Other definitive proxy statements


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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

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Definitive Proxy Statement

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Soliciting Material Pursuant to §240.14a-12

TearLab Corporation


(Name of Registrant as Specified In Its Charter)


(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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TEARLAB CORPORATION

9980 Huennekens St., Suite 100

San Diego, California 92121

NOTICE OF ANNUAL MEETING OF

STOCKHOLDERS AND PROXY STATEMENT

To the Stockholders of TearLab Corp.:

Notice is hereby given that the Annual Meeting of the Stockholders (“Annual Meeting”) of TearLab Corporation, will be held on June 11, 2014 at 8:30 a.m. Eastern Daylight Time at the offices of Torys LLP, 79 Wellington Street West, 33rd Floor, Toronto, Ontario, Canada for the following purposes:

1.

To elect eight directors for a one-year term to expire at the 2015 Annual Meeting of Stockholders.  Our present Board of Directors has nominated and recommends for election as director the following persons:

Elias Vamvakas

Anthony E. Altig

Thomas N. Davidson, Jr.

Adrienne L. Graves

Paul M. Karpecki

Richard L. Lindstrom

Donald Rindell

Brock Wright

2.

To approve an amendment to the 2002 Stock Incentive Plan to increase the shares reserved thereunder by 1,000,000 shares.

3.

To approve the 2014 Employee Stock Purchase Plan.

4.

To ratify the selection of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2014.

5.

To vote, on an advisory basis, regarding the compensation of the named executive officers for the year ended December 31, 2013, as set forth in this proxy statement.

6.

To transact such other business as may be properly brought before our Annual Meeting or any adjournment thereof.

We have also elected to provide access to our proxy materials over the Internet under the Securities and Exchange Commission's “notice and access” rules. We believe these rules allow us to provide you with the information you need while reducing our delivery costs and the environmental impact of the Annual Meeting. Our Board of Directors has fixed the close of business on April 14, 2014, as the record date for the determination of stockholders entitled to notice of and to vote at our Annual Meeting and at any adjournment or postponement thereof. Our proxy materials were first sent or given on April 25, 2014, to all stockholders as of the record date.

Whether or not you expect to be at our Annual Meeting, please complete, sign and date the Proxy you received in the mail and return it promptly . You may vote over the Internet, by telephone or, if you request to receive printed proxy materials, by mailing a proxy or voting instruction card. You may also vote your shares during the Annual Meeting. Please review the instructions on each of your voting options described in this proxy statement, as well as in the Notice of Internet Availability of Proxy Materials or proxy card you received by mail.

All stockholders are cordially invited to attend the meeting.

By Order of the Board of Directors,

/s/ Elias Vamvakas

Elias Vamvakas

Chairman of the Board

April 25, 2014


PROXY STATEMENT

FOR 2014 ANNUAL MEETING OF STOCKHOLDERS

TABLE OF CONTENTS

PROXY STATEMENT

1

PROPOSAL 1: ELECTION OF DIRECTORS

2

Information Regarding Directors

2

Board Meetings

4

Committees of the Board

4

Director Nomination Process

6

Communications with the Board of Directors

6

Code of Business Conduct and Ethics

7

Corporate Governance Documents

7

Report of the Audit Committee

7

Principal Accounting Fees and Services

9

Director Attendance at Annual Meetings

9

Director Independence

9

Board Leadership Structure

9

Board Role in Risk Oversight

10

Board of Directors’ Recommendation

10

EXECUTIVE AND BENEFICIAL OWNERSHIP INFORMATION

11

Our Executive Officers

11

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

12

Equity Compensation Plan Information

14

Certain Relationships and Related Transactions

14

PROPOSAL 2: AMENDMENT OF THE 2002 STOCK INCENTIVE PLAN

15

Summary of the 2002 Stock Incentive Plan

15

Number of Awards Granted to Employees, Directors and Consultants

18

Federal Tax Aspects

19

Board of Director’s Recommendation

19

PROPOSAL 3: APPROVAL OF THE 2014 EMPLOYEE STOCK PURCHASE PLAN

20

Summary of the 2014 Employee Stock Purchase Plan

20

General

20

Shares Available for Issuance

20

Administration

20

Eligibility

20

Offering Period

20

Purchase Price

21

Payment of Purchase Price; Payroll Deductions

21

Withdrawal

21

Termination of Employment

21

Adjustments upon Changes in Capitalization, Dissolution, Liquidation, Merger or Change of Control

21

Amendment and Termination of the Purchase Plan

22

Plan Benefits

22

Certain Federal Income Tax Information

22

Board of Director’s Recommendation

22

PROPOSAL 4: RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS

23

Audit Committee Policy Regarding Pre-Approval of Audit and Permissible Non-Audit Services of Our Independent Auditors

23

Board of Directors’ Recommendation

23

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PROPOSAL 5: ADVISORY VOTE ON EXECUTIVE COMPENSATION

24

Compensation Program and Philosophy

24

Board of Directors’ Recommendation

24

EXECUTIVE COMPENSATION

25

Compensation Discussion and Analysis

25

Summary Compensation Table

31

Grants of Plan-Based Awards

32

Outstanding Equity Awards at Fiscal Year-End

32

Option Exercises in 2013

34

Equity Compensation Plan Information

34

Compensation of Directors

34

Compensation Committee Interlocks and Insider Participation

35

Directors’ and Officers’ Liability Insurance

35

Employment Contracts and Certain Transaction-based Contracts

36

Estimated Payments Upon Termination or Change in Control

37

Report of the Compensation Committee

38

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

39

STOCKHOLDER PROPOSALS

39

ANNUAL REPORT

39

HOUSEHOLDING OF PROXY MATERIALS

39

OTHER BUSINESS

39

APPENDIX A - 2002 STOCK INCENTIVE PLAN

A-1

APPENDIX B - 2014 EMPLOYEE STOCK PURCHASE PLAN

B-1

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TEARLAB CORPORATION

9980 Huennekens St., Suite 100

San Diego, California 92121


PROXY STATEMENT

The Board of Directors of TearLab Corp., a Delaware corporation, or the Company, is soliciting the Proxy for use at our Annual Meeting of Stockholders to be held on June 11, 2014 at 8:30 a.m. Eastern Daylight Time at the offices of Torys LLP, 79 Wellington Street West, 33rd Floor, Toronto, Ontario, Canada and at any adjournments or postponements thereof.

Details regarding the meeting and the business to be conducted are described in the Notice of Internet Availability of Proxy Materials you received in the mail and in this proxy statement.  We have also made available a copy of our 2013 Annual Report to Stockholders with this proxy statement.  We encourage you to read our Annual Report.  It includes our audited consolidated financial statements and provides information about our business and products.

We have elected to provide access to our proxy materials over the internet under the Securities and Exchange Commission’s “notice and access” rules.  We believe that providing our proxy materials over the internet increases the ability of our stockholders to connect with the information they need, while reducing the environmental impact of our Annual Meeting.

All stockholders who find it convenient to do so are cordially invited to attend the meeting in person.  In any event, please complete, sign, date and return the Proxy.

A proxy may be revoked by written notice to the Secretary of the Company at any time prior to the voting of the proxy, or by executing a subsequent proxy prior to voting or by attending the meeting and voting in person.  Unrevoked proxies will be voted in accordance with the instructions indicated in the proxies, or if there are no such instructions, such proxies will be voted (1) for the election of our Board of Directors’ nominees as directors, (2) to approve an amendment of the Company’s 2002 Stock Incentive Plan to increase the shares reserved thereunder by 1,000,000 shares, (3) to approve the 2014 Employee Stock Purchase Plan, (4) for the ratification of the selection of Ernst & Young LLP as our independent auditors, and (5) for, on an advisory basis, the compensation of our named executive officers for the year ended December 31, 2013.  Shares represented by proxies that reflect abstentions or include “broker non-votes” will be treated as present and entitled to vote for purposes of determining the presence of a quorum.  Abstentions have the same effect as votes “against” the matters, except in the election of directors.  “Broker non-votes” do not constitute a vote “for” or “against” any matter and thus will be disregarded in the calculation of “votes cast.”

Stockholders of record at the close of business on April 14, 2014, or the Record Date, will be entitled to vote at the meeting or vote by proxy using the Proxy Card that was mailed to you with the Notice of Internet Availability of Proxy Materials.  As of the Record Date, 33,582,068 shares of our common stock, par value $0.001 per share, were outstanding.  Each share of our common stock is entitled to one vote.  A majority of the outstanding shares of our common stock entitled to vote, represented in person or by proxy at our Annual Meeting, constitutes a quorum.  A majority of the shares present in person or represented by proxy at our Annual Meeting and entitled to vote thereon is required for the election of directors, approval of an amendment of the Company’s 2002 Stock Incentive Plan, approval of the 2014 Employee Stock Purchase Plan, ratification of the selection of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2014, and approval of the compensation of our named executive officers for the year ending December 31, 2013.

The cost of preparing the Notice of Annual Meeting and Proxy Statement, and mailing the Notice of Internet Availability of Proxy Materials and Proxy, will be borne by us.  In addition to soliciting proxies by mail, our officers, directors and other regular employees, without additional compensation, may solicit proxies personally or by other appropriate means.  It is anticipated that banks, brokers, fiduciaries, other custodians and nominees will forward proxy soliciting materials to their principals, and that, upon request, we will reimburse such persons’ out-of-pocket expenses.

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PROPOSAL 1

ELECTION OF DIRECTORS

Our Amended and Restated Bylaws authorize the number of directors to be not less than five and not more than nine.  Our Board of Directors currently consists of eight members.  Each of our directors is elected for a term of one year to serve until his or her successor is duly elected and qualified or until his or her earlier death, resignation or removal.  The eight nominees for election to our Board of Directors at our upcoming Annual Meeting of the Stockholders are Elias Vamvakas, Anthony E. Altig, Thomas N. Davidson, Jr., Adrienne L. Graves, Paul M. Karpecki, Richard L. Lindstrom, Donald Rindell and Brock Wright, each of whom is presently a member of our Board of Directors.

A plurality of the votes of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote on the election of directors is required to elect directors.  If no contrary indication is made, Proxies in the accompanying form are to be voted for our Board of Directors’ nominees or, in the event any of such nominees is not a candidate or is unable to serve as a director at the time of the election (which is not currently expected), for any nominee who shall be designated by our Board of Directors to fill such vacancy.  Each person nominated for election has agreed to serve if elected and the Board of Directors has no reason to believe that any nominee will be unable to serve.

Information Regarding Directors

The information set forth below as to the nominees for director has been furnished to us by the nominees:

Nominees for Election to the Board of Directors

Name

Age

Position

Elias Vamvakas

55

Chairman of the Board and Chief Executive Officer

Anthony E. Altig

58

Director

Thomas N. Davidson, Jr.

55

Director

Adrienne L. Graves

60

Director

Paul M. Karpecki

47

Director

Richard L. Lindstrom

66

Director

Donald Rindell

62

Director

Brock Wright

54

Director

Elias Vamvakas co-founded TLC Vision, an eye care services company, where he was the Chairman from 1994 to June 2006 and was the Chief Executive Officer from 1994 to July 2004. He has been the Chairman of the Board of Directors of TearLab Corporation, or the Board, since June 2003 and was the Chief Executive Officer and Secretary of the Company from July 2004 until October 2008 and again since June 2009. Since November 30, 2006, Mr. Vamvakas has been a member of the board of directors of TearLab Research, Inc. formerly known as TearLab, Inc. and OcuSense, Inc. Mr. Vamvakas has been the chairman of the board of Greybrook Capital, a Toronto-based private equity firm. Mr. Vamvakas also serves on the boards of several of Greybrook’s portfolio companies, Jameson Bank and the National Golf Club, and as chairman of Brandimensions Inc. and Nulogx Inc. Mr. Vamvakas was named to “Canada’s Top Forty Under Forty” in 1996. In 1999, he was named Ernst & Young’s Entrepreneur of the Year for Ontario in the Emerging Category and Canadian Entrepreneur of the Year for Innovative Partnering. In 2000, Mr. Vamvakas was recognized by Profit Magazine for managing one of Canada’s fastest growing companies. Mr. Vamvakas received a B.Sc. degree from the University of Toronto in 1981.  As our Chief Executive Officer, Mr. Vamvakas is specially qualified to serve on the Board because of his detailed knowledge of our operations and market.

Anthony E. Altig has been a member of the Board since January 2009. Mr. Altig is the Chief Financial Officer at Biotix Holdings, Inc., a company that manufactures microbiological and molecularbiological consumables. He has also served as a director of Optimer Pharmaceuticals since November 2007. From December 2004 to June 2007, Mr. Altig served as the Chief Financial Officer of Diversa Corporation (subsequently Verenium Corporation), a public company focused on enzyme technology. Prior to joining Diversa, Mr. Altig served as the Chief Financial Officer of Maxim Pharmaceuticals, Inc., a public biopharmaceutical company, from 2002 to 2004. From 2000 to 2001, Mr. Altig served as the Chief Financial Officer of NBC Internet, Inc., an internet portal company, which was acquired by General Electric. Mr. Altig’s additional experience includes his role as the Chief Accounting Officer at USWeb Corporation, as well as his experience serving biotechnology and other technology companies during his tenure at both PricewaterhouseCoopers and KPMG. In addition, Mr. Altig serves as a director for such public companies as: Optimer Pharmaceuticals, Inc. and Ventrus Biosciences. Mr. Altig is a former member of the board of directors of MultiCell Technologies, Inc. Mr. Altig received a B.A. degree from the University of Hawaii.  Mr. Altig’s experience as Chief Financial Officer of several public companies brings to the Board perspective regarding financial and accounting issues.

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Thomas N. Davidson, Jr. has been a member of the Board since January 2011. Since 1997, Mr. Davidson has been the Chief Executive Officer and majority shareholder of Nisim International, a manufacturer of hair and skin care products distributed on a worldwide basis. Mr. Davidson has been managing partner of Quarry Hill Partners, a holding company for a diversified group of manufacturing companies, since June 2000. Mr. Davidson has been the principal owner and operator of several other companies including Speedy Printing Centers, Quarry Hill Foundry Supplies, Optiplas Films and Eco II Plastics. Mr. Davidson is currently on the boards of two private companies, Brandimensions Inc. and Balmshell Inc. Mr. Davidson is also on the boards of the YPO Ontario Chapter and the Fishing Forever Foundation. From 1999 until 2010, Mr. Davidson served on the board of directors Synergex International Corporation, previously a Toronto Stock Exchange listed company, where he served as a member of the audit committee. In addition, Mr. Davidson previously served on the board of directors for Clemmer Steelcraft Technologies Inc. and Nu-Tech Precision Metals, both privately held companies. Mr. Davidson has a BSc from Michigan State University in Geological Engineering.  Mr. Davidson’s extensive business background makes him a valuable addition to the Board.  Mr. Davidson is the son of Thomas N. Davidson, Sr., who retired from the Board in August 2010.

Adrienne L. Graves , Ph.D. has been a member of the Board since April 2005 and, from 2002 to 2010 was President and Chief Executive Officer of Santen Inc., or Santen, the U.S. subsidiary of Santen Pharmaceutical Co., Ltd. Dr. Graves is currently a strategic advisor for Santen. Dr. Graves joined Santen Inc. in 1995 as Vice President of Clinical Affairs to initiate the company’s clinical development in the U.S. Prior to joining Santen Inc., Dr. Graves spent nine years with Alcon Laboratories, Inc., or Alcon, beginning in 1986 as a Senior Scientist. She was named Associate Director of Alcon’s Clinical Science Division in 1992 and then Alcon’s Director of International Ophthalmology in 1993. Dr. Graves is the author of over 30 research papers and is a member of a number of professional associations, including the Association for Research in Vision and Ophthalmology, the American Academy of Ophthalmology, the American Glaucoma Society and Women in Ophthalmology. She also serves on the boards of the American Academy of Ophthalmology Foundation, the Pan-American Association of Ophthalmology, the American Association for Cataract and Refractive Surgery, the Glaucoma Research Foundation and the Corporation Committee for the Brown University Medical School. Dr. Graves also co-founded Ophthalmic Women Leaders. She received her B.A. in psychology with honors from Brown University, her Ph.D. in psychobiology from the University of Michigan and completed a postdoctoral fellowship in visual neuroscience at the University of Paris.  Dr. Graves brings to the Board a long history of experience in the field of ophthalmology and business strategy.

Paul M. Karpecki O.D., FAAO has been a member of the Board since March 2010 and has been the Director of Ocular Disease Research at Koffler Vision Group in Lexington, Kentucky since March of 2009, where he also works in corneal services. In 2007 Dr. Karpecki accepted a position with the Cincinnati Eye Institute in Corneal Services after five years as Director of Research for the Moyes Eye Clinic in Kansas City. Dr. Karpecki serves on or chairs numerous optometric association committees including Chair of the Refractive Surgery Advisory Committee to the AOA (American Ophthalmology Association) and on the AOA Meetings Executive Committee. He has lectured in more than 300 symposia covering four continents and was the first optometrist to be invited to both the Delphi International Society at Wilmer-John’s Hopkins, which includes the top 25 dry eye experts in the world, and the National Eye Institute’s dry eye committee. This was a task force established by the U.S. Department of Health and Human Services to better understand and treat dry eye disease in women. A noted educator and author, Dr. Karpecki lectures on new technology, surgical advancements and therapeutics with an emphasis on cornea and external disease. He presently serves on eight professional journal editorial boards. Dr. Karpecki received his doctorate of optometry from Indiana University and completed a Fellowship in Cornea and Refractive Surgery at Hunkeler Eye Centers in affiliation with the Pennsylvania College of Optometry in 1994.  Dr. Karpecki’s experience in the field of optometry, and in particular his specialty regarding dry eye disease, make him a valuable addition to the Board.

Richard L. Lindstrom , M.D. has been a member of the Board since September 2004 and has served as a director of TLC Vision since May 2002 and, prior to that, was a director of LaserVision Centers, Inc. since November 1995. Since 1979, Dr. Lindstrom has been engaged in the private practice of ophthalmology and is Founder, a director and Attending Surgeon of Minnesota Eye Consultants P.A., a provider of eye care services. Dr. Lindstrom has served as Associate Director of the Minnesota Lions Eye Bank since 1987. He is also a medical advisor for several medical device and pharmaceutical manufacturers. Dr. Lindstrom has been a director on the board of Onpoint Medical Diagnostics, Inc. since 2010. Dr. Lindstrom is also currently on the boards of Acufocus, Inc., Wavetec Vision, RevitalVision, LLC and Lindstrom Environmental, Inc., each of which is a private company. Dr. Lindstrom is a past President of the International Society of Refractive Surgery, the International Intraocular Implant Society, the International Refractive Surgery Club and the American Society of Cataract and Refractive Surgery. From 1980 to 1989, he served as a Professor of Ophthalmology at the University of Minnesota and is currently Adjunct Professor Emeritus in the Department of Ophthalmology at the University of Minnesota. Dr. Lindstrom received his Doctor of Medicine, Bachelor of Arts and Bachelor of Sciences degrees from the University of Minnesota.  Dr. Lindstrom’s background in ophthalmology gives him a perspective that is helpful to the Board for understanding the Company’s product market.

Donald Rindell has been a member of the Board since September 2008 and was on the board of TearLab Research, Inc. between March 2006 and December 2010. Mr. Rindell currently serves as Executive Director of Business Development for Amylin Pharmaceuticals, Inc., a position he has held since 2005. Prior to joining Amylin Pharmaceuticals, Inc., Mr. Rindell had a successful consulting practice, during which time he served as Acting President of Medical Device Group, Inc., an acute care and respiratory company, Vice President of Business Development of CardioNet, Inc., a “real-time” 24/7 cardiovascular monitoring company, and Vice President of Business Development of HandyLab, Inc., a molecular diagnostics and pharmacogenomics system company. His responsibilities included corporate marketing, mergers and acquisitions activities, product planning and new strategic initiatives. Prior to his consulting practice, he served as Vice President of Corporate Development & Strategic Planning of Advanced Tissues Sciences, Inc., or ATS, a La Jolla, California-based biotechnology company. Prior to his tenure at ATS, Mr. Rindell was the Vice President for Global Business Management of Braun/Thermoscan, a division of The Gillette Company. At Braun/Thermoscan, he played a major role in building its medical diagnostics business to achieve sales exceeding $170 million. Mr. Rindell was also employed by Hybritech, a division of Eli Lilly and Company as Executive Director of Sales and Marketing. Mr. Rindell received his B.S. degree in Economics from the College of Wooster and an M.B.A. from Pepperdine University Graduate School of Business.  Mr. Rindell’s years of experience in the medical device field are very valuable to the Company as it works through regulatory requirements and marketing.

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Brock Wright BSc, MD, FRCPC, MBA has been a member of the Board of Tearlab since August 2010 and has been the Senior Vice-President Clinical Services (since October 2008) and Chief Medical Officer (since January 2000) of the Winnipeg Regional Health Authority. Dr. Wright has been an Assistant Professor in the Department of Community Health Sciences since 1990, and is a member of the board of directors of Diagnostic Services Manitoba, a publically funded organization responsible for laboratory services for the entire province of Manitoba. Dr. Wright is also Chair of the Provincial Medical Leadership Council in Manitoba (since 2012). Dr. Wright was the Associate Dean, Clinical Affairs, for the Faculty of Medicine, University of Manitoba between 2008 and 2012. Dr. Wright served as the Chief Operating Officer for the Health Sciences Centre in Winnipeg from 2004 until 2008 and served as the Vice-President and Chief Medical Officer of the Winnipeg Regional Health Authority from 2000 to 2008. Dr. Wright served as Vice-President and Chief Medical Officer of the Health Sciences Centre in Winnipeg from 1997 until 2000. He also served in the mid-nineties as Vice-President responsible for the Pathology and Laboratory Division of the Health Sciences Centre and led the development of a successful plan to integrate laboratory services across the Province to form Diagnostic Services Manitoba (DSM). Dr. Wright received his Bachelor of Science degree from the University of Winnipeg in 1980. He received his Medical Degree in 1984, Fellowship in Community Medicine in 1990 and MBA in 1992, from the University of Manitoba.  Dr. Wright’s extensive medical and public sector experience make him a valuable addition to the Board.

Board Meetings

The Board held seven meetings during 2013.  No director who served as a director during the past year attended fewer than 75% of the aggregate of the total number of meetings of the Board and the total number of meetings of committees of the Board on which he or she served.

Committees of the Board

The Board currently has, and appoints members to, three standing committees: our Compensation Committee, our Corporate Governance and Nominating Committee and our Audit Committee.  Prior to December 2013, each non-employee director was a member of each of the three standing committees.  The current members of our committees are identified below:

Director

Compensation

Corporate

Governance and

Nominating

Audit

Anthony E. Altig (1)

.

.

.

Thomas N. Davidson, Jr.

.

.

.

Adrienne L. Graves

Paul M. Karpecki

.

.

.

Richard L. Lindstrom (2)

.

.

.

Donald Rindell (3)

.

.

.

Brock Wright

.

.

.


(1)       Audit Committee Chair.

(2)       Compensation Committee Chair.

(3)       Corporate Governance and Nominating Committee Chair.

Compensation Committee .  The Compensation Committee currently consists of Dr. Wright, Mr. Davidson, Dr. Graves and Dr. Lindstrom, with Dr. Lindstrom serving as chairman. The Compensation Committee held two meetings during 2013.  All members of the Compensation Committee are independent as determined under the various NASDAQ Stock Market, U.S. Securities and Exchange Commission, or SEC, and Internal Revenue Service qualification requirements.  The Compensation Committee is governed by a written charter approved by the Board. The charter is available on our website at www.tearlab.com.  The functions of this committee include, among other things:

●          to provide oversight of the development and implementation of the compensation policies, strategies, plans and programs for the Company’s key employees and directors, including policies, strategies, plans and programs relating to long-term compensation for the Company’s senior management, and the disclosure relating to these matters;

●          to make recommendations regarding the operation of and/or implementation of employee bonus plans and incentive compensation plans;

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●          to review and approve the compensation of the Chief Executive Officer and the other executive officers of the Company and the remuneration of the Company’s directors; and

●          to provide oversight of the selection of officers, management, succession planning, the performance of individual executives and related matters.

Role and Authority of Compensation Committee

The Compensation Committee is responsible for discharging the responsibilities of the Board with respect to the compensation of our executive officers.  The Compensation Committee approves all compensation of our executive officers without further Board action. The Compensation Committee reviews and approves each of the elements of our executive compensation program and continually assesses the effectiveness and competitiveness of our program. The Compensation Committee also periodically reviews director compensation.

The Role of our Executives in Setting Compensation

The Compensation Committee meets with our Chief Executive Officer, Mr. Vamvakas, and/or other executives at least once per year to obtain recommendations with respect to Company compensation programs, practices, and packages for executives, directors and other employees. Management makes recommendations to the Compensation Committee on the base salary, bonus targets, and equity compensation for the executive team and other employees. The Compensation Committee considers, but is not bound by and does not always accept, management’s recommendations with respect to executive compensation. The Compensation Committee has the ultimate authority to make decisions with respect to the compensation of our named executive officers, but may, if it chooses, delegate any of its responsibilities to subcommittees.

Mr. Vamvakas attends some of the Compensation Committee’s meetings, but the Compensation Committee also regularly holds executive sessions not attended by any members of management or non-independent directors. The Compensation Committee discusses Mr. Vamvakas’s compensation package with him, but makes decisions with respect to his compensation outside of his presence .

Audit Committee .  The Audit Committee consists of Mr. Davidson, Mr. Rindell and Mr. Altig, with Mr. Altig serving as chairman.  The Audit Committee held five meetings during 2013.  All members of the Audit Committee are independent directors (as independence is currently defined in Rules 5605(a)(2) and 5605(c)(2) of the NASDAQ Listing Rules).  Mr. Altig qualifies as an “audit committee financial expert” as that term is defined in the rules and regulations established by the SEC.  The Audit Committee is governed by a written charter approved by the Board.  The charter is available on our website at www.tearlab.com. The functions of this committee include, among other things:

●          to monitor the Company’s financial reporting process and internal control system;

●          to appoint and replace the Company’s independent outside auditors from time to time, to determine their compensation and other terms of engagement and to oversee their work;

●          to oversee the performance of the Company’s internal audit function; and

●          to oversee the Company’s compliance with legal, ethical and regulatory matters.

Both our independent auditors and internal financial personnel regularly meet privately with our Audit Committee and have unrestricted access to this committee.  The Audit Committee has the power to investigate any matter brought to its attention within the scope of its duties.  It also has the authority to retain counsel and advisors to fulfill its responsibilities and duties.

Corporate Governance and Nominating Committee .  The Corporate Governance and Nominating Committee, or the Corporate Governance Committee, members are Mr. Altig, Dr. Karpecki, Dr. Graves and Mr. Rindell, with Mr. Rindell serving as chairman.  From February 22, 2012 until March 6, 2013, the committee consisted of Mr. Rindell, Dr. Karpecki and Mr. Altig. On March 6, 2013, Dr. Graves became a member of the committee.  The Corporate Governance Committee held two meetings during 2013.  All members of the Corporate Governance Committee are independent directors, as defined in the NASDAQ Stock Market qualification standards.  The Corporate Governance Committee is governed by a written charter approved by the Board.  The charter is available on our website at www.tearlab.com. The functions of this committee include, among other things:

●          to establish criteria for Board and committee membership and to recommend to the Board proposed nominees for election to the Board and for membership on committees of the Board;

●          to ensure that appropriate processes are established by the Board to fulfill its responsibility for (i) the oversight of strategic direction and development and the review of ongoing results of operations of the Company by the appropriate committee of the Board and (ii) the oversight of the Company’s investor relations and public relations activities and ensuring that procedures are in place for the effective monitoring of the stockholder base, receipt of stockholder feedback and responses to stockholder concerns;

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●          to monitor the quality of the relationship between management and the Board and to recommend improvements for ensuring an effective and appropriate relationship; and

●          to make recommendations to the Board regarding corporate governance matters and practices.

Director Nomination Process

Director Qualifications

In evaluating director nominees, the Corporate Governance Committee considers, among others, the following factors:

●          experience, skills and other qualifications in view of the specific needs of the Board and the Company;

●          diversity of background; and

●          demonstration of high ethical standards, integrity and sound business judgment.

The Corporate Governance Committee’s goal is to assemble a Board that brings to the Company a variety of perspectives and skills derived from high quality business and professional experience which are well suited to further the Company’s objectives.  In doing so, the Corporate Governance Committee also considers candidates with appropriate non-business backgrounds.

Other than the foregoing, there are no stated minimum criteria for director nominees, although the Corporate Governance Committee may also consider such other facts as it may deem are in the best interests of the Company and its stockholders.  The Corporate Governance Committee does, however, believe it appropriate for at least one, and, preferably, several, members of the Board to meet the criteria for an “audit committee financial expert” as defined by SEC rules, and that a majority of the members of the Board meet the definition of an “independent director” under the NASDAQ Stock Market qualification standards.  At this time, the Corporate Governance Committee also believes it appropriate for our Chief Executive Officer to serve as the Chairman of the Board.

Identification and Evaluation of Nominees for Directors

The Corporate Governance Committee identifies nominees for Board membership by first evaluating the current members of the Board willing to continue in service.  Current members with qualifications and skills that are consistent with the Corporate Governance Committee’s criteria for Board service and who are willing to continue in service are considered for re-nomination, balancing the value of continuity of service by existing members of the Board with that of obtaining a new perspective.  If any member of the Board does not wish to continue in service or if the Board decides not to re-nominate a member for re-election, the Corporate Governance Committee identifies the desired skills and experience of a new nominee in light of the criteria above.  The Corporate Governance Committee generally polls the Board and members of management for their recommendations.  The Corporate Governance Committee may also review the composition and qualification of the boards of directors of our competitors, and may seek input from industry experts or analysts.  The Corporate Governance Committee reviews the qualifications, experience and background of the candidates.  Final candidates are interviewed by our independent directors and Chief Executive Officer.  In making its determinations, the Corporate Governance Committee evaluates each individual in the context of the Board as a whole, with the objective of assembling a group that can best attain success for the Company and represent stockholder interests through the exercise of sound judgment.  After review and deliberation of all feedback and data, the Corporate Governance Committee makes its recommendation to the Board.  Historically, the Corporate Governance Committee has not relied on third-party search firms to identify Board candidates.  The Corporate Governance Committee may in the future choose to do so in those situations where particular qualifications are required or where existing contacts are not sufficient to identify and acquire an appropriate candidate.

The Corporate Governance Committee has not received director candidate recommendations from our stockholders and does not have a formal policy regarding consideration of such recommendations since it believes that the process currently in place for the identification and evaluation of prospective members of the Board is adequate.  Any recommendations received from stockholders will be evaluated in the same manner as potential nominees suggested by members of the Board or management.  Stockholders wishing to suggest a candidate for director should write to the Company’s Chief Financial Officer.

Communications with the Board of Directors

Our stockholders may send written correspondence to non-management members of the Board to the Chief Financial Officer or Chief Executive Officer at 9980 Huennekens St., Suite 100, San Diego, California 92121.  Our Chief Financial Officer or Chief Executive Officer will review the communication, and if the communication is determined to be relevant to our operations, policies, or procedures (and not vulgar, threatening, or of an inappropriate nature not relating to our business), the communication will be forwarded to the Chairman of the Board.  If the communication requires a response, our Chief Financial Officer will assist the Chairman of the Board (or other directors) in preparing the response.

-6-

Code of Business Conduct and Ethics

We have established a Code of Business Conduct and Ethics that applies to our officers, directors and employees.  The Code of Business Conduct and Ethics contains general guidelines for conducting our business consistent with the highest standards of business ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K.  The Code of Business Conduct and Ethics is available on our website at www.tearlab.com.  If we make any substantive amendments to the Code of Business Conduct and Ethics or grant any waiver from a provision of the Code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website.

Corporate Governance Documents

Our corporate governance documents, including the Audit Committee Charter, Compensation Committee Charter, Corporate Governance Committee Charter and Code of Business Conduct and Ethics are available free of charge on our website at www.tearlab.com.  Please note, however, that the information contained on the website is not incorporated by reference in, or considered part of, this Annual Report.  We will also provide copies of these documents free of charge to any stockholder upon written request to Investor Relations, TearLab Corporation, 9980 Huennekens St., Suite 100, San Diego, California 92121.

Report of the Audit Committee

The following is the report of the Audit Committee with respect to the Company’s audited consolidated financial statements for the year ended December 31, 2013.

The purpose of the Audit Committee is to assist the Board in its general oversight of the Company’s financial reporting, internal controls and audit functions.  The Audit Committee Charter describes in greater detail the full responsibilities of the Audit Committee.  All of the members of the Audit Committee are independent directors under the NASDAQ and SEC audit committee structure and membership requirements.

The Audit Committee has reviewed and discussed the consolidated financial statements with management and Ernst & Young, LLP, the Company’s independent auditors.  Management is responsible for the preparation, presentation and integrity of our consolidated financial statements, accounting and financial reporting principles; establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)); establishing and maintaining internal control over financial reporting (as defined in Exchange Act Rule 13A-15(f)); evaluating the effectiveness of disclosure controls and procedures; evaluating the effectiveness of internal control over financial reporting; and evaluating any change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.  Ernst & Young LLP is responsible for performing an independent audit of the consolidated financial statements and expressing an opinion on the conformity of those financial statements with generally accepted accounting principles in the United States of America.

Beginning in fiscal 2004 and continuing through fiscal 2013 (the tenth year of certification), management has implemented a process of documenting, testing and evaluating the Company’s internal control over financial reporting in accordance with the requirements of the Sarbanes-Oxley Act of 2002. Ernst & Young LLP is also responsible for auditing the Company’s internal control over financial reporting. The Audit Committee is kept apprised of the progress of the evaluation and provides oversight and advice to management regarding such compliance.  In connection with this oversight, the Audit Committee receives periodic updates provided by management at each regularly scheduled Audit Committee meeting.  At a minimum, these updates occur quarterly.  At the conclusion of the process, management provides the Audit Committee with a report on the effectiveness of the Company’s internal control over financial reporting which is reviewed and commented upon by the Audit Committee.  The Audit Committee also holds regular private sessions with Ernst & Young LLP to discuss their audit plan for the year, and the results of their quarterly reviews and the annual audit.  The Audit Committee also reviewed Ernst & Young LLP’s Report of Independent Registered Public Accounting Firm included in the Company’s Annual Report on Form 10-K related to our consolidated financial statements and financial statement schedule, as well as Ernst & Young LLP’s Report of Independent Registered Public Accounting Firm related to internal control over financial reporting.  The Audit Committee continues to oversee the Company’s efforts and reviews management’s report on the effectiveness of its internal control over financial reporting and management’s preparations for the evaluation.

The Committee met on five occasions in 2013.  The Committee met privately in executive session with Ernst & Young LLP as part of each regular meeting.  The Committee Chair also held private meetings with the Chief Financial Officer.

-7-

The Audit Committee has discussed with Ernst & Young LLP the matters required to be discussed by PCAOB Auditing Standard No. 16, “Communications with Audit Committees.”  In addition, Ernst & Young LLP has provided the Audit Committee with the written disclosures and the letter required by PCAOB Rule 3526, “Communication with Audit Committees Concerning Independence.”  In connection with the foregoing, the Audit Committee has discussed with Ernst & Young LLP their firm’s independence.

Based on their review of the consolidated financial statements and discussions with, and representations from, management and Ernst & Young LLP referred to above, the Audit Committee recommended to the Board that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, for filing with the U.S. Securities and Exchange Commission.

In accordance with Audit Committee policy and the requirements of law, the Audit Committee pre-approves all services to be provided by our independent auditors, Ernst & Young LLP.  Pre-approval is required for audit services, audit-related services, tax services and other services.  In some cases, the full Audit Committee provides pre-approval of services for up to a year, which may be related to a particular defined task or scope of work and subject to a specific budget.  In other cases, a designated member of the Audit Committee may have delegated authority from the Audit Committee to pre-approve additional services, and such pre-approval is later reported to the full Audit Committee.  See “Fees for Professional Services” for more information regarding fees paid to Ernst & Young LLP for services in fiscal years 2012 and 2013.

April 25, 2014

AUDIT COMMITTEE

Anthony Altig

Thomas N. Davidson

Donald Rindell

The Report of the Audit Committee does not constitute soliciting material, and shall not be deemed to be filed or incorporated by reference into any other filing by TearLab under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent TearLab specifically incorporates the Report of the Audit Committee by reference therein.

-8-

Principal Accounting Fees and Services.

In connection with the audit of the 2013 consolidated financial statements and our internal control over financial reporting, the Company entered into an engagement agreement with Ernst & Young LLP, which sets forth the terms by which Ernst & Young LLP has performed audit services for the Company.

The following table sets forth the aggregate fees agreed to by the Company for the annual audits for the fiscal years ended December 31, 2013 and 2012, and all other fees paid by the Company to Ernst & Young LLP during 2013 and 2012:

For the years ended December 31,

2013

2012

(in thousands)

Audit Fees

$

742.0

$

453.0

Audit-Related Fees

21.0

-

Tax Fees

15.0

15.0

All Other Fees

2.0

-

Totals

$

780.0

$

468.0

Audit Fees .  Audit fees for the fiscal years ended December 31, 2013 and 2012 were for professional services provided in connection with the annual audits of the Company’s consolidated financial statements and internal control over financial reporting, review of the Company’s quarterly consolidated financial statements, accounting matters directly related to the annual audits, professional services in connection with SEC registration statements, periodic reports (including Form 8-Ks) and other documents filed with the SEC or other documents issued in connection with securities offerings, and professional services provided in connection with other statutory or regulatory filings.

Audit-Related Fees .  Audit-related fees for 2013 and 2012 were for consultations by the Company’s management as to the accounting or disclosure treatment of certain transactions or events and/or the actual or potential impact of final or proposed rules, standards or interpretations by the SEC, FASB, or other regulatory standard setting bodies.

Tax Fees .   Tax fees for 2013 and 2012 related to IRC Section 382 tax studies.

All Other Fees .  Other fees for 2013 related to a subscription to an online knowledge management system.

All audit fees relating to the audit for the fiscal years ended December 31, 2013 and 2012, were approved in advance by the Audit Committee.  All audit and non-audit services to be provided by Ernst & Young LLP were, and will continue to be, pre-approved by the Audit Committee.

Director Attendance at Annual Meetings

Although the Company does not have a formal policy regarding attendance by members of the Board at our Annual Meeting, we encourage all of our directors to attend.  All of the Company’s directors attended our 2013 Annual Meeting, our most recent Annual Meeting, in person.

Director Independence

The Board of Directors has determined that each of the director nominees standing for election, except Elias Vamvakas and Adrienne Graves are independent directors under the NASDAQ Stock Market qualification standards.  In determining the independence of our directors, the Board considered all transactions in which the Company and any director had any interest, including those discussed under “Certain Relationships and Related Transactions” below.

Board Leadership Structure

The Board does not have a policy on whether or not the roles of Chief Executive Officer and Chairman of the Board should be separate and, if they are to be separate, whether the Chairman of the Board should be selected from the non-employee directors or be an employee.  The offices of Chief Executive Officer and Chairman of the Board have been at times combined and at times separated, and the Board considers such combination or separation in conjunction with, among other things, its succession planning processes.  The Board believes that it should be free to make a choice regarding the leadership structure from time to time in any manner that is in our and our stockholders’ best interests.

We currently have combined the roles of Chairman of the Board and Chief Executive Officer.  The Board does not have a lead independent director.  We believe this is appropriate because the Board includes a number of seasoned independent directors.  In concluding that having Mr. Vamvakas serve as Chief Executive Officer and Chairman of the Board represents the appropriate structure for us at this time, the Board considered the benefits of having the Chief Executive Officer serve as a bridge between management and the Board, ensuring that both groups act with a common purpose.  The Board also considered Mr. Vamvakas’ knowledge regarding our operations and the industry in which we compete and his ability to promote communication, to synchronize activities between the Board and our senior management and to provide consistent leadership to both the Board and the Company in coordinating our strategic objectives.  The Board further concluded that the combined role of Chairman of the Board and Chief Executive Officer ensures there is clear accountability.

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Board Role in Risk Oversight

While each of the committees of the Board evaluate risk in their respective areas of responsibility, our Corporate Governance Committee is primarily responsible for overseeing the Company’s risk management processes on behalf of the full Board.  We believe that employing a committee specifically focused on our Company’s risk profile is beneficial, given the increased importance of monitoring risks in the current economic and business climate.  The Corporate Governance Committee discusses the Company’s risk profile, and the Corporate Governance Committee reports to the full Board on the most significant risk issues.  The Compensation Committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements.

While the Board and the Corporate Governance Committee oversee the Company’s risk management, Company management is ultimately responsible for day-to-day risk management activities.  We believe this division of responsibilities is the most effective approach for addressing the risks facing our Company and that the Board leadership structure supports this approach.

Board of Directors’ Recommendation

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION AS

DIRECTOR OF EACH NOMINEE LISTED ABOVE.

-10-

EXECUTIVE AND BENEFICIAL OWNERSHIP INFORMATION

Our Executive Officers

The following table sets forth the name and position of each of the persons who were serving as our named executive officers as of April 14, 2014.

Name

Age

Position

Elias Vamvakas

55

Chairman of the Board and Chief Executive Officer

Joseph Jensen

42

Chief Operating Officer and President

William Dumencu

59

Chief Financial Officer

Michael Berg

61

Vice President, Regulatory

Tracy Puckett

50

Vice President, Marketing

Joseph Jensen, has over 18 years of experience in pharmaceutical and medical device sectors spanning sales, sales management, marketing, international and global positions. He is a proven leader with consistent performance and commensurate promotions at a Fortune 50 company. From 1996 to 2013, Mr. Jensen served in managerial roles, most recently as the head of marketing of Alcon Laboratories. From 1995 to 1996, Mr. Jensen served as territory manager of Warner Lambert. From 1994 to 1995, Mr. Jensen served as district manager of Payroll Services. Mr. Jensen graduated from Flagler College with Bachelor of Arts degrees in Business and Communications and a minor in Advertising.

William Dumencu, served as TearLab’s Chief Financial Officer and Treasurer between September 2003 and June 2005 and has been serving again in that capacity since the middle of April 2006. Prior to his re-appointment as TearLab’s Chief Financial Officer and Treasurer in April 2006, Mr. Dumencu had been serving as TearLab’s Vice President, Finance. From January 2003 to August 2003, Mr. Dumencu was a consultant for TearLab and TLC Vision, and from 1998 until 2002, Mr. Dumencu served in a variety of financial leadership positions at TLC Vision, including Controller. Mr. Dumencu was employed in various financial management positions by Hawker Siddeley Canada, Inc., a manufacturing conglomerate, from 1978 to 1998. Mr. Dumencu is a Chartered Professional Accountant and a member of the Canadian Institute of Chartered Accountants. He holds a Bachelor of Math degree from the University of Waterloo.

Michael Berg, has over 25 years experience introducing new technology into the professional healthcare marketplace, through his own companies and as consultant to the industry. He is experienced in product development and acquisition, finance, manufacturing, marketing and strategic planning, domestic and international distribution, reimbursement and regulatory affairs. Michael, having studied and lived in Japan is an expert in Japanese regulatory and distribution strategies. As 50% joint-venture owner and President of HemoCue, Inc, Michael launched a blood hemoglobin point-of-care analyzer in the U.S. through a unique distribution model he created, the Independent Direct Distribution Organization. This model incorporated an educational approach to convert the healthcare profession from the prevailing spun microhematocrit technology, to a more expensive but accurate and safer hemoglobin test for the diagnosis of classic anemia. This distribution system provided all the advantages of a direct sales force at a fraction of the cost. Under this model, 13,000 HemoCue analyzers were sold into the market in the first 4 years of operation, with continued placement to date of 30,000+ instruments resulting in a business exceeding $50 million in annual revenue. Michael divested all interest in HemoCue, Inc. upon Mallinckrodt's acquisition of the parent company, HemoCue AB, in January 1991 for $100 million. As a consultant to the industry, Michael has repeatedly formulated and implemented successful strategies to obtain CLIA Waiver categorization for point-of-care technology, solicited and obtained CPT coding through the American Medical Association process, and facilitated strong reimbursement for his clients through the Medicare (CMS) system. Focused on market development and physician education, Michael is experienced in the design and coordination of clinical studies, positioning products to meet clinical guidelines, evidence-based medicine and pay-for-performance criteria, and co-promotion with the pharmaceutical industry to link diagnosis and therapy. Michael received his BA from the University of Notre Dame and currently resides in Orange County California.

Tracy Puckett , with U.S. and global experience in both packaged goods and pharmaceutical products, Tracy brings more than 23 years of marketing and product launch experience to the TearLab Corporation team. Prior to joining Tearlab Corporation, Tracy was the Executive Director of Branding at Alimera Sciences, in Atlanta, Georgia where she launched her first ethically promoted OTC product in record time. Tracy has created and managed brand strategies for numerous ophthalmic OTC and prescription products. In her role as Executive Direct, US Marketing at Novartis Ophthalmics, Tracy managed a team of product managers overseeing the anterior segment business for the company. Before moving to the pharmaceutical industry, Tracy worked for healthcare advertising agency, Adair-Greene where she managed the Novartis Ophthalmics account. International consumer experience was achieved during her tenure at McCann-Erickson in Moscow, Russia, a multi-national advertising agency. As head of New Business, Tracy brought a number of key accounts into the agency. In her role as Group Account Supervisor, she led a diverse brand team which managed clients such as Johnson & Johnson, Nestle and Gillette. Throughout her career, Tracy has had proven success in building sustainable brand propositions which meet company P&L objectives. Tracy is responsible for US and Global Marketing. Tracy holds a Bachelor of Science degree from Georgia Southern University.

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A biography for Elias Vamvakas can be found in the section entitled Information Regarding Directors above.

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

The following table sets forth information as of March 15, 2014 regarding the beneficial ownership of our common stock by (i) each person we know to be the beneficial owner of 5% or more of our common stock, (ii) each of our current executive officers, (iii) each of our directors and (iv) all of our current executive officers and directors as a group.  Information with respect to beneficial ownership has been furnished by each director, executive officer or 5% or more stockholder, as the case may be.

Percentage of beneficial ownership is calculated based on 33,573,735 shares of common stock outstanding as of March 7, 2014.  Beneficial ownership is determined in accordance with the rules of the SEC which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and includes shares of our common stock issuable pursuant to the exercise of stock options, warrants or other securities that are immediately exercisable or convertible or exercisable or convertible within 60 days of March 7, 2014.  Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Unless otherwise noted, the address for each person set forth on the table below is c/o TearLab Corporation, 9980 Huennekens St., Suite 100, San Diego, California 92121.

Name of Beneficial Owner

Shares

Beneficially

Owned

Percentage of

Shares Beneficially

Owned

5% Stockholder

Entities affiliated with the Douglas Family (1)

4,241,340

12.63%

Massachusetts Financial Services Company (2)

3,322,512

9.90%

Executive Officers and Directors:

Elias Vamvakas (3)

2,752,251

7.90%

William Dumencu (4)

111,200

*

Stephen Zmina (5)

110,000

*

Paul Karpecki (6)

94.269

*

Richard Lindstrom (7)

241,398

*

Adrienne Graves (8)

113,799

*

Donald Rindell (9)

153,687

*

Anthony Altig (10)

177,096

*

Brock Wright (11)

718,896

2.14%

Thomas N. Davidson, Jr. (12)

447,164

1.32%

Michael Lemp (13)

293,192

*

David C. Eldridge (14)

247.423

*

Duane Morrison (15)

110,000

*

Michael Berg (16)

161,037

*

Benjamin Sullivan (17)

229,239

*

Robert Walder (18)

135,945

*

Tracy Puckett (19)

171,498

*

Joseph Jensen (20)

0

*

Delano Ligu (21)

35,000

*

All directors and executive officers as a group (19 people) (22)

6,303,094

17.10%


(*)

Represents beneficial ownership of less than 1%.

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(1) Pursuant to a Schedule 13G/A filed February 13, 2014, represents 4,241,340 shares beneficially owned by Kevin Douglas, Michelle Douglas, James E. Douglas, III, K&M Douglas Trust, Douglas Family Trust, and James Douglas and Jean Douglas Irrevocable Descendants’ Trust. The address of the entities affiliated with the Douglas family is 125 E. Sir Francis Drake Blvd., Ste 400, Larkspur, CA 94393. Includes (a) 1,525,500 shares beneficially owned by Kevin Douglas; (b) 1,190,340 shares beneficially owned by Michelle Douglas; (c) 40,000 shares beneficially owned by James E. Douglas, III; (d) 495,590 shares beneficially owned by K&M Douglas Trust; (e) 295,160 shares beneficially owned by Douglas Family Trust; and (f) 694,750 shares beneficially owned by James Douglas and Jean Douglas Irrevocable Descendants’ Trust.

(2)

Pursuant to a Schedule 13G/A filed February 10, 2014. Massachusetts Financial Services Company address is 111 Huntington Avenue, Boston, MA 02199.

(3)

Includes (a) 1,148,729 shares subject to options exercisable within 60 days of March 7, 2014; (b) 1,283,486 shares held beneficially by Mr. Vamvakas through his relationship with Greybrook Capital Inc., which includes 19,375 shares subject to warrants exercisable within 60 days of March 7, 2014; (c) 44,028 shares held beneficially by Mr. Vamvakas through his relationship with Greybrook Securities Inc.; and (d) 276,008 shares held by Mr. Vamvakas, which includes 104,604 shares subject to warrants. Mr. Vamvakas is the Chairman of Greybrook Capital, Inc., which is located at 5090 Explorer Drive, Suite 203 Mississauga, Ontario Canada L4W 4T9.

(4)

Includes 111,200 shares subject to options exercisable within 60 days of March 7, 2014.

(5)

Includes 110,000 shares subject to options exercisable within 60 days of March 7, 2014.

(6)

Includes 88,769 shares subject to options exercisable within 60 days of March 7, 2014.

(7)

Includes (a) 125,148 shares subject to options exercisable within 60 days of March 7, 2014, and (b) 6,250 shares subject to warrants exercisable within 60 days of March 7, 2014.

(8)

Includes 113,670 shares subject to options exercisable within 60 days of March 7, 2014.

(9)

Includes 153,687 shares subject to options exercisable within 60 days of March 7, 2014.

(10)

Includes (a) 122,096 shares subject to options exercisable within 60 days of March 7, 2014.

(11)

Includes (a) 76,992 shares subject to options exercisable within 60 days of March 7, 2014, and (b) 6,249 shares subject to warrants exercisable within 60 days of March 7, 2014.

(12)

Includes (a) 71,795 shares subject to options exercisable within 60 days of March 7, 2014; (b) 304,079 shares held beneficially by Mr. Davidson through his relationship with Cardinal Crest Partners, 7 Sunrise Cay, Key Largo, Florida 33037, which includes 100,000 shares subject to warrants; (c) 48,890 shares held by Mr. Davidson Jr., which includes 15,000 shares subject to warrants; and (d) 22,400 shares held by Mr. Davidson, Jr.’s spouse.

(13)

Includes 85,351 shares subject to options exercisable within 60 days of March 7, 2014.

(14) Includes 144,906 shares subject to options exercisable within 60 days of March 7, 2014.

(15)

Includes 110,000 shares subject to options exercisable within 60 days of March 7, 2014.
(16) Includes 110,000 shares subject to options exercisable within 60 days of March 7, 2014.
(17) Includes 204,733 shares subject to options exercisable within 60 days of March 7, 2014.
(18) Includes 110,000 shares subject to options exercisable within 60 days of March 7, 2014.
(19) Includes 110,000 shares subject to options exercisable within 60 days of March 7, 2014.
(20) No shares subject to options exercisable within 60 days of March 7, 2014.
(21) Includes 35,000 shares subject to options exercisable within 60 days of March 7, 2014.
(22) Includes (a) 3,032,076 shares subject to options exercisable within 60 days of March 7, 2014 held on record by the current directors and executive officers; and (b) 251,478 shares subject to warrants exercisable within 60 days of March 7, 2014 held of record by the current directors and executive officers.

-13-

Equity Compensation Plan Information

The following table provides information regarding the equity compensation plans as of December 31, 2013.

Equity Compensation Plan Category

Number of securities to be issued upon exercise of outstanding options, warrants and rights

(a)

Weighted average exercise price of outstanding options,

warrants and rights

(b)

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

(c)

Plans approved by security holders (1)

5,536,795

4.91

134,400

Plans not approved by security holders

The June 2011 PIPE Warrants (2)

524,549

1.86

The June 2011 Debt Warrants (3)

74,063

1.60

––

Total

598,612

1.83

––


(1)

For discussion of the 2002 Stock Incentive Plan, which was approved by the security holders, please refer to footnote 10 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. The number of securities remaining available for future issuance under equity compensation plans excludes 337,500 options granted in December 2013. As of December 31, 2013, the Company had granted 337,500 options to certain employees and consultants which require shareholder approval to increase the option pool by at least 203,100 options before the options granted become exercisable. If shareholder approval is not obtained by December 13, 2014 to increase the option pool, then these options shall expire and will be returned to the Plan. These options vest one-third annually on the anniversary of its grant date of December 13, 2013.

(2)

On June 30, 2011, pursuant to a private placement financing, the Company issued warrants to certain investors.  The warrants are five-year warrants exercisable into an aggregate of 3,846,154 shares of the Company’s common stock at $1.86 per common share.

(3)

On June 13, 2011, pursuant to a conversion and retirement of the Company’s outstanding Financing obligations, the Company issued warrants to certain investors.  The warrants are five-year warrants exercisable into an aggregate of 109,375 shares of the Company’s common stock at $1.60 per common share.

Certain Relationships and Related Transactions.

Since January 1, 2013, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or are a party in which the amount involved exceeds $120,000 and in which any director, executive officer or beneficial holder of more than 5% of any class of our voting securities or members of such person’s immediate family had or will have a direct or indirect material interest.  All future transactions between us and any of our directors, executive officers or related parties will be subject to the review and approval of our Audit Committee.  In accordance with its charter, the Audit Committee is responsible for reviewing and approving all related party transactions for potential conflicts of interest on an ongoing basis.

-14-

PROPOSAL 2: AMENDMENT OF THE 2002 STOCK INCENTIVE PLAN

We are asking our stockholders to approve, on a disinterested basis, an amendment and restatement of the Company’s 2002 Stock Incentive Plan (the “Incentive Plan”). The Incentive Plan was adopted and approved by our stockholders in June 2013. As of April 14, 2014, a total of 5,200,000 shares have been authorized for issuance under the Option Plan.

On February 24, 2014, our Board of Directors (the “Board”) approved, subject to the approval from our stockholders at the 2014 Annual Meeting, the amendment and restatement of the Incentive Plan to provide for the following:

to increase the shares reserved for issuance to 6,200,000 shares;

to remove prospective service providers from the list of individuals eligible to participate in the Incentive Plan;

to remove the limits on the number of awards that may be granted to an employee in a fiscal year; and

to make certain other amendments to update the Incentive Plan.

We believe that long-term incentive compensation programs align the interests of management, employees and stockholders to create long-term stockholder value. We believe that plans such as the Incentive Plan increase the Company’s ability to achieve this objective by allowing for several different forms of long-term incentive awards, which we believe will help us recruit, reward, motivate and retain talented personnel. The Incentive Plan, as proposed to be amended and restated, provides for the grant of stock appreciation rights, stock options, restricted stock and restricted stock units. As of April 14, 2014, options to purchase 4,924,025 shares were issued and outstanding under the Incentive Plan, options to purchase 238,960 shares had been exercised, and options to purchase 257,736 shares remained available for future grants. Our executive officers have an interest in this proposal as they may receive awards under the Incentive Plan.

If stockholders approve the amendment, we currently anticipate that the shares available under the Incentive Plan will be sufficient to meet our expected needs during approximately the next 1 to 2 years. However, future circumstances and business needs may dictate a different result. In determining the number of shares to be added to the total number of shares reserved for issuance under the Incentive Plan, the Compensation Committee and the Board considered the following:

Historical Grant Practices . The Compensation Committee and the Board considered the historical amounts of equity awards that we have granted in the past three years. In fiscal years 2011, 2012 and 2013, we granted equity awards representing a total of 3,236,028 shares.

Forecasted Grant Practices . Consistent with the growth of our workforce, we currently forecast granting equity awards covering approximately 750,000 - 1,000,000 shares over the next 1-year period. The proposed share reserve under the amended and restated Incentive Plan would increase the number of available shares from 5,200,000 to 6,200,000.

Awards Outstanding Under Existing Grants . As of April 14, 2014, there are 4,924,025 shares subject to outstanding stock options, no outstanding shares of restricted stock, and no unvested and outstanding restricted stock units.  Accordingly, the 4,924,025 shares subject to our outstanding equity awards (commonly referred to as the “overhang”) represent approximately 14.7% of our outstanding shares.

In addition, in December 2013 and again in February 2014, the Board granted a total of 537,500 stock option awards to employees and service providers of the Company and its subsidiaries (but not including any named executive officers), that are conditioned upon the approval of the share reserve increase set forth in this proposal. If Company shareholders do not approve of this proposal to add shares to the total number of shares reserved for issuance under the Incentive Plan, such option awards will be void. The options to purchase 257,736 shares remaining available for future grants exclude the impact of the aforementioned 537,500 stock options.

Summary of the 2002 Stock Incentive Plan

The following paragraphs provide a summary of the principal features of the Incentive Plan and its operation.  The summary is qualified in its entirety by reference to the Incentive Plan’s full text, a copy of which is attached hereto as Appendix A and which may also be accessed from the SEC’s website at http://www.sec.gov .  In addition, a copy of the Incentive Plan may be obtained upon written request to the Company.

Purpose .  The purpose of the Incentive Plan is to advance the interests of the Company or any parent or subsidiary of the Company (each, a “Participating Company”, and collectively, the “Participating Company Group”) and the Participating Company Group’s stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group.

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Administration .  The Incentive Plan may be administered by the Board or a committee, which the Board may appoint from among its members (in either case, the “Administrator”). Subject to the provisions of the Incentive Plan, the Administrator has the authority to: (1) determine the persons to whom, and the time or times at which, awards will be granted and the number of shares of stock to be subject to each award; (2) designate options as incentive stock options or nonstatutory stock options; (3) determine the fair market value of shares of stock or other property; (4) determine the terms, conditions and restrictions applicable to each award (which need not be identical) and any shares acquired upon the exercise thereof, including, without limitation, (i) the exercise price of the award, (ii) the method of payment for shares purchased upon the exercise of the award, (iii) the method for satisfaction of any tax withholding obligation arising in connection with the award, including by the withholding or delivery of shares of stock, (iv) the timing, terms and conditions of the exercisability of the award or the vesting of any shares acquired upon the exercise thereof, (v) the time of the expiration of the award, (vi) the effect of the participant’s termination of service with the Participating Company Group on any of the foregoing, and (vii) all other terms, conditions and restrictions applicable to the award or such shares not inconsistent with the terms of the Incentive Plan; (5) approve one or more forms of award agreement; (6) amend, modify, extend, cancel, renew, reduce the exercise price of or in any other manner re-price any outstanding award or to waive any restrictions or conditions applicable to any outstanding award or any shares acquired upon the exercise thereof; (7) accelerate, continue, extend or defer the exercisability of any award or the vesting of any shares acquired upon the exercise thereof, including with respect to the period following a participant’s termination of service with the Participating Company Group; (8) prescribe, amend or rescind rules, guidelines and policies relating to the Incentive Plan, or to adopt supplements to, or alternative versions of, the Incentive Plan, including, without limitation, as the Administrator deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted award; and (9) correct any defect, supply any omission or reconcile any inconsistency in the Incentive Plan or any award agreement and to make all other determinations and take such other actions with respect to the Incentive Plan or any award as the Administrator may deem advisable to the extent not inconsistent with the provisions of the Incentive Plan or applicable law.  All decisions, interpretations and other actions of the Administrator will be final and binding on all holders of options or rights and on all persons deriving their rights therefrom.

Reserved Shares .  If our stockholders approve the amendment and restatement of the Incentive Plan, then subject to adjustment, the maximum aggregate number of shares of stock that may be issued under the Incentive Plan will be 6,200,000. This share reserve will consist of authorized but unissued or reacquired shares of stock or any combination thereof. If an outstanding award for any reason expires, is forfeited, or is terminated or canceled or if shares of stock are acquired upon the exercise of an award, subject to a Company repurchase option and are repurchased by the Company at the participant’s exercise price, the shares of stock allocable to the unexercised portion of such award or repurchased, forfeited or cancelled shares of stock will again be available for issuance under the Incentive Plan. If our stockholders approve the amendment and restatement of the Incentive Plan, then subject to adjustment, the maximum aggregate number of shares of stock that may be issued pursuant to the exercise of incentive stock options will be 6,200,000 (the “ISO Share Issuance Limit”).

Eligibility .  The Incentive Plan provides that awards, other than incentive stock options, may be granted to employees, consultants, and directors of a Participating Company.  An incentive stock option may only be granted to an employee of a Participating Company.   As of April 14, 2014, approximately 101 of our current and former employees, 11 of our current and former directors, and 30 of our consultants were eligible to participate in the Incentive Plan. The Incentive Plan does not limit insider participation.

Options .  The Administrator is able to grant nonstatutory stock options and incentive stock options under the Incentive Plan.  The Administrator determines the number of shares subject to each option.

The Administrator determines the exercise price of options at the time the options are granted, provided that (a) the exercise price per share for an option will be not less than the fair market value of a share of stock on the effective date of grant of the option and (b) no incentive stock option granted to any participant who owns 10% of the voting power of all classes of a Participating Company’s outstanding capital stock will have an exercise price per share less than 110% of the fair market value of a share of stock on the effective date of grant of the option.  However, an option may be granted with an exercise price lower than the minimum exercise price if the option is granted pursuant to an assumption or substitution for another option in a manner qualifying under the provisions of Section 424(a) of the Code.

The term and vesting schedule of each option will be stated in the award agreement.  The term of an option may not exceed 10 years, except that, with respect to any participant who owns more than 10% of the voting power of all classes of a Participating Company’s outstanding capital stock, the term of an incentive stock option may not exceed 5 years.

After a termination of service with the Company, a participant will be able to exercise the vested portion of his or her option for the period of time stated in the award agreement. If no such period of time is stated in the participant’s award agreement, the participant will generally be able to exercise his or her option for (i) 3 months following his or her termination for reasons other than death or disability, and (ii) 12 months following his or her termination due to death or disability. In no event may an option be exercised later than the expiration of its term.

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If a sale of the shares underlying the option would subject the participant to suit under Section 16(b) of the Securities Exchange Act of 1934, as amended, the option will remain exercisable until the earliest to occur of (i) the 10th day following the date on which a sale of such shares by the participant would no longer be subject to such suit, (ii) the 190th day after the participant’s termination of service, or (iii) the option expiration date.  If the participant is subject to a Company-imposed trading blackout, the option generally will remain exercisable until the earlier of (i)  the end of the tenth (10th) business day after the trading blackout or (ii) the option expiration date.

Generally, a participant may not assign or transfer his or her option except by will or by the laws of descent and distribution, and during the participant's lifetime, the option will be exercisable only by the participant or the participant's guardian or legal representative. However, the Board, in its discretion may provide in a stock option agreement that a nonstatutory stock option will be assignable or transferable subject to the applicable limitations, if any, described in the General Instructions to Form S-8 Registration Statement under the Securities Act.

Stock Appreciation Rights .  Stock appreciation rights are rights to receive a cash amount (net of applicable withholdings) equal to the appreciation in fair market value of our common stock between the exercise date and the date of grant.  The Administrator will be able to grant stock appreciation rights to any employee, consultant, or director of a Participating Company in connection with the grant of any option.  Any grant of stock appreciation rights will be included in the option agreement.  Stock appreciation rights will be exercisable only at the same time, by the same person and to the same extent, that the related option is exercisable.  Upon exercise of any stock appreciation right, the corresponding portion of the related Option will be surrendered to the Company.  The Company has the absolute right, at any time and from time to time, to require a participant to exercise an option in lieu of the related stock appreciation right.

Restricted Stock .  Awards of restricted stock are rights to acquire or purchase shares of our common stock, which vest in accordance with the terms and conditions established by the Administrator in its sole discretion. Subject to the terms and conditions of the Incentive Plan, restricted stock may be granted to employees, consultants or directors of a Participating Company at any time and from time to time at the discretion of the Administrator. The Administrator will have complete discretion to determine (i) the number of shares subject to a restricted stock award granted to any participant and (ii) the conditions for grant or for vesting that must be satisfied.

Unless the Administrator determines otherwise, the Company as escrow agent will hold shares of restricted stock until the restrictions on such shares of restricted stock have lapsed.  During the period of restriction, participants holding shares of restricted stock may exercise full voting rights and will be entitled to receive all dividends and other distributions paid with respect to those shares of restricted stock, unless the Administrator provides otherwise.  If any dividends or distributions are paid in shares of stock, the shares of stock will be subject to the same restrictions on transferability and forfeitability as the shares of restricted stock with respect to which they were paid. Each restricted stock grant will be evidenced by an agreement that will specify the purchase price (if any) and such other terms and conditions as the Administrator will determine.  Shares of restricted stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable period of restriction.

Restricted Stock Units .  Restricted stock units represent a right to receive shares at a future date determined in accordance with the participant’s award agreement.  No monetary payment is required for receipt of restricted stock units or the shares issued in settlement of the award, the consideration for which is furnished in the form of the participant’s service to the Company.  In determining whether an award of restricted stock units should be made, and/or the vesting schedule for any such award, the Committee may impose whatever conditions to vesting it determines to be appropriate.

Change in Control .  An “Ownership Change Event” will be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of more than 50% of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company; or (iv) a liquidation or dissolution of the Company.  A “Change in Control” means an Ownership Change Event or a series of related Ownership Change Events (collectively, a “Transaction”) wherein the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, in substantially the same proportions as their ownership of shares of the Company’s voting stock immediately before the Transaction, direct or indirect beneficial ownership of more than 50% of the total combined voting power of the outstanding voting securities of the Company or, in the case of a sale, exchange, or transfer of all or substantially all of the assets of the Company, the corporation or other business entity to which the assets of the Company were transferred (the “Transferee”), as the case may be.  Indirect beneficial ownership includes, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities which own the Company or the Transferee, either directly or through one or more subsidiary corporations or other business entities.  The Board will have the right to determine whether multiple sales or exchanges of the voting securities of the Company or multiple Ownership Change Events are related, and its determination will be final, binding and conclusive.

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In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof (the “Acquiring Corporation”), may, without the consent of the participant, either assume the Company’s rights and obligations under outstanding awards or substitute for outstanding awards substantially equivalent awards for the Acquiring Corporation’s stock.  In the event that the Acquiring Corporation does not assume or substitute for the outstanding awards, the participant will fully vest in and have the right to exercise all of his or her outstanding awards, including shares of stock as to which such awards would not otherwise be vested or exercisable.  Any awards which are neither assumed or substituted for by the Acquiring Corporation in connection with the Change in Control nor exercised as of the date of the Change in Control will terminate and cease to be outstanding effective as of the date of the Change in Control.  Shares acquired upon exercise of an award prior to the Change in Control and any consideration received pursuant to the Change in Control with respect to such shares will continue to be subject to all applicable provisions of the award agreement evidencing such award except as otherwise provided in such award agreement.  Furthermore, if the corporation the stock of which is subject to the outstanding awards immediately prior to a sale or exchange by the stockholders of more than 50% percent of the voting stock of the Company is the surviving or continuing corporation and immediately after such Ownership Change Event less than fifty percent (50%) of the total combined voting power of its voting stock is held by another corporation or by other corporations that are members of an affiliated group within the meaning of Section 1504(a) of the Code without regard to the provisions of Section 1504(b) of the Code, the outstanding awards will not terminate unless the Administrator otherwise provides in its discretion.  Additionally, if a participant’s service is terminated by reason of an involuntary termination within 18 months following the effective date of a Change in Control in which the Acquiring Corporation assumes or substitutes for outstanding awards, the shares of stock subject to such participant’s outstanding awards will automatically accelerate and vest in full as of the participant’s termination of service, including shares of stock as to which such awards would not otherwise be vested or exercisable.  Any award so accelerated will remain exercisable until the award’s expiration or, if earlier, the termination of the award, as provided in the participant’s award agreement.

Capitalization Changes .  In the event of any dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of shares of our common stock or other securities, or other change in our corporate structure affecting the shares of our common stock, appropriate adjustments will be made in the number and class of shares subject to the Incentive Plan and to any outstanding awards, in the ISO Share Issuance Limit, and in the exercise price per share of any outstanding awards.  If a majority of the shares which are of the same class as the shares that are subject to outstanding awards are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the “New Shares”), the Administrator may unilaterally amend the outstanding awards to provide that such awards are exercisable for New Shares.  In the event of any such amendment, the number of shares subject to, and the exercise price per share of, the outstanding awards will be adjusted in a fair and equitable manner as determined by the Administrator, in its discretion.  Any fractional share resulting from an adjustment will be rounded down to the nearest whole number, and in no event may the exercise price of any award be decreased to an amount less than the par value, if any, of the stock subject to the award.  The adjustments determined by the Administrator will be final, binding and conclusive.

Amendment, Suspensions and Termination of the Incentive Plan .  The Board may amend or terminate the Incentive Plan at any time, except that stockholder approval is required for any amendment to the Incentive Plan to the extent required by any applicable laws. No amendment or termination of the Incentive Plan will impair the rights of any participant without the participant’s consent, unless required by applicable law, legislation, regulation or rule.  If our stockholders approve the amendment of the Incentive Plan, no awards may be granted under the Incentive Plan after June 6, 2022.

Number of Awards Granted to Employees, Directors and Consultants

The number of awards that an employee, director or consultant may receive under the Incentive Plan is in the discretion of the Administrator and therefore cannot be determined in advance.  The following table sets forth (i) the aggregate number of shares of common stock subject to options and restricted stock units granted under the Incentive Plan during our last fiscal year and (ii) the average per share exercise price of such options.

Name of Individual or Group

Number of

Options Granted

(#)

Average

Exercise

Price ($)

Number of

Restricted Stock

Units Granted (#)

Dollar Value of

Shares subject to

Restricted Stock

Units ($)

Elias Vamvakas, Chief Executive Officer

125,000 6.43 - -

Joseph Jensen, President, Chief Operating Officer

- - -

Bill Dumencu, Chief Financial Officer

30,000 6.43 - -

Michael Berg, Vice President, Regulatory

30,000 6.43 - -

Tracy Puckett, Vice President of Marketing

30,000 6.43 - -

All Named Executive Officers, as a group

215000 6.43 - -

All directors who are not Named Executive Officers, as a group

105,000 11.84 - -

All employees who are not Named Executive Officers, as a group

1,217,500 9.82 - -

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Federal Tax Aspects

The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers and the Company of awards granted under the Incentive Plan. Tax consequences for any particular individual may be different.

Nonstatutory Stock Options .  No taxable income is reportable when a nonstatutory stock option with an exercise price equal to the fair market value of the underlying stock on the date of grant is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the excess of the fair market value (on the exercise date) of the shares purchased over the exercise price of the option. Any taxable income recognized in connection with an option exercise by an employee of the Company is subject to tax withholding by the Company. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.

Incentive Stock Options . No taxable income is reportable when an incentive stock option is granted or exercised (except for purposes of the alternative minimum tax, in which case taxation is the same as for nonqualified stock options). If the participant exercises the option and then later sells or otherwise disposes of the shares more than two years after the grant date and more than one year after the exercise date, the difference between the sale price and the exercise price will be taxed as capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the shares before the end of the two- or one-year holding periods described above, he or she generally will have ordinary income at the time of the sale equal to the fair market value of the shares on the exercise date (or the sale price, if less) minus the exercise price of the option.

Stock Appreciation Rights .  No taxable income is reportable when a stock appreciation right with an exercise price equal to the fair market value of the underlying stock on the date of grant is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the amount of cash received and the fair market value of any shares received.  Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.

Restricted Stock and Restricted Stock Units .  A participant will not have taxable income upon grant (unless, with respect to restricted stock, he or she elects to be taxed at that time). Instead, he or she will recognize ordinary income at the time of vesting equal to the fair market value (on the vesting date) of the vested shares or cash received less any amount paid for the shares of our vested common stock.

Tax Effect for Us .  We generally will be entitled to a tax deduction in connection with an award under the Incentive Plan in an amount equal to the ordinary income realized by a participant at the time the participant recognizes such income (for example, the exercise of a nonstatutory stock option). Special rules limit the deductibility of compensation paid to our Chief Executive Officer and to our four other most highly compensated named executive officers (other than our Chief Executive Officer). Under Section 162(m), the annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed $1,000,000.

Section 409A .  Section 409A of the Internal Revenue Code of 1986, as amended (“ Section 409A ”), provides certain requirements on non-qualified deferred compensation arrangements. These include requirements with respect to an individual’s election to defer compensation and the individual’s selection of the timing and form of distribution of the deferred compensation. Section 409A also generally provides that distributions must be made on or following the occurrence of certain events (e.g., the individual’s separation from service, a predetermined date, or the individual’s death).  Section 409A imposes restrictions on an individual’s ability to change his or her distribution timing or form after the compensation has been deferred.  For certain individuals who are officers, Section 409A requires that such individual’s distribution commence no earlier than six months after such officer’s separation from service.

Awards granted under the Incentive Plan with a deferral feature will be subject to the requirements of Section 409A.  If an award is subject to and fails to satisfy the requirements of Section 409A, the recipient of that award will recognize ordinary income on the amounts deferred under the award, to the extent vested, which may be prior to when the compensation is actually or constructively received. Also, if an award that is subject to Section 409A fails to comply with Section 409A’s provisions, Section 409A imposes an additional 20% federal income tax on compensation recognized as ordinary income, as well as possible interest charges and penalties. Certain states have enacted laws similar to Section 409A which impose additional taxes, interest and penalties on non-qualified deferred compensation arrangements. We will also have withholding and reporting requirements with respect to such amounts.

Board of Director’s Recommendation

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE 2002 STOCK INCENTIVE PLAN AND THE RATIFICATION OF THE OPTIONS GRANTED SUBJECT TO STOCKHOLDER APPROVAL.

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PROPOSAL 3: APPROVAL OF THE 2014 EMPLOYEE STOCK PURCHASE PLAN

The stockholders are being asked to approve a new employee stock purchase plan, the 2014 Employee Stock Purchase Plan (the “Purchase Plan”). The proposed Purchase Plan will be a significant part of our overall equity compensation strategy, especially with respect to our non-executive employees. The proposed Purchase Plan will be one of the primary programs through which our employees may achieve ownership in our company and thereby share in our success. The Board of Directors has determined that it is in the best interests of TearLab and its stockholders to have an employee stock purchase plan and is asking TearLab’s stockholders to approve the Purchase Plan. The Board of Directors has adopted the Purchase Plan and has reserved a total of 671,500 shares of TearLab’s common stock for purchase under the Purchase Plan, subject to stockholder approval at the Annual Meeting. As of the date hereof, no rights to purchase shares of our common stock have been granted pursuant to the Purchase Plan.

Summary of the 2014 Employee Stock Purchase Plan

The following is a summary of the principal features of the Purchase Plan and its operation. The summary is qualified in its entirety by the specific language of the Purchase Plan, which is attached as Appendix B to this Proxy Statement.

General

The Purchase Plan was adopted by the Board of Directors in April 2014, subject to stockholder approval at the Annual Meeting. The purpose of the Purchase Plan is to provide eligible employees with an opportunity to purchase shares of TearLab’s common stock through contributions, generally through payroll deductions. The Purchase Plan permits the Board of Directors or the Compensation Committee (referred to herein as the “Administrator”) to grant rights that qualify for preferential tax treatment under Section 423 and rights that do not so qualify.

Shares Available for Issuance

If our stockholders approve this proposal, a total of 671,500 shares of TearLab’s common stock will be reserved for issuance under the Purchase Plan.

Administration

The Board of Directors or the Compensation Committee administers the Purchase Plan. All questions of interpretation or application of the Purchase Plan are determined by the Administrator and its decisions are final and binding upon all participants.

Eligibility

Each employee of TearLab’s designated subsidiaries or affiliates is eligible to participate in the Purchase Plan, except that no employee will be eligible to participate in the Purchase Plan to the extent that (i) immediately after the grant, such employee would own 5% or more of the combined voting power of all classes of capital stock of TearLab or its parents or subsidiaries, or (ii) his or her rights to purchase stock under all of TearLab’s employee stock purchase plans accrues at a rate that exceeds $25,000 worth of stock (determined as the fair market value of the shares on the grant date) for each calendar year. In addition, the Administrator, in its sole discretion and prior to an offering date, may determine that an individual will not be eligible to participate if he or she: (i) has not completed at least 2 years of service since his or her last hire date (or such lesser period of time as may be determined by the Administrator in its discretion), (ii) customarily works not more than 20 hours per week (or such lesser period of time as may be determined by the Administrator in its discretion), (iii) customarily works not more than 5 months per calendar year (or such lesser period of time as may be determined by the Administrator in its discretion), (iv) is an executive, officer or other manager, or (v) is a highly compensated employee under Section 414(q) of the Internal Revenue Code. The Plan does not contain insider participation limits.

Offering Period

Unless otherwise determined by the Administrator, each offering period under the Purchase Plan will have a duration of approximately 6 months, commencing on the first trading day on or after January 1 of each year and terminating on the first trading day on or after June 30, approximately 6 months later, and commencing on the first trading day on or after July 1 of each year and terminating on the first trading day on or after December 31, approximately 6 months later. To participate in the Purchase Plan, an eligible employee may authorize contributions up to 20% of such employee’s compensation during the offering period. For purposes of the Purchase Plan, “compensation” shall mean an employee’s base straight time gross earnings and payments for overtime and shift premium, but exclusive of payments for incentive compensation, commissions, bonuses and other similar compensation. Once an employee becomes a participant in the Purchase Plan, the employee automatically will participate in each successive offering period until the employee withdraws from the Purchase Plan or the employee’s employment with TearLab or one of TearLab’s designated subsidiaries or affiliates terminates. On the first day of each offering period, each participant automatically is granted a right to purchase shares of our common stock. This purchase right expires at the end of the offering period or upon termination of employment, whichever is earlier, but is exercised on the last trading day of the offering period to the extent of the contributions made during such offering period.

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Purchase Price

Unless and until the Administrator determines otherwise, the purchase price will be 90% of the lesser of the fair market value of our common stock on (i) the first trading day of the offering period, or (ii) the last trading day of the offering period, subject to compliance with the Internal Revenue Code and the terms of the Purchase Plan. The fair market value of our common stock on any relevant date will be the closing price of our stock as reported on NASDAQ.

Payment of Purchase Price; Payroll Deductions

Contributions are accumulated throughout each offering period, generally through payroll deductions. The number of whole shares that a participant may purchase in each offering period will be determined by dividing the total amount of a participant’s contributions during that offering period by the purchase price; provided, however, that a participant may not purchase more than 5,000 shares each offering period. During an offering period, a participant may discontinue his or her participation in the Purchase Plan and generally may not change the rate of payroll deductions in an offering period. No fractional shares will be purchased under the Purchase Plan and any contributions accumulated in a participant’s account that are not sufficient to purchase a full share will be retained in a participant’s account for the subsequent offering periods.

All participant contributions are credited to the participant’s account, are generally only withheld in whole percentages and are included with TearLab’s general funds. Funds received by TearLab pursuant to exercises under the Purchase Plan are used for general corporate purposes. A participant generally may not make additional contributions into his or her account outside the regularly established process.

Withdrawal

Generally, a participant may withdraw all but not less than all of his or her contributions from an offering period at any time by written or electronic notice without affecting his or her eligibility to participate in future offering periods. Once a participant withdraws from a particular offering period, however, that participant may not participate again in the same offering period. To participate in a subsequent offering period, the participant must deliver a new subscription agreement to TearLab.

Termination of Employment

Upon termination of a participant’s employment for any reason, including disability or death, he or she will be deemed to have elected to withdraw from the Purchase Plan and the contributions credited to the participant’s account (to the extent not used to make a purchase of our common stock) will be returned to him or her or, in the case of death, to the person or persons entitled thereto as provided in the Purchase Plan, and such participant’s right to purchase shares under the Purchase Plan will automatically be terminated.

Adjustments upon Changes in Capitalization, Dissolution, Liquidation, Merger or Change of Control

Changes in Capitalization .  In the event that any dividend or other distribution (whether in the form of cash, common stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of common stock or other securities of TearLab, or other change in the corporate structure of TearLab affecting our common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Purchase Plan, then the Administrator will adjust the number and class of common stock that may be delivered under the Purchase Plan, the purchase price per share, the number of shares of common stock covered by each right to purchase shares under the Purchase Plan that has not yet been exercised, and the maximum number of shares a participant can purchase during an offering period.

Dissolution or Liquidation .  In the event of TearLab’s proposed dissolution or liquidation, the Administrator will shorten any offering period then in progress by setting a new exercise date and any offering periods will end on the new exercise date. The new exercise date will be prior to the dissolution or liquidation. If the Administrator shortens any offering periods then in progress, the Administrator will notify each participant in writing, at least ten business days prior to the new exercise date, that the exercise date has been changed to the new exercise date and that the right to purchase shares under the Purchase Plan will be exercised automatically on the new exercise date, unless the participant has already withdrawn from the offering period.

Change in Control .  In the event of a merger or “Change in Control,” as defined in the Purchase Plan, each right to purchase shares under the Purchase Plan will be assumed or an equivalent right to purchase shares will be substituted by the successor corporation or a parent or subsidiary of such successor corporation. In the event the successor corporation refuses to assume or substitute for the options, the Administrator will shorten the offering period with respect to which such option relates by setting a new exercise date on which such offering period will end. The new exercise date will be prior to the merger or change in control. If the Administrator shortens any offering periods then in progress, the Administrator will notify each participant in writing, prior to the new exercise date, that the exercise date has been changed to the new exercise date and that the right to purchase shares under the Purchase Plan will be exercised automatically on the new exercise date, unless the participant has already withdrawn from the offering period.

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Amendment and Termination of the Purchase Plan

The Administrator may at any time amend, suspend, or terminate the Purchase Plan, including the term of any offering period then outstanding. Any amendment can be made without stockholder approval unless stockholder approval is required under any applicable law, regulation or rule. Generally, no such termination can adversely affect previously granted rights to purchase shares under the Purchase Plan.

Upon its approval by the stockholders, the Purchase Plan will continue until 2024, unless terminated sooner by the Board of Directors.

Plan Benefits

Participation in the Purchase Plan is voluntary and is dependent on each eligible employee’s election to participate and his or her determination as to the level of payroll deductions. Accordingly, future purchases under the Purchase Plan are not determinable. Non-employee directors are not eligible to participate in the Purchase Plan. No purchases have been made under the Purchase Plan since its adoption by the Board of Directors.

Certain Federal Income Tax Information

The following brief summary of the effect of federal income taxation upon the participant and TearLab with respect to the shares purchased under the Purchase Plan does not purport to be complete and does not discuss the tax consequences of a participant’s death or the income tax laws of any state or foreign country in which the participant may reside.

The Purchase Plan, and the right of U.S. participants to make purchases thereunder, is intended to qualify under the provisions of Sections 421 and 423 of the Code. Under these provisions, no income will be taxable to a participant until the shares purchased under the Purchase Plan are sold or otherwise disposed of. Upon sale or other disposition of the shares, the participant will generally be subject to tax in an amount that depends upon the holding period. If the shares are sold or otherwise disposed of more than two years from the first day of the applicable offering period and one year from the applicable date of purchase, the participant will recognize ordinary income measured as the lesser of (a) the excess of the fair market value of the shares at the time of such sale or disposition over the purchase price, or (b) an amount equal to 10% of the fair market value of the shares as of the first day of the applicable offering period. Any additional gain will be treated as long-term capital gain. If the shares are sold or otherwise disposed of before the expiration of these holding periods, the participant will recognize ordinary income generally measured as the excess of the fair market value of the shares on the date the shares are purchased over the purchase price. Any additional gain or loss on such sale or disposition will be long-term or short-term capital gain or loss, depending on how long the shares have been held from the date of purchase. TearLab generally is not entitled to a deduction for amounts taxed as ordinary income or capital gain to a participant except to the extent of ordinary income recognized by participants upon a sale or disposition of shares prior to the expiration of the holding periods described above.

THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF THE U.S. FEDERAL INCOME TAXATION UPON PARTICIPANTS AND TEARLAB UNDER THE PURCHASE PLAN. IT DOES NOT PURPORT TO BE COMPLETE AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF A PARTICIPANT’S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.

Board of Director’s Recommendation

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE AMENDMENT OF THE 2014 EMPLOYEE STOCK PURCHASE PLAN AND THE NUMBER OF SHARES RESERVED FOR ISSUANCE THEREUNDER.

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PROPOSAL 4

RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS

The Audit Committee has selected Ernst & Young LLP, or Ernst & Young, as our independent auditors for the year ending December 31, 2014 and has directed that management submit the selection of independent auditors to the stockholders for ratification at the Annual Meeting.  Representatives of Ernst & Young will be present at the Annual Meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

Stockholders are not required to ratify the selection of Ernst & Young as our independent auditors.  However, we are submitting the selection of Ernst & Young to the stockholders for ratification as a matter of good corporate practice.  If you fail to ratify the selection, the Audit Committee will reconsider whether or not to retain Ernst & Young.  Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of a different independent accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and our stockholders.

The affirmative vote of the holders of a majority of the shares of our common stock represented and voting at the Annual Meeting will be required to ratify the selection of Ernst & Young.

Audit Committee Policy Regarding Pre-Approval of Audit and Permissible Non-Audit Services of Our Independent Auditors

Our Audit Committee has established a policy that requires that all audit and permissible non-audit services provided by our independent auditors will be pre-approved by the Audit Committee.  These services may include audit services, audit-related services, tax services and other services.  The Audit Committee considers whether the provision of each non-audit service is compatible with maintaining the independence of our auditors.  Pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget.  Our independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date.

Board of Directors’ Recommendation

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION
OF THE SELECTION OF ERNST & YOUNG AS OUR INDEPENDENT AUDITOR
FOR THE FISCAL YEAR ENDING

DECEMBER 31, 2014.

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PROPOSAL 5

ADVISORY VOTE ON EXECUTIVE COMPENSATION

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted on July 21, 2010. As required by the Dodd-Frank Act, we are asking our stockholders to approve, on an advisory basis, the compensation of our named executive officers as described in this proxy statement. This proposal, commonly known as a “say-on-pay” proposal, gives our stockholders the opportunity to express their views on the compensation of our named executive officers.

Compensation Program and Philosophy

Our executive compensation program is designed to:

to attract and retain talented and experienced executives;

to motivate and reward executives whose knowledge, skills and performance are critical to our success;

to ensure fairness among the executive management team by recognizing the contributions each executive makes to our success; and

to incentivize our executives to manage our business to meet our long-term objectives and the long-term objectives of our stockholders.

Under this program, our named executive officers are rewarded for the achievement of specific short-term and long-term goals that enhance stockholder value. Stockholders are urged to read the Executive Compensation and Other Information section of this proxy statement, which describes our executive compensation program and contains information about the fiscal year 2013 compensation of our named executive officers. The compensation committee and our board of directors believe that our compensation design and practices are effective in implementing our executive compensation goals.

We are asking our stockholders to indicate their support for the compensation of our named executive officers as described in this proxy statement by voting in favor of the following resolution:

“RESOLVED, that the stockholders approve, on an advisory basis in a non-binding vote, the compensation of TearLab Corporation named executive officers as disclosed in this proxy statement pursuant to Item 402 of Regulation S-K, including information under the caption “Executive Compensation and Other Information,” the tabular disclosure regarding executive compensation, and the accompanying narrative disclosure set forth in the proxy statement relating to TearLab’s 2014 Annual Meeting of Stockholders.”

Even though this say-on-pay vote is advisory and, therefore, will not be binding on us, our compensation committee and our board of directors value the opinions of our stockholders. Accordingly, to the extent there is a significant vote against the compensation of our named executive officers, we will consider our stockholders’ concerns, and the compensation committee will evaluate what actions may be necessary or appropriate to address those concerns.

Board of Directors’ Recommendation

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY STATEMENT.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The following discussion and analysis of compensation arrangements of our named executive officers should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current plans, considerations, expectations, and determinations regarding future compensation programs. The actual amount and form of compensation and the compensation programs that we adopt may differ materially from currently planned programs as summarized in this discussion.

Overview

The compensation committee of our board of directors is responsible for establishing, implementing, and monitoring adherence with our compensation philosophy. The compensation provided to our “named executive officers” for 2013 is set forth in detail in the Summary Compensation Table below and other tables and the accompanying footnotes and narrative that follow this section. This section explains our executive compensation philosophy, objectives and design, our compensation-setting process, our executive compensation program components and the decisions made in relation to fiscal year 2013 for each of our named executive officers.

Our named executive officers for 2013, which consist of those executive officers who appear in the Summary Compensation Table, were:

Elias Vamvakas, our Chief Executive Officer (our “CEO”);

Joseph Jensen, our Chief Operating Officer and President;

William Dumencu, our Chief Financial Officer;

Michael Berg, our Vice President, Regulatory; and

Tracy Puckett, our Vice President, Marketing.

These executives were our named executive officers for fiscal 2013 (the “named executive officers”). In this Compensation Discussion and Analysis, TearLab Corporation and its subsidiaries is referred to as “our,” “us,” “we,” or the “Company.”

Executive Compensation Philosophy, Objective and Design

Philosophy .

As an ophthalmic device company, we operate in the professional health sector and medical laboratories and research industry. To succeed in this environment, we must hire experienced executives with specific skills in key functional areas who have worked in an environment similar to ours. We are primarily located in San Diego, California, which is a life sciences technology center in the U.S. that has many companies who reward their executives with equity compensation. Our overall compensation philosophy, therefore, is to compensate seasoned executives in a manner that attracts the caliber of individuals needed to manage and staff a technical and government-regulated business and operate in an innovative and competitive industry yet drive a business with a capitalization of less than $300 million to grow.

Objectives and Design .

Our executive compensation program is designed to:

attract and retain talented and experienced executives;

motivate and reward executives whose knowledge, skills and performance are critical to our success;

ensure fairness among the executive management team by recognizing the contributions each executive makes to our success; and

incentivize our executives to manage our business to meet our long-term objectives and the long-term objectives of our stockholders.

Our size and industry, as well as our primary location, have lead us to provide equity compensation as a primary compensation element. Accordingly, o ur executive compensation was weighted towards equity in 2013, which was awarded in the form of stock options. Our board of directors determined that this form of compensation aligns the executive team’s incentives with the long-term interests of our stockholders by rewarding our named executive officers for growing the Company and providing a positive return to shareholders, as evidenced by an executive benefiting from a stock option grant only if there is appreciation in the Company’s stock .

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To maintain a competitive compensation program and meet our need to attract seasoned executives that have experience in our sector, we also offer cash compensation in the form of (1) base salaries to reward individual contributions and compensate for their day-to-day responsibilities and (2) annual bonuses to drive targeted corporate goals and individual short-term objectives.

Impact of Fiscal 2013 Stockholder Advisory Vote on Executive Compensation

In April 2013, we conducted a non-binding advisory vote on the compensation of the named executive officers for fiscal 2012, commonly referred to as a “say-on-pay” vote, at our 2013 Annual Meeting of Stockholders. Our stockholders approved the named executive officer’s compensation, with approximately 99.7% of stockholder votes cast in favor of our executive compensation program.

As the compensation committee evaluated our executive compensation policies and practices throughout fiscal 2013, it was mindful of the strong support our stockholders expressed for our compensation philosophy and objectives. As a result, the compensation committee decided to retain our general approach to executive compensation. Consistent with the recommendation of the board of directors and the preference of our stockholders as reflected in the advisory vote on the frequency of future say-on-pay votes, the board of directors has adopted a policy providing for annual advisory votes on the compensation of the named executive officers. Accordingly, the next advisory vote on the compensation of the named executive officers will take place at the Annual Meeting of Stockholders to which this Proxy Statement relates, with the next say-on-pay vote after that to take place in 2015.

Compensation-Setting Process

We formed our compensation committee in September 2005. For 2013, our compensation committee was responsible for reviewing and making recommendations to our board of directors regarding our CEO’s compensation and the components thereof. In 2013, our compensation committee reviewed and recommended to our board of directors Company goals and objectives relevant to our CEO, evaluated our CEO in light of those goals and objectives, and made recommendations regarding our CEO’s compensation based on the evaluation.

Our compensation committee also is responsible for reviewing and making recommendations to our board of directors on non-CEO executive officer compensation and making recommendations to our board of directors with respect to incentive compensations plans and equity-based plans. In 2013, our compensation committee reviewed and made recommendations to our board of directors regarding the compensation of our other executive officers, including the establishment and evaluation of performance goals.

Our CEO attends meetings of our compensation committee, except with respect to discussions involving his own compensation. Typically, our CEO makes recommendations regarding compensation matters for each named executive officer, including with respect to each key element of compensation (i.e., stock option awards, base salary and annual bonus).

In determining executive compensation for 2013, neither our board of directors nor our compensation committee met with a compensation consulting firm or considered market data presented by a compensation consulting firm in determining compensation. We did not engage in any benchmarking or targeting of any specific levels of pay. We did not engage a consultant as there was not a change in the base compensation of the executives as a whole scheduled in 2013, and we could not justify the cost of such an arrangement while we are focused on growing the Company. We are, however, in the process of establishing our executive compensation program for 2014. Our compensation committee is currently evaluating whether to use a compensation consultant in 2014.

Unless otherwise stated, the discussion and analysis below is in large measure based on decisions by our board of directors. Therefore, the philosophy of how we will compensate our named executive officers in the future may not be the same as how they have been compensated previously. We expect that our board of directors will continue to review, evaluate and modify the executive compensation framework based on the recommendations of our compensation committee. Our compensation program may, over time, vary from our historical practices.

Executive Compensation Program Components

Equity Compensation

We have historically used equity compensation as a principal component of our executive compensation program. Consistent with our compensation objectives, we believe this approach aligns our executive team’s contributions with our long-term interests by allowing our executive team to participate in any future appreciation in the Company’s stock. While the equity awards to our named executive officers have typically been made in the form of stock options, we also granted four of our named executive officers fully vested restricted stock unit awards in 2012 to provide an immediate reward for a corporate achievement that was not integrated into our annual cash bonus program and to conserve the Company’s cash position. We did not grant restricted stock units in 2013, and we do not expect to grant restricted stock units in 2014 because we believe stock options better align executive officer compensation with stockholder interests by rewarding Company growth. We also believe that stock options serve as an effective retention tool due to vesting requirements that are based on continued service with us and help create an ownership culture. In granting options, we considered, among other things, the named executive officer’s cash compensation, the need to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value, our financial results, an evaluation of the expected and actual performance of each executive officer, his or her individual contributions and responsibilities, and market conditions.

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In 2013, our board of directors granted stock options to all of our named executive officers. In making this determination, our board considered the recommendation by our compensation committee, which had reviewed the equity award holdings of our named executive officers, and concurred with our CEO’s recommendation that the then-current equity award holdings of our executive officers, taking into consideration the unvested portion and the value of such awards, did not appropriately meet our retention and incentive goals, and, as a result, additional stock option awards were necessary. Accordingly, the board of directors approved in March 2013 a grant of options for 125,000 shares to our CEO and a grant of options for 30,000 shares to each of Mr. Dumencu, Mr. Berg, and Ms. Puckett. These time-based options vest annually in 1/3 installments, starting on the one year anniversary of the date of grant. Each of these awards were disclosed to stockholders in our annual proxy statement for 2013 and subject to stockholder approval pursuant to an increase in the authorized shares reserved for issuance under our 2002 stock incentive plan. In addition, Mr. Jensen was hired in October 2013, and as a material inducement for his hire, he was granted a stock option for 300,000 shares, which also vests annually in 1/3 installments, starting on the one year anniversary of the date of grant.

For 2014, we expect our compensation committee to continue this review process to determine whether to make a recommendation to our board of directors to approve any equity award grants for our named executive officers. No equity award grants have been made to our named executive officers in 2014 to date.

While we have not yet adopted a formal policy regarding the timing of stock option and other equity grants as a public company, it has been our practice, which we expect to continue, that stock option grants have been granted with an exercise price not less than the fair value of the underlying stock on the date of grant.

Base Salary

In determining base salaries for 2013, our compensation committee and our board of directors considered the overall compensation package of our executive officers and, including the fact that we have emphasized providing compensation in the form of stock option grants in order to motivate our executive team and foster long-term growth for the benefit of our stockholders. Based on this emphasis on option grants, no adjustments were made to the base salaries of any of our named executive officers in 2013 as compared to the prior year, except with regard to our CEO whose base salary was increased from Cdn. $360,000 to Cdn. $380,000. The compensation committee increased our CEO’s salary because of the greater demands placed on our CEO. In addition, in connection with the negotiation of Mr. Jensen’s hire as our Chief Operating Officer and President, the compensation committee agreed to provide Mr. Jensen an annual base salary of $370,000.

In fiscal years 2012 and 2013, the base compensation for our named executive officers was as follows:

Named Executive Officer

Fiscal Year 2013 Base Salary

Fiscal Year 2012 Base Salary

Mr. Vamvakas

Cdn. $

380,000

360,000

Mr. Jensen

$

370,000 (1)

-

Mr. Dumencu

Cdn. $

184,271

184,271

Mr. Berg

$

180,000

180,000

Ms. Puckett

$

180,000

180,000

(1)

Mr. Jensen joined the Company in October 2013 and earned, on a pro-rated basis, $74,474 in base salary during fiscal year 2013.

In 2014, our compensation committee and our board of directors may conduct a review of our executive officers’ base salaries and determine adjustments, if any.

2013 Bonus Plan

Our board of directors adopted an annual bonus plan for 2013 in order to reward the performance of our named executive officers in achieving our corporate goals and, with respect to Mr. Dumencu, Mr. Berg, and Ms. Puckett, individual objectives. Our CEO evaluates the individual performance of Mr. Dumencu, Mr. Berg, and Ms. Puckett and makes a recommendation to our compensation committee, which in turn makes a recommendation of the bonus earned under the bonus plan to our board of directors. Our board of directors retains the ultimate discretion whether to pay any bonus under the plan, which means that our board may choose in any given year whether to pay a bonus in cash or via an additional stock option upon a recommendation from our CEO. Bonuses for 2013 were paid in cash due to the cash position of the Company.

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A target bonus amount for each named executive officer is expressed as a percentage of base salary under our 2013 bonus plan, and any such bonus would be earned upon the achievement of the applicable corporate goals and individuals objectives. Given our emphasis on providing option grants as a key component of our executive compensation, target bonus amounts for our executive officers were not adjusted in 2013 from prior years. Accordingly, our CEO’s target bonus amount remained at 50% of his base salary, and each other named executive officer’s target bonus amount remained at 25% of his or her respective base salary. In connection with the negotiation of Mr. Jensen’s hire, our compensation committee agreed to provide Mr. Jensen a target bonus amount of 50% of his base salary, which was prorated in 2013 based on the number of days employed with us. Our CEO and Mr. Jensen have higher bonus percentages that are solely based on corporate performance measures because they have broad degree of responsibility, including responsibility for the performance of all Company divisions generally and supervision of our other executive officers, including Mr. Dumencu, Mr. Berg, and Ms. Puckett. Our board of directors and compensation committee believe that bonus pay for our CEO and Mr. Jensen should be aligned on metrics that tie in closely with driving Company value and stockholder interests.

Under the 2013 bonus plan, with regard to each of Mr. Dumencu, Mr. Berg, and Ms. Puckett, 75% of the bonus opportunity was based on the achievement of corporate performance measures and 25% of the bonus opportunity was based on individual performance. Our CEO and Mr. Jenson each meet with Mr. Dumencu, Mr. Berg, and Ms. Puckett and discuss their individual objectives at the beginning of each year and come to a tentative agreement on the short-term projects and goals that each executive should be focused in for the coming fiscal year, which is communicated by our CEO to the compensation committee for review. Our board of directors makes the ultimate decision whether to approve those individual performance goals.

Corporate Performance Measures . For 2013, our board of directors established the following five corporate performance goals:

revenue;

unit/contract sales;

minimum revenue per active contracted unit;

integration of our technology platform with customer relationship management technology; and

operating profitability.

The operational measures (i.e., integration) are based on information management, which our board of directors believes is very important to our long-term success. In addition, our financial measures (i.e., revenue, unit/contract sales, minimum revenue and profitability) are important indicators of our ability to monetize our products and services. Each of these corporate performance measures was given equal weighting of 20% based on our belief that each was similarly critical to our strategic goals for 2013.

At the time the corporate performance measures were set, our board of directors believed that the corporate performance measures were challenging and aggressive because they represented significant growth in revenues, improved utilization of the TearLab Osmolarity System by customers which is critical to our successful commercialization, the improvement of our reporting infrastructure to better manage our expected growth and continued prudence in the management of our cash resources including being able to obtain additional cash resources/funding when the opportunity arises. Our board of directors believed that the achievement of the corporate performance measures at the target levels would require extraordinary efforts, excellent leadership, effective leveraging of our competencies and a clear focus on driving results throughout the year.

Individual Performance Measures . We, as well as our customers, operate in a market that is highly regulated in terms of research, development, testing, manufacture, labeling, promotion, advertising, distribution and marketing of our products, which requires strong leadership and management capabilities. Necessarily, we expect a high level of performance from each of Mr. Dumencu, Mr. Berg, and Ms. Puckett in carrying out their respective responsibilities to achieve results effectively. As a result, Mr. Dumencu, Mr. Berg, and Ms. Puckett are individually evaluated based on his or her overall performance relative to individualized short-term goals that are set by the board of directors, after consultation with our CEO, relative to the executive’s position with the Company.

During fiscal 2013, each of our executives, including the named executive officers, was eligible to earn a cash bonus targeted to equal a specified percentage of his or her base salary, as follows:

Named Executive Officer

Fiscal Year 2013 Target Cash Bonus
Opportunity (as a Percentage  of
Base Salary)

Fiscal Year 2013 Target Cash Bonus
Opportunity ($)

Mr. Vamvakas

50

%

Cdn. $

190,000

Mr. Jensen

50

%

$

185,000

(1)

Mr. Dumencu

25

%

Cdn. $

46,068

Mr. Berg

25

%

$

45,000

Ms. Puckett

25

%

$

45,000

(1)

Mr. Jensen joined the Company in October 2013 and was eligible to earn, on a pro-rated basis, $37,237 in bonuses during fiscal year 2013.

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2013 Bonus Plan Payments .

In early 2014, our board of directors determined that the cash bonuses paid to the named executive officers for fiscal 2013 were as follows:

Named Executive Officer

Fiscal 2013 Bonus Payment

Mr. Vamvakas

Cdn. $

129,200

Mr. Jensen

$

24,468

Mr. Dumencu

Cdn. $

30,405

Mr. Berg

$

30,488

Ms. Puckett

$

31,388

2014 Bonus Plan .

In early 2014, our compensation committee adopted an annual cash bonus plan for 2014, which includes corporate performance objectives and, for our named executive officers other than our CEO and Mr. Jensen, includes individual performance objectives. The corporate performance objectives have not been modified and focus on the goals of increasing revenues and adjusted operating profitability targets. Similarly, the target bonus opportunity for each named executive officer remains unchanged for 2014.

Retirement and Health Benefits

We design our employee benefits programs to be affordable and competitive in relation to the market, as well as compliant with applicable laws and practices. We adjust our employee benefits programs as needed based upon regular monitoring of applicable laws and practices and the competitive market.

Our U.S. named executive officers are entitled to participate in the same employee benefit plans, and on the same terms and conditions, as all other U.S. full-time employees. U.S. employees, including named executive officers located in the U.S., are eligible to participate in a defined contribution 401(k) plan; however, the Company does not make any matching or employer contributions to the 401(k) plan.

Our named executive officers located in Canada, including our CEO, are entitled to participate in the same employee benefit plans, and on the same terms and conditions, as all other Canadian full-time employees, except that we provide our CEO with certain club membership benefits and with coverage under a critical illness insurance policy, which has been historically provided to our CEO since his commencement of service with us. Club membership benefits are provided to our CEO in order to foster the ability of our CEO to network in the business community on behalf of the Company. In 2013, the club membership benefits provided to our CEO had a value of approximately $21,676.

Post-Employment Compensation

We recognize that it is possible that we may be involved in a transaction involving a change of control of the Company and that this possibility could result in the departure or distraction of our executives to the detriment of our business. Our compensation committee believes that the prospect of such a change of control transaction would likely result in our executives facing uncertainties about their future employment and distractions from how the potential transaction might personally affect them.

To allow our executives to focus solely on making decisions that are in the best interests of our stockholders in the event of a possible, threatened, or pending change of control transaction and to encourage them to remain with us despite the possibility that the change of control might affect them adversely, in 2013 we entered into Executive Change of Control and Severance Agreements with each of our named executive officers (except our CEO and Mr. Jensen) that provide them with certain payments and benefits in the event of the certain terminations of their employment without regard to a change of control of the Company or within the twelve-month period following a change of control of the Company. Our compensation committee believes that these agreements serve as an important retention tool to ensure that personal uncertainties do not dilute our executives’ complete focus on building stockholder value.

In June 2013, we entered into an executive employment agreement with our CEO which provides that upon a qualifying termination of his employment, our CEO will receive (i) a lump sum payment equal to two times his then-current annual base salary plus two times the average of the bonus paid to him in the two years preceding the year of termination and (ii) reimbursement of group health plan insurance premiums for up to eighteen months.  The executive employment agreement with our CEO also requires that he provide three-months’ advance notice period if he resigns and the resignation is not a qualifying termination.

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Mr. Jensen is party to an employment offer letter that was entered into in October 2013 upon his hire which provides that upon a qualifying termination of his employment, he will receive (i) a lump sum payment equal to two times his then-current annual base salary plus two times the average of the bonus paid to him in the two years preceding the year of termination and (ii) reimbursement of group health plan insurance premiums for up to eighteen months.  The offer letter also requires that he provide three-months’ advance notice period if Mr. Jensen resigns and the resignation is not a qualifying termination. In addition, Mr. Jensen’s new hire stock option for 300,000 shares provides that, in the event of a change of control (as defined in Mr. Jensen’s offer letter) prior to his termination of service, such option will fully accelerate as to vesting.

The Executive Change of Control and Severance Agreements with the other named executive officers (other than, as described above, with our CEO and Mr. Jensen) provide that upon a qualifying termination of the applicable named executive officer’s employment, he or she will receive (i) continuing payments of base salary for twelve or twenty-four months and (ii) reimbursement of group health plan insurance premiums (or in the case of Mr. Dumencu, our continued contributions to the group insured benefit plans) for twelve or eighteen months from the date the named executive officer’s employment ceases.

In establishing the terms and conditions of our CEO’s executive employment agreement and these Executive Change of Control and Severance Agreements and in the negotiation of Mr. Jensen’s employment offer letter, our board of directors and our compensation committee evaluated the cost to us of these arrangements and the potential payout levels to each affected executive under various scenarios. In approving these arrangements, they determined that their cost to us and our stockholders was reasonable and not excessive, given the benefit conferred to us. Our boards of directors and our compensation committee believe that these arrangements will help to maintain the continued focus and dedication of our named executive officers to their assigned duties without the distraction that could result from the possibility of a change of control of the Company.

For a detailed summary of the material terms and conditions of these agreements, see “— Employment Contracts and Certain Transaction-based Contracts .”

Tax and Accounting Considerations

Deductibility of Executive Compensation

Section 162(m) of the Internal Revenue Code (“Code”) limits the amount that we may deduct from our federal income taxes for remuneration paid to certain executive officers to one million dollars per executive officer per year, unless certain requirements are met. Section 162(m) provides an exception from this deduction limitation for certain forms of “performance-based compensation,” as well as for the gain recognized by executive officers upon the exercise of qualifying compensatory stock options. While our compensation committee is mindful of the benefit to us of the full deductibility of compensation, our compensation committee believes that it should not be constrained by the requirements of Section 162(m) where those requirements would impair flexibility in compensating our executive officers (whose compensation would be subject to the limitations of Section 162(m) of the Code) in a manner that can best promote our corporate objectives. Therefore, our compensation committee has not adopted a policy that requires that all compensation be deductible. Our compensation committee intends to continue to compensate our executive officers in a manner consistent with the best interests of the Company and our stockholders.

Taxation of “Parachute” Payments and Deferred Compensation

We did not provide any executive officer, including any named executive officer, with a “gross-up” or other reimbursement payment for any tax liability that he or she might owe as a result of the application of Code Sections 280G, 4999, or 409A during 2013, and we have not agreed and are not otherwise obligated to provide any named executive officers with such a “gross-up” or other reimbursement. Sections 280G and 4999 of the Code provide that executive officers and directors who hold significant equity interests and certain other service providers may be subject to an excise tax if they receive payments or benefits in connection with a change in control that exceeds certain prescribed limits and that the Company, or a successor, may forfeit a deduction on the amounts subject to this additional tax. Section 409A of the Code also imposes additional significant taxes on the individual in the event that an executive officer, director or other service provider receives “nonqualified deferred compensation” that does not meet the requirements of Section 409A of the Code.

Accounting Treatment

Authoritative accounting guidance on stock compensation requires companies to measure the compensation expense for all share-based payment awards made to employees and directors, including stock options, based on the grant date “fair value” of these awards. This calculation is performed for accounting purposes and reported in the compensation tables below, even though our executive officers may never realize any value from their awards. Authoritative accounting guidance also requires companies to recognize the compensation cost of their stock-based compensation awards in their income statements over the period that an executive officer is required to render service in exchange for the option or other award.

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Compensation Risk Assessment

As part of its review of the compensation to be paid to our executives, as well as the compensation programs generally available to the Company’s employees, the compensation committee considers any potential risks arising from our compensation programs and the management of these risks, in light of the Company’s overall business, strategy and objectives.

As is the case with our employees generally, our named executive officers’ base salaries are fixed in amount and thus do not encourage risk-taking. Bonus amounts under the Company bonus plan are tied to the Company’s performance during the fiscal year compared to pre-established target levels for equally-weighted measures and, in the case of Mr. Dumencu, Mr. Berg, and Ms. Puckett, pre-established individual performance. Combined, we believe these measures limit the ability of an executive to be rewarded for taking excessive risk on behalf of the Company by, for example, seeking revenue enhancing opportunities at the expenses of profitability. A significant portion of compensation also is provided to our named executive officers is in the form of equity awards that help further align their interests with those of the Company’s stockholders. The compensation committee believes that these awards do not encourage unnecessary or excessive risk-taking because the ultimate value of the awards is tied to the Company’s stock price and because the awards are staggered and subject to multi-year vesting schedules to help ensure that executives have significant value tied to long-term stock price performance.

Also, the Company has implemented effective controls at various levels, including adoption of written codes of conduct and ethics, which each named executive officer signs and acknowledges each year, in order to mitigate the risk of unethical behavior.

Summary Compensation Table

The following table provides information regarding the compensation of our chief executive officer, chief financial officer, and each of the next three most highly compensated executive officers during 2013, together referred to as our “named executive officers,” for 2013, 2012, and 2011.

Name and Principal Position

Year

Salary ($)

Option

Awards ($)(1)

Non-Equity

Incentive Plan Compensation

($)(2)

All Other

Compensation

($)

Total ($)

Elias Vamvakas
Chief Executive Officer

2013

2012

2011

347,235
323,368

234,558

643,538


126,239
357,804

17,592

34,146

36,691

27,076

1,151,158
717,863

279,226

Joseph Jensen (3)
President, Chief Operating Officer

2013


74,474


2,613,990

250,000


9,869

2,948,333

William Dumencu
Chief Financial Officer

2013

2012

2011

172,313

184,898

183,647

154,449

29,617

173,356

13,315

5,598

3,859

2,820

361,977

362,113

199,782

Michael Berg
Vice President, Regulatory

2013

2012

2011

180,000
180,000

180,000

154,449


30,938
174,675

0

18,219

22,239

28,188

383,606
376,914

208,188

Tracy Puckett
Vice President, Marketing

2013

2012

2011

180,000

180,000

180,000

154,449

34,313

170,175

13,500

16,374

17,904

22,225

385,136

368,079

215,725


(1)

Amounts represent the aggregate grant date fair value of options granted in the year indicated to the named executive officer calculated in accordance with FASB ASC 718 without regard to estimated forfeitures. See Note 11 of the notes to our audited consolidated financial statements for a discussion of assumptions made in determining the grant date fair value and compensation expense of our stock options.

(2)

The amounts in this column for 2013, 2012, and 2011 represent total performance-based bonuses earned for service rendered during 2013, 2012, and 2011, respectively, under our executive bonus plan for the applicable year. All such amounts were paid subsequent to year end. For a description of our executive bonus plan, please see the section entitled “Executive Bonus Plan” under “Compensation Discussion and Analysis” above.

(3)

Joseph Jensen joined the Company in 2013.

-31-

Grants of Plan-Based Awards

The following table presents information concerning each grant of an award made to a named executive officer in 2013 under any plan.

Estimated Future Payouts Under Non-Equity Incentive Plan Awards Target ($) All Option Awards: Number of Securities Underlying Options (#)

Exercise or Base Price of Option Awards

($/Sh)(1)

Grant Date Fair Value of Stock and Option Awards ($)(2)
Name Grant Date Target Maximum

Elias Vamvakas

3/6/2013 (3)

125,000 6.43 643,538

Joseph Jensen

10/21/2013 (4)

300,000 11.33 2,613,990

William Dumencu

3/6/2013 (3)

30,000 6.43 154,449

Michael Berg

3/6/2013 (3)

30,000 6.43 154,449

Tracy Puckett

3/6/2013 (3)

30,000 6.43 154,449


(1)

Based upon the higher of a) closing sale price of our common stock as reported on the NASDAQ Stock Market on the date of grant and b) the volume weighted average share price for the five business days immediately prior to the date of grant.

(2)

Amounts represent the grant date fair value of the stock options, calculated in accordance with FASB ASC Topic 718 without regard to estimated forfeitures. See Note 11 of the notes to our audited consolidated financial statements for a discussion of assumptions made in determining the grant date fair value.

(3)

Represents awards granted under our 2002 Stock Incentive Plan.

(4)

Represents awards granted outside of our 2002 Stock Incentive Plan.

Outstanding Equity Awards at Fiscal Year-End

The following table presents the outstanding equity awards held by each of the named executive officers as of the fiscal year ended December 31, 2013. As of December 31, 2013, our named executive officers had not been awarded any equity awards other than stock options.

Option Awards

Name

Number of

Securities

Underlying

Unexercised

Options

Number of

Securities Underlying Unexercised

Options

Option

Exercise Price

Option Expiration

Date

(#)

Exercisable

(#)

Unexercisable

($)

Elias Vamvakas (1)

4,500

51.25

3/30/2015

Elias Vamvakas (2)

12,000

47.50

8/3/2016

Elias Vamvakas (3)

4,000

27.75

7/3/2017

Elias Vamvakas (4)

626,164

2.63

10/6/2018

Elias Vamvakas (5)

15,000

2.00

6/18/2019

Elias Vamvakas (6)

14,899

1.22

9/30/2019

Elias Vamvakas (7)

135,000

1.22

9/30/2019

Elias Vamvakas (8)

100,000

1.22

9/30/2019

Elias Vamvakas (9)

200,000

1.22

9/30/2019

Elias Vamvakas (10)

41,666

83,334

6.43

3/6/2023

Michael Berg (11)

56,129

2.25

10/1/2016

Michael Berg (12)

25,000

1.99

3/3/2019

Michael Berg (13)

18,871

1.22

9/30/2019

Michael Berg (14)

10,000

20,000

6.43

3/6/2023

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Tracy Puckett (15)

29,860

2.25

6/1/2017

Tracy Puckett (16)

25,000

1.99

3/3/2019

Tracy Puckett (17)

45,140

1.22

9/30/2019

Tracy Puckett (18)

10,000

20,000

6.43

3/6/2023

Joseph Jensen (19)

300,000

11.33

10/21/2023

William Dumencu (20)

1,800

51.25

3/30/2015

William Dumencu (21)

1,200

27.75

7/3/2017

William Dumencu (22)

37,665

2.63

10/6/2018

William Dumencu (23)

10,000

1.99

3/3/2019

William Dumencu (24)

52,335

1.22

9/30/2019

William Dumencu (25)

10,000

20,000

6.43

3/6/2023


(1)

4,500 post-split options were granted on March 30, 2005, under the Plan.  These performance-based options were to vest as follows: (a) as to 100% when and if the Company receives the approval that it is seeking from the U.S. Food and Drug Administration for the RHEO System for use in the Rheopheresis treatment of non-exudative age-related macular degeneration (the “FDA Approval”), if the FDA Approval is received on or before November 30, 2006; (b) as to 80% when and if the Company receives the FDA Approval, if the FDA Approval is received after November 30, 2006 but on or before January 31, 2007; (c) as to 60% when and if the Company receives the FDA Approval, if the FDA Approval is received after January 31, 2007.

(2)

12,000 post-split options were granted on August 3, 2006, under the Plan.  These options vested fully upon the date of grant.

(3)

4,000 post-split options were granted on July 3, 2007, under the Plan.  These time-based options have fully vested.

(4)

626,164 post-split options were granted on October 6, 2008, under the Plan.  These options vested fully upon the date of grant.

(5)

15,000 options were granted on June 18, 2009, under the Plan.  These time-based options have fully vested.

(6)

14,899 options were granted on September 30, 2009, under the Plan.  These options vested fully upon the date of grant.

(7)

135,000 options were granted on September 30, 2009, under the Plan.  These time-based options have fully vested.

(8)

100,000 options were granted on September 30, 2009, under the Plan.  These time-based options have fully vested.

(9)

200,000 options were granted on September 30, 2009, under the Plan.  These time-based options have fully vested.

(10)

125,000 options were granted on March 6, 2013, under the Plan.  These time-based options vest annually in 1/3 installments, starting on the one year anniversary of the date of grant. Vesting commencement was subject to stockholder approval of an increase in authorized shares reserved for issuance under the Plan.

(11)

56,129 post-split options were granted on October 1, 2006, under the Plan.  These time-based options are fully vested.

(12)

25,000 options were granted on March 3, 2009, under the Plan.  These time-based options are fully vested.

(13)

18,871 options were granted on September 30, 2009, under the Plan.  These time-based options are fully vested.

(14)

30,000 options were granted on March 6, 2013, under the Plan.  These time-based options vest annually in 1/3 installments, starting on the one year anniversary of the date of grant. Vesting commencement was subject to stockholder approval of an increase in authorized shares reserved for issuance under the Plan.

(15)

29,860 post-split options were granted on June 1, 2007, under the Plan.  These time-based options are fully vested.

(16)

25,000 options were granted on March 3, 2009, under the Plan.  These time-based options are fully vested.

(17)

45,140 options were granted on September 30, 2009, under the Plan.  These time-based options are fully vested.

(18)

30,000 options were granted on March 6, 2013, under the Plan.  These time-based options vest annually in 1/3 installments, starting on the one year anniversary of the date of grant. Vesting commencement was subject to stockholder approval of an increase in authorized shares reserved for issuance under the Plan.

(19)

300,000 options were granted on October 21, 2013, outside of the Plan.  These time-based options vest annually in 1/3 installments, starting on the one year anniversary of the date of grant.

(20)

1,800 post-split options were granted on March 30, 2005, under the Plan.  These performance-based options were to vest as follows: (a) as to 100% when and if the Company receives the approval that it is seeking from the U.S. Food and Drug Administration for the RHEO System for use in the Rheopheresis treatment of non-exudative age-related macular degeneration (the “FDA Approval”), if the FDA Approval is received on or before November 30, 2006; (b) as to 80% when and if the Company receives the FDA Approval, if the FDA Approval is received after November 30, 2006 but on or before January 31, 2007; (c) as to 60% when and if the Company receives the FDA Approval, if the FDA Approval is received after January 31, 2007.

-33-

(21)

1,200 post-split options were granted on July 3, 2007, under the Plan.  These time-based options are fully vested.

(22)

37,665 post-split options were granted on October 6, 2008, under the Plan.  These options vested fully upon the date of grant.

(23)

10,000 options were granted on March 3, 2009, under the Plan.  These time-based options are fully vested.

(24)

52,335 options were granted on September 30, 2009, under the Plan.  These time-based options are fully vested.

(25)

30,000 options were granted on March 6, 2013, under the Plan.  These time-based options vest annually in 1/3 installments, starting on the one year anniversary of the date of grant. Vesting commencement was subject to stockholder approval of an increase in authorized shares reserved for issuance under the Plan.

Option Exercises in 2013

The following table provides additional information about the value realized by the named executive officers on option award exercises during the year ended December 31, 2013.

Option Awards

Name

Number of

Shares

Acquired on

Exercise (#)

Value

Realized on

Exercise ($)

Elias Vamvakas

Joseph Jensen

William Dumencu

Michael Berg

Tracy Puckett

As of December 31, 2013, our named executive officers had not been awarded any equity awards other than stock options and restricted stock units issued and exercised in 2012.

Equity Compensation Plan Information

The following table summarizes the number of outstanding options, warrants and rights granted to our employees, consultants, and directors, as well as the number of shares of common stock remaining available for future issuance, under our equity compensation plans as of December 31, 2013.

Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights (a)

Weighted Average Exercise Price of Outstanding Options and Rights (b)

Reserved for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a))

Equity compensation plans approved by security holders

OcuSense, Inc. 2003 Stock Option/Stock Issuance Plan (1)

335,003 $ 2.25

2002 Equity Incentive Plan (2)

4,893,792 $ 4.62 134,400

Equity compensation plans not approved by security holders (3)

308,000 $ 12,37

Total

5,536,795 $ 4.91 134,400

Equity compensation plans approved by security holders


(1)

TearLab assumed options under the OcuSense, Inc. 2003 Stock Option/Stock Issuance Plan in October 2008.

(2)

The number of securities remaining available for future issuance under equity compensation plans excludes 337,500 options granted in December 2013. As of December 31, 2013, the Company had granted 337,500 options to certain employees and consultants which require shareholder approval to increase the option pool by at least 203,100 options before the options granted become exercisable. If shareholder approval is not obtained by December 13, 2014 to increase the option pool, then these options shall expire and will be returned to the Plan. These options vest one-third annually on the anniversary of its grant date of December 13, 2013.

(3)

Joseph Jensen was hired in October 2013, and as a material inducement for his hire, he was granted a stock option for 300,000 shares not approved by security holders, which also vests annually in 1/3 installments, starting on the one year anniversary of the date of grant. In October 2005, the Company granted 8,000 post-split options at a post-split exercise price of $51.25, to an executive as a material inducement. Those options have fully vested .

Compensation of Directors

Directors who are non employees are entitled to receive annual grants of an option to purchase 15,000 shares of the Company’s common stock and annual compensation of $36,000, to be paid quarterly.  The following table sets forth summary information concerning compensation paid or accrued for services rendered to us in all capacities to the non-employee members of the Board for the fiscal year ended December 31, 2013.

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Name

Fees Earned

or Paid

in Cash ($)

Stock

Awards

($)

Option

Awards

($) (1)

Non-Equity Incentive Plan

Compensation ($)

Change in Pension Value and Nonqualified

Deferred Compensation Earnings ($)

All Other

Compensation ($)

Total ($)

Anthony E. Altig

36,000

118,629

154,629

Thomas N. Davidson, Jr.

36,000

118,629

154,629

Adrienne L. Graves

36,000

118,629

154,629

Paul M. Karpecki

36,000

118,629

154,629

Richard Lindstrom

36,000

118,629

154,629

Donald Rindell

36,000

118,629

154,629

Brock Wright

36,000

118,629

154,629


(1)

The values set forth in this column are based on the full grant date fair value of stock option awards, computed in accordance with the provisions of FASB ASC Topic 718, using the Black-Scholes pricing model, utilizing certain assumptions as outlined in the footnotes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.  These stock options include time-based stock options earned during the 12 month period ended June 7, 2013.

As of December 31, 2013, the aggregate number of unvested shares underlying stock awards and options outstanding for each of our non-employee directors was:

Name

Aggregate Number of Shares Underlying Stock Awards Outstanding

Aggregate Number of Shares Underlying Options Outstanding

Anthony E. Altig

122,096

Thomas N. Davidson, Jr.

71,795

Adrienne L. Graves

114,570

Paul M. Karpecki

92,145

Richard Lindstrom

126,048

Donald Rindell

153,687

Brock Wright

76,992

Compensation Committee Interlocks and Insider Participation

The members of our compensation committee are Dr. Wright, Mr. Davidson, Dr. Graves and Dr. Lindstrom. No member of the Compensation Committee has ever been an officer or employee of the Company.  None of the Company’s executive officers currently serves, or has served during the last completed fiscal year, on the compensation committee or the board of directors of any other entity that has one or more executive officers serving as a member of the Board or the Compensation Committee of the Company.

Directors’ and Officers’ Liability Insurance

The Company maintains directors’ and officers’ liability insurance.  Under this insurance coverage, the insurer pays, on the Company’s behalf, for losses for which the Company indemnifies its directors and officers and, on behalf of individual directors and officers, losses arising during the performance of their duties for which the Company does not indemnify them.  The total limit for the policy is $15,000,000 per policy term, subject to a deductible of $250,000 per claim with respect to corporate indemnity provisions and $500,000 if the claim relates to securities law claims.  In addition, the Company has implemented a Side A DIC policy which is additional protection for the directors and officers in the event the company is legally not permitted or financially unable to indemnify.  The level of insurance is $5,000,000 in excess of the basic $15,000,000 insurance.  The total premiums in respect of the directors’ and officers’ liability insurance paid in the financial year ended December 31, 2013 were approximately $205,000.  The directors’ and officers’ liability insurance policy is effective from December 7, 2013 to December 7, 2014.  The insurance policy does not distinguish between directors and officers as separate groups.

-35-

Employment Contracts and Certain Transaction-based Contracts

2002 Stock Incentive Plan, as amended

Our named executive officers hold awards granted under our 2002 Stock Incentive Plan (the “Incentive Plan”) that may be subject to vesting acceleration in connection with a Change in Control (as defined in the Incentive Plan) pursuant to the terms of the Incentive Plan. Under the Incentive Plan, any outstanding awards granted under the Incentive Plan will fully vest and become exercisable in connection with a Change in Control (as defined in the Incentive Plan) if (i) they are not assumed or substituted for by the Acquiring Corporation (as defined in the Incentive Plan) or (ii) they are assumed or substituted for by the Acquiring Corporation but the participant’s service is terminated by reason of an involuntary termination within 18 months following the effective date of a Change in Control.

Elias Vamvakas Change of Control and Severance Agreement

We entered into an executive employment agreement with Mr. Vamvakas in June 2013. Pursuant to his employment agreement, if Mr. Vamvakas’s employment is terminated by the Company at any time without cause (other than for death or disability) or Mr. Vamvakas resigns due to a material adverse change in the terms and conditions of his employment within 6 months of a Change in Control (as such term is defined in the Employment Agreement), then subject to his timely execution of a release of claims, Mr. Vamvakas will be entitled to receive: (i) a lump sum payment equal to 2 times his then-current annual base salary plus 2 times the average of the bonus paid to him in the 2 years preceding the year of termination, and (ii) reimbursement of group health plan insurance premiums for up to 18 months.

If Mr. Vamvakas intends to resign other than as described in the previous paragraph, the employment agreement requires him to give the Company written notice of at least 3 months prior to his resignation. During the resignation notice period, the Company may, at its discretion, terminate Mr. Vamvakas’s employment before the resignation becomes effective, but in such case, Mr. Vamvakas will then be entitled to: (i) continuing payments of his base salary for the remainder of the resignation notice period; and (ii) a lump sum payment of his pro-rated bonus calculated as of the date his employment ceases.

William Dumencu Change of Control and Severance Agreement

We entered into an executive change of control and severance agreement with Mr. Dumencu in July 2013. Mr. Dumencu’s severance agreement provide that if his employment is terminated without cause (other than death or disability), we will provide him with (i) continuing payments of base salary for 12 months and (ii) our continued contributions to the group insured benefit plans for 12 months from the date his employment ceases. If within 12 months following a change of control (as defined in the severance agreement) either (A) Mr. Dumencu’s employment is terminated by us without cause (other than death or disability) or (B) he resigns for good reason (as defined in the severance agreement), he will be entitled to (i) continuing payments of base salary for 24 months and (ii) our continued contributions to the group insured benefit plans for 18 months from the date his employment ceases.

Joseph Jensen Employment Offer Letter

We entered into an offer letter agreement with Mr. Jensen in October 2013. Pursuant to his offer letter, if Mr. Jensen’s employment is terminated by the Company at any time without cause (other than for death or disability) or Mr. Jensen resigns due to a material adverse change in the terms and conditions of his employment within 6 months of a Change in Control (provided that Mr. Jensen gives written notice within 30 days of the events constituting a material adverse change, provides a cure period of not less than 30 days for the Company to cure any such material adverse change, and resigns within 30 days following the end of such cure period), then subject to his timely execution of a release of claims, Mr. Jensen will be entitled to receive: (i) a lump sum payment equal to 2 times his then-current annual base salary plus 2 times the average of the bonus paid to him in the 2 years preceding the year of termination, and (ii) reimbursement of group health plan insurance premiums for up to 18 months.

If Mr. Jensen intends to resign other than as described in the previous paragraph, his offer letter requires him to give the Company written notice of at least 3 months prior to his resignation. During the resignation notice period, the Company may, at its discretion, terminate Mr. Jensen’s employment before the resignation becomes effective, but in such case, Mr. Jensen will then be entitled to: (i) continuing payments of his base salary for the remainder of the resignation notice period; and (ii) a lump sum payment of his pro-rated bonus calculated as of the date his employment ceases.

Michael Berg and Tracy Puckett Change of Control and Severance Agreements

We entered into an executive change of control and severance agreement with each of Mr. Berg and Ms. Puckett in July 2013. The severance agreements each provide that if the applicable executive’s employment is terminated without cause (other than death or disability), we will provide him or her with (i) continuing payments of base salary for 12 months and (ii) reimbursement of group health plan insurance premiums for up to 12 months. If within 12 months following a change of control (as defined in the severance agreement) either (A) the applicable executive’s employment is terminated by us without cause (other than death or disability) or (B) he or she resigns for good reason (as defined in the severance agreement), he or she will be entitled to (i) continuing payments of base salary for 24 months and (ii) reimbursement of group health plan insurance premiums for up to 18 months.

-36-

Estimated Payments Upon Termination or Change in Control

The following table provides information concerning the estimated payments and benefits that would be provided in the circumstances described above for each of the named executive officers. Payments and benefits are estimated assuming that the triggering event took place on the last business day of fiscal 2013 (December 31, 2013), and the price per share of TearLab’s common stock is the closing price on the NASDAQ Global Select Market as of that date ($9.34). There can be no assurance that a triggering event would produce the same or similar results as those estimated below if such event occurs on any other date or at any other price, of if any other assumption used to estimate potential payments and benefits is not correct. Due to the number of factors that affect the nature and amount of any potential payments or benefits, any actual payments and benefits may be different.

Potential Payments Upon:

Involuntary Termination Other Than For Cause

Voluntary Termination for Good Reason

Name Type of Benefit (1)

Not in

Connection

With a Change

in Control

($ ) (2)

Within 6 (or 12) Months of

Change in

Control

($ ) (3)

Not in

Connection

With a Change

in Control

($ ) (2)

Within 6 (or12) Months of

Change in

Control

($ ) (3)

Elias Vamvakas

Cash Severance Payments

957,733 957,733 - 957,733

Vesting Acceleration (4)

242,502 242,502 - 242,502

Continued Coverage of Employee Benefits (5)

6,115 6,115 - 6,115

Total Termination Benefits (6):

1,206,350 1,206,350 - 1,206,350

Joseph Jensen

Cash Severance Payments

991,573 991,573 - 991,573

Vesting Acceleration (4)

-

Continued Coverage of Employee Benefits (5)

21,037 21,037 - 21,037

Total Termination Benefits (6):

1,012,611 1,012,611 - 1,012,611

William Dumencu

Cash Severance Payments

172,313 344,625 - 344,625

Vesting Acceleration (4)

58,200 58,200 - 58,200

Continued Coverage of Employee Benefits (5)

4,076 6,115 - 6,115

Total Termination Benefits (6):

234,589 408,940 - 408,940

Michael Berg

Cash Severance Payments

180,000 360,000 - 360,000

Vesting Acceleration (4)

58,200 58,200 - 58,200

Continued Coverage of Employee Benefits (5)

18,219 27,329 - 27,329

Total Termination Benefits (6):

256,419 445,529 - 445,529

Tracy Puckett

Cash Severance Payments

180,000 360,000 - 360,000

Vesting Acceleration (4)

58,200 58,200 - 58,200

Continued Coverage of Employee Benefits (5)

16,374 24,561 - 24,561

Total Termination Benefits (6):

254,574 442,761 - 442,761

(1)

Reflects the terms of: (i) the Executive Severance Plan described above; (ii) the Change of Control Severance Agreements between TearLab and the executive officers; and (iii) the terms of the Stock Incentive Plan.

(2)

Reflects the terms of the Executive Severance Plan described above.

(3) Reflects the terms of the Equity Incentive Plans and Change of Control Severance Agreements described above. (4)     Reflects the aggregate market value of unvested option grants with exercise prices less than $9.34 (“in-the-money options”) and full value awards, which includes performance shares and restricted stock units. For unvested in-the-money option grants, aggregate market value is computed by multiplying (i) the number of shares underlying unvested in-the-money options at December 31, 2013, by (ii) the difference between $9.34 and the exercise price of such in-the-money option. Does not reflect any market value for options with exercise prices in excess of $9.34. None of the Named Executive Officers in this table held any in-the-money options relative to the $9.34 closing price of TearLab common stock on December 31, 2013.

(5)

For terminations under the Change of Control Severance Agreements, assumes continued coverage of employee benefits at the amounts paid by TearLab for fiscal 2013 for health, dental, vision, long-term disability and life insurance coverage. For terminations under the Executive Severance Plan, assumes continued coverage of employee benefits at the amounts that would have been paid by TearLab for continued coverage of employee benefits for fiscal 2013 for continued health, dental, vision and long-term disability and life insurance coverage.

(6)

In the event that the severance and other benefits provided would be subject to excise taxes imposed by Section 280G and Section 4999 of the Internal Revenue Code, such amount will either be delivered in full or reduced so as not to be subject to excise taxation, whichever amount is higher, pursuant to the terms of the Executive Severance Plan or Change of Control Severance Agreement.

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Report of the Compensation Committee

The compensation committee oversees TearLab’s compensation policies, plans, and benefit programs. The compensation committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based on such review and discussions, the compensation committee has recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement.

The Compensation Committee

Richard L. Lindstrom (Chair)

Thomas N. Davidson, Jr.

Adrienne L. Graves

Brock Wright

This Report of the Compensation Committee does not constitute soliciting material, and shall not be deemed to be filed or incorporated by reference into any other filing by TearLab under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent TearLab specifically incorporates the Report of the Compensation Committee by reference therein.

-38-

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under Section 16(a) of the Exchange Act, directors, officers and beneficial owners of ten percent or more of our common stock, or the Reporting Persons, are required to report to the SEC on a timely basis the initiation of their status as a Reporting Person and any changes regarding their beneficial ownership of our common stock. The Company believes that, during 2013, the Reporting Persons complied with all Section 16(a) filing requirements.

STOCKHOLDER PROPOSALS

Proposals of stockholders intended to be presented at our Annual Meeting of Stockholders to be held in 2015 must be received by us no later than December 29, 2014, which is 120 days prior to the first anniversary of the mailing date of the proxy, in order to be included in our proxy statement and form of proxy relating to that meeting.  These proposals must comply with the requirements as to form and substance established by the Securities and Exchange Commission for such proposals in order to be included in the proxy statement.  A stockholder who wishes to make a proposal at the Annual Meeting of Stockholders to be held in 2014 without including the proposal in our proxy statement and form of proxy relating to that meeting must notify us no later than March 13, 2014 unless the date of the Annual Meeting of Stockholders held in 2014 is more than 30 days before or after the one-year anniversary of the Annual Meeting of the Stockholders held in 2013.  If the stockholder fails to give notice by this date, then the persons named as proxies in the proxies solicited by the Board of Directors for the 2014 Annual Meeting may exercise discretionary voting power regarding any such proposal.

ANNUAL REPORT

Our Annual Report for the fiscal year ended December 31, 2013 will be mailed to stockholders of record as of April 14, 2014.  Our Annual Report does not constitute, and should not be considered, a part of this Proxy.

A copy of our Annual Report on Form 10-K will be furnished without charge upon receipt of a written request identifying the person so requesting a report as a stockholder of the Company at such date to any person who was a beneficial owner of our common stock on the Record Date.  Requests should be directed to TearLab Corp., 9980 Huennekens St., Suite 100, San Diego, California 92121, Attention: Corporate Secretary.

HOUSEHOLDING OF PROXY MATERIALS

The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for proxy materials with respect to two or more stockholders sharing the same address by delivering a single copy of the applicable proxy materials addressed to those stockholders.  This process, which is commonly referred to as “householding,” potentially means extra convenience for stockholders and cost savings for companies.

This year, a number of brokers with account holders who are TearLab Corp. stockholders will be “householding” our proxy materials.  A single Notice of Internet Availability of Proxy Materials and Proxy will be delivered to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders.  Once you have received notice from your broker that they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent.  If, at any time, you no longer wish to participate in “householding” and would prefer to receive separate proxy materials, please notify your broker, direct your written request to TearLab Corp., Investor Relations; 9980 Huennekens St., Suite 100, San Diego, California 92121 or contact TearLab Corp. at (858) 455-6006.  Stockholders who currently receive multiple copies of the proxy materials at their address and would like to request “householding” of their communications should contact their brokers.

OTHER BUSINESS

Our Board of Directors does not know of any matter to be presented at our Annual Meeting which is not listed on the Notice of Annual Meeting and discussed above.  If other matters should properly come before the meeting, however, the persons named in the accompanying Proxy will vote all Proxies in accordance with their best judgment.

All stockholders are urged to complete, sign, date and return the accompanying Proxy Card.

By Order of the Board of Directors,

/s/ Elias Vamvakas

Elias Vamvakas

Chairman of the Board

Dated: April 25, 2014

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APPENDIX A

2002 STOCK INCENTIVE PLAN


TEARLAB CORPORATION

(formerly OCCULOGIX, INC. and formerly VASCULAR SCIENCES CORPORATION)

2002 STOCK INCENTIVE PLAN

AS AMENDED EFFECTIVE AS OF April [__], 2014

1. Establishment, Purpose and Term of Plan.

1.1 Establishment .  The TearLab Corporation 2002 Stock Incentive Plan (the “ Plan ”) was originally established effective as of the effective date of the Delaware reincorporation of OccuLogix Corporation (the predecessor corporation to the Company) on June 5, 2002 (the “ Original Effective Date ”), and is hereby amended and restated effective as of April [__], 2014 (the “ Effective Date ”).

1.2 Purpose .  The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group.

1.3 Term of Plan .  The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and