UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 (Mark
one)
 [X]
              Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934for the
      quarterly period ended June 30,
2009
 OR
 
 [   ]
              Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the transition period from _____________ to
      _____________
 
 Commission
file number: 1-14128
 
 
 EMERGING
VISION, INC.
 (Exact
name of Registrant as specified in its charter)
 
 NEW
YORK
 (State or
other jurisdiction of incorporation or organization)
 
 11-3096941
 (I.R.S.
Employer Identification No.)
 
 100
Quentin Roosevelt Boulevard
 Garden
City, NY 11530
 (Address
and zip code of principal executive offices)
 
 Telephone
Number: (516) 390-2100
 (Registrant’s
telephone number, including area code)
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
 Yes  X
                          No__
 
 Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 Yes
      __
                No__
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act (Check One):
 
 Large
      accelerated filer  __
                Accelerated
      filer  __Non
      accelerated filer  __
                Smaller
      reporting company  X
 (Do not check if a smaller reporting
company)
 
 Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
 Yes
      __
                No  X
 
 As of
August 14, 2009, there were 129,157,103 outstanding shares of the Issuer’s
Common Stock, par value $0.01 per share.
  
  
 
 
 
 TABLE
      OF CONTENTSPAGEPART I – FINANCIAL INFORMATIONItem 1.  Financial Statements
      (Unaudited)Consolidated Condensed Balance Sheets as of June 30, 2009 and
      December 31, 2008
              4Consolidated Condensed Statements of Operations for the Three
      and Six Months
              5Ended June 30, 2009
      and 2008Consolidated Condensed Statements of Cash Flows for the Three
      and Six Months
              6-7Ended June 30, 2009
      and 2008Notes to Consolidated Condensed Financial
      Statements
              8-17Item 2.  Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
              18-30Item 3.  Quantitative and Qualitative Disclosures
      about Market Risk
              31Item 4T.  Controls and
    Procedures
              31PART II – OTHER INFORMATIONItem 1. Legal Proceedings
              32Item 1A. Risk Factors
              32Item 2. Unregistered Sales of Equity Securities and
      Use of Proceeds
              32Item 3. Defaults Upon Senior
      Securities
              32Item 4. Submission of Matters to a Vote of Security
      Holders
              32Item 5. Other Information
              32Item 6. Exhibits
              32-33Signatures
              34Exhibit 31.1
                
                Exhibit 31.2
                
                Exhibit 32.1
 
 
 
 
 
 
 
 
 
 PART I - FINANCIAL INFORMATION
 
 Item
1.  Financial Statements
 
 EMERGING
      VISION, INC. AND SUBSIDIARIES
                    CONSOLIDATED CONDENSED BALANCE SHEETS
                    (In
      Thousands, Except Share Data)ASSETS
                  
                  June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008(unaudited)
                  
                  
                  (audited)Current
      assets:Cash
      and cash equivalents
                  
                  $
                  1,656
                  
                  
                  $
                  2,090Franchise
      receivables, net of allowance of $148 and $140,
    respectively
                  
                  
                  1,793
                  
                  
                  
                  1,744Optical
      purchasing group receivables, net of allowance of $95 and $172,
      respectively
                  
                  
                  5,961
                  
                  
                  
                  4,221Other
      receivables, net of allowance of $6 and $7, respectively
                  
                  
                  199
                  
                  
                  
                  322Current
      portion of franchise notes receivable, net of allowance of
    $29
                  
                  
                  218
                  
                  
                  
                  107Inventories
                  
                  
                  344
                  
                  
                  
                  322Prepaid
      expenses and other current assets
                  
                  
                  584
                  
                  
                  
                  543Deferred
      tax assets
                  
                  
                  351
                  
                  
                  
                  351Total
      current assets
                  
                  
                  11,106
                  
                  
                  
                  9,700Property
      and equipment, net
                  
                  
                  1,025
                  
                  
                  
                  1,191Franchise
      notes receivable
                  
                  
                  267
                  
                  
                  
                  302Deferred
      tax asset, net of current portion
                  
                  
                  803
                  
                  
                  
                  803Goodwill
                  
                  
                  4,127
                  
                  
                  
                  4,127Intangible
      assets, net
                  
                  
                  3,116
                  
                  
                  
                  3,218Other
      assets
                  
                  
                  277
                  
                  
                  
                  296Total
      assets
                  
                  $
                  20,721
                  
                  
                  $
                  19,637
 
 LIABILITIES AND SHAREHOLDERS’
      EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities
                  
                  $
                  4,002
                  
                  
                  $
                  4,362Optical
      purchasing group payables
                  
                  
                  5,361
                  
                  
                  
                  3,709Accrual
      for store closings
                  
                  
                  160
                  
                  
                  
                  146Short-term
      debt
                  
                  
                  4,971
                  
                  
                  
                  14Related
      party obligations
                  
                  
                  356
                  
                  
                  
                  353Total
      current liabilities
                  
                  
                  14,850
                  
                  
                  
                  8,584Long-term
      debt
                  
                  
                  43
                  
                  
                  
                  5,358Related
      party borrowings, net of current portion
                  
                  
                  364
                  
                  
                  
                  417Franchise
      deposits and other liabilities
                  
                  
                  276
                  
                  
                  
                  310Total
      liabilities
                  
                  
                  15,533
                  
                  
                  
                  14,669Commitments
      and contingenciesShareholders'
      equity:Preferred
      stock, $0.01 par value per share; 5,000,000 shares
      authorized:  Senior Convertible Preferred Stock, $100,000
      liquidation preference per share; 0.74 shares issued and
      outstanding
                  
                  
                  74
                  
                  
                  
                  74Common
      stock, $0.01 par value per share; 150,000,000 shares authorized;
      125,475,143 shares issued and 125,475,143 shares
    outstanding
                  
                  
                  1,254
                  
                  
                  
                  1,254Treasury
      stock, at cost, 182,337 shares
                  
                  
                  (204
                  )
                  
                  
                  (204
                  )Additional
      paid-in capital
                  
                  
                  128,059
                  
                  
                  
                  128,059Accumulated
      comprehensive loss
                  
                  
                  (213
                  )
                  
                  
                  (267
                  )Accumulated
      deficit
                  
                  
                  (123,782
                  )
                  
                  
                  (123,948
                  )Total
      shareholders' equity
                  
                  
                  5,188
                  
                  
                  
                  4,968Total
      liabilities and shareholders' equity
                  
                  $
                  20,721
                  
                  
                  $
                  19,637
 
 The
accompanying notes are an integral part of these consolidated condensed
financial statements.
 
 
 EMERGING
      VISION, INC. AND SUBSIDIARIES
                              CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
      (UNAUDITED)
                              (In
      Thousands, Except Per Share Data)For
      the Three Months Ended June 30,
                            
                            
                            For
      the Six MonthsEnded
      June 30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Revenues:Optical
      purchasing group sales
                            
                            $
                            14,148
                            
                            
                            $
                            17,235
                            
                            
                            $
                            25,524
                            
                            
                            $
                            31,530Franchise
      royalties
                            
                            
                            1,410
                            
                            
                            
                            1,595
                            
                            
                            
                            2,900
                            
                            
                            
                            3,246Membership
      fees – VisionCare of California
                            
                            
                            872
                            
                            
                            
                            877
                            
                            
                            
                            1,747
                            
                            
                            
                            1,720Retail
      sales – Company-owned stores
                            
                            
                            500
                            
                            
                            
                            954
                            
                            
                            
                            1,030
                            
                            
                            
                            2,096Franchise
      related fees and other revenues
                            
                            
                            65
                            
                            
                            
                            18
                            
                            
                            
                            143
                            
                            
                            
                            248Total
      revenue
                            
                            
                            16,995
                            
                            
                            
                            20,679
                            
                            
                            
                            31,344
                            
                            
                            
                            38,840Costs
      and operating expenses:Cost
      of optical purchasing group sales
                            
                            
                            13,469
                            
                            
                            
                            16,494
                            
                            
                            
                            24,254
                            
                            
                            
                            30,027Cost
      of retail sales – Company-owned stores
                            
                            
                            99
                            
                            
                            
                            246
                            
                            
                            
                            259
                            
                            
                            
                            511Selling,
      general and administrative expenses
                            
                            
                            3,414
                            
                            
                            
                            3,723
                            
                            
                            
                            6,527
                            
                            
                            
                            7,444Total
      costs and operating expenses
                            
                            
                            16,982
                            
                            
                            
                            20,463
                            
                            
                            
                            31,040
                            
                            
                            
                            37,982Operating
      income
                            
                            
                            13
                            
                            
                            
                            216
                            
                            
                            
                            304
                            
                            
                            
                            858Other
      income (expense):Interest
      on franchise notes receivable
                            
                            
                            6
                            
                            
                            
                            7
                            
                            
                            
                            13
                            
                            
                            
                            14Other
      (expense) income, net
                            
                            
                            (28
                            )
                            
                            
                            14
                            
                            
                            
                            (25
                            )
                            
                            
                            48Interest
      expense, net
                            
                            
                            (58
                            )
                            
                            
                            (69
                            )
                            
                            
                            (115
                            )
                            
                            
                            (161
                            )Total
      other expense
                            
                            
                            (80
                            )
                            
                            
                            (48
                            )
                            
                            
                            (127
                            )
                            
                            
                            (99
                            )(Loss)
      income before income tax benefit (provision)
                            
                            
                            (67
                            )
                            
                            
                            168
                            
                            
                            
                            177
                            
                            
                            
                            759Income
      tax benefit (provision)
                            
                            
                            3
                            
                            
                            
                            139
                            
                            
                            
                            (11
                            )
                            
                            
                            265Net
      (loss) income
                            
                            
                            (64
                            )
                            
                            
                            307
                            
                            
                            
                            166
                            
                            
                            
                            1,024Comprehensive
      (loss) income:Foreign
      currency translation adjustments
                            
                            
                            (264
                            )
                            
                            
                            9
                            
                            
                            
                            54
                            
                            
                            
                            33Comprehensive
      (loss) income
                            
                            $
                            (328
                            )
                            
                            $
                            316
                            
                            
                            $
                            220
                            
                            
                            $
                            1,057Net
      (loss) income per share:Basic
      and diluted
                            
                            $
                            (0.00
                            )
                            
                            $
                            0.00
                            
                            
                            $
                            0.00
                            
                            
                            $
                            0.01Weighted-average
      number of common shares outstanding:Basic
                            
                            
                            125,475
                            
                            
                            
                            125,475
                            
                            
                            
                            125,475
                            
                            
                            
                            125,475Diluted
                            
                            
                            125,475
                            
                            
                            
                            130,965
                            
                            
                            
                            125,742
                            
                            
                            
                            131,357
 
 
 The
accompanying notes are an integral part of these consolidated condensed
financial statements.
 
 EMERGING
      VISION, INC. AND SUBSIDIARIES
                    CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
      (UNAUDITED)
                    (Dollars
      in Thousands)For
      the Six MonthsEnded
      June 30,2009
                  
                  
                  2008Cash
      flows from operating activities:Net
      income
                  
                  $
                  166
                  
                  
                  $
                  1,024Adjustments
      to reconcile net income to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  321
                  
                  
                  
                  313Provision
      for bad debt
                  
                  
                  183
                  
                  
                  
                  12Deferred
      tax assets
                  
                  
                  -
                  
                  
                  
                  (265
                  )Gain
      on the sale of property and equipment
                  
                  
                  -
                  
                  
                  
                  (19
                  )Disposal
      of property and equipment
                  
                  
                  15
                  
                  
                  
                  -Non-cash
      compensation charges related to options and warrants
                  
                  
                  -
                  
                  
                  
                  46Changes
      in operating assets and liabilities:Franchise
      and other receivables
                  
                  
                  (47
                  )
                  
                  
                  (42
                  )Optical
      purchasing group receivables
                  
                  
                  (1,831
                  )
                  
                  
                  (2,527
                  )Inventories
                  
                  
                  (22
                  )
                  
                  
                  4Prepaid
      expenses and other current assets
                  
                  
                  (41
                  )
                  
                  
                  (222
                  )Other
      assets
                  
                  
                  (35
                  )
                  
                  
                  (7
                  )Accounts
      payable and accrued liabilities
                  
                  
                  (346
                  )
                  
                  
                  (1,081
                  )Optical
      purchasing group payables
                  
                  
                  1,652
                  
                  
                  
                  2,289Franchise
      deposits and other liabilities
                  
                  
                  (34
                  )
                  
                  
                  (82
                  )Net
      cash used in operating activities
                  
                  
                  (19
                  )
                  
                  
                  (557
                  )Cash
      flows from investing activities:Proceeds
      from franchise and other notes receivable
                  
                  
                  84
                  
                  
                  
                  126Settlement
      on accounts payable related to enhancing trademark value
                  
                  
                  102
                  
                  
                  
                  -Costs
      associated with enhancing trademark value
                  
                  
                  (98
                  )
                  
                  
                  (228
                  )Franchise
      notes receivable issued
                  
                  
                  (131
                  )
                  
                  
                  (20
                  )Purchases
      of property and equipment
                  
                  
                  (18
                  )
                  
                  
                  (21
                  )Net
      cash used in investing activities
                  
                  
                  (61
                  )
                  
                  
                  (143
                  )Cash
      flows from financing activities:Borrowings
      under credit facility
                  
                  
                  150
                  
                  
                  
                  -Payments
      under credit facility
                  
                  
                  (500
                  )
                  
                  
                  -Payments
      on related party obligations and other debt
                  
                  
                  (58
                  )
                  
                  
                  (74
                  )Net
      cash used in financing activities
                  
                  
                  (408
                  )
                  
                  
                  (74
                  )Net
      decrease in cash before effect of foreign exchange rate
      changes
                  
                  
                  (488
                  )
                  
                  
                  (774
                  )Effect
      of foreign exchange rate changes
                  
                  
                  54
                  
                  
                  
                  2Net
      decrease in cash and cash equivalents
                  
                  
                  (434
                  )
                  
                  
                  (772
                  )Cash
      and cash equivalents – beginning of period
                  
                  
                  2,090
                  
                  
                  
                  2,846Cash
      and cash equivalents – end of period
                  
                  $
                  1,656
                  
                  
                  $
                  2,074
  
  
 
 Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                    
                    $
                    102
                    
                    
                    $
                    158Taxes
                    
                    $
                    16
                    
                    
                    $
                    32Non-cash
      investing and financing activities:Notes
      receivable in connection with the sale of two Company-owned stores
      (inclusive of all inventory and property and equipment)
                    
                    $
                    -
                    
                    
                    $
                    169Notes
      receivable in connection with franchisee settlement (inclusive of all
      franchise related receivables)
                    
                    $
                    95
                    
                    
                    $
                    -
 The
accompanying notes are an integral part of these consolidated condensed
financial statements.
 
  
  EMERGING
VISION, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 NOTE
1 – ORGANIZATION:
 
 Business
 
 Emerging
Vision, Inc. and subsidiaries (collectively, the “Company”) operates one of the
largest chains of retail optical stores and one of the largest franchise optical
chains in the United States, based upon management’s beliefs, domestic sales and
the number of locations of Company-owned and franchised stores (collectively
“Sterling Stores”).  The Company also targets retail optical stores
within the United States and within Canada to become members of its two optical
purchasing groups, Combine Buying Group, Inc. (“Combine”) and The Optical Group
(“TOG”).  Additionally, the Company operates VisionCare of California,
Inc. (“VCC”), a wholly owned subsidiary that is a specialized health care
maintenance organization licensed by the State of California, Department of
Managed Health Care, which employs licensed optometrists who render services in
offices located immediately adjacent to, or within, most Sterling Stores located
in California.  The Company was incorporated under the laws of the
State of New York in January 1992 and, in July 1992, purchased substantially all
of the assets of Sterling Optical Corp., a New York corporation, then a
debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code.
 
 As of
June 30, 2009, there were 136 Sterling Stores in operation, consisting of 6
Company-owned stores (inclusive of 1 store operated under the terms of a
management agreement) and 130 franchised stores, 818 active members of Combine,
and 539 active members of TOG.
 
 Principles
      of Consolidation
 
 The
Consolidated Condensed Financial Statements include the accounts of Emerging
Vision, Inc. and its operating and non-operating subsidiaries, all of which are
wholly-owned. All intercompany balances and transactions have been eliminated in
consolidation.
 
 Basis
      of Presentation
 
 The
accompanying Consolidated Condensed Financial Statements of the Company have
been prepared in accordance with accounting principles generally accepted for
interim financial statement presentation and in accordance with the instructions
to Form 10-Q and Articles 8 and 10 of Regulation S-X.  Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted for complete financial statement
presentation.  In the opinion of management, all adjustments for a
fair statement of the results of operations and financial position for the
interim periods presented have been included.  All such adjustments
are of a normal recurring nature.  This financial information should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.
 
 
 NOTE
2 – SIGNIFICANT ACCOUNTING POLICIES:
 
 Share-Based
Compensation
 
 The
Company follows the provisions of Financial Accounting Standards Board’s
(“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123R,
“Share-Based Payment,” which revised SFAS No. 123 to require all share-based
payments to employees, including grants of employee stock options, to be
recognized based on their fair values.
 
 Share-based
compensation cost of approximately $41,000 and $46,000 is reflected in selling,
general and administrative expenses on the accompanying Consolidated Condensed
Statements of Operations for the three and six months ended June 30, 2008,
respectively.  There was no such expense during the three and six
months ended June 30, 2009.  The Company determined the fair value of
options and warrants issued during 2008 using the Black-Scholes option pricing
model.
 
 Revenue
Recognition
 
 The
Company recognizes revenues in accordance with the Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition.”  Accordingly, revenues are recorded when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the Company’s prices to buyers are fixed or determinable, and
collectability is reasonably assured.
 
 The
Company derives its revenues from the following five principal
sources:
 
 Optical purchasing group
sales – Represents product pricing extended to the Company’s
optical purchasing group members associated with the sale of vendor’s eye care
products to such members;
 
 Franchise royalties –
Represents continuing franchise royalty fees based upon a percentage of the
gross revenues generated by each franchised location.  To the extent
that collectability of royalties is not reasonably assured, the Company
recognizes such revenue when the cash is received;
 
 Retail sales – Company-owned stores– Represents sales from eye care products and related services generated
at a Company-owned store;
 
 Membership fees – VisionCare of
California – Represents membership fees generated by VisionCare of
California, Inc. (“VCC”), a wholly owned subsidiary of the Company, for
optometric services provided to individual patients (members).  A
portion of membership fee revenues is deferred when billed and recognized
ratably over the one-year term of the membership agreement;
 
 Franchise related feesand other revenues –
Represents certain franchise fees collected by the Company under the terms of
franchise agreements (including, but not limited to, initial franchise,
transfer, renewal and conversion fees).  Initial franchise fees, which
are non-refundable, are recognized when the related franchise agreement is
signed.  The Company recognized franchise related fees of $69,000 and
$10,000 for the three months ended June 30, 2009 and 2008, respectively, and
$140,000 and $160,000 for the six months ended June 30, 2009 and 2008,
respectively.  Other revenues are revenues that are not generated by
one of the other five principal sources including commission income and employee
optical sales.
 
 The
Company also follows the provisions of Emerging Issue Task Force (“EITF”) Issue
01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendor’s Products),” and accordingly, accounts for discounts,
coupons and promotions (that are offered to its customers) as a direct reduction
of revenue.
 
 Comprehensive
Income
 
 The
Company follows the provisions of SFAS No. 130, “Reporting Comprehensive
Income,” which establishes standards for the reporting of comprehensive income
and its components.  Comprehensive income is defined as the change in
equity from transactions and other events and circumstances other than those
resulting from investments by owners and distributions to owners.  The
Company’s comprehensive (loss) income is comprised solely of the cumulative
translation adjustment arising from the translation of TOG’s financial
statements.
 
 Foreign
Currency Translation
 
 The
financial position and results of operations of TOG were measured using TOG’s
local currency (Canadian Dollars) as the functional currency.  Balance
sheet accounts are translated from the foreign currency into U.S. Dollars at the
period-end rate of exchange.  Income and expenses are translated at
the weighted average rates of exchange for the period.  The resulting
$264,000 translation loss and $9,000 translation gain from the conversion of
foreign currency to U.S. Dollars is included as a component of comprehensive
income for the three months ended June 30, 2009 and 2008, respectively, and the
resulting $54,000 and $33,000 translation gain from the conversion of foreign
currency to U.S. Dollars is included as a component of comprehensive income for
the six months ended June 30, 2009 and 2008, respectively.  Each of
the translation adjustments are recorded directly to accumulated comprehensive
loss within the Consolidated Condensed Balance Sheets.
 
 Income
Taxes
 
 The
Company follows the provisions of FASB’s Interpretation (“FIN”) No. 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB No.
109.”  FIN 48 prescribes a recognition threshold and measurement
attribute for how a company should recognize, measure, present, and disclose in
its financial statements uncertain tax positions that the company has taken or
expects to take on a tax return.  FIN 48 requires that the financial
statements reflect expected future tax consequences of such positions presuming
the taxing authorities’ full knowledge of the position and all relevant facts,
but without considering time values.  There were no adjustments
related to uncertain tax positions recognized during the three and six months
ended June 30, 2009 and 2008, respectively.
 
 The
Company recognizes interest and penalties related to uncertain tax positions as
a reduction of the income tax benefit.  No interest and penalties
related to uncertain tax positions were accrued as of June 30, 2009 and December
31, 2008, respectively.
 
 The
Company operates in multiple tax jurisdictions within the United States of
America and Canada.  Although the Company does not believe that the
Company is currently under examination in any major tax jurisdiction in which it
operates, the Company remains subject to examination in all of those tax
jurisdictions until the applicable statutes of limitation expire.  As
of June 30, 2009, a summary of the tax years that remains subject to examination
in the Company’s major tax jurisdictions are:  United States – Federal
and State – 2005 and forward.  The Company does not expect to have a
material change to unrecognized tax positions within the next twelve
months.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities as of the dates of such financial statements,
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.  Significant
estimates made by management include, but are not limited to, allowances on
franchise, notes and other receivables, allowances on optical purchasing group
receivables, costs of current and potential litigation, and the allowance on
deferred tax assets
 
 Reclassification
 
 Certain
reclassifications have been made to prior year’s consolidated condensed
financial statements to conform to the current year presentation.
 
 
 NOTE
3 – PER SHARE INFORMATION:
 
 In
accordance with SFAS No. 128, “Earnings Per Share”, basic earnings per share of
common stock (“Basic EPS”) is computed by dividing the net (loss) income by the
weighted-average number of shares of common stock
outstanding.  Diluted earnings per share of common stock (“Diluted
EPS”) is computed by dividing the net (loss) income by the weighted-average
number of shares of common stock, and dilutive common stock equivalents and
convertible securities then outstanding.  SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the Company’s
Consolidated Condensed Statements of Operations.  Common stock
equivalents totaling 22,485,311 and 3,522,687 were excluded from the computation
of Diluted EPS for the three months ended June 30, 2009 and 2008, respectively,
and 22,485,311 and 3,522,687 were excluded for the six months ended June 30,
2009 and 2008, respectively, as their effect on the computation of Diluted EPS
would have been anti-dilutive.
  
  
 The
following table sets forth the computation of basic and diluted per share
information:
 
 For
      the Three Months Ended June 30,
                  
                  
                  For
      the Six Months Ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Numerator:Net
      (loss) income (in thousands):
                  
                  $
                  (64
                  )
                  
                  $
                  307
                  
                  
                  $
                  166
                  
                  
                  $
                  1,024Denominator:Weighted-average
      shares of common stock outstanding
                  
                  
                  125,475
                  
                  
                  
                  125,475
                  
                  
                  
                  125,475
                  
                  
                  
                  125,475Dilutive
      effect of stock options, warrants and restricted stock
                  
                  
                  -
                  
                  
                  
                  5,490
                  
                  
                  
                  267
                  
                  
                  
                  5.882Weighted-average
      shares of common stock outstanding, assuming dilution
                  
                  
                  125,475
                  
                  
                  
                  130,965
                  
                  
                  
                  125,742
                  
                  
                  
                  131,357Net
      (loss) income per share:Basic
      and diluted
                  
                  $
                  (0.00
                  )
                  
                  $
                  0.00
                  
                  
                  $
                  0.00
                  
                  
                  $
                  0.01
 
 NOTE
4 – CREDIT FACILITY:
 
 On August
8, 2007, the Company entered into a Revolving Line of Credit Note and Credit
Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Company
(“M&T”), establishing a revolving credit facility (the “Credit Facility”),
for aggregate borrowings of up to $6,000,000, to be used for general working
capital needs and certain permitted acquisitions, which is secured by
substantially all of the assets of the Company, other than the assets of
Combine, which assets are used to secure the repayment of Combine’s
debt.  The Credit Facility is set to mature on April 1,
2010.  All sums drawn by the Company under the Credit Facility
are repayable, interest only, on a monthly basis, commencing on the first
day of each month during the term of the Credit Facility, calculated at the
variable rate of three hundred (300) basis points in excess of LIBOR, and all
principal drawn by the Company is payable on April 1, 2010.  The
Company is currently exploring certain options available to it to
extend or refinance, prior to April 2010, provided, however, that the Company
does not know if it will be able to extend or refinance the debt and cannot
guarantee that extending or refinancing the debt will be on terms favorable to
the Company.
 
 As of
June 30, 2009, the Company had outstanding borrowings of $4,956,854 under the
Credit Facility, which amount was included in Short-term Debt on the
accompanying Consolidated Condensed Balance Sheet and was utilizing
$500,000 of the Credit Facility to hold a letter of credit in favor of a key
vendor of Combine to ensure payment of any outstanding invoices not paid by
Combine.  Additionally, the Company had $543,146 available under the
Credit Facility for future borrowings.
 
 The
Credit Facility includes various financial covenants including minimum net
worth, maximum funded debt and debt service ratio requirements.  As of
June 30, 2009, the Company was not in compliance with two of the financial
covenants, however, M&T granted the Company a waiver and agreed that, as of
June 30, 2009, it was now in compliance with such covenants.
 
 
 NOTE
5 – SEGMENT REPORTING
 
 Business
Segments
 
 Operating
segments are organized internally primarily by the type of services provided,
and in accordance with SFAS 131, “Disclosures About Segments of an
Enterprise and Related Information.”  The Company has aggregated
similar operating characteristics into six reportable segments: (1) Optical
Purchasing Group Business, (2) Franchise, (3) Company Store, (4) VisionCare of
California, (5) Corporate Overhead and (6) Other.
 
 (1) The
Optical Purchasing Group Business segment consists of the operations of Combine
and TOG.  Revenues generated by this segment represent the sale of
products and services, at discounted pricing, to Combine and TOG
members.  The businesses in this segment are able to use their
membership count to get better discounts from vendors than a member could obtain
on its own.  Expenses include direct costs for such product and
services, salaries and related benefits, depreciation and amortization, interest
expense on financing these acquisitions, and other overhead.
 
 (2) The
Franchise segment consists of 130 franchise locations as of June 30,
2009.  Revenues generated by this segment represent royalties on the
total sales of the franchise locations, other franchise related fees such as
initial franchise, transfer, renewal and conversion fees, additional royalties
in connection with franchise store audits, and interest charged on franchise
financing.  Expenses include the salaries and related
benefits/expenses of the Company’s franchise field support team, corporate
office salaries and related benefits, convention and trade show expenses,
consulting fees, and other overhead.
 
 (3) The
Company Store segment consists of six Company-owned retail optical stores
(including one under the terms of a management agreement) as of June 30,
2009.  Revenues generated from such stores are a result of the sales
of eye care products and services such as prescription and non-prescription
eyeglasses, eyeglass frames, ophthalmic lenses, contact lenses, sunglasses and a
broad range of ancillary items.  Expenses include the direct costs for
such eye care products, doctor and store staff salaries and related benefits,
rent, advertising, and other overhead.
 
 (4) The
VisionCare of California segment consists of optometric services provided to
patients (members) of those franchise retail optical stores located in the state
of California.  Revenues consist of membership fees generated for such
optometric services provided to individual patients
(members).  Expenses include salaries and related benefits for the
doctors that render such optometric services, and other overhead.
 
 (5) The
Corporate Overhead segment consists of expenses not allocated to one of the
other segments.  There are no revenues generated by this
segment.  Expenses include costs associated with being a publicly
traded company (including salaries and related benefits, professional fees,
Sarbanes-Oxley compliance, board of director fees, and director and officer
insurance), other salaries and related benefits, rent, other professional fees,
and depreciation and amortization.
 
 (6) The
Other segment includes revenues and expenses from other business activities that
do not fall within one of the other segments.  Revenues generated by
this segment consist of employee optical benefit sales, commission income, and
residual income on credit card processing.  Expenses primarily include
the direct cost of such employee optical benefit sales, salaries and related
benefits, commission expense, and advertising.
 
 Certain
business segment information is as follows (in thousands):
 
 As
      ofJune
      30,
                    2009
                  
                  
                  As
      of December 31, 2008(unaudited)
                  
                  
                  (audited)Total
      Assets:Optical
      Purchasing Group Business
                  
                  $
                  13,609
                  
                  
                  $
                  12,246Franchise
                  
                  
                  5,356
                  
                  
                  
                  5,386VisionCare
      of California
                  
                  
                  668
                  
                  
                  
                  632Company
      Store
                  
                  
                  439
                  
                  
                  
                  547Corporate
      Overhead
                  
                  
                  634
                  
                  
                  
                  814Other
                  
                  
                  15
                  
                  
                  
                  12Total
      assets
                  
                  $
                  20,721
                  
                  
                  $
                  19,637
  
  
 
 As
      ofJune
      30,
                    2009
                  
                  
                  As
      of December 31, 2008(unaudited)
                  
                  
                  (audited)Capital
      Expenditures:Optical
      Purchasing Group Business
                  
                  $
                  -
                  
                  
                  $
                  42Franchise
                  
                  
                  8
                  
                  
                  
                  40VisionCare
      of California
                  
                  
                  -
                  
                  
                  
                  2Company
      Store
                  
                  
                  3
                  
                  
                  
                  139Corporate
      Overhead
                  
                  
                  7
                  
                  
                  
                  121Other
                  
                  
                  -
                  
                  
                  
                  -Total
      capital expenditures
                  
                  $
                  18
                  
                  
                  $
                  344
 
 Total
      Goodwill:Optical
      Purchasing Group Business
                  
                  $
                  2,861
                  
                  
                  $
                  2,861Franchise
                  
                  
                  1,266
                  
                  
                  
                  1,266VisionCare
      of California
                  
                  
                  -
                  
                  
                  
                  -Company
      Store
                  
                  
                  -
                  
                  
                  
                  -Corporate
      Overhead
                  
                  
                  -
                  
                  
                  
                  -Other
                  
                  
                  -
                  
                  
                  
                  -Total
      goodwill
                  
                  $
                  4,127
                  
                  
                  $
                  4,127
 
 Total
      Intangible Assets:Optical
      Purchasing Group Business
                  
                  $
                  2,209
                  
                  
                  $
                  2,307Franchise
                  
                  
                  907
                  
                  
                  
                  911VisionCare
      of California
                  
                  
                  -
                  
                  
                  
                  -Company
      Store
                  
                  
                  -
                  
                  
                  
                  -Corporate
      Overhead
                  
                  
                  -
                  
                  
                  
                  -Other
                  
                  
                  -
                  
                  
                  
                  -Total
      intangible assets
                  
                  $
                  3,116
                  
                  
                  $
                  3,218
 
 Total
      Intangible Asset Additions:Optical
      Purchasing Group Business
                  
                  $
                  -
                  
                  
                  $
                  -Franchise
                  
                  
                  (4
                  )
                  
                  
                  601VisionCare
      of California
                  
                  
                  -
                  
                  
                  
                  -Company
      Store
                  
                  
                  -
                  
                  
                  
                  -Corporate
      Overhead
                  
                  
                  -
                  
                  
                  
                  -Other
                  
                  
                  -
                  
                  
                  
                  -Total
      intangible asset additions
                  
                  $
                  (4
                  )
                  
                  $
                  601
 
  
  
 
 For
      the Three MonthsEnded
      June 30,
                  
                  
                  For
      the Six MonthsEnded
      June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      Revenues:Optical
      Purchasing Group Business
                  
                  $
                  14,148
                  
                  
                  $
                  17,235
                  
                  
                  $
                  25,524
                  
                  
                  $
                  31,530Franchise
                  
                  
                  1,479
                  
                  
                  
                  1,605
                  
                  
                  
                  3,040
                  
                  
                  
                  3,406VisionCare
      of California
                  
                  
                  872
                  
                  
                  
                  877
                  
                  
                  
                  1,747
                  
                  
                  
                  1,720Company
      Store
                  
                  
                  500
                  
                  
                  
                  954
                  
                  
                  
                  1,030
                  
                  
                  
                  2,096Corporate
      Overhead
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
                  
                  
                  (4
                  )
                  
                  
                  8
                  
                  
                  
                  3
                  
                  
                  
                  88Net
      revenues
                  
                  $
                  16,995
                  
                  
                  $
                  20,679
                  
                  
                  $
                  31,344
                  
                  
                  $
                  38,840(Loss)
      Income before Income Tax Benefit (Provision):Optical
      Purchasing Group Business
                  
                  $
                  158
                  
                  
                  $
                  319
                  
                  
                  $
                  382
                  
                  
                  $
                  640Franchise
                  
                  
                  486
                  
                  
                  
                  808
                  
                  
                  
                  1,189
                  
                  
                  
                  1,904VisionCare
      of California
                  
                  
                  12
                  
                  
                  
                  4
                  
                  
                  
                  28
                  
                  
                  
                  6Company
      Store
                  
                  
                  (133
                  )
                  
                  
                  (193
                  )
                  
                  
                  (234
                  )
                  
                  
                  (211
                  )Corporate
      Overhead
                  
                  
                  (585
                  )
                  
                  
                  (710
                  )
                  
                  
                  (1,189
                  )
                  
                  
                  (1,535
                  )Other
                  
                  
                  (5
                  )
                  
                  
                  (60
                  )
                  
                  
                  1
                  
                  
                  
                  (45
                  )(Loss)
      income before income tax benefit (provision)
                  
                  $
                  (67
                  )
                  
                  $
                  168
                  
                  
                  $
                  177
                  
                  
                  $
                  759Depreciation
      and Amortization:Optical
      Purchasing Group Business
                  
                  $
                  77
                  
                  
                  $
                  77
                  
                  
                  $
                  153
                  
                  
                  $
                  153Franchise
                  
                  
                  63
                  
                  
                  
                  54
                  
                  
                  
                  124
                  
                  
                  
                  110VisionCare
      of California
                  
                  
                  6
                  
                  
                  
                  5
                  
                  
                  
                  11
                  
                  
                  
                  11Company
      Store
                  
                  
                  27
                  
                  
                  
                  16
                  
                  
                  
                  33
                  
                  
                  
                  35Corporate
      Overhead
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
                  
                  
                  -
                  
                  
                  
                  4
                  
                  
                  
                  -
                  
                  
                  
                  4Total
      depreciation and amortization
                  
                  $
                  173
                  
                  
                  $
                  156
                  
                  
                  $
                  321
                  
                  
                  $
                  313Interest
      Expense, Net:Optical
      Purchasing Group Business
                  
                  $
                  45
                  
                  
                  $
                  55
                  
                  
                  $
                  88
                  
                  
                  $
                  140Franchise
                  
                  
                  13
                  
                  
                  
                  14
                  
                  
                  
                  27
                  
                  
                  
                  21VisionCare
      of California
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Company
      Store
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Corporate
      Overhead
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      interest expense, net
                  
                  $
                  58
                  
                  
                  $
                  69
                  
                  
                  $
                  115
                  
                  
                  $
                  161
 
  
  
 Geographic
Information
 
 The
business of the Company is concentrated into two separate geographic areas; the
United States and Canada.  Certain geographic information for
continuing operations is as follows:
 
 For
      the Three MonthsEnded
      June 30,
                  
                  
                  For
      the Six MonthsEnded
      June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      Revenues:United
      States
                  
                  $
                  6,666
                  
                  
                  $
                  11,623
                  
                  
                  $
                  13,125
                  
                  
                  $
                  21,940Canada
                  
                  
                  10,329
                  
                  
                  
                  9,056
                  
                  
                  
                  18,219
                  
                  
                  
                  16,900Net
      revenues
                  
                  $
                  16,995
                  
                  
                  $
                  20,679
                  
                  
                  $
                  31,344
                  
                  
                  $
                  38,840(Loss)
      Income before Income Tax Benefit:United
      States
                  
                  $
                  (289
                  )
                  
                  $
                  (81
                  )
                  
                  $
                  (305
                  )
                  
                  $
                  277Canada
                  
                  
                  222
                  
                  
                  
                  249
                  
                  
                  
                  482
                  
                  
                  
                  482(Loss)
      income before income tax benefit (provision)
                  
                  $
                  (67
                  )
                  
                  $
                  168
                  
                  
                  $
                  177
                  
                  
                  $
                  759
 
 The
geographic information on Canada includes TOG’s business
activities.  Canadian revenue is generated from the Company’s optical
purchasing group members located in Canada.  TOG provides customer
management services on behalf of the Company, to such members.
 
 Additional
geographic information is summarized as follows for the six months ended June
30, 2009 (in thousands):
 
 United
      States
                  
                  
                  Canada
                  
                  
                  TotalTotal
      Assets
                  
                  $
                  16,360
                  
                  
                  $
                  4,361
                  
                  
                  $
                  20,721Property
      and Equipment
                  
                  
                  994
                  
                  
                  
                  31
                  
                  
                  
                  1,025Depreciation
      and Amortization
                  
                  
                  315
                  
                  
                  
                  6
                  
                  
                  
                  321Capital
      Expenditures
                  
                  
                  18
                  
                  
                  
                  -
                  
                  
                  
                  18Goodwill
                  
                  
                  4,127
                  
                  
                  
                  -
                  
                  
                  
                  4,127Intangible
      Assets
                  
                  
                  3,116
                  
                  
                  
                  -
                  
                  
                  
                  3,116Intangible
      Asset Additions
                  
                  
                  (4
                  )
                  
                  
                  -
                  
                  
                  
                  (4
                  )Interest
      Expense
                  
                  
                  115
                  
                  
                  
                  -
                  
                  
                  
                  115
 Geographic
information is summarized as follows for the year ended December 31, 2008 (in
thousands) (audited):
 
 United
      States
                  
                  
                  Canada
                  
                  
                  TotalTotal
      Assets
                  
                  $
                  16,678
                  
                  
                  $
                  2,959
                  
                  
                  $
                  19,637Property
      and Equipment
                  
                  
                  1,156
                  
                  
                  
                  35
                  
                  
                  
                  1,191Depreciation
      and Amortization
                  
                  
                  645
                  
                  
                  
                  9
                  
                  
                  
                  654Capital
      Expenditures
                  
                  
                  344
                  
                  
                  
                  -
                  
                  
                  
                  344Goodwill
                  
                  
                  4,127
                  
                  
                  
                  -
                  
                  
                  
                  4,127Intangible
      Assets
                  
                  
                  3,218
                  
                  
                  
                  -
                  
                  
                  
                  3,218Intangible
      Asset Additions
                  
                  
                  601
                  
                  
                  
                  -
                  
                  
                  
                  601Interest
      Expense
                  
                  
                  346
                  
                  
                  
                  -
                  
                  
                  
                  346
 
 NOTE
6 – COMMITMENTS AND CONTINGENCIES:
 
 Litigation
 
 On May
20, 2003, Irondequoit Mall, LLC commenced an action against the Company and
Sterling Vision of Irondequoit, Inc. (“SVI”) alleging, among other things, that
the Company had breached its obligations under its guaranty of the lease for the
former Sterling Optical store located in Rochester, New York.  In June
2009, this action was settled.  The terms of the settlement include
the payment, by the Company to Irondequoit Mall, LLC, of an aggregate sum of
$75,000, of which $50,000 was paid in July 2009 and $25,000 is due prior to
September 30, 2009, and the exchange of mutual general releases.
 
 In August
2006, the Company and its subsidiary, Sterling Vision of California, Inc.
(“SVC”) (collectively referred to as the “Company”) filed an action against For
Eyes Optical Company (“For Eyes” or “Defendant”) in response to allegations by
For Eyes of trademark infringement for Plaintiff’s use of the trademark “Site
For Sore Eyes”.  The Company claims, among other things, that (i)
there is no likelihood of confusion between the Company’s and Defendant’s mark,
and that the Company has not infringed, and is not infringing, Defendant’s mark;
ii) the Company is not bound by that certain settlement agreement, executed in
1981 by a prior owner of the Site For Sore Eyes trademark; and iii) Defendant’s
mark is generic and must be cancelled.  For Eyes, in its Answer,
asserted defenses to the Company’s claims, and asserted counterclaims against
the Company, including, among others, that (i) the Company has infringed For
Eyes’ mark; (ii) the Company wrongfully obtained a trademark registration for
its mark and that said registration should be cancelled; and (iii) the acts of
the Company constitute a breach of the aforementioned settlement
agreement.  For Eyes seeks injunctive relief, cancellation of the
Company’s trademark registration, trebled monetary damages, payment of any
profits made by the Company in respect of the use of such trade name, and costs
and attorney fees.  The Company has not recorded an accrual for a loss
in this action, as the Company does not believe it is probable that the Company
will be held liable in respect of Defendant’s
counterclaims.  Currently, the parties are in settlement discussions,
provided, however, that there can be no assurance that the litigation will be
settled, or, if it is settled, that the terms of such settlement will be
favorable to the Company.
 
 In
September 2008, Pyramid Mall of Glen Falls Newco, LLC commenced an action
against the Company and its subsidiary Sterling Vision of Aviation Mall, Inc.,
in the Supreme Court of the State of New York, Onondaga County, alleging, among
other things, that the Company had breached its obligations under its lease for
the former Sterling Optical store located at Aviation Mall, New
York.  The Company believes that it has a meritorious defense to such
action.  As of the date hereof, these proceedings were in the
discovery stage.  Although the Company has recorded an accrual for
probable losses in the event that the Company shall be held liable in respect of
plaintiff’s claims, the Company does not believe that any such loss is
reasonably possible, or, if there is a loss, the Company does not believe that
it is reasonably possible that such loss would exceed the amount
recorded.
 
 In
October 2008, Crossgates Mall Company Newco, LLC commenced an action against the
Company’s subsidiary, Sterling Optical of Crossgates Mall, Inc., in the Supreme
Court of the State of New York, Onondaga County, alleging, among other things,
that the Company had breached its obligations under its lease for the former
Sterling Optical store located at Crossgates Mall, New York.  The
Company believes that it has a meritorious defense to such action.  As
of the date hereof, these proceedings were in the discovery
stage.  The Company has not recorded an accrual for a loss in this
action, as the Company does not believe it is probable that the Company will be
held liable in respect of plaintiff’s claims.
 
 Although
the Company, where indicated herein, believes that it has a meritorious defense
to the claims asserted against it (and its affiliates), given the uncertain
outcomes generally associated with litigation, there can be no assurance that
the Company’s (and its affiliates’) defense of such claims will be
successful.
 
 In
addition to the foregoing, in the ordinary course of business, the Company is a
defendant in certain lawsuits alleging various claims incurred, certain of which
claims are covered by various insurance policies, subject to certain deductible
amounts and maximum policy limits.  In the opinion of management, the
resolution of these claims should not have a material adverse effect,
individually or in the aggregate, upon the Company’s business or financial
condition.  Other than as set forth above, management believes that
there are no other legal proceedings, pending or threatened, to which the
Company is, or may be, a party, or to which any of its properties are or may be
subject to, which, in the opinion of management, will have a material adverse
effect on the Company.
 
 Guarantees
 
 As of
June 30, 2009, the Company was a guarantor of certain leases of retail optical
stores franchised and subleased to its franchisees.  Such guarantees
generally expire one year from the month the rent was last paid.  In
the event that all of such franchisees defaulted on their respective subleases,
the Company would be obligated for aggregate lease obligations of approximately
$2,429,000.  The Company continually evaluates the credit-worthiness
of its franchisees in order to determine their ability to continue to perform
under their respective subleases.  Additionally, in the event that a
franchisee defaults under its sublease, the Company has the right to take over
operation of the respective location.
 
 Employment
Agreements
 
 The
Company has an Employment Agreement (“Agreement 1”) with its Chief Executive
Officer (“CEO”), which extends through November 2009.  Agreement 1
provides for an annual salary of $275,000 and certain other
benefits.  Additionally, as per Agreement 1, the CEO may be eligible
for bonus compensation as determined by the Company’s Board of
Directors.
 
 The
Company has an Employment Agreement (“Agreement 2”) with the President of
Combine, which extends through September 2011.  Agreement 2 provides
for an annual salary of $210,000, certain other benefits, and an annual bonus
based upon certain financial targets of Combine.
 
 
 NOTE
7 – SUBSEQUENT EVENTS:
 
 The
Company has evaluated subsequent events from the balance sheet date through
August 14, 2009, the date the accompanying financial statements were
issued.  The following is a material subsequent event.
 
 Equity
Transactions:
 On July
13, 2009, certain executives of the Company elected to exercise their
outstanding common stock options totaling 8,128,810 on a cash-less
basis.  As of August 14, 2009, those executives and the Company’s
Board of Directors are in negotiations to rescind such transactions, provided,
however, that there can be no assurances such negotiations will result in a
rescission or, if a rescission occurs it will be on terms favorable to the
Company.
 
 In
addition, a material subsequent event has been disclosed in Note 4.
 
 
 
  
  Item
2.MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
 
 This
Quarterly Report, as of and for the three and six months ended June 30, 2009,
(the “Report”) contains certain forward-looking statements and information
relating to the Company that is based on the beliefs of the Company’s
management, as well as assumptions made by, and information currently available
to, the Company’s management.  When used in this Report, the words
“anticipate”, “believe”, “estimate”, “expect”, “there can be no assurance”,
“may”, “could”, “would”, “might”, “intends” and similar expressions and their
negatives, as they relate to the Company or the Company’s management, are
intended to identify forward-looking statements.  Such statements
reflect the view of the Company at the date they are made with respect to future
events, are not guarantees of future performance and are subject to various
risks and uncertainties as identified in the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 and those described from time to time
in previous and future reports filed with the Securities and Exchange
Commission.  Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein with the forward-looking
statements referred to above and as set forth in this Report.  The
Company does not intend to update these forward-looking statements for new
information, or otherwise, for the occurrence of future events.
 
 Segment
results for the three and six months ended June 30, 2009, as compared to the
three and six months ended June 30, 2008
 
 Consolidated
Segment Results
 
 Total
revenues for the Company decreased approximately $3,684,000, or 17.8%, to
$16,995,000 for the three months ended June 30, 2009, as compared to $20,679,000
for the three months ended June 30, 2008, and decreased approximately
$7,496,000, or 19.3%, to $31,344,000 for the six months ended June 30, 2009, as
compared to $38,840,000 for the six months ended June 30, 2008.  These
decreases were mainly a result of the decrease in Optical Purchasing Group
revenues during the comparable periods due to current economic trends in the US
and Canadian economies as well as currency fluctuations between the US and
Canadian dollars.  Additionally, the Company experienced a decrease in
the average number of Company-owned stores in operation from 10 for the six
months ended June 30, 2008 compared to 6 for the six months ended June 30, 2009,
and a decrease in the average number of franchise locations in operation from
145 for the six months ended June 30, 2008 compared to 131 for the six months
ended June 30, 2009, which resulted in decreased revenues for the Company-store
and franchise segments.
 
 Total
costs and operating expenses for the Company decreased approximately $3,481,000,
or 17.0%, to $16,982,000 for the three months ended June 30, 2009, as compared
to $20,463,000 for the three months ended June 30, 2008, and decreased
approximately $6,942,000, or 18.3%, to $31,040,000 for the six months ended June
30, 2009, as compared to $37,982,000 for the six months ended June 30,
2008.  The decreases in Optical Purchasing Group cost of sales were a
direct result of the currency fluctuations described
above.  Additionally, the Company made an effort to streamline certain
corporate office administrative functions and expenses during 2009, including
the elimination of in-house counsel and moving franchise business development to
a commission based structure.  Selling, general and administrative
expenses also decreased due to the reduction of certain administrative job
functions and the decrease in the number of Company stores in operations during
2009.
  
  Optical
Purchasing Group Business Segment
 
 For
      the Three Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeNet
      Revenues:Optical
      purchasing group sales
                  
                  $
                  14,148
                  
                  
                  $
                  17,235
                  
                  
                  $
                  (3,087
                  )
                  
                  
                  (17.9
                  %)Cost
      of optical purchasing group sales
                  
                  
                  13,469
                  
                  
                  
                  16,494
                  
                  
                  
                  (3,025
                  )
                  
                  
                  (18.3
                  %)Gross
      margin
                  
                  
                  679
                  
                  
                  
                  741
                  
                  
                  
                  (62
                  )
                  
                  
                  (8.4
                  %)Selling,
      General and Administrative Expenses:Salaries
      and related benefits
                  
                  
                  132
                  
                  
                  
                  110
                  
                  
                  
                  22
                  
                  
                  
                  20.0
                  %Bad
      debt
                  
                  
                  91
                  
                  
                  
                  -
                  
                  
                  
                  91
                  
                  
                  
                  n/aDepreciation
      and amortization
                  
                  
                  77
                  
                  
                  
                  77
                  
                  
                  
                  -
                  
                  
                  
                  0.0
                  %Rent
      and related overhead
                  
                  
                  56
                  
                  
                  
                  88
                  
                  
                  
                  (32
                  )
                  
                  
                  (36.4
                  %)Credit
      card and bank fees
                  
                  
                  67
                  
                  
                  
                  76
                  
                  
                  
                  (9
                  )
                  
                  
                  (11.8
                  %)Professional
      fees
                  
                  
                  48
                  
                  
                  
                  3
                  
                  
                  
                  45
                  
                  
                  
                  1500.0
                  %Other
      general and administrative costs
                  
                  
                  5
                  
                  
                  
                  13
                  
                  
                  
                  (8
                  )
                  
                  
                  (61.5
                  %)Total
      selling, general and administrative expenses
                  
                  
                  476
                  
                  
                  
                  367
                  
                  
                  
                  109
                  
                  
                  
                  29.7
                  %Operating
      Income
                  
                  
                  203
                  
                  
                  
                  374
                  
                  
                  
                  (171
                  )
                  
                  
                  (45.7
                  %)
 
 Other
      Income (Expense):Interest
      expense, net
                  
                  
                  (45
                  )
                  
                  
                  (55
                  )
                  
                  
                  10
                  
                  
                  
                  18.2
                  %Total
      other expense
                  
                  
                  (45
                  )
                  
                  
                  (55
                  )
                  
                  
                  10
                  
                  
                  
                  18.2
                  %Income
      before income tax benefit
                  
                  $
                  158
                  
                  
                  $
                  319
                  
                  
                  $
                  (161
                  )
                  
                  
                  (50.5
                  %)
 
 
 For
      the Six Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeNet
      Revenues:Optical
      purchasing group sales
                  
                  $
                  25,524
                  
                  
                  $
                  31,530
                  
                  
                  $
                  (6,006
                  )
                  
                  
                  (19.0
                  %)Cost
      of optical purchasing group sales
                  
                  
                  24,254
                  
                  
                  
                  30,027
                  
                  
                  
                  (5,773
                  )
                  
                  
                  (19.2
                  %)Gross
      margin
                  
                  
                  1,270
                  
                  
                  
                  1,503
                  
                  
                  
                  (233
                  )
                  
                  
                  (15.5
                  %)Selling,
      General and Administrative Expenses:Salaries
      and related benefits
                  
                  
                  231
                  
                  
                  
                  225
                  
                  
                  
                  6
                  
                  
                  
                  2.7
                  %Depreciation
      and amortization
                  
                  
                  153
                  
                  
                  
                  153
                  
                  
                  
                  -
                  
                  
                  
                  0.0
                  %Credit
      card and bank fees
                  
                  
                  121
                  
                  
                  
                  136
                  
                  
                  
                  (15
                  )
                  
                  
                  (11.0
                  %)Rent
      and related overhead
                  
                  
                  122
                  
                  
                  
                  162
                  
                  
                  
                  (40
                  )
                  
                  
                  (24.7
                  %)Bad
      debt
                  
                  
                  91
                  
                  
                  
                  -
                  
                  
                  
                  91
                  
                  
                  
                  n/aProfessional
      fees
                  
                  
                  62
                  
                  
                  
                  16
                  
                  
                  
                  46
                  
                  
                  
                  287.5
                  %Other
      general and administrative costs
                  
                  
                  20
                  
                  
                  
                  31
                  
                  
                  
                  (11
                  )
                  
                  
                  (35.5
                  %)Total
      selling, general and administrative expenses
                  
                  
                  800
                  
                  
                  
                  723
                  
                  
                  
                  77
                  
                  
                  
                  10.7
                  %Operating
      Income
                  
                  
                  470
                  
                  
                  
                  780
                  
                  
                  
                  (310
                  )
                  
                  
                  (39.7
                  %)
 
 Other
      Income (Expense):Interest
      expense
                  
                  
                  (88
                  )
                  
                  
                  (140
                  )
                  
                  
                  52
                  
                  
                  
                  37.1
                  %Total
      other expense
                  
                  
                  (88
                  )
                  
                  
                  (140
                  )
                  
                  
                  52
                  
                  
                  
                  37.1
                  %Income
      before income tax benefit
                  
                  $
                  382
                  
                  
                  $
                  640
                  
                  
                  $
                  (258
                  )
                  
                  
                  (40.3
                  %)
 
 Optical
purchasing group revenues decreased approximately $3,087,000, or 17.9%, to
$14,148,000 for the three months ended June 30, 2009, as compared to $17,235,000
for the three months ended June 30, 2008, and decreased approximately $6,006,000
or 19.0%, to $25,524,000 for the six months ended June 30, 2009, as compared to
$31,530,000 for the six months ended June 30, 2008.  Individually,
Combine’s revenues decreased approximately $970,000, or 20.5%, to $3,773,000 for
the three months ended June 30, 2009, as compared to $4,743,000 for the three
months ended June 30, 2008, and decreased approximately $1,486,000, or 17.0%, to
$7,236,000 for the six months ended June 30, 2009, as compared to $8,722,000 for
the six months ended June 30, 2008.  These decreases were due to a
generally weaker economy that began to affect Combine in the 2nd half of
2008 and carried through the first six months of 2009.  As of June 30,
2009, there were 818 active members, as compared to 852 active members as of
June 30, 2008.  Individually, TOG revenues decreased approximately
$2,163,000, or 17.3%, to $10,329,000 for the three months ended June 30, 2009,
as compared to $12,492,000 for the three months ended June 30, 2008, and
decreased approximately $4,589,000, or 20.1%, to $18,219,000 for the six months
ended June 30, 2009, as compared to $22,808,000 for the six months ended June
30, 2008.  These decreases were mainly due to the fluctuation of the
foreign currency exchange rate between the Canadian and US
Dollar.  The rate averaged $0.99 for every Canadian Dollar during the
first six months of 2008, as compared to $0.83 for every Canadian Dollar during
the first six months of 2009.  Additionally, similar to the U.S.
economy, the Canadian economy experienced a downturn beginning in the 2nd half of
2008.
 
 Costs of
optical purchasing group sales decreased approximately $3,025,000, or 18.3%, to
$13,469,000 for the three months ended June 30, 2009, as compared to $16,494,000
for the three months ended June 30, 2008, and decreased approximately
$5,773,000, or 19.2%, to $24,254,000 for the six months ended June 30, 2009, as
compared to $30,027,000 for the six months ended June 30,
2008.  Individually, Combine’s cost of sales decreased approximately
$968,000, or 21.7%, to $3,494,000 for the three months ended June 30, 2009, as
compared to $4,462,000 for the three months ended June 30, 2008, and decreased
approximately $1,385,000, or 17.0%, to $6,763,000 for the six months ended June
30, 2009, as compared to $8,148,000 for the six months ended June 30,
2008.  Individually, TOG’s cost of sales decreased approximately
$2,485,000, or 20.7%, to $9,547,000 for the three months ended June 30, 2009, as
compared to $12,032,000 for the three months ended June 30, 2008, and decreased
approximately $4,442,000, or 20.3%, to $17,437,000 for the six months ended June
30, 2009, as compared to $21,879,000 for the six months ended June 30,
2008.  Both of these decreases were a direct result of, and
proportionate to, the revenue fluctuations described above.
 
 Operating
expenses of the optical purchasing group segment increased approximately
$109,000, or 29.7%, to $476,000 for the three months ended June 30, 2009, as
compared to $367,000 for the three months ended June 30, 2008, and increased
approximately $77,000, or 10.7%, to $800,000 for the six months ended June 30,
2009, as compared to $723,000 for the six months ended June 30,
2008.  These increases were mainly due to bad debt incurred on certain
member receivables during the three and six months ended June 30, 2009 of
approximately $91,000 as certain Combine members went out of business due to the
current economic conditions.  Additionally, Combine and TOG engaged
the services of consultants ($10,000 per month) in May 2009 to enhance vendor
programs designed to encourage greater spending by the members while achieving
greater profit margins.  These increases were offset, in part, by the
fluctuation of the foreign currency exchange rate as described
above.
 
 Interest
expense related to the optical purchasing group segment decreased approximately
$10,000, or 18.2%, to $45,000 for the three months ended June 30, 2009, as
compared to $55,000 for the three months ended June 30, 2008, and decreased
approximately $52,000, or 37.1%, to $88,000 for the six months ended June 30,
2009, as compared to $140,000 for the six months ended June 30,
2008.  These decreases were related to a decrease in the interest
rates on the borrowings under the Company’s Credit Facility with Manufacturers
and Traders Trust Corporation (“M&T”).  Additionally, as Combine
continues to pay down its related party debt, the Company continues to incur
less interest.
 
 Franchise
Segment
 
 For
      the Three Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeNet
      Revenues:Royalties
                  
                  $
                  1,410
                  
                  
                  $
                  1,595
                  
                  
                  $
                  (185
                  )
                  
                  
                  (11.6
                  %)Franchise
      and other related fees
                  
                  
                  69
                  
                  
                  
                  10
                  
                  
                  
                  59
                  
                  
                  
                  590.0
                  %Net
      revenues
                  
                  
                  1,479
                  
                  
                  
                  1,605
                  
                  
                  
                  (126
                  )
                  
                  
                  (7.9
                  %)Selling,
      General and Administrative Expenses:Salaries
      and related benefits
                  
                  
                  336
                  
                  
                  
                  364
                  
                  
                  
                  (28
                  )
                  
                  
                  (7.7
                  %)Professional
      fees
                  
                  
                  153
                  
                  
                  
                  111
                  
                  
                  
                  42
                  
                  
                  
                  37.8
                  %Rent
      and related overhead
                  
                  
                  122
                  
                  
                  
                  93
                  
                  
                  
                  29
                  
                  
                  
                  31.2
                  %Convention
      and trade show expenses
                  
                  
                  91
                  
                  
                  
                  99
                  
                  
                  
                  (8
                  )
                  
                  
                  (8.1
                  %)Depreciation
                  
                  
                  63
                  
                  
                  
                  54
                  
                  
                  
                  9
                  
                  
                  
                  16.7
                  %Bad
      debt
                  
                  
                  45
                  
                  
                  
                  -
                  
                  
                  
                  45
                  
                  
                  
                  n/aOther
      general and administrative costs
                  
                  
                  138
                  
                  
                  
                  77
                  
                  
                  
                  61
                  
                  
                  
                  79.2
                  %Total
      selling, general and administrative expenses
                  
                  
                  948
                  
                  
                  
                  798
                  
                  
                  
                  150
                  
                  
                  
                  18.8
                  %Operating
      Income
                  
                  
                  531
                  
                  
                  
                  807
                  
                  
                  
                  (276
                  )
                  
                  
                  (34.2
                  %)
 
 Other
      Income (Expense):Interest
      on franchise notes receivable
                  
                  
                  6
                  
                  
                  
                  7
                  
                  
                  
                  (1
                  )
                  
                  
                  (14.3
                  %)Other
      (expense) income, net
                  
                  
                  (38
                  )
                  
                  
                  8
                  
                  
                  
                  (46
                  )
                  
                  
                  (575.0
                  %)Interest
      expense, net
                  
                  
                  (13
                  )
                  
                  
                  (14
                  )
                  
                  
                  1
                  
                  
                  
                  7.1
                  %Total
      other (expense) income
                  
                  
                  (45
                  )
                  
                  
                  1
                  
                  
                  
                  (46
                  )
                  
                  
                  (4600.0
                  %)Income
      before income tax benefit
                  
                  $
                  486
                  
                  
                  $
                  808
                  
                  
                  $
                  (322
                  )
                  
                  
                  (39.9
                  %)
 
 
 For
      the Six Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeNet
      Revenues:Royalties
                  
                  $
                  2,900
                  
                  
                  $
                  3,246
                  
                  
                  $
                  (346
                  )
                  
                  
                  (10.7
                  %)Franchise
      and other related fees
                  
                  
                  140
                  
                  
                  
                  160
                  
                  
                  
                  (20
                  )
                  
                  
                  (12.5
                  %)Net
      revenues
                  
                  
                  3,040
                  
                  
                  
                  3,406
                  
                  
                  
                  (366
                  )
                  
                  
                  (10.7
                  %)Selling,
      General and Administrative Expenses:Salaries
      and related benefits
                  
                  
                  710
                  
                  
                  
                  789
                  
                  
                  
                  (79
                  )
                  
                  
                  (10.0
                  %)Professional
      fees
                  
                  
                  280
                  
                  
                  
                  221
                  
                  
                  
                  59
                  
                  
                  
                  26.7
                  %Rent
      and related overhead
                  
                  
                  227
                  
                  
                  
                  154
                  
                  
                  
                  73
                  
                  
                  
                  47.4
                  %Convention
      and trade show expenses
                  
                  
                  175
                  
                  
                  
                  164
                  
                  
                  
                  11
                  
                  
                  
                  6.7
                  %Depreciation
                  
                  
                  124
                  
                  
                  
                  110
                  
                  
                  
                  14
                  
                  
                  
                  12.7
                  %Other
      general and administrative costs
                  
                  
                  285
                  
                  
                  
                  97
                  
                  
                  
                  188
                  
                  
                  
                  193.8
                  %Total
      selling, general and administrative expenses
                  
                  
                  1,801
                  
                  
                  
                  1,535
                  
                  
                  
                  266
                  
                  
                  
                  17.3
                  %Operating
      Income
                  
                  
                  1,239
                  
                  
                  
                  1,871
                  
                  
                  
                  (632
                  )
                  
                  
                  (33.8
                  %)
 
 Other
      Income (Expense):Interest
      on franchise notes receivable
                  
                  
                  13
                  
                  
                  
                  14
                  
                  
                  
                  (1
                  )
                  
                  
                  (7.1
                  %)Other
      (expense) income, net
                  
                  
                  (36
                  )
                  
                  
                  40
                  
                  
                  
                  (76
                  )
                  
                  
                  (190.0
                  %)Interest
      expense, net
                  
                  
                  (27
                  )
                  
                  
                  (21
                  )
                  
                  
                  (6
                  )
                  
                  
                  (28.6
                  %)Total
      other (expense) income
                  
                  
                  (50
                  )
                  
                  
                  33
                  
                  
                  
                  (83
                  )
                  
                  
                  (251.5
                  %)Income
      before income tax benefit
                  
                  $
                  1,189
                  
                  
                  $
                  1,904
                  
                  
                  $
                  (715
                  )
                  
                  
                  (37.6
                  %)
 
 
 Franchise
royalties decreased approximately $185,000, or 11.6%, to $1,410,000 for the
three months ended June 30, 2009, as compared to $1,595,000 for the three months
ended June 30, 2008, and decreased approximately $346,000, or 10.7%, to
$2,900,000 for the six months ended June 30, 2009, as compared to $3,246,000 for
the six months ended June 30, 2008.  Franchise sales decreased
approximately $1,264,000, or 6.2%, for the three months ended June 30, 2009, as
compared to the three months ended June 30, 2008, and decreased approximately
$2,325,000, or 5.6%, for the six months ended June 30, 2009, as compared to the
six months ended June 30, 2008.  This led to decreased royalty income
of approximately $101,000 and $186,000 for the three and six months ended June
30, 2009, respectively, mainly due to 12 fewer stores in operations during
2009.  As of June 30, 2009 and 2008, there were 130 and 142 franchised
stores in operation, respectively.
 
 Franchise
and other related fees (which includes initial franchise fees, renewal fees,
conversion fees and store transfer fees) increased approximately $59,000, or
590.0%, to $69,000 for the three months ended June 30, 2009, as compared to
$10,000 for the three months ended June 30, 2008, and decreased approximately
$20,000, or 12.5%, to $140,000 for the six months ended June 30, 2009, as
compared to $160,000 for the six months ended June 30, 2008.  These
fluctuations were primarily attributable to 7 franchise agreement renewals
($71,000), 1 independent store conversion ($10,000), and 3 new franchise
agreements ($55,000) in 2009, as compared to 4 franchise agreement renewals
($40,000), 3 independent store conversions ($21,000), and 5 new franchise
agreements ($100,000) in 2008.  In the future, franchise fees are
likely to fluctuate depending on the timing of franchise agreement expirations,
new store openings, franchise store transfers, and the approval of the Franchise
Disclosure Document, which is renewed annually in April.
 
 Operating
expenses of the franchise segment increased approximately $150,000, or 18.8%, to
$948,000 for the three months ended June 30, 2009, as compared to $798,000 for
the three months ended June 30, 2008, and increased approximately $266,000, or
17.3%, to $1,801,000 for the six months ended June 30, 2009, as compared to
$1,535,000 for the six months ended June 30, 2008.  These increases
were partially a result of increases in; professional fees as the Company began
utilizing outside counsel to administer franchise agreement transactions (during
fiscal 2008 the Company employed in-house counsel to handle such work), rent and
related overhead as the Company reallocated certain expenses from the corporate
segment to the franchise segment as well as $55,000 due to a rent subsidy the
Company is provided on certain franchise locations during the first six months
of 2009, which was not provided in the first six months of
2008.  Additionally, the franchise segment incurred travel, training,
and related costs associated with the installation of the Company’s new
Point-of-Sale computer system (initiated March 2008).  These increases
were offset, in part, by a decrease in certain salaries and related expenses as
the Company continued to stream-line certain operations, including franchise
business development to commission-based compensation.
 
 Company
Store Segment
 
 For
      the Three Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeNet
      Revenues:Retail
      sales
                  
                  $
                  500
                  
                  
                  $
                  954
                  
                  
                  $
                  (454
                  )
                  
                  
                  (47.6
                  %)Cost
      of retail sales
                  
                  
                  99
                  
                  
                  
                  246
                  
                  
                  
                  (147
                  )
                  
                  
                  (59.8
                  %)Gross
      margin
                  
                  
                  401
                  
                  
                  
                  708
                  
                  
                  
                  (307
                  )
                  
                  
                  (43.4
                  %)Selling,
      General and Administrative Expenses:Salaries
      and related benefits
                  
                  
                  228
                  
                  
                  
                  427
                  
                  
                  
                  (199
                  )
                  
                  
                  (46.6
                  %)Rent
      and related overhead
                  
                  
                  227
                  
                  
                  
                  294
                  
                  
                  
                  (67
                  )
                  
                  
                  (22.8
                  %)Advertising
                  
                  
                  30
                  
                  
                  
                  65
                  
                  
                  
                  (35
                  )
                  
                  
                  (53.8
                  %)Other
      general and administrative costs
                  
                  
                  49
                  
                  
                  
                  115
                  
                  
                  
                  (66
                  )
                  
                  
                  (57.4
                  %)Total
      selling, general and administrative expenses
                  
                  
                  534
                  
                  
                  
                  901
                  
                  
                  
                  (367
                  )
                  
                  
                  (40.7
                  %)Operating
      Loss
                  
                  $
                  (133
                  )
                  
                  $
                  (193
                  )
                  
                  $
                  60
                  
                  
                  
                  31.1
                  %
 
 
 For
      the Six Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeNet
      Revenues:Retail
      sales
                  
                  $
                  1,030
                  
                  
                  $
                  2,096
                  
                  
                  $
                  (1,066
                  )
                  
                  
                  (50.9
                  %)Cost
      of retail sales
                  
                  
                  259
                  
                  
                  
                  511
                  
                  
                  
                  (252
                  )
                  
                  
                  (49.3
                  %)Gross
      margin
                  
                  
                  771
                  
                  
                  
                  1,585
                  
                  
                  
                  (814
                  )
                  
                  
                  (51.4
                  %)Selling,
      General and Administrative Expenses:Salaries
      and related benefits
                  
                  
                  478
                  
                  
                  
                  925
                  
                  
                  
                  (447
                  )
                  
                  
                  (48.3
                  %)Rent
      and related overhead
                  
                  
                  393
                  
                  
                  
                  569
                  
                  
                  
                  (176
                  )
                  
                  
                  (30.9
                  %)Advertising
                  
                  
                  60
                  
                  
                  
                  133
                  
                  
                  
                  (73
                  )
                  
                  
                  (54.9
                  %)Other
      general and administrative costs
                  
                  
                  74
                  
                  
                  
                  169
                  
                  
                  
                  (95
                  )
                  
                  
                  (56.2
                  %)Total
      selling, general and administrative expenses
                  
                  
                  1,005
                  
                  
                  
                  1,796
                  
                  
                  
                  (791
                  )
                  
                  
                  (44.0
                  %)Operating
      Loss
                  
                  $
                  (234
                  )
                  
                  $
                  (211
                  )
                  
                  $
                  (23
                  )
                  
                  
                  (10.9
                  %)
 
 
 Retail
sales for the Company store segment decreased approximately $454,000, or 47.6%,
to $500,000 for the three months ended June 30, 2009, as compared to $954,000
for the three months ended June 30, 2008, and decreased approximately
$1,066,000, or 50.9%, to $1,030,000 for the six months ended June 30, 2009, as
compared to $2,096,000 for the six months ended June 30, 2008.  This
decrease was mainly attributable to fewer Company-owned store locations open
during the comparable periods.  As of June 30, 2009, there were 6
Company-owned stores, as compared to 9 Company-owned stores as of June 30, 2008
(both periods inclusive of one store operated by a franchisee under the terms of
a management agreement). Over the last 12 months,
the Company has closed one Company-owned location and franchised one other that
were part of the store count as of June 30, 2008.  The two stores
generated retail sales of $608,000 for the twelve months ended June 30, 2008, as
compared to $268,000 for the twelve months ended June 30, 2009.On a same
store basis (for stores that operated as a Company-owned store during the
entirety of all of the periods ended June 30, 2009 and 2008), comparative net
sales decreased approximately $99,000, or 18.1%, to $449,000 for the three
months ended June 30, 2009, as compared to $548,000 for the three months ended
June 30, 2008, and decreased approximately $119,000, or 10.8%, to $983,000 for
the six months ended June 30, 2009, as compared to $1,102,000 for the six months
ended June 30, 2008.  The decrease in overall revenues for both
periods were partially a result of the Company reserving, in January 2009, the
total amount of managed care receivables generated by such stores and
recognizing the income on such receivables when cash receipts are
recovered.  Additionally, management believes that the decreases were
a direct result of current economic conditions, as well as the loss of a key
optometrist in the 2nd quarter
of 2009, which led to reduced exam fee revenues.
 
 The
Company-owned store’s gross profit margin, which calculation does not include
the exam fee revenues of $67,000 and $117,000 for the three months ended June
30, 2009 and 2008, respectively, and $174,000 and $257,000 for the six months
ended June 30, 2009 and 2008, respectively, generated by such Company-owned
stores, increased by 6.4%, to 76.2%, for the three months ended June 30, 2009,
as compared to 69.8% for the three months ended June 30, 2008, and decreased by
2.9%, to 69.7% for the six months ended June 30, 2009, as compared to 72.6% for
the six months ended June 30, 2008.  The six month decrease was a
direct result of the decrease in managed care revenues as described
above.  The three month improvement on gross profit margins is
attributable to certain vendor programs initiated during the 4th quarter
of 2008 that has helped improve the Company’s lab/lens
costs.  Additionally, management continues to work to improve the
profit margin through increased training at the Company-store level and improved
vendor partnerships, among other things, and anticipates these changes will
result in improvements in the Company’s gross profit margin in the
future.  The Company’s gross margin may, however, fluctuate in the
future depending upon the extent and timing of changes in the product mix in
such stores, competitive pricing, and certain one-time sales
promotions.
 
 Operating
expenses of the Company store segment decreased approximately $367,000, or
40.7%, to $534,000 for the three months ended June 30, 2009, as compared to
$901,000 for the three months ended June 30, 2008, and decreased approximately
$791,000, or 44.0%, to $1,005,000 for the six months ended June 30, 2009, as
compared to $1,796,000 for the six months ended June 30, 2008.  These
decreases were mainly a result of having fewer Company-owned stores in operation
during the three and six months ended June 30, 2009.  Additionally,
the Company streamlined certain store payroll coverage in its stores to reduced
salaries and related benefits, the loss of the optometrist as noted above, and
enhanced the media plans for each store, which reduced advertising costs on a
by-store basis.
 
 VisionCare
of California Segment
 
 For
      the Three Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeNet
      Revenues:Membership
      fees
                  
                  $
                  872
                  
                  
                  $
                  877
                  
                  
                  $
                  (5
                  )
                  
                  
                  (0.6
                  %)Selling,
      General and Administrative Expenses:Salaries
      and related benefits
                  
                  
                  773
                  
                  
                  
                  812
                  
                  
                  
                  (39
                  )
                  
                  
                  (4.8
                  %)Rent
      and related overhead
                  
                  
                  41
                  
                  
                  
                  35
                  
                  
                  
                  6
                  
                  
                  
                  17.1
                  %Other
      general and administrative costs
                  
                  
                  56
                  
                  
                  
                  32
                  
                  
                  
                  24
                  
                  
                  
                  75.0
                  %Total
      selling, general and administrative expenses
                  
                  
                  870
                  
                  
                  
                  879
                  
                  
                  
                  (9
                  )
                  
                  
                  (1.0
                  %)Operating
      Income (Loss)
                  
                  
                  2
                  
                  
                  
                  (2
                  )
                  
                  
                  4
                  
                  
                  
                  200.0
                  %
 
 Other
      Income (Expense):Other
      income
                    
                    
                    10
                    
                    
                    
                    6
                    
                    
                    
                    4
                    
                    
                    
                    66.7
                    %Total
      other income
                    
                    
                    10
                    
                    
                    
                    6
                    
                    
                    
                    4
                    
                    
                    
                    66.7
                    %Income
      before income tax benefit
                    
                    $
                    12
                    
                    
                    $
                    4
                    
                    
                    $
                    8
                    
                    
                    
                    200.0
                    %
 
 
 For
      the Six Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeNet
      Revenues:Membership
      fees
                  
                  $
                  1,747
                  
                  
                  $
                  1,720
                  
                  
                  $
                  27
                  
                  
                  
                  1.6
                  %Selling,
      General and Administrative Expenses:Salaries
      and related benefits
                  
                  
                  1,550
                  
                  
                  
                  1,594
                  
                  
                  
                  (44
                  )
                  
                  
                  (2.8
                  %)Rent
      and related overhead
                  
                  
                  80
                  
                  
                  
                  73
                  
                  
                  
                  7
                  
                  
                  
                  9.6
                  %Other
      general and administrative costs
                  
                  
                  100
                  
                  
                  
                  55
                  
                  
                  
                  45
                  
                  
                  
                  81.8
                  %Total
      selling, general and administrative expenses
                  
                  
                  1,730
                  
                  
                  
                  1,722
                  
                  
                  
                  8
                  
                  
                  
                  0.5
                  %Operating
      Income (Loss)
                  
                  
                  17
                  
                  
                  
                  (2
                  )
                  
                  
                  19
                  
                  
                  
                  950.0
                  %
 
 Other
      Income (Expense):Other
      income
                  
                  
                  11
                  
                  
                  
                  8
                  
                  
                  
                  3
                  
                  
                  
                  37.5
                  %Total
      other income
                  
                  
                  11
                  
                  
                  
                  8
                  
                  
                  
                  3
                  
                  
                  
                  37.5
                  %Income
      before income tax benefit
                  
                  $
                  28
                  
                  
                  $
                  6
                  
                  
                  $
                  22
                  
                  
                  
                  366.7
                  %
 
 
 Revenues
generated by the Company’s wholly-owned subsidiary, VisionCare of California,
Inc. (“VCC”), a specialized health care maintenance organization licensed by the
State of California Department of Managed Health Care, decreased approximately
$5,000, or 0.6%, to $872,000 for the three months ended June 30, 2009, as
compared to $877,000 for the three months ended June 30, 2008, and increased
approximately $27,000, or 1.6%, to $1,747,000 for the six months ended June 30,
2009, as compared to $1,720,000 for the six months ended June 30,
2008.  The increase for the six months ended June 30, 2009 related to
an increase in the daily membership fee charged by VCC effective June
2008.
 
 Operating
expenses of the VCC segment remained consistent with last year’s expenses,
decreasing only $9,000, or 1.0%, to $870,000 for the three months ended June 30,
2009, as compared to $879,000 for the three months ended June 30, 2008, and
increased approximately $8,000, or 0.5%, to $1,730,000 for the six months ended
June 30, 2009, as compared to $1,722,000 for the six months ended June 30,
2008.  The increase for the six months ended June 30, 2009 related to
increased doctor salaries and related benefits paid by VCC, which will be offset
in future quarters due to the increase in the daily membership fees as discussed
above.
 
 Corporate
Overhead Segment
 
 For
      the Three Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeSelling,
      General and Administrative Expenses:Salaries
      and related benefits
                  
                  $
                  351
                  
                  
                  $
                  382
                  
                  
                  $
                  (31
                  )
                  
                  
                  (8.1
                  %)Professional
      fees
                  
                  
                  162
                  
                  
                  
                  168
                  
                  
                  
                  (6
                  )
                  
                  
                  (3.6
                  %)Insurance
                  
                  
                  40
                  
                  
                  
                  38
                  
                  
                  
                  2
                  
                  
                  
                  5.3
                  %Rent
      and related overhead
                  
                  
                  26
                  
                  
                  
                  60
                  
                  
                  
                  (34
                  )
                  
                  
                  (56.6
                  %)Compensation
      expense
                  
                  
                  -
                  
                  
                  
                  41
                  
                  
                  
                  (41
                  )
                  
                  
                  (100.0
                  %)Other
      general and administrative costs
                  
                  
                  6
                  
                  
                  
                  21
                  
                  
                  
                  (15
                  )
                  
                  
                  (71.4
                  %)Total
      selling, general and administrative expenses
                  
                  
                  585
                  
                  
                  
                  710
                  
                  
                  
                  (125
                  )
                  
                  
                  (17.6
                  %)Operating
      Loss
                  
                  $
                  (585
                  )
                  
                  $
                  (710
                  )
                  
                  $
                  125
                  
                  
                  
                  17.6
                  %
 
 
 For
      the Six Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeSelling,
      General and Administrative Expenses:Salaries
      and related benefits
                  
                  $
                  720
                  
                  
                  $
                  853
                  
                  
                  $
                  (133
                  )
                  
                  
                  (15.6
                  %)Professional
      fees
                  
                  
                  286
                  
                  
                  
                  302
                  
                  
                  
                  (16
                  )
                  
                  
                  (5.3
                  %)Insurance
                  
                  
                  118
                  
                  
                  
                  126
                  
                  
                  
                  (8
                  )
                  
                  
                  (6.3
                  %)Rent
      and related overhead
                  
                  
                  51
                  
                  
                  
                  121
                  
                  
                  
                  (70
                  )
                  
                  
                  (57.9
                  %)Compensation
      expense
                  
                  
                  -
                  
                  
                  
                  46
                  
                  
                  
                  (46
                  )
                  
                  
                  (100.0
                  %)Other
      general and administrative costs
                  
                  
                  14
                  
                  
                  
                  87
                  
                  
                  
                  (73
                  )
                  
                  
                  (83.9
                  %)Total
      selling, general and administrative expenses
                  
                  
                  1,189
                  
                  
                  
                  1,535
                  
                  
                  
                  (346
                  )
                  
                  
                  (22.5
                  %)Operating
      Loss
                  
                  $
                  (1,189
                  )
                  
                  $
                  (1,535
                  )
                  
                  $
                  346
                  
                  
                  
                  22.5
                  %
 
 
 There
were no revenues generated by the corporate overhead segment.
 
 Operating
expenses decreased approximately $125,000, or 17.6%, to $585,000 for the three
months ended June 30, 2009, as compared to $710,000 for the three months ended
June 30, 2008, and decreased approximately $346,000, or 22.5%, to $1,189,000 for
the six months ended June 30, 2009, as compared to $1,535,000 for the six months
ended June 30, 2008.  The decreases for the three and six months ended
June 30, 2009 were a result of decreases to salaries and related benefits of
$31,000 and $151,000, respectively, due, in part, to decreases, in May 2008, in
the Company’s medical and dental insurance premiums and the utilization, in
January 2009, of an outside attorney to handle all franchise agreement
transactions (during 2008 the Company utilized an “in-house”
counsel).  Additionally, the Company reallocated certain rent and
related overhead expenses to the franchise segment due to certain overhead
reductions that occurred in the first quarter of 2009, the Company incurred
compensation expense of approximately $41,000 in May 2008 due to the granting of
stock options to the directors of the Company (there were no such grants during
the first six months of 2009), and the Company absorbed the entire increase in
medical and dental benefits of VCC for the first quarter of 2008.
 
 Other
Segment
 
 For
      the Three Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeNet
      Revenues:Commissions
                  
                  $
                  -
                  
                  
                  $
                  12
                  
                  
                  $
                  (12
                  )
                  
                  
                  (100.0
                  %)Other
                  
                  
                  (4
                  )
                  
                  
                  (4
                  )
                  
                  
                  -
                  
                  
                  
                  n/aNet
      revenues
                  
                  
                  (4
                  )
                  
                  
                  8
                  
                  
                  
                  (12
                  )
                  
                  
                  (150.0
                  %)Selling,
      General and Administrative Expenses:Salaries
      and related benefits
                  
                  
                  -
                  
                  
                  
                  8
                  
                  
                  
                  (8
                  )
                  
                  
                  (100.0
                  %)Advertising
                  
                  
                  -
                  
                  
                  
                  50
                  
                  
                  
                  (50
                  )
                  
                  
                  (100.0
                  %)Other
      general and administrative costs
                  
                  
                  1
                  
                  
                  
                  10
                  
                  
                  
                  (9
                  )
                  
                  
                  (90.0
                  %)Total
      selling, general and administrative expenses
                  
                  
                  1
                  
                  
                  
                  68
                  
                  
                  
                  (67
                  )
                  
                  
                  (98.5
                  %)Operating
      Loss
                  
                  $
                  (5
                  )
                  
                  $
                  (60
                  )
                  
                  $
                  55
                  
                  
                  
                  91.7
                  %
 
 
 For
      the Six Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeNet
      Revenues:Commissions
                  
                  $
                  3
                  
                  
                  $
                  69
                  
                  
                  $
                  (66
                  )
                  
                  
                  (95.7
                  %)Other
                  
                  
                  -
                  
                  
                  
                  19
                  
                  
                  
                  (19
                  )
                  
                  
                  (100.0
                  %)Net
      revenues
                  
                  
                  3
                  
                  
                  
                  88
                  
                  
                  
                  (85
                  )
                  
                  
                  (96.6
                  %)Selling,
      General and Administrative Expenses:Salaries
      and related benefits
                  
                  
                  1
                  
                  
                  
                  28
                  
                  
                  
                  (27
                  )
                  
                  
                  (96.4
                  %)Advertising
                  
                  
                  -
                  
                  
                  
                  92
                  
                  
                  
                  (92
                  )
                  
                  
                  (100.0
                  %)Other
      general and administrative costs
                  
                  
                  1
                  
                  
                  
                  13
                  
                  
                  
                  (12
                  )
                  
                  
                  (92.3
                  %)Total
      selling, general and administrative expenses
                  
                  
                  2
                  
                  
                  
                  133
                  
                  
                  
                  (131
                  )
                  
                  
                  (98.5
                  %)Operating
      Income (Loss)
                  
                  $
                  1
                  
                  
                  $
                  (45
                  )
                  
                  $
                  46
                  
                  
                  
                  102.2
                  %
 
 
 Revenues
generated by the other segment decreased approximately $85,000, or 96.6%, to
$3,000 for the six months ended June 30, 2009, as compared to $88,000 for the
six months ended June 30, 2008.   The Company began generating
commission revenues in January 2008 under operations of the Company that do not
fall within one of the other operating segments.  Those operations
ceased during the 2nd half of
fiscal 2008.
 
 Operating
expenses of the other segment decreased approximately $131,000, or 98.5%, to
$2,000 for the six months ended June 30, 2009, as compared to $133,000 for the
six months ended June 30, 2008.  The decrease was due to the cease in
operations as described above.
 
 Use
of Non-GAAP Performance Indicators
 
 The
following section expands on the financial performance of the Company detailing
the Company’s EBITDA.  EBITDA is calculated as net earnings before
interest, taxes, depreciation and amortization.  The Company refers to
EBITDA because it is a widely accepted financial indicator of a company’s
ability to service or incur indebtedness.
 
 EBITDA
does not represent cash flow from operations as defined by generally accepted
accounting principles, is not necessarily indicative of cash available to fund
all cash flow needs, should not be considered an alternative to net income or to
cash flow from operations (as determined in accordance with GAAP) and should not
be considered an indication of our operating performance or as a measure of
liquidity.  EBITDA is not necessarily comparable to similarly titled
measures for other companies.
 
 EBITDA
Reconciliation
 
 For
      the Three Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeEBITDA
      Reconciliation:Net
      income
                  
                  $
                  (64
                  )
                  
                  $
                  307
                  
                  
                  $
                  (371
                  )
                  
                  
                  (120.8
                  %)Interest
                  
                  
                  58
                  
                  
                  
                  69
                  
                  
                  
                  (11
                  )
                  
                  
                  (15.9
                  %)Taxes
                  
                  
                  (3
                  )
                  
                  
                  (139
                  )
                  
                  
                  136
                  
                  
                  
                  97.8
                  %Depreciation
      and amortization
                  
                  
                  173
                  
                  
                  
                  156
                  
                  
                  
                  17
                  
                  
                  
                  10.9
                  %EBITDA
                  
                  $
                  164
                  
                  
                  $
                  393
                  
                  
                  $
                  (229
                  )
                  
                  
                  (58.3
                  %)
 
 
 For
      the Six Months Ended June 30 (in thousands):2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeEBITDA
      Reconciliation:Net
      income
                  
                  $
                  166
                  
                  
                  $
                  1,024
                  
                  
                  $
                  (858
                  )
                  
                  
                  (83.8
                  %)Interest
                  
                  
                  115
                  
                  
                  
                  161
                  
                  
                  
                  (46
                  )
                  
                  
                  (28.6
                  %)Taxes
                  
                  
                  11
                  
                  
                  
                  (265
                  )
                  
                  
                  276
                  
                  
                  
                  104.2
                  %Depreciation
      and amortization
                  
                  
                  321
                  
                  
                  
                  313
                  
                  
                  
                  8
                  
                  
                  
                  2.6
                  %EBITDA
                  
                  $
                  613
                  
                  
                  $
                  1,233
                  
                  
                  $
                  (620
                  )
                  
                  
                  (50.3
                  %)
 
 
 The
Company also incurred other non-cash charges that effected earnings including
compensation expenses related to the grant of common stock options and warrants
of $41,000 and $46,000 for the three and six months ended June 30,
2008.  No such charges were incurred for the three and six months
ended June 30, 2009.
 
 Management
has provided an EBITDA calculation to provide a greater level of understanding
of the Company’s performance had it not been for certain significant non-cash
charges, many of which were incurred as a result of the acquisitions of Combine
and TOG.  These charges, such as depreciation and amortization, and
interest expense, are included in selling, general and administrative expenses
on the Consolidated Condensed Statements of Operations.
 
 Liquidity
and Capital Resources
 
 As of
June 30, 2009, the Company had a working capital deficit of $3,744,000 due, in
part, to the reclassification of the Company’s outstanding principal on the
M&T line of credit from long-term to short-term (approximately
$4,957,000).  The Company had cash on hand of
$1,656,000.  The outstanding principal under the Credit Facility is
due on April 1, 2010.  The Company’s ability to meet its obligations
will be dependent upon its ability to generate future profitability and/or its
ability to obtain additional financing or obtain an extension of the expiration
of the Credit Facility from M&T, however, the Company does not know if it
will be able to extend or refinance the debt and cannot guarantee that extending
or refinancing the debt will be on terms favorable to the Company.
 
 During
the six months ended June 30, 2009, cash flows used in operating activities were
$19,000.  This was principally due to an increase in optical
purchasing group receivables of $1,831,000 due to increased optical purchasing
group sales, as well as a decrease in accounts payable and accrued expenses of
$346,000, partially due to the decrease in the number of Company-owned stores in
operation leading to a reduction in product purchased, and the payment of
approximately $501,000 of legal invoices outstanding as of December 31, 2008
related to the For Eyes litigation.  This was offset, in part, by net
income and other non-cash expenses of $685,000, as well as an increase in
optical purchasing group payables of $1,652,000 for the reason described
above.  The Company hopes to continue to improve its operating cash
flows through the continued implementation of the Company’s Point-of-Sales
(“POS”) system to improve the franchise sales reporting process, the addition of
new franchise locations, its current and future acquisitions, new vendor
programs, and continued efficiencies as it relates to corporate overhead
expenses.
 
 For the
six months ended June 30, 2009, cash flows used in investing activities were
$61,000 mainly due to the issuance of new promissory notes (including
approximately $67,000 for the acquisition of a franchise location) and capital
expenditures related to improvements to the Company’s IT infrastructure and the
implementation of the POS system.  Management does anticipate certain
capital expenditures over the next 12 months, including expenditures to continue
to implement the POS system within the Franchise community, and enhance the
Company’s technology infrastructure and related internal
controls.  Such improvements to the IT infrastructure could include
the relocation of Combine’s operations from Florida to New York, which could
result in capital expenditures of approximately
$100,000.  Additionally, Management does not know the extent of the
legal costs associated with the continuance of litigation in defending one of
the Company’s trademarks; however, the Company is in settlement discussions with
its adversary, which settlement could reduce future litigation costs, provided,
however, that there can be no assurance that the litigation will be settled, or,
if it is settled, that the terms of such settlement will be favorable to the
Company.
 
 For the
six months ended June 30, 2009, cash used in financing activities was $408,000
due to additional borrowings under the Company’s Credit Facility of $150,000,
offset by the repayment of the Company’s related party borrowings and repayment
on the Credit Facility of $500,000.  In April 2010, the Company’s
Credit Facility will expire and all outstanding borrowings will be
due.  The Company is currently exploring certain options available to
it to extend or refinance, prior to April 2010, provided, however, that the
Company does not know if it will be able to extend or refinance the debt and
cannot guarantee that extending or refinancing the debt will be on terms
favorable to the Company.
 
 The
Company has been able to utilize the earnings from the operations of Combine to
support the repayment of its related party debt with the previous owner and
current President of Combine (“COM President”).  Management believes
it will continue to be able to utilize the earnings of Combine to repay the
remaining amounts due, however, commencing on September 29, 2010, and expiring
September 28, 2016, COM President may put back to the Company 2,187,500 options
at a put price per share of $0.32 ($700,000).  The Company believes it
will need additional financing should COM President decide to put back such
options and is currently exploring certain options available to make such
payment.  However, there can be no assurance that the Company will
find financing or that such financing will be on terms favorable to the
Company.
 
 Credit
Facility
 
 On August
8, 2007, the Company entered into a Revolving Line of Credit Note and Credit
Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Company
(“M&T”), establishing a revolving credit facility (the “Credit Facility”),
for aggregate borrowings of up to $6,000,000, to be used for general working
capital needs and certain permitted acquisitions, which is secured by
substantially all of the assets of the Company, other than the assets of
Combine, which assets are used to secure the repayment of Combine’s
debt.  The Credit Facility is set to mature on April 1,
2010.  All sums drawn by the Company under the Credit Facility are
repayable, interest only, on a monthly basis, commencing on the first day of
each month during the term of the Credit Facility, calculated at the variable
rate of three hundred (300) basis points in excess of LIBOR, and all principal
drawn by the Company is payable on April 1, 2010.  The Company is
currently exploring certain options available to it to extend or refinance,
prior to April 2010, provided, however, that the Company does not know if it
will be able to extend or refinance the debt and cannot guarantee that extending
or refinancing the debt will be on terms favorable to the Company.
 
 As of
June 30, 2009, the Company had outstanding borrowings of $4,956,854 under the
Credit Facility, which amount was included in Short-term Debt on the
accompanying Consolidated Condensed Balance Sheet and was utilizing $500,000 of
the Credit Facility to hold a letter of credit in favor of a key vendor of
Combine to ensure payment of any outstanding invoices not paid by
Combine.  Additionally, the Company had $543,146 available under the
Credit Facility for future borrowings.
 
 The
Credit Facility includes various financial covenants including minimum net
worth, maximum funded debt and debt service ratio requirements.  As of
June 30, 2009, the Company was not in compliance with two of the financial
covenants, however, M&T granted the Company a waiver and agreed that, as of
June 30, 2009, it was now in compliance with such covenants.
 
 Off-Balance
Sheet Arrangements
 
 An
off-balance sheet arrangement is any contractual arrangement involving an
unconsolidated entity under which a company has (a) made guarantees,
(b) a retained or a contingent interest in transferred assets, (c) any
obligation under certain derivative instruments or (d) any obligation under
a material variable interest in an unconsolidated entity that provides
financing, liquidity, market risk, or credit risk support to the company, or
engages in leasing, hedging, or research and development services within the
company.
 
 The
Company does not have any off-balance sheet financing or unconsolidated variable
interest entities, with the exception of certain guarantees on
leases.  The Company refers the reader to the Notes to the
Consolidated Condensed Financial Statements included in Item 1 of this Quarterly
Report for information regarding the Company’s lease guarantees.
 
 Management’s
Discussion of Critical Accounting Policies and Estimates
 
 High-quality
financial statements require rigorous application of high-quality accounting
policies.  Management believes that its policies related to revenue
recognition, deferred tax assets, legal contingencies, impairment on goodwill
and intangible assets, and allowances on franchise, notes and other receivables
are critical to an understanding of the Company’s Consolidated Condensed
Financial Statements because their application places the most significant
demands on management’s judgment, with financial reporting results relying on
estimation about the effect of matters that are inherently
uncertain.
 
 Management’s
estimate of the allowances on receivables is based on historical sales,
historical loss levels, and an analysis of the collectability of individual
accounts.  To the extent that actual bad debts differed from management's
estimates by 10 percent, consolidated net income would be an estimated $18,000
and $1,000 higher/lower for the six months ended June 30, 2009 and 2008,
respectively, depending upon whether the actual write-offs are greater or
less than estimated.
 
 Management’s
estimate of the valuation allowance on deferred tax assets is based on whether
it is more likely than not that the Company’s net operating loss carry-forwards
will be utilized.  Factors that could impact estimated utilization of the
Company's net operating loss carry-forwards are the success of its stores and
franchisees, and the optical purchasing groups, the Company's operating
efficiencies and the effects of Section 382 of the Internal Revenue Code of
1986, as amended, based on certain changes in ownership that have occurred, or
could occur in the future.  To the extent that management lowered its
valuation allowance on deferred tax assets by 10 percent, consolidated net
income would be an estimated $1,463,000 and $1,536,000 higher/lower for the six
months ended June 30, 2009 and 2008, respectively.
 
 The
Company recognizes revenues in accordance with SEC Staff Accounting Bulletin
(“SAB”) No. 104, “Revenue Recognition.”  Accordingly, revenues are
recorded when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the Company’s price to the buyer is
fixed or determinable, and collectability is reasonably assured.  To
the extent that collectability of royalties and/or interest on franchise notes
is not reasonably assured, the Company recognizes such revenues when the cash is
received.  To the extent that revenues that were recognized on a cash
basis were recognized on an accrual basis, consolidated net income would be an
estimated $115,000 and $112,000 higher for the six months ended June 30, 2009
and 2008, respectively.
 
 Management’s
performs an annual impairment analysis to determine the fair value of goodwill
and certain intangible assets.  In determining the fair value of such
assets, management uses a variety of methods and assumptions including a
discounted cash flow analysis along with various qualitative
tests.  To the extent that management needed to impair its goodwill or
certain intangible assets by 10 percent, consolidated net income would be an
estimated $724,000 and $744,000 lower for the six months ended June 30, 2009 and
2008, respectively.
 
 
  
  Item
3.  Quantitative and Qualitative Disclosures about Market
Risk
 
 The
quarterly report does not include information for Item 3 pursuant to the rules
of the Securities and Exchange Commission that permit “smaller reporting
companies” to omit such information.
 
 Item
4T.  Controls and Procedures
 
 Disclosure
Controls and Procedures
 
 We
maintain disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) that are designed to ensure that information required to be disclosed
in our Exchange Act of reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated to
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
 
 As
required by Exchange Act Rule 13a-15(b), as of the end of the period covered by
this Quarterly Report, with the participation of our principal executive officer
and principal financial officer, we evaluated the effectiveness of our
disclosure controls and procedures.  Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of June 30,
2009.
 
 Changes
in Internal Control over Financial Reporting
 
 There was
no change in our internal control over financial reporting, identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 of the
Exchange Act, that occurred during our most recently completed fiscal quarter
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
 
 PART II - OTHER INFORMATION
 
 
 Item 1.  Legal
Proceedings
 
 On May
20, 2003, Irondequoit Mall, LLC commenced an action against the Company and
Sterling Vision of Irondequoit, Inc. (“SVI”) alleging, among other things, that
the Company had breached its obligations under its guaranty of the lease for the
former Sterling Optical store located in Rochester, New York.  In June
2009, this action was settled.  The terms of the settlement include
the payment, by the Company to Irondequoit Mall, LLC, of an aggregate sum of
$75,000, of which $50,000 was paid in July 2009 and $25,000 is due prior to
September 30, 2009, and the exchange of mutual general releases.
 
 Item 1a.
Risk Factors
 
 There
have been no material changes to the disclosure related to risk factors made in
the Company Annual Report on Form 10-K for the year ended December 31,
2008.
 
 Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
 
 None.
 
 Item 3.
Defaults upon Senior Securities
 
 None.
 
 Item 4.
Submission of Matters to a Vote of Security Holders
 
 None.
 
 Item 5.
Other Information
 
 None.
 
 Item 6.
Exhibits
 
 3.1
              Restated
      Certificate of Incorporation of Sterling Vision, Inc., filed on December
      20, 1995 (incorporated by reference to Exhibit 3.1 to Sterling Vision,
      Inc.’s Annual Report on Form 10-K/A for the year ended December 31,
      1995).
 
 3.2
              Certificate
      of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
      filed on January 26, 2000 (incorporated by reference to Exhibit 3.3 to
      Sterling Vision, Inc.’s Annual Report on Form 10-K for the fiscal year
      ended December 31, 2002, Securities and Exchange Commission (“SEC”) File
      Number 001-14128, Film Number
03630359).
 
 3.3
              Certificate
      of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
      filed on February 8, 2000 (incorporated by reference to Exhibit 10.94 to
      Sterling Vision, Inc.’s Current Report on Form 8-K, dated February 8,
      2000, SEC File Number 001-14128, Film Number
  549404).
 
 3.4
              Certificate
      of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
      filed on February 10, 2000 (incorporated by reference to Exhibit 10.96 to
      Sterling Vision, Inc.’s Current Report on Form 8-K, dated February 8,
      2000, SEC File Number 001-14128, Film Number
  549404).
 
 3.5
              Certificate
      of Amendment of the Certificate of Incorporation of Sterling Vision, Inc.,
      filed on April 17, 2000 (incorporated by reference to Exhibit 3.6 to
      Sterling Vision, Inc.’s Annual Report on Form 10-K for the fiscal year
      ended December 31, 2002, SEC File Number 001-14128, Film Number
      03630359).
 
 3.6
              Certificate
      of Amendment of the Certificate of Incorporation of Emerging Vision, Inc.,
      filed on July 15, 2002 (incorporated by reference to Exhibit 3.7 to
      Emerging Vision, Inc.’s Annual Report on Form 10-K for the fiscal year
      ended December 31, 2002, SEC File Number 001-14128, Film Number
      03630359).
 
 3.7
              Amended
      and Restated By-Laws of Sterling Vision, Inc., dated December 18, 1995
      (incorporated by reference to Exhibit 3.2 to Sterling Vision, Inc.’s
      Annual Report on Form 10-K/A for the fiscal year ended December 31,
      1995).
 
 3.8
              First
      Amendment to Amended and Restated By-Laws of Emerging Vision, Inc.
      (incorporated by reference to Exhibit 3.8 to the Company’s Current Report
      in Form 8-K, dated December 31, 2003, SEC File Number 001-14128, Film
      Number 04610079).
 
 10.1
              Revolving
      Line of Credit Amendment, dated as of April 1, 2009, by and among Emerging
      Vision, Inc., OG Acquisition, Inc., Combine Buying Group, Inc., 1725758
      Ontario Inc. d/b/a The Optical Group and Manufacturers and Traders Trust
      Company (incorporated by reference to Exhibit 10.1 to Emerging
      Vision, Inc.’s Current Report on Form 8-K, as filed with the SEC on April
      13, 2009).
 
 10.2
              Allonge
      (Revision Agreement of Note), dated as of April 1, 2009, by and among
      Emerging Vision, Inc., OG Acquisition, Inc., Combine Buying Group, Inc.,
      1725758 Ontario Inc. d/b/a The Optical Group and Manufacturers and Traders
      Trust Company (incorporated by reference to Exhibit 10.2 to Emerging
      Vision, Inc.’s Current Report on Form 8-K, as filed with the SEC on April
      13, 2009).
 
 10.3
              Letter
      of Reaffirmation of General Security Agreement, dated as of April 1, 2009,
      delivered by Emerging Vision, Inc., OG Acquisition, Inc., Combine Buying
      Group, Inc. and 1725758 Ontario Inc. d/b/a The Optical Group to
      Manufacturers and Traders Trust Company (incorporated by reference to
      Exhibit 10.3 to Emerging Vision, Inc.’s Current Report on Form 8-K,
      as filed with the SEC on April 13,
2009).
 
 10.4
              Letter
      of Reaffirmation of Guaranty, dated as of April 1, 2009, delivered by OG
      Acquisition, Inc., Combine Buying Group, Inc. and 1725758 Ontario Inc.
      d/b/a The Optical Group to Manufacturers and Traders Trust Company
      (incorporated by reference to Exhibit 10.4 to Emerging Vision, Inc.’s
      Current Report on Form 8-K, as filed with the SEC on April 13,
      2009).
 
 10.5
              Letter
      of Reaffirmation of Absolute Assignment of Franchisee Notes and Proceeds
      Due, Assignment of Rents and Subleases, Pledge Agreement, and United
      States Trademark Collateral Assignment and Security Agreement, dated as of
      April 1, 2009, delivered by Emerging Vision, Inc. and OG Acquisition, Inc.
      to Manufacturers and Traders Trust Company (incorporated by reference to
      Exhibit 10.5 to Emerging Vision, Inc.’s Current Report on Form 8-K,
      as filed with the SEC on April 13,
2009).
 
 31.1
              Certification of Chief Executive Officer pursuant to
      Rules 13a-14(a) or15d-14(a) of the Securities Exchange
      Act.
 
 31.2
              Certification of Chief Financial Officer pursuant to
      Rules 13a-14(a) or 15d-14(a) of the Securities Exchange
      Act.
 
 32.1
              Certification of Chief Executive Officer and Chief
      Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of
  2002.
  
  
 SIGNATURES
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
 
 
 EMERGING VISION, INC.
 (Registrant)
 
 
 
 BY:
 /s/ Christopher G.
Payan
 Christopher
G. Payan
 Chief
Executive Officer
 (Principal
Executive Officer)
 
 
 BY:
 /s/ Brian P.
Alessi
 Brian P. Alessi
 Chief Financial Officer
 (Principal Financial and Accounting
Officer)
 
 
 
 
 Dated: August 14, 2009