ 0.86 $ 0.84 $ (0.35) $ (0.11)

Balance Sheet Data (at the end of year):Working capital $ 14,837 $ 9,359 $ 18,388 $ 19,997 $ 12,266Total assets 25,054 26,108 50,405 62,004 86,931Total debt (including current portion) 30 3,265 12,526 26,610 18,319



Stockholders� equity 18,701 13,964 23,753 17,597 55,207

(1) On July 24, 2000, the Company effected a two-for-one stock split. All share and per share information has been adjusted retroactively togive effect to this stock split.

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Item 7. Management��s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Company is a leading direct marketer of replacement contact lenses. The Company was formed in February 1995 and is thesuccessor to the mail order business founded by the Company�s Vice President of Trade Relations in March 1991. The Company�s net saleshave grown rapidly from $3.6 million in fiscal 1996 to $187.3 million in fiscal 2003.

Recent Transactions

Lens Express / Lens 1st. On January 30, 2003, the Company acquired certain assets and assumed certain liabilities of Lens ExpressLLC and Camelot Ventures/CJ, L.L.C. d/b/a Lens 1st (collectively, the �Seller�), two leading U.S. mail order contact lens retailers. The assetsacquired included databases, customer information, web sites and Internet addresses or domain names, telephone numbers, certain specifiedcontracts and intellectual property rights. In addition, acquired assets included certain property, equipment, inventories, receivables andprepaid expenses. With the exception of specifically identified liabilities, the Company did not assume the liabilities of the Seller. Theliabilities assumed by the Company included certain of the Seller�s identified contracts, accounts payable, accrued liabilities, certain customerprogram obligations and severance obligations as of January 30, 2003.

The consideration paid by the Company consisted of approximately $7.0 million in cash (including $0.5 million in transaction costs),900,000 shares of restricted Common Stock of the Company with a fair value of $19.9 million and the assumption of approximately $4.1million of the aforementioned liabilities. The 900,000 shares of restricted common stock were subject to a lock-up period of 12 months afterthe acquisition date of January 30, 2003. In connection with the acquisition, the Company entered into a registration rights agreement grantingthe Seller certain piggyback registration rights with respect to the 900,000 shares of restricted Common Stock. The Company funded the cashconsideration portion of the asset purchase from its revolving credit facility.

Subsequent to fiscal 2003, the Company announced that it will be consolidating the operating facility acquired from Lens 1st into itsprincipal operating facilities in Utah, effective by the end of the first quarter of fiscal 2004.

Cole National Marketing Agreement. On June 30, 2003, the Company and Cole National Corporation (�Cole�) announced that theyhad signed an agreement under which the Company�s customers can receive discounted eye exams and value pricing on eyeglasses,sunglasses and other vision products that the Company does not sell from a network of doctors contracted with Cole Managed Vision andassociated with more than 1,500 Pearle Vision, Pearle VisionCare, Sears Optical and Target Optical stores in the U.S. Cole will offer itsnetwork of doctors for at least one year. The Company will retain the contact lens business of customers referred to Cole stores.

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

Supplier Agreements. During the latter part of 2003, the Company reached agreements with its top three vendors for improvedpricing and marketing support. This support will come in the form of cooperative marketing and rebate programs designed to promote themanufacturer�s products and build sales. As part of its ongoing relationship with its suppliers, the Company annually reviews its specificmarketing plans and negotiates cooperative marketing programs and product pricing.

Letter of Intent (Purchase of VisionTec). On March 13, 2003, the Company signed a letter of intent with VisionTec, a developerand manufacturer of contact lenses based in the United Kingdom, and certain of its shareholders. The Company agreed to pay VisionTec anon-refundable sum equal to $1.5 million to be used by the



24

entity for research and development activities relating to contact lenses. Of the total, $700,000 was paid on March 14, 2003, and theremaining $800,000 was paid on June 13, 2003. In addition, the Company was granted a six-month option to either: (1) acquire all of theshares of common stock of the entity; or, (2) acquire from the entity a worldwide license to manufacture, market, sell or otherwise use orexploit specific technology developed by the entity. As consideration for this option, the Company paid $100,000 to VisionTec on March 14,2003. In the event that the Company did not exercise the option to purchase the shares of the VisionTec, the Company agreed to pay theentity an additional $800,000. The Company also reimbursed VisionTec and its shareholders $161,000 for legal and financial expensesincurred by the entity in connection with the agreement.

On September 12, 2003, the Company exercised the option to acquire all of the shares of common stock of VisionTec. During theperiod between September 12, 2003 and the closing of the acquisition on February 24, 2004, the Company continued to pay certain fees andexpenses of the entity related to the entity�s research and development activities. The Company paid approximately $2.1 million toVisionTec from September 12, 2003 through January 3, 2004 and $536,000 from January 3, 2004 through February 24, 2004, for suchresearch and development activities.

In connection with the agreement, and the transactions discussed above, the Company has expensed a total of approximately $3.9million from March 13, 2003 through January 3, 2004 (inclusive of the $161,000 in costs) related to these research and developmentinitiatives.

On February 24, 2004, the Company completed the acquisition of the shares of VisionTec (subsequently renamed ClearLab UK).The transaction was accomplished as a purchase of all of the stock of the entity. The consideration paid included approximately $3.2 millionin cash and 155,084 shares of the Company�s common stock with a fair value of approximately $3.2 million. In addition, the Company hasagreed to pay a per unit royalty to the former shareholders of VisionTec for a period of ten years. The Company financed the cash portion ofthis acquisition with its revolving credit facility from its U.S. bank.

IGEL (ClearLab International). On July 24, 2002, the Company completed the acquisition of certain net assets and the majority ofthe business operations of IGEL, a developer and contract manufacturer of contact lenses based in Singapore. The acquisition was effectedthrough a wholly owned subsidiary of the Company, IGEL Acquisition Co. Pte Ltd (subsequently renamed ClearLab International). Theresults of operations of ClearLab International are included in the consolidated results of the Company from the date of the acquisition.

ClearLab International manufactures injection cast molded soft contacts lenses on a contract basis for various contact lensmanufacturers, as well as, manufactures and distributes branded and private label contact lenses via distributors and other sales channelsoutside the U.S. It produces a wide range of frequent replacement spherical and toric lenses and is focused on developing new lens materialsfor the future. ClearLab International markets its products principally in Europe and other international markets.

The consideration paid by the Company consisted of approximately $6.6 million in cash (which includes $1.2 million in transactioncosts), $8.9 million in assumed building and business loans to be paid over seven years from the acquisition date, $0.7 million in assumedcapital lease obligations, a non-interest bearing note payable of $2.1 million to be paid over five years from the acquisition date, 700,000shares of restricted common stock of the Company, and 270,000 common stock options of the Company in three tranches of 90,000 each withexercise prices of $15, $25 and $35 per share, respectively. The Company obtained a $10 million, five-year term loan from a U.S. bank toprovide partial financing for this asset purchase. 1-800 CONTACTS, INC. also executed guarantees for the building and business loansassumed in the transaction.

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The 700,000 shares of restricted common stock were placed in escrow, subject to a performance guarantee, and vest over a two-yearschedule with no shares released from escrow for a minimum of one year from the acquisition date. On June 6, 2003, the performanceguarantee was met relating to these shares and 175,000 shares were released on July 24, 2003, and an additional 437,500 shares were released



on January 24, 2004 in accordance with the vesting provisions. The remaining 87,500 shares held in escrow will be released on July 24, 2004based on an October 14, 2003 amendment to the escrow agreement. For financial reporting purposes, all shares held in escrow are treated asoutstanding as of June 6, 2003, the date the performance guarantee was met, and the Company reflected additional purchase consideration forthe estimated fair value of these shares of approximately $17.0 million. The fair value was based upon the closing market price of theCompany�s common stock on the date the performance guarantee was met, reduced by an approximate 9% discount due to the restrictionsassociated with the vesting period of the common stock held in escrow. This discount was determined by an independent third party appraisal.

The $17.0 million of additional purchase consideration, net of a contingent consideration liability of $5.4 million recorded at thepurchase date in accordance with SFAS No. 141, was recorded as goodwill. At January 3, 2004, goodwill related to this transaction amountedto $11.5 million.

The value of the options to purchase 270,000 shares of common stock will be determined and recorded as additional purchaseconsideration at the applicable vesting dates. These options vest equally at the end of the third, fourth and fifth years from the acquisitiondate.

During the second quarter of fiscal 2003, the Company also recorded compensation expense and additional paid-in capital ofapproximately $0.7 million due to the transfer of 28,000 common shares owned by ClearLab International�s chief technology officer to keyemployees of ClearLab International. The shares transferred represented a portion of the 700,000 shares held in escrow and are subject to thesame performance guarantee and vesting provisions. Because the performance conditions were met, and there are no additional contingencies,the fair value of the shares was recorded as compensation expense.

Subsequent to year-end, ClearLab was renamed ClearLab International. ClearLab International will be the principal salesorganization for the Company�s international wholesale manufacturing business.

Johnson & Johnson Vision Care Agreement. In December 2002, the Company announced that it had reached an agreement withJohnson & Johnson Vision Care to become an authorized retailer of Johnson & Johnson Vision Care contact lenses. The Company modifiedits operating systems in connection with this agreement. The Company implemented new procedures for Johnson & Johnson Vision Care bygeographic region based on time zone. The Company began this implementation in February 2003 and completed it in April 2003. TheCompany began buying direct from Johnson & Johnson Vision Care during March 2003.

This direct relationship with Johnson & Johnson Vision Care has lowered the Company�s product acquisition costs and allowed it tooffer rebates and other incentives not previously available to its customers who wear Johnson & Johnson Vision Care lenses. The Companyhas also been able to reduce its inventory investment by purchasing a more balanced mix of products at lower prices than it has historicallybeen able to obtain through indirect sources. This agreement also resolved long-standing disputes.

Net sales for fiscal 2003 were negatively impacted by canceled orders due to prescription verification procedures including mostsignificantly those implemented as part of the Johnson & Johnson Vision Care agreement. The Company is taking steps to recover thesecanceled orders, including creating a doctor network through the Cole agreement and establishing a doctor network department to helpcustomers schedule eye exams in order to obtain prescriptions. The Company is uncertain of the ultimate impact these prescriptionverification procedures will have on future net sales.

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Regulatory Considerations

The sale and delivery of contact lenses are governed by both Federal and state laws and regulations, including the recently enactedfederal Fairness to Contact Lens Consumer Act (�FCLCA�). The FCLCA requires that contact lenses only be sold to consumers based on avalid prescription. Satisfying this prescription requirement obligates the seller either to obtain a copy of the prescription itself or to verify theprescription by direct communication with the customer�s prescriber. Consistent with this requirement, the Company�s current operatingpractice is to require all customers to provide either a valid copy of their prescription or the contact information for their prescriber so that theCompany can verify their prescription by direct communication with their prescriber. If the Company does not have a valid copy of the



customer�s prescription, the Company directly communicates to the customer�s prescriber the precise prescription information received fromthe customer and informs the prescriber that it will proceed with the sale based on this prescription information unless the prescriber advises itwithin eight business hours that such prescription information is expired or otherwise invalid. If the prescriber properly advises the Companywithin this time period that the customer�s prescription is expired or otherwise invalid, the Company�s practice is to cancel the customer�sorder. On the other hand, if the prescriber either advises the Company that the prescription is valid or fails to properly respond within thecommunicated time period, the Company�s practice is to complete the sale based on the prescription information communicated to theprescriber, as expressly permitted by the FCLCA. The Company retains copies of the written prescriptions that it receives and maintainsrecords of its communications with the customer�s prescriber. See �Government Regulation� under Item 1 of Part I of this Form 10-K.

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Results of Operations

The Company�s fiscal year consists of a 52/53-week period ending on the Saturday nearest to December 31. Fiscal 2001 endedDecember 29, 2001; fiscal 2002 ended December 28, 2002; and fiscal 2003 ended January 3, 2004. Fiscal 2001 and 2002 were 52-weekyears. Fiscal 2003 is a 53-week year and ended on January 3, 2004.

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

Fiscal Year

2001 2002 2003

Net sales 100.0% 100.0% 100.0%Cost of goods sold 61.0 70.1 62.4Gross profit 39.0 29.9 37.6Advertising 15.9 7.5 10.8Legal and professional 1.7 2.8 3.4Research and development 0.0 0.1 2.5Purchased in-process research and development 0.0 4.6 0.0Other operating expenses 11.7 14.2 20.1Total operating expenses 29.3 29.2 36.8Income from operations 9.7 0.7 0.8Other expense, net (0.2) (0.8) (0.6)Income (loss) before provision for income taxes 9.5 (0.1) 0.2Provision for income taxes (3.7) (2.3) (1.0)

Net income (loss) 5.8% (2.4%) (0.8%)

Fiscal Year 2003 Compared to Fiscal Year 2002

Net sales. Net sales for fiscal 2003 increased 11% to $187.3 million from $168.6 million for fiscal 2002. Net sales (excludingClearLab International) for fiscal 2003 and 2002 were $181.3 million and $166.5 million, respectively. The increase in net sales is mainly dueto the acquisition of Lens Express and Lens 1st on January 30, 2003, although the Company has realized fewer incremental sales fromcustomers of these operations than it had originally expected. ClearLab International net sales for fiscal 2003 and 2002 (for the periodsubsequent to the acquisition date of July 24, 2004) were $6.0 million and $2.1 million, respectively.

Also, the increase in net sales is partially due to an increase in advertising. The Company plans to spend about $25 to $30 million onadvertising during the fiscal 2004, including nearly $9 million in the first quarter of fiscal 2004. During the latter part of 2003, the Companyalso reached agreements with its top three suppliers for improved pricing and marketing support. The support will come mainly in the form ofrebates and cooperative marketing arrangements, which will begin during the first quarter of fiscal 2004 and continue throughout fiscal 2004.

28



Net sales for fiscal 2003 were negatively impacted by canceled orders due to prescription verification procedures implemented as partof the Johnson & Johnson Vision Care agreement and in response to changes in some state laws. The Company has taken steps to minimizethese canceled orders, including continued development of a doctor network through the Cole agreement and the establishment of a doctornetwork department to help obtain the necessary prescription information that is required to complete an order. During fiscal 2003, theCompany�s order cancellation rate increased an estimated ten percentage points from the Company�s order cancellation rate in fiscal 2002,due mainly to these verification procedures. Subsequent to the FCLCA taking effect on February 4, 2004, the Company�s cancellation ratehas increased from the rate which occurred during fiscal 2003 as the Company has extended its verification procedures used in response to theJohnson & Johnson Vision Care agreement and certain state laws nationally. The Company is successfully recovering a portion of thesecancelled orders through the implementation of the above noted order recovery procedures. The Company is uncertain of the ultimate long-term impact that these prescription verification procedures required by the Act and the Company�s efforts to recover the canceled sales willhave on future net sales.

On August 1, 2003, the Company lowered its retail prices to its customers on Johnson & Johnson Vision Care products. TheCompany had increased its retail prices on select Johnson & Johnson Vision Care products during December 2001. The Company�s retailprices for Johnson & Johnson Vision Care products are now at levels similar to those prior to the December 2001 increase. During fiscal2003, Johnson & Johnson Vision Care products accounted for approximately 40% of the Company�s net sales.

Gross profit. Gross profit as a percentage of net sales increased to 37.6% for fiscal 2003 from 29.9% for fiscal 2002. During fiscal2003, the Company realized the expected benefits of a decrease in wholesale prices paid for Johnson & Johnson Vision Care products,partially offset by the lowering of the retail price to its customers for Johnson & Johnson Vision Care products as mentioned above.

The Company expects gross profit as a percentage of net sales for fiscal 2004 to improve slightly from the level achieved duringfiscal 2003. The majority of the expected benefits from the new supplier agreements are expected to come in the form of rebates andcooperative marketing arrangements, rather than in the form of improved pricing on inventory purchases. However, the Company could seefurther improvement in gross profit as a percentage of net sales during fiscal 2004 if it can reach an agreement with the one remainingmanufacturer from which it does not purchase directly.

Advertising. Advertising expense for fiscal 2003 increased $7.5 million, or 59.7%, from fiscal 2002. As a percentage of net sales,advertising expense increased to 10.8% for fiscal 2003 from 7.5% for fiscal 2002. The Company plans to spend about $25 to $30 million onadvertising during fiscal 2004, including nearly $9 million in the first quarter of fiscal 2004. However, if opportunities present themselves, theCompany may increase advertising spending above currently planned levels. The Company�s experience has been that increases inadvertising expenditures have a direct impact on the growth of net sales not only in the current period but also in future periods.

The Company expenses all advertising costs when the advertising first takes place. As a result, quarter-to-quarter comparisons areimpacted within and between quarters by the timing of television, radio and Internet advertisements and by the mailing of the Company�sprinted advertisements. The volume of mailings and other advertising may vary in different quarters and from year to year depending on theCompany�s assessment of prevailing market opportunities. The Company does not defer any direct response advertising costs because itsability to track individual sales to specific advertising campaigns is restricted as a result of the variety of advertising vehicles utilized.

Legal and professional. Legal and professional fees for fiscal 2003 increased $1.6 million, or 34.1%, from fiscal 2002. As apercentage of net sales, legal and professional fees increased to 3.4% for fiscal 2003 from 2.8% for fiscal 2002. During fiscal 2003, theCompany incurred significant legal and professional fees related to its legal matters and its increased efforts, including significant lobbyingactivities, to overcome the anticompetitive barriers in the industry.

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On February 4, 2004, the FCLCA became effective. This was a significant step in the Company�s proactive approach to eliminatethese anticompetitive barriers. With the passing of the Fairness to Contact Lens Consumers Act, the Company expects consolidated legal andprofessional fees to decrease by as much as $2.0 million in fiscal 2004. However, the Company will continue to support legal and legislativeinitiatives that it believes will benefit contact lens wearers and the industry, including the implementation and enforcement of the FCLCA.



Research and development. Research and development expenses for fiscal 2003 increased $4.4 million to $4.6 million from $0.2million in fiscal 2002. The majority of this amount relates to payments to ClearLab UK for research and development activities on behalf ofthe Company. On February 24, 2004, the Company acquired ClearLab UK. The Company plans to incur additional research anddevelopment expenses during fiscal 2004 as it continues to develop lens materials, manufacturing processes and other contact lenstechnologies. Fiscal 2004 research and development costs will be dependent on progress with research and development efforts and the resultsof the international sales and marketing efforts.

Other operating expenses. Other operating expenses for fiscal 2003 increased $13.7 million, or 57.6%, from fiscal 2002. As apercentage of net sales, other operating expenses increased to 20.1% for fiscal 2003 from 14.2% for fiscal 2002. ClearLab Internationalaccounted for about $2.7 million of the fiscal 2003 increase. ClearLab International�s results include non-cash compensation expense ofapproximately $0.7 million relating to the grant of shares of 1-800 CONTACTS� common stock owned by ClearLab International�s chieftechnology officer to key employees of ClearLab International. The Company also incurred approximately $0.3 million in integration costsrelated to the acquisition of Lens Express and Lens 1st, approximately $1.8 million in incremental amortization related to the acquired LensExpress and Lens 1st customer database definite-lived intangible assets and $1.7 million relating to ongoing operations of facilities acquiredfrom Lens 1st. The Company�s employee costs for its U.S. operations increased by approximately $4.9 million due to increasing sales and theenhancement of its management and administrative team to meet the current and future demands of the business. Included in this increase wasapproximately $0.2 million related to a former executive officer�s severance agreement and approximately $0.3 in recruiting expenses due toexecutive management searches.

Subsequent to fiscal 2003, the Company announced that it will be consolidating the operating facility acquired from Lens 1st into itsprincipal operating facilities in Utah, effective by the end of the first quarter of fiscal 2004. The Company anticipates this will reduce otheroperating expenses by as much as $1.0 million, net of expected costs associated with the consolidation, during fiscal 2004.

The Company expects other operating expenses to fluctuate as a percentage of net sales as the Company continues to grow andexpand its U.S. and international operations.

Other expense, net. For fiscal 2003 and 2002, other expense consisted mainly of interest expense, resulting from use of therevolving credit facility and debt related to the acquisition of ClearLab. In addition, during fiscal 2003, the Company recorded a foreignexchange gain, relating primarily to an intercompany loan to ClearLab International of approximately $223,000 compared to a $9,000 foreignexchange loss during fiscal 2002.

Income taxes. For fiscal 2003, the Company recorded an effective income tax rate (excluding ClearLab International) of 55%compared to 42% for fiscal 2002. The increase in the effective income tax rate results from the increase in nondeductible expenses, includingthose relating to the Company�s lobbying efforts, in relation to the pre tax income. ClearLab International is taxed separately in its taxjurisdiction of Singapore. During fiscal 2003, the Company did not record a tax benefit for the loss from ClearLab International�s operationsdue to the uncertainty with respect to the realization of a tax benefit in Singapore. As of fiscal 2003, the Company provided a valuationallowance for the full amount of the deferred income tax assets in Singapore. During fiscal 2003, the Company�s Singapore operationsapplied for a pioneer tax certificate. This pioneer tax certificate allows for a seven year tax holiday with an extension for an additional threeyears if certain conditions are met. The tax holiday has clawback provisions if the Company does not continually meet certain requirements.The tax holiday reduces the Singapore statutory tax rate from 22% to 0% on qualified income. The Company�s future effective tax rate willdepend upon future taxable income. The Company anticipates that its fiscal 2004 effective income tax rate will be closer to historical rates,should the Company achieve its targeted operating profit.

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Fiscal Year 2002 Compared to Fiscal Year 2001

Net sales. Net sales for fiscal 2002 decreased slightly to $168.6 million from $169.0 million for fiscal 2001. Net sales (excludingClearLab International) for fiscal 2002 were $166.5 million. The decrease in net sales was mainly due to a decline in new sales as a result ofspending less on advertising as part of the Company�s effort to manage demand for Johnson & Johnson Vision Care products in response toJohnson & Johnson Vision Care�s refusal to sell to the Company during fiscal 2002. During fiscal 2002, the Company spent approximately$14.2 million, or 53%, less on advertising than in fiscal 2001. ClearLab International�s net sales for fiscal 2002 were $2.1 million.

The decline in new sales was partially offset by the increase in repeat sales as the Company continues to realize the benefits of astrong customer base. Repeat sales for fiscal 2002 increased 13% to $134.5 million, or 81% of net sales (excluding ClearLab International),



from $119.2 million, or 71% of net sales, for fiscal 2001. The Company also believes that its net sales reflect some of the benefits of itssignificant investment in its national advertising campaign over the last several years and its commitment to customer service.

In addition, the Company continued to refine its marketing efforts to its customer base, to enhance its website and to highlight itswebsite in its advertising. Internet sales for fiscal 2002 were $70.7 million, or 42% of net sales (excluding ClearLab International), ascompared to $67.6 million, or 40% of net sales, for fiscal 2001.

During fiscal 2002, the Company passed on a portion of the wholesale price increases on Johnson & Johnson Vision Care productsthrough increased retail prices for these products to its customers. During May 2002, increased levels of Johnson & Johnson Vision Careproducts allowed the Company to move the standard quantity of Johnson & Johnson Vision Care contact lenses offered to customers back tohistorical quantities consistent with what the Company offers with other manufacturers� products. During February 2003, the Company onceagain began offering quantity discounts on all Johnson & Johnson Vision Care contact lenses. The Company initially suspended thesequantity discounts in June 2001 because of the higher wholesale prices.

Gross profit. Gross profit as a percentage of net sales decreased to 29.9% for fiscal 2002 from 39.0% for fiscal 2001. During fiscal2002, gross profit was largely impacted by the increase in wholesale prices paid for Johnson & Johnson Vision Care products. To offset someof the increase in wholesale prices paid for Johnson & Johnson Vision Care products, the Company raised its retail prices on Johnson &Johnson Vision Care products during December 2001. During fiscal 2002, Johnson & Johnson Vision Care products accounted for about 40%of the Company�s net sales. Gross profit during fiscal 2002 was also negatively impacted by product discounts the Company offered in Texasand various other states to offset the inconvenience its customers were experiencing trying to obtain prescriptions from their eye carepractitioners.

Advertising. Advertising expense for fiscal 2002 decreased $14.2 million, or 52.9%, from fiscal 2001. As a percentage of net sales,advertising expense decreased to 7.5% for fiscal 2002 from 15.9% for fiscal 2001. The decrease in advertising expense was part of theCompany�s ongoing effort to manage demand for Johnson & Johnson Vision Care products in response to Johnson & Johnson Vision Care�srefusal to sell to the Company.

Legal and professional. Legal and professional fees for fiscal 2002 increased $1.9 million, or 66.9%, from fiscal 2001. As apercentage of net sales, legal and professional fees increased to 2.8% for fiscal 2002 from 1.7% for fiscal 2001. During fiscal 2002, theCompany incurred significant legal and professional fees related to its legal matters and its increased efforts, including significant lobbyingactivities, to overcome the anticompetitive barriers in the industry on behalf of itself and consumers. This legal effort included investingresources to ensure that the multi-district litigation settlement agreement with Johnson & Johnson allowed the Company to purchase contactlenses directly from Johnson & Johnson Vision Care.

Purchased in-process research and development. The value allocated to purchased in-process research and development wascharged to expense upon consummation of the acquisition of ClearLab International. The valuation of the in-process research anddevelopment was determined using the income approach method, which

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includes an analysis of the markets, cash flows and risks associated with achieving such cash flows. The amount allocated represents theestimated purchased in-process technology for projects that have not yet reached commercial viability. Based on preliminary assessments, thevalue of these projects was determined by estimating the costs to develop the purchased in-process technologies into commercially viableproducts; estimating the resulting net cash flows from the sale of those products (reduced by the portion of revenue attributable to coretechnology); and discounting the net cash flows back to their present value. The cash flows were discounted at a rate of return of 38%, whichwas adjusted for an additional risk premium. This additional risk premium reflects the uncertainty and risk inherent in in-process technology,the remaining technological/regulatory issues to be resolved and the amount of time remaining to complete the technologies. Several of thetechnologies must undergo clinical studies and must obtain FDA approval.

Other operating expenses. Other operating expenses for fiscal 2002 increased $4.2 million, or 21.3%, from fiscal 2001. As apercentage of net sales, other operating expenses increased to 14.3% for fiscal 2002 from 11.7% for fiscal 2001. ClearLab Internationalaccounted for about $0.8 million of the increase for fiscal 2002. In addition to costs incurred by ClearLab International, the Company spentapproximately $0.5 million related to new product development. The Company�s operating and payroll costs also increased as the Companyenhanced its operating infrastructure and its management team to meet the demands of the business.



Other income (expense), net. Other income (expense) increased to approximately ($1.2) million for fiscal 2002 from approximately($0.3) million in 2001. For fiscal 2002, other expense consisted mainly of interest expense, resulting from the increased use of the revolvingcredit facility and debt related to the acquisition of ClearLab International.

Income taxes. The Company�s effective income tax rate (excluding ClearLab International) for fiscal 2002 was 42.0% compared to38.8% for fiscal 2001. In fiscal 2002, nondeductible expenses relating to its lobbying efforts were higher in proportion to income than infiscal 2001. ClearLab International is taxed separately in its tax jurisdiction of Singapore. The Company did not record a tax benefit for fiscal2002 for the loss from ClearLab International�s operations, including the charge for purchased in-process research and development, due tothe uncertainty with respect to the realization of a tax benefit in Singapore. As of December 28, 2002, the Company provided a valuationallowance for the full amount of the deferred income tax assets in Singapore.

Liquidity and Capital

The Company�s principal sources of liquidity have been cash provided by operating activities and proceeds from debt financings.The Company�s principal uses of cash have been to meet debt service requirements, finance acquisitions, finance capital expenditures, fundworking capital needs and repurchase common stock. The Company anticipates that, with the exception of repurchases of common stockthese uses will continue to be the principal demands on its cash in the future. As of January 3, 2004, the Company had net working capital ofapproximately $12.2 million, compared to $20.0 million as of December 28, 2002.

The Company believes that its cash on hand, together with cash generated from operating activities and the borrowings availablethrough the credit facility, will be sufficient to support planned operations through the foreseeable future. Should the Company�s plans orexpectations change, the Company may be required to seek additional sources of funds and there can be no assurance that such funds will beavailable on satisfactory terms. Failure to obtain such financing could delay or prevent the Company�s planned growth, which couldadversely affect the Company�s business, financial condition, liquidity and results of operations.

As a result of regulatory requirements, the Company�s liquidity, capital resources and results of operations may be negativelyimpacted in the future if the Company incurs increased costs (including legal fees) or fines, is prohibited from selling its products orexperiences losses of a substantial portion of the Company�s customers for whom the Company is unable to obtain or verify a prescriptiondue to the enforcement of requirements by regulatory agencies.

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Acquisition of VisionTec (subsequently renamed ClearLab UK) - During fiscal 2003, the Company paid $3.9 million for researchand development activities performed by ClearLab UK on the Company�s behalf and an additional $0.5 million in January 2004. OnFebruary 24, 2004, the Company acquired all of the stock of ClearLab UK. The consideration paid included approximately $3.2 million incash and 155,084 shares of the Company�s common stock with a fair value of approximately $3.2 million. In addition, the Company hasagreed to pay a per unit royalty to the former shareholders of ClearLab UK for a period of ten years. The Company financed the cash portionof this acquisition with its revolving credit facility from its U.S. bank.

The Company will continue to pursue and fund the research and development activities of ClearLab UK. ClearLab UK began tomanufacture products in a test environment in late 2003, and the Company will expand its manufacturing capabilities in fiscal 2004 to marketthe ClearLab UK products internationally. The establishment of manufacturing operations will require investments in capital expendituresand working capital in 2004. In addition, the Company anticipates incurring other infrastructure costs including the hiring of additionalemployees during 2004 as this entity continues to develop contact lens technologies and commercialize products.

Renewed Loan Agreement - Effective February 27, 2004, the Company executed a restated loan agreement with its existing U.S. bank,providing for a revolving credit facility for borrowings of up to $28 million through June 1, 2004, and reducing thereafter on the first day ofeach September, December, March and June by $400,000 until the maturity date of February 27, 2007. Additionally, the agreement providesfor letters of credit up to a maximum of $15 million outstanding or payable at any time. If the maximum leverage ratio, as defined in therestated loan agreement, is greater than 2.5, then the amounts outstanding on the revolving credit facility together with the amount of alloutstanding letters of credit can at no time exceed the Company�s book value of inventory. Outstanding borrowings on the revolving creditfacility bear interest at a floating rate equal to the lender�s prime interest rate plus a margin or the lender�s LIBOR rate plus a margin. Interestbased on the lender�s prime rate is the prime rate plus 0.75 percent until July 31, 2004, and thereafter is adjusted quarterly, ranging between



prime plus 0.0 percent and prime plus 1.25 percent, depending on the Company�s maximum leverage ratio. Interest based on the lender�sLIBOR rate is the LIBOR rate for the applicable period plus 2.75 percent until July 31, 2004, and thereafter is adjusted quarterly, rangingbetween LIBOR plus 2.0 percent and LIBOR plus 3.25 percent, depending on the Company�s maximum leverage ratio. Interest is payablemonthly. The facility requires the payment of an unused credit fee which is also determined by the Company�s maximum leverage ratio. Theunused credit fee is payable quarterly at 0.5 percent until July 31, 2004, and thereafter is adjusted quarterly, ranging from 0.38 percent to 0.5percent.

Upon execution of this loan agreement, the Company paid a closing fee of $140,000 and the U.S. bank�s associated legal andprofessional fees. All outstanding balances on this credit facility are secured by substantially all of the Company�s U.S. assets, subsidiarydebt instruments, 100 percent ownership interests in all domestic subsidiaries and 65 percent ownership interest in foreign subsidiaries directlyowned by the Company. The new loan agreement includes various financial covenants including a capital expenditure limit, a maximumleverage ratio, a minimum working capital requirement, a minimum fixed charge coverage ratio and a minimum net worth requirement. Thenew loan agreement also does not permit the Company or its subsidiaries to dissolve, sell, dispose or merge all of its assets or acquire all theassets of any entity without the written consent of the U.S. bank, unless the transaction meets the definition of a �Permitted AcquisitionBasket�, as defined in the agreement. The new loan agreement also places a limit on the amount the Company can loan to any entity, outsidethe normal course of business. Additionally, the agreement does not permit the Company to declare or pay any cash dividends, to repurchaseits stock or to perform other similar equity transactions prior to December 31, 2005; thereafter such transactions are subject to other terms.This agreement defines several customary events of default including any material adverse change or any event that occurs which may cause amaterial adverse change in the Company�s or its subsidiaries� condition. This restated loan agreement succeeds and replaces the Company�sprior loan agreement executed July 22, 2002. All outstanding balances associated with the July 22, 2002 loan agreement were paid withproceeds from this new loan agreement.

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Contractual Obligations and Commitments - The following table summarizes our contractual obligations and commitments as ofJanuary 3, 2004, except as noted (in thousands):

Contractual Obligations and

Commitments Total

Less than

1 year 1-3 years 3-5 years Thereafter

Revolving credit facility (3) $ � $ � $ � $ � $ �

Term loan (3) 7,725 2,425 5,300 � �

Term loan payable (ClearLab International) 5,055 587 2,348 2,120 �

Note payable (ClearLab International) (1) 4,046 � � 1,873 2,173Related party note payable (1) 1,578 440 881 257 �

Capital leases 299 224 31 30 14Operating leases 9,940 1,452 2,400 1,934 4,154Employment agreement (ClearLab International) (2) 461 129 332 � �

Advertising purchase commitments 21,500 21,500 � � �

Other 44 � � � 44Total $ 50,648 $ 26,757 $ 11,292 $ 6,214 $ 6,385

(1) Certain of these debt instruments carry an interest rate that management believes is below market value and the Company hasrecorded discounts against these debt instruments. The amounts shown do not reflect discounts in the amount of approximately $384,000, asof January 3, 2004.

(2) In conjunction with the acquisition of ClearLab International, the Company entered into an employment agreement whereby theCompany is required to pay Singapore dollars ("SGD") $1,125,000 (USD$660,000) over the five-year term of the agreement. If employmentis terminated for any reason other than cause, the Company is obligated to pay any unpaid amounts under the agreement at that time. Theamounts in this table represent unpaid items as of January 3, 2004.



(3) Effective February 27, 2004, the Company executed a restated loan agreement with its existing U.S. bank. All outstandingbalances, including this balance, associated with the previous loan agreement were paid off using proceeds from this new loan agreement.

As of January 3, 2004, the Company did not have any off balance sheet arrangements or other commercial commitments, such asletters of credit, guarantees or repurchase obligations.

The Company has agreed to indemnify one of its vendors up to a total of $10 million (with $5 million coverage per occurrence) withrespect to consumer claims brought against the vendor for harm or injury attributable to the Company�s method for verifying prescriptions forthis vendor�s products. The Company believes its current insurance policy from a third party will cover claims, if any, under thisindemnification.

In the event the Company, in its sole discretion, decides to exploit certain technologies of ClearLab International, the Company willbe required to pay commissions on a per unit basis of applicable products sold beginning one year after the date of the acquisition and endingfive years after the termination of the employment agreement to the president and chief technology officer of ClearLab International. If theCompany decides to exploit the technologies but has not yet exploited them by July 2005, the Company will pay a commission ofSGD$1,000,000 (USD$587,000) and SGD$1,000,000 for each year thereafter until the Company has exploited the

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technologies. In the event that the Company decides, in its sole discretion, not to exploit the technologies, the Company shall assign thetechnologies back to the seller in exchange for the forfeiture of any unvested common stock options of the 270,000 stock options issued underthis agreement. As of January 3, 2004, the Company had not exploited these technologies; although the Company plans to exploit thetechnologies in the future.

Cash flows from operating activities. For fiscal 2003 and 2002, net cash provided by operating activities was approximately $18.6million and $9.5 million, respectively. In fiscal 2003, cash was provided primarily by a decrease in inventories partially offset by a decreasein accounts payable and the increase in other assets. In fiscal 2002, cash was provided primarily by income from the U.S. Operations and adecrease in inventories partially offset by decreases in accounts payable and accruals and increases in prepaid income taxes and accountsreceivable in ClearLab International. Historically, the Company has maintained higher levels of inventory to ensure a sufficient supply ofproducts than would be required if the Company were able to purchase directly from all contact lens manufacturers. The Company anticipatesfurther reductions in inventory in subsequent periods as its relationships with suppliers continue to improve.

Cash flows from investing activities. The Company used approximately $10.1 million and $9.5 million for investing activities infiscal 2003 and 2002, respectively. In fiscal 2003, the Company paid approximately $7.0 million in cash (including $0.5 million in transactioncosts) in connection with the acquisition of Lens Express and Lens 1st. In 2002, the Company paid $6.6 million in cash (including $1.2million in transaction costs) in connection with the ClearLab International acquisition.

Capital expenditures for infrastructure improvements for fiscal 2003 and 2002 were approximately $2.8 million and $2.1 million,respectively. A portion of these expenditures during each of these fiscal years relates to the expansion of the Company�s leased distributioncenter and leased space used for its management and call center operations. Of the fiscal 2003 amount, approximately $1.6 million related tothe Singapore operations. The Company anticipates additional capital expenditures in fiscal 2004 for infrastructure as it continues to expandand improve operating facilities, telecommunications systems and management information systems in order to handle future operations ofboth its U.S. and international operations. Of the fiscal 2002 amount, approximately $0.2 million related to the Singapore operations. TheCompany is currently renovating its corporate headquarters to meet the demands required with the growth and expansion of its business. Theexpansion is estimated to be complete by the end of the second fiscal quarter of 2004. Additionally, the Company anticipates that capitalexpenditures will increase during fiscal 2004 as it funds the expansion of production capacity at the ClearLab International and ClearLab UKfacilities.

During fiscal 2003 and 2002, the Company also acquired intangible assets for approximately $0.1 million and $0.5 million,respectively. In October 2002, the Company purchased certain assets of a direct-to-consumer contact lens business for $800,000 paid asfollows: $400,000 on the closing date, $250,000 on January 2, 2003 and $150,000 on January 5, 2004. The assets acquired include acustomer database, Internet address, various telephone numbers and a noncompetition agreement.



Cash flows from financing activities. During fiscal 2003and 2002, net cash provided by (used in) financing activities wasapproximately ($7.8 million) and $0.3 million, respectively. During fiscal 2003, the Company had net repayments on its credit facility ofapproximately $5.8 million and made principal payments on debt obligations and capital lease obligations of approximately $2.9 million,which were partially offset by proceeds of $0.9 million from the exercise of common stock options. During fiscal 2002, the Company had netrepayments on its credit facility of approximately $6.8 million and repurchased 200,000 shares of its common stock for a total cost ofapproximately $2.2 million. Also, during fiscal 2002, the Company obtained a $10 million term loan from its U.S. bank to provide partialfinancing for its acquisition of ClearLab International. Principal payments made during

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fiscal 2002 on this term loan amounted to approximately $0.5 million. The Company also made payments on the capital lease and debtobligations assumed in the acquisition.

Effective February 27, 2004, the Company executed a restated loan agreement with its existing U.S. bank providing for a revolvingcredit facility for borrowings of up to $28 million through June 1, 2004 and reducing thereafter on the first day of each September, December,March and June by $400,000 until the maturity date of February 27, 2007. All amounts outstanding under the Company�s prior revolvingcredit facility and U.S. term loan were paid off with proceeds from this new credit facility.

The Company�s Board of Directors has authorized the repurchase of up to 3,000,000 shares of the Company�s Common Stock. Apurchase of the full 3,000,000 shares would equal approximately 23 percent of the total shares issued as of January 3, 2004. The repurchaseof common stock is subject to market conditions and is accomplished through periodic purchases at prevailing prices on the open market, byblock purchases or in privately negotiated transactions. From inception of its authorized repurchase programs through January 3, 2004, theCompany had repurchased 1,706,500 shares for a total cost of approximately $22.1 million. No shares were repurchased by the Companyduring fiscal 2003 and the Company is currently prohibited by its restated loan agreement from purchasing any additional shares untilJanuary 1, 2006. The repurchased shares were retained as treasury stock. As of January 3, 2004, no shares remain in treasury as these shareswere used to acquire ClearLab International and Lens 1st/Lens Express.

Effective July 22, 2002, the Company entered into a loan agreement with a U.S. bank, providing for both a $10 million term loan anda revolving credit facility for borrowings up to $20 million. As of January 3, 2004, the U.S. bank term loan interest rate was fixed at the30-day LIBOR rate plus 3% (4.17% at January 3, 2004 until January 5, 2004). This agreement contained various financial covenants, ofwhich the Company was not compliant as of January 3, 2004, but such non-compliance was waived at the time the Company executed therestated loan agreement on February 27, 2004 described above. All amounts outstanding under this revolving credit facility and U.S. termloan were paid off with proceeds from the new credit facility described above.

Recently Issued Accounting Standards

In January 2003, the Financial Accounting Standards Board (�FASB�) issued Interpretation No. 46 (�FIN No. 46�), �Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51,� which addresses the consolidation by business enterprises of variable interestentities as defined therein and applies immediately to variable interests in variable interest entities created or obtained after January 31, 2003.With respect to variable interest entities created before January 31, 2003, in December 2003, the FASB issued FIN No. 46R which, amongother things, revised the implementation date to first fiscal years or interim periods ending March 15, 2004, with the exception of SpecialPurpose Entities (�SPEs�). The consolidation requirements apply to all SPEs in the first fiscal year or interim period ending afterDecember 15, 2003. The Company does not have any variable interest entities or SPEs and accordingly, the adoption of FIN No. 46 did notimpact the Company�s consolidated financial statements and the adoption of FIN No. 46R will not impact the Company�s consolidatedfinancial statements in the first quarter of fiscal 2004.

In May 2003, the FASB issued SFAS No. 150, �Accounting for Certain Financial Instruments with Characteristics of Both Liabilitiesand Equity.� The new statement establishes standards for how an issuer classifies and measures certain financial instruments withcharacteristics of both debt and equity. The provisions of SFAS No. 150 apply to the classification and disclosure requirements for thefollowing three types of financial instruments: Mandatorily Redeemable Instruments, Instruments with Repurchase Obligations, and



Instruments with Obligations to Issue a Variable Number of Securities. The new reporting and disclosure requirements for SFAS No. 150become effective for the first interim period beginning after June 15, 2003 or for any covered instruments entered into or modified subsequentto May 31, 2003. The Company adopted this statement during the third quarter of 2003. There was no impact on the Company�s financialposition, liquidity or results of operations.

In November 2002, the Financial Accounting Standards Board Emerging Issues Task Force issued its consensus concerning RevenueArrangements with Multiple Deliverables (�EITF 00-21�). EITF 00-21 addresses how to determine whether a revenue arrangement involvingmultiple deliverables should be divided into separate

36

units of accounting, and, if separation is appropriate, how the arrangement consideration should be measured and allocated to the identifiedaccounting units. The guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15,2003. The adoption of EITF 00-21 did not have an impact on the Company�s financial position, liquidity or results of operations.

Seasonality

The Company does not believe that seasonality has had a material effect on its operations, however, contact lens wear does increaseslightly with warmer weather and increased outdoor activity. This can be seen in historical sales which are typically higher in the second andthird quarters and lower in the first and fourth quarters. Additionally, as contact lenses are a discretionary purchase, sales typically declineduring the fourth quarter holiday season.

Inflation

The Company does not believe that inflation has had a material effect on its operations.

Critical Accounting Policies

Accounting polices that require significant judgments and estimates include revenue recognition (including sales returns andallowances); excess and obsolete inventories; realizability of deferred income tax assets; accounting for business combinations includingassessment of realizability of long-lived assets; stock-based compensation; and legal and regulatory contingencies. A description of theCompany�s significant accounting policies is included in the notes to the consolidated financial statements. Judgments and estimates arebased on historical experience as well as relevant facts and circumstances known at each reporting date. Actual results may differ from theseestimates.

Sales are generally recognized when products are shipped and the customer takes ownership and assumes risk of loss, collection ofthe related receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Net sales consistof product sales less provisions for sales returns and allowances, which provisions are made at the time of sale. The Company accrues anestimated amount for sales returns and allowances based on historical information, adjusted for current economic trends. To the extent actualreturns and allowances vary from historical experience, revisions to the allowances may be required.

In assessing the realizability of inventories, the Company makes judgments as to future demand requirements and product expirationdates. The inventory requirements change based on projected customer demand, which changes due to fluctuations in market conditions andproduct life cycles.

The Company has significant long-lived tangible and intangible assets consisting of property, plant and equipment, goodwill anddefinite-lived intangibles. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carryingamounts of such assets may not be recoverable. In addition, the Company performs an impairment test related to goodwill at least annually.An impairment analysis related to long-lived tangible and definite lived intangible assets requires the assessment of expected future



undiscounted cash flows over the remaining useful life of the asset. An impairment analysis of goodwill requires the use of a fair-value basedanalysis. As of January 3, 2004, the Company determined that no impairment existed. All of the goodwill and a significant portion of theother long-lived assets were generated from the Company�s recent acquisitions of ClearLab International and Lens Express and Lens 1st. Ifforecasts and assumptions used to support the realizability of long-lived assets change in the future, significant impairment charges couldresult that would adversely affect the Company�s results of operations and financial position.

Deferred income tax assets are assessed for recoverability and valuation allowances are provided as necessary to reduce deferredincome tax assets to amounts expected to be realized. Should expectations of taxable income change in future periods, it may becomenecessary to change the valuation allowance, which could affect the

37

Company�s results of operations in the period such determination is made. The Company records an income tax provision or benefit at a ratethat is based on expected results for the fiscal year. If future changes in market conditions cause actual results to be more or less favorable,adjustments to the effective income tax rate on a quarterly basis could be required.

The Company records liabilities for legal and regulatory matters when the contingency is both probable and reasonably estimable.The Company is involved in several legal and regulatory matters. The Company, after consultation with legal counsel, believes that theultimate dispositions of these matters will not have a material impact on its financial position, liquidity, or results of operations. However,there can be no assurance that the Company will be successful in its efforts to satisfactorily resolve these matters and the ultimate outcomecould result in a material negative impact on the Company�s financial position, liquidity, or results of operations.

Forward-Looking Statements

Except for the historical information contained herein, the matters discussed in this Form 10-K are forward-looking statements withinthe meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.These forward-looking statements involve risks and uncertainties and often depend on assumptions, data or methods that may be incorrect orimprecise. The Company�s future operating results may differ materially from the results discussed in, or implied by, forward-lookingstatements made by the Company. Factors that may cause such differences include, but are not limited to, those discussed below and the otherrisks detailed in the Company�s other reports filed with the Securities and Exchange Commission. Words such as �believes,� �anticipates,��expects,� �future,� �intends,� �would,� �may,� and similar expressions are intended to identify forward-looking statements. The Companyundertakes no obligation to revise any of these forward-looking statements to reflect events or circumstances after the date hereof.

Factors That May Affect Future Results

� The Company may encounter unforeseen difficulties in managing its future growth;

� A significant portion of the Company�s sales may be found not to comply with state laws and regulations concerning the deliveryand sale of contact lenses;

� Because the Company does not manufacture most of the contact lenses that it sells, the Company cannot ensure that all of the contactlenses it sells meet all federal regulatory requirements;

� It is possible that the FDA could consider certain of the contact lenses the Company sells to be misbranded;

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

� The Company obtains a large percentage of its inventory from a limited number of suppliers, with a single manufacturer accountingfor 46%, 35% and 23% of the Company�s inventory purchases in fiscal 2001, 2002 and 2003, respectively. In addition, the



Company�s top three suppliers accounted for 70 percent, 63 percent and 59 percent of the Company�s inventory purchased in fiscal2001, 2002 and 2003, respectively;

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

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

� The Company is dependent on its telephone, Internet and management information systems for the sale and distribution of contactlenses;

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� The retail sale of contact lenses is highly competitive; certain of the Company�s competitors are large, national optical chains thathave greater resources than the Company;

� The demand for contact lenses could be substantially reduced if alternative technologies to permanently correct vision gain inpopularity;

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

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

� The Company�s business could be harmed if it is required to collect state sales tax on the sale of all products;

� The Company faces an inherent risk of exposure to product liability claims in the event that the use of the products it manufacturersor sells results in personal injury;

� The Company conducts its retail operations through a single distribution facility;

� The Company�s success is dependent, in part, on continued use of the Internet;

� Government regulation and legal uncertainties relating to the Internet and online commerce could negatively impact the Company�sbusiness operations;

� Changing technology could adversely affect the operation of the Company�s website;

� The Company may not be able to develop and manufacture a viable, high quality contact lens for sale to consumers that meets allfederal regulatory requirements;

� The Company may not be able to fully integrate the operations of its acquisitions into its business;

� Consumer acceptance of the Company�s manufactured products may not meet the Company�s expectations;

� The Company�s intellectual property rights may be challenged;

� The Company may encounter legal, regulatory and government agency oversight risks with foreign operations;

� The Company may not be able to establish a sufficient network of eye care practitioners to prescribe the products manufactured bythe Company;



� The Company may not be able to adequately manage its foreign currency risk;

� The Company may incur unforeseen costs or not realize all of the anticipated benefits from its new relationships with Johnson &Johnson Vision Care, CIBA Vision and Cole; and

� The Company may be required to reduce the carrying value of its intangible assets if events and circumstances indicate the remainingbalance of intangible assets may not be recoverable.

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

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk. As of January 3, 2004, the Company was exposed to changes in interest rates relating to its revolving creditfacility and other debt obligations. The revolving credit facility and U.S. bank term loan bear interest at a variable rate based on the U.S.prime rate or LIBOR. The Company�s outstanding borrowings on the credit facility, including bank overdrafts, and U.S. bank term loan wereapproximately $7.7 million as of January 3, 2004. The remainder of the Company�s interest bearing debt obligations, including capital leaseobligations, is denominated in Singapore dollars and bears interest at a fixed rate. As of January 3, 2004, the face amounts of the outstandingborrowings on these fixed rate debt obligations were approximately $9.4 million. If interest rates were to change by one full percentage point,the net impact on interest expense would be approximately $0.1 million per year.

Foreign Currency Risk. As of January 3, 2004, the Company faced foreign currency risks primarily as a result of its Singaporeoperations and the intercompany balances between its U.S. and Singapore operations. The functional currency of the Company�s Singaporeoperations is the Singapore dollar, however, most of the sales of the Singapore operations and some of the expenses are denominated in U.S.dollars. The Company has debt and other long-term obligations of approximately $11.0 million that are denominated in Singapore dollars andmature over the next seven years. For fiscal 2003, the Company recorded a foreign currency transaction gain of approximately $223,000.Fluctuations in exchange rates between the U.S. dollar and the Singapore dollar could lead to additional currency exchange losses or gains onthe intercompany balances and transactions denominated in currencies other than the functional currency. If the U.S. dollar weakens relativeto the Singapore dollar, additional funds may be required to meet these obligations if the debt cannot be adequately serviced from theSingapore operations. The exchange rate between the U.S. dollar and the Singapore dollar has fluctuated approximately 1.1 percent(strengthening of the U.S. dollar) from December 29, 2002 through March 5, 2004. From the date of acquisition, July 24, 2002, throughMarch 5, 2004 the exchange rate has fluctuated approximately 1.8 percent (strengthening of the U.S. dollar). If the Singapore dollar weakensagainst the U.S. dollar by an additional 10 percent, the Company would record a $1.2 million foreign currency loss on the intercompanybalances that exist as of January 3, 2004. The Company has not entered into any foreign currency derivative financial instruments; however, itmay choose to do so in the future in an effort to manage or hedge its foreign currency risk.

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Item 8. Financial Statements and Supplementary Data.

The audited financial statements required by Item 8 are set forth on pages F-1 through F-34 of this Form 10-K.

Selected Quarterly Results of Operations

The following unaudited selected quarterly results of operations data for the last eight quarters have been derived from theCompany�s unaudited consolidated financial statements, which in the opinion of management, have been prepared on the same basis as theaudited financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the informationfor the quarters presented. This information should be read in conjunction with the financial statements and the related notes and�Management�s Discussion and Analysis of Financial Condition and Results of Operations� included as part of this Form 10-K. Theoperating results for the quarters presented are not necessarily indicative of the operating results for any future period.



First Quarter Second Quarter Third Quarter Fourth Quarter


Fiscal Year ended December 28, 2002:Net sales $ 41,581 $ 42,233 $ 44,316 $ 40,450Gross profit 12,687 12,430 13,657 11,625Net income (loss) 1,940 1,003 (6,367) (580)

Basic and diluted net income (loss) per common share 0.17 0.09 (0.56) (0.05)

Fiscal Year ended January 3, 2004:Net sales $ 46,662 $ 46,354 $ 48,400 $ 45,887Gross profit 16,102 17,774 18,912 17,642Net income (loss) (488) 560 (628) (882)Basic and diluted net income (loss) per common share (0.04) 0.04 (0.05) (0.07)

Net income (loss) per common share are computed independently for each of the quarters listed. Therefore, the sum of the quarterlynet income (loss) per common share may not equal the total computed for the year.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

On May 15, 2002, the Board of Directors of the Company, upon recommendation of its Audit Committee, dismissed ArthurAndersen LLP as the Company�s independent auditors, and authorized the engagement of KPMG LLP to serve as the Company�sindependent auditors for the fiscal year ended December 28, 2002. The Company filed a Current Report on Form 8-K on May 16, 2002 todisclose the information required by this Item 9.

41

Item 9A. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. The Company�s Chief Executive Officer and Chief Financial Officer, afterevaluating the effectiveness of the Company�s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) asof the end of the period covered by this report (the �Evaluation Date�), have concluded that, as of the Evaluation Date, the Company�sdisclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and itsconsolidated subsidiaries would be made known to them by others within those entities.

(b) Changes in internal controls. There were no significant changes in the Company�s internal controls or in other factors thatcould significantly affect the Company�s disclosure controls and procedures subsequent to the Evaluation Date, nor were there any significantdeficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actionswere taken.

42

PART III

Item 10. Directors and Executive Officers of the Registrant.

Information with respect to Directors of the Company is set forth in the Proxy Statement under the heading �Proposal No. 1 �Election of Directors,� which information is incorporated herein by reference. Information regarding the executive officers of the Company isincluded as Item 4A of Part I of this Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item405 of Regulation S-K is set forth in the Proxy Statement under the heading �Section 16(a) Beneficial Ownership Reporting Compliance,�which information is incorporated herein by reference.



The Company has a written code of ethics that applies to all of its employees, including its Directors, Chief Executive Officer, ChiefFinancial Officer and Controller. The Code of Ethics was distributed to all employees and is included as Exhibit 14.1 to this report.

The Company�s business and affairs are overseen by its board of directors pursuant to the Delaware General Corporation Law and itsBy-Laws. The board of directors has three standing committees: Audit, Compensation, and Governance and Nominating.

Item 11. Executive Compensation.

Information with respect to executive compensation is set forth in the Proxy Statement under the heading �Executive Compensationand Other Matters,� which information is incorporated herein by reference (except for the Report of the Compensation Committee onExecutive Compensation, the Performance Graph and Report of the Audit Committee of the Board of Directors).

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information with respect to security ownership of certain beneficial owners and management is set forth in the Proxy Statement underthe heading �Security Ownership of Certain Beneficial Owners and Management,� which information is incorporated herein by reference.Information with respect to equity compensation plans is set forth in the Proxy Statement under the heading �Equity Compensation Plans�which information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

Information with respect to certain relationships and related transactions is set forth in the Proxy Statement under the headings�Compensation Committee Interlocks and Insider Participation� and �Certain Relationships and Related Transactions,� which information isincorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

Information with respect to principal accountant fees and services is set forth in the Proxy Statement under the headings �PrincipalAccountant Fees and Services�, which information is incorporated herein by reference.

43

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) The following documents are filed as a part of this report:1. Financial Statements. The following financial statements of the Company and the reports of the independent

auditors thereon, are included in this Form 10-K on pages F-1 through F-34:

Independent Auditors� ReportsConsolidated Balance Sheets as of December 28, 2002 and January 3, 2004Consolidated Statements of Operations for the fiscal years ended December 29, 2001, December 28, 2002,

and January 3, 2004Consolidated Statements of Stockholders� Equity and Comprehensive Income (Loss) for the fiscal years

ended December 29, 2001, December 28, 2002 and January 3, 2004Consolidated Statements of Cash Flows for the fiscal years ended December 29, 2001, December 28, 2002

and January 3, 2004Notes to Consolidated Financial Statements



2. Financial Statement Schedules. All financial statement schedules have been omitted because they are inapplicableor the required information is included elsewhere herein.

44

3. Exhibits. The Company will furnish to any eligible stockholder, upon written request of such stockholder, a copyof any exhibit listed below upon the payment of a reasonable fee equal to the Company�s expenses in furnishingsuch exhibit.

Exhibit

No. Exhibit

2.1 Asset Purchase Agreement, dated May 4, 2002. (8)

2.2 Asset Purchase Agreement, dated January 30, 2003. (9)3.1(i) Restated Certificate of Incorporation of the Company. (1)

3.1(ii) Restated By-Laws of the Company. (1)4.1 Form of certificate representing shares of Common Stock, $0.01 par value per share. (2)4.2 Registration Rights Agreement, dated January 30, 2003. (11)

10.1 Employment Agreement between the Company and Jonathan C. Coon. (6) *10.2 Employment Agreement between the Company and John F. Nichols. (6) *

10.3 Employment Agreement between the Company and Robert G. Hunter. (6) *10.4 Employment Agreement between the Company and R. Joe Zeidner. (11) *10.5 Employment Agreement between the Company and S. Todd Witzel. (11) *10.6 Employment Agreement between the Company and Brian Bethers. (12) *10.7 Employment Agreement between the Company and Dave Saylor. (10) *10.8 Employment Agreement between the Company and Graham Mullis *10.9 Employment Agreement between the Company and Steve Newman *

10.10 Severance Agreement between the Company and Scott S. Tanner. (11) *10.11 1-800 CONTACTS, INC. Amended and Restated 1998 Incentive Stock Option Plan. (7) *10.12 Employment Agreement between the Company and Kevin K. McCallum. (5) *10.13 Lease between the Company and Draper Land Limited Partnership No. 2, dated November 3, 1997,

with respect to the Company�s call center. (2)

10.14 Loan Agreement between the Company and Zions First National Bank, dated July 22, 2002. (8)10.15 Restated Loan Agreement between the Company and Zions First National Bank, dated

February 27, 200410.16 Indemnification Agreement between the Company and its officers and directors. (2)

10.17 First Amendment to Lease between the Company and ProLogis North American Properties Fund ILLC, dated October 9, 2000, with respect to the Company�s distribution center. (5)

10.18 Stock Option Agreement. (2) *10.19 First Amendment to Lease between the Company and Draper Land Limited Partnership No. 2,

dated May 25, 1998, with respect to the Company�s call center. (3)10.20 Second Amendment to Lease between the Company and Draper Land Limited Partnership No. 2,

dated August 6, 1998, with respect to the

45

Company�s call center. (3)



10.21 Lease between the Company and ProLogis Development Services Incorporated, dated October 13,1998, with respect to the Company�s distribution center. (3)

10.22 Third Amendment to Lease between the Company and Draper Land Limited Partnership No. 2,dated January 17, 2001, with respect to the Company�s call center. (5)

10.236 Fourth Amendment to Lease between the Company and Draper Land Limited Partnership No. 2,dated January 17, 2001, with respect to the Company�s call center. (5)

10.24 Fifth Amendment to Lease between the Company and Draper Land Limited Partnership No. 2,dated January 17, 2001, with respect to the Company�s call center. (5)

10.25 Sixth Amendment to Lease between the Company and Draper Land Limited Partnership No. 2,dated January 17, 2001, with respect to the Company�s call center. (5)

10.26 Seventh Amendment to Lease between the Company and Draper Land Limited Partnership No. 2,dated March 31, 2003. (11)

10.27 Eighth Amendment to Lease between the Company and Draper Land Limited Partnership No. 2.(12)

10.28 Second Amendment to Lease between the Company and ProLogis North American Properties FundI LLC, dated March 1, 2002, with respect to the Company�s distribution center. (4)

14.1 Code of Ethics21.1 Subsidiaries of the Registrant.23.1 Consent of Independent Auditors.31.1 Certification Required Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2 Certification Required Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1 Certification Required Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2 Certification Required Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to the Company�s Quarterly Report on Form 10-Q for the quarterlyperiod ended April 4, 1998 (Commission File No. 0-23633).

(2) Incorporated by reference to the same numbered exhibit to the Company�s RegistrationStatement on Form S-1 (Registration No. 333-41055).

(3) Incorporated by reference to the same numbered exhibit to the Company�s Annual Report onForm 10-K for the year ended January 2, 1999 (Commission File No. 0-23633).

(4) Incorporated by reference to the Company�s Annual Report on Form 10-K for the year endedDecember 29, 2001 (Commission File No. 0-23633).

(5) Incorporated by reference to the Company�s Annual Report on Form 10-K for the year endedDecember 30, 2000 (Commission File No. 0-23633).

46

(6) Incorporated by reference to the same numbered exhibit to the Company�s Quarterly Report onForm 10-Q for the quarterly period ended March 30, 2002 (Commission File No. 0-23633).

(7) Incorporated by reference to the Company�s Quarterly Report on Form 10-Q for the quarterlyperiod ended June 29, 2002 (Commission File No. 0-23633).

(8) Incorporated by reference to the Company�s Current Report on Form 8-K filed August 8, 2002(Commission File No. 0-23633).

(9) Incorporated by reference to the Company�s Current Report on Form 8-K filed February 14,2003 (Commission File No. 0-23633).

(10) Incorporated by reference to the Company�s Quarterly Report on Form 10-Q for the quarterlyperiod ended June 28, 2003 (Commission File No. 0-23633).

(11) Incorporated by reference to the Company�s Quarterly Report on Form 10-Q for the quarterlyperiod ended March 29, 2003 (Commission File No. 0-23633).

(12) Incorporated by reference to the Company�s Quarterly Report on Form 10-Q for the quarterlyperiod ended September 27, 2003 (Commission File No. 0-23633).

* Management contract, compensatory plan or arrangement required to be filed as an exhibitpursuant to Item 14(c) of this report.

(b) Reports on Form 8-K.



Current Report on Form 8-K filed October 28, 2003. Other Event � press release announcing financial results for the quarterended September 27, 2003 and related financial statements.

Current Report on Form 8-K filed December 1, 2003. Other Event � press release relating to the passage of the Fairness toContact Lens Consumers Act.

Current Report on Form 8-K filed December 8, 2003. Other Event � press release announcing that the Fairness to ContactLens Consumers Act was signed into law by President Bush and would take effect on February 4th, 2004.

47

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized, on March 18, 2004.


By: /s/ Jonathan C. CoonName: Jonathan C. CoonTitle: Chief Executive Officer

By: /s/ Brian W. BethersName: Brian W. BethersTitle: President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons onbehalf of the Registrant in the capacities indicated on March 18, 2004.

Signature Capacity

/s/ Jonathan C. Coon Chief Executive Officer and Director (principal executive officer)Jonathan C. Coon

/s/ Brian W. Bethers President and Chief Financial Officer (principal financial officer)Brian W. Bethers

/s/ Aaron J. Meyer Corporate Controller (principal accounting officer)Aaron J. Meyer

/s/ John F. Nichols DirectorJohn F. Nichols

/s/ Stephen A. Yacktman DirectorStephen A. Yacktman

/s/ E. Dean Butler DirectorE. Dean Butler

/s/ Jason S. Subotky Director



Jason S. Subotky

/s/ Bradley T. Knight DirectorBrad Knight

/s/ Garth T. Vincent DirectorGarth T. Vincent

/s/ Thomas Hale Boggs, Jr. DirectorThomas Hale Boggs, Jr.

48

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors� Report (KPMG LLP)Report of Independent Public Accountants (ARTHUR ANDERSEN LLP)Consolidated Balance Sheets as of December 28, 2002 and January 3, 2004Consolidated Statements of Operations for the fiscal years ended December 29, 2001, December 28, 2002, and January 3, 2004Consolidated Statements of Stockholders� Equity and Comprehensive Income (Loss) for the fiscal years ended December 29, 2001,

December 28 2002 and January 3, 2004Consolidated Statements of Cash Flows for the fiscal years ended December 29, 2001, December 28, 2002, and January 3, 2004Notes to Consolidated Financial Statements

F-1

Independent Auditors�� Report

Board of Directors and Stockholders of1-800 CONTACTS, INC.:

We have audited the accompanying consolidated balance sheets of 1-800 CONTACTS, INC. and subsidiaries as of December 28, 2002 andJanuary 3, 2004, and the related consolidated statements of operations, stockholders� equity and comprehensive income (loss), and cash flowsfor the fiscal years then ended. These consolidated financial statements are the responsibility of the Company�s management. Ourresponsibility is to express an opinion on these consolidated financial statements based on our audits. The accompanying consolidatedstatements of operations, stockholders� equity and comprehensive income (loss), and cash flows for the fiscal year ended December 29, 2001,were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements intheir report dated January 30, 2002.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financialposition of 1-800 CONTACTS, INC. and subsidiaries as of December 28, 2002 and January 3, 2004, and the results of their operations andtheir cash flows for the fiscal years then ended in conformity with accounting principles generally accepted in the United States of America.



/s/ KPMG LLPSalt Lake City, UtahFebruary 27, 2004

F-2

This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with the Company�s consolidated financialstatements as of December 29, 2001 and December 30, 2000 and for each of the three fiscal years in the period ended December 29, 2001.This audit report has not been reissued by Arthur Andersen LLP since Arthur Andersen LLP has ceased operations.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To 1-800 CONTACTS, INC.:

We have audited the accompanying consolidated balance sheets of 1-800 CONTACTS, Inc. and subsidiaries as of December 30, 2000 andDecember 29, 2001, and the related consolidated statements of income, stockholders� equity and cash flows for each of the three fiscal yearsin the period ended December 29, 2001. These financial statements are the responsibility of the Company�s management. Our responsibilityis to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of 1-800CONTACTS, INC. and subsidiaries as of December 30, 2000 and December 29, 2001, and the results of their operations and their cash flowsfor each of the three fiscal years in the period ended December 29, 2001 in conformity with accounting principles generally accepted in theUnited States.

/s/ ARTHUR ANDERSEN LLP

Salt Lake City, UtahJanuary 30, 2002

F-3

1-800 CONTACTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

(in thousands)

December 28,

2002

January 3,

2004

CURRENT ASSETS:



Cash $ 259 $ 1,075Accounts receivable 655 944Inventories, net 37,785 24,127Prepaid income taxes 769 797Deferred income taxes 756 548Other current assets 1,095 1,752

Total current assets 41,319 29,243

PROPERTY, PLANT AND EQUIPMENT, at cost:Office, computer and other equipment 5,954 7,591Manufacturing equipment 2,061 3,219Manufacturing facility 6,918 7,045Leasehold improvements 1,702 2,179

16,635 20,034Less - accumulated depreciation and amortization (3,773) (6,851)

Net property, plant and equipment 12,862 13,183

DEFERRED INCOME TAXES, net of current portion 365 710

GOODWILL � 33,853

DEFINITE-LIVED INTANGIBLE ASSETS, net 7,089 9,207

OTHER ASSETS 369 735

Total assets $ 62,004 $ 86,931

See accompanying notes to consolidated financial statements.

F-4


CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS�� EQUITY

(in thousands, except per share amount)

December 28,

2002

January 3,

2004

CURRENT LIABILITIES:Line of credit $ 5,770 $ �

Current portion of long-term debt 2,853 3,381Current portion of capital lease obligations 372 191Acquisition payable 400 150Accounts payable 8,597 8,558Accrued liabilities 2,927 4,474Unearned revenue 403 223



Total current liabilities 21,322 16,977

LONG-TERM LIABILITIES:Long-term debt, net of current portion 17,365 14,683Capital lease obligations, net of current portion 250 64Liability related to contingent consideration 5,470 �

Total long-term liabilities 23,085 14,747

COMMITMENTS AND CONTINGENCIES (Notes 1, 3, 4, 5 and 13)

STOCKHOLDERS� EQUITY:Common stock, $.01 par value, 20,000 shares authorized, 12,861 and 13,113 shares issued,

respectively 129 131Additional paid-in capital 24,013 42,346Retained earnings 14,272 12,834Treasury stock at cost, 1,473 and 0 shares, respectively (20,739) �

Accumulated other comprehensive loss (78) (104)Total stockholders� equity 17,597 55,207

Total liabilities and stockholders� equity $ 62,004 $ 86,931


F-5


CONSOLIDATED STATEMENTS OF OPERATIONS


Fiscal Year Ended

December 29,

2001

December 28,

2002

January 3,

2004

NET SALES $ 169,036 $ 168,580 $ 187,303COST OF GOODS SOLD 103,093 118,181 116,873

Gross profit 65,943 50,399 70,430OPERATING EXPENSES:

Advertising 26,850 12,642 20,191Legal and professional 2,838 4,738 6,352Research and development � 247 4,625Purchased in-process research and development � 7,789 �

Other operating expenses 19,874 23,870 37,615Total operating expenses 49,562 49,286 68,783

INCOME FROM OPERATIONS 16,381 1,113 1,647OTHER INCOME (EXPENSE):

Interest expense (96) (1,128) (1,276)Loss on impairment of non-marketable securities (220) � �

Other, net 64 (58) 109



Total other, net (252) (1,186) (1,167)INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 16,129 (73) 480PROVISION FOR INCOME TAXES (6,265) (3,931) (1,918)

NET INCOME (LOSS) $ 9,864 $ (4,004) $ (1,438)

PER SHARE INFORMATION:Basic net income (loss) per common share $ 0.85 $ (0.35) $ (0.11)

Diluted net income (loss) per common share $ 0.84 $ (0.35) $ (0.11)


F-6


CONSOLIDATED STATEMENTS OF STOCKHOLDERS�� EQUITY AND COMPREHENSIVE INCOME (LOSS)

(in thousands)

Common Stock Treasury Stock

Shares Amount

Additional

Paid-in

Capital

Retained

Earnings

(Accumulated

Deficit) Shares Amount

Accumulated

Other

Comprehensive

Loss

Total

Stockholders��

Equity

Comprehensive

Income (Loss)

BALANCE,

December 30, 2000 12,861 $ 129 $ 23,802 $ 8,412 (1,290) $ (18,376) $ (3) $ 13,964

Purchase of treasury shares � � � � (22) (438) � (438)

Exercise of common stock options � � 19 � 27 165 � 184

Income tax benefit from common

stock options exercised � � 177 � � � � 177

Net income � � � 9,864 � � � 9,864 $ 9,864

Foreign currency translation

adjustments � � � � � � 2 2 2

Comprehensive income $ 9,866

BALANCE,

December 29, 2001 12,861 129 23,998 18,276 (1,285) (18,649) (1) 23,753

Purchase of treasury shares � � � � (200) (2,213) � (2,213)

Exercise of common stock options � � (38) � 12 123 � 85

Stock options granted to consultant � � 14 � � � � 14



Net loss � � � (4,004) � � � (4,004) $ (4,004)


adjustments � � � � � � (77) (77) (77)

Comprehensive loss $ (4,081)

BALANCE,

December 28, 2002 12,861 129 24,013 14,272 (1,473) (20,739) (78) 17,597

Exercise of common stock options 125 1 860 � 2 � 863

Stock issued for acquisition of Lens

1st/Lens Express 127 1 8,035 � 773 11,823 � 19,859





Release of Escrow Shares � � 8,066 � 700 8,914 � 16,980

Release of Escrow Shares Stock

Gifts � � 744 744

Net loss � � � (1,438) � � � (1,438) $ (1,438)


adjustments � � � � � � (26) (26) (26)

Comprehensive loss $ (1,464)

BALANCE,

January 3, 2004 13,113 $ 131 $ 42,346 $ 12,834 � $ � $ (104) $ 55,207


F-7


CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Fiscal Year Ended

December 29,

2001

December 28,

2002

January 3,

2004

CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss) $ 9,864 $ (4,004) $ (1,438)Adjustments to reconcile net income (loss) to net cash (used in)

provided by operating activities:Depreciation and amortization 1,459 2,587 6,377Amortization of debt issuance costs and discounts � 83 217Unrealized foreign currency exchange gain � (2) (223)Stock-based compensation � 14 744Purchased in-process research and development � 7,789 �

Loss (gain) on sale of property and equipment (6) 10 7Loss on impairment of non-marketable securities 220 � �

Deferred income taxes (546) 303 (137)Changes in operating assets and liabilities, net of effects of

acquisitions:Accounts receivable � (646) (95)Inventories, net (22,598) 6,527 16,456Other current assets (634) (34) (810)Income taxes payable / prepaid income taxes (889) (870) 600Accounts payable 6,605 (1,660) (3,633)Accrued liabilities (229) (571) 759Unearned revenue (63) (18) (180)

Net cash (used in) provided by operating activities (6,817) 9,508 18,644CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment (1,517) (2,076) (2,828)



Proceeds from sale of property and equipment 7 16 33Purchase of intangible assets (692) (472) (135)Cash paid for acquisition of ClearLab � (6,589) �

Notes receivable related to acquisition of ClearLab � (550) �

Cash paid for acquisition of Lens 1st/Lens Express � � (7,012)Proceeds from settlement of notes receivable � 250 �

Deposits and other 2 (107) (171)Net cash used in investing activities (2,200) (9,528) (10,113)

CASH FLOWS FROM FINANCING ACTIVITIES:Common stock repurchases (438) (2,213) �

Proceeds from exercise of common stock options 184 85 863Net borrowings (repayments) on line of credit 9,261 (6,756) (5,769)Principal payments on capital lease obligations � (190) (370)Debt issuance costs � (156) �

Proceeds from issuance of long-term debt � 10,000 �

Principal payments on long-term debt � (464) (2,483)Net cash provided by (used in) financing activities 9,007 306 (7,759)

EFFECT OF FOREIGN EXCHANGERATES ON CASH 4 (63) 44

NET INCREASE (DECREASE) IN CASH (6) 223 816CASH AT BEGINNING OF YEAR 42 36 259CASH AT END OF YEAR $ 36 $ 259 $ 1,075

SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest $ 93 $ 1,042 $ 1,073Cash paid for income taxes 7,700 4,499 1,455


F-8

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

During fiscal 2002, the Company received $300 of equipment as settlement of a note receivable related to an acquisition(see Note 4).

During fiscal 2002, the Company purchased certain net assets and the majority of the business operations of IGEL, a developer and contractmanufacturer of contact lenses based in Singapore. The purchase consideration included cash of $6,589, the assumption of debt and otherlong-term obligations (net of discounts) of $11,192, and assumed operating liabilities of $253 ( see Note 4).

During fiscal 2002, the Company acquired $400 of intangible assets in exchange for a short-term acquisition payable (see Note 4).

During fiscal 2002, the Company entered into a capital lease obligation for equipment totaling approximately $90.

During fiscal 2003, the Company purchased certain assets and assumed certain liabilities of Lens Express and Lens 1st. The purchaseconsideration included cash of $7,012, common stock with a fair value of $19,859 and assumed operating liabilities of $4,099 (see Note 4).

During fiscal 2003, the performance guarantee was met relating to 700 shares of the Company�s restricted common stock held in escrow aspartial consideration for the July 2002 acquisition of ClearLab. The Company recorded additional purchase consideration of approximately



$16,980 for these shares. The Company recorded this as goodwill, net of a contingent consideration liability recorded at the purchase date(see Note 4).


F-9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF OPERATIONS AND ORGANIZATION OF BUSINESS

1-800 CONTACTS, INC. (the �Company�) is a direct marketer of replacement contact lenses. The Company sells contact lensesprimarily through its toll-free telephone number and the Internet. The Company sells all of the popular brands of contact lenses, includingthose manufactured by Johnson & Johnson Vision Care, CIBA Vision, Bausch & Lomb, Ocular Sciences and Cooper Vision. On July 24,2002, the Company completed the acquisition of certain net assets and the majority of the business operations of IGEL, a developer andcontract manufacturer of contact lenses based in Singapore. The acquisition was effected through a wholly owned subsidiary of the Company,IGEL Acquisition Co. Pte Ltd (subsequently renamed ClearLab Pte Ltd). ClearLab manufactures injection cast molded soft contacts lenses ona contract basis for various contact lens manufacturers, as well as, manufactures and distributes branded and private label contact lenses viadistributors and other sales channels outside the U.S. It produces a wide range of frequent replacement spherical and toric lenses and isfocused on developing new lens materials for the future. ClearLab markets its products principally in Europe and other international markets.

Sources of Supply

Historically, substantially all of the major manufacturers of contact lenses refused to sell lenses to direct marketers, including theCompany, and sought to prohibit their distributors from doing so. As a result, the Company historically purchased a substantial portion of itsproducts from unauthorized distributors. Currently, Ocular Sciences is the only remaining major manufacturer who refuses to sell directly tothe Company.

Although the Company seeks to reduce its reliance on any one supplier by establishing relationships with a number of distributors,manufacturers and other sources, the Company acquired from a single distributor approximately 46 percent, 35 percent and 23 percent of itscontact lens purchases in fiscal 2001, 2002 and 2003, respectively. The Company�s top three suppliers accounted for approximately 70percent, 63 percent and 59 percent of the Company�s inventory purchases in fiscal 2001, 2002 and 2003, respectively. The Companycontinually seeks to establish new relationships with potential suppliers in order to obtain adequate inventory at competitive prices. In theevent that these suppliers could no longer supply the Company with contact lenses, there can be no assurance that the Company could secureother adequate sources of supply, or that such supply could be obtained on terms no less favorable to the Company than its current supply,which could adversely affect the Company by increasing its costs or, in the event adequate replacement supply cannot be secured, reducing itsnet sales.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year

The Company�s fiscal year consists of a 52/53 week period ending on the Saturday nearest to December 31. Fiscal 2001 endedDecember 29, 2001; fiscal 2002 ended December 28, 2002; and fiscal 2003 ended January 3, 2004. Fiscal 2001 and 2002 were 52-weekyears. Fiscal 2003 was a 53-week year.

Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingentassets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

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Principles of Consolidation

The consolidated financial statements include the accounts of 1-800 CONTACTS, INC. and its wholly owned subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

Revenues are generally recognized when products are shipped, the customer takes ownership and assumes risk of loss, collection of therelated receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Payments for theproduct are received prior to shipment, except with respect to ClearLab product sales. ClearLab provides its customers with standard industrypayment terms. Unearned revenue represents amounts received from customers for which shipment has not occurred. Net sales consist ofproduct sales less a provision for sales returns and allowances, which is made at the time of the sale. The Company accrues an estimatedamount for sales returns and allowances at the time the sale is recorded based on historical information. Shipping and handling fees chargedto customers are included as part of net sales. The related freight costs and supplies expense directly associated with shipping products tocustomers are included as a component of cost of goods sold. Other indirect shipping and handling costs, consisting mainly of labor andfacilities costs, are included as a component of other selling, general and administrative expenses.

ClearLab performs ongoing credit evaluations of its customers and provides for doubtful accounts to the extent determined necessarybased on historical data and current economic trends. As of January 3, 2004, there is no allowance for doubtful accounts.

Inventories

Inventories are recorded at the lower of cost (using the first-in, first-out method) or market value. Inventories consisted of the following(in thousands):

December 28,

2002

January 3,

2004

Purchased contact lenses $ 36,571 $ 20,943Manufactured contact lenses:

Raw materials 109 429Work in process 210 2,681Finished goods 895 74

Total $ 37,785 $ 24,127

Provision is made to reduce excess and obsolete inventories to their estimated net realizable values. As of December 28, 2002 andJanuary 3, 2004, reserves for excess and obsolete inventories were $731,000 and $ 623,000, respectively. For fiscal 2001 the provision forexcess and obsolete inventories was $465,000 and there were no write-offs. For fiscal 2002 the provision for excess and obsolete inventorieswas $130,000 and write-offs were $490,000. For fiscal 2003 the provision for excess and obsolete inventories was $231,000 and write-offswere $339,000.

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Property, Plant and Equipment

Property, plant and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives.Leasehold improvements are amortized over the lesser of the useful life of the asset or the term of the lease. The useful lives are as follows:

Useful Lives

Office, computer and other equipment 3 to 7 yearsManufacturing equipment 7 yearsManufacturing facility 18 yearsLeasehold improvements 2 to 7 years

The manufacturing facility represents the Company�s leasehold interest in a building in Singapore which was assumed in connectionwith the acquisition of ClearLab (See Note 4). The Company subleases a portion of its Singapore building to others. For the fiscal yearsended December 28, 2002 and January 3, 2004, sublease income of approximately $167,000 and $182,000, respectively, is reflected as areduction of other operating expenses in the accompanying consolidated statement of operations. Expected future sublease income underthese agreements for the next five fiscal years is as follows: $138,000 in fiscal 2004, $31,000 in fiscal 2005 and none in fiscal 2006, 2007 and2008.

Major additions and improvements are capitalized, while costs for minor replacements, maintenance and repairs that do not increase theuseful life of an asset are expensed as incurred. Upon retirement or other disposition of property, plant and equipment, the cost and relatedaccumulated depreciation or amortization are removed from the accounts. The resulting gain or loss is reflected in other operating expenses.

Definite-Lived Intangible Assets

Intangible assets mainly consist of amounts paid to secure the rights to the Company�s telephone numbers and Internet addresses;acquired technology relating to the development and manufacturing of contact lenses; non-compete agreements; and customer databases. Thecosts relating to the definite-lived intangible assets are amortized over the estimated lives using straight-line and accelerated methods. As ofJanuary 3, 2004, the weighted average amortization period for all intangibles was 7 years. The weighted average amortization periods fortelephone numbers and internet addresses is 5 years, acquired customer databases is 5 years, core and completed technologies is 12 years andnoncompetition agreements is 5 years.

The Company has contractual rights customary in the industry to use its telephone numbers and Internet addresses. However, underapplicable rules and regulations of the Federal Communications Commission, the Company does not have and cannot acquire any propertyrights to the telephone numbers. In addition, the Company does not have and cannot acquire any property rights to the Internet addresses.The Company does not expect to lose its rights to use the telephone numbers or Internet addresses; however, there can be no assurance in thisregard and such loss would have a material adverse effect on the Company�s financial position and results of operations.

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The Company�s definite-lived intangible assets are summarized in the table below (in thousands):

December 28,

2002

January 3,

2004

Telephone numbers, internet addresses and other $ 3,178 $ 3,313Acquired customer databases (see Note 4) � 5,100Core and completed technologies 4,036 4,109Non-competition agreements 1,741 1,768

8,955 14,290

Accumulated amortization (1,866) (5,083)



Definite-lived intangible assets, net $ 7,089 $ 9,207

Definite-lived intangible assets amortization expense totaled approximately $410,000, $804,000, and $3,197,000 for fiscal years 2001,2002 and 2003, respectively. Estimated amortization expense for the next five fiscal years is as follows: $2,755,000 in fiscal 2004,$2,071,000 in fiscal 2005, $1,395,000 in fiscal 2006, $757,000 in fiscal 2007 and $348,000 in fiscal 2008.

Impairment of Long-lived Assets

Long-lived tangible assets and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amounts of such assets may not be recoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset or asset group to its future undiscounted net cash flows expected to be generated during its useand eventual disposition. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds their fair value. As of January 3, 2004, none of the Company�s long-lived assets were impaired.

Goodwill

Goodwill resulted from the acquisitions of ClearLab and Lens1st/Lens Express and represents the difference between the purchase priceand the fair value of the identifiable tangible and intangible net assets. Goodwill is not amortized, but rather tested for impairment on anannual basis or more often if events or circumstances indicate a potential impairment exists. Goodwill is tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the estimated fair value of thereporting unit containing goodwill with the related carrying amount. If the estimated fair value of the reporting unit exceeds its carryingamount, the reporting unit�s goodwill is not considered to be impaired and the second step of the impairment test is unnecessary. If thereporting unit�s carrying amount exceeds its estimated fair value, the second step test must be performed to measure the amount of thegoodwill impairment loss, if any. The second step test compares the implied fair value of the reporting unit�s goodwill, determined in thesame manner as the amount of goodwill recognized in a business combination, with the carrying amount of such goodwill. If the carryingamount of the reporting unit�s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equalto that excess. The Company performed its annual impairment analysis for fiscal 2003 and determined that as of January 3, 2004, goodwillwas not impaired.

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Fair Value of Financial Instruments

The Company�s financial instruments consist mainly of accounts receivable, a line of credit, long-term debt and short-term obligations.The Company believes that the carrying amounts approximate their fair values. The estimated fair values have been determined usingappropriate market information and valuation methodologies.

Foreign Currency Translation

The accounts of the Company�s international subsidiary�s financial statements are translated into U.S. dollars using the exchange rate atthe balance sheet date for assets and liabilities and the weighted average exchange rate for the year for revenues, expenses, gains and losses.Foreign currency translation adjustments are recorded as a separate component of comprehensive income (loss). Gains or losses resultingfrom foreign currency transactions are included in other income (expense) and totaled gains of $9,000 and $223,000 for fiscal 2002 and 2003,respectively. The Company had no international subsidiaries in 2001.

Advertising Costs



The Company expenses all advertising costs when the advertising first takes place. The Company does not defer any direct responseadvertising costs because its ability to track individual sales to specific advertising campaigns is restricted as a result of the variety ofadvertising vehicles utilized.

Research and Development

Research and development costs are expensed as incurred. Research and development expenses for fiscal 2002 and 2003 wereapproximately $247,000 and $4,625,000, respectively. No research and development expenses were incurred in 2001. In connection with theacquisition of ClearLab in 2002, the Company recorded approximately $7,800,000 of purchased in-process research and development expense(see Note 4).

Income Taxes

The Company recognizes deferred income tax assets or liabilities for expected future tax consequences of events that have beenrecognized in the financial statements or tax returns. Under this method, deferred income tax assets or liabilities are determined based uponthe difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates expected to apply whendifferences are expected to be settled or realized. Deferred income tax assets are reviewed for recoverability and valuation allowances areprovided when it is more likely than not that a deferred tax asset is not realizable in the future. The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized in income in the period that includes the enactment date.

Net Income (Loss) Per Common Share

Basic net income (loss) per common share (�Basic EPS�) excludes dilution and is computed by dividing net income (loss) by theweighted-average number of common shares outstanding during the year. Diluted net income (loss) per common share (�Diluted EPS�)reflects the potential dilution that could occur if stock options or other common stock equivalents were exercised or converted into commonstock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an antidilutive effect on netincome (loss) per common share. At December 29, 2001, December 28, 2002 and January 3, 2004 options to purchase 158,192, 1,176,199,and 1,317,344 shares of common stock were not included in the computation of Diluted EPS because the effect would be antidilutive. Forfiscal 2002, Basic and Diluted EPS do not include the impact of 700,000 shares of

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restricted stock held in escrow since the necessary performance guarantee for the release of those shares had not been satisfied at that time.During fiscal 2003, the performance guarantee was met and the shares were released from escrow and treated as outstanding.

The following is a reconciliation of the numerator and denominator used to calculate Basic and Diluted EPS (in thousands, except pershare amounts):

Net Income

(Loss) Shares

Per-Share

Amount

Year Ended December 29, 2001:Basic EPS $ 9,864 11,574 $ 0.85Effect of stock options 178Diluted EPS $ 9,864 11,752 $ 0.84

Year Ended December 28, 2002:Basic EPS $ (4,004) 11,417 $ (0.35)Effect of stock options �

Diluted EPS $ (4,004) 11,417 $ (0.35)



Year Ended January 3, 2004:Basic EPS $ (1,438) 12,696 $ (0.11)Effect of stock options �

Diluted EPS $ (1,438) 12,696 $ (0.11)

Stock-Based Compensation

The Company applies Accounting Principles Board Opinion No. 25, �Accounting for Stock Issued to Employees,� and relatedinterpretations and uses the intrinsic method of accounting for its stock option grants to employees and directors. No compensation expensehas been recognized for stock option awards granted at or above fair market value of the stock on the date of grant.

Under Statement of Financial Accounting Standards (�SFAS�) No. 123, �Accounting for Stock-Based Compensation,� compensationexpense is recognized for the fair market value of each option as estimated on the date of grant using the Black-Scholes option-pricing model.SFAS No. 148, �Accounting for Stock-Based Compensation � Transition and Disclosure,� amends SFAS No. 123, to provide alternativemethods of transition for a voluntary change to the fair market value based method of accounting for stock-based employee compensation. Inaddition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require new prominent disclosures in both annual andinterim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used onreported results. The Company has elected to adopt the �disclosure only� provisions of SFAS No. 148.

F-15

If compensation expense for all stock options had been determined consistent with SFAS No. 123, the Company�s net income (loss) andbasic and diluted net income (loss) per common share would have been as follows (in thousands, except per share amounts):

Fiscal Year

2001 2002 2003

Net income (loss):As reported $ 9,864 $ (4,004) $ (1,438)Fair-value based compensation, net of

tax (732) (862) (1,315)Pro forma $ 9,132 $ (4,866) $ (2,753)

Basic net income (loss) per common share:As reported $ 0.85 $ (0.35) $ (0.11)Pro forma $ 0.79 $ (0.43) $ (0.22)

Diluted net income (loss) per common share:As reported $ 0.84 $ (0.35) $ (0.11)Pro forma $ 0.78 $ (0.43) $ (0.22)

Due to the nature and timing of option grants, the resulting pro forma compensation cost may not be indicative of future years� expense.

The weighted average per share fair value of option grants during fiscal 2001, 2002 and 2003 was $19.72, $7.57, and $13.72,respectively. The fair value of each option grant has been estimated on the grant date using the Black-Scholes option-pricing model with thefollowing weighted average assumptions:

2001 2002 2003

Risk-free interest rate 4.8% 4.0% 2.6%Expected dividend yield 0.0% 0.0% 0.0%Volatility 68% 79% 71%Expected life 5 years 5 years 5 years



New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (�FASB�) issued Interpretation No. 46 (�FIN No. 46�), �Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51,� which addresses the consolidation by business enterprises of variable interestentities as defined therein and applies immediately to variable interests in variable interest entities created or obtained after January 31, 2003.With respect to variable interest entities created before January 31, 2003, in December 2003, the FASB issued FIN No. 46R which, amongother things, revised the implementation date to fiscal years or interim periods ending March 15, 2004, with the exception of Special PurposeEntities (�SPEs�). The consolidation requirements apply to all SPEs in the first fiscal year or interim period ending after December 15, 2003.The Company does not have any variable interest entities or SPEs and accordingly, the adoption of FIN No. 46 did not impact the Company�sconsolidated financial statements and the adoption of FIN No. 46R will not impact the Company�s consolidated financial statements in thefirst quarter of fiscal 2004.

In May 2003, the FASB issued SFAS No. 150, �Accounting for Certain Financial Instruments with Characteristics of Both Liabilitiesand Equity.� The new statement establishes standards for how an issuer classifies and measures certain financial instruments withcharacteristics of both debt and equity. The provisions of SFAS No. 150 apply to the classification and disclosure requirements for thefollowing three types of financial instruments: Mandatorily Redeemable Instruments, Instruments with Repurchase Obligations, andInstruments with Obligations to Issue a Variable Number of Securities. The new reporting and disclosure requirements for SFAS No. 150become effective for the first interim period beginning after June 15, 2003 or for any covered instruments entered into or modified subsequentto May 31, 2003. The Company adopted this statement during the third quarter of 2003. There was no impact on the Company�s financialposition, results of operations, or liquidity.

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In November 2002, the Financial Accounting Standards Board Emerging Issues Task Force issued its consensus concerning RevenueArrangements with Multiple Deliverables (�EITF 00-21�). EITF 00-21 addresses how to determine whether a revenue arrangement involvingmultiple deliverables should be divided into separate units of accounting, and, if separation is appropriate, how the arrangement considerationshould be measured and allocated to the identified accounting units. The guidance in EITF 00-21 is effective for revenue arrangementsentered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a material impact on the Company�sfinancial position, results of operations, and liquidity.

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NOTE 3. DEBT AND CAPITAL LEASE OBLIGATIONS

Debt Obligations

The Company�s debt obligations are comprised of the following (Singapore dollars (�SGD�) and U.S. dollars (�USD�) in thousands):

December 28,

2002

January 3,

2004

Revolving credit facility (see description below) $ 5,770 $ �

Long-term Debt Obligations:Term loan payable to a U.S. bank, interest payable monthly at prime

plus 0.5% or LIBOR plus 3.0%, principal due in quarterlyinstallments through June 30, 2007, secured by substantially all of theCompany�s U.S. assets. The 2003 balance was paid off subsequent $ 9,550 $ 7,725



to fiscal 2003 year end in connection with entering into a new loanagreement (see further description below).

Term loan payable to a Singapore bank (SGD 8,610 at January 3, 2004),interest payable monthly at 6.75%, principal due in monthlyinstallments from January 2003 through December 2007, secured bysubstantially all of the assets of ClearLab and guaranteed by 1-800CONTACTS, INC. 4,999 5,055

Subordinated note payable to the parent of IGEL (SGD 6,892 atJanuary 3, 2004), interest payable monthly at 6.0%, principal due inmonthly installments from January 2008 through December 2009,subordinated to a term loan to a Singapore bank, secured by a deed ofsecond assignment of sale proceeds from the Singapore buildingleasehold and guaranteed by 1-800 CONTACTS, INC. (interestimputed at 7.0%), net of discount of $232 and $198 for 2002 and2003, respectively. 3,741 3,848

Unsecured note payable to ClearLab�s chief technology officer (SGD2,688 at January 3, 2004), non-interest bearing, due in monthlyinstallments through July 2007 (interest imputed at 7.0%), net ofdiscount of $291 and $186 for 2002 and 2003, respectively. 1,871 1,392

Other 57 44Total long-term debt obligations 20,218 18,064Current portion (2,853) (3,381)

Long-term debt, net of current portion $ 17,365 $ 14,683

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The aggregate amounts of principal maturities of long-term debt at January 3, 2004 are as follows (in thousands):

Fiscal Year:

2004 $ 3,4632005 3,6762006 3,7762007 3,4872008 1,873Thereafter 2,173

18,448Discounts (384)Total, net of discounts $ 18,064

Effective July 22, 2002, the Company entered into a loan agreement with a U.S. bank, providing for both a $10 million term loan anda revolving credit facility for borrowings up to $20 million. The amounts outstanding on both the term loan and the revolving credit facilitywere limited to a percentage of eligible inventory. As of the effective date, the percentage was 75% and was reduced by 1.25% each calendarquarter beginning September 30, 2002 until the percentage would reach 50%. The percentage as of January 3, 2004 was 67.5%. Theoutstanding borrowings were secured by substantially all of the Company�s U.S. assets including a portion of the Company�s common stockownership in ClearLab. The agreement contained various financial covenants including a capital expenditure limit, a minimum working



capital requirement, a leverage ratio and a minimum net income requirement. Also, if the Company were unable to cure a default on itsSingapore debt within 30 days of occurrence, the Company would be in default on this debt.

As of January 3, 2004, the U.S. bank term loan interest rate was fixed at the 30-day LIBOR rate plus 3% (4.17% at January 3, 2004 untilJanuary 5, 2004).

Outstanding borrowings on the revolving credit facility bore interest at a floating rate equal to the lender�s prime interest rate plus 0.25percent (4.25 percent at January 3, 2004) or 2.75 percent above the lender�s LIBOR for the applicable period. As of January 3, 2004, theinterest rate on the outstanding borrowings was based on the lender�s prime interest rate plus 0.25 percent. Interest was payable monthly. Thecredit facility also included an unused credit fee equal to one-eighth of one percent, payable quarterly. The credit facility was scheduled toexpire on April 30, 2003, however the Company obtained an extension of the maturity date until the renewal of the credit facility onFebruary 27, 2004 as discussed below. As of January 3, 2004, the Company was not in compliance with some of the financial covenants, butsuch non-compliance was waived at the time the Company executed the restated loan agreement on February 27, 2004.

Effective February 27, 2004, the Company executed a restated loan agreement with its existing U.S. bank, providing for a revolvingcredit facility for borrowings of up to $28 million through June 1, 2004, and reducing thereafter on the first day of each September, December,March and June by $400,000 until the maturity date of February 27, 2007. Additionally, the agreement provides for letters of credit up to amaximum of $15 million outstanding or payable at any time. If the maximum leverage ratio, as defined in the restated loan agreement, isgreater than 2.5, then the amounts outstanding on the revolving credit facility together with the amount of all outstanding letters of credit canat no time exceed the Company's book value of inventory. Outstanding borrowings on the revolving credit facility bear interest at a floatingrate equal to the lender's prime interest rate plus a margin or the lender's LIBOR rate plus a margin. Interest based on the lender's prime rate isthe prime rate plus 0.75 percent until July 31, 2004, and thereafter is adjusted quarterly, ranging between prime plus 0.0 percent and primeplus 1.25 percent, depending on the Company's maximum leverage ratio. Interest based on the lender's LIBOR rate is the LIBOR rate for theapplicable period plus 2.75 percent until July 31, 2004, and thereafter is adjusted quarterly, ranging between LIBOR plus 2.0 percent andLIBOR plus 3.25 percent, depending on the Company's maximum leverage ratio. Interest is payable monthly. The facility requires thepayment of an unused credit fee which is also determined by the Company's maximum leverage ratio. The unused credit fee is payablequarterly at 0.5 percent until July 31, 2004, and thereafter is adjusted quarterly, ranging from 0.38 percent to 0.5 percent.

F-19

Upon execution of this loan agreement, the Company paid a closing fee of $140,000 and the U.S. bank's associated legal andprofessional fees. All outstanding balances on this credit facility are secured by substantially all of the Company's U.S. assets, subsidiary debtinstruments, 100 percent ownership interests in all domestic subsidiaries and 65 percent ownership interest in foreign subsidiaries directlyowned by the Company. The new loan agreement includes various financial covenants including a capital expenditure limit, a manimumleverage ratio, a minimum working capital requirement, a minimum fixed charge coverage ratio and a minimum net worth requirement. Thenew loan agreement also does not permit the Company or its subsidiaries to dissolve, sell, dispose or merge all of its assets or acquire all theassets of any entity without the written consent of the U.S. bank, unless the transaction meets the definition of a "Permitted AcquisitionBasket", as defined in the agreement. The new loan agreement also places a limit on the amount the Company can loan to any entity, outsidethe normal course of business. Additionally, the agreement does not permit the Company to declare or pay any cash dividends, to repurchaseits stock or to perform other similar equity transactions prior to December 31, 2005; thereafter such transactions are subject to other terms.This agreement defines several customary events of default including any material adverse change or any event that occurs which may cause amaterial adverse change in the Company's or its subsidiaries' condition. This restated loan agreement succeeds and replaces the Company'sprior loan agreement executed July 22, 2002. All outstanding balances associated with the July 22, 2002 loan agreement were paid withproceeds from this new loan agreement.

The Company�s Singapore bank term loan contains various financial covenants including minimums on net worth and shareholders�funds of the Singapore operations. As of January 3, 2004, the Company was in compliance with all applicable covenants. 1-800CONTACTS, INC. has guaranteed this term loan.



Cross default clauses exist such that if the Company were in default on its U.S. debt, the Company would also be in default on itsSingapore debt. If the Company were in default on its Singapore bank term loan, the Company would also be in default on its note payable tothe parent of IGEL and its new U.S. debt.

Capital Lease Obligations

The Company leases various manufacturing and other equipment under capital lease arrangements. All of the equipment is maintained atthe Singapore facility. The majority of the leases were assumed in connection with the Company�s acquisition of ClearLab (see Note 4). Theminimum future lease payments under capital lease obligations as of January 3, 2004 are as follows (in thousands):

Fiscal Year Amount

2004 $ 2242005 162006 152007 152008 15Thereafter 14

Total minimum lease payments 299Less amount representing interest (44)Present value of minimum lease payments 255Current portion (191)Capital lease obligations, net of current

portion $ 64

As of January 3, 2004, the equipment held under capital lease obligations had a cost of approximately $1,038,000 and accumulatedamortization of approximately $579,000.

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NOTE 4. ASSET ACQUISITIONS

In October 2002, the Company purchased certain assets of a direct-to-consumer contact lens business for $800,000 with paymentsscheduled as follows: $400,000 on the closing date, $250,000 on January 2, 2003 and $150,000 subsequent to fiscal 2003 on January 5, 2004.The assets acquired principally include a customer database, Internet address, various telephone numbers and a noncompetition agreement.

IGEL (ClearLab)

On July 24, 2002, the Company completed the acquisition of certain net assets and the majority of the business operations of IGEL, adeveloper and contract manufacturer of contact lenses based in Singapore. The acquisition was effected through a wholly owned subsidiary ofthe Company, IGEL Acquisition Co. Pte Ltd (subsequently renamed ClearLab Pte Ltd), and included the purchase of assets of Igel C.M.Laboratory Pte Ltd and International Vision Laboratories Pte Ltd, both subsidiaries of Igel Visioncare Pte Ltd, as well as certain other assetsfrom Sinduchajana Sulistyo and Stephen D. Newman. The assets acquired included principally the long-term leasehold interests in the landand building where the manufacturing facility is located, as well as equipment, inventories, and certain intellectual property rights, includingpatents key to the operation of the acquired business. manufactures injection cast molded soft contacts lenses on a contract basis for variouscontact lens manufacturers, as well as, manufactures and distributes branded and private label contact lenses via distributors and other saleschannels outside the U.S. It produces a wide range of frequent replacement spherical and toric lenses and is focused on developing new lensmaterials for the future. ClearLab International markets its products principally in Europe and other international markets. The Company



accounted for this transaction under the purchase method in accordance with SFAS No. 141. The results of operations of ClearLab areincluded in the consolidated results of the Company from the date of the acquisition.

The consideration paid by the Company consisted of approximately $6.6 million in cash (which includes $1.2 million in transactioncosts), $8.9 million in assumed building and business loans to be paid over 7 years from the acquisition date, $0.7 million in assumed capitallease obligations, a non-interest bearing note payable of $2.1 million to be paid over 5 years from the acquisition date, 700,000 shares ofrestricted common stock of the Company, and 270,000 common stock options of the Company in three tranches of 90,000 each with exerciseprices of $15, $25 and $35 per share, respectively. 1-800 CONTACTS, INC. also executed guarantees for the building and business loansassumed in the transaction.

The purchase consideration was denominated primarily in Singapore dollars. As a result, applicable amounts have been translated intoU.S. dollars at the exchange rate on the date of the transaction. The following sets forth the consideration paid by the Company (in thousands):

Cash $ 5,358Direct acquisition expenses 1,2316.75% term loan payable to bank 4,9656% note payable to parent of seller (discounted at 7%) 3,701Non-interest bearing note payable (discounted at 7%) 1,808Capital lease obligations assumed 718

Total purchase consideration $ 17,781

F-21

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

Inventories $ 1,306Other current assets 38Property and equipment 8,845Other long-term assets 50In-process research and development 7,789Definite-lived intangible assets:

Core and completed technologies 4,009Non-competition agreement 1,432

Accrued liabilities (253)Estimated fair value of acquired net assets 23,216Liability related to contingent consideration (5,435)


The value allocated to purchased in-process research and development was charged to expense upon consummation of the acquisition.The valuation of the in-process research and development was determined using the income approach method, which includes an analysis ofthe markets, cash flows and risks associated with achieving such cash flows. The amount allocated represents the estimated purchased in-process technology for projects that have not yet reached commercial viability. Based on preliminary assessments, the value of these projectswas determined by estimating the costs to develop the purchased in-process technologies into commercially viable products; estimating theresulting net cash flows from the sale of those products (reduced by the portion of revenue attributable to core technology); and discountingthe net cash flows back to their present value. The cash flows have been discounted at a rate of return of 38%, which has been adjusted for anadditional risk premium. This additional risk premium reflects the uncertainty and risk inherent in in-process technology, the remainingtechnological/regulatory issues to be resolved and the amount of time remaining to complete the technologies. Several of the technologiesmust undergo clinical studies and must obtain FDA approval. Management believes that the acquired in-process research and developmentwill be successfully developed; however, these technologies may not achieve commercial viability.



In contemplation of the acquisition and to provide interim financing for operations and equipment purchases, the Company entered into aconsulting agreement with Stephen D. Newman effective January 31, 2002, and later loaned Stephen D. Newman $550,000. Upon closing ofthe transaction, Stephen D. Newman became an employee of the Company, and $250,000 of the loan was repaid and the remaining $300,000was satisfied by transferring equipment purchased with the loan proceeds by Stephen D. Newman to the Company.

The 700,000 shares of restricted common stock were placed in escrow, subject to a performance guarantee, and vest over a two-yearschedule with no shares released from escrow for a minimum of one year from the acquisition date. On June 6, 2003, the performanceguarantee was met relating to these shares and 175,000 shares were released on July 24, 2003 and 437,500 shares were released on January 24,2004 in accordance with the vesting provisions, based on an October 14, 2003 amendment to the escrow agreement. The remaining 87,500shares held in escrow will be released on July 24, 2004. For financial reporting purposes, all shares held in escrow are treated as outstandingas of June 6, 2003, the date the performance guarantee was met, and the Company reflected additional purchase consideration for theestimated fair value of these shares of approximately $17.0 million. The fair value was based upon the closing market price of the Company�scommon stock on the date the performance guarantee was met, reduced by an approximate 9% discount due to the restrictions associated withthe

F-22

vesting period of the common stock held in escrow. This discount was determined by an independent third party appraisal.

In accordance with SFAS No. 141, at the date of acquisition the Company recorded a liability of $5,435,000 for the excess of the fairvalue of the acquired net assets over the purchase consideration (excluding contingent consideration). The difference between this amountand the $17.0 million of value determined at the date the escrow conditions were met was reflected as an increase to goodwill. At January 3,2004, goodwill related to this transaction amounted to $11.5 million.

The value of the options to purchase 270,000 shares of common stock will be determined and recorded as additional purchaseconsideration at the applicable vesting dates. These options vest equally at the end of the third, fourth and fifth years from the acquisitiondate.

During fiscal 2003, the Company also recorded compensation expense and additional paid-in capital of approximately $0.7 million dueto the transfer of 28,000 common shares owned by ClearLab�s chief technology officer to key employees of ClearLab. The shares transferredrepresented a portion of the 700,000 shares held in escrow and were subject to the same performance guarantee and are subject to the samevesting provisions. Because the performance conditions were met, and there are no additional contingencies, the fair value of the shares wasrecorded as compensation expense during fiscal 2003.

Lens Express and Lens 1st

On January 30, 2003, the Company completed the acquisition of certain assets and the assumption of certain liabilities of Lens ExpressLLC and Camelot Ventures/CJ, L.L.C. d/b/a Lens 1st (collectively, the �Seller�), two leading U.S. mail order contact lens retailers. The assetsacquired included databases, customer information, web sites and Internet addresses or domain names, telephone numbers, certain specifiedcontracts and intellectual property rights. In addition, acquired assets included certain property, equipment, inventories, receivables andprepaid expenses. With the exception of specifically identified liabilities, the Company did not assume the liabilities of the Seller. Theliabilities assumed by the Company included certain of the Seller�s identified contracts, accounts payable, accrued liabilities, certain customerprogram obligations and severance obligations as of January 30, 2003.

The consideration paid by the Company consisted of approximately $7.0 million in cash (including $0.5 million in transaction costs),900,000 shares of restricted common stock of the Company with a fair value of $19.9 million and the assumption of approximately $4.1million of the aforementioned liabilities. The 900,000 shares of restricted common stock are subject to a lock-up period of 12 months after theacquisition date of January 30, 2003. In connection with the acquisition, the Company entered into a registration rights agreement granting



the Seller certain piggyback registration rights with respect to the 900,000 shares of restricted common stock. The following sets forth theconsideration paid by the Company (in thousands, except per share amounts):

Cash $ 6,500Restricted shares (900 shares at $22.07 per share) 19,859Acquisition expenses 512Accounts payable 3,575Accrued expenses 524


For purposes of computing the purchase price, the value of the restricted common stock was determined by taking the average closingprice of the Company�s common stock as quoted on Nasdaq for the two days before, the day of and the two days following the announcementof the signing of a letter of intent to acquire Lens Express and Lens 1st. This average price was then reduced by a 15 percent discount (asdetermined by a third party appraisal) due to the restriction provisions associated with the common shares issued.

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

Accounts receivable $ 178Inventories 2,740Other assets 76Property and equipment 572Customer databases 5,100Goodwill 22,304

Total $ 30,970

Pro Forma Information

The unaudited pro forma information below sets forth summary results of operations as if the acquisitions of ClearLab (acquired July 24,2002) and Lens 1st and Lens Express (acquired January 30, 2003) had taken place at the beginning of fiscal 2002, after giving effect to certainadjustments, including amortization of intangibles, depreciation, interest expense and other adjustments directly attributable to thetransactions. The following pro forma information does not include the $7.8 million non-recurring charge related to in-process research anddevelopment. The following pro forma information for the fiscal years 2002 and 2003 has been prepared for comparative purposes only anddoes not purport to be indicative of what would have occurred had the acquisitions occurred at the beginning of fiscal 2002 or of results whichmay occur in the future (in thousands, except per share amounts):

Fiscal Year

2002 2003

Net sales $ 218,424 $ 190,712Net loss (1,760) (1,324)Earnings per share:

Basic $ (0.14) $ (0.11)Diluted $ (0.14) $ (0.11)

Letter of Intent (Acquisition of VisionTec).

On March 13, 2003, the Company signed a letter of intent with VisionTec, a developer and manufacturer of contact lenses based in theUnited Kingdom, and certain of its shareholders. The Company agreed to pay VisionTec a non-refundable sum equal to $1.5 million to beused by the entity for research and development activities relating to contact lenses. Of the total, $700,000 was paid on March 14, 2003, and



the remaining $800,000 was paid on June 13, 2003. In addition, the Company was granted a six-month option to either: (1) acquire all of theshares of common stock of the entity; or, (2) acquire from the entity a worldwide license to manufacture, market, sell or otherwise use orexploit specific technology developed by the entity. As consideration for this option, the Company paid $100,000 to VisionTec on March 14,2003. In the event that the Company did not exercise the option to purchase the shares of the VisionTec, the Company agreed to pay theentity an additional $800,000. The Company also reimbursed VisionTec and its shareholders $161,000 for legal and financial expensesincurred by the entity in connection with the agreement.

On September 12, 2003, the Company exercised the option to acquire all of the shares of common stock of VisionTec. During the periodbetween September 12, 2003 and the closing of the acquisition on February 24, 2004,

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the Company continued to pay certain fees and expenses of the entity related to the entity�s research and development activities. TheCompany paid approximately $2.1 million to VisionTec from September 12, 2003 through January 3, 2004 and $536,000 from January 3,2004 through February 24, 2004, for such research and development activities.

In connection with the agreement, and the transactions discussed above, the Company has expensed a total of approximately $3.9 millionfrom March 13, 2003 through January 3, 2004 (inclusive of the $161,000 in costs) related to these research and development initiatives.

On February 24, 2004, the Company completed the acquisition of the shares of VisionTec (subsequently renamed ClearLab UK). Thetransaction was accomplished as a purchase of all of the stock of the entity. The consideration paid included approximately $3.2 million incash and 155,084 shares of the Company�s common stock with a fair value of approximately $3.2 million. In addition, the Company hasagreed to pay a per unit royalty to the former shareholders of VisionTec for a period of ten years. The Company financed the cash portion ofthis acquisition with its revolving credit facility from its U.S. bank.

NOTE 5. COMMITMENTS AND CONTINGENCIES

Legal and Regulatory Matters

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

On April 7, 1999, the Kansas Board of Examiners in Optometry (�KBEO�) commenced a civil action against the Company. The actionwas filed in the District Court of Shawnee County, Kansas, Division 6. The complaint was amended on May 28, 1999. The amendedcomplaint alleges that �on one or more occasions� the Company sold contact lenses in the state of Kansas without receipt of a prescription.The amended complaint seeks an order enjoining the Company from further engaging in the alleged activity. The amended complaint doesnot seek monetary damages. The Company filed an answer to the amended complaint and, at the request of the Court, filed a motion forsummary judgment. In November 2000, the Court issued an order denying the summary judgment motion, finding that there were factual



issues regarding whether the KBEO can meet the requirements necessary to obtain injunctive relief, and whether the Kansas law violates theCommerce Clause of the United States Constitution. On June 18, 2002, the court granted a summary judgment motion in favor of the KBEO.However, the court made no findings of any violations of Kansas law. Further, the court based its decision on a Kansas optometry law thathas been repealed and amended by the Kansas legislature. To preserve the issues for appeal, on July 2, 2002, the Company filed a motion toalter or amend judgment, asking the court to reverse its decision, and to enter

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summary judgment in favor of defendant, or to dismiss the KBEO�s lawsuit as moot based on the new law. The court denied the motion onSeptember 12, 2002, finding that no new evidence had been presented to persuade the court to change its prior ruling. The court made no newfindings of fact and did not change its conclusions of law. On October 11, 2002, the Company filed its Notice of Appeal with the KansasCourt of Appeals; the Docketing Statement was filed on October 30, 2002. All pleadings were timely filed and an oral argument was held onAugust 27, 2003. On November 7, 2003, the Kansas Court of Appeals reversed the trial court�s order that entered summary judgment infavor of the Board. The Appellate court remanded the case back to the trial court for further proceedings. Thus, as a result of the Appellatecourt�s order, there is no injunction against the Company, and the matter is again pending before the trial court. The parties have eachsubmitted proposed orders to the trial court. The Board has asked the court to re-enter summary judgment in its favor, and to reinstate theinjunction. The Company has asked the court to dismiss the case, based either on the lack of any basis for injunctive relief, or because thecase is now moot based on changes to Kansas law which took effect while the case was pending on appeal, or based on the recent passage ofthe FCLCA which took effect on February 4, 2004. As of the date of this summary, the trial court has made no ruling, and the case remainspending.

From time to time the Company is involved in other legal matters generally incidental to its business.

It is the opinion of management, after discussion with legal counsel that, except for legal and professional fees that the Company incursfrom time to time, the ultimate dispositions of all of these matters will not have a material impact on the financial position, liquidity or resultsof operations of the Company. However, there can be no assurance that the Company will be successful in its efforts to satisfactorily resolvethese matters and the ultimate outcome could result in a material negative impact on the Company�s financial position, liquidity or results ofoperations.

Operating Leases

The Company leases land, office and warehouse facilities and certain equipment under noncancelable operating leases. Lease expensefor fiscal 2001, 2002 and 2003 totaled approximately $1,115,000, $1,556,000 and $1,594,000, respectively.

Future minimum lease payments under noncancelable operating leases are as follows (in thousands):

Fiscal Year Amount

2004 $ 1,4582005 1,4432006 1,0132007 1,0092008 1,033Thereafter 4,232

$ 10,188

Sales Tax

The Company�s direct mail business is located, and most of its operations are conducted, from the state of Utah. The Company doesnot collect sales or other similar taxes for any out-of-state sales. However, various states have sought to impose state sales tax collectionobligations on out-of-state mail-order companies, such as the Company. The U.S. Supreme Court has held that the various states, absent



Congressional legislation, may not impose tax collection obligations on an out-of-state mail order company whose only contacts with thetaxing state are the distribution of advertising materials through the mail, and whose subsequent delivery of purchased goods is

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by mail or interstate common carriers. The Company has not received an assessment from any state. The Company anticipates that anylegislative changes, if adopted, would be applied on a prospective basis.

Advertising Commitments

As of January 3, 2004, the Company had entered into certain noncancelable commitments with various advertising companies that willrequire the Company to pay approximately $21.5 million for advertising during 2004.

Other Commitments

The Company has agreed to indemnify one of its vendors up to a total of $10 million (with $5 million coverage per occurrence) withrespect to consumer claims brought against the vendor for harm or injury attributable to the Company�s method for verifying prescriptions forthis vendor�s products. The Company believes its current insurance policy from a third party will cover claims under this indemnification.

In connection with the acquisition of ClearLab (see Note 4), the Company entered into an employment agreement with the chieftechnology officer of ClearLab. Under the provisions of the agreement, the Company is required to pay SGD$1,125,000 (USD$660,000) overthe five-year term of the agreement for employment. If employment is terminated for any reason other than cause, the Company is obligated topay any unpaid amounts under the agreement at that time.

Also in connection with the acquisition of ClearLab, certain technologies and intellectual property were assigned to the Company for usein new products. In the event the Company, in its sole discretion, decides to exploit the technologies, the Company will be required to paycommissions on a per unit basis of applicable products sold beginning one year after the date of the acquisition and ending five years after thetermination of the employment agreement with the chief technology officer entered into in connection with the acquisition. If the Companydecides to exploit the technologies but has not yet exploited them by July 2005, the Company will pay a commission of SGD$1,000,000(USD$587,000) and SGD$1,000,000 for each year thereafter until the Company has exploited the technologies. In the event that the Companydecides, in its sole discretion, not to exploit the technologies, the Company shall assign the technologies back to the seller in exchange for theforfeiture of any unvested options for the purchase of 270,000 shares of common stock that were issued under this agreement (see Note 4). Asof January 3, 2004, the Company had not exploited these technologies; although the Company plans to exploit the technologies in the future.

NOTE 6. COMMON STOCK TRANSACTIONS

During fiscal 2001and 2002, the Company repurchased 22,500 and 200,000 shares of its common stock, respectively, for a total cost ofapproximately $0.4 million and $2.2 million, respectively. During fiscal 2003, the Company did not repurchase any shares of its commonstock.

The Company�s Board of Directors has authorized the repurchase of up to 3,000,000 shares of the Company�s Common Stock. Apurchase of the full 3,000,000 shares would equal approximately 23 percent of the total shares issued as of January 3, 2004. The repurchaseof common stock is subject to market conditions and is accomplished through periodic purchases at prevailing prices on the open market, byblock purchases or in privately negotiated transactions. From inception of its authorized repurchase programs through January 3, 2004, theCompany had repurchased 1,706,500 shares for a total cost of approximately $22.1 million. No shares were repurchased by the Companyduring fiscal 2003 and the Company is currently prohibited by its restated loan agreement from purchasing any additional shares untilJanuary 1, 2006. The repurchased shares were retained as treasury stock. As

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of January 3, 2004, no shares remain in treasury as these shares were used to acquire ClearLab International and Lens 1st/Lens Express.

During fiscal 2003 the Board of Directors granted 7,317 shares of restricted common stock to an officer of the Company. The grant issubject to shareholder approval at the 2004 shareholder meeting. The stock was valued at the closing stock price on December 30, 2003, thedate the grant was approved by the Company�s Board of Directors, which was $20.50. The restrictions on the common stock lapse in equalamounts over a ten-year period.

During fiscal 2003, the Company issued 900,000 shares of restricted common stock as partial consideration for the acquisition of LensExpress and Lens 1st (see Note 4). Of the 900,000 shares, 772,655 were issued from treasury stock. The 900,000 shares of restricted commonstock were subject to a lock-up period of twelve months after the acquisition date of January 30, 2003. In connection with the acquisition, theCompany entered into a registration rights agreement pursuant to which the Company granted the Seller certain piggyback registration rightswith respect to the 900,000 shares of restricted common stock.

During fiscal 2003, the performance conditions were met on the 700,000 shares of restricted common stock placed in escrow as part ofthe purchase consideration for the ClearLab acquisition. These shares were treated as outstanding at the time the performance guarantee wasmet. Additionally, the Company recorded compensation expense and additional paid-in capital of $0.7 million due to the transfer of sharesowned by ClearLab�s chief technology officer to key employees of ClearLab (see Note 4).

NOTE 7. STOCK-BASED COMPENSATION

The Company has established a stock option plan that provides for the issuance of a maximum 1,590,000 shares of common stock toofficers, other key employees, directors, and consultants. The plan allows for the issuance of both incentive stock options and nonqualifiedstock options. Incentive and nonqualified stock options are granted at not less than 100 percent of the fair market value of the underlyingcommon stock on the date of grant. As of January 3, 2004, 336,927 shares are available for future granting.

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

All options granted through January 1, 2000 vest equally over a three-year period and expire in ten years. The stock options issued as aportion of the consideration for the assignment of certain technologies and intellectual property in conjunction with the acquisition ofClearLab (see Note 4) and other options issued to the president and chief technology officer of ClearLab vest equally at the end of the third,fourth and fifth years and expire in ten years. All other options granted subsequent to January 1, 2000, vest equally over a four-year periodand expire in five to ten years. A summary of stock option activity is as follows (in thousands, except per share amounts):

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Shares

Weighted-

Average

Exercise

Price per

Share

Outstanding at December 30, 2000 616 $ 11.45Granted 112 32.82Exercised (27) 6.75Forfeited (39) 30.92

Outstanding at December 29, 2001 662 14.12Granted 546 21.42Exercised (12) 7.10Forfeited (20) 15.03

Outstanding at December 28, 2002 1,176 17.56



Granted 303 26.99Exercised (124) 6.95Forfeited (38) 22.12

Outstanding at January 3, 2004 1,317 $ 20.60

Exercisable at January 3, 2004 455 $ 13.64

The following is additional information with respect to stock options as of January 3, 2004 (shares in thousands):

Options Outstanding Options Exercisable

Range of

Exercise Prices Shares

Weighted-

Average

Remaining

Contractual Life

Weighted-

Average

Exercise Price Shares

Weighted-

Average

Exercise Price

$1.61 - $4.37 5 3.4 $ 3.89 5 $ 3.894.38 - 8.75 212 4.2 5.74 212 5.748.76 - 13.12 110 6.9 11.83 25 11.8313.13 - 17.50 274 7.1 14.44 115 14.0117.51 - 21.87 10 7.1 21.11 5 21.2521.88 - 26.25 258 7.0 24.76 38 24.1026.26 - 30.62 246 5.0 27.60 6 30.0030.63 - 35.00 182 7.8 34.98 34 34.9435.01 - 43.75 20 6.8 43.75 15 43.75

1,317 6.3 $ 20.60 455 $ 13.64

During the fourth quarter of fiscal 2002, the chief technology officer of ClearLab, agreed to transfer 28,000 shares of restricted commonstock to key employees of ClearLab. The shares are part of the 700,000 shares of restricted common stock issued as partial consideration forthe acquisition of ClearLab (see Note 4). These shares were subject to the same performance guarantee and vesting provisions as the original700,000 that were held in escrow. The Company recorded compensation expense and additional paid-in capital of $0.7 million based on thefair market value of the shares in June 2003, the date the performance conditions were met.

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NOTE 8. RELATED PARTY TRANSACTIONS

During fiscal 2000, the Company made a $220,000 investment in the stock of an entity in which a member of the Company�s Board ofDirectors holds a significant ownership interest and serves as an officer and director. This investment was accounted for under the costmethod.

During fiscal 2001, the Company determined that its investment in this entity was impaired and recorded a $220,000 impairment loss.

During fiscal 2002, the Company incurred legal and consulting expense of approximately $60,000 to an entity in which its president is asibling of an officer of the Company.

During fiscal 2002, the Company incurred legal expenses of approximately $18,000 to a legal firm in which a member of the Company�sBoard of Directors is a partner. These fees represent the total amount incurred subsequent to this individual joining the Company�s Board ofDirectors in December 2002. During the fiscal 2003, the Company incurred expenses of approximately $1,162,000 to legal firms in whichmembers of the Company�s Board of Directors are partners. These fees represent the total amount incurred subsequent to the individualsjoining the Company�s Board of Directors.



During fiscal 2002, the Company acquired certain assets of ClearLab (see Note 4). Subsequent to the acquisition, the Company soldproduct to an entity owned by the sellers of ClearLab, one of which is the chief technology officer of ClearLab. Net revenue from this entityduring the fiscal 2002 post-acquisition period was approximately $419,000. During fiscal 2003, the officer sold his ownership interest in thisentity. In addition, this entity subleases space in the Company�s Singapore building. Sublease income during fiscal 2002 was approximately$18,000.

In connection with the ClearLab acquisition, the Company issued certain notes payable to related parties (see Notes 3 and 4).

NOTE 9. INCOME TAXES

Income (loss) before income taxes consists of the following components for fiscal 2001, 2002 and 2003 (in thousands):

Fiscal Year

2001 2002 2003

U.S. operations $ 16,149 $ 9,350 $ 3,510Foreign operations (20) (9,423) (3,030)

$ 16,129 $ (73) $ 480

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The components of the provision for income taxes for fiscal 2001, 2002 and 2003 are as follows (in thousands):

Fiscal Year

2001 2002 2003

Current provision:Federal $ (5,915) $ (3,142) $ (1,781)State (896) (486) (274)Foreign � � �

Total current provision for income taxes (6,811) (3,628) (2,055)Deferred benefit (provision):

Federal 475 (264) 119State 71 (39) 18Foreign � 243 249Change in valuation allowance � (243) (249)

Total deferred benefit (provision) for income taxes 546 (303) 137

Total provision for income taxes $ (6,265) $ (3,931) $ (1,918)

The Company�s income tax provision for fiscal 2003 relates 100% to income generated in U.S. tax jurisdictions. The Company has notrecorded any income tax benefit related to its foreign losses, given the uncertainty of the ultimate realization of operating loss carryforwardsincurred for the pre-2003 periods. It is anticipated the foreign operating loss carryforwards incurred during fiscal 2003will be utilized duringthe 0% pioneer certificate period (see below). The following table presents the principal reasons for the difference between the effectiveincome tax rate and the U.S. federal statutory income tax rate for fiscal 2001 and fiscal 2003:

Fiscal Year

2001 2003

Statutory U.S. federal income tax rate 35.0% 34.0%State income taxes, net of federal benefit 3.3 35.2Non-deductible lobbying expenses 0.5 111.2



Foreign � 162.7Change in foreign deferred tax assets valuation allowance � 51.9Other � 4.6

38.8% 399.6%

A rate reconciliation is not presented for fiscal 2002 because the Company has a total provision for income taxes and a pre-tax loss, andtherefore an effective tax rate cannot be calculated. Using the 34% statutory U.S. federal income tax rate, a benefit of $25,000 would havebeen expected. Reconciling items included $346,000 of state income taxes, net of federal benefit, $355,000 of non-deductible lobbyingexpenses, $2,961,000 of U.S. income tax liability because foreign losses are not benefited, $243,000 of change in foreign deferred tax assetsvaluation allowance, and $51,000 of other items that resulted in the total provision for income taxes of $3,931,000.

The Company�s effective income tax rate on the U.S. pre-tax income is 38.8%, 42.0% and 54.6% for fiscal 2001, 2002 and 2003,respectively. The fiscal 2003 U.S. effective income tax rate is greater than the statutory U.S. income tax rate primarily due to the level ofnon-deductible lobbying expenses incurred during the fiscal year.

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The components of the deferred income tax assets and liabilities are as follows (in thousands):

December 28,

2002

January 3,

2004

Deferred income tax assets:Accrued reserves $ 479 $ 356Depreciation and amortization � 182Intangibles amortization 394 642Inventory capitalization 193 103Foreign operating loss carry-forwards 171 310Other 240 211

1,477 1,804Valuation allowance (243) (492)

1,234 1,312Deferred income tax liabilities:

Depreciation (113) (54)Net deferred income tax asset: $ 1,121 $ 1,258

Balance sheet classification:Net deferred income tax asset � current $ 756 $ 548Net deferred income tax asset � noncurrent 365 710

$ 1,121 $ 1,258

A valuation allowance is provided when it is more likely than not that all or some portion of the deferred income tax assets will not berealized. Due to uncertainty with respect to the realization of the net deferred income tax assets in Singapore, the Company has recorded avaluation allowance against these assets.

As of January 3, 2004, the Company has a net operating loss carry-forward for Singapore income tax purposes of approximately$2,714,000, which does not expire. The deferred income tax asset relating to these foreign operating loss carry-forwards is $310,000 and iscalculated based on the Singapore statutory tax rate of 22% for the pre-2003 periods and 0% for the pioneer certificate periods (see below).



During fiscal 2003, the Company�s Singapore operations applied for a pioneer tax certificate. This pioneer tax certificate allows for aseven-year tax holiday with an extension for an additional three years if certain conditions are met. The tax holiday has clawback provisionsif the Company does not continually meet certain research and development, capital investment and employment requirements. The taxholiday reduces the Singapore statutory tax rate from 22% to 0% on qualified income.

NOTE 10. PREFERRED STOCK

The Company has 1,000,000 shares authorized of $.01 par value preferred stock. For fiscal 2001, 2002 and 2003, no shares were issuedor outstanding. The Company�s Board of Directors may, without further action by its stockholders, from time to time, direct the issuance ofshares of preferred stock in series and may, at the time of issuance, determine the rights, preferences and limitations of each series.

NOTE 11. SEGMENT INFORMATION

Beginning in the third quarter of fiscal 2002, the Company has two operating segments as a result of the acquisition of ClearLab (SeeNote 4). These operating segments represent components of the Company for which separate financial information is available and areevaluated regularly by management in determination of resource

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allocation and performance assessment. The Company�s U.S. segment includes the operations of 1-800 CONTACTS, a direct marketer ofreplacement contact lenses. The Company�s Singapore segment includes the operations of ClearLab, a developer and contract manufacturerof contact lenses. Operating segment information for fiscal 2002 and 2003 is as follows (in thousands):

Fiscal Year 2002 Fiscal Year 2003

U.S. Singapore Total U.S. Singapore Total

Net sales $ 166,511 $ 2,069 $ 168,580 $ 181,331 $ 5,972 $ 187,303Gross profit (loss) 50,678 (279) 50,399 68,178 2,252 70,430Purchased in-process

research and development � 7,789 7,789 � � �

Income (loss) fromoperations 10,053 (8,940) 1,113 3,701 (2,054) 1,647

The following reconciles total segment income from operations to income (loss) before provision for income taxes for the applicablefiscal year ended (in thousands):

2002 2003

Income from operations $ 1,113 $ 1,647Interest expense (1,128) (1,276)Other income (expense) (58) 109Income (loss) before provision for income taxes $ (73) $ 480

Identifiable segment assets as of December 28, 2002 and January 3, 2004 are as follows (in thousands):

Fiscal Year 2002 Fiscal Year 2003

U.S. Singapore Total U.S. Singapore Total

Long-lived assets, net $ 5,776 $ 14,175 $ 19,951 $ 30,615 $ 25,628 $ 56,243Total assets 45,427 16,577 62,004 56,274 30,657 86,931



ClearLab generates a substantial portion of its revenue from the manufacture and sale of contact lenses from a concentration of a fewlarge customers. During fiscal 2003, ClearLab generated 55%, 15% and 11% of these revenues, respectively, from its three largestcustomers.

NOTE 12. RETIREMENT AND SAVINGS PLAN

Effective January 1, 2000, the Company established a 401(k) plan covering substantially all of its employees. Eligible employees maycontribute, through payroll deductions, up to 15 percent of their eligible compensation, but not more than the statutory limits. The Companycontributes fifty cents for each dollar a participant contributes, with a maximum Company contribution of three percent of a participant�seligible compensation. The Company contributed approximately $105,000, $123,000 and $146,000 to the plan during fiscal 2001, 2002 and2003, respectively.

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NOTE 13. SUBSEQUENT EVENTS

Purchase of VisionTec (See Note 4)

On February 24, 2004, the Company completed the acquisition of the shares of VisionTec, a developer and manufacturer of contactlenses. The transaction was accomplished as a purchase of 100% of the stock of VisionTec. The consideration paid included approximately$3.2 million in cash and 155,084 shares of the Company�s common stock with a fair value of approximately $3.2 million. In addition, theCompany has agreed to pay a per unit royalty to the former shareholders of VisionTec for a period of ten years. The Company financed thecash portion of this acquisition with its revolving credit facility from its U.S. bank.

Renewal of Loan Agreement (See Note 3)

Effective February 27, 2004, the Company executed a restated loan agreement with its existing U.S. bank, providing for a revolvingcredit facility for borrowings of up to $28 million through June 1, 2004, and reducing thereafter on each September, December, March andJune until the maturity date of February 27, 2007. This restated loan agreement succeeds and replaces the Company�s prior loan agreementexecuted July 22, 2002. All outstanding balances associated with the July 22, 2002 loan agreement were paid with proceeds from this newloan agreement.

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Exhibit 10.8

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this �Agreement�) is made as of December 1, 2002 between 1-800 CONTACTS, INC., a Delawarecorporation (the �Company�), and Graham David Mullis (the �Executive�). This Agreement shall be deemed to be effective as ofDecember 1, 2002 (the �Effective Date�), subject to the Company�s background check being verified to the Company�s good faithsatisfaction.

In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency ofwhich are hereby acknowledged, the parties hereto agree as follows:

1. Employment. The Company shall employ Executive, and Executive hereby accepts employment with the Company, uponthe terms and conditions set forth in this Agreement, for the period beginning on the Effective Date and ending as provided in paragraph 4hereof (the �Employment Period�).

2. Position and Duties.

(a) During the Employment Period, Executive shall serve as President, 1-800 CONTACTS International Division, for theCompany and shall have the normal duties, responsibilities and authority of such position. In addition, Executive shall spend at least sixmonths in Singapore beginning December 2002 to assist in the operations at the Clearlab facility.

(b) Executive shall report to the Company�s Chief Executive Officer and such other persons as the board of directors (�theBoard�) may direct from time to time, and Executive shall devote his best efforts and his full business time and attention (except for permittedvacation periods and reasonable periods of illness or other incapacity) to the business and affairs of the Company and its Subsidiaries (ashereinafter defined). Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslikeand efficient manner.

(c) For purposes of this Agreement, �Subsidiaries� shall mean any corporation owned by the Company, directly or through oneor more Subsidiaries.

3. Base Salary and Benefits.

(a) During the first year of the Employment Period, Executive�s base salary shall be 175,000 GBP per annum (the �BaseSalary�), which salary shall be payable in regular installments in accordance with the Company�s general payroll but paid on the 1st day ofeach Month. Thereafter, the Base Salary shall be such higher rate as the Board may designate from time to time. As used in this Agreement,the term �Base Salary� shall be deemed to include any such increases as may be designated from time to time by corporate management.During the Employment Period, Executive shall be entitled to participate in all of the Company�s employee benefit programs for which

management employees of the Company and its Subsidiaries are generally eligible (including the Company�s stock option program).

(b) In addition to the Base Salary, the Board will award an annual bonus of up to 10% of the Executive�s Base Salary toExecutive following the end of each fiscal year during the Employment Period upon the Company achieving certain operating targets asdetermined by the Board at the beginning of each fiscal year during the Employment Period.

(c) At the execution of this Agreement, Executive shall receive 87,500 GBP (the �Signing Bonus�) which shall be paid on orbefore December 16, 2002; provided however, that should Executive resign his employment or be terminated for Cause prior to May 31, 2003,he shall repay the pro rata portion of the Signing Bonus to the Company.

(d) In addition to the Base Salary and any bonuses payable to Executive pursuant to this paragraph, Executive shall be entitledto the following benefits during the Employment Period:

(i) 20,000 stock options at a strike price of $25.00 (USD) which shall vest 25% per year for four years with a five yearlife, see Exhibit A;



(ii) A maximum of four weeks vacation each year (20 working days) with salary in addition to the statutory bankholidays of the UK country, subject to additional vacation time either upon executive approval or according to theCompany vacation policy; and

(iii) Reimbursement for travel, entertainment and other business expenses reasonably incurred by Executive; and(iv) 32,115 GBP travel budget for personal trips back to the UK or for family to visit in Singapore during the period

specified in 3(c) above;(v) Life insurance provided by Company in amount equal to four times Executive�s Base Salary; and(vi) Payment of all medical premiums for spouse and children up to the age of 18 years; and(vii) The Company will make 50% matching contributions of up to 6% of Executive�s annual Base Salary to an

approved personal pension plan nominated by Executive, i.e. total matched contribution dollars of up to 3% ofExecutives annual Base Salary (consistent with Company�s current 401k plan).

4. Termination.

(a) The Employment Period shall continue until the earliest of (i) Executive�s resignation upon 60 days� advance written notice; (ii)Executive�s death, disability or other incapacity, which cannot be reasonably accommodated, (as determined by the Board in its good faithjudgment); (iii) the Board�s termination of Executive�s employment for Cause; or (iv) the Board�s termination of Executive�s employmentwithout Cause.

(b) In the event of Executive�s termination without Cause or his resignation based on the Company�s material breach of thisAgreement, which breach has not been cured within 30 days of written notice from Executive, Executive shall be entitled to receive (i) 85% ofhis Base Salary and the health and life insurance premiums described in paragraph 3(d) for a period of 12 months thereafter, and (ii) followingthe end of the fiscal year in which Executive�s employment is terminated and the determination of the amount of bonus to which Executivewould have been entitled if he remained employed by the Company or its Subsidiaries for the entire fiscal year (the �Bonus Amount�), (A)50% of the Bonus Amount if such termination occurs in the first six months of such fiscal year or (B) 100% of the Bonus Amount if suchtermination occurs in the second six months of such fiscal year.

(c) For purposes of this Agreement, �Cause� shall mean (i) the willful and continued failure by Executive to perform his dutiesof the position set forth herein or his continued failure to perform duties reasonably requested or reasonably prescribed by the Board, (ii) theengaging by Executive in conduct which is materially monetarily injurious to the Company or any of its Subsidiaries, (iii) gross negligence orwillful misconduct by Executive in the performance of his duties which results in, or causes, material monetary harm to the Company or anyof its Subsidiaries, or (iv) Executive�s commission of a felony or other civil or criminal offense involving moral turpitude. In the case of (i),(ii) and (iii) above, finding of Cause for termination shall be made only after reasonable notice to Executive and an opportunity for Executive,together with counsel (if requested by executive), to be heard before the Board.

5. Confidential Information. Executive acknowledges that the information, observations, data, strategic and developmentplans, financial condition, business plans, co-developer identities, business records, customer lists, clients and suppliers, project records,market reports, employee lists and business manuals, policies and procedures, information relating to processes, technologies of theory and allother information which may be disclosed or obtained by Executive while employed by the Company and its Subsidiaries concerning thebusiness or affairs of the Company or any other Subsidiary (�Confidential Information�) are the property of the Company or such Subsidiary.Therefore, Executive agrees that he shall not disclose to any unauthorized person or use for his own purposes any Confidential Informationwithout the prior written consent of the Board, unless and to the extent that the aforementioned matters become generally known to andavailable for use by the public other than as a result of Executive�s acts or omissions. Executive shall deliver to the Company at thetermination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computertapes, printouts and software and other documents and data (and copies or reproductions thereof) relating to the Confidential Information,Work Product (as defined below) or the business of the Company or any Subsidiary which he may then possess or have under his control.

6. Inventions and Patents. In accordance with UCA §34-39-1 et. seq., Executive acknowledges that any invention or partthereof conceived, developed, reduced to practice, or created by Executive which is:

(a) conceived, developed, reduced to practice, or created by Executive:(i) within the scope of his employment;



(ii) on Company�s or its Subsidiaries� time; or(iii) with the aid, assistance, or use of any of Company�s or its Subsidiaries� property, equipment, facilities, supplies,resources, or intellectual property;

(b) the result of any work, services, or duties performed by Executive for Company or its Subsidiaries;(c) related to the industry or trade of the Company or its Subsidiaries; or(d) related to the current or demonstrably anticipated business, research, or development of the Company or its Subsidiaries is an

(�Employment invention�) and belongs to the Company or such Subsidiary.(e) (�Intellectual property�) means any and all patents, trade secrets, know-how, technology, confidential information, ideas,

copyrights, trademarks, and service marks and any and all rights, applications, and registrations relating to them.(f) Executive shall promptly disclose such Employment invention to the Board and perform all actions reasonably requested by the

Board (whether during or after the Employment Period) to establish and confirm such ownership (including, without limitation, assignments,consents, powers of attorney and other instruments).

7. Non-Compete

(a) In further consideration of the compensation to be paid to Executive hereunder, Executive acknowledges that in the courseof his employment with the Company he shall become familiar with the Company�s trade secrets and with other Confidential Informationconcerning the Company and its Subsidiaries and that his services shall be of special, unique and extraordinary value to the Company and itsSubsidiaries. Therefore, Executive agrees that, during the Employment Period and for 12 months thereafter, (the �Noncompete Period�), heshall not directly or indirectly manage, control, participate in, consult with, advise, render services for, or in any manner engage in any activitycompeting with the businesses of the Company or its Subsidiaries within any geographical area in which the Company or its Subsidiaries orthe Executive has manufactured, provided, sold or offered or promoted for sale any of the Company�s products.

(b) In the event Executive plans or desires to form, obtain employment with or otherwise affiliate with any business in thecontact lens industry during the Noncompete Period, he will first give notice to the Company of his desire and the Company will then make agood faith assessment regarding whether and under what circumstances Executive may go forward with such plans without violating the termsof this Agreement.

(c) At its sole option, the Company may extend the Noncompete Period by an additional 12 months by providing Executivewritten notice at least 30 days prior to the expiration of the original Noncompete Period. In such an event, Executive will receive 75% of hisBase Salary during the second 12 months of the Noncompete Period.

8. Non-Solicitation. Executive agrees that during the Employment Period and for 24 months thereafter, Executive shall notdirectly or indirectly through another entity (i) hire any person who was an employee of the Company or any Subsidiary at any time during thethree-month period

prior to the expiration of the Employment Period or (ii) induce or attempt to induce any customer, supplier, licensee, licensor, franchisee orother business relation of the Company or any Subsidiary to cease doing business with the Company or such Subsidiary, or in any wayinterfere with the relationship between any such customer, supplier, licensee or business relation and the Company or any Subsidiary(including, without limitation, making any negative statements or communications about the Company or its Subsidiaries) which interferencecauses material monetary damage to the Company or its Subsidiaries.

9. Enforcement. If, at the time of enforcement of paragraph 5, 6, 7 or 8 of this Agreement, a court holds that the restrictionsstated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographicalarea reasonable under such circumstances shall be substituted for the stated period, scope or area. Because Executive�s services are uniqueand because Executive has access to Confidential Information and Work Product, the parties hereto agree that money damages would not bean adequate remedy for any breach of this Agreement. Therefore, in the event of a breach or threatened breach of this Agreement, theCompany or its successors or assigns may, in addition to all other rights and remedies existing in their favor, apply to any court of competentjurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof(without posting a bond or other security). In addition, in the event of an alleged breach or violation by Executive of paragraph 7, theNoncompete Period shall be tolled until such breach or violation has been duly cured. Executive agrees that the restrictions contained inparagraphs 7 and 8 are reasonable.



10. Executive�s Representations. Executive hereby represents and warrants to the Company that (i) the execution, delivery andperformance of this Agreement by Executive do not and shall not conflict with, breach, violate or cause a default under any contract,agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound, (ii) Executive is not a party to orbound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon theexecution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceablein accordance with its terms. Executive hereby acknowledges and represents that he fully understands the terms and conditions containedherein.

11. Survival. Paragraphs 5, 6, 7, 8 and 9 and paragraphs 11 through 19 shall survive and continue in full force in accordancewith their terms notwithstanding any termination of the Employment Period.

12. Notices. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed byfirst class mail, return receipt requested, to the recipient at the address below indicated:

Notices to Executive:

Graham David Mullis18 Levignen CloseChurch CrookhamFleetHampshireGU52 0TWUK

Notices to the Company:

1-800 CONTACTS, INC.66 E. Wadsworth Park Drive, 3rd FloorDraper, Utah 84020Attn: Board of Directors

or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sendingparty. Any notice under this Agreement shall be deemed to have been given when so delivered or mailed.

13. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effectiveand valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under anyapplicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any otherjurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceableprovision had never been contained herein.

14. Complete Agreement. This Agreement, those documents expressly referred to herein and other documents of even dateherewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings,agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way.

15. No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the partieshereto to express their mutual intent, and no rule of strict construction shall be applied against any party.

16. Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and allof which taken together constitute one and the same agreement.



17. Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive,the Company and their respective heirs, successors and assigns, except that Executive may not assign his rights or delegate his obligationshereunder without the prior written consent of the Company.

18. Choice of Law. All issues and questions concerning the construction, validity, enforcement and interpretation of thisAgreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of Utah,without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Utah or any other jurisdiction) thatwould cause the application of the laws of any jurisdiction other than the State of Utah.

19. Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior written consentof the Company and Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect thevalidity, binding effect or enforceability of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.


By:Name: Jonathan CoonIts: Chief Executive Officer

Graham David Mullis



Exhibit 10.9

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this �Agreement�) is made and entered into on the 4th day of May, 2002 effective as of theEffective Date (as defined below), by and between Igel Acquisition Co. Pte. Ltd., a Singapore corporation located at 139 Joo Seng Road,#06-01,ATD Centre, Singapore 368362 (the �Company�), and STEPHEN D. NEWMAN, the undersigned individual (�Employee�).

RECITALS

A. 1-800 Contacts, Inc., a Delaware corporation and parent of the Company (�Parent�), owns all of the shares of theCompany.

B. The Company has been formed to engage in the business of developing, manufacturing and marketing contact lenses usingcertain assets acquired from Igel VisionCare Pte. Ltd. (�IVC�) and certain proprietary technology of Employee embodied in certain patentapplications and patents issued thereon acquired by the Company pursuant to an assignment agreement dated the date of this Agreement madebetween the Company and Employee (the �Assignment Agreement�).

C. The Company desires to employ Employee, and Employee desires to be employed by the Company, subject to the terms andconditions hereinafter set forth.

D. The parties hereto agree that this Agreement shall take effect from the date of closing (the �Effective Date�) under theAsset Purchase Agreement dated the date of this Agreement made by and among Employee, the Company, IVC, Igel C.M. Laboratory PteLtd, International Vision Laboratories Pte Ltd and Sinduchajana Sulistyo (the �Asset Purchase Agreement�).

AGREEMENT

NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereby agree as follows:

GENERAL PROVISIONS

1. Employment Term.

The Company hereby employs Employee and Employee hereby agrees to serve the Company as its President and ChiefTechnology Officer. The initial term of this Agreement shall, unless sooner terminated pursuant to Sections 4 or 5 below, be five years fromthe Effective Date (the ��Initial Term�). This Agreement may be renewed for a further term of one year upon expiration of the Initial Termupon written agreement of both parties and thereafter, upon written agreement of both parties, for further terms of one year each upon theexpiry of each preceding one year period (any of such renewed one year terms shall be referred to as a

�Renewal Term� and the Initial Term and any Renewal Terms shall be collectively referred to as the �Term�). If, however, either or bothEmployee and the Company fail to agree upon one or more Renewal Terms, this Agreement shall terminate on the last day of the Initial Termor the last day of any Renewal Term (as the case may be); provided, however, if Employee remains in the Company�s employ in any capacitywhatsoever following any such last day, the term of this Agreement shall be extended on a month-to-month basis until it is terminated byeither the Company or Employee with not less than one month�s prior written notice to the other.

2. Employee��s Duties.

(a) Position. Employee shall act as President and Chief Technology officer of the Company and shall perform the duties andresponsibilities as may from time to time be reasonably requested by the Chairman of the Company and the Board of Directors of the



Company (the �Board�), including the duties specified in Exhibit A hereto. Employee shall diligently and faithfully execute such duties andresponsibilities, and shall report directly to the Chairman of the Company and the Board.

(b) Policies. Employee further agrees to abide by any policies and procedures of the Company that may be set forth inhandbooks, manuals and other materials provided or developed by the Company during the Term of this Agreement, as amended from time totime by the Company at its discretion. In the event of any conflict or inconsistency between this Agreement and any matter set out in suchhandbooks, manuals and other materials, the terms of this Agreement shall prevail. There is not and there will not be any collective agreementapplicable to Employee�s employment hereunder.

(c) Time and Loyalty. Subject to Section 2(d) below, Employee shall devote all of his working hours and his best efforts to theperformance of his duties to the Company during the Term of this Agreement. Employee shall also act with complete loyalty to the Companyand, without limiting the generality of the foregoing, shall not engage in any activity or conduct prohibited by Sections 9 through 13 belowduring the Term of this Agreement.

(d) Permitted Activities. Notwithstanding the provisions of Section 2(c) above, the Company agrees that Employee shall beentitled to continue fulfilling his existing obligations under existing license agreements dated 4 August 1998 and 1 August 1998 entered intoby Fysh Pty Ltd (�Fysh�) and Dugmont Pty Ltd. (�Dugmont�) respectively and attached in Exhibit C hereto, prior to the Effective Datespecifically in respect of certain patens relating to toric contact lenses referred to in the said existing license agreements developed byEmployee and that Employee shall be entitled from time to time to provide consulting services to Fysh, Dugmont and/or Donald Bruce Noack(�DBN�) in connection with the conception and development of products based on such patents (such agreements and arrangements withFysh, Dugmont DBN and the licensees under such license agreements are hereinafter referred to as the �Toric Lens

Consulting and License Arrangements�), provided that such activities do not unreasonably interfere or conflict with Employee�s duties andobligations under this Agreement.

(e) Product Development. Employee shall devote his best efforts to the development, design and manufacture of contact lensesand related products, and without. limiting the generality of the foregoing, Employee may be required by the Company to conceive, design ordevelop any toric lenses based on the patents licensed by Fysh to the Company pursuant to a License Agreement dated the date of thisAgreement made between Fysh and the Company. Employee shall not be required by the Company to conceive, design or develop any toriccontact lenses that are or may be construed as being based upon, utilizing, copying or infringing on any patent, design, know-how, technology,method and or process underlying any toric contact lenses conceived, designed and/or developed by Fysh or DBN after the date of thisAgreement.

(f) Residency Employment Pass. During the Term, Employee shall secure and maintain an employment pass issued by theMinistry of Manpower of Singapore to legally perform his duties under this Agreement and the Company shall execute such documents andprovide all necessary assistance as Employee may reasonably require for securing and maintaining such employment pass.

3. Compensation.

(a) Base Salary. As compensation for services rendered under this Agreement Employee shall be entitled to receive from theCompany an annual base salary in the amount of 225,000 Singapore Dollars (�S$�) for each 12-month period of this Agreement commencingfrom the Effective Date; provided, however, that such amount shall be paid in twenty-four (24) equal payments in each 12-month period,payable on the 1st and 15th of each month. Employee shall be entitled to receive increments to his annual base salary consistent with thepolicy of the Company prevailing from time to time with regard to executive salary increments.

(b) Stock Options. In addition to the compensation provided for in Section 3(a) above and as additional consideration for thecovenant not to compete and not to solicit set out in Sections 12 and 13 below, Employee shall be granted options to purchase shares ofParent�s US$0.01 par value common stock, according to the price and vesting schedule set forth in Exhibit B hereto and pursuant to the termsand conditions set forth in Exhibit B hereto. Employee shall also be eligible to participate in Parent�s stock option plan, and any other equityparticipation, bonus or incentive plan offered or provided to other executives of the Company.

(c) Medical Benefits



(i) Employee and his immediate family will be extended medical benefits consistent with the policy of the Companyprevailing from time to time and which is offered or provided to executives of the Company.

(ii) Employee and his immediate family will be entitled to participate in the appropriate insurance scheme that may beimplemented by the Company whereby the Company contributes for the provision of death and disability insurance to its executives andmembers of their families, consistent with the policy of the Company prevailing from time to time.

(d) Vacation. Employee shall be entitled to yearly paid vacation leave in accordance with practices and policies established bythe Company provided that Employee shall in any event be entitled to four weeks� paid vacation leave each year and Employee shall beentitled at the end of each year to carry over up to one week�s vacation leave to the next year, provided that any unused vacation leave will beforfeited without payment.

(e) Retirement Benefits. Employee shall be entitled to retirement benefits in accordance with practices and policies establishedby the Company from time to time.

(f) Reimbursed Expenses. Employee shall be reimbursed all approved traveling expenses, hotel expenses and other out-of-pocket expenses reasonably incurred by Employee in or about the discharge of his duties hereunder, in accordance with the practices andpolicies established by the Company.

(g) Other Benefits. Employee shall also be entitled to all other benefits outlined in the Company�s benefits policy as may beimplemented from time to time. The Company reserves the right to amend, modify or revoke any and all benefits referred to in subsections (c)through (g) of Section 3 of this Agreement or any policies of the Company.

(h) Taxes. All taxes on salaries, allowances and other payments made to Employee shall be borne by Employee in accordancewith applicable laws. Employee agrees and acknowledges that the Company has the right to deduct and/or to withhold such salaries or moniesnotwithstanding that the same may be due to Employee, for the purpose of (i) making good any sums that Employee may owe to theCompany, (ii) recovering any sums which may have been paid by the Company to Employee in excess of Employee�s entitlement under theterms of this Agreement, and/or (iii) complying with applicable laws including (but without limitation to) the payment of taxes due to theInland Revenue Department of Singapore in accordance with the Income Tax Act (Cap. 134, 1996 Ed), and/or such sums to anyone, as may berequired under applicable laws.

4. Termination by the Company. Notwithstanding anything to the contrary, Employee�s employment may be terminated bythe Company at any time as provided in this Section 4.

(a) Termination with Notice. The Company my terminate Employee�s employment at any time by giving Employee aminimum of six month�s advance written notice and by paying Employee the compensation provided for in Section 4(c) below.

(b) Termination with Cause. The Company may, with cause, terminate Employee�s employment immediately and withoutany notice or pay in lieu of notice of such termination. For purposes of this Section 4(b), �cause� shall mean (i) the willful and continuedfailure by Employee to perform his duties of the position set forth herein or his continued failure to perform duties to the Company as set forthherein or his continued failure to perform duties reasonably requested or reasonably prescribed by the Company�s Board of Directors (otherthan as a result of Employee�s death, insanity, incapacity or disability), (ii) Employee engaging in conduct which is materially monetarilyinjurious to the Company or any of its affiliates, (iii) gross negligence or willful misconduct by Employee in the performance of his dutieswhich results in, or causes, material monetary harm to the Company or any of its affiliates, or (iv) Employee�s commission of a felony orother civil or criminal offence involving moral turpitude In the case of subsections (i), (ii) and (iii) above, finding of �cause� for terminationshall be made only after the Company first giving Employee written notice and a 30 day opportunity to cure together with an opportunity forEmployee, together with counsel (if requested by Employee), to be heard before the Board. A determination of �cause� by the Board shall beeffective only if agreed upon by a majority of the Directors on the Board, which shall include at least one Director who is not an employee ofthe Company or its affiliates.

(c) Compensation. If Employee�s employment is terminated by the Company without cause or if Employee terminates hisemployment for cause pursuant to subsections (i), (ii) or (iii) of Section 5(b) below, the Company shall pay to Employee:

(i) a sum equal to his last drawn monthly salary multiplied by the number of unexpired months (or partthereof) of the then current Term together with all other payments to which. Employee is then entitled under this Agreement, including,without limitation, the aggregate of all installments of the sum of S$125,000 that remain payable under Section 12 below;



(ii) in the case where Employee�s employment is terminated by the Company without cause pursuant toSection 4(a) above, the stock options set forth in Exhibit B hereto and any other stock options granted to Employee by Parent and/or theCompany shall, to the extent not vested immediately prior to the date of such termination, immediately vest and all such options shall beexercisable in accordance with the terms of the relevant stock option plan under which such options were granted;

(iii) in the case where Employee terminates his employment for cause pursuant to subsections (i), (ii) or (iii)of Section 5(b) below, all stock options set forth in Exhibit B hereto and any other stock options granted to Employee by Parent or theCompany prior to the date of such terminations shall, but only to the extent such stock options are vested

on or prior to the date of such termination, be exercisable in accordance with the terms of the relevant stock option plan under which suchoptions were granted. Any unvested stock options as of the date of any such termination shall be forfeited; and

(iv) the Company and Employee agree that the provisions of subsection (iii) above shall also apply ifEmployee terminates his employment with notice or if the Company terminates Employee�s employment for cause pursuant to Section 4(b)above.

For the avoidance of doubt, none of the above compensation will be paid on the termination of Employee�s employment under anyother circumstances whatsoever.

(d) Acknowledgement. Employee understands that other than as provided in Sections 4(a), 4(b) and 4(c) above, Employee isnot entitled to any additional prior notice of the termination of his employment or any additional payment of salary, damages or compensationin lieu of notice for any termination of this Agreement by the Company.

5. Termination by Employee.

(a) Termination with Notice. Employee may terminate his employment under this Agreement at any time by giving theCompany a minimum of six month�s advance written notice.

(b) Termination with Cause. Employee may, with cause, terminate his employment immediately and without any notice orpay in lieu of notice of such termination. For purposes of this Section 5(a) above, �cause� shall mean (i) a material and persistent breach bythe Company of its obligations under this Agreement, (ii) a proceeding has been instituted seeking a declaration that the Company or Parent isinsolvent or seeking arrangement or composition with creditors, liquidation or the appointment of a trustee, receiver or liquidator or analogousprocedure under any applicable law and such proceedings remain undismissed and unstayed for a period of 60 days or are being consented toby the Company or Parent (as the case may be), or (iii) the Company or Parent ceasing to carry on business. Notwithstanding the foregoing,however, Employee shall not terminate his employment under subsection (i) above without first giving the Company or Parent written noticeand a 30 day opportunity to cure.

6. Changes in Position and Transfer of Employee. During the Term, Employee shall be assigned such additional orsubstitute titles and duties as the Chairman of the Company and the Board may reasonably assign to him, provided such additional orsubstitute titles or duties are commensurate with the level set out initially in this Agreement and, provided further, that the Company shall nothave the right to transfer Employee to a location outside Singapore and Australia without Employee�s consent, provided that Employeeacknowledges and agrees that he will be required to travel to the extent necessary for the conduct of the Company�s business.

7. Corporate Opportunities. Employee agrees that during the Term he shall promptly disclose and offer to the Company inwriting any opportunities regarding the manufacture or sale of contact lenses and the contact lens technology and market in general of whichhe might become aware during the Term and that he shall refrain from using any of those opportunities to his personal benefit.

8. Definition of Confidential Information. In this Agreement, the term �Confidential Information� with respect to theCompany and its affiliates, or any third party, shall mean any and all intellectual property (including, but not limited to, patents, trademarks,trade secrets, copyrights and designs, and all applications therefore), business information, confidential information and other information ofthe Company or Parent or of any third party received or acquired by the Company, as the case may be. Confidential Information shall includeany and all of the following, which are not intended to be mutually exclusive:



(a) technologies, techniques, computer programs, designs, data, research, testing data and results, books, methods, systems,formulae, formulations, recipes, compositions, trade secrets, devices, apparatuses, processes, procedures and records (whether owned by theCompany or Parent or any third party or used under license);

(b) the Company�s or Parent�s data base;

(c) the Company�s or Parent�s customer lists, together with telephone numbers, addresses, email addresses and all otherinformation related to customers;

(d) all of the Company�s or Parent�s proprietary software and other proprietary information and processes necessary to operatethe Company�s web site;

(e) business names and telephone numbers of persons with which the or Parent maintains a business relationship or which aredisclosed to Employee as a result of his employment by the Company;

(f) marketing information and methods, including marketing data, market expansion plans, sales and marketing techniques andthe names, addresses, telephone and telecopier numbers, and the operations, buying habits and practices of customers, potential customers,distributors, representatives and brokers;

(g) information regarding employees, including terms and conditions of employment and performance evaluations:

(h) information regarding purchasing methods, sources, including names and identifying and other information regardingvendors and suppliers, costs of materials, and prices at which materials, products or services are or have been obtained or sold:

(i) financial information, financial statements, forecasts, reports and all other financial information not disseminated to thepublic

(j) information regarding the Company�s or Parent�s products and services; and

(k) information regarding the Company or Parent or their respective operations and activities.

Confidential Information shall not include any information:

(i) that is in the public domain;

(ii) that was not acquired from the Company or Parent or their affiliates and which Employee lawfully had in his possessionprior to the date of this Agreement; and

(iii) that, hereafter, through no act or omission on the part of the Employee, becomes part of the public domain.

For the avoidance of doubt, Confidential Information shall also not include any information regarding the patent applications andpatents and other items of intellectual property that are the subject of the Toric Lens Consulting and License Arrangements.

9. Duty of Confidentiality.

(a) Employee agrees to hold all Confidential Information of the Company and its affiliates (collectively, the �GroupCompanies�), in strictest confidence unless disclosure or use is required by law or any governmental authority or regulatory body. During theterm of Employee�s employment hereunder, Employee may have access to and become acquainted with Confidential Information of thirdparties (such as suppliers, customers, etc. of the Group Companies) which is in the Company�s possession and with whom a Group Companyis in a confidential relationship. Employee agrees to also hold such third parties� Confidential Information in strictest confidence as if it wereConfidential Information of the Company.



(b) During the term of this Agreement and thereafter, Employee shall not directly or indirectly in any way use (other than forthe Group Companies� purposes), copy, transfer or disclose any Confidential Information of the Group Companies or of any third partyreferred to in Section 9(a) above, except as required in the performance of Employee�s duties for the Company, or as specifically authorizedby the Chairman of the Company or the Board. The parties acknowledge and agree that, as between them all items of ConfidentialInformation are important, material and confidential trade secrets of the Group Companies and affect the successful conduct of the business ofthe Group Companies and their goodwill, and that any breach of this Section 9 is a material breach of this Agreement.

(c) All files, documents, works and other materials containing any (i) Confidential Information of any third party referred to inSection 9(a) above which is in the Company�s possession, (ii) Confidential Information of the Group Companies, or (iii) information affectingor relating to the business, services or products of the Group Companies, which Employee shall prepare, use, possess or control shall be andremain the sole property of the Group Companies; and with the exception of ordinary work routinely taken home, shall not be removed fromthe Company�s facilities without prior specific authorization of the Chairman of the Company or the Board.

10. Employee��s Duties on Termination.

(a) Employee agrees that, upon termination of this Agreement or upon the request of the Company at any time, Employee shallimmediately return to the company all property of the Group Companies in Employee�s possession, use or control, including all originals andany and all copies of any files, documents, works and other materials containing any Confidential Information of the Group Companies or anythird party referred to in a Section 9(a) above, in whatsoever medium contained. Employee shall not take with him, or cause or permit theremoval from the Company�s facilities, or any unauthorized destruction of, any originals or copies of any files, documents, works or othermaterials containing any Confidential Information of the Group Companies or any third party referred to in Section 9(a) above, regardless ofthe form or medium in which they are contained.

(b) After Employee ceases to be an employee of the Company, Employee shall not undertake any employment or activity ifEmployee has actual knowledge prior to such undertaking that the loyal and complete fulfillment of the duties of such employment or otheractivity would require or would be likely to require Employee to disclose or use any Confidential Information in breach of Section 9 above.

11. Ownership of Inventions.

Employee hereby assigns and transfers to the Company any and all inventions and innovations relating to contact lenses andrelated products (whether deemed patentable or not), and/or any improvements thereof (whether completed or in process) made or discoveredby Employee (or jointly with others) during the Term, and in the course of, Employee�s employment by the Company and whether or notusing any of Company�s methods processes, know-how, software, hardware, facilities, trade secrets or Confidential Information (whethermade during or after normal office hours, or at or away from the Company�s facilities) relating to or useful in the business of the Company,including all rights and interests with respect to any formula, process, technique, know-how, methodology, apparatus, device, technology,product, accessory or other item (collectively, �Inventions�) but the Inventions shall exclude any of the foregoing that is based specifically onthe patents relating to toric contact lenses referred to in the Toric Consulting and License Arrangements and that arises from Employee�sperformance of his obligations under the Toric Consulting and License Arrangements (whether

or not such obligations are in writing and regardless of whether such obligations are moral or contractual in nature, but only to the extent thatsuch obligations exist as of the Effective Date). Employee agrees to promptly disclose to the Company all Inventions. Employee agrees toexecute any reasonable document prepared by the Company that is necessary or appropriate to document, perfect or affect the purposes of thisSection 11 or to secure any patent, trademark or copyright registration or other protection thereof of the Company.

12. Non-competition. In consideration of the entry by the Company into this Agreement and the Company�s undertakings topay the base salary referred to in Section 3(a) above and to procure that Parent extends the stock options referred to in Section 3(b) above andthe payment of S$125,000 to Employee, which payment shall be made in five installments of S$25,000 each at the beginning of each period of12 months during the Initial Term, Employee hereby undertakes that during the Term and for a period of 24 months after the termination ofEmployee�s employment, Employee shall not, and shall not attempt to, directly or indirectly, own an interest in, operate, join, control,participate in, or be retained as an officer, director, employee, agent, consultant, independent contractor, partner, shareholder, investor orprincipal of, any individual, person or entity engaged in a business where a majority of the sales of such business are from the development,design manufacture and/or sale of contact lens products or services similar to or competing with or likely to compete with those of the



Company or Parent (and the development, design and/or manufacture of which Employee was materially concerned during the 24 monthperiod immediately prior to termination of his employment) in any part of the territory where the Company or its affiliates is then doingbusiness directly or indirectly through a subsidiary, joint venture, distributorship or otherwise (other than as a holder of not more than onepercent of the issued shares or debentures of any company listed on any stock exchange).

Notwithstanding the foregoing, it is agreed that for purposes of this Section 12 and this Agreement, the following activities shall notbe deemed to be a breach of this Section 12:

(a) the performance by Employee of his obligations pursuant to the Toric Consulting and License Arrangements (whether or notsuch obligations are in writing and regardless of whether such obligations are moral or contractual in nature, but only to the extent suchobligations exist as of the Effective Date);

(b) the ownership by Employee of an interest in IVC;

(c) IVC designing, developing, manufacturing or selling any product or service for sale in Asia (excluding Japan);

(d) the design, development, manufacture or sale by IVC in Europe of contact lenses in vials;

(e) the manufacture by IVC of contact lenses by lathing and the design, development or sale thereof; and

(f) the exploitation or use by Employee in any manner of the Flipper Lens Technology and/or the Packaging Technology (asrespectively defined in the Assignment Agreement) and/or the design, development, manufacture or sale of contact lenses and related productsin relation thereto by or on behalf of Employee in the event that the Flipper Lens Technology and/or the Packaging Technology is re-assignedby the Company to Employee pursuant to the Assignment Agreement.

For the avoidance of doubt, Employee shall be in breach of his non-compete covenants in this Section if Employee�s involvement inIVC extends beyond an ownership interest in IVC to include performance of any work for, or any participation in the operations of, IVC orany other form of participation in IVC unless such performance or participation by Employee takes place after the termination of Employee�semployment hereunder and is restricted to the activities permitted in subsections (a) to (f) above in which case Employee shall not be inbreach of his non-compete covenants in this Section 12.

The Company and Employee agree that, in the event of any conflict between the provisions of this Section 12 and any non-competition covenants given by Employee under the Asset Purchase Agreement, the provisions of this Section 12 shall prevail.

13. Non-solicitation. For a period of 24 months after the date of termination of this Agreement Employee shall not, directly orindirectly, do any of the following:

(a) solicit, induce or influence (or seek to induce or influence) any employee of the Company, Parent or their respectiveaffiliates who is employed by the Company, Parent or their respective affiliates as at the date of such termination; or

(b) solicit any supplier, contractor or customer of the Company, the Parent or their respective affiliates, who, at any time duringthe one year preceding the date of termination, has been a supplier, contractor or customer of the Company, Parent or their respective affiliateswith whom Employee was directly in contact with during the course of his employment.

The Company and Employee agree that, in the event of any conflict between the provisions of this Section 13 and any non-solicitation covenants given by Employee under the Asset Purchase Agreement, the provisions of this Section 13 shall prevail.

14. Interpretation and Acknowledgement.

(a) It is the intention of the parties that the confidentiality, non-competition and non-solicitation covenants contained inSection 9, 12, and 13 above shall be enforced to the greatest extent (but to no greater extent) in time, area and degree of participation aspermitted by applicable law. To this end, the parties agree that such covenants shall be construed to extend in time and territory and withrespect to degree of participation only so far as it may be enforced, and that such covenants are to that end hereby declared divisible andseverable since it is a



purpose of this Agreement tot govern competition by Employee anywhere in the territory where the Company, Parent or their affiliates maythen be doing business.

(b) Employee acknowledges that Employee�s covenants and agreements in the said Section 9, 12, and 13 are reasonable and arenecessary to protect the legitimate interests and Confidential Information of the Group Companies. Employee�s covenants and agreement inthe said Sections 9, 12, and 13 shall survive the termination of this Agreement.

15. Enforcement. For any breach of the said Sections 9, 12 and 13, Employee agrees that the Company shall be entitled to suchremedies as are provided under Singapore law, including, without limitation, equitable remedies.

MISCELLANEOUS

16. Previous Agreements. This Agreement shall supersede any previous agreements and understandings between Employeeand the Company and/or Parent, including the Consulting Agreement dated January 31, 2002 between Employee and Parent. Employeeacknowledges that he does not have any claim whatsoever against the Company or Parent for costs, damages, compensation or otherwiseunder or in connection with the said previous agreements and understandings, including the Consulting Agreement, other than for unpaid feesowing to Employee thereunder (if any) which shall be deemed to have been terminated by mutual consent on the Effective Date.

17. Entire Agreement. This Agreement (including the recitals set forth at the beginning of this Agreement and Exhibits A andB attached hereto) and the Assignment Agreement set forth the entire agreement and understanding between the parties in respect ofEmployee�s employment and cannot be modified or altered, nor can any provision hereof be waived, except in writing signed by the parties ora duly authorized officer of the parties.

18. Interpretation. The section and other headings in this Agreement are for purposes of reference only and shall not limit,expand, or otherwise affect the construction of any of the provisions of this Agreement. Whenever the context requires, the singular shallinclude the plural, the plural shall include the singular, and the whole shall include any part thereof.

19. Invalidity of Provision. In case anyone or more of the provisions in this Agreement. shall, for any reason, be held to beinvalid, illegal, or unenforceable in any respect, such invalid, illegal, or unenforceable provision(s) shall be curtailed, limited, construed, oreliminated to the extent necessary to remove such invalidity, illegality, or unenforceability with respect to the applicable law as it shall then beapplied and the other provisions of this Agreement shall not be affected thereby.

20. Assignment. No party hereto may assign this Agreement without the prior written consent of the other party provided thatthe Company may assign this Agreement to any of its affiliates upon prior written notice to and with consent from, Employee (which consentshall not be unreasonably withheld).

21. Binding Effect. This Agreement shall inure to the benefit of and be binding upon Employee and Employee�s heirs, andlegal representatives, and upon the Company and its successors and assigns.

22. Waiver. No waiver of any provision of this Agreement shall constitute a waiver of any other provision, whether or notsimilar, nor shall any waiver constitute a continuing waiver.

23. Notice. Any notice required or permitted to be given under this Agreement shall be in writing and shall be sufficient ifpersonally delivered or sent by a reputable courier service (e.g. Federal Express, DHL, etc.) and addressed, if to Employee, at Employee�saddress in the Company�s records, or if to the Company, to the Chairman of the Company and the Board at the Company�s Singapore office.Such notice shall be deemed given when delivered, if delivered personally, or, if sent by courier, at the earlier of actual receipt or five businessdays after delivery to the courier service, addressed as aforesaid.

24. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of Singapore.



25. Jurisdiction. The parties irrevocably agree that the courts of Singapore are to have non-exclusive jurisdiction to settle anydisputes which may arise out of or in connection with this Agreement and that, accordingly, any legal action or proceedings arising out of orin connection with this Agreement may be brought in those courts and the parties irrevocably submit to the jurisdiction of those courts.

26. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original,but all of which together will constitute one and the same instrument; provided, however, that original signature pages for any signaturesreceived by� facsimile shall be delivered to both parties within five (5) days of transmission.

27. Contracts (Rights of Third Parties) Act 2001. A person who is not a party to this Agreement has no right under theContracts (Rights of Third Parties) Act 2001 to enforce any term of this Agreement

28. Definitions. In this Agreement, the following terms shall have the following meanings respectively ascribed to them:

�affiliates� means an entity or person controlled by, controlling, or under common control with, another entity or person;

�business day� means a day (other than a Saturday or Sunday) on which commercial banks are open for business inSingapore; and

�control� (including its correlative meanings, �controlled by�, �controlling� and �under common control with�) means,respect to a corporation, the right to exercise, directly or indirectly more than 50 percent of the voting rights attributable to the sharesof such corporation or the possession, directly or indirectly, of the power to direct or cause the direction of the management orpolicies of such corporation.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above.

COMPANY:

IGEL Acquisition Co. Pte. Ltd.

Signed By: Jonathan CoonTitle: Director

EMPLOYEE:

Stephen D. Newman



Exhibit 10.15

RESTATED LOAN AGREEMENT

Between

ZIONS FIRST NATIONAL BANKLender

and

1-800 CONTACTS, INC.Borrower

Effective Date: February 27, 2004

LOAN AGREEMENT

Table of Contents

1. Definitions1.1 Definitions

2. Loan Description2.1 Amount of Loan2.2 Nature and Duration of Loan2.3 Promissory Note2.4 Notice and Manner of Borrowing2.5 Limitations on Advances2.6 Closing Fee2.7 Non-Use Fee2.8 Letter of Credit Fee2.9 Payment of Prior Loan2.10 Automatic Debit of Borrower�s Account

3. Security for Loan3.1 Collateral3.2 Release of Lender as Condition to Lien Termination

4. Conditions to Loan Disbursements4.1 Conditions to Loan Disbursements4.2 No Default, Adverse Change, False or Misleading Statement

5. Representations and Warranties5.1 Organization and Qualification5.2 Authorization5.3 Subsidiaries5.4 No Governmental Approval Necessary5.5 Accuracy of Financial Statements5.6 No Pending or Threatened Litigation5.7 Full and Accurate Disclosure5.8 Compliance with ERISA



5.9 Compliance with USA Patriot Act5.10 Compliance with All Other Applicable Law5.11 Environmental Representations and Warranties5.12 Operation of Business5.13 Payment of Taxes5.14 Licensing and Distribution Agreements

6. Borrower�s Covenants6.1 Use of Proceeds6.2 Continued Compliance with ERISA6.3 Compliance with USA Patriot Act6.4 Continued Compliance with Applicable Law6.5 Subsidiaries6.6 Prior Consent for Amendment or Change

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6.7 Payment of Taxes and Obligations6.8 Financial Statements and Reports6.9 Financial Covenants6.10 Insurance6.11 Inspection6.12 Operation of Business6.13 Maintenance of Records and Properties6.14 Notice of Claims6.15 Environmental Covenants6.16 Exclusive Negative Pledge6.17 Restriction on Debt6.18 Mergers, Consolidations, and Purchase and Sale of Assets6.19 Dividends6.20 Loans and Investments6.21 Intercompany Transfers of Assets6.22 Covenants for Post-Closing Events

7. Default7.1 Events of Default7.2 No Waiver of Event of Default

8. Remedies8.1 Remedies upon Event of Default8.2 Rights and Remedies Cumulative8.3 No Waiver of Rights

9. General Provisions9.1 Restated Loan Agreement9.2 Governing Agreement9.3 Borrower�s Obligations Cumulative9.4 Payment of Expenses and Attorney�s Fees9.5 Right to Perform for Borrower9.6 Assignability9.7 Third Party Beneficiaries9.8 Governing Law9.9 Severability of Invalid Provisions9.10 Interpretation of Loan Agreement



9.11 Survival and Binding Effect of Representations, Warranties, and Covenants9.12 Indemnification9.13 Environmental Indemnification9.14 Interest on Expenses and Indemnification, Collateral, Order of Application9.15 Limitation of Consequential Damages9.16 Waiver and Release of Claims9.17 Revival Clause9.18 Arbitration9.19 Consent to Utah Jurisdiction and Exclusive Jurisdiction of Utah Courts9.20 Notices

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9.21 Duplicate Originals; Counterpart Execution; Fax Delivery9.22 Disclosure of Financial and Other Information9.23 Integrated Agreement and Subsequent Amendment

EXHIBITS

Exhibit A - Promissory Note (Reducing Revolving Line of Credit)

Exhibit B - Form of General Release

Exhibit C - List of Organizational Documents of Subsidiaries

Exhibit D � Schedule of Existing Third Party Debt and Collateral of Borrower and Subsidiaries

Exhibit E � Form of Amendment to Subordination Agreement

Exhibit F � Form of Opinion of Counsel for Foreign Subsidiaries

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RESTATED LOAN AGREEMENT

This Restated Loan Agreement is made and entered into by and between Zions First National Bank and 1-800 CONTACTS, INC.

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Definitions

1.1 Definitions

Terms defined in the singular shall have the same meaning when used in the plural and vice versa. As used herein, the term:

�Approved Subsidiary Loans� means Subsidiary Loans for which Lender has granted prior written approval. Lender�s approval willbe conditioned upon, among other things, loan documentation acceptable to lender and assignment and granting of a security interest in theSubsidiary Loans and the Subsidiary Loan Documents. The IGEL Acquisition/ClearLab Debt Instruments, the Existing Lens 1st SubsidiaryLoan, the Existing ClearLab Subsidiary Loan, and the Existing Shayna Subsidiary Loan are hereby each approved as an Approved SubsidiaryLoan.



�Aquasoft� means AQUASOFT, LLC, a limited liability company organized and existing under the laws of the State of Utah, itssuccessors, and, if permitted, assigns.

�Article 8 Opt-In� means provisions in the Organizational Documents of a limited liability company to provide (i) the membershipinterests of the limited liability company are a security and are governed by Article 8 of the Uniform Commercial Code, as adopted now or inthe future in the State of Utah, (ii) the limited liability company shall issue certificates evidencing the ownership of the membership interestsand maintain a ledger demonstrating the issuance, surrender, transfer and ownership of such certificates, and (iii) such provisions may not beamended, modified, terminated, rescinded, or repealed without the prior written consent of Lender so long as the Loan is outstanding andunpaid.

�Asset Purchase Agreement� means the Asset Purchase Agreement dated May 4, 2002 by and among ClearLab (then known as IGELAcquisition, Co. Pte. Ltd.) International Vision Laboratories Pte. Ltd., IGEL Visioncare Pte. Ltd., IGEL CM Laboratory Pte. Ltd., Stephen D.Newman, and Sinduchajana Sulistyo.

�Banking Business Day� means any day not a Saturday, Sunday, legal holiday in the State of Utah, or day on which national banksin the State of Utah are authorized to close.

�Borrower� means 1-800 CONTACTS, INC., a corporation organized and existing under the laws of the State of Delaware, itssuccessors, and, if permitted, assigns.

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�CL I� means CL I, Inc., a corporation organized and existing under the laws of the State of Utah, its successors, and, if permitted,assigns.

�CL II� means CL II, Inc., a corporation organized and existing under the laws of the State of Utah, its successors, and, if permitted,assigns.

�CL III� means CL III, Inc., a corporation organized and existing under the laws of the State of Utah, its successors, and, ifpermitted, assigns.

�CL4� means CL 4, L.L.C., a limited liability company organized and existing under the laws of the State of Utah, its successors,and, if permitted, assigns.

�ClearLab� means ClearLab Pte. Ltd., a private company limited by shares organized and existing under the laws of the Republic ofSingapore, successor by change of name to IGEL Acquisition Co. Pte. Ltd., its successors, and, if permitted, assigns.

�Collateral� shall have the meaning set forth in Section 3.1 Collateral.

�Contacts Japan� means 1-800 CONTACTS Japan, KK, a corporation organized and existing under the laws of Japan, its successors,and, if permitted, assigns.

�Contacts Texas� means 1-800 CONTACTS TEXAS, INC., a corporation organized and existing under the laws of the State ofTexas, its successors, and, if permitted, assigns.

�DBS/ATD Default� means an event of default by ClearLab (then known as IGEL Acquisition Co. Pte. Ltd.) under its obligations toDevelopment Bank of Singapore Ltd relating to an eight million six hundred seventy thousand dollar ($8,670,000.00) (Singapore) loan madein connection with the Asset Purchase Agreement and/or under ClearLab�s obligations to Alliance Technology and Development Limitedunder or relating to the Asset Purchase Agreement, which event of default is cured within thirty (30) days of occurrence.



�Debt� means (i) indebtedness or liability for borrowed money; (ii) obligations evidenced by bonds, debentures, notes, or othersimilar instruments; (iii) obligations for the deferred purchase price of property or services (including trade obligations) which are aged morethan one hundred twenty (120) days from the billing date and current operating liabilities (other than for borrowed money) which are morethan one hundred twenty (120) days past due, (iv) obligations as lessee under capital leases; (v) current liabilities in respect of unfunded vestedbenefits under Plans covered by ERISA; (vi) obligations under letters of credit; (vii) obligations under acceptance facilities; (viii) all thirdparty guarantees (excluding inter-company guarantees between Borrower and Subsidiaries or between Subsidiaries), endorsements (other thanfor collection or deposit in the ordinary course of business), and other contingent obligations to purchase (excluding outstanding purchaseorders prior to delivery of the subject goods or performance of the subject services), to provide funds for payment to supply funds to invest inany person or entity, or otherwise to assure a creditor against loss; and (ix) obligations secured by any mortgage, deed of trust, lien, pledge, orsecurity interest or other charge or encumbrance on property, whether or not the obligations have been assumed.

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�Dollar� and �$� mean United States of America dollars unless indicated otherwise.

�Domestic Subsidiaries� means CL I, CL II, CL III, Lens 1st, CL4, Aquasoft, Evision, Contacts Texas, and any other domestic entity,now existing or formed or acquired in the future, in which Borrower and/or any Subsidiary, individually or collectively, owns or controls,directly or indirectly, more than fifty percent (50%) of the outstanding securities or ownership interests having ordinary voting power.

�EBITDA� means net income (excluding extraordinary gains and losses realized other than in the ordinary course of business) beforeinterest, taxes, depreciation, and amortization, and other non-cash charges determined in accordance with generally accepted accountingprinciples consistent with the financial statements of Borrower previously delivered to Lender, provided that for any calculation based upon aTrailing Twelve Month period which includes any of the fiscal months of October, November or December, 2003 or January, 2004, the sumof two hundred thousand dollars ($200,000.00) for each such month in 2003 and four hundred fifteen thousand dollars ($415,000.00) forJanuary, 2004, shall be added to the EBITDA amount determined pursuant to the foregoing definition.

�Effective Date� shall mean the date the parties intend this Loan Agreement to become binding and enforceable, which is the datestated at the conclusion of this Loan Agreement.

�Environmental Condition� shall mean any condition involving or relating to Hazardous Materials and/or the environment affectingthe Real Property, which results in any damage, loss, cost, expense, claim, demand, order, or liability to or against Borrower, the Subsidiaries,or Lender by any third party (including, without limitation, any government entity), including, without limitation, any condition resulting fromthe operation of Borrower�s or any Subsidiaries� business and/or operations in the vicinity of the Real Property and/or any activity oroperation formerly conducted by any person or entity on or off the Real Property.

�Environmental Health and Safety Law� shall mean any legal requirement that requires or relates to:

a. advising appropriate authorities, employees, or the public of intended or actual releases of Hazardous Materials,violations of discharge limits or other prohibitions, and of the commencement of activities, such as resource extraction orconstruction, that do or could have significant impact on the environment;

b. preventing or reducing to acceptable levels the release of Hazardous Materials;

c. reducing the quantities, preventing the release, or minimizing the hazardous characteristics of wastes that aregenerated;

d. assuring that products are designed, formulated, packaged, and used so that they do not present unreasonable risksto human health or the environment when used or disposed of;

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e. protecting resources, species, or ecological amenities;

f. use, storage, transportation, sale, or transfer of Hazardous Materials or other potentially harmful substances;

g. cleaning up Hazardous Materials that have been released, preventing the threat of release, and/or paying the costsof such clean up or prevention; or

h. making responsible parties pay for damages done to the health of others or the environment or permitting self-appointed representatives of the public interest to recover for injuries done to public assets.

�Event of Default� shall have the meaning set forth in Section 7.1 Events of Default.

�Evision� means Evision, Inc., a corporation organized and existing under the laws of the State of Oregon, its successors, and, ifpermitted, assigns.

�Existing ClearLab Subsidiary Loan� means an existing Subsidiary Loan or Subsidiary Loans to ClearLab, excluding the IGELAcquisition/ClearLab Debt Instruments, not to exceed an aggregate outstanding principal balance of five million eight hundred fifty-ninethousand four hundred eighty-five dollars ($5,859,485.00).

�Existing Debt� means all Debt of Borrower and all Subsidiaries which is existing and outstanding as of the Effective Date.

�Existing Lens 1st Subsidiary Loan� means an existing Subsidiary Loan or Subsidiary Loans to Lens 1st not to exceed an aggregateoutstanding principal balance of one million four hundred thirty-five thousand dollars ($1,435,000.00) less the Lens 1st Equity Allocation.

�Existing Loan Agreement� means the Loan Agreement dated July 22, 2002 between Lender and Borrower.

�Existing Loan Documents� means the Loan Documents as defined in the Existing Loan Agreement.

�Existing Shayna Subsidiary Loan� means an existing Subsidiary Loan or Subsidiary Loans to Shayna not to exceed an aggregateoutstanding principal balance equal to four million three hundred eighty-four thousand dollars ($4,384,000.00) less the Shayna EquityAllocation.

�Existing Third Party Debt� means Existing Debt owing to a party other than Lender, Borrower or a Subsidiary.

�Foreign Subsidiaries� means Contacts Japan, ClearLab, Shayna, VisionTec and any other foreign entity, now existing or formed oracquired in the future, in which Borrower and/or any Subsidiary, individually or collectively, owns or controls, directly or indirectly, morethan fifty percent (50%) of the outstanding securities or ownership interests having ordinary voting power.

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�Formula Default� means an Event of Default based upon failure of Borrower to timely comply with the provisions of Section 2.5,Limitations on Advances.

�Hazardous Materials� means (i) �hazardous waste� as defined by the Solid Waste Disposal Act, as amended by the ResourceConservation and Recovery Act of 1976 (42 U.S.C. Section 6901 et. seq.), including any future amendments thereto, and regulationspromulgated thereunder, and as the term may be defined by any contemporary state counterpart to such act; (ii) �hazardous substance� asdefined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. Section 9601 et. seq.), includingany future amendments thereto, and regulations promulgated thereunder, and as the term may be defined by any contemporary statecounterpart of such act; (iii) asbestos; (iv) polychlorinated biphenyls; (v) underground or above ground storage tanks, whether empty or filled



or partially filled with any substance; (vi) any substance the presence of which is or becomes prohibited by any federal, state, or local law,ordinance, rule, or regulation; and (vii) any substance which under any federal, state, or local law, ordinance, rule or regulation requiresspecial handling or notification in its collection, storage, treatment, transportation, use or disposal.

�IGEL Acquisition/ClearLab Debt Instruments� means the Unsecured Promissory Note dated July 22, 2002 executed by ClearLab(then known as IGEL Acquisition Co. Pte Ltd) in favor of Borrower in the original principal amount of six million six hundred twenty-eightthousand five hundred fifteen dollars and eighty-five cents ($6,628,515.85) and the Loan Agreement dated July 22, 2002 between ClearLab(then known as IGEL Acquisition Co. Pte Ltd) and Borrower evidencing the debt investment by Borrower in ClearLab which was made inconnection with the Asset Purchase Agreement, and any and all renewals, extensions, modifications, and replacements thereof.

�Intellectual Property Assets� means (i) all right, title and interest of Borrower in and to patent applications and patents, including,without limitation, all proceeds thereof (such as, by way of example, license royalties and proceeds of infringement suits), the right to sue forpast, present and future infringements, all rights corresponding thereto throughout the world, and all reissues, divisions, continuations,renewals, extensions, and continuations-in-part thereof (collectively, the �Patents�); (ii) all right, title and interest of Borrower in and totrademark applications and trademarks, including, without limitation, all renewals thereof, all proceeds thereof (such as, by way of example,license royalties and proceeds of infringement suits), the right to sue for past, present and future infringements, and all rights correspondingthereto throughout the world, and the good will of the business to which each of the Trademarks relates (collectively, the �Trademarks�); (iii)all copyrights of Borrower and all rights and interests of every kind of Borrower in copyrights and works protectible by copyright, and allrenewals and extensions thereof, and in and to the copyrights and rights and interests of every kind or nature in and to all works based upon,incorporated in, derived from, incorporating or relating to any of the foregoing or from which any of the foregoing is derived, and all proceedsthereof (such as, by way of example, license royalties and proceeds of infringement suits), the right to sue for past, present and futureinfringements, and all rights corresponding thereto throughout the world (collectively, the �Copyrights�); (iv) all of Borrower�s trade secretsand other proprietary information, and all proceeds thereof (collectively, the �Trade Secrets�); (v) all right, title, and interest of Borrower in,to and under license agreements and contracts concerning Patents,

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Trademarks, Copyrights, and Trade Secrets, all amendments, modifications, and replacements thereof, all royalties and other amounts owingthereunder, and all proceeds thereof (collectively, the �Licenses�); (vi) all internet domain names and addresses of Borrower and all proceedsthereof; and (vii) the phone number 1-800-CONTACTS.

�Lender� means Zions First National Bank, its successors, and assigns.

�Lens 1st� means Lens 1st Holding Company, a corporation organized and existing under the laws of the State of Utah, itssuccessors, and, if permitted, assigns.

�Lens 1st Equity Allocation� means that portion of an existing outstanding advance of one million four hundred thirty-five thousanddollars ($1,435,000.00) made by Borrower to Lens 1st which Borrower determines will be treated as an equity investment and not debt.

�LIBOR Rate Applicable Margin� means two and seventy-five hundredths percent (2.75%) until July 31, 2004, and thereafter:

a. If the Maximum Leverage Ratio is greater than three (3.0), three and twenty-five hundredths percent (3.25%).

b. If the Maximum Leverage Ratio is greater than two and five-tenths (2.5) but less than or equal to three (3.0), twoand seventy-five hundredths percent (2.75%).

c. If the Maximum Leverage Ratio is greater than two (2.0) but less than or equal to two and five-tenths (2.5), two andtwenty-five hundredths percent (2.25%).

d. If the Maximum Leverage Ratio is less than or equal to two (2.0), two percent (2.0%).



�Loan� means the reducing revolving line of credit loan to be made pursuant to Section 2 Loan Description.

�Loan Agreement� means this agreement, together with any exhibits, amendments, addendums, and modifications.

�Loan Documents� means the Loan Agreement, Promissory Note, Security Documents, all other agreements and documentscontemplated by any of the aforesaid documents, and all amendments, modifications, addenda, and replacements, whether presently existingor created in the future.

�Material Adverse Change� means a material adverse change in (i) the business, assets, Real Property, condition (financial orotherwise), results of operations, or future business prospects of Borrower and its Subsidiaries taken as a whole, or (ii) the validity orenforceability of any of the Loan Documents or the rights or remedies of Lender thereunder.

�Material Adverse Effect� means a material adverse effect on (i) the business, assets, Real Property, condition (financial orotherwise), results of operations, or future business

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prospects of Borrower and its Subsidiaries taken as a whole, or (ii) the validity or enforceability of any of the Loan Documents or the rights orremedies of Lender thereunder.

�Maximum Available Advance Amount� means twenty-eight million dollars ($28,000,000.00) through June 1, 2004, and reducingthereafter on June 1, 2004 and on the first day of each September, December, March and June until maturity of the Promissory Note, by theamount of four hundred thousand dollars ($400,000.00).

�Maximum Leverage Ratio� means the maximum leverage ratio set forth in Subsection c of Section 6.9, Financial Covenants.

�Organizational Documents� means, in the case of a corporation, its Articles of Incorporation and By-Laws; in the case of a generalpartnership, its Articles of Partnership; in the case of a limited partnership, its Articles of Limited Partnership; in the case of a limited liabilitycompany, its Articles of Organization and Operating Agreement or Regulations, if any; in the case of a limited liability partnership, itsArticles of Limited Liability Partnership or similar documents; and all amendments, modifications, and changes to any of the foregoing whichare currently in effect.

�Payment Default� means an Event of Default based upon failure of Borrower to timely make any payment to Lender under thePromissory Note.

�Permitted Debt� means (i) debt contemplated by this Loan Agreement; (ii) debt of Borrower and Domestic Subsidiaries not toexceed an aggregate, outstanding principal amount of five million dollars ($5,000,000.00) in excess of the Existing Third Party Debt; (iii)Existing Debt; (iv) Permitted Subsidiary Loans; (v) VisionTec Acquisition Debt; (vi) a line of credit in favor of VisionTec existing prior to theacquisition of VisionTec by Shayna and Borrower, which shall not exceed a principal amount of five hundred thousand dollars ($500,000.00)after completion of such acquisition; and (vii) existing capital leases of VisionTec in the amount of approximately one hundred twenty-fivethousand dollars ($125,000.00).

�Permitted Subsidiary Loans� means (i) Subsidiary Loans to Subsidiaries other than Lens 1st, ClearLab, and Shayna which do notexceed at any time outstanding principal of two hundred fifty thousand dollars ($250,000.00) per Subsidiary, (ii) the Existing Lens 1stSubsidiary Loan (iii) the Existing ClearLab Subsidiary Loan, (iv) the Existing Shayna Subsidiary Loan, and (v) Approved Subsidiary Loans.

�Prime Rate Applicable Margin� means seventy-five hundredths percent (.75%) until July 31, 2004, and thereafter:

a. If the Maximum Leverage Ratio is greater than three (3.0), one and twenty-five hundredths percent (1.25%).



b. If the Maximum Leverage Ratio is greater than two and five-tenths (2.5) but less than or equal to three (3.0),seventy-five hundredths percent (.75%).

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c. If the Maximum Leverage Ratio is greater than two (2.0) but less than or equal to two and five-tenths (2.5), twenty-five hundredths percent (.25%).

d. If the Maximum Leverage Ratio is less than or equal to two (2.0), zero percent (0%).

�Promissory Note� means the Promissory Note (Reducing Revolving Line of Credit) to be executed by Borrower pursuant toSection 2.3 Promissory Note in the form of Exhibit A hereto, which is incorporated herein by reference, and any and all renewals, extensions,modifications, and replacements thereof.

�Real Property� means any and all real property or improvements thereon owned or leased by Borrower or in which Borrower hasany other interest of any nature whatsoever.

�SEC� means the United States Securities and Exchange Commission.

�Security Documents� means all security agreements, assignments, pledges, financing statements, deeds of trust, mortgages, andother documents which create or evidence any security interest, assignment, lien or other encumbrance in favor of Lender to secure any or allof the obligations created or contemplated by any of the Loan Documents, and all amendments, modifications, addenda, and replacements,whether presently existing or created in the future.

�Shayna� means Shayna Limited, a private limited company organized and existing under the laws of England, its successors, and, ifpermitted, assigns.

�Shayna Equity Allocation� means that portion of an existing outstanding advance of four million three hundred eighty-fourthousand dollars ($4,384,000.00) made by Borrower to Shayna which Borrower determines will be treated as an equity investment and notdebt.

�Subsidiaries� means the Domestic Subsidiaries and the Foreign Subsidiaries.

�Subsidiary Loans� means loans from Borrower to any of the Subsidiaries, and all amendments, modifications, addenda andreplacements, whether presently existing or made in the future. Subsidiary Loans include the loan evidenced by the IGEL Acquisition/ClearLab Debt Instruments, the Existing Lens 1st Subsidiary Loan, the Existing ClearLab Subsidiary Loan, and the Existing ShaynaSubsidiary Loan.

�Subsidiary Loan Documents� means all promissory notes, loan agreements, security agreements, assignments, pledges, financingstatements, deeds of trust, mortgages, guarantees, and other documents which create or evidence Subsidiary Loans, and all amendments,modifications, addenda and replacements, whether presently existing or created in the future.

�Sweep Account� means the U.S. Government Money Market Sweep Account described in the Sweep Account Agreement, AccountNo. 024-75488-9.

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�Sweep Account Agreement� means the Zions First National Bank Government Money Market Sweep Account Agreement datedFebruary 27, 2004 between Borrower and Lender, and all amendments, modifications, and replacements thereof.



�Trailing Twelve Month� means the twelve (12) fiscal month period immediately preceding the date of calculation.

�Unused Facility Fee Applicable Margin� means five-tenths percent (.5%) until July 31, 2004, and thereafter:

a. If the Maximum Leverage Ratio is greater than two and five-tenths (2.5), five-tenths percent (.5%).

b. If the Maximum Leverage Ratio is less than or equal to two and five-tenths (2.5), thirty-eight hundredths percent(.38%).

�VisionTec� means VisionTec CL Ltd., a private company organized and existing under the laws of England, its successors, and, ifpermitted, assigns.

�VisionTec Acquisition Debt� means Loan Note Instruments issued from time to time by Shayna, Borrower or a Foreign Subsidiary,pursuant to agreements for the acquisition of VisionTec by Shayna and Borrower.

2. Loan Description

2.1 Amount of Loan

Upon fulfillment of all conditions precedent set forth in Section 4 Conditions to Loan Disbursements, and so long as no Event ofDefault exists, Lender agrees to loan Borrower twenty eight million dollars ($28,000,000.00) as a reducing revolving line of credit.

2.2 Nature and Duration of Loan

The Loan shall be a reducing revolving loan payable in full upon the dates and upon the terms and conditions provided in thePromissory Note. Lender and Borrower intend the Loan to be in the nature of a line of credit under which Borrower may repeatedly draw andrepay funds on a revolving basis in accordance with the terms and conditions of this Loan Agreement and the Promissory Note. The right ofBorrower to draw funds and the obligation of Lender to advance funds shall not accrue until all of the conditions set forth in Section 4Conditions to Loan Disbursements have been fully satisfied, and shall terminate: (i) upon occurrence of an Event of Default or (ii) uponmaturity of the Promissory Note, unless the Promissory Note is renewed or extended by Lender in which case such termination shall occurupon the maturity of the final renewal or extension of the Promissory Note. Upon such termination, any and all amounts owing to Lenderpursuant to the Promissory Note shall thereupon be due and payable in full.

Upon request of Borrower, commercial or standby letters of credit for the account of Borrower may be issued against the PromissoryNote, provided that the aggregate face amount of

9

all such letters of credit which are outstanding or payable may not exceed fifteen million dollars ($15,000,00.00) at any time. The terms,conditions, and maturity of any such letters of credit shall be reasonably acceptable to Lender. In addition to the letter of credit fee providedbelow, Borrower shall pay Lender�s standard and customary charges for issuance of letters of credit. Borrower shall submit such documentsand applications for issuance of letters of credit as are required by Lender. Upon issuance of any letter of credit against the Promissory Note,an amount equal to the letter of credit shall be deducted from the amount available for disbursement on the Promissory Note and will not beavailable to Borrower so long as the letter of credit is outstanding or subject to payment. Upon submission of any drawing under any suchletter of credit which is honored by Lender, the amount of the drawing shall thereupon be immediately disbursed under the Promissory Notefor payment of the drawing. Interest on such amount shall accrue under the Promissory Note only from the date of disbursement of funds topay a drawing.

2.3 Promissory Note



The Loan shall be evidenced by the Promissory Note. The Promissory Note shall be executed and delivered to Lender prior todisbursement of any of the Loan.

2.4 Notice and Manner of Borrowing

Borrower shall give Lender at least two (2) Banking Business Days notice of any advances requested under the Promissory Note.Any advances shall be in a minimum amount of at least five hundred thousand dollars ($500,000.00) and shall be only in multiples thereof.

Additionally, at the election of Borrower, the Promissory Note may be linked to the Sweep Account pursuant to the Sweep AccountAgreement. Borrower may unilaterally terminate the Sweep Account at any time. Except as expressly modified hereby, the terms andconditions of the Sweep Account Agreement shall remain in full force and effect.

All references in the Sweep Account Agreement to the �Commercial Loan Line with Zions Bank� are amended to refer to the Loan.

If such election is made, (i) Lender is authorized and directed to disburse funds under the Promissory Note for deposit into the SweepAccount on each Banking Business Day as needed to cover all checks and other charges against the Sweep Account; (ii) disbursements shallbe made up to the Maximum Available Advance Amount; (iii) upon occurrence of an Event of Default or event which, with the passage oftime or giving of notice or both, would constitute an Event of Default, Lender may, in its sole discretion, cease all disbursements under thePromissory Note into the Sweep Account; and (iv) Lender is authorized and directed to disburse all collected funds in the Sweep Account oneach Banking Business Day to Lender to be applied on the Promissory Note.

It is acknowledged that posting of credits and debits to and from the Sweep Account are made one Banking Business Day after thetransactions occur and back dated to the prior Banking Business Day.

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2.5 Limitations on Advances

Notwithstanding anything to the contrary in the Loan Documents, no advance shall be made on the Promissory Note if, after makingthe requested advance, the total principal amount of all advances outstanding, together with the amount of all outstanding letters of creditissued against the Promissory Note pursuant to Section 2.2 Nature and Duration of Loan, will exceed (i) the Maximum Available AdvanceAmount, and (ii) at all times when the Maximum Leverage Ratio is greater than two and five-tenths (2.5), the book value, as determined bygenerally accepted accounting principles consistent with those used in preparation of the financial statements of Borrower and Subsidiariessubmitted to Lender, of Borrower�s inventory.

Borrower will at all times when the Maximum Leverage Ratio is greater than two and five-tenths (2.5) maintain inventory so that theaggregate, principal amount of all advances at any time outstanding and unpaid on the Promissory Note shall be in compliance with thisrequirement. If at any time the aggregate, principal amount of all such advances outstanding and unpaid exceeds the amount allowable underthis requirement or the Maximum Available Advance Amount, Borrower shall immediately make payment to Lender in a sufficient amount tobring the amount of such advances back into compliance. If the foregoing covenant requires prepayment of an advance based on the LIBORRate (as defined in the Promissory Note) prior to the last day of the applicable Interest Period (as defined in the Promissory Note), suchprepayment shall be subject to a prepayment fee as provided in the Promissory Note.

2.6 Closing Fee

Upon execution and delivery of this Loan Agreement, and satisfaction of all conditions required to fund the Loan, Borrower shall pay Lendera closing fee of one hundred forty thousand dollars ($140,000.00). No portion of such fee shall be refunded in the event of early terminationof this Loan Agreement or any termination or reduction of the right of Borrower to request advances under this Loan Agreement. Lender isauthorized and directed, upon execution of this Loan Agreement and confirmation that funds are available for disbursement to Borrower underthe Loan, to disburse a sufficient amount of the Loan proceeds to pay the closing fee in full.



2.7 Non-Use Fee

Borrower shall pay to Lender a non-use fee for the Loan for so long as this Loan Agreement is in effect. The non-use fee shall be anamount equal to the Unused Facility Fee Applicable Margin per annum of the unused portion of the Loan or, if less, the unused portion of theLoan which is available to be advanced based upon Borrower�s inventory as provided in Section 2.5, Limitations on Advances, calculated onthe average unused portion of the Loan for each calendar quarter or portion thereof. The fee shall be payable quarterly, in arrears, and shall bedue no later than the fifth Banking Business Day after the first day of the month following each calendar quarter. Changes in the UnusedFacility Fee Applicable Margin shall take effect on the later of (i) the first day of the month following forty-five (45) days after the end ofeach fiscal quarter of Borrower, or (ii) provided no Event of Default exists, the first day of the month

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following receipt by Lender of the monthly financial statements for the quarter or quarterly financial statements provided in Section 6.8,Financial Statements and Reports.

2.8 Letter of Credit Fee

Borrower shall pay to Lender a letter of credit fee for each letter of credit issued against the Promissory Note. The fee for standbyletters of credit shall be the amount of the letter of credit multiplied by the LIBOR Rate Applicable Margin. The fee for commercial letters ofcredit shall be the amount of the letter of credit multiplied by .125% for each ninety (90) day period or portion thereof until maturity of theletter of credit.

2.9 Payment of Prior Loan

The Promissory Note succeeds and replaces that certain Promissory Note (Revolving Line of Credit) dated July 22, 2002 executed byBorrower in favor of Lender in the original principal amount of twenty million dollars ($20,000,000.00) and that certain Promissory Note(Amortizing Term Loan) dated July 22, 2002, executed by Borrower in favor of Lender in the original principal amount of ten million dollars($10,000,000.00), as extended. Lender is authorized and directed to disburse a sufficient amount of the funds pursuant to the Promissory Noteto pay in full all obligations owing under the aforesaid Promissory Notes. Lender agrees to waive any prepayment fees on the aforesaidPromissory Note.

2.10 Automatic Debit of Borrower�s Account

Lender is authorized and directed to establish automatic debits to Borrower�s Account No. 071-01403-9 with Lender for payment ofinterest on the Promissory Note and for payment of non-use fees and letter of credit fees.

3. Security for Loan

3.1 Collateral

The Loan, Promissory Note, and all obligations of Borrower under the Loan Documents shall be secured by such collateral as isprovided in the Security Documents (the �Collateral�), which shall consist of the following, whether now existing or hereafter created: (i) ablanket lien on all assets of Borrower, including, the Intellectual Property Assets, including, without limitation, the mark �1-800CONTACTS�; (ii) the IGEL Acquisition/ClearLab Debt Instruments; (iii) the Subsidiary Loans and the Subsidiary Loan Documents; (iv) onehundred percent (100%) of the issued and outstanding stock and equity and ownership interests in the Domestic Subsidiaries except ContactsTexas; and (v) sixty-five percent (65%) of the issued and outstanding stock and equity and ownership interests in the Foreign Subsidiariesdirectly owned by Borrower.

Any and all UCC Financing Statements previously filed by Lender with Borrower as debtor may, at the discretion of Lender, remainof record and shall constitute notice of Lender�s security interest in the Collateral.



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3.2 Release of Lender as Condition to Lien Termination

In recognition of Lender�s right to have all its attorneys fees and expenses incurred in connection with this Loan Agreement securedby the Collateral, notwithstanding payment in full of the Loan and all other obligations secured by the Collateral, Lender shall not be requiredto release, reconvey, or terminate any Security Document unless and until Borrower has executed and delivered to Lender a general releasesubstantially in the form attached hereto as Exhibit C.

4. Conditions to Loan Disbursements

4.1 Conditions to Loan Disbursements

Lender�s obligation to disburse any of the Loan is expressly subject to, and shall not arise until all of the conditions set forth belowhave been satisfied. All of the documents referred to below must be in a form and substance reasonably acceptable to Lender.

a. All of the Loan Documents and all other documents contemplated to be delivered to Lender prior to funding, andall other documents reasonably required by Lender, have been fully executed and delivered to Lender.

b. All of the documents contemplated by the Loan Documents which require filing or recording have been properlyfiled and recorded so that all of the liens and security interests granted to Lender in connection with the Loan will be properly createdand perfected and will have a priority acceptable to Lender.

c. All other conditions precedent provided in or contemplated by the Loan Documents have been performed.

d. As of the date of disbursement of all or any portion of the Loan, the following shall be true and correct: (i) allrepresentations and warranties made by Borrower in the Loan Documents are true and correct as of the date of such disbursement;and (ii) no Event of Default has occurred and no conditions exist and no event has occurred, which, with the passage of time or thegiving of notice, or both, would constitute an Event of Default.

e. Lender has completed its due diligence and review with results reasonably acceptable to Lender.

f. Lender has received an opinion of counsel for Borrower and Domestic Subsidiaries from a law firm or law firms orattorney acceptable to Lender.

g. Aquasoft and CL4 have amended their Organizational Documents to provide for the Article 8 Opt-In and issuedcertificates to Borrower as provided in the amended Organizational Documents.

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h. Lender has received the original stock certificates and membership certificates issued to Borrower by theSubsidiaries.

All conditions precedent set forth in this Loan Agreement and any of the Loan Documents are for the sole benefit of Lender and maybe waived unilaterally by Lender.

4.2 No Default, Adverse Change, False or Misleading Statement

Lender�s obligation to advance any funds at any time pursuant to this Loan Agreement and the Promissory Note shall, at Lender�ssole discretion, terminate upon the occurrence of any Event of Default or upon the occurrence of any change: (i) in any of Borrower�s orSubsidiary�s organization or affairs, (ii) in any matter concerning which an agreement, covenant, representation, or warranty has been madeherein, or (iii) upon the determination by Lender that any representations of Borrower made in any of the Loan Documents were materially



false or materially misleading when made, which would have a Material Adverse Effect. Upon the exercise of such discretion, Lender shall berelieved of all further obligations to advance funds under the Loan Documents.

5. Representations and Warranties

5.1 Organization and Qualification

Borrower represents and warrants that Borrower is a corporation duly organized and existing in good standing under the laws of theState of Delaware, and is duly qualified to do business in each jurisdiction in which the failure to so qualify would have a Material AdverseEffect, and that Borrower is qualified and in good standing as a foreign corporation in the State of Utah.

Borrower represents and warrants that it has the full power and authority to own its property and to conduct the business in which itengages and to enter into and perform its obligations under the Loan Documents.

Borrower represents and warrants that it has delivered to Lender or Lender�s counsel accurate and complete copies of itsOrganizational Documents which are operative and in effect as of the Effective Date, which Organizational Documents consist of a RestatedCertificate of Incorporation filed with the Delaware Secretary of State on February 11, 1998, and By-Laws adopted as of February 11, 1998.

5.2 Authorization

Borrower represents and warrants that the execution, delivery, and performance by Borrower of the Loan Documents have been dulyauthorized by all necessary action on the part of Borrower and are not inconsistent with Borrower�s Organizational Documents or anyresolution of the Board of Directors of Borrower, do not and will not contravene any provision of, or constitute a default under, any indenture,mortgage, contract, or other instrument to which Borrower is a party or by which it is bound, and that upon execution and delivery thereof, the

14

Loan Documents will constitute legal, valid, and binding agreements and obligations of Borrower, enforceable in accordance with theirrespective terms, except as may be limited by public policy, and subject to laws of general application related to bankruptcy, insolvency andthe relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies.

5.3 Subsidiaries

Borrower represents and warrants that:

a. Aquasoft is a limited liability company organized and existing in good standing under the laws of the State of Utah,and is duly qualified to do business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.

b. CL I is a corporation duly organized and is duly existing in good standing under the laws of the State of Utah, andis duly qualified to do business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.

c. CL II is a corporation duly organized and is duly existing in good standing under the laws of the State of Utah, andis duly qualified to do business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.

d. CL III is a corporation duly organized and is duly existing in good standing under the laws of the State of Utah, andis duly qualified to do business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.

e. CL4 is a limited liability company duly organized and is duly existing in good standing under the laws of the Stateof Utah, and is duly qualified to do business in each jurisdiction in which the failure to so qualify would have a Material AdverseEffect.



f. ClearLab is a private company limited by shares organized and existing in good standing under the laws of theRepublic of Singapore, is the successor by change of name to IGEL Acquisition Co. Pte. Ltd., and is duly qualified to do business ineach jurisdiction in which the failure to so qualify would have a Material Adverse Effect

g. Contacts Japan is a corporation organized and existing in good standing under the laws of Japan, and is dulyqualified to do business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.

h. Contacts Texas is a corporation duly organized and is duly existing in good standing under the laws of the State ofTexas, and is duly qualified to do business in each jurisdiction in which the failure to so qualify would have a Material AdverseEffect.

i. Evision is a corporation organized and existing in good standing under the laws of the State of Oregon, and is dulyqualified to do business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.

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j. Lens 1st is a corporation organized and existing in good standing under the laws of the State of Utah, and is dulyqualified to do business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.

k. Shayna is a private company organized and existing in good standing under the laws of England, and is dulyqualified to do business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.

l. VisionTec is a private company organized and existing in good standing under the law of England and is dulyqualified to do business in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.

m. Each of the Subsidiaries has the full power and authority to own its property and to conduct the business in whichit engages.

n. Borrower owns one hundred percent (100%) of the issued and outstanding stock, membership interests, or otherequity or ownership interests, as the case may be, in the Subsidiaries; provided, however, that VisionTec may be owned by Shayna.

o. There is only one class of stock or other equity or ownership interest issued and outstanding for each of theSubsidiaries.

p. There are no issued and outstanding, or obligation to issue any, warrants, options or other rights of any nature toacquire any stock or other equity or ownership interest in any of the Subsidiaries.

q. As of the date of the initial disbursement of the Loan, the IGEL Acquisition/ClearLab Debt Instruments, theExisting ClearLab Subsidiary Loan, the Existing Lens 1st Loan, the Existing Shayna Subsidiary Loan, the Existing VisionTecSubsidiary Loan, and advances to other Subsidiaries not to exceed in the aggregate two hundred fifty thousand dollars ($250,000.00)to any Subsidiary, are the only debt obligations of any of the Subsidiaries owing to Borrower.

r. Borrower has delivered to Lender or Lender�s counsel accurate and complete copies of the OrganizationalDocuments of each of the Subsidiaries which are operative and in effect as of the Effective Date, which Organizational Documentsare listed on Exhibit C hereto.

s. CL I, CL II, CL III, Contacts Texas and Contacts Japan are dormant, do not have any material assets, and are notengaged in any active operations.

t. The business and operations of CL4 consist solely of the purchase of equipment relating to contact lenses andcomputer equipment at wholesale for immediate resale to Borrower or Domestic Subsidiaries and lobbying activities.

u. The business and operations of ClearLab consist solely of research and development and manufacture of contactlenses and related products in the Republic of

16



Singapore for sale at wholesale, and sale of products manufactured by VisionTec at wholesale.

v. The business and operations of Lens 1st consist solely of third party contact lens sales fulfillment.

w. The business and operations of Aquasoft consist solely of distribution of Aquasoft brand products.

x. The business and operations of Evision consist solely of sales and marketing of contact lenses and related products.

y. The business and operations of Shayna consist solely of a holding company for the VisionTec acquisition andmanagement functions for foreign operations.

z. The business and operations of VisionTec consist solely of research and development and the manufacturing ofcontact lenses and related products in England for sale at wholesale.

5.4 No Governmental Approval Necessary

Borrower represents and warrants that no consent by, approval of, giving of notice to, registration with, or taking of any other actionwith respect to or by any foreign, federal, state, or local governmental authority or organization is required for Borrower to be legally boundby the terms of the Loan Documents or for Borrower�s execution, delivery, or performance of the Loan Documents.

5.5 Accuracy of Financial Statements

Borrower represents and warrants that all of its audited financial statements heretofore delivered to Lender have been prepared inaccordance with generally accepted accounting principles consistently applied and fully and fairly represent Borrower�s financial condition asof the date thereof and the results of Borrower�s operations for the period or periods covered thereby.

Borrower represents and warrants that all of its unaudited financial statements heretofore delivered to Lender fully and fairlyrepresent Borrower�s financial condition as of the date thereof and the results of Borrower�s operations for the period or periods coveredthereby and are consistent with other financial statements previously delivered to Lender.

Borrower represents and warrants that since the dates of the most recent audited and unaudited financial statements delivered toLender, there has been no Material Adverse Change in its financial condition.

Borrower represents and warrants that Exhibit D hereto is a complete and accurate list of all Existing Third Party Debt and allcollateral therefor as of Borrower�s Fiscal year ending

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January 3, 2004 and that no material change in the Existing Debt or the collateral therefor has occurred since that date.

5.6 No Pending or Threatened Litigation

Borrower represents and warrants that except as Lender has been otherwise advised in writing, or as otherwise disclosed inBorrower�s prospectus or other filings with the SEC, there are no actions, suits, or proceedings pending or, to Borrower�s knowledge,threatened against or affecting Borrower or any Subsidiary in any court or before any governmental commission, board, or authority which, ifadversely determined, would have a Material Adverse Effect on Borrower�s or any Subsidiary�s financial condition, conduct of Borrower�sor any Subsidiary�s business, or ability of Borrower to perform its obligations under the Loan Documents.

5.7 Full and Accurate Disclosure



Borrower represents and warrants that this Loan Agreement, the financial statements referred to herein, any loan applicationsubmitted to Lender, and all other statements furnished by Borrower to Lender in connection herewith contain no untrue statement of amaterial fact and omit no material fact necessary to make the statements contained therein or herein not misleading. Borrower represents andwarrants that it has not failed to disclose to Lender in writing, or as otherwise disclosed in Borrower�s prospectus or other filings with theSEC, any fact that materially and adversely affects, or is reasonably likely to materially and adversely affect, Borrower�s or any Subsidiary�sbusiness, operations, properties, future business prospects, profits, condition (financial or otherwise), or ability of Borrower to perform itsobligations under this Loan Agreement or the other Loan Documents.

5.8 Compliance with ERISA

Borrower represents and warrants that Borrower is in compliance in all material respects with all applicable provisions of theEmployee Retirement Income Security Act of 1974 (�ERISA�), as amended, and the regulations and published interpretations thereunder.Neither a Reportable Event as set forth in Section 4043 of ERISA or the regulations thereunder (�Reportable Event�) nor a prohibitedtransaction as set forth in Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended, has occurred and iscontinuing with respect to any employee benefit plan established, maintained, or to which contributions have been made by Borrower or anytrade or business (whether or not incorporated) which together with Borrower would be treated as a single employer under Section 4001 ofERISA (�ERISA Affiliate�) for its employees which is covered by Title I or Title IV of ERISA (�Plan�); no notice of intent to terminate aPlan has been filed nor has any Plan been terminated which is subject to Title IV of ERISA; no circumstances exist that constitute groundsunder Section 4042 of ERISA entitling the Pension Benefit Guaranty Corporation (�PBGC�) to institute proceedings to terminate, or appoint atrustee to administer a Plan, nor has the PBGC instituted any such proceedings; neither Borrower nor any ERISA Affiliate has completely orpartially withdrawn under Section 4201 or 4204 of ERISA from any Plan described in Section 4001(a)(3) of ERISA which covers employeesof Borrower or any ERISA Affiliate (�Multi-employer Plan�); Borrower and each ERISA Affiliate has met its minimum funding requirementsunder ERISA

18

with respect to all of its Plans and the present fair market value of all Plan assets equals or exceeds the present value of all vested benefitsunder or all claims reasonably anticipated against each Plan, as determined on the most recent valuation date of the Plan and in accordancewith the provisions of ERISA and the regulations thereunder and the applicable statements of the Financial Accounting Standards Board(�FASB�) for calculating the potential liability of Borrower or any ERISA Affiliate under any Plan; neither Borrower nor any ERISAAffiliate has incurred any liability to the PBGC (except payment of premiums, which is current) under ERISA.

Borrower, each ERISA Affiliate and each group health plan (as defined in ERISA Section 733) sponsored by Borrower and eachERISA Affiliate, or in which Borrower or any ERISA Affiliate is a participating employer, are in material compliance with, have satisfied andcontinue to satisfy (to the extent applicable) all requirements for continuation of group health coverage under Section 4980B of the InternalRevenue Code and Sections 601 et seq. of ERISA, and are in material compliance with, have satisfied and continue to satisfy Part 7(Sections 701 et seq., Sections 711, 712 and 731 et seq.) of ERISA and all corresponding and similar state laws relating to portability, accessand renewability of group health benefits and other requirements included in Part 7.

5.9 Compliance with USA Patriot Act

Borrower represents and warrants that it is not subject to any law, regulation, or list of any government agency (including, withoutlimitation, the U.S. Office of Foreign Asset Control list) that prohibits or limits Lender from making any advance or extension of credit toBorrower or from otherwise conducting business with Borrower.

5.10 Compliance with All Other Applicable Law

Except as disclosed in Borrower�s prospectus and other filings with the SEC, Borrower represents and warrants that it has compliedwith all applicable statutes, rules, regulations, orders, and restrictions of any domestic or foreign government, or any instrumentality or agencythereof having jurisdiction over the conduct of Borrower�s business or the ownership of its properties, which may have a Material AdverseEffect.



5.11 Environmental Representations and Warranties

Except as disclosed in Borrower�s prospectus and other filings with the SEC, Borrower represents and warrants that no HazardousMaterials are now located on, in, or under the Real Property, nor is there any Environmental Condition on, in, or under the Real Property andneither Borrower nor, to Borrower�s knowledge, after due inquiry and investigation, any other person has ever caused or permitted anyHazardous Materials to be placed, held, used, stored, released, generated, located or disposed of on, in or under the Real Property, or any partthereof, nor caused or allowed an Environmental Condition to exist on, in or under the Real Property, except in the ordinary course ofBorrower�s business under conditions that are generally recognized to be appropriate and safe and that are in strict compliance with allapplicable Environmental

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Health and Safety Laws. Except as disclosed in Borrower�s prospectus and other filings with the SEC, Borrower further represents andwarrants that no investigation, administrative order, consent order and agreement, litigation or settlement with respect to Hazardous Materialsand/or an Environmental Condition is proposed, threatened, anticipated or in existence with respect to the Real Property.

5.12 Operation of Business

Borrower represents and warrants that the nature of the business and operations of Borrower and each Subsidiary are consistent withthe reports heretofore provided to Lender by Borrower and the Subsidiaries and that Borrower and the Subsidiaries are not engaged in anybusiness or operations other than the research and development, manufacture and marketing of contact lenses and related products.

Except as disclosed in Borrower�s prospectus and other filings with the SEC, Borrower represents and warrants that Borrower andthe Subsidiaries possess all licenses, permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, materiallyrequired to conduct their businesses substantially as now conducted, and neither Borrower nor the Subsidiaries are in violation of any validrights of others with respect to any of the foregoing.

5.13 Payment of Taxes

Borrower represents and warrants that Borrower has filed all tax returns (federal, state, and local) required to be filed and has paid alltaxes, assessments, and governmental charges and levies, including interest and penalties, on Borrower�s assets, business and income, exceptsuch as are being contested in good faith by proper proceedings and as to which adequate reserves are maintained.

5.14 Licensing and Distribution Agreements

There are no material licensing, distribution or other agreements between Borrower and any vendor or supplier of inventory or rawmaterials except (i) that certain 1-800 Contacts Qualified Retailer Agreement between Vistakon Division of Johnson & Johnson Vision Care,Inc. (�Vistakon�) and Borrower, dated November 25, 2002, as amended by that certain Agreement dated December 29, 2003 betweenVistakon and Borrower; and (ii) that certain letter agreement between CIBA Vision Corporation and Borrower, dated October 24, 2003, andthat certain Supply and Purchase Agreement F.O.B. Destination between CIBA Vision Corporation and Borrower dated April 3, 2003, asamended by that certain Supply and Purchase Agreement Addendum between CIBA Vision Corporation and Borrower (undated), completeand accurate copies of which have been provided to Lender or Lender�s counsel.

6. Borrower�s Covenants

Borrower makes the following agreements and covenants, which shall continue so long as this Loan Agreement is in effect and solong as Borrower is indebted to Lender for obligations arising out of, identified in, or contemplated by this Loan Agreement.

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6.1 Use of Proceeds

Borrower shall use the proceeds of the Loan solely for working capital, other general corporate purposes, Permitted Subsidiary Loansand investments permitted in Section 6.20, Loans and Investments.

Borrower shall not, directly or indirectly, use any of the proceeds of the Loan for prepayment of any debt or obligation owing byBorrower or any Subsidiary without the prior written consent of Lender.

Borrower shall not, directly or indirectly, use any of the proceeds of the Loan for the purpose of purchasing or carrying any marginstock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, or to extend credit to any person or entityfor the purpose of purchasing or carrying any such margin stock or for any purpose which violates, or is inconsistent with, Regulation X ofsaid Board of Governors, or for any other purpose not permitted by Section 7 of the Securities Exchange Act of 1934, as amended, or by anyof the rules and regulations respecting the extension of credit promulgated thereunder.

6.2 Continued Compliance with ERISA

Borrower covenants that, with respect to all Plans (as defined in Section 5.8 Compliance with ERISA) which Borrower or any ERISAAffiliate currently maintains or to which Borrower or any ERISA Affiliate is a sponsoring or participating employer, fiduciary, party ininterest or disqualified person or which Borrower or any ERISA Affiliate may hereafter adopt, Borrower and each ERISA Affiliate shallcontinue to comply with all applicable provisions of the Internal Revenue Code and ERISA and with all representations made inSection 5.8 Compliance with ERISA, including, without limitation, conformance with all notice and reporting requirements, fundingstandards, prohibited transaction rules, multi-employer plan rules, necessary reserve requirements, and health care continuation, coverage andportability requirements.

6.3 Compliance with USA Patriot Act

Borrower shall (a) not be or become subject at any time to any law, regulation, or list of any government agency (including, withoutlimitation, the U.S. Office of Foreign Asset Control list) that prohibits or limits Lender from making any advance or extension of credit toBorrower or from otherwise conducting business with Borrower, and (b) provide documentary and other evidence of Borrower�s identity asmay be requested by Lender at any time to enable Lender to verify Borrower�s identity or to comply with any applicable law or regulation,including, without limitation, Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318.

6.4 Continued Compliance with Applicable Law

Except as disclosed in Borrower�s prospectus and other filings with the SEC prior to the Effective Date, Borrower shall conduct itsbusiness in a lawful manner and in material compliance with all applicable federal, state, and local laws, ordinances, rules, regulations, andorders; shall maintain in good standing all licenses and organizational or other qualifications reasonably necessary to its business andexistence; and shall not engage in any business not

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authorized by and not in accordance with its Organizational Documents and other governing documents.

Except as disclosed in Borrower�s prospectus and other filings with the SEC prior to the Effective Date, Borrower shall cause allSubsidiaries to conduct their respective business in a lawful manner and in material compliance with all applicable laws, ordinances, rules,regulations, and orders; shall cause all Subsidiaries to maintain in good standing all licenses and organizational or other qualificationsreasonably necessary to its business and existence; and shall not permit any Subsidiaries to engage in any business not authorized by and notin accordance with their respective Organizational Documents and other governing documents.

6.5 Subsidiaries



Borrower covenants that:

a. Borrower shall at all times be the sole shareholder, member and owner of any equity or ownership interest in eachof the Subsidiaries and shall own one hundred percent (100%) of such stock and equity and ownership interests; provided, however,that VisionTec may be owned by Shayna.

b. CL I, CL II, CL III and Contacts Japan will remain dormant and will not engage in any active operations withoutthe prior written consent of Lender.

c. The Subsidiaries shall not materially change the nature of their respective businesses and operations without theprior written consent of Lender, which consent will not be unreasonably withheld. Lender hereby consents to the relocation by Lens1st of a significant portion of its operations from Michigan to Utah.

d. Borrower will not permit any of the Subsidiaries to issue any stock, equity or ownership interest, warrant, option orother right of any nature to acquire any stock or equity or ownership interest in any of the Subsidiaries, except that Lender consents tothe acquisition of stock in VisionTec by Shayna and the issuance of additional stock by VisionTec to Shayna, and to the issuance ofstock or membership interests to Borrower to evidence investments authorized by Section 6.20 Loans and Investments.

e. The stock and equity and ownership interests of Borrower which are Collateral shall at all times constitute onehundred percent (100%) of the issued and outstanding stock and equity and ownership interests of the Domestic Subsidiaries.

f. The stock and equity and ownership interests of Borrower which are Collateral shall at all times constitute sixty-five percent (65%) of the issued and outstanding stock and equity and ownership interests of the Foreign Subsidiaries, except that thestock of VisionTec may be owned by Shayna.

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6.6 Prior Consent for Amendment or Change

Borrower shall not, without Lender�s prior written consent which will not be unreasonably withheld, modify, amend, waive, orotherwise alter, or fail to enforce, its Organizational Documents. Borrower shall not permit any of the Subsidiaries to modify, amend, waive,or otherwise alter, or fail to enforce, its Organizational Documents or other governing documents without Lender�s prior written consent,which will not be unreasonably withheld.

6.7 Payment of Taxes and Obligations

Borrower shall pay when due all taxes, assessments, and governmental charges and levies on Borrower�s assets, business, andincome, and all material obligations of Borrower of whatever nature, except such as are being contested in good faith by proper proceedingsand as to which adequate reserves are maintained.

6.8 Financial Statements and Reports

Borrower shall provide Lender with such financial statements and reports regarding Borrower and the Subsidiaries as Lender mayreasonably request. Audited financial statements and reports shall be prepared in accordance with generally accepted accounting principlesand shall fully and fairly represent Borrower�s and the Subsidiaries� financial condition as of the date thereof and the results of Borrower�sand the Subsidiaries� operations for the period or periods covered thereby. Unaudited financial statements and reports shall fully and fairlyrepresent Borrower�s and the Subsidiaries� financial condition as of the date thereof and the results of Borrower�s and the Subsidiaries�operations for the period or periods covered thereby and shall be consistent with other financial statements previously delivered to Lender.All audited and unaudited financial statements and reports shall be presented on a consolidated basis.

Until requested otherwise by Lender, Borrower shall provide the following financial statements, reports and notices to Lender:



a. Annual audited financial statements with an unqualified opinion for each fiscal year of Borrower and allSubsidiaries from an independent accounting firm and in a form reasonably acceptable to Lender, to be delivered to Lender withinone hundred twenty (120) days of the end of the fiscal year. Borrower shall also submit to Lender copies of any management lettersor other reports submitted to Borrower and/or any Subsidiaries by independent certified public accountants in connection withexamination of the financial statements of Borrower and the Subsidiaries made by such accountants.

b. At all times when the Maximum Leverage Ratio exceeds two and five-tenths (2.5), Borrower shall provide monthlyunaudited financial statements of Borrower and all Subsidiaries for each fiscal month. At all times when the Maximum LeverageRatio is equal to or less than two and five-tenths (2.5), Borrower shall provide quarterly unaudited financial statements of Borrowerand all Subsidiaries for each fiscal quarter. The monthly and quarterly unaudited financial statements shall be in a form reasonablyacceptable to Lender. The unaudited financial statements shall be delivered to Lender within forty-five (45) days of the end of eachapplicable fiscal month or quarter. The quarterly unaudited financial statements may be those submitted by Borrower to the SEC

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in connection with its 10Q report or, if not, shall, and the monthly unaudited financial statements shall, include a certification by thechief financial officers or chief executive officers of Borrower and the Subsidiaries that the monthly or quarterly financial statementsfully and fairly represent Borrower�s and the Subsidiaries� financial condition as of the date thereof and the results of operations forthe period covered thereby and are consistent with other financial statements previously delivered to Lender.

c. Promptly after the sending or filing thereof, Borrower shall provide to Lender copies of all proxy statements,financial statements, and reports which Borrower sends to its stockholders or investors, and copies of all regular, periodic, and specialreports, and all registration statements which Borrower files with the Securities and Exchange Commission, any governmentalauthority which may be substituted therefor, with any national securities exchange, or with any similar state authority; provided,however, that Borrower shall not be required to deliver information under this Section 6.7(c) that has already been delivered toLender under Sections 6.7(a) and 6.7(b) above.

d. Each financial statement shall be accompanied by a compliance certificate in a form reasonably acceptable toLender certifying that Borrower is in compliance with all terms and conditions of this Loan Agreement, including compliance withthe financial covenants provided in Section 6.9 Financial Covenants. The compliance certificate shall include the data andcalculations supporting all financial covenants, whether in compliance or not, and shall be signed by the chief executive officer, chieffinancial officer or vice president of finance of Borrower.

6.9 Financial Covenants

Except as otherwise provided herein, each of the accounting terms used in this Section 6.9 shall have the meanings used inaccordance with generally accepted accounting principles consistent with those used in preparation of the financial statements of Borrowerand the Subsidiaries submitted to Lender. Financial covenants shall be determined on a consolidated basis.

a. Working Capital. Borrower will maintain at all times an excess of current assets over current liabilities of not lessthan five million two hundred fifty thousand dollars ($5,250,000.00), excluding outstanding principal owing on the Promissory Noteand excluding the current portion of long term liabilities.

b. Capital Expenditures. Borrower will not make any expenditures for tangible fixed or capital assets if, after givingeffect thereto, the aggregate of all such expenditures made by Borrower would exceed nine million dollars ($9,000,000.00) forBorrower�s fiscal year 2004, fourteen million dollars ($14,000,000.00) for Borrowers fiscal year 2005, and seventeen million dollars($17,000,000.00) for each Borrower�s fiscal year thereafter. Amounts not expended in any fiscal year may be carried over to thenext fiscal year for purposes of this calculation.

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c. Maximum Leverage Ratio. Borrower will at all times maintain a Trailing Twelve Month ratio of Total BorrowedDebt to EBITDA of three and five-tenths (3.5) until the end of the fiscal quarter ending approximately June 30, 2004, three (3.0)thereafter until the end of the fiscal quarter ending approximately December 31, 2004, and two and five-tenths (2.5) thereafter.



Total Borrowed Debt means (i) indebtedness or liability of Borrower for borrowed money, (ii) obligations of Borrower as alessee under capital leases, (iii) all guarantees (excluding inter-company guarantees between Borrower and Subsidiaries or betweenSubsidiaries), endorsements (other than for collection or deposit in the ordinary course of business), (iv) other contingent obligationsto purchase (excluding purchase orders prior to delivery of the subject goods or performance of the subject services) to provide fundsfor payment, to supply funds to invest in any person or entity, or otherwise assure a creditor against loss (but excluding all VisionTecAcquisition Debt), (v) accounts payable to trade creditors for goods or services which are more than one hundred twenty (120) dayspast due, and (vi) the face amount of all outstanding letters of credit issued for the account of Borrower.

d. Minimum Fixed Charge Coverage Ratio. Borrower will at all times maintain a ratio of (i) Trailing Twelve MonthEBITDA minus Replacement Capital Expenditures minus Trailing Twelve Month Cash Taxes to (ii) Trailing Twelve Month NetCash Interest Expense plus current maturities of long term debt (excluding the principal balance outstanding and due under thePromissory Note at maturity and excluding current maturities of the VisionTec Acquisition Debt), of one and two-tenths (1.2) untilthe end of the fiscal quarter ending approximately September 30, 2004, one and four-tenths (1.4) thereafter until the end of the fiscalquarter ending approximately March 31, 2005, and one and five-tenths (1.5) thereafter.

Replacement Capital Expenditures means one million five hundred thousand dollars ($1,500,000.00) for Borrower�s fiscalyear 2004, two million dollars ($2,000,000.00) for Borrower�s fiscal year 2005, and two million five hundred thousand dollars($2,500,000.00) for each of Borrower�s fiscal years thereafter.

Cash Taxes means expenditures paid for foreign, federal and state income taxes.

Net Cash Interest Expense means interest expenses paid minus interest income received.

e. Net Worth. Borrower will maintain at all times a net worth of not less than fifty million dollars ($50,000,000.00)until the end of the fiscal quarter ending approximately December 31, 2004, fifty-five million ($55,000,000.00) thereafter until theend of the fiscal quarter ending approximately December 31, 2005, and sixty-five million dollars ($65,000,000.00) thereafter.

Net worth means the excess of total assets over total liabilities.

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6.10 Insurance

Borrower shall maintain insurance with financially sound and reputable insurance companies or associations in such amounts andcovering such risks as are usually carried by companies engaged in the same or a similar business and similarly situated, which insurance shallname Lender as a loss payee and an additional insured and may provide for reasonable deductibility from coverage thereof. Borrower shallprovide copies of policies or certificates of coverage evidencing such insurance is in place upon request of Lender and with all annualfinancial statements.

6.11 Inspection

Borrower shall, and shall cause the Subsidiaries to, permit Lender or any representative of Lender from time to time upon at least two(2) Banking Business Days prior notice and within normal business hours to examine and make copies of and abstracts from the records andbooks of account of, and visit and inspect the properties and assets of, Borrower and the Subsidiaries, and to discuss the affairs, finances, andaccounts of Borrower and the Subsidiaries with any of Borrower�s or the Subsidiaries� officers and directors and with Borrower�s and theSubsidiaries� independent accountants.

6.12 Operation of Business

Except as disclosed in Borrower�s prospectus and other filings with the SEC prior to the Effective Date, Borrower shall maintain,and cause the Subsidiaries to maintain, all licenses, permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto,materially necessary to conduct their respective businesses and Borrower shall not violate, or allow the Subsidiaries to violate, any valid rights



of others with respect to any of the foregoing. Borrower and the Subsidiaries shall continue to engage in a business of the same general typeas now conducted.

6.13 Maintenance of Records and Properties

Borrower and the Subsidiaries shall keep adequate records and books of account in which complete entries will be made inaccordance with generally accepted accounting principles consistently applied, reflecting all financial transactions of Borrower and theSubsidiaries. Borrower shall maintain, keep and preserve, and cause the Subsidiaries to maintain, keep and preserve, all of their respectiveproperties (tangible and intangible) necessary or useful in the proper conduct of their businesses in good working order and condition,ordinary wear and tear excepted.

6.14 Notice of Claims

Borrower and the Subsidiaries shall promptly notify Lender in writing, unless Borrower has made or will make such disclosure in itsfilings with the SEC and provided a copy thereof to Lender, of all actions, suits or proceedings filed or threatened against or affectingBorrower or the Subsidiaries in any court or before any governmental commission, board, or authority which, if adversely determined, wouldhave a Material Adverse Effect.

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6.15 Environmental Covenants

Borrower covenants that it will:

a. Not permit the presence, use, disposal, storage or release of any Hazardous Materials on, in, or under the RealProperty, except in the ordinary course of Borrower�s business under conditions that are generally recognized to be appropriate andsafe and that are in strict compliance with all applicable Environmental Health and Safety Laws.

b. Not permit any substance, activity or Environmental Condition on, in, under or affecting the Real Property which isin violation of any Environmental Health and Safety Laws.

c. Comply with the provisions of all Environmental Health and Safety Laws.

d. Notify Lender immediately of any discharge of Hazardous Materials, Environmental Condition, or environmentalcomplaint or notice received from any governmental agency or any other party.

e. Upon any discharge of Hazardous Materials or upon the occurrence of any Environmental Condition, immediatelycontain and remove the same in strict compliance with all Environmental Health and Safety Laws, promptly pay any fine or penaltyassessed in connection therewith, and immediately notify Lender of such events.

f. Permit Lender to inspect the Real Property for Hazardous Materials and Environmental Conditions, to conduct teststhereon, and to inspect all books, correspondence, and records pertaining thereto.

g. From time to time upon Lender�s reasonable request not to exceed once per year, and at Borrower�s expense,provide a report (including all validated and unvalidated data generated for such reports) of a qualified independent environmentalengineer acceptable to Lender, satisfactory to Lender in scope, form, and content, and provide to Lender such other and furtherassurances reasonably satisfactory to Lender, that Borrower is in compliance with these covenants concerning Hazardous Materialsand Environmental Conditions, and that any past violation thereof has been corrected in compliance with all applicableEnvironmental Health and Safety Laws.

h. Immediately advise Lender of any additional, supplemental, new, or other information concerning any HazardousMaterials or Environmental Conditions relating to the Real Property.

6.16 Exclusive Negative Pledge



Borrower will not create, incur, assume, or suffer to exist, and will not permit the Subsidiaries to create, incur, assume, or suffer toexist, any mortgage, deed of trust, pledge, lien, security interest, hypothecation, assignment, deposit arrangement, or other preferentialarrangement, charge, or encumbrance (including, without limitation, any conditional sale, other title retention agreement, or finance lease) ofany nature, upon or with respect to any of Borrower�s or the Subsidiaries� properties or assets, now owned or hereafter acquired, or sign or

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file, under the Uniform Commercial Code of any jurisdiction, a financing statement under which Borrower or the Subsidiaries appears asdebtor, or sign any security agreement authorizing any secured party thereunder to file such financing statement, except (i) those contemplatedby this Loan Agreement, (ii) those presently existing and securing Existing Debt, (iii) those approved in writing by Lender, (iv) purchasemoney security interests securing Permitted Debt, and (v) liens for taxes and assessments not yet due and payable or, if due and payable, thosebeing contested in good faith by appropriate proceedings and for which appropriate reserves are maintained.

Borrower will not enter into any covenant or agreement with any other lender, creditor, or any other party in which Borrower agreesto not create, incur, assume, or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, hypothecation, assignment, depositarrangement or other preferential arrangement, charge, or encumbrance (including, without limitation, any conditional sale, other titleretention agreement, or finance lease) of any nature, upon or with respect to any of Borrower�s properties or assets, now owned or hereafteracquired, except as consented to in advance in writing by Lender.

Borrower shall cause each of the Subsidiaries to comply with the covenants of this Section 6.16 the same as if the covenants had beenmade by each of the Subsidiaries.

6.17 Restriction on Debt

Borrower shall not create, incur, assume, or suffer to exist and will not permit the Subsidiaries to create, incur, assume, or suffer toexist any debt except Permitted Debt.

Borrower shall cause each of the Subsidiaries to comply with the covenants of this Section 6.17 the same as if the covenants had beenmade by each of the Subsidiaries.

6.18 Mergers, Consolidations, and Purchase and Sale of Assets

Except for Permitted Acquisition Baskets, Borrower shall not wind up, liquidate, or dissolve itself, reorganize, merge, or consolidatewith or into, or convey, sell, assign, transfer, lease, or otherwise dispose of (whether in one transaction or a series of transactions) all orsubstantially all of its assets (whether now owned or hereafter acquired) to any person or entity, or acquire all or substantially all of the assetsor the business of any person or entity, without prior written consent of Lender, which consent shall not be unreasonably withheld.

Except for Permitted Acquisition Baskets and as provided in Section 6.22 Covenants for Post-Closing Events, Borrower shall notpermit any of the Subsidiaries to wind up, liquidate, or dissolve itself, reorganize, merge, or consolidate with or into, or convey, sell, assign,transfer, lease, or otherwise dispose of (whether in one transaction or a series of transactions) all or substantially all of its assets (whether nowowned or hereafter acquired) to any person or entity, or acquire all or substantially all of the assets or the business of any person or entitywithout prior written consent of Lender, which consent shall not be unreasonably withheld.

Permitted Acquisition Baskets means any merger involving Borrower or any of the Subsidiaries or any acquisitions by Borrower orany of the Subsidiaries of all or substantially all

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of the assets or business of any person or entity in which (i) if a merger, Borrower or the Subsidiary is the surviving entity; (ii) the acquiredcompany operates or the assets are used in the same business lines as Borrower or any Subsidiaries; (iii) the value (whether cash or otherconsideration) paid by Borrower or the Subsidiary does not exceed two million five hundred thousand dollars ($2,500,000.00); and (iv) theaggregate value (whether cash or other consideration) paid by Borrower and all Subsidiaries for all acquired companies and assets during theTrailing Twelve Month period does not exceed five million dollars ($5,000,000.00).

The acquisition of VisionTec shall be excluded from and not counted in calculating the Permitted Acquisition Basket.

6.19 Dividends

Borrower shall not (a) (i) declare or pay any cash dividends, (ii) purchase, redeem, retire or otherwise acquire for value any of itscapital stock now or hereafter outstanding, (iii) make any distribution of assets to its stockholders, investors, or equity holders, whether incash, assets, or in obligations of Borrower, (iv) allocate or otherwise set apart any sum for the payment of any dividend or distribution on, orfor the purchase, redemption, or retirement of any shares of its capital stock or equity interests, or (v) make any other distribution by reductionof capital or otherwise in respect of any shares of its capital stock or equity interests, (b) (i) at any time prior to December 31, 2005, (ii) at anytime if an Event of Default has occurred which has not been waived or cured, (iii) if an Event of Default would result by such payment oraction or exist after such payment or action, and (iv) if the aggregate amount or value of all such payments, distributions, and allocationswould exceed ten million dollars ($10,000,000.00) in any fiscal year of Borrower.

6.20 Loans and Investments

Borrower shall not make any loans to, or make any investments in, or pay any advances of any nature whatsoever to any person orentity, in an aggregate, outstanding amount greater than two million five hundred thousand dollars ($2,500,000.00), except (i) advances in theordinary course of business to vendors, suppliers, and contractors; (ii) Permitted Subsidiary Loans; and (iii) investments in ClearLab andVisionTec and/or Shayna.

Borrower shall not permit any of the Subsidiaries to make any loans to, or make any investments in, or pay any advances of anynature whatsoever to any person or entity, except (i) advances in the ordinary course of business to vendors, suppliers and contractors; (ii) theinvestment of Shayna in VisionTec in connection with the acquisition of VisionTec; and (iii) investments, loans and advances by ForeignSubsidiaries in other Foreign Subsidiaries.

6.21 Intercompany Transfers of Assets

Borrower shall not make and shall not allow to be made any transfers of assets between Borrower and any of the Subsidiaries orbetween any of the Subsidiaries except the Permitted Subsidiary Loans, payment of the Permitted Subsidiary Loans, loans and advances byForeign Subsidiaries to other Foreign Subsidiaries and repayment of such loans and advances, the

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acquisition of VisionTec, transfers of intellectual property assets related to manufacturing processes and materials, and as consented to inwriting by Lender.

6.22 Covenants for Post-Closing Events

a. Within thirty (30) days of the Effective Date, Borrower shall deliver to Lender an executed amendment to theSubordination Agreement dated July 22, 2002, executed by Lender, Borrower, ClearLab (then known as IGEL Acquisition Co. Pte.Ltd.), The Development Bank of Singapore Ltd, and Alliance Technology and Development Limited (in judicial management) insubstantially the form attached hereto as Exhibit E.

b. Within thirty (30) days of the Effective Date, Borrower shall provide all information, records, documents andinformation reasonably requested by Lender to assist Lender in identifying, describing, valuing, taking a security interest in,perfecting its security interest in, and performing due diligence concerning, the Intellectual Property Assets and Borrower shall



execute and deliver such additional or replacement security agreements, collateral assignment agreements, notices, and otherdocuments as may be reasonably requested by Lender concerning the Intellectual Property Assets.

c. Within thirty (30) days of the Effective Date, Borrower shall cause to be delivered to Lender and opinion oropinions of counsel for ClearLab, Shayna and VisionTec, from a law firm or law firms or attorney acceptable to Lender, insubstantially the form attached hereto as Exhibit F, dated as of the Effective Date.

d. Within thirty (30) days of the Effective Date, Borrower shall:

(i) Cause to be filed a termination of the UCC Financing Statement No. 2014448 9 filed on December 14,2001, with the Delaware Secretary of State, with U.S. Bancorp as secured party.

(ii) Provide to Lender copies of the following UCC Financing Statements filed with the Utah Division ofCorporations and Commercial Code naming US Bancorp as secured party: Filing No. 203040200224 filed November 19,2002 and Filing No. 205519200227 filed December 18, 2002.

(iii) If the UCC Financing Statements provided in (ii), above, cover any Collateral other than a purchasemoney security interest in specific equipment and proceeds thereof, Borrower shall provide a subordination or release fromUS Bancorp in a form acceptable to Lender, as to all such other Collateral.

e. Within one hundred eighty (180) days of the Effective Date, Borrower shall cause Contacts Texas to be wound upand dissolved.

f. Within thirty (30) days of the Effective Date, (i) Borrower shall cause to be delivered to Lender copies of the finaldocuments for acquisition of VisionTec by Borrower and Shayna, copies of the final documents, if any, transferring ownership of

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VisionTec from Borrower to Shayna, copies of the Organizational Documents of VisionTec, a copy of the Stock Ledger ofVisionTec, copies of the outstanding stock certificates issued by VisionTec to Borrower and Shayna, and such other documents andrecords concerning the VisionTec acquisition as may be reasonably requested by Lender; and (ii) Borrower shall cause to bedelivered to Lender an opinion or opinions of counsel for VisionTec, Borrower and Shayna, from a law firm or firms or attorneyacceptable to Lender, addressing such matters concerning the acquisition of VisionTec by Borrower and Shayna as are reasonablyrequested by Lender, including closing of the VisionTec acquisition and the authorized, issued and outstanding stock of VisionTecand ownership thereof.

g. Within thirty (30) days of the Effective Date, Borrower shall cause to be executed and delivered promissory notesevidencing the Existing ClearLab Subsidiary Loan, the Existing Lens 1st Subsidiary Loan, and the Existing Shayna Subsidiary Loanand Borrower shall endorse and deliver such promissory notes to Lender.

7. Default

7.1 Events of Default

Time is of the essence of this Loan Agreement. The occurrence of any of the following events, and if required, the giving of anynotice and passage of the prescribed time period without cure, shall constitute a default under this Loan Agreement and under the LoanDocuments and shall be termed an �Event of Default�:

a. Borrower fails in the payment or performance of any obligation, covenant, agreement, or liability created by any ofthe Loan Documents.

b. Any representation, warranty, or financial statement made by or on behalf of Borrower in any of the LoanDocuments, or any document contemplated by the Loan Documents, is materially false or materially misleading.

c. Default occurs or Borrower fails to comply with any term in any of the Loan Documents.



d. Any indebtedness of Borrower or any of the Subsidiaries under any note, indenture, contract, agreement, orundertaking is accelerated, other than a DBS/ATD Default.

e. Default or an event which, with the passage of time or the giving of notice or both, would constitute a default, byBorrower or any of the Subsidiaries, occurs on any note, indenture, contract, agreement, or undertaking, including any note,indenture, contract, agreement, or undertaking between Borrower and any of the Subsidiaries, other than a DBS/ATD Default.

f. Borrower or any of the Subsidiaries is dissolved or substantially ceases business operations, except as permitted inthis Loan Agreement.

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g. A receiver, trustee, or custodian is appointed for any part of Borrower�s or any of the Subsidiaries� property, orany part of Borrower�s or any of the Subsidiaries� property is assigned for the benefit of creditors.

h. Any proceeding is commenced or petition filed under any bankruptcy or insolvency law by or against Borrower orany of the Subsidiaries.

i. Any judgment or regulatory fine is entered against Borrower or any of the Subsidiaries which may materially affectBorrower or any of the Subsidiaries.

j. Borrower or any of the Subsidiaries becomes insolvent or fails to pay its debts as they mature.

k. Any Material Adverse Change occurs in Borrower�s or any Subsidiaries� condition or any event occurs which maycause a Material Adverse Change in Borrower�s or any Subsidiaries� condition.

Any Payment Default shall not be entitled to any notice nor any cure period. Any Formula Default shall not be entitled to any noticebut Borrower shall have three (3) Banking Business Days from the due date of the Compliance Certificate pursuant to Subsection 6.8d to curesuch Formula Default. If the Formula Default is cured within said three (3) Banking Business Days, then Lender may not exercise any rightsor remedies based upon that Formula Default. Any other Event of Default shall be subject to Lender first giving Borrower notice of suchdefault and Borrower shall have fifteen (15) days from the date of giving such notice to cure such Event of Default. If the Event of Default iscured within said fifteen day period, then Lender may not exercise any rights or remedies based upon that Event of Default.

7.2 No Waiver of Event of Default

No course of dealing or delay or failure to assert any Event of Default shall constitute a waiver of that Event of Default or of anyprior or subsequent Event of Default.

8. Remedies

8.1 Remedies upon Event of Default

Upon the occurrence of an Event of Default, and at any time thereafter, all or any portion of the obligations due or to become duefrom Borrower to Lender, whether arising under this Loan Agreement, the Promissory Note, the Security Documents or otherwise, at theoption of Lender and without notice to Borrower of the exercise of such option, shall accelerate and become at once due and payable in full,and Lender shall have all rights and remedies created by or arising from the Loan Documents, and all other rights and remedies existing atlaw, in equity, or by statute.

Additionally, Lender shall have the right, immediately and without prior notice or demand, to set off against Borrower�s obligationsto Lender, whether or not due, all money and other amounts owed by Lender in any capacity to Borrower, including, without limitation,

32



checking accounts, savings accounts, and other depository accounts, and Lender shall be deemed to have exercised such right of setoff and tohave made a charge against any such money or amounts immediately upon occurrence of an Event of Default, even though such charge isentered on Lender�s books subsequently thereto.

8.2 Rights and Remedies Cumulative

The rights and remedies herein conferred are cumulative and not exclusive of any other rights or remedies and shall be in addition toevery other right, power, and remedy that Lender may have, whether specifically granted herein or hereafter existing at law, in equity, or bystatute. Any and all such rights and remedies may be exercised from time to time and as often and in such order as Lender may deemexpedient.

8.3 No Waiver of Rights

No delay or omission in the exercise or pursuance by Lender of any right, power, or remedy shall impair any such right, power, orremedy or shall be construed to be a waiver thereof.

9. General Provisions

9.1 Restated Loan Agreement

This Loan Agreement and the Loan Documents replace and supersede the Existing Loan Agreement and the Existing LoanDocuments, except that UCC Financing Statements filed in connection with the Existing Loan Documents may, at Lender�s option, remain ofrecord and provide notice of the security interests granted by the Loan Documents.

9.2 Governing Agreement

In the event of conflict or inconsistency between this Loan Agreement and the other Loan Documents, excluding the PromissoryNote, the terms, provisions and intent of this Loan Agreement shall govern.

9.3 Borrower�s Obligations Cumulative

Every obligation, covenant, condition, provision, warranty, agreement, liability, and undertaking of Borrower contained in the LoanDocuments shall be deemed cumulative and not in derogation or substitution of any of the other obligations, covenants, conditions, provisions,warranties, agreements, liabilities, or undertakings of Borrower contained herein or therein.

9.4 Payment of Expenses and Attorney�s Fees

Borrower shall pay all reasonable expenses of Lender relating to the negotiation, drafting of documents, documentation of the Loan,and administration and supervision of the Loan, including, without limitation, filing fees and reasonable attorneys fees and legal expenses,

33

whether incurred in making the Loan, in future amendments or modifications to the Loan Documents, or in ongoing administration andsupervision of the Loan.

Upon occurrence of an Event of Default, Borrower agrees to pay all costs and expenses, including reasonable attorney fees and legalexpenses, incurred by Lender in enforcing, or exercising any remedies under, the Loan Documents, and any other rights and remedies.



Borrower agrees to pay all expenses, including reasonable attorney fees and legal expenses, incurred by Lender in any bankruptcyproceedings of any type involving Borrower, the Loan Documents, or the Collateral, including, without limitation, expenses incurred inmodifying or lifting the automatic stay, determining adequate protection, use of cash collateral or relating to any plan of reorganization.

9.5 Right to Perform for Borrower

Lender may, in its sole discretion and without any duty to do so, elect to discharge taxes, tax liens, security interests, or any otherencumbrance upon the Collateral or any other property or asset of Borrower, to pay any filing, recording, or other charges payable byBorrower, or to perform any other obligation of Borrower under this Loan Agreement or under the Security Documents, in the event thatBorrower is in default under the terms of the Loan Documents.

9.6 Assignability

Borrower may not assign or transfer any of the Loan Documents and any such purported assignment or transfer is void.

Lender may assign or transfer any of the Loan Documents. Funding of this Loan may be provided by an affiliate of Lender.

9.7 Third Party Beneficiaries

The Loan Documents are made for the sole and exclusive benefit of Borrower and Lender and are not intended to benefit any otherthird party. No third party may claim any right or benefit or seek to enforce any term or provision of the Loan Documents.

9.8 Governing Law

The Loan Documents shall be governed by and construed in accordance with the laws of the State of Utah, except to the extent thatany such document expressly provides otherwise.

9.9 Severability of Invalid Provisions

Any provision of this Loan Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction only, beineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof, and anysuch prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

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9.10 Interpretation of Loan Agreement

The article and section headings in this Loan Agreement are inserted for convenience only and shall not be considered part of theLoan Agreement nor be used in its interpretation.

All references in this Loan Agreement to the singular shall be deemed to include the plural and vice versa and references in thecollective or conjunctive shall also include the disjunctive unless the context otherwise clearly requires a different interpretation.

9.11 Survival and Binding Effect of Representations, Warranties, and Covenants

All agreements, representations, warranties, and covenants made herein by Borrower shall survive the execution and delivery of thisLoan Agreement and shall continue in effect so long as any obligation to Lender contemplated by this Loan Agreement is outstanding andunpaid, notwithstanding any termination of this Loan Agreement. All agreements, representations, warranties, and covenants made herein byBorrower shall survive any bankruptcy proceedings involving Borrower, to the extent permissible under applicable bankruptcy laws. Allagreements, representations, warranties, and covenants in this Loan Agreement shall bind the party making the same, its successors and, in



Lender�s case, assigns, and all rights and remedies in this Loan Agreement shall inure to the benefit of and be enforceable by each party forwhom made, their respective successors and, in Lender�s case, assigns.

9.12 Indemnification

Borrower shall indemnify Lender for any and all claims and liabilities, and for damages which may be awarded or incurred byLender, and for all reasonable attorney fees, legal expenses, and other out-of-pocket expenses incurred in defending such claims, arising fromor related in any manner to the negotiation, execution, or performance by Lender of any of the Loan Documents, but excluding any suchclaims based upon breach or default by Lender or gross negligence or willful misconduct of Lender.

Lender shall have the sole and complete control of the defense of any such claims. Lender is hereby authorized to settle or otherwisecompromise any such claims as Lender in good faith determines shall be in its best interests.

9.13 Environmental Indemnification

Borrower shall indemnify Lender for any and all claims and liabilities, and for damages which may be awarded or incurred byLender, and for all reasonable attorney fees, legal expenses, and other out-of-pocket expenses arising from or related in any manner, directlyor indirectly, to (i) Hazardous Materials located on, in, or under the Real Property; (ii) any Environmental Condition on, in, or under the RealProperty; (iii) violation of or non-compliance with any Environmental Health and Safety Law; (iv) any breach or violation ofSection 5.11 Environmental Representations and Warranties and/or Section 6.15 Environmental Covenants; and/or (v) any activity oromission, whether occurring on or off the Real Property,

35

whether prior to or during the term of the loans secured hereby, and whether by Borrower or any other person or entity, relating to HazardousMaterials or an Environmental Condition. The indemnification obligations of Borrower under this Section shall survive any reconveyance,release, or foreclosure of the Real Property, any transfer in lieu of foreclosure, and satisfaction of the obligations secured hereby.

Lender shall have the sole and complete control of the defense of any such claims. Lender is hereby authorized to settle or otherwisecompromise any such claims as Lender in good faith determines shall be in its best interests.

9.14 Interest on Expenses and Indemnification, Collateral, Order of Application

All expenses, out-of-pocket costs, attorneys fees and legal expenses, amounts advanced in performance of obligations of Borrower,and indemnification amounts owing by Borrower to Lender under or pursuant to this Loan Agreement, the Promissory Note, and/or anySecurity Documents shall be due and payable upon demand. If not paid upon demand, all such obligations shall bear interest at the defaultrate provided in the Promissory Note from the date of disbursement until paid to Lender, both before and after judgment. Lender is authorizedto disburse funds under the Promissory Note for payment of all such obligations.

Payment of all such obligations shall be secured by the Collateral and by the Security Documents.

All payments and recoveries shall be applied to payment of the foregoing obligations, the Promissory Note, and all other amountsowing to Lender by Borrower in such order and priority as determined by Lender. Unless provided otherwise in the Promissory Note,payments on the Promissory Note shall be applied first to accrued interest and the remainder, if any, to principal.

9.15 Limitation of Consequential Damages

Except for acts by Lender of gross negligence or willful misconduct, Lender and its officers, directors, employees, representatives,agents, and attorneys, shall not be liable to Borrower for consequential damages arising from or relating to any breach of contract, tort, orother wrong in connection with the negotiation, documentation, administration or collection of the Loan.



9.16 Waiver and Release of Claims

Borrower (i) represents that it has no defenses to or setoffs against any indebtedness or other obligations owing to Lender or itsaffiliates (the �Obligations�), nor claims against Lender or its affiliates for any matter whatsoever, related or unrelated to the Obligations, and(ii) releases Lender and its affiliates from all claims, causes of action, and costs, in law or equity, existing as of the date of this LoanAgreement, which Borrower has or may have by reason of any matter of any conceivable kind or character whatsoever, related or unrelated tothe Obligations, including the subject matter of this Loan Agreement. This provision shall not apply

36

to claims for performance of express contractual obligations owing to Borrower by Lender or its affiliates.

9.17 Revival Clause

If the incurring of any debt by Borrower or the payment of any money or transfer of property to Lender by or on behalf of Borrowershould for any reason subsequently be determined to be �voidable� or �avoidable� in whole or in part within the meaning of any state orfederal law (collectively �voidable transfers�), including, without limitation, fraudulent conveyances or preferential transfers under the UnitedStates Bankruptcy Code or any other federal or state law, and Lender is required to repay or restore any voidable transfers or the amount orany portion thereof, or upon the advice of Lender�s counsel is advised to do so, then, as to any such amount or property repaid or restored,including all reasonable costs, expenses, and attorneys fees of Lender related thereto, the liability of Borrower shall automatically be revived,reinstated and restored and shall exist as though the voidable transfers had never been made.

9.18 Arbitration

ARBITRATION DISCLOSURES:

1. ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO ONLY VERY LIMITED REVIEWBY A COURT.

2. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT, INCLUDING THEIRRIGHT TO A JURY TRIAL.

3. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT.

4. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING IN THEIRAWARDS. THE RIGHT TO APPEAL OR TO SEEK MODIFICATION OF ARBITRATORS� RULINGS IS VERYLIMITED.

5. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS AFFILIATED WITH THEBANKING INDUSTRY.

6. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE AMERICANARBITRATION ASSOCIATION.

a. Any claim or controversy (�Dispute�) between or among the parties and their employees, agents, affiliates, andassigns, including, but not limited to, Disputes arising out of or relating to the Loan, the Collateral, the Loan Documents, thisarbitration provision (�arbitration clause�), or any related agreements or instruments relating hereto or delivered in connectionherewith (�Related Agreements�), and including but not limited to a Dispute based on or arising from an alleged tort, shall at therequest of any

37



party be resolved by binding arbitration in accordance with the applicable arbitration rules of the American Arbitration Association(the �Administrator�). The provisions of this arbitration clause shall survive any termination, amendment, or expiration of this LoanAgreement or Related Agreements. The provisions of this arbitration clause shall supersede any prior arbitration agreement betweenor among the parties.

b. The arbitration proceedings shall be conducted in a city mutually agreed by the parties. Absent such an agreement,arbitration will be conducted in Salt Lake City, Utah or such other place as may be determined by the Administrator. TheAdministrator and the arbitrator(s) shall have the authority to the extent practicable to take any action to require the arbitrationproceeding to be completed and the arbitrator(s)� award issued within one hundred fifty (150) days of the filing of the Dispute withthe Administrator. The arbitrator(s) shall have the authority to impose sanctions on any party that fails to comply with time periodsimposed by the Administrator or the arbitrator(s), including the sanction of summarily dismissing any Dispute or defense withprejudice. The arbitrator(s) shall have the authority to resolve any Dispute regarding the terms of this Loan Agreement, thisarbitration clause, or Related Agreements, including any claim or controversy regarding the arbitrability of any Dispute. Alllimitations periods applicable to any Dispute or defense, whether by statute or agreement, shall apply to any arbitration proceedinghereunder and the arbitrator(s) shall have the authority to decide whether any Dispute or defense is barred by a limitations period and,if so, to summarily enter an award dismissing any Dispute or defense on that basis. The doctrines of compulsory counterclaim, resjudicata, and collateral estoppel shall apply to any arbitration proceeding hereunder so that a party must state as a counterclaim in thearbitration proceeding any claim or controversy which arises out of the transaction or occurrence that is the subject matter of theDispute. The arbitrator(s) may in the arbitrator(s)� discretion and at the request of any party: (i) consolidate in a single arbitrationproceeding any other claim arising out of the same transaction involving another party that is substantially related to the Disputewhere that other party to that transaction that is bound by an arbitration clause with Lender, such as borrowers, guarantors, sureties,and owners of collateral and (ii) consolidate or administer multiple arbitration claims or controversies as a class action in accordancewith the provisions of Rule 23 of the Federal Rules of Civil Procedure.

c. The arbitrator(s) shall be selected in accordance with the rules of the Administrator from panels maintained by theAdministrator. A single arbitrator shall have expertise in the subject matter of the Dispute. Where three arbitrators conduct anarbitration proceeding, the Dispute shall be decided by a majority vote of the three arbitrators, at least one of whom must haveexpertise in the subject matter of the Dispute and at least one of whom must be a practicing attorney. The arbitrator(s) shall award tothe prevailing party recovery of all costs and fees (including attorneys� fees and costs, arbitration administration fees and costs, andarbitrator(s)� fees). The arbitrator(s), either during the pendency of the arbitration proceeding or as part of the arbitration award, alsomay grant provisional or ancillary remedies including but not limited to an award of injunctive relief, foreclosure, sequestration,attachment, replevin, garnishment, or the appointment of a receiver.

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d. Judgment upon an arbitration award may be entered in any court having jurisdiction, subject to the followinglimitation: the arbitration award is binding upon the parties only if the amount does not exceed four million dollars ($4,000,000.00);if the award exceeds that limit, any party may demand the right to a court trial. Such a demand must be filed with the Administratorwithin thirty (30) days following the date of the arbitration award; if such a demand is not made within that time period, the amountof the arbitration award shall be binding. The computation of the total amount of an arbitration award shall include amounts awardedfor attorneys� fees and costs, arbitration administration fees and costs, and arbitrator(s)� fees.

e. No provision of this arbitration clause, nor the exercise of any rights hereunder, shall limit the right of any party to:(i) judicially or non-judicially foreclose against any real or personal property collateral or other security; (ii) exercise self-helpremedies, including but not limited to repossession and setoff rights; or (iii) obtain from a court having jurisdiction thereover anyprovisional or ancillary remedies including but not limited to injunctive relief, foreclosure, sequestration, attachment, replevin,garnishment, or the appointment of a receiver. Such rights can be exercised at any time, before or after initiation of an arbitrationproceeding, except to the extent such action is contrary to the arbitration award. The exercise of such rights shall not constitute awaiver of the right to submit any Dispute to arbitration, and any claim or controversy related to the exercise of such rights shall be aDispute to be resolved under the provisions of this arbitration clause. Any party may initiate arbitration with the Administrator. Ifany party desires to arbitrate a Dispute asserted against such party in a complaint, counterclaim, cross-claim, or third-party complaintthereto, or in an answer or other reply to any such pleading, such party must make an appropriate motion to the trial court seeking tocompel arbitration, which motion must be filed with the court within forty-five (45) days of service of the pleading, or amendmentthereto, setting forth such Dispute. If arbitration is compelled after commencement of litigation of a Dispute, the party obtaining anorder compelling arbitration shall commence arbitration and pay the Administrator�s filing fees and costs within forty-five (45) daysof entry of such order.



f. Notwithstanding the applicability of any other law to this Loan Agreement, the arbitration clause, or RelatedAgreements between or among the parties, the Federal Arbitration Act, 9 U.S.C. § 1 et. seq., shall apply to the construction andinterpretation of this arbitration clause. If any provision of this arbitration clause should be determined to be unenforceable, all otherprovisions of this arbitration clause shall remain in full force and effect.

9.19 Consent to Utah Jurisdiction and Exclusive Jurisdiction of Utah Courts

Borrower acknowledges that by execution and delivery of the Loan Documents Borrower has transacted business in the State of Utahand Borrower voluntarily submits to, consents to, and waives any defense to the jurisdiction of courts located in the State of Utah as to allmatters relating to or arising from the Loan Documents and/or the transactions contemplated thereby. EXCEPT AS EXPRESSLY AGREEDIN WRITING BY LENDER AND EXCEPT AS

39

PROVIDED IN THE ARBITRATION PROVISIONS ABOVE, THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OFUTAH SHALL HAVE SOLE AND EXCLUSIVE JURISDICTION OF ANY AND ALL CLAIMS, DISPUTES, AND CONTROVERSIES,ARISING UNDER OR RELATING TO THE LOAN DOCUMENTS AND/OR THE TRANSACTIONS CONTEMPLATED THEREBY. NOLAWSUIT, PROCEEDING, OR ANY OTHER ACTION RELATING TO OR ARISING UNDER THE LOAN DOCUMENTS AND/ORTHE TRANSACTIONS CONTEMPLATED THEREBY MAY BE COMMENCED OR PROSECUTED IN ANY OTHER FORUMEXCEPT AS EXPRESSLY AGREED IN WRITING BY LENDER.

9.20 Notices

All notices or demands by any party to this Loan Agreement shall, except as otherwise provided herein, be in writing and may be sentby certified mail, return receipt requested. Notices so mailed shall be deemed received when deposited in a United States post office box,postage prepaid, properly addressed to Borrower or Lender at the mailing addresses stated herein or to such other addresses as Borrower orLender may from time to time specify in writing. Any notice so addressed and otherwise delivered shall be deemed to be given when actuallyreceived by the addressee.

Mailing addresses:

Lender:

Zions First National BankCommercial Banking DivisionUT KC15 032110 E. South Temple, Suite 1500Salt Lake City, Utah 84133Attention: Jim C. Stanchfield, Vice President

With a copy to:

Snell & Wilmer, L.L.P.Gateway Tower West15 West South Temple, Suite 1200Salt Lake City, Utah 84101Attention: John A. Beckstead

Borrower:




66 E. Wadsworth Park DriveDraper, Utah 84020Attention: Brian W. Bethers, President

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with a copy to:

1-800 CONTACTS, INC.66 E. Wadsworth Park DriveDraper, Utah 84020Attention: Joe Zeidner, Corporate Counsel

9.21 Duplicate Originals; Counterpart Execution; Fax Delivery

Two or more duplicate originals of the Loan Documents may be signed by the parties, each duplicate of which shall be an originalbut all of which together shall constitute one and the same instrument.

This Loan Agreement may be executed in several counterparts, without the requirement that all parties sign each counterpart. Eachof such counterparts shall be an original, but all counterparts together shall constitute one and the same instrument.

Any party may deliver this executed Loan Agreement by sending its signature page to this Loan Agreement to Lender or Lender�scounsel by facsimile transmission (fax). Such delivery shall be binding and effective the same as if the original executed document had beendelivered; provided that Lender may elect to require delivery of the original executed signature of Borrower in the presence of Lender or itsrepresentative as a condition to funding.

9.22 Disclosure of Financial and Other Information

Borrower hereby consents to Lender disclosing to any other lender who may participate in the Loan any and all information,knowledge, reports, and records, including, without limitation, financial statements, relating in any manner whatsoever to the Loan andBorrower.

9.23 Integrated Agreement and Subsequent Amendment

The Loan Documents constitute the entire agreement between Lender and Borrower, and may not be altered or amended except bywritten agreement signed by Lender and Borrower. PURSUANT TO UTAH CODE SECTION 25-5-4, BORROWER IS NOTIFIED THATTHESE AGREEMENTS ARE A FINAL EXPRESSION OF THE AGREEMENT BETWEEN LENDER AND BORROWER AND THESEAGREEMENTS MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY ALLEGED ORAL AGREEMENT.

All prior and contemporaneous agreements, arrangements and understandings between the parties hereto as to the subject matter hereof are,except as otherwise expressly provided herein, rescinded.

Effective Date: February 27, 2004

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Lender:

Zions First National Bank



By:Jim C. StanchfieldVice President

Borrower:


By:Robert G. HunterVice President of Finance and Treasurer

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EXHIBIT A

PROMISSORY NOTE(REDUCING REVOLVING LINE OF CREDIT)

EXHIBIT B

FORM OF GENERAL RELEASE

EXHIBIT C

LIST OF ORGANIZATIONAL DOCUMENTS OF SUBSIDIARIES

EXHIBIT D

SCHEDULE OF EXISTING THIRD PARTY DEBT ANDCOLLATERAL OF BORROWER AND SUBSIDIARIES

EXHIBIT E

FORM OF AMENDMENT TO SUBORDINATION AGREEMENT

EXHIBIT F

FORM OF OPINION OF COUNSEL FOR FOREIGN SUBSIDIARIES



Exhibit 14.1


Code of Ethics

Introduction

1- 800 CONTACTS, INC. and its subsidiaries (the �Company�) and its directors, officers and employees have committed to conduct businessthroughout the world in accordance with the highest ethical standards. This code of ethics (the �Code�) sets out the principles to which alldirectors, officers and employees of the Company are expected to adhere and advocate in meeting these standards. The Code embodies rulesregarding individual and peer responsibilities as well as responsibilities to the Company, the public and other shareholders.

The Board of Directors of the Company has adopted this Code to accomplish the following:

a. promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest;

b. promote the full, fair, accurate, timely and understandable disclosure of the Company�s financial results in accordance withapplicable disclosure standards, including, where appropriate, standards of materiality;

c. promote compliance with applicable governmental laws, rules and regulations;

d. deter wrongdoing; and

e. require prompt internal reporting of breaches of, and accountability for adherence to, the Code.

The Code may be amended only by resolution of the Company�s board of directors.

Honest and Ethical Conduct

Company directors, officers and employees have an obligation to promote the best interests of the Company at all times and exhibit andpromote the highest standards of honest and ethical conduct.

Specifically, each director, officer and employee must:

a. act with integrity, including being honest and candid while still maintaining the confidentiality of Company information whererequired or in the Company�s interests;

b. observe, fully, applicable governmental laws, rules and regulations;

c. comply with the requirements of applicable accounting and auditing standards and Company policies in the maintenance of a highstandard of accuracy and completeness in the Company�s financial records;

d. adhere to a high standard of business ethics and not seek competitive advantage through unlawful or unethical business practices; and

e. avoid conflicts of interest wherever possible.

Conflicts of Interest



Anything that would be a conflict for a director, officer or employee will also be a conflict if it is related to a member of his or her family or aclose relative. Common examples of conflict of interest situations, if material, include the following:

a. any significant ownership interest in any supplier or customer;

b. any consulting or employment relationship with any customer, supplier or competitor;

c. any outside business activity that detracts from an individual�s ability to devote appropriate time and attention to his or herresponsibilities with the Company;

d. the receipt of any money, non-nominal gifts or excessive entertainment from any company with which the Company has current orprospective business dealings.

Where conflicts of interest arise, directors, officers and employees must provide full disclosure of the circumstances and excuse themselvesfrom any related decision making process.

Directors, officers and employees must also avoid apparent conflicts of interest, which occur where a reasonable observer might assume thereis a conflict of interest and, therefore, a loss of objectivity in their dealings on behalf of the Company.

Compliance with Laws

It is the Company�s policy to comply with all applicable governmental laws, rules and regulations. It is the personal responsibility of eachdirector, officer and employee to adhere to the standards and restrictions imposed by those laws, rules and regulations, including those relatingto accounting and auditing matters.

Directors, officers and employees of the Company must respect and follow the laws and regulations of the municipalities and countries inwhich the Company conducts business. If a law conflicts with a policy in the Code, directors, officers and employees must comply with thelaw; however, if a local custom or policy conflicts with this Code, officers, directors and employees must comply with the Code.

Disclosure

The Company strives to ensure that the contents of and the disclosures in the reports and documents that the Company files with the Securitiesand Exchange Commission (the �SEC�) and other public communications shall be full, fair, accurate, timely and understandable inaccordance with applicable disclosure standards, including standards of materiality, where appropriate.

Each officer, director and employee must not knowingly misrepresent, or cause others to misrepresent, facts about the Company to others,whether within or outside the Company, including to the Company�s independent auditors, governmental regulators, self-regulatingorganizations and other governmental officials, as appropriate.

In addition, each officer, director and employee, in relation to his or her area of responsibility, must properly review and critically analyzeproposed disclosure for accuracy and completeness.

Furthermore, any director, officer or employee in possession of material information must not disclose such information before is publicdisclosure and, in relation to his or her area of responsibility, must take steps to ensure that the Company complies with its timely disclosureobligations.

Accountability for Compliance with the Code of Ethics

If employees have knowledge or are suspicious of any non-compliance with any section of this Code or are concerned whether circumstancescould lead to a violation of this Code, they should discuss the situation with their immediate supervisor. The legal, financial or human



resource departments may also be contacted for advice and, if the circumstances are such that it would be inappropriate to involve theirimmediate supervisor, they should contact these departments directly. The Company will not allow any retaliation against any director,officer or employee who acts in good faith in reporting any such violation or suspected violation.

If directors and executive officers have knowledge or are suspicious of any non-compliance with any section of the Code, or are concernedwhether circumstances could lead to a violation of this Code, they should discuss the situation with the audit committee of the Company�sboard of directors.

Any waiver or implicit waiver of this Code for directors, officers or employees may be made only by the audit committee and will bepromptly disclosed as required by law. A �waiver� is defined as a material departure from a provision of this Code and an �implicit waiver�means failure to take action within a reasonable period of time regarding a material departure from a provision of the Code that has been madeknown to an executive officer of the Company. Officers, directors and employees should note that it is not the Company�s intention to grantor to permit waivers from the requirements of this Code

All directors, officers and employees are responsible for abiding by this Code. This includes individuals responsible for the failure to exerciseproper supervision and to detect and report a violation by their subordinates. Discipline may, when appropriate, include dismissal.



EXHIBIT 21.1

SUBSIDIARIES OF 1-800 CONTACTS, INC.

The following is a list of the subsidiaries of 1-800 CONTACTS, INC., a Delaware corporation.

The common stock of all the corporations listed below is wholly owned by 1-800 CONTACTS, INC.

Name of Corporation State / Country of Incorporation

1-800 CONTACTS Japan, KK JapanCL I, Inc. UtahCL II, Inc. UtahCL III, Inc. Utah1-800 CONTACTS TEXAS, INC. TexasClearLab International SingaporeLens 1st Holding Company UtahEvision, Inc. OregonShayna Limited United KingdomClearLab UK Ltd. United Kingdom

1-800 CONTACTS, INC. is also the sole member of CL4, L.L.C., a Utah limited liability company, and AQUASOFT, LLC, a Utah limitedliability company.



Exhibit 23.1

Independent Auditors�� Consent

The Board of Directors and Shareholders1-800 CONTACTS, INC.:

We consent to the incorporation by reference in the registration statements (File Nos. 333-61205 and 333-96765) on Form S-8 of 1-800CONTACTS, INC. of our report dated February 27, 2004, with respect to the consolidated balance sheets of 1-800 CONTACTS, Inc. andsubsidiaries as of December 28, 2002 and January 3, 2004 and the related consolidated statements of operations, stockholders� equity andcomprehensive income (loss), and cash flows for the fiscal years then ended, which report appears in the January 3, 2004 Annual Report onForm 10-K of 1-800 CONTACTS, INC.

/s/ KPMG LLPSalt Lake City, UtahMarch 15, 2004



Exhibit 31.1

CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jonathan C. Coon, certify that:

1. I have reviewed this annual report on Form 10-K of 1-800 CONTACTS, INC.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant�s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant�s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and

c) Disclosed in this report any change in the registrant�s internal control over financial reporting that occurred during the registrant�smost recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant�s internal control overfinancial reporting.

5. The registrant�s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant�s auditors and the audit committee of the registrant�s board of directors (or persons performing the equivalentfunctions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant�s ability to record, process, summarize, and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant�sinternal control over financial reporting.

Dated: March 18, 2004 /s/ Jonathan C. CoonChief Executive Officer



Exhibit 31.2



I, Brian W. Bethers, certify that:

1. I have reviewed this annual report on Form 10-K of 1-800 CONTACTS, INC.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant�s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant�s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and

c) Disclosed in this report any change in the registrant�s internal control over financial reporting that occurred during the registrant�smost recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant�s internal control overfinancial reporting.

5. The registrant�s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant�s auditors and the audit committee of the registrant�s board of directors (or persons performing the equivalentfunctions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant�s ability to record, process, summarize, and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant�sinternal control over financial reporting.

Dated: March 18, 2004 /s/ Brian W. BethersPresident and Chief Financial Officer



EXHIBIT 32.1



In connection with the Annual Report of 1-800 CONTACTS, INC. (the �Company�) on Form 10-K for the period ended January 3,2004 as filed with the Securities and Exchange Commission on the date hereof (the �Report�), I, Jonathan C. Coon, Chief Executive Officerof the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operationsof the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by theCompany and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ Jonathan C. CoonChief Executive OfficerDate: March 18, 2004



EXHIBIT 32.2



In connection with the Annual Report of 1-800 CONTACTS, INC. (the �Company�) on Form 10-K for the period ended January 3,2004 as filed with the Securities and Exchange Commission on the date hereof (the �Report�), I, Brian W. Bethers, President and ChiefFinancial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Actof 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operationsof the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by theCompany and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ Brian W. BethersPresident and Chief Financial OfficerDate: March 18, 2004

