** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-KSB**

 

| **ý****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-----------------------------------------------------------------------------------------------------|
|                                                                                                |
| **FOR  THE FISCAL YEAR ENDED DECEMBER 31, 2002**                                                    |
|                                                                                                |
| **o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                |
| **COMMISSION  FILE NUMBER 0-32543**                                                                 |

 

| **REFOCUS  GROUP, INC.**                                                                  |
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| (Exact name of  registrant as specified in its charter)                                   |
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| **Delaware**                                                                              |   | **75-2910096** |
| (State or other  jurisdiction of incorporation or organization)                           |   | (I.R.S. Employer  Identification No.) |
|                                                                                      |   |   |
| **10300 North Central Expressway,  Suite 104, Dallas, Texas**                             |   | **75231** |
| (Address of  principal executive offices)                                                 |   | (Zip Code) |
|                                                                                      |   |   |
| Registrant’s telephone number, including area code:  **214-368-0200**           |
|                                                                                      |   |   |
| **VeryBestoftheInternet.com,  Inc., 1950 Stemmons Freeway, Suite 4048, Dallas, TX 75207** |
| (Former name or  former address, if changed since last report)                            |
|                                                                                      |   |   |
| Securities registered pursuant to Section 12(b) of the  Act:   **None**    |
|                                                                                      |   |   |
| Securities registered pursuant to Section 12(g) of the Act:                               |   |   |
| Title of each class                                                                       |
| **Common  Stock, par value $.0001 per share**                                             |

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that the registrantwas required to file such reports) and (2) has been subject to such filing requirementsfor the past 90 days.  Yes  ý        No o

 

Check if disclosure ofdelinquent filers in response to Item 405 of Regulation S-B is not contained inthis form, and no disclosure will be contained, to the best of the issuer’sknowledge, in definite proxy or information statements incorporated by referencein Part III of the Form 10-KSB or any amendment to this Form 10-KSB.  ý

 

Issuer’s revenues for thefiscal year ended December 31, 2002 were $0.

 

On March 25, 2003, theaggregate value of voting stock held by non-affiliates of the registrant wasapproximately $39,891,000.  For purposesof this computation, all officers, directors and 10% stockholders were deemedaffiliates.  Such determination shouldnot be construed as an admission that such officers, directors and 10%stockholders are affiliates.

 

On March 25, 2002, therewere 18,943,887 shares of the registrant’s common stock outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE:**

The information calledfor by Part III is incorporated by reference to the definitive Proxy Statementfor the Annual Meeting of Stockholders of the Company to be filed with theSecurities and Exchange Commission not later than 120 days after December 31,2002.

 

Transitional SmallBusiness Disclosure Format (check one): Yes  o        No ý

 

 

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**PART I**

 

**ITEM 1. BUSINESS**

 

VeryBestoftheInternet.com was organized as a Texascorporation on November 21, 2000.  InFebruary 2003, VeryBestoftheInternet.com reincorporated in Delaware and changedits name to Refocus Group, Inc (“Refocus”). Refocus was an internet ranking service that allowed consumers toidentify websites that are most useful to them so as to minimize the timeexpended in searching for desired information.

 

On March 6, 2003, Refocus completed the merger ofRefocus Acquisition Corp., a Delaware corporation and newly createdwholly-owned subsidiary of Refocus, with and into Presby Corp (“Presby”), a Delaware corporation, a medical devicecompany based in Dallas, Texas, which is engaged principally in the researchand development of surgical treatments for human vision disorders.  Presby was the surviving corporation andbecame a wholly-owned subsidiary of Refocus.  The merger was consummated under Delaware law and pursuant to anAgreement of Merger and Plan of Reorganization, dated as of March 6, 2003 (the“Merger Agreement”).

 

Prior to the merger, Refocus effected a forward-splitof its common stock on the basis of approximately six shares for each share issuedand outstanding and determined to change its business efforts.  As part of the merger, substantially all ofthe shares owned by Danny Gunter and Adrienne Beam, the sole members of theboard of directors of Refocus prior to the merger, were repurchased by Refocusand then canceled at the closing of the merger. After cancellation of Mr.Gunter’s and Ms. Beam’s shares and immediately prior to the merger, there were4,097,107 shares of common stock of Refocus issued and outstanding (on apost-forward split basis).

 

Pursuant to the Merger Agreement, at closing, Refocusissued 11,940,144 shares of its common stock (on a post-forward split basis),to the stockholders of Presby in exchange for 100% of the outstanding capitalstock of Presby, subject to the assertion of appraisal rights by former Presbystockholders.  In addition, Refocusassumed the Presby Amended and Restated 1997 Stock Option Plan and reserved 4.1million shares of Refocus common stock (on a post-forward split basis) foroptions issued and issuable under that plan. At the time of the merger, Presby had outstanding options to purchase719,486 shares of common stock that were converted in the merger into optionsto purchase shares of common stock of Refocus. The stock options that were converted in the merger included an optionto purchase 557,635 shares granted to the chief executive officer of Presby inaccordance with his employment agreement. After giving effect to the merger and the initial tranche of the privateplacement (See "Item 5.  Market forCorporation's Common Equity and Related Stockholders Matters"), Refocushad 18,924,751 shares of its common stock outstanding with the formerstockholders of Presby owning 63.1% of the outstanding shares of Refocus commonstock, subject to the assertion of appraisal rights.  In addition, after giving effect to the merger and the initialtranche of the private placement, warrants to purchase 2,737,500 shares andoptions to purchase 719,486 shares of Refocus common stock were outstanding.

 

After the merger, Refocus discontinued its previousbusiness as an internet ranking service, the founders of Refocus resigned theirpositions, and Refocus succeeded to the business of Presby.  For accounting purposes, the merger is beingaccounted for as a reverse merger with Presby acquiring Refocus as the formerstockholders of Presby own a majority of the issued and outstanding shares ofcommon stock of Refocus immediately following the merger.

 

Therefore, since the Company’s future business will bethat of Presby only and the former Presby stockholders control the mergedcompanies, the information in this Form 10-KSB will be that of Presby as ifPresby had been the registrant for all the periods presented in thisreport.  The audited financialstatements presented in Item 7 and Management’s Discussion and Analysispresented in Item 6 of this report are also those of Presby as these providethe most relevant information for Refocus on a continuing basis.  The audited financial statements for Refocusat December 31, 2002, prior to the merger, which represent the discontinuedbusiness, are presented as an Exhibit to this report.

 

At the same time as the merger, Refocus also completeda private placement of common stock and warrants that raised working capital tocontinue the business of Presby to which Refocus succeeded.  See the discussion of the merger and theprivate placement in Management’s Discussion and Analysis in Item 6 and in theaudited financial statements in Item 7 contained herein.

 

**Description of Business**

 

Cautionary Statement under the Private SecuritiesLitigation Reform Act of 1995:  ThisAnnual Report on Form 10-KSB contains certain “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995 thatare based on the assumptions, beliefs and opinions of our management.  When used in this document, the words“anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,”“should,” “plan”, “potential” and similar expressions are intended to identifyforward-looking statements.  Suchstatements reflect our current views with respect to future events and involveknown and unknown risks, uncertainties and other factors that may cause ouractual results, levels of activity, performance or achievements to bematerially different from what management currently believes.  Such risks and uncertainties include, amongother things, those described in the “Cautionary Statements” section below andelsewhere in this Form 10-KSB.  Shouldone or more of those risks or uncertainties materialize, or should underlyingassumptions prove incorrect, our actual results may vary materially from thosedescribed herein.  The forward-lookingstatements made in this document speak only to the date on which

 

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such statements are made,and we undertake no obligation to update any forward-looking statement toreflect events or circumstances after the date on which such statement is madeor to reflect the occurrence of unanticipated events.

 

Unless otherwise indicated, or unless the contextotherwise requires, all references below to the term “Refocus”, “Presby”, the“Company”, “we”, “our” or “us” shall mean Presby prior to the merger andRefocus, as successor to the business of Presby, after giving effect to themerger.

 

***General***

 

We are a medical device company based in Dallas,Texas, engaged in the research and development of surgical treatments for humanvision disorders.  We have also used ourresearch and understanding of the human eye to develop and patent technologyfor use with commercial optical lens applications.  Our primary products are the patented PresVIEW device and therelated PresVIEW Incision System, the automated surgical instrument for thesurgical treatment of Presbyopia, Ocular Hypertension and Primary Open AngleGlaucoma (“POA Glaucoma”) in the human eye. *See*“*Currentand Future Products*.” Marketing rights for these products have been awarded to CIBA VisionCorp. (“CIBA”), the eye care unit of Novartis AG (“Novartis”), subject tocertain conditions.  Novartis is aglobal, multi-billion dollar revenue pharmacological and life sciences companyand one of the major eye care companies in the world with distribution in over70 countries.  CIBA has agreed to assumeresponsibility for product commercialization worldwide and to provide adequateresources for marketing, mutually agreed-upon patent protection, internationalregulatory approvals and manufacturing. CIBA has also committed its considerable expertise to co-manage, withus, the U.S. Food and Drug Administration (“FDA”) approval process in theUnited States.  *See*“*Strategic Alliances*.”

 

We have additional products in early-stagedevelopment, including a medical device for the treatment of Dry Age-RelatedMacular Degeneration (“ARMD”) and a single element variable focus lens(“SEVFL”) for use in commercial optical lens applications.  We own an extensive patent portfolio toprotect our medical and commercial lens intellectual property.

 

We previously marketed our medical device as the“Scleral Expansion Band” (“SEB”).  CIBAhas determined that it intends to market the device under a new name, the“PresVIEW” Implant, trademark pending by CIBA. References to the PresVIEW device in periods prior to our agreement withCIBA should be understood to refer to the medical device under its previousname.

 

***History of Presby Corp***

 

Presby was incorporated in 1994 to conduct researchand develop a surgical treatment for Presbyopia in the human eye.  Extensive research and investigationalsurgeries were conducted, and by 1998, Presby had obtained the European CE Markand other regulatory approvals necessary to market versions of the technologyin a number of international markets. Presby began selectively selling the PresVIEW device and relatedcustomized surgical instruments to key surgeons in the European Union and othercountries.

 

In the year 2000, Presby received approval from theFDA to conduct feasibility clinical trials of the PresVIEW Procedure for thetreatment of Presbyopia on humans, as well as approval from Health Canada (theCanadian equivalent of the FDA) to conduct a clinical trial of the PresVIEWProcedure for the treatment of Ocular Hypertension and POA Glaucoma.  In 2002, CIBA acquired the right to obtainan exclusive worldwide license to the technology and Presby Corp suspendedsales to new surgeons.

 

***Business andIndustry Overview***

 

*Presbyopia*.  Presbyopia (the Greek word for “old eye”) isthe primary reason that nearly everyone beginning in their early 40s uses bifocals,reading glasses or removes their distance glasses in order to read at a comfortabledistance.  According to Dain RauscherWessels in May 2001, Presbyopia ultimately affects 100% of the population, withthe first effects of Presbyopia generally occurring at about the age of 40 andnearly fully prevalent after age 45. There are approximately 120 million Americans who currently suffer fromPresbyopia and, based on widely available estimates, the United Statespopulation over the age of 40 continues to grow.  External lenses such

 

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as bifocals and reading glasses are currently the principal alternativesavailable to counter the effects of Presbyopia. We believe the PresVIEWProcedure will be particularly attractive to the approximately 3 millionAmericans who, since 1996, have already demonstrated a willingness to reduce oreliminate their need for glasses via LASIK and laser vision correctionprocedures—only to find that they need glasses again for reading as they becomepresbyopic after age 40.

 

## **A February 1999 study conducted by Business ValuationServices, an independent consulting firm commissioned by us, revealed thatwhile only about 40% of the United States population under age 40 wear visioncorrective lens, over 90% of the United States population over the age of 55require vision correction, including reading glasses.  This increased need for vision correction is primarily due to theonset of Presbyopia.  We believe that asignificant segment of the population from ages 40 to 65 will benefitsignificantly from the PresVIEW Procedure and may be able to discontinue orreduce the need for vision correction. The study commissioned by us estimated the number of patients ideallysuited, by age, vision and income qualifications, to be in excess of 50 millionpeople worldwide.  We believe that thismarket will continue to refresh and grow as more people reach the age of 40.**

 

Widely publicized lasersurgical techniques, such as LASIK  andLASEK, are generally designed to treat other refractive imperfections of theeye, primarily nearsightedness (myopia), farsightedness (hyperopia) and astigmatism.  These techniques generally do not competewith the PresVIEW Procedure and do not directly treat Presbyopia.  In fact, the PresVIEW Procedure iscomplementary to these laser surgical procedures.  We expect that ophthalmologists, optometrists and other eye careprofessionals will aggressively market this elective procedure in similarfashion to laser procedures, especially since it complements those lasersurgery procedures, which are marketed to the baby-boomer population.

## ** **

## ***Ocular Hypertension and POA Glaucoma.***  OcularHypertension is a medical condition involving elevated pressure within the eyeand may lead to serious damage to vision. Ocular Hypertension is caused by a buildup of fluid pressure in the eyeand is primarily associated with the inability of the eye to properly drainitself of fluids. Just as with high blood pressure, abnormally high levels ofocular pressure must be medically treated. Advanced or prolonged Ocular Hypertension is believed to damage theoptic nerve in the back of the eye and can result in an initial loss ofperipheral vision.  This condition isdeemed POA Glaucoma once there is a loss of vision.  Continued loss of peripheral vision shrinks the person’s field ofvision and eventually leads to tunnel vision and then blindness. OcularHypertension and POA Glaucoma are considered to be genetic and related to thetissue of the eye.  The initial stagesof Ocular Hypertension are not noticeable to a patient.  Consequently, early diagnosis is extremelyimportant because damage from POA Glaucoma is irreversible.  Ocular Hypertension and POA Glaucoma arecurrently treated primarily with pharmaceutical drops and pills with varyingsuccess.  POA Glaucoma medications havesubstantial side effects, are costly, not continuous in their action and arenot fully effective due to the person’s lack of compliance with proper use ofthe medication.  Many of thesemedications have to be taken several times each day on a strict schedule forthe rest of the person’s life.  Personswith more advanced stages of POA Glaucoma must undergo other types of surgicaltreatments that involve artificial methods to drain the fluid from theeye.  These surgical methods may have significantcomplications and side effects and typically have varying success.

 

According to the NationalInstitutes of Health in June 2002, it is estimated that more than five millionAmericans have Ocular Hypertension.  Italso estimates that Glaucoma affects three million Americans and many morepeople worldwide and is the second leading cause of irreversibleblindness.  Glaucoma medication is estimatedby us to currently represent over 50% of the ophthalmic pharmaceutical industry’srevenues.  According to publishedreports by Alcon and SG Cowen in 2000, the ophthalmic pharmaceutical industryhas annual revenues exceeding $2.0 billion in the United States.

 

We believe that thePresVIEW Procedure treats Ocular Hypertension and POA Glaucoma by restoring thenatural spacing between the muscle and the lens, which also restores thenatural base-line tension of the muscle inside the eye.  Assuming that a significant number ofpatients that undergo the PresVIEW Procedure for the treatment of OcularHypertension demonstrate the same surgical results that has been shown inclinical studies, the PresVIEW Procedure could become the first-line preferredtreatment for Ocular Hypertension and POA Glaucoma.  Since these eye disorders are considered to be genetic, thePresVIEW Procedure could become the first preventive procedure inophthalmology.

 

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*Age-Related Macular Degeneration*.  ARMD is estimated to affect up to 10 millionAmericans and is the leading cause of irreversible severe central vision lossin Caucasians 50 years and older in the United States and in most of thedeveloped world.  The incidence andprogression of ARMD increase significantly with age.  According to the 2001 American Academy of Ophthalmology PreferredPractice Pattern, approximately 10% of patients 66 to 74 years of age haveARMD, and the prevalence increases to approximately 30% of patients 75 to 85years of age.  Certain companies,including QLT, Inc. (Nasdaq: QLTI), have developed drug related treatments for“Wet” ARMD.  Wet ARMD involves thegrowth of abnormal blood vessels under the central part of the retina, calledthe macula.  These vessels cause photoreceptordamage and a loss of central vision. According to the American Macular Degeneration Foundation in 2001, about85% of patients, however, suffer from “Dry” ARMD.  Dry ARMD involves similar damage to photoreceptors; however, thecause is unclear and is the subject of extensive medical debate.  Our research has resulted in the developmentof the Macular Enhancing Device (“MED”) which may be the first device designedfor use in the treatment of Dry ARMD.  Wehave received two issued United States patents on the device and will be furtherdeveloping the product for later commercialization.  To date, we have not licensed this product.

 

***Current and Future******Products***

 

**PresVIEW Device and PresVIEW IncisionSystem**

 

The PresVIEW deviceconsists of four separate tiny plastic segments, each about the size of a grainof rice, made from polymethylacrylate (“PMMA”).  PMMA has been implanted in the eye for other types of surgicalprocedures (intraocular lenses, hard contact lenses) for over fifty years.  The surgeon uses the PresVIEW IncisionSystem to make four superficial incisions in the quadrants of the sclera (whiteof the eye).  The PresVIEW device isinserted into the superficial tunnels, causing a lift in the sclera that inturn reduces the crowding of the underlying muscles.  The surgery is an outpatient surgical procedure performed undertopical or local anesthesia.

 

We believe that thePresVIEW Procedure provides the following benefits to patients:

 

•              long-term improved near or readingvision;

•              low risk procedure;

•              minimally invasive procedure, which webelieve is fully reversible; and

•              reduction in intraocular pressure inpatients with Ocular Hypertension and POA Glaucoma.

 

**MacularEnhancing Device**

 

## **MED is a device we developed to treat Dry ARMD.  We have received two issued United States patentson the device.  We expect to furtherresearch and develop the device for commercialization in the future.  To date, we have not licensed this device.**

 

**SingleElement Variable Focus Lens**

 

Our research andunderstanding of the human lens has led to the development of a SEVFL that webelieve duplicates the functionality of the human eye.  Variable focus commercial lens systems incamera and other applications currently involve multiple lenses, which must bemoved relative to each other in order to produce variations in opticalpower.  We plan to develop a SEVFLprototype that will demonstrate that these same large optical effects can beproduced with microscopic movement to a single uniquely shaped lens.  SEVFL is expected to be smaller, lighter andless complex than a multiple lens system. Commercial applications may include cameras, robotics or otheruses.  We have obtained domestic andinternational patents on this technology. To date, we have not commercialized or licensed this technology.

 

***Strategic Alliances***

 

**CIBA Vision Corp.**

 

In the summer of 2001,CIBA began an extensive period of due diligence on our PresVIEW Procedure andconcluded that the PresVIEW device and the related PresVIEW Procedurerepresented significant market potential.

 

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Negotiations between CIBAand us concluded with an exclusive license agreement in March 2002, pursuant towhich CIBA has the right to obtain an exclusive worldwide license to market,distribute and sell the PresVIEW device, the PresVIEW Incision System (thespecialized automated incision device) and related disposable blades developedfor the surgery.  The license agreement,subject to certain terms and conditions, includes a requirement for CIBA to purchaseequity interests in us.  Our productswill be marketed under the PresVIEW trademark.

 

Under our agreement withCIBA, we will receive a percentage royalty on CIBA’s worldwide net sales of thePresVIEW device and related products. CIBA has the option to make minimum royalty payments totaling $13.6 millionin the initial five years under its agreement with us if it wishes to maintainits rights to an exclusive license of the PresVIEW device, PresVIEW IncisionSystem and related products.  CIBA haspaid us $2.0 million in advance for future royalties.  CIBA also purchased a total of $1.25 million of our common stockin the first tranche and has committed to purchase an additional $1.25 millionof our common stock in the second tranche of a private placement completedMarch 6, 2003. Subject to certain conditions precedent, CIBA will also purchasean additional $2.5 million of our common stock within 60 days following theenrollment of the first patient in our Phase III FDA clinical trial.  Further, CIBA has agreed to pay us anadditional amount up to $4.0 million upon the achievement of certain FDA relatedmilestones.

 

CIBA has agreed to assumeresponsibility for the legal defense of our worldwide PresVIEW patent portfolioagainst patent infringement, subject to mutual agreement between CIBA andus.  A legal committee consisting of twomembers from each of CIBA and us will jointly make decisions regarding suchpatent defense.

## ** **

## ***Business Strategy and Intellectual Property***

 

One of our primarystrategies has been to develop strong proprietary patents both domestically andinternationally for our products, including the PresVIEW device, the PresVIEWIncision System, the MED, and the SEVFL. We have 18 issued United States patents and 30 issued or publishedinternational patents.  We have 15pending United States patent applications and 81 pending international patentapplications.  Related to the PresVIEWtechnology we have 10 United States patents and 21 international patents issued.  We have 9 United States and 73 internationalpatents pending related to the PresVIEW technology.  The patents associated with the PresVIEW technology haveexpiration dates from 2012 to 2018.  Thepatents and patent applications related to our early stage products generallydo not expire until after 2015.

 

We have soughtintellectual property rights in virtually every significant economic marketthroughout the world that has a legal system that tends to recognize suchrights.  We intend to continue to submitadditional patent applications and amendments to maintain and strengthen ourpatent protection.  Our patents protectthe PresVIEW device as well as variations of the PresVIEW device to achieve thedesired treatment of Presbyopia, POA Glaucoma and Ocular Hypertension.  Due to the nature of the medical discovery,we believe that we have unusually broad patent protection.  We also seek to protect our proprietarytechnology, in part, through proprietary confidentiality and nondisclosureagreements with employees, consultants, and other parties.  Subject to certain conditions set forth inour agreement with CIBA and the severance and consulting agreement with Dr.Schachar (*See*“Liquidity and Capital Resources” *below*),we retain ownership of all our patent rights.

 

## ***Competition***

 

We believe that thePresVIEW Procedure provides a physiological or natural improvement in the humaneye’s ability to focus at all near points. Glasses, contact lenses, and other optical changes to the eye provideonly a compensation for the inability of the older eye to focus:

 

•                  *Glasses. *Presbyopia was initially treated with nearvision optical aids using magnifying lenses, reading glasses, and monocles.  Patients were constantly removing readingglasses and losing them because the reading glasses interfere with vision atall other distances.  In the 1700’s,Benjamin Franklin fused the distance lens with the near reading lens to give usbifocals that were later modified to trifocals.  The problem with these reading aids is that they only allow sharpnear vision at a given distance and the near visual field is limited by thelens.  Patients must learn to rotatetheir eyes downward when reading with bifocals

 

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insteadof rotating their head.  It usuallytakes weeks for patients to get used to wearing bifocals and most patientsremain dissatisfied.  Trifocals can beeven more of a problem for many patients.

 

•                  *Multifocal Glasses.*  Multifocal lenses producemultiple images at various focal points. Light reflected or emitted by an object must be dispersed by themultifocal lens over all the focal points. Therefore, the intensity at any given focal point is reduced and thecontrast sensitivity diminished.  Inorder to avoid prismatic effects, the visual field of a multifocal lens is reduced.  The patient must learn to select the appropriateimage of the several images produced by the lens.

 

•                  *Bifocal and Multifocal Contact Lenses*.  Inorder to avoid the problems of bifocals and trifocals, bifocal contact lenseshave been developed.  Bifocal contactlenses have generally been unsuccessful because the distance and near power ofthe contact lens must be crowded into an area that can barely cover thepupil.  The patient must learn how toshift the contact lens and to ignore the distant or near image according to thevisual task.  Multifocal contact lenseshave the same significant drawbacks as multifocal glasses.  It is estimated that approximately 70% ofpeople who wear contact lenses for Presbyopia (less than one million people inthe United States) wear them in monovision, i.e., with one lens in one eye fornear vision, and one lens in the other eye for distance vision.  After 30 years of contact lens usage, webelieve that contact lenses remain largely ineffective in addressingPresbyopia.

 

•                  *LaserSurgery Alternatives.*  Someresearchers have developed plans for the use of laser refractive surgery tocreate a bifocal or multifocal cornea. In other words, the laser technique is intended to shape the cornea inthe same manner as a multifocal contact lens. This alternative has essentially the same limitations and problems asmultifocal glasses and contact lenses. The patient will see multiple images ofreduced light intensity, i.e., with decreased contrast sensitivity.  This approach would be an irreversible surgicaltreatment.

 

•                  *Monovision*.  The use of monovision, or correction in oneeye for near vision and correction in the second eye for distance vision, canprovide functional vision for some presbyopes. Monovision relies on the brain’s ability to recognize the more appropriateimage; although, it is important to note that not every patient is able toadjust adequately.  Monovision can beachieved through contact lenses and LASIK. While many patients are satisfied with this method, the drawbacks ofmonovision include reduced night vision, difficulty driving in some cases and asignificant decrease in depth perception.

 

•                  *Other Typesof Corneal Surgery*. Conductive Keratoplasty, or CK, uses a controlled release of radio frequencyenergy to shrink corneal tissue, which steepens the cornea, reducingfarsightedness.  CK is not reversible,but does regress over time.  CK is primarilyfor the treatment of farsightedness to restore normal distance vision.  Some physicians advertise this procedure forthe treatment of Presbyopia; however, reading vision would be improved only ifone eye is overcorrected to become nearsighted, and thus, the patient wouldhave monovision.

 

•                  *MultifocalIOLs*.  During 1997, Allerganreceived FDA approval for its *Array*TM multifocal intraocular lens, orIOL, the first multifocal lens indicated for cataract replacement.  As a result of cataract patient satisfactionwith the lens, some market observers have suggested that non-cataractpresbyopes could undergo the procedure (off-label) to restore near vision.  Note that in order to implant the *Array*lens, the patient’s functioning natural lens would have to be removed in aprocedure known as clear lensectomy. There are some reports of decreased contrast sensitivity and difficultieswith nighttime driving.  In addition, reportshave indicated that these patients experience a higher incidence of retinaldetachments, which raises ethical concerns surrounding the removal of a healthylens.

 

•                  *AccommodatingIOLs*.  A handful of companies,including C&C Vision, are investigating the use of an accommodating IOL,which attempts to magnify the accommodative ability of the eye through the useof hinges on either side of the IOL. We believe that changes in vitreouspressure associated with accommodative effort moves the lens forward andbackward, effectively changing the focus of the eye.  These techniques are directed to those patients who requirecataract removal as the eye care community has ethical and medical issuesregarding the removal of healthy or pre-cataract lenses for such purposes.  The amount of accommodation that is achievedpostoperatively is limited.  The risksassociated with clear lens

 

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extraction to treatPresbyopia in patients who do not have a cataract and the lack of reversibilityand the limited gain in accommodative amplitude mitigate against accommodatingIOLs offering any significant competition to the PresVIEW Procedure.

 

•                  *AnteriorCiliary Sclerotomy (ACS)*. ACS is a procedure whereby eight incisions are made in the sclera eitherwith a diamond blade or with a laser, allowing it to expand and ideally producean accommodative effect.  Results aregenerally limited to less than 1.50 diopters of gain in accommodation, and anybenefit appears to be negligible after approximately one year as a result ofthe healing ability of the sclera.  Weown issued patents that are believed to include this technology, have alreadysettled one suit in which the defendant acknowledged that our patents werevalid and enforceable and will vigorously defend our patents in this areaagainst other infringers.

 

SurgiLight, Inc(“SurgiLight”) has announced that it is developing laser systems for thetreatment of Presbyopia.  Generally, SurgiLightintends to use a laser to weaken the sclera and thereby manipulate the ciliarymuscle to treat Presbyopia.  We believethis procedure structurally weakens the globe of the eye, subjecting it to riskof rupture via a severe blow to the eye or head.  We believe that, while SurgiLight’s approach is based on ourscientific theory, the use of a laser to weaken the sclera will provide only amodest benefit, which will regress with healing.  In March 2000, we filed a patent infringement suit againstSurgiLight.  *See* “Legal Proceedings.”

 

We believe that CIBA hasthe financial resources necessary and the economic incentive to assist inprotecting the intellectual property rights worldwide and prevent potentialcompetitors from entering the market with infringing products.

 

While a variety ofsurgical techniques and medical devices exist for the treatment of OcularHypertension and POA Glaucoma, we believe that none of these surgicaltreatments work in the same manner as the PresVIEW device and do not offerstable, continuous therapy with the added benefit of an improvement in nearvision:

 

•                  *Trabeculoplasty*is the most common surgical procedure performed for uncontrollableglaucoma.  It essentially involves makinga drainage hole in the eye.  Theprocedure has significant potential adverse reactions with a relatively highfailure rate.

 

•                  *Argon LaserTrabeculoplasty (ALT)* involves using a laser to increase thedrainage of aqueous through the trabecular meshwork.  However, the intraocular pressure lowering effect is not lasting.

 

•                  *Glaucomavalves* involve making a drainage site in the eye whose rate ofoutflow is controlled by a valve.  Thisprocedure is usually only performed for very severe cases of glaucoma and whereTrabeculoplasty has failed.  Glaucomavalves have high failure rates and can have significant adverse reactions.  A newer drainage valve, the Optonol,consists of a miniature stainless steel pipe to drain fluid from the eye.  This device is used for uncontrolledglaucoma.  Since it is new to the market,the long-term failure rates and potential complications are unknown.

 

## ***Manufacturing***

 

Under our agreement withCIBA, we are obligated to continue to manufacture our products during a transitionperiod that should end during 2003. After the transition period, CIBA has sole responsibility formanufacturing and the selection of manufacturing contractors.  Historically, the PresVIEW device has beenmanufactured to our specifications by an independent contractor using astandard injection molding process.  Weown the customized injection molds.  Ourcurrent injection molding contractor is Superior Plastics of Fort Worth,Texas.  Superior Plastics has ISO 9000quality certification.  Our customizedsurgical instruments and other equipment have been manufactured by independentcontractors that specialize in the production of these types of instruments andequipment.  We have been conductingquality control and packaging operations for the PresVIEW device at our Denisonfacility.

 

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## ***Government Regulation***

 

The PresVIEW device hasreceived European Union CE Mark certification and other regulatory approval ina variety of countries around the world. The PresVIEW Procedure has been successfully performed on hundreds of patientsin these international markets.

 

**United States**

 

A technical committeecomprised of CIBA and us, or Company/CIBA joint technical committee, managesthe process to obtain FDA approval in the United States.  The PresVIEW device and the PresVIEW IncisionSystem are not currently approved for sale in the U.S.

 

Our primary products aresubject to regulation by numerous governmental authorities in the United Statesand other countries.  In the UnitedStates, medical devices are subject to regulation by the FDA under the Food,Drug, and Cosmetic Act (the “FD&C Act”). The FDA regulates, among other things, the manufacture, distribution,study, and marketing of medical devices sold in the United States.  Under the FD&C Act, the FDA classifiesmedical devices into one of three classes depending on the risks that the FDAbelieves are associated with the device and the types of controls necessary toassure safety and effectiveness.  ThePresVIEW device is a Class III device and subject to the FDA’s most rigorous review.

 

Before the PresVIEWdevice can be sold in the United States, FDA approval must be obtained througha Pre-Market Approval (the “PMA”) application. A PMA must be supported by extensive data, including pre-clinical andclinical trial data, that demonstrates the safety and effectiveness of thedevice.  Among other requirements, CIBA(or its contractors) and we are required to manufacture and test our productsin accordance with Good Manufacturing Practices as specified in the regulationsfor such devices.  Both themanufacturer’s facilities and the facilities used for packaging and testing ofthe PresVIEW device will be subject to periodic inspections by the FDA.

 

Prior to conducting theclinical trials in the United States, we are required to apply to the FDA foran Investigational Device Exemption (“IDE”). The IDE application must include,among other things, a complete report of prior investigations, copies of alllabeling, copies of all forms and informational materials used as a basis forobtaining informed consent, a description of the methods of manufacture, and adetailed description of the proposed clinical trial, including by way ofexample, the protocol, a risk analysis, monitoring procedures and sites wherethe device will be tested.

 

We received approval fromthe FDA in 2000 to conduct a feasibility clinical trial of the PresVIEW devicein the United States for the treatment of Presbyopia.  The feasibility clinical trials were conducted at theBarnes-Jewish Hospital at Washington University School of Medicine in St.Louis, Missouri, the Dean A. McGee Eye Institute at the University of Oklahomain Oklahoma City, Oklahoma, the New York Eye and Ear Infirmary in New YorkCity, New York, the Jules Stein Eye Institute at UCLA in Los Angeles, California,the Stanford University School of Medicine in Stanford, California and theStorm Eye Institute at the Medical University of South Carolina in Charleston,South Carolina.

 

We then proposed andreceived FDA approval to conduct the next phase of a broader clinical trial. The second-year IDE progress report concerningthe patient results from the feasibility phase was submitted to the FDA inMarch 2002.  With CIBA’s involvement,modifications to the Phase II clinical trial evaluations were proposed to the FDAin July 2002.  An IDE application,incorporating the recommendations of the Company/CIBA joint technicalcommittee, is being prepared for submission to the FDA.  The IDE requests approval for a Phase IIclinical study of 150 patients with a two-year follow-up period.  We anticipate that enrollment of patientscould begin by the mid to late-2003 with the initial data from the trialssubmitted to the FDA within three to six months after commencement.  Upon submission of the data to the FDA andassuming successful outcomes, the Company/CIBA joint technical committeeanticipates that it will request FDA approval for the extension of the PhaseIII trial to include another 150 patients. This Phase III trial could begin in 2004 and would run concurrent withthe initial stage of 150 patients.  TheCompany/CIBA joint technical committee is considering a modular submissionapproach, which may allow for portions of the PMA to be submitted, andpotentially approved, ahead of the final results of the full clinical trial.  The Phase III clinical results would besubmitted to the FDA as soon as all patients in the trial reach the one-yearpoint.  At this point, it is anticipatedthat we will also have two-year follow-up results from our Phase II clinicaltrial.  All patients would continue tobe followed for a required two-year period. After submission of the final PMA, including the clinical results, theFDA generally takes one year or longer to review and approve a

 

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Class III device for salein the United States.  For equivalentmedical devices, the clinical and regulatory process to FDA approval and commercializationcan take four to five years from the initiation of Phase II clinical trials.

 

CIBA and we will also berequired to submit an IDE, conduct separate clinical trials and submit a finalPMA to obtain approval of the PresVIEW device for the treatment of Ocular Hypertensionand POA Glaucoma.  We expect to beginthe Phase II clinical trial for the treatment of POA Glaucoma and OcularHypertension in late 2003 or early 2004.

 

**Europe**

 

The PresVIEW device andPresVIEW Incision System are CE marked and, therefore, can be marketed and soldin the European Community (the “EC”). The indications approved by SGS, The Company’s European Notified Body,include the treatment of Presbyopia, Ocular Hypertension and POA Glaucoma.

 

The regulatoryenvironment in Europe for medical devices differs significantly from that inthe United States.  A total of 19 Europeancountries are grouped in a union with the objective of establishing a singlemarket without internal borders among the member countries and eliminatingdivergent national requirements.  Themembers of the European Union (the “EU”), include Austria, Belgium, Denmark,Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands,Portugal, Spain, Sweden, the United Kingdom, Iceland, Norway, Switzerland andLiechtenstein.

 

Products that comply withthe requirements of a specified EC medical directive are entitled to bear CEmarking.  Since July 14, 1998, allcommercial medical device products have been required to bear CE markings.  It is illegal to market these products inthe EU without a CE marking.  To obtaina CE marking, the product must be assessed and found to conform to the applicabledirective.  This assessment is carriedout by the manufacturer, in most cases with the assistance of a third partycertification organization known as a “notified body.”  The notified body assessment may consist ofan audit of the manufacturer’s quality system or specific testing of theproduct.  A manufacturer can sell aproduct throughout the EU once it secures an assessment by a notified body inone of the EU countries.

 

The EU has adoptedseveral directives to regulate medical devices such as the PresVIEWdevice.  A manufacturer may affix CEmarking after a determination that the product complies with the essentialrequirements of the applicable directives and completion of the appropriateconformity assessment procedures as specified by the directives.  The conformity assessment requirements arebased upon a given product’s classification within the directive.  Products within the scope of the directiveare grouped within four classes: Class I, IIA, IIB and III.  A product with a higher classification isconsidered to have higher risk, and will, therefore, be subject to morecontrols in order to obtain CE marking. The PresVIEW device has been designated as a Class IIB device.  The Disposable Blades and the PresVIEW IncisionsSystem have been designated as a Class IIA device.  The medical devices directives also cover the hand-held instrumentationsupplied by CIBA or us for use in conjunction with implanting the PresVIEWdevice.  These instruments areclassified as Class I and, therefore, are subject to self-registration.

 

Essential requirementsunder the directives for the most stringent device, the Class IIB PresVIEWdevice, include substantiating that the device meets the manufacturer’sperformance claims and that any undesirable side effects of the deviceconstitute an acceptable medical risk when weighed against the intendedbenefits of the device.  Certificationunder the ISO 9000 series of standards for quality assurance and manufacturingprocesses is one of the CE Mark requirements.

 

There are two basicoptions for assessing conformity of devices designated as Class IIB.  The first option allows a manufacturer toseek a decision from the notified body that the processes employed in thedesign and manufacture of a device qualifies as a full quality system.  Alternatively, manufacturers can seekproduct certification based on various control schemes.  The full quality system encompasses theorganizational structure, responsibilities, procedures, processes and resourcesnecessary to assure quality assurance in design, development, production,installation and servicing of its medical devices.  Once a manufacturer has satisfactorily completed the regulatory

 

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compliance tasks requiredby the directive and received a favorable decision from the notified body, itmay affix CE marking to its product.

 

Manufacturers arerequired to report serious adverse incidents concerning CE marked devices tothe authorities of the countries where the incidents take place.  If such incidents occur, the manufacturermay have to take remedial action, perhaps including withdrawal of the productfrom the European market.  Thedirectives must be transposed into national law in order to be applied.  All member states of the EU have completedthis transposition.  This transpositionprocess has not created significant differences among the member states of theEU with respect to compliance with the essential requirements and theconformity assessment process.  However,meaningful differences have emerged on certain other issues.

 

Our EU distributorobtained “Own Brander” CE Mark certification for the PresVIEW device inNovember 1997.  The certification involveda limited amount of clinical testing and review of the distributor’s qualitysystem.  The significance of the OwnBrander CE mark is that the EU distributor is responsible for certain qualitycontrol issues and record keeping.  Forregulatory purposes, the product is considered to “originate” from the EUdistributor, and we, in the United States, serve as a manufacturingsubcontractor.

 

We were awarded ISO 9001and E46001 certification and our own CE Mark certification for the PresVIEWdevice on January 19, 2000.  We obtainedqualification of our processes as a full quality system.  During 2001, we formed a wholly ownedsubsidiary, Presby Corp – Europe SPRL, organized under the laws ofBelgium.  The purpose of Presby Corp –Europe SPRL was to obtain and maintain “Own Brander” CE mark certification onour products.  Presby Corp - Europe SPRLwas awarded the Own Brander CE Mark certification for the PresVIEW device in2001.  Presby Corp - Europe SPRL wasawarded CE Mark certification for the PresVIEW Incision System and the disposableblades in 2002.  We sold our products inthe EU from late 1997, based on the EU distributor’s CE certification, until terminationof the distributor agreement in late 2000. We have sold the products based on our own certifications since thattime.

 

Based on the current regulatorylaws, we believe that no additional pre-market approvals in the individual EUcountries are required.  CIBA hasadvised us that it intends to establish its own CE mark certifications for thesale of the PresVIEW device and related products.  Under our agreement with CIBA, CIBA has assumed responsibilityfor obtaining any additional regulatory approvals for sale of the licensedproducts outside the United States.

 

**Canada**

 

The PresVIEW device isnot currently approved for sale in Canada by Health Canada.

 

Clinical trials have beenperformed at one Canadian facility.  Asa result, clinical data is available and has been collected with one-yearpatient follow-up.  The device was usedfor the indication of *“reducing IOP in patients with Ocular Hypertensionand Primary Open Angle Glaucoma.*” These results were published in an article appearing in *OphthalmologyTimes* (March 2002).  We havealready achieved ISO 13485 registration certification by SGS, which meets theCanadian requirements for Quality Systems. In December 2002, CIBA and we submitted to Health Canada a Class IIIsubmittal for approval of our PresVIEW device for the Ocular Hypertension, POAGlaucoma and Presbyopia applications.    Asa result of the clinical data to date regarding treatment of patients with POAGlaucoma and/or Ocular Hypertension,  webelieve it reasonable to expect to receive approval from Health Canada tomarket the PresVIEW device in Canada for these indications (and possiblypresbyopia) in the second or third quarter of 2003.

 

### ***Research and Development***

 

Researchand development expenditures were approximately $167,000 during fiscal 2002 and$339,000 during fiscal 2001.  The expendituresfor both periods were related primarily to development of the PresVIEW IncisionSystem.  The expenditures will continueto decrease as the system nears full development and with CIBA contributing tothe development process.

 

Additional expendituresfor research on a treatment for ARMD will be conducted for the Company

 

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primarily on a consultingbasis and are not expected to be significant in the near term.  The Company also will need to expendadditional amounts for research to develop the SEVFL.  We believe these research and development costs will be verylimited until adequate cash flow is achieved under our CIBA agreement and,therefore, believe the research and development activities will not result in anew revenue source in the near future.

 

## ***Other Material Agreements***

 

**Verus Support Services Inc.**

 

On March 3, 2003, weentered into an agreement with Verus Support Services Inc. (“Verus”).  Pursuant to this agreement, Verus willprovide strategic advisory services to us for a period of one year.  During the term of this agreement, we haveagreed to pay Verus a monthly fee of $15,000. In addition, in the event that we do not successfully raise at least $1million of additional capital within six months of the Merger Closing Date uponterms that are at least as favorable as the private placement conducted inconnection with the merger, Verus has subscribed to purchase that number ofshares of our common stock at a price of $2 per share in order to satisfy thedeficiency between the amount of additional capital we successfully raise and$1 million.  Each share purchased byVerus upon the occurrence of this event will have a detachable warrant topurchase one-half of a share of our common at an exercise price of $2.50 pershare that expires three years from the date of issuance.

 

**Kingsdale Capital Corp.**

 

On March 4, 2003, weentered into an agreement with Kingsdale Capital Corp. (“Kingsdale”).  Pursuant to this agreement, Kingsdale willprovide strategic advisory services to us in Canada for a period of oneyear.  During the term of this agreement,we have agreed to pay Kingsdale a monthly fee of $15,000.

 

Both Verus and Kingsdale,or their affiliates, were involved in the private placement.  In addition, Verus and Kingsdale, or their affiliates,owned an aggregate of 1.6% of the shares of Refocus common stock outstandingprior to the private placement, the repurchase of shares owned by Mr. Gunterand Ms. Beam and the merger and own 5.0% of the shares of Refocus common stockoutstanding after such transactions.

 

## ***Employees***

 

We currently have fiveemployees, including two persons performing research and product developmentservices and three persons performing executive and administrativefunctions.  We are not party to acollective bargaining agreement with a labor union, and we consider relationswith our employees to be good.  Weintend to hire additional personnel in the future, including an optometrist toassist with the management of the clinical trials.

 

***CAUTIONARY STATEMENTS***

 

If any of the followingmaterial risks occur, our business, financial condition or results ofoperations would likely suffer.

 

***Risks Related to our Business and Industry***

 

**Wehave a history of net losses and limited revenues; we expect to continue toincur net losses and we may never achieve or maintain profitability.**  We began operations in August 1994 and havea limited operating history upon which you can evaluate our business.  We have incurred losses every year since webegan operations. As of December 31, 2002, our accumulated deficit was approximately$16.9 million, including a net loss of approximately $3.1 million for the yearended December 31, 2002.  These losseshave resulted primarily from expenses associated with research and developmentactivities, including pre-clinical and clinical trials, obtaining regulatoryapprovals in international markets and general and administrative expenses. We anticipate that our operating expenses willincrease substantially for the foreseeable future as we expand our FDA clinicaltrials in the United States and increase expenditures on research anddevelopment associated with new products.

 

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To become profitable, ourroyalty income derived from the CIBA Agreement must substantiallyincrease.  For the past three fullyears, our total revenues have been $1.5 million.  If substantial growth in our sales does not occur through royaltyrevenues from CIBA, we may not be able to achieve or maintain profitability inthe future.  The amount of net lossesand the time required to reach profitability are highly uncertain, and thus, noassurance can be given that we will ever achieve profitability.

 

While we have generatedsubstantial tax loss carryforwards in prior years, we believe that these taxloss carryforwards may be substantially reduced due to an ownership change (asdefined in the Internal Revenue Code of 1986) that may have occurred as aresult of the merger.  Additional workwill need to be performed, however, to determine whether an actual ownershipchange occurred and the amount of tax loss carryforwards that may be available,if any.

 

**Wehave a limited operating history, a single unproven product to date and ourbusiness may not become profitable.**  We have spent the past eight years concentrating our efforts onthe development of the PresVIEW device and the related surgical procedure forthe correction of Presbyopia and, more recently, for the treatment of OcularHypertension and POA Glaucoma.  Sales ofthe PresVIEW device are currently restricted to international markets pendingapproval of the product by the FDA in the United States.

 

This short history maynot be adequate to enable you to fully assess our ability to achieve marketacceptance of our products or our ability to respond to competition.  Accordingly, we are subject to the sameuncertainties and risks associated with any company developing products andbeginning operations.  If we areunsuccessful in addressing the risks and uncertainties frequently encounteredby early stage companies in a new and evolving market, our business will beseriously harmed.

 

For the next severalyears, our revenue will be dependent on the PresVIEW Procedure, for thetreatment of Presbyopia, Ocular Hypertension and POA Glaucoma utilizing ourpatented PresVIEW device.  There can beno assurance that the PresVIEW technology will be proven safe and effective, orthat if proven safe and effective, the technology will be successfullycommercialized.  To improve the surgicaloutcomes of the PresVIEW Procedure, we developed the PresVIEW IncisionSystem.  We and CIBA are in the finalstages of developing and testing this device. Also, CIBA has separately partnered with an ophthalmic ultrasoundprovider named OTI of Toronto, Canada (“OTI”). OTI’s ultrasound mapping technology is being incorporated into a newprotocol for the PresVIEW Procedure to help the surgeon identify preoperativelythe exact locations on the surface of the eye for the PresVIEW device.  The success of the PresVIEW Procedure may bedependent upon the successful integration and enhancement of these two newdevices into the PresVIEW Procedure. The amount of time required to establish production of the PresVIEWIncision System and OTI’s ultrasound technology and whether the FDA willapprove usage of these devices in our clinical trials remains uncertain as ofthis date.

 

**Werely on third-party sales, marketing, manufacturing, training and customerservice, which are out of our control and may have a negative effect on ourbusiness.**  We have alimited staff of five full-time persons. We have no sales, manufacturing, training or customer servicestaff.  We have marketed and sold only arelatively small number of the PresVIEW devices.  Except as contemplated under the CIBA Agreement, the Company hasnot yet established the manufacturing capacity or the distribution, marketing,sales staff and expertise necessary to commercialize the potential market.  Instead, we will depend on third parties toexecute these aspects of our business.

 

Under our strategicagreement with CIBA, CIBA will be training ophthalmologists on the surgicalprocedure and providing customer service. Under the CIBA Agreement, either party has the right to terminate theagreement if the other party becomes insolvent or materially breaches theagreement and fails to cure such breach. If either party terminates the CIBA Agreement, we would have to developnew arrangements with other third parties or hire a significant number of newstaff, either of which may result in substantially higher costs or lowerrevenues to the Company.  Also, becauseall of our revenues for the foreseeable future are expected to be received fromCIBA, our financial condition is highly dependent on CIBA’s financial abilityto pay royalties and milestone payments when they come due.

 

Although CIBA has an economicincentive to sell our products, CIBA could determine the products do notprovide the necessary profit margins or could decide to reduce its allocationof resources to market our products in

 

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some or all markets.  We do not have any control over CIBA’smarketing plans or budget including pricing and product bundling, and CIBAcould devote substantially less funding than required to effectively market theproducts.  Furthermore, no assurance canbe given that CIBA will be effective in selling and marketing our products.

 

As contemplated by theCIBA Agreement, upon the termination or expiration of a transition supply agreementbetween the Company and CIBA, CIBA shall be responsible for and use commerciallyreasonable efforts to manufacture the PresVIEW device and relatedproducts.  We cannot be assured thatCIBA will manufacture the Company’s products in accordance with variousgovernmental regulations or that CIBA will produce and maintain appropriate inventoriesof our products to service the potential market.  CIBA could limit its production of the PresVIEW device to free upmanufacturing capacity for other products. If the Company or CIBA fails to produce enough of a product at afacility, or if our manufacturing process at that facility is disrupted, theCompany or CIBA may be unable to deliver that product to our customers on atimely basis.  A failure to deliverproducts on a timely basis could lead to customer dissatisfaction, damage toour reputation, and a negative impact on our sales and profitability.

 

**Wecurrently rely on single sources for surgical instruments, drive components andthe PresVIEW device, and other sources may not be available or they may notproperly provide products.** Several of the surgical instruments and materials used to manufactureour custom surgical instruments, the PresVIEW Incision System, and the PresVIEWdevice are currently provided by single sources.  If we lose one or more of these vendors, delivery of our productscould be delayed or prevented and our business would suffer.  If we or CIBA were unable to produce ourproducts in a cost-effective or timely manner, or if the manufacturing of ourproducts were interrupted, our business, financial condition and results ofoperations could be materially adversely affected.

 

Many of our instruments,components, and manufacturing processes require a significant degree of technicalexpertise.  If our third-party vendorsand manufacturers fail to produce to specifications or inadvertently use defectivematerials in the manufacturing process, the reliability and performance of ourproducts will be compromised.  Duringand after the currently ongoing transfer of manufacturing to CIBA, CIBA willhave control over the selection of vendors, and they may or may not continue touse our existing key vendors.  If thistransfer of manufacturing duties and potential change in vendors is not handledproperly, delivery of our products could be delayed or prevented and ourbusiness could be materially adversely affected.

 

**Weare dependent on our management, key personnel and consultants, and on therecruitment of additional personnel to succeed, and the loss of such personnelor consultants may damage our business.**  Our founder, Dr. Ronald A. Schachar, is theinventor of the PresVIEW device and currently serves as a consultant forus.  Our existing products and futureproduct candidates are based on theories and research developed by Dr.Schachar.  Other principal executiveofficers and key personnel have extensive knowledge of our PresVIEW technology,the PresVIEW Incision System and the research and development efforts needed tobring the products to market.  The lossof the services of any of our executive officers, other key personnel or consultantscould have a material adverse effect on our business and financial condition.

 

Our success and businessstrategy is dependent in large part on our ability to attract and retain key management,scientific and operating personnel. Such persons are in high demand and are often subject to competingemployment offers.  We will need todevelop expertise and add skilled personnel or retain consultants in such areasas research and development, clinical trials, government approvals, andpossibly sales, marketing and manufacturing in the future.  There can be no assurance that we will beable to attract and retain the qualified personnel or develop the expertiseneeded for our business.  We currentlyhave a small research and management group with limited operatingexperience.  The inability to hireadditional personnel and develop expertise as needed could have a materialadverse effect on us.

 

Dr. Schachar and we haveentered into a severance and consulting agreement, which expires upon the earlierof Dr. Schachar’s receipt of $1.75 million from us or the fifth anniversary ofthe agreement.  In the event that suchagreement is terminated by either party, we might be required to seek a replacement for Dr. Schachar, and such replacementmay not be as knowledgeable or effective as Dr. Schachar, which couldnegatively affect the development of our early stage products.

 

**Wehave recently hired a new chief executive officer, and in conjunction with themerger, we will**

 

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**have asignificant change in the board of directors and such change may be disruptiveto our business.** Terence A. Walts, the President and Chief Executive Officer of theCompany, was elected to these positions as of September 1, 2002.  Mr. Walts and five of our other directorsjoined the board of directors effective March 17, 2003.  In addition, the other two board memberswere elected at the Merger Closing Date. As a result, all eight of our directors, including Mr. Walts, will havejoined the board of directors in March 2003. Although our board of directors believes that the changes in managementand in the board are necessary and desirable developments as we transition froma research and development company, there can be no assurance, however, thatthese changes will not have a disruptive effect on our operations and businessprospects.

 

**CIBA and we face variousinternational risks that may cause an increase in costs.** CIBA and we face risks due to our reliance onsales in international markets.  Ourfuture success will depend in part on the continued expansion of internationalsales of the PresVIEW device. International operations expose CIBA or us to risks, including: need forexport licenses; unexpected regulatory requirements; tariffs and otherpotential trade barriers and restrictions; political, legal and economicinstability in foreign markets; longer account receivable cycles; difficultiesin managing operations across disparate geographic areas; foreign currencyfluctuations; reduced or limited protection of our intellectual property rightsin some countries; dependence on local distributors; and potential disruptionsin sales or manufacturing due to military or terrorist acts.  If one or more of these risks materialize,CIBA’s or our sales to international customers may decrease and costs mayincrease, which could negatively impact our financial condition.

 

**Dueto our dependence on the PresVIEW device, failure to achieve market acceptancein a timely manner could harm our business.**  Even if regulatory authorities approve ourproducts, the PresVIEW device or the PresVIEW Incision System may not be commerciallysuccessful.  Acceptance of and demandfor the PresVIEW device or the PresVIEW Incision System will depend largely onthe following factors:

 

•                  awarenessand acceptance by ophthalmologists and patients of our product as safe andeffective;

 

•                  resolutionof remaining product development issues associated with the disposable bladesfor the PresVIEW Incision System;

 

•                  safety,effectiveness and pricing of alternative products;

 

•                  prevalenceand severity of side effects associated with our product;

 

•                  pricingof our product to both the ophthalmic community and the consumer;

 

•                  safetyand effectiveness for all targeted indications (i.e., Presbyopia, POA Glaucomaand Ocular Hypertension);

 

•                  theamount of training required for the proper use of the PresVIEW Incision Systemand insertion of the PresVIEW device;

 

•                  thegeneral resistance to implanting a foreign object in the eye;

 

•                  thelack of long-term follow-up data;

 

•                  thepossibility of unknown side effects;

 

•                  thedegree of usage by the ophthalmic community as a treatment alternative;

 

•                  howquickly competitive companies can develop and obtain FDA approval forcompetitive treatment methods;

 

•                  successfulseeding efforts with noted physicians and commercialization in Europe andCanada preceding FDA approval;

 

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•                  ourability to decrease the technical skill level of surgery required for outstandingoutcomes via the standardization and automation steps provided in theultrasound and mechanical drive enhancements in the latest protocol; and

 

•                  resolutionand/or clarification in the various scientific theories of what causesPresbyopia and the specific mechanism of action involved in the PresVIEWProcedure.

 

Because all of ourrevenue over the next several years is projected to come from royalties basedon the sale of the PresVIEW device and related products, our financialperformance will depend upon ophthalmologist adoption and patient awareness ofthe PresVIEW Procedure.  If CIBA or weare unable to convince ophthalmologists to use the PresVIEW device, we may notbe able to generate revenues because we have not projected revenues from ourother product candidates in the foreseeable future.

 

In order for CIBA or usto sell our products, ophthalmologists must recommend and endorse them.  We may not obtain the necessaryrecommendations or endorsements from ophthalmologists.  Acceptance of our product is dependent oneducating the ophthalmic community as to the distinctive characteristics,perceived benefits, clinical efficacy and cost-effectiveness of our product comparedto competitive products, and on training ophthalmologists in the proper applicationof our product and surgical techniques of the PresVIEW Procedure.  No assurance can be given that the medicalcommunity or the patients will accept the PresVIEW Procedure over currentconventional treatments.

 

**Ifwe fail to keep pace with advances in our industry or fail to persuadephysicians to adopt new products we introduce, customers may not buy ourproducts and our revenues and profits may decline.**  The ophthalmic industry is characterized byrapid product development, with a significant competitive advantage gained bycompanies that introduce products that are first to market, constant innovationin products and techniques, frequent new product introductions and pricecompetition.  Our future growth depends,in part, on our ability to develop products that are more effective in treatingdiseases and disorders of the eye or that incorporate the latesttechnologies.  In addition, CIBA or wemust be able to manufacture and effectively market those products and persuadea sufficient number of eye care professionals to use the new products weintroduce.  Many doctors are reluctantto switch a patient to a new treatment. For example, ophthalmologists may be reluctant to cease a patient’scurrent treatment for glaucoma, if the current treatment remains effective.  Also, sales of our existing products maydecline rapidly if a new product is introduced by one of our competitors or ifwe announce a new product that, in either case, represents a substantial improvementover our existing products.  Similarly, ifwe fail to make sufficient investments in research and development programs orif we focus on technologies that do not lead to more effective products, ourcurrent and planned products could be surpassed by more effective or advancedproducts.

 

**Weare subject to extensive government regulation that increases our costs andcould prevent us from or delay us in selling our products.**  The research, development, testing,manufacturing and marketing of our products (including the PresVIEW device andthe PresVIEW Incision System) are subject to extensive governmentalregulation.  Government regulation includesinspection of and controls over testing, manufacturing, safety andenvironmental controls, efficacy, labeling, advertising, promotion, record keeping,and the sale and distribution of medical device products and samples.  CIBA is also subject to governmentregulation with respect to the prices it will charge, the rebates it may offerto customers and the methods of its marketing. Government regulation substantially increases the cost of developing,manufacturing and selling our products.

 

We are required to obtainthe approval of regulatory agencies worldwide before CIBA or we can market andsell the PresVIEW device or other products and to undergo rigorous inspectionsby these agencies.  In the UnitedStates, we must obtain FDA approval or clearance for each medical device beforethe devices can be marketed.  The FDAapproval process is typically lengthy and expensive, and approval is nevercertain.  In order to obtain suchapprovals, our products must be shown to be efficacious and safe for use inhumans.  In addition, productsdistributed outside of the United States are subject to government regulation,which may be equally or more demanding. Our products could take a significantly longer time than we expect togain regulatory approval and may never gain approval.  If a regulatory authority delays approval of a product, ourmarket value and operating results may decline.  Even if the FDA or another regulatory agency approves a product,the approval may limit the indicated uses for a product or may otherwise limitCIBA’s or our ability to promote, sell and distribute a product.  A regulatory agency may requirepost-marketing studies.  If we areunable to obtain regulatory approval of our

 

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products, CIBA and wewill not be able to market these products, which would result in a significantshortfall in our sales.  Currently, CIBAand we are actively pursuing approval of our products from regulatoryauthorities in a number of countries, including the United States.  Growth in our sales will depend on thetimely and successful introduction and marketing of some or all of ourproducts.

 

The clinical trials requiredto obtain regulatory approvals are complex and expensive and their outcomes areuncertain.  We have incurred and willcontinue to incur substantial expense for and will continue to devote significanttime to clinical trials, but we cannot be certain that the trials will everresult in the commercial sale of a product. Positive results from pre-clinical studies and early clinical trials donot ensure positive results in later clinical trials that form the basis of anapplication for regulatory approval.  Wemay suffer significant setbacks in clinical trials, even after earlier clinicaltrials show promising results.    Any ofour products may produce undesirable side effects that could cause us orregulatory authorities to interrupt, delay or halt clinical trials of apharmaceutical or medical device candidate. The FDA, another regulatory authority or we may suspend or terminateclinical trials at any time if they or we believe that the trial participantsface unacceptable health risks.

 

CIBA and we are alsorequired to demonstrate compliance with the FDA’s quality system regulations beforewe can receive FDA approval for the PresVIEW device and the PresVIEW IncisionSystem.  The FDA enforces its qualitysystem regulations through pre-approval and periodic post-approvalinspections.  These regulations relateto product testing, vendor qualification, design control, product manufacturingand quality assurance, as well as the maintenance of records and documentation.  If CIBA or we are unable to conform to theseregulations, we will be required to locate alternative manufacturers that doconform.  Identifying and qualifyingalternative manufacturers may be a long and difficult process and the delayscould seriously harm our business.

 

Medical devices are alsosubject to post-market reporting requirements. If safety or efficacy problems occur after the product reaches themarket, the FDA may take steps to prevent or limit further marketing of theproduct.  Additionally, the FDA activelyenforces regulations prohibiting marketing of devices for indications or usesthat have not been cleared or approved by the FDA.

 

Noncompliance withapplicable United States requirements can result in fines, injunctions,penalties, disgorgement of profits, mandatory recalls or seizures, suspensionsof production, denial or withdrawal of pre-marketing approvals, marketingrestrictions, recommendations by the FDA against governmental contracts,criminal prosecution or clinical trial delays. The FDA also has authority to request repair, replacement or refund ofthe cost of any device that CIBA or we manufacture or distribute.  Regulatory authorities outside of the UnitedStates may impose similar sanctions against CIBA or us for noncompliance withapplicable regulatory requirements.  Noassurances can be given that restrictions, sanctions or findings by one of theworldwide regulatory agencies will not result in similar or stronger actions byother regulatory agencies, including the FDA.

 

**Ifwe do not receive and maintain regulatory approvals for our products, we willnot be able to market our products.**  We cannot market our products or surgical procedure in the UnitedStates until the products receive approval from the FDA, and there can be noassurance that we will receive approval. Before receiving FDA clearance to market a product, we must demonstratethat the product is safe and effective in the patient population that will betreated for specific indications. Negative or inconclusive results or adverse medical events during a clinicaltrial could cause a clinical trial to be repeated or a program to be terminatedor could delay getting approval.  Wehave limited experience in conducting or managing the clinical trials necessaryto obtain regulatory approval.  Instead,we rely on third-party clinical investigators to conduct our clinical trialsand other third-party organizations, including CIBA, to perform certain othertasks, and as a result, we may face additional delaying factors outside ourcontrol.  In addition, delays or rejectionsmay be encountered based upon additional government regulation from futurelegislation, administrative action or changes in FDA policy, FDA interpretationduring the period of product development, clinical trials or FDA regulatoryreview.  Therefore, the actual time andexpenditures required to pursue FDA approval are beyond our control and cannotbe predicted.

 

We received approval forand have conducted feasibility clinical trials in the United States on the PresVIEWProcedure for the treatment of Presbyopia. We have submitted the clinical trial data to the FDA and must seekadditional approvals to conduct subsequent portions of the total proposedclinical trial.  The FDA may decline toauthorize additional clinical trials or may substantially delay such trials fora variety of reasons.  We also plan tosubmit an application to the FDA to conduct clinical trials on the PresVIEWProcedure for the treatment of Ocular

 

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Hypertension and POAGlaucoma.  The FDA may not approve theproposed study or may significantly delay the study if approved.  The PresVIEW Incision System developed by usand OTI’s ultrasound technology will also require FDA approval to be used in conjunctionwith the PresVIEW Procedure in the United States.  Although the approval process for these products is not expectedto be lengthy relative to the PresVIEW device, the Company or CIBA has not yetdetermined specifically the regulatory process that may be required.

 

Sales of medical devicesoutside the United States are subject to regulatory requirements that vary bycountry.  The time required to obtainapproval may be shorter or longer than the time required for FDA considerationand involve complexities of dealing with a variety of internationalgovernmental regulations.  We havelimited experience in dealing with the specific regulations that may berequired to sell the PresVIEW device in certain international markets.  Our strategic partner, CIBA, has assumedresponsibility for obtaining and maintaining regulatory approvals outside ofthe United States.  We have no controlover and must rely on CIBA’s actions regarding these international regulatoryapprovals.  No assurance can be giventhat CIBA will properly obtain or maintain regulatory approvals outside of theUnited States.

 

**Wecurrently lack long-term data regarding the safety and efficacy of our productand may find that long-term data does not support our short-term clinicalresults.**  The PresVIEWProcedure is a new and revolutionary technology with only a relatively limitednumber of clinical cases to date.  Thelong-term effects, if any, of the procedure have not been determined.  The human eye may or may not tolerate thepresence of the PresVIEW device. The PresVIEW device may ultimately result inundesirable side effects or medical complications.  We are unaware of any patient who has suffered any significantdamage to their vision or experienced any serious complications in the investigationalsurgeries conducted to date.  Thecomplications experienced to date appear to be minor and related to theevolution of the surgical technique. Further clinical testing of the PresVIEW device could reveal othercomplications and side effects, which could bear on the long-term safety andefficiency of the PresVIEW device, any of which could have a material adverseeffect on our business.  There can be noassurance that the PresVIEW device and the related surgical procedure will notresult in latent complications or that the PresVIEW Procedure is fullyreversible in all patients.

 

**Weface competition from alternative therapies and sales of our products may beless than our expectations.** We compete with many domestic and foreign competitors, who conductbusiness in various rapidly evolving and technologically advanced fields,including medical device, pharmaceutical and biopharmaceutical companies.  For example, in the worldwide Presbyopiamarket, the PresVIEW device will compete with reading glasses, bifocals,multifocal glasses, and the bifocal and multifocal contact lens industry.  There are world leaders in these marketssuch as: Varilux, Bausch & Lomb, Vistakon (a subsidiary of Johnson &Johnson), Alcon and Allergan.  For thetreatment of Ocular Hypertension and POA Glaucoma, we will compete with majorpharmaceutical companies such as Alcon, Allergan, Bausch & Lomb, Merck andPharmacia.  These competitors maydevelop technologies and products that are more effective, easier to use orless costly than any of our current or future product candidates or that couldrender our technologies and product candidates obsolete or noncompetitive.  Many of these competitors have substantiallymore resources as well as more product development, manufacturing and marketingexperience and capabilities than we do. In addition, many of our competitors have significantly greaterexperience than we do in conducting pre-clinical testing, clinical trials andin obtaining FDA and other regulatory approvals of products and therapies.

 

The vision correctionindustry is intensely competitive.  Thesignificant competitive factors in the industry include price, convenience,acceptance of new technologies, patient satisfaction, and governmentapproval.  Our ability to competesuccessfully depends in part on our ability to respond quickly to medical andtechnological change and user preference through the development andintroduction of new products that are of high quality and that address patientand surgeon requirements.  We competewith many larger companies that enjoy several competitive advantages, includingestablished distribution networks; established relationships with health careproviders and payors; additional lines of products; the ability to bundleproducts to offer higher discounts or other incentives to gain a competitiveadvantage; and greater resources for product development, sales and marketingand patent litigation.  If we are unableto compete effectively against existing or future competitors, sales of ourproducts may be significantly less than our expectations.

 

Other companies aredeveloping products based on the same or similar scientific theories used byus.  Those products may be moreeffective than our products and may not infringe our intellectual propertyrights.  These

 

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companies may be able todevelop a surgical technique that does not require the use of any implantdevice to achieve the same or similar surgical result.

 

**Wemay not successfully develop and launch replacements for our products that losepatent protection, which could significantly decrease our future sales andprofits.**  Most of ourproducts are covered by patents that give us a degree of market exclusivityduring the term of the patent. Significant patents covering our products will expire within the next 9to 15 years.  Upon patent expiration,our competitors may introduce products using the same technology.  As a result of this possible increase incompetition, CIBA or we may need to charge a lower price in order to maintainsales of our products, which could result in these products becoming lessprofitable.  If we fail to develop andsuccessfully launch and receive regulatory approval for new products prior tothe expiration of patents for our existing products, our sales and profits withrespect to those products could decline significantly.  We may not be able to develop andsuccessfully launch more advanced replacement products before these and otherpatents expire.

 

The royalty rates to bepaid to us on the net sales of our products are set forth in the CIBA Agreementare in effect until the later of the expiration of the patent rights in acountry or 20 years from the date of the CIBA Agreement.  This period is referred to as the RoyaltyPeriod.  In the event that our patentrights expire or are invalidated in any country during the Royalty Period, theroyalty rate for net sales in such country significantly decreases to a 3%“know how” rate.  Following theexpiration of the Royalty Period, CIBA’s license shall be fully paid up androyalty free with respect to future sales of our products.

 

**Resourcesdevoted to research and development may not yield new products that achievecommercial success and we would be dependent only on the PresVIEW device forsales.**  In the past,we have devoted substantial resources to research and development.  In the foreseeable future, we plan to devoterelatively less resources to research and development.  The research and development process is expensive,prolonged and entails considerable uncertainty.  Development of a new product, from discovery through testing andregistration to initial product launch, typically takes between four and tenyears for a medical device.  Theseperiods vary considerably from product to product and country to country.  Because of the complexities anduncertainties associated with ophthalmic research and development, products weare currently developing may not complete the development process or obtain theregulatory approvals required for us to market such products successfully.  None of the products currently in ourdevelopment pipeline may be commercially successful.

 

**Surgeontraining and the ability of surgeons to routinely achieve a good surgicalresult for virtually all patients is important to our success.  Failure, for any reason, of surgeons toachieve good results will harm our business.**  During the course of the development of thePresVIEW device, the PresVIEW Incision System and the related surgicalprocedure, the surgical technique and surgical instruments have evolved andchanged as we attempted to make the surgical procedure easier for the surgeonto perform.  The PresVIEW Procedure,while using surgical skills similar to other ophthalmic surgical procedures, isa relatively new surgical technique that requires training and preciseexecution by the surgeon.  Over recentyears and even in recent months, some surgeons have not been able tosuccessfully use the PresVIEW Incision System. Some surgeons have not been able to successfully place the PresVIEWdevice in the sclera of the eye to achieve the necessary effect.  Certain of these surgeons have chosen topublish their unsuccessful clinical results.

 

It is critical to CIBA’ssales effort to train a sufficient number of physicians to properly perform thePresVIEW Procedure.  We understand thatCIBA intends to educate ophthalmic surgeons through presentations atinternational conferences and through surgical training courses.  If physicians are not properly trained, theymay misuse or ineffectively use our products resulting in unsatisfactorypatient outcomes, patient injury and related liability or negativepublicity.  If CIBA or we are notsuccessful in adequately training surgeons, or perhaps in further improving thetechnique and surgical instruments such that all surgeons with the requisiteskills can routinely obtain good surgical results, our business will besignificantly harmed.

 

**Wemay be subject to future product liability litigation that could be expensiveand may result in the inability to obtain insurance coverage.**  The manufacture, distribution and sale ofmedical devices are inherently subject to the risk of product liabilityclaims.  The Company uses all itsefforts to take reasonable precaution in the handling, testing, packaging anddistribution of the product to minimize potential liability.  Nonetheless, it is possible that the Companyand CIBA may become subject to litigation involving the PresVIEW device, bothin domestic and

 

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internationalmarkets.  We have provided and maycontinue to provide certain limited indemnities to academic or other institutionsthat are participating in the FDA clinical trials.

 

We have obtained productliability insurance coverage with a policy aggregate limit of $10.0million.  Effective April 1, 2003, thecoverage was lowered to $5.0 million as a result of the transitioning of ourmanufacturing and distribution to CIBA. The coverage is on a claims made basis, and has a retroactive effectivedate to the date of incorporation of Presby in August 1994.  Despite such coverage, we may be subject toclaims that exceed the insurance coverage and such claims may have a materialadverse effect on us.  In addition, wemay require increased product liability coverage if sales of our productsincrease.  Product liability insuranceis expensive and may not be available to us in the future on acceptable terms,if at all.  We have not been subject toany product liability litigation to date.

 

Although we are not currentlysubject to any product liability proceedings, we may incur material liabilitiesrelating to product liability claims in the future, including product liabilityclaims arising out of procedures performed using the PresVIEW device or oursurgical equipment.  The combination ofour insurance coverage, cash flows and reserves may not be adequate to satisfyproduct liabilities we may incur in the future.  Even claims without merit could subject us to adverse publicity,hinder us from securing insurance coverage in the future and require us to incursignificant legal fees.  Successfulproduct liability claims could have a material adverse effect on our financialcondition.  Under the CIBA Agreement,CIBA indemnifies us from certain claims and potential losses associated withour products manufactured by CIBA.

 

**Wemay be subject to future claims from physicians who disagree with our returnpolicy, and we may incur unexpected expenses to resolve the complaints.**  A number of ophthalmologists with practicesbased in the United States purchased surgical kits including the PresVIEWdevice at international locations. While certain of these physicians conducted investigational surgeries atinternational locations for the purpose of research, many of these physicians purchasedour products with a desire to participate in the clinical trials approved andregulated by the FDA of the PresVIEW Procedure.  All of these physicians were aware that the PresVIEW device wasnot approved by the FDA for use in the United States at the time of theirpurchase.  We did not sell the productssubject to a right of refund. Nevertheless, several of these ophthalmologists have recently informedus that if they are not selected to participate in the clinical trials, theyplan to return the products with a request for a refund.  Due to the CIBA Agreement, we do not havefull control over the selection process of the ophthalmologists to become the investigatorsand thus cannot ensure that these physicians will be selected to participate inthe clinical trials.  Any discussionsare preliminary and the amount of liability, if any, to these physicians isuncertain at this time.

 

We established a reserveof $50,000 at December 31, 2001, as an estimate of the cost of providingreplacement PresVIEW devices to all physicians that might have PresVIEW deviceinventory on hand.  The packaging of thePresVIEW device provides guaranteed sterility only for a limited period oftime.  We have encouraged physicians toawait the availability of the PresVIEW Incision System for use in futurePresVIEW Procedures.  The sterilitydating of the packaging of the physicians’ inventories of the PresVIEW devicemay be expired by the time the physicians are prepared to once again performthe surgical procedure.  Subject toCIBA’s consent, we intend to replace the PresVIEW device inventory ofphysicians with the new CIBA packaged PresVIEW device.

 

**Failureof users of our products to obtain adequate reimbursement from third-partypayors could limit market acceptance of our products, which could impact oursales and profits.** The initiatives of managed care organizations and governments to containhealthcare costs in the United States and elsewhere are placing an increasedemphasis on the delivery of more cost-effective medical therapies. Thisemphasis could adversely affect sales and prices of our products.  For example:

 

•                  majorthird-party payors for hospital services, including government insurance plans,Medicare, Medicaid and private healthcare insurers, have substantially revisedtheir payment methodologies during the last few years, resulting in stricterstandards for reimbursement of hospital and outpatient charges for some medicalprocedures, including cataract and intraocular lens procedure.  Because of increased transparency of pricesfollowing the adoption of the euro, member governments in some countries in theEuropean Union are requesting price reductions to match prices charged in othercountries in the European Union;

 

•                  numerouslegislative proposals have been considered that, if enacted, would result inmajor reforms in the United States healthcare system;

 

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•                  ourcompetitors may reduce the prices of their products, which could result in ourcompetitors being reimbursed for a larger number of procedures by third-partypayors;

 

•                  thereare proposed and existing laws and regulations governing product prices and theprofitability of companies in the health care industry; and

 

•                  therehave been recent initiatives by third-party payors to challenge the pricescharged for medical products, which could affect our profitability.

 

Currently availablesurgical procedures to improve vision, such as laser refractive surgery, aregenerally not reimbursable by third-party payors.  We believe that third-party payors will not provide reimbursementto patients for the PresVIEW Procedure if the procedure is undergone for thetreatment of Presbyopia.  Third-partypayors or government insurance programs may provide some level of reimbursementto patients that undergo the PresVIEW Procedure for the treatment of OcularHypertension or POA Glaucoma.  Thisreimbursement may not be available immediately at FDA approval or, ifavailable, reimbursement may be limited, thereby adversely affecting CIBA’s orour ability to sell our medical devices on a profitable basis for the treatmentof Ocular Hypertension or POA Glaucoma. Further, an adverse coverage decision by the Centers for Medicare andMedicaid Services, the government agency that oversees the Medicare andMedicaid programs, could adversely influence private insurers, as well as otherpublic payors.

 

Reductions in the pricesfor our products in response to the trends noted above could reduce ourprofits.  Moreover, the PresVIEWProcedure for the treatment of Ocular Hypertension and POA Glaucoma may not becovered in the future by third-party payors. Consequently, ophthalmologists, out-patient surgical facilities,hospitals and other health care providers may be reluctant to purchase our productsif they do not receive substantial reimbursement for the cost of our productsand for procedures performed using our surgical medical device products fromthird-party payors such as Medicare, Medicaid and health insurance programs,both governmental and private.                Therefore,the failure of our products to be so covered could cause our profits to decline.

 

Since the same PresVIEWProcedure treats Presbyopia as well as Ocular Hypertension and POA Glaucoma, adecline in the price of the PresVIEW device due to price pressures bythird-party payors could result in a price decline for the PresVIEW device usedin the treatment of the other indication.

 

**Economicconditions and price competition may cause sales of our products used inelective surgical procedures to decline and reduce our profitability.**  Sales of products used in elective surgicalprocedures may be adversely impacted by economic conditions.  Generally, the costs of elective surgicalprocedures are borne by individuals without reimbursement from their medicalinsurance providers or government programs. Accordingly, individuals may be less willing to incur the costs of theseprocedures in weak or uncertain economic conditions and there may be a declinein the number of these procedures. Sales of the PresVIEW device worldwide and our revenues from licensingfees may come under pressure and may remain under pressure if current weakeconomic conditions persist.

 

**Wemay be required to bring litigation to enforce our intellectual propertyrights, which may result in substantial expense.**  We rely on patents to protect ourintellectual property rights.  We have18 issued United States patents and 30 issued or published internationalpatents.  We have 15 pending UnitedStates patent applications and 81 pending international patent applications.  Related to the PresVIEW technology, we have10 issued United States patents and 21 issued international patents.  Related to the PresVIEW technology, we have9 pending United States patent applications and 73 pending internationalpatents.  The patents associated withthe PresVIEW technology have expiration dates ranging from 2012 to 2018.  The patents and patent applications relatedto our early stage products generally do not expire until after 2015.  The strength of our patent portfolio,however, is uncertain.  In particular,our competitors and others entities may allege that:

 

•                  ourpatents and pending patent applications use technology that we did not inventfirst, or

 

•                  wewere not the first to file patent applications for these inventions.

 

Further, because of theuncertain nature of patent protection, we cannot be certain that:

 

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•                  otherswill not independently develop similar or alternative technologies or duplicateour technologies,

 

•                  anyof our pending patent applications will result in further issued patents, or

 

•                  anypatents issued to us will provide a basis for commercially viable products,will provide us with any competitive advantages or will not face third-partychallenges or be subjected to further proceedings limiting their scope.

 

We may become involved ininterference proceedings in the U.S. Patent and Trademark Office to determinethe priority of our inventions.  Wecould also become involved in opposition proceedings in foreign countries challengingthe validity of our patents.  In addition,costly litigation could be necessary to protect our patent position.  In some jurisdictions, patent law relatingto the scope of claims in the technology fields in which we operate is stillevolving, and consequently, patent positions in our industry are somewhatuncertain.  We may not prevail in anylawsuit or, if we do prevail, we may not be awarded commercially valuableremedies.  In addition, it is possiblethat we will not have the resources required to pursue necessary litigation orto otherwise protect our patent rights. Failure to protect our patent rights could harm us.

 

We have been involved asplaintiffs in three such lawsuits in the United States related to our patentedtechnology for the PresVIEW Procedure. For more information on such lawsuits, see “Legal Proceedings.”

 

Patent rights injurisdictions outside the United States are even more uncertain and difficultto protect.  There may be patents in certaininternational jurisdictions that are not enforceable or, if enforceable, theCompany or CIBA may determine not to attempt to enforce such rights due to theexpense, the likelihood of prevailing or for other reasons.  Furthermore, the laws of foreign countriesmay not protect our intellectual property rights to the same extent as the lawsof the United States.

 

Pursuant to the CIBAAgreement, a Patent Litigation Committee (the “PLC”) has the responsibility tofacilitate communication and decision-making concerning all threatened andpotential claims relating to patent infringement.  The PLC is composed of two members from CIBA and two members fromthe Company.  As a result, we cannotcontrol the PLC’s actions, and the PLC could take action or fail to take actionthat causes damage to our patent and other intellectual property rights.

 

We rely on trade secrets,unpatented proprietary know-how and continuing technological innovation that weseek to protect with confidentiality agreements with employees, consultants andothers with whom we discuss our business, including CIBA.  We may not be able to prevent theunauthorized disclosure or use of our technical knowledge or other tradesecrets by consultants, vendors, former employees and current employees,despite the existence of nondisclosure and confidentiality agreements and othercontractual restrictions.  These individualsor CIBA or their employees may breach our confidentiality agreements and ourremedies may not be adequate to enforce these agreements.  Disputes may arise concerning the ownershipof intellectual property or the applicability or enforceability of these agreements,and these disputes may not be resolved in our favor.  Furthermore, our competitors may independently develop trade secretsand proprietary technology similar to ours. If we do not receive patents for products arising from our research, wemay not be able to maintain the confidentiality of information relating to suchproducts.

 

If our intellectualproperty rights are not adequately protected, we may be unable to keep othercompanies from competing directly with us, which could result in a decrease inour market share.  Enforcement of ourintellectual property rights to prevent or inhibit appropriation of ourtechnology by competitors can be expensive and time-consuming to litigate, orotherwise dispose of, and can divert management’s attention from carrying onwith our core business.

 

**Ourproducts could infringe upon the intellectual property rights of others, whichmay cause us to engage in costly litigation and, if we are not successful,could cause us to pay substantial damages and prohibit us from selling ourproducts.**  Thirdparties may assert infringement or other intellectual property claims againstus based on their patents or other intellectual property claims.  We may be required to pay substantialdamages, including triple damages, for past infringement if it is ultimatelydetermined that our products infringe a

 

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third party’spatents.  Even if infringement claimsagainst us are without merit, defending a lawsuit takes significant time, maybe expensive and may divert management attention from other businessconcerns.  Further, we may be prohibitedfrom selling our products before we obtain a license from the owner of therelevant technology.  If such a licenseis available at all, it may require us to pay substantial royalties.

 

Under the CIBA Agreementand if mutually agreed by the PLC, CIBA shall control and be responsible forthe cost of defense of patent infringement claims against us related to ourproducts licensed by CIBA.  We are responsiblefor reimbursing CIBA up to 100% of the defense costs if funds are paid to athird-party as a result of infringement by us. Since CIBA controls the defense of these claims, we cannot be assuredthat CIBA will take any actions that are in our best interest in these matters.

 

**CIBAor we may implement a product recall or voluntary market withdrawal due toproduct defects or product enhancements and modifications, which would significantlyincrease our costs.** The manufacturing and marketing of medical devices and surgicalequipment and instruments involve an inherent risk that our products may proveto be defective or cause a health risk. In that event, CIBA or we may voluntarily implement a recall or marketwithdrawal or may be required to do so by a regulatory authority.  We have recalled products in the past asexplained later in this section and, based on this experience, believe that theoccurrence of a recall could result in significant costs to CIBA or us,potential disruptions in the supply of our products to our customers andpotential adverse publicity, all of which could harm the ability to market ourproducts.  A recall of one of ourproducts or a similar product manufactured by another manufacturer could impairsales of the products we market as a result of confusion concerning the scopeof the recall.

 

We have devotedsubstantial financial and management resources to research and development andthe enhancement and improvement of both the patented PresVIEW device and thePresVIEW Procedure.  In order to improvethe results of the PresVIEW Procedure, we have on several occasions replacedthe inventory of the physician customers with a new release of the PresVIEWdevice.  We have also provided to ourpaid customers all upgrades or modifications to the hand-held surgicalinstruments free of charge.  We havewritten off the cost of the previous injection molding equipment, thediscontinued PresVIEW device or instrument inventory and other costs associatedwith the upgrade of the PresVIEW device and instruments.

 

In 1999 and early 2000,Presby conducted a voluntary recall of the PresVIEW device because of aredesign of the shape of the segments of the PresVIEW device.  One or more of the segments of the PresVIEWdevice prototype sold in 1998 and early 1999 had a tendency to turn on its sidein a small percentage of patients presumably as a result of the patients rubbingtheir eyes.  Although not posing anyknown safety risk to the patient, the patients would generally notice thattheir improvement in near vision as a result of the surgery would decreaseafter the segment rotation.  Presbyredesigned the shape of the PresVIEW device segments by making the segmentwider than it was tall with the intent of eliminating this rotationproblem.  Presby replaced, at no cost tothe physicians, PresVIEW device inventory of physician customers worldwide withthe newly designed PresVIEW device.  Weare not aware of any report of the rotation of the current PresVIEW devicedesign.  During the period of therecall, Presby did not recognize sales pending shipment of the new release ofthe PresVIEW device.

 

Presby did not ship orrecognize any significant sales in 2001 pending final development of thePresVIEW Incision System.  There can beno assurance that such expenses associated with product upgrades and the suspensionof sales during similar future periods, if any, will not have a material impacton our operating and financial position.

 

Pursuant to the CIBAAgreement, such decisions regarding the modification of the PresVIEW device andrelated products shall be determined by a Joint Technical Committee comprisedof two members from each of CIBA and the Company.  CIBA may or may not decide to provide product upgrades at no costto customers and particularly to customers that purchased their products priorto the date of the CIBA Agreement.  IfCIBA decides not to provide product upgrades to customers, those customers maybe dissatisfied and may cause damage to the product marketing efforts.

 

Modifications to ourproducts may require new clinical trials, FDA 510(k) clearances or pre-marketapprovals or may require us to recall the modified devices until clearances areobtained.  Any modification to anFDA-cleared device that significantly affects its safety or effectiveness, orthat would constitute a major change in its intended use, requires a new FDA510(k) clearance or possibly pre-market approval.  The FDA requires every

 

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manufacturer to make thisdetermination in the first instance, but the FDA can review any such decision.  We may make additional modifications to ourproducts and future products after they have received clearance or approvaland, in appropriate circumstances, determine that new submission isunnecessary.  The FDA may not agree withany of our decisions not to seek new clearance or approval.  Also, in such a circumstance, we could besubject to significant regulatory fines or penalties.

 

**We will face substantial futurecapital requirements, which we may not be able to satisfy, and such a scenariomay cause us to delay or curtail our business plan.** The amount of our available working capitalmay not be adequate, and we may be unable to obtain future capital onsatisfactory terms.  We will be requiredto commit substantial resources to conduct the research and development,clinical studies and regulatory activities necessary to bring any potentialmedical device products to market. There can be no assurance that our current cash and cash equivalentswill be sufficient to fund our operations until profitability or throughcompletion of FDA clinical trials. Therefore, we may be required to seek additional funding throughcollaborative arrangements with corporate partners and through public orprivate debt or equity financings.  Anyadditional equity financing may be dilutive to stockholders, and any debtfinancing, if available, may involve restrictions on our ability to pay dividendson our capital stock or the manner in which we conduct our business.  There can be no assurance that anyfinancings, if needed, will be available to us or that adequate funds for ouroperations, whether from our revenues, financial markets, collaborative orother arrangements with corporate partners or from other sources, will beavailable when needed or on terms attractive to us.  The inability to obtain sufficient funds may require us to delay,scale back or eliminate some or all of our research and product developmentprograms, clinical studies and/or regulatory activities or may cause us tocease our operations.

 

**Any acquisitions that we consummatecould disrupt our business and harm our financial condition.** In the future, we may evaluate potentialstrategic acquisitions of complementary businesses, products ortechnologies.  We may not be able toidentify appropriate acquisition candidates or successfully negotiate, financeor integrate any businesses, products or technologies that we acquire.  Furthermore, the integration of anyacquisition may divert management’s time and resources from our corebusiness.  While we from time to timeevaluate potential acquisitions of businesses, products and technologies, andanticipate continuing to make these evaluations, we have no presentunderstandings, commitments or agreements with any respect to acquisitions.

 

***Risks Related to Our Common Stock***

 

**The liquidity of our common stock isaffected by its limited trading market.** Shares of our common stock are traded on the OTC Bulletin Board underthe symbol “RFCG.OB.” There is currently no broadly followed establishedtrading market for our common stock.  An“established trading market” may never develop or be maintained.  Active trading markets generally result inlower price volatility and more efficient execution of buy and sellorders.  The absence of an activetrading market reduces the liquidity of our shares.  The trading volume of our common stock historically has beenlimited and sporadic.  As a result ofthis trading activity and the merger, the quoted price for our common stock onthe OTC Bulletin Board is not necessarily a reliable indicator of its fair marketvalue.  Further, if we cease to be quoted,holders would find it more difficult to dispose of, or to obtain accuratequotations as to the market value of, our common stock and the market value ofour common stock likely would decline. While we have applied for approval for the listing of our common stockon the American Stock Exchange, we cannot be certain that we will receive suchapproval.

 

**Our common stock may be subject toregulations prescribed by the Securities and Exchange Commission relating to“penny stock.”**  The Securities and Exchange Commission hasadopted regulations that generally define a penny stock to be any equity securitythat has a market price (as defined in such regulations) of less than $5.00 pershare, subject to certain exceptions. If our common stock meets the definition of a penny stock, it will besubjected to these regulations, which impose additional sales practice requirementson broker-dealers who sell such securities to persons other than establishedcustomers and accredited investors, generally institutions with assets inexcess of $5,000,000 and individuals with a net worth in excess of $1,000,000or annual income exceeding $200,000 (individually) or $300,000 (jointly withtheir spouse).

 

**Our common stock will likely besubject to substantial price and volume fluctuations.**  Themarket price of our common stock has been volatile and could fluctuate widelyin response to several factors, some of which are beyond our control, including:

 

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•                   our quarterly operating results;

•                   additions or departures of keypersonnel;

•                   changes in the business, earningsestimates or market perceptions of our competitors;

•                   the introduction of new products byus or our competitors;

•                   future sales of our common stock byus or other selling stockholders;

•                   changes in general market oreconomic conditions;

•                   announcements of legislative orregulatory change; and

•                   potentially significant downwardselling pressure on the stock price during the first years as certain currentand new stockholders seek to liquidate a portion or all of their holdings forvarious reasons, subject to certain lock-up provisions where applicable.

 

The stock market hasexperienced extreme price and volume fluctuations in recent years that havesignificantly affected the quoted prices of the securities of many companies, includingcompanies in our industry. The changes often appear to occur without regard tospecific operating performance.  Inaddition, there has been a limited public market for our common stock.  We cannot predict the extent to whichinvestor interest in us will be maintained. Such interest is necessary for an active, liquid trading market for ourcommon stock.  Active trading marketsgenerally result in lower price volatility and more efficient execution of buyand sell orders for investors. The price and trading volumes of our commonstock may fluctuate widely due to the limited public market for our stock.

 

**Asignificant number of our shares are eligible for sale and their sale coulddepress the market price of our stock.**  Sales of a significant number of shares ofour common stock in the public market following the merger and relatedtransactions could harm the market price of our common stock.  Moreover, as additional shares of our commonstock become available for resale in the public market pursuant to theregistration of the sale of the shares, and otherwise, the supply of our commonstock will increase, which could decrease its price.  Some or all of the shares of common stock may be offered fromtime to time in the open market pursuant to Rule 144, and these sales may havea depressive effect on the market for the shares of common stock.  In general, a person who has held restrictedshares for a period of one year may, upon filing with the SEC a notification onForm 144, sell into the market common stock in an amount equal to the greaterof 1% of the outstanding shares or the average weekly number of shares sold inthe last four weeks prior to such sale. Such sales may be repeated once each three months, and any of therestricted shares may be sold by a non-affiliate after they have been held twoyears.

 

**Aftergiving effect to the merger, certain of our principal stockholders willcontinue to have significant voting power and may take actions that may not bein the best interest of other stockholders.**  Certain of our officers, directors andprincipal stockholders continue to control a significant percentage of ouroutstanding common stock.  If thesestockholders act together, they may be able to exert significant control overour management and affairs requiring stockholder approval, including approvalof significant corporate transactions. This concentration of ownership may have the effect of delaying orpreventing a change in control and might adversely affect the market price ofour common stock.  This concentration ofownership may not be in the best interests of all our stockholders.

 

**Wedo not anticipate paying dividends in the foreseeable future, and the lack ofdividends may have a negative effect on the stock price.**  We have never declared or paid any cashdividends or distributions on our common stock.  We currently intend to retain our future earnings to supportoperations and to finance expansion and, therefore, do not anticipate payingany cash dividends on our common stock in the foreseeable future.

 

**Ourcertificate of incorporation and Delaware law contain certain anti-takeoverprovisions that may inhibit a takeover, and we may adopt other measures todiscourage a takeover.** Delaware Law and the provisions we intend to add to our certificate ofincorporation relating to a classified board of directors may have the effectnot only of discouraging attempts by others to buy us, but also of making itmore difficult or impossible for existing stockholders to make managementchanges.  A classified board, which ismade up of directors elected for staggered terms, while promoting stability inboard membership and management, also moderates the pace of any change in controlof our board of directors by extending the time required to elect a majority,effectively requiring action in at least two annual meetings.  Our board may consider and adopt additionalmeasures that would prevent us from being subject to a takeover.

 

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**Weare subject to critical accounting policies and actual results may vary fromour estimates.**  Wefollow accounting principles generally accepted in the United States of Americain preparing our financial statements. As part of this work, we must make many estimates and judgments aboutfuture events.  These affect the valueof the assets and liabilities, contingent assets and liabilities, and revenueand expenses that we report in our financial statements.  We believe these estimates and judgments arereasonable, and we make them in accordance with our accounting policies basedon information available at the time. However, actual results could differ from our estimates, and this couldrequire us to record adjustments to expenses or revenues that could be materialto our financial position and results of operations in future periods.

 

## **ITEM 2. PROPERTIES**

 

Our corporateheadquarters are located at 10300 North Central Expressway, Suite 104, Dallas,Texas, in approximately 600 square feet of space occupied under a lease with amonthly rental rate of $668.25 that expires in September 2003.  We occupy additional space under amonth-to-month lease that is located in a freestanding 4,000 square footbuilding on 4.5 acres in Denison, Texas. The Denison facility houses our clean room and is owned by Dr. Ronald A.Schachar, the former chairman and Chief Scientist of Presby.  The rent for the Denison facility is $4,000per month.** **Mr. Walts, a director and ourChief Executive Officer and President, is based in Atlanta, Geogia.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

In March 2000, we filedsuit against Surgilight, Inc.  forpatent infringement in the United States District Court for the Middle Districtof Florida, Orlando Division.  We ownmultiple domestic and international patents directed to methods, devices andsystems for the treatment of Presbyopia and other eye disorders.  One such patented methodology is directed tothe use of lasers to weaken the sclera (the white of the eye), and therebymanipulate the ciliary muscle to treat Presbyopia.  Our international patent portfolio is directed to, and includeswithin its scope, various means and methodologies that increase the effectiveworking distance of the ciliary muscle in a presbyopic eye.

 

By using lasers to ablatethe sclera, we asserted that Surgilight infringed one or more of thepatents.  During the litigation, substantiallyall discovery and pretrial litigation were conducted.  During this litigation, Surgilight filed several substantive motionsfor summary judgment, all of which were denied by the Federal Magistrate.

 

Following these denials,in December 2001, we accepted a cash settlement from Surgilight.  In conjunction with that settlement, Surgilightacknowledged the validity and enforceability of our patents.  The settlement did not include a license ofany of our technology to Surgilight.

 

In May 2000, we filed apatent infringement suit against Howard N. Straub, D.O., the Colorado EyeInstitute, Restorvision, Inc. and LensTec, in the United States District Courtfor the District of Colorado.  Wealleged that Straub has performed or arranged for the performance of surgicalprocedures on United States citizens and in foreign countries in whichunauthorized copies of our patented PresVIEW devices were used. During thelitigation, significant discovery and pretrial litigation were conducted.  We and our patent counsel believe suchcopies of the PresVIEW device created by the defendants are covered underexisting patents issued to us.  During thislitigation, the defendants filed substantive motions for summary judgment, allof which were denied by the Federal Judge.

 

Following the most recentdenial, in June 2002, the Court granted a Motion jointly proposed by both partiesthat stayed the litigation for a period of 12 months.  During this period, the United States Patent and Trademark Officewill continue its investigation into the validity of Restorvision’s patentapplications.  We believe that thoseapplications will be rejected by the Patent Office.

 

If the Patent Officeissues a patent on Restorvision’s modification, we and our counsel believe thatRestorvision would still be required to obtain a license to our underlyingPresVIEW patents prior to marketing the Restorvision modification in the UnitedStates and in many countries around the world. Under the CIBA Agreement, we are prohibited from agreeing to such alicense, although CIBA could grant such a license with our consent.

 

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To encourage medical andscientific research that might otherwise constitute patent infringement in theUnited States, Congress has provided a limited patent infringement exemption.  This exemption, found at 35 U.S.C. §271(e)(1), provides that a person does not commit an act of infringement byusing patented technology “solely for uses reasonably related to thedevelopment and submission of information” to the FDA.  This exemption applies equally to patenteddrugs and medical devices.

 

In the Surgilight andStraub suits, the defendants attempted to rely upon this exemption as part oftheir defense.

 

We disputed that thedefendants’ activities are protected by the exemption.  We contend, among other things, that inorder for activities to be undertaken solely for the purposes of submittinginformation to the FDA, the activities must comply with the regulations of theFDA.  We believe that the defendantshave violated FDA regulations and are not protected by the exemption.

 

We further believe thatany activities not permitted under such exemption, such as commercialactivities in the United States, are violations of our patents.

 

In August 1999, we filedsuit against Orbtek, Bausch & Lomb, Bausch & Lomb Surgical, and variousdoctors alleging that the defendants practiced, without permission, variouspatented methods relating to astigmatic correctional surgery and radialkeratotomy.  The patents at issue inthis suit do not relate to the PresVIEW technology.  In early 2001, we accepted a cash settlement from the defendantsto settle this litigation on a confidential basis.

 

In May 2001, we alsofiled suit against Douglas Steel, M.D. We alleged in the suit that Dr. Steel copied, manufactured and sold inthe United States a scleral prosthesis developed and patented by us.  We further alleged that Dr. Steel performed numerouscommercial surgeries in the United States to treat Presbyopia in accordancewith procedures developed and patented by us. The United States District Court for the Central District of Californiaissued a preliminary injunction in late May 2001 against Dr. Steel as requestedby us.  In October 2001, we accepted acash settlement from Dr. Steel.  Thesettlement did not include a license of any of our technology to Dr. Steel.

 

We have notified certainother potential infringers of potential litigation by us, but are not currentlyengaged in other litigation.

 

Under the CIBA Agreement,a Patent Litigation Committee (“PLC”), was formed to facilitate communicationand decision-making concerning all pending, threatened and potential claimsrelating to patent infringement, including both claims against CIBA or us andclaims by CIBA or us against any third party based upon our patent rights.  The PLC has two voting members from CIBA andtwo from the Company.  Generally, allpatent litigation must have the majority vote approval of the PLC.  Subject to the approval of the PLC, CIBAwill lead and fund the litigation to prevent or eliminate any infringement ofour patent rights by third parties.  Anyrecovery of damages will be allocated to both parties first as reimbursementfor expenses and then based on the damages incurred by  CIBA and us, respectively.  Should the recovery of damages not coverCIBA’s expenses, CIBA shall recover 50% of the total unrecovered costs fromfuture royalty payments to be paid to us such that each party bears 50% of theunrecovered costs of litigation.

 

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

 

As of the close ofbusiness on January 6, 2003, VeryBestoftheInternet.com, Inc. received writtenconsents of stockholders in lieu of a special meeting from stockholders thatheld 9,140,000 shares of common stock, or approximately 93% of the aggregate outstandingshares of common stock.  Pursuant to thewritten consent, the stockholders of VeryBestoftheInternet.com, Inc. approvedthe reincorporation of VeryBestoftheInternet.com, Inc., a Texas corporation, inDelaware through a merger of it with and into its wholly-owned Delaware subsidiary,Refocus Group, Inc.  The reincorporationchanged the name of VeryBestoftheInternet.com, Inc. to Refocus Group, Inc. andwas effected in February 2003.

 

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The number of shares ofcommon stock held by stockholders who executed consents in favor of thereincorporation constituted a majority of the 9,823,400 shares eligible toconsent to such matter. No other actions were taken by the stockholderspursuant to the written consent.

 

**PART II**

 

**ITEM 5. MARKET FOR CORPORATION’S COMMON EQUITY AND RELATED STOCKHOLDERMATTERS**

 

On April 16, 2002, shares of common stock ofVeryBestoftheInternet.com became eligible for quotation on the NASD ElectronicBulletin Board under the symbol “VYIB.OB.” On February 25, 2003, the symbol waschanged to “RFCG.OB.”  No trades, however,were ever made with respect to shares of Refocus common stock prior to themerger.  As a result, the range of highand low bid information for shares of Refocus common stock for each fullquarterly period within the two most recent fiscal years is not available. Therange of high and low bids for shares of Refocus common stock since the closingof the merger through March 25, 2003 have been $5.50 and $3.60, respectively,based on bids that represent prices quoted by broker-dealers on the OTC BulletinBoard System.  These quotations reflectinter-dealer prices, without retail mark-up, mark-down or commissions, and maynot represent actual transactions.

 

Presby stock,prior to the merger, was not traded on a public trading market, and Presby hadno registered securities outstanding.

 

As of March 25, 2003, there were 18,943,887 shares ofRefocus common stock outstanding with approximately 422 stockholders ofrecord.  The increase in shares ofRefocus common stock outstanding since the closing of the merger is due to theexercise of stock options.

 

# ***Dividend Policy***

 

While there are norestrictions on the payment of dividends, Refocus has not declared or paid anycash or other dividends on shares of Refocus common stock in the last twofiscal years and presently has no intention of paying any cash dividends in the foreseeable future.

 

*Equity Compensation Plan Information*

 

                Information relating to Refocus’equity compensation plans will be set forth in our 2003 Proxy Statement for theAnnual Meeting of Shareholders.

 

*Recent Transactions and Sales ofUnregistered Securities*

 

Pursuant to the MergerAgreement, at the closing on March 6, 2003, Refocus issued 11,940,144 shares ofRefocus common stock to the stockholders of Presby in exchange for 100% of theoutstanding capital stock of Presby, subject to the assertion of appraisalrights by former Presby stockholders. In addition, Refocus assumed the amended and restated 1997 Stock OptionPlan of Presby (the “Option Plan”) and reserved 4.1 million shares of Refocus commonstock for options issued and issuable under the Option Plan.  At the time of the merger, Presby hadoutstanding options to purchase 719,486 shares of common stock that wereconverted in the merger into options to purchase the same number of shares ofRefocus common stock.

 

Prior to the merger,Refocus effected a forward-split of its common stock on the basis ofapproximately six shares for each share issued and outstanding. Following theforward-split and immediately prior to the private placement described belowand the merger, Refocus purchased all but 4,000 shares of Refocus common stockheld by Mr. Gunter and Ms. Beam for $25,000, resulting in Refocus having4,097,107 shares outstanding prior to the merger and the private placement.

 

Concurrently with the merger, Refocus (as it existedwith Presby) consummated a private placement resulting in the issuance ofshares of Refocus common stock at a price per share of $2.00 with a detachablewarrant to purchase one-half of a share of Refocus common stock at an exerciseprice per share of $2.50. The private placement is being consummated in twotranches. The first tranche closed simultaneously with the closing of themerger.  Investors who participated inthe first tranche were required to irrevocably commit to the second tranche,with 50% of their subscribed investment being funded at the closing of thefirst tranche and the remaining 50% being funded at the closing of the secondtranche. The closing of the second tranche (and the funding of investor funds inconnection with the second tranche) is contingent on:

 

•                  the initiation of Presby’s Phase II FDA clinical trialfor the treatment of Presbyopia;

 

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•                  the earlier of:

 

•                  approval from Health Canada  to commercialize Presby’s treatment for POA Glaucoma, and/orOcular Hypertension or

 

•                  the completion, after the closing of the merger, of500 surgical procedures in Canada and/or the EU utilizing the PresVIEW devicefor the treatment of POA Glaucoma or Ocular Hypertension; and

 

•                  the concurrent second tranche investment by CIBA of$1.25 million.

 

The gross proceeds from the private placement,including both tranches, is expected to be $11.5 million. This $11.5 milliondoes not include the $1.0 million Verus contingent subscription (See "Item1. Business - Description of Business - *OtherMaterial Agreements* - Verus Support Services Inc."). Refocusreceived approximately $5,147,500 for 2,875,000 shares of Refocus common stock,net of advisory, placement agent and finder fees, in the initial tranche of theprivate placement.  Warrants to purchasean aggregate of 1,437,500 shares of Refocus common stock were issued to theseinvestors in the initial tranche. In addition to the $194,447 of deferredexpenses at December 31, 2002, an estimated $570,000 in additional costs forlegal, audit, and other merger and private placement costs are to be offsetagainst the proceeds received from the shares of Refocus common stockissued.  As consideration for advisoryservices provided to Refocus and Presby in connection with the merger, Refocusissued an aggregate of 12,500 shares of Refocus common stock, warrants topurchase an aggregate of 1,200,000 shares of Refocus common stock at anexercise price per share of $2.50 and warrants to purchase an aggregate of50,000 shares of Refocus common stock at an exercise price per share of $2.00to certain advisors.  In connection withthe private placement, Refocus paid $40,000, and issued warrants to purchase anaggregate of 50,000 shares of Refocus common stock at an exercise price of$2.50 per share to Atlas Capital Services, LLC, who served as the placementagent in the private placement.

 

After giving effect to the merger and the initialtranche of the private placement, there was a total of 18,924,751 shares ofRefocus common stock outstanding. Additionally, there were warrants to purchase a total of 2,737,500shares of Refocus common stock and options to purchase 719,486 shares ofRefocus common stock outstanding at the closing of the merger and initialtranche of the private placement.

 

The shares of Refocus common stock issued tostockholders of Presby in connection with the merger and the shares of Refocuscommon stock and warrants to purchase shares of Refocus common stock that wereissued in the private placement were not registered under the Securities Act of1933 and, as a result, are “restricted securities” and may not be offered orsold in the United States absent registration or an applicable exemption fromregistration requirements.  Certificatesand agreements representing these shares and warrants, respectively, willcontain a legend stating the same. These securities were issued by Refocus in reliance upon an exemptionfrom registration set forth in Section 4(2) of the Securities Act of 1933 andRule 506 promulgated under that act.  The issuance of the shares of Refocus common stock to the former Presbystockholders and to the investors in the private placement was undertakenwithout general solicitation or advertising. The former Presby stockholders and the investors represented to Refocusthat, among other items, they were acquiring these securities for investmentpurposes only and not with a view toward public distribution and that they wereaccredited investors within the meaning of Rule 506.   Additionally, the former Presby stockholders and investorsacknowledged that the securities issued to them were “restrictedsecurities”.  Moreover, Refocus filedwith the Securities and Exchange Commission Forms D pursuant to Rule 506 withrespect to these transactions. If any securities are issued to Verus SupportServices Inc. pursuant to the Verus contingent subscription agreement referencedabove, this issuance will not be registered under the Securities Act of 1933 inreliance upon the exemption from the registration afforded by Section 4(2) ofthe Securities Act of 1933 and Rule 506 promulgated under that act.  This agreement was a privately negotiatedtransaction without general solicitation or advertising with a company that webelieve is an accredited investor within the meaning of Rule 506. As acondition to the issuance of such securities, Refocus will require Verus tomake the same representations as were made by the investors in the privateplacement. Furthermore, Refocus has filed with the Securities and ExchangeCommission a Form D pursuant to Rule 506 with respect to this transaction.

 

Additionally, in connection with the merger and theprivate placement, holders of approximately 91% of the outstanding stock ofPresby and all holders of shares of Refocus common stock and warrants topurchase shares of Refocus common stock acquired in the private placemententered into agreements with Refocus that prohibit the stockholder from:

 

•                    publiclyselling, contracting to sell or otherwise transferring any of the shares ofRefocus common stock beneficially owned by the stockholder following themerger; or

 

•                    privatelyselling, contracting to sell or otherwise transferring (unless the proposedtransferee agrees to be bound by the restrictions on transfer contained in thestockholder’s agreement with Refocus) any of the shares of Refocus common stockbeneficially owned by the stockholder following the merger.

 

Stockholders who entered into these agreements and whoreceived or acquired shares of Refocus common stock and warrants to purchaseshares of Refocus common stock as a result of the merger or the privateplacement may, however, transfer those shares, publicly or otherwise, asfollows:

 

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•                    *Shares ofRefocus common stock and warrants to purchase shares of Refocus commonstock  acquired in the private placement*.  Stockholders who acquired shares of Refocuscommon stock and warrants to purchase shares of Refocus common stock in the privateplacement may transfer those shares at a rate of nine percent of the aggregatenumber of shares of Refocus common stock and shares of Refocus common stockunderlying the warrants issued to that stockholder in the private placement permonth, subject to applicable securities laws, following the effective date of aregistration statement covering those shares.

 

•                    *Shares ofPresby common stock and Series C preferred stock (prior to the conversion ofthe Series C preferred stock into Presby common stock) prior to the merger*.  Holders of Presby common stock and/or PresbySeries C preferred stock prior to the merger may transfer the shares of Refocuscommon stock received in connection with conversion of the Presby common stockand Series C preferred stock in the merger at a rate of nine percent of theaggregate number of shares of Refocus common stock issued to the stockholderfor his shares of Presby common stock and/or Series C preferred stock in themerger (calculated at the date of the closing of the initial tranche of theprivate placement) per month, subject to applicable securities laws, beginningone year after the effective date of a registration statement covering thoseshares.

 

•                    *Shares ofPresby Series B preferred stock (prior to the conversion of the Series Bpreferred stock into Presby common stock) prior to the merger*.  These stockholders may transfer shares ofRefocus common stock as follows:

 

•                    at a rate ofthree percent of the aggregate number of shares of Refocus common stock issuedto the stockholder for his shares of Presby Series B preferred stock in themerger (calculated at the date of the closing of initial tranche of the privateplacement) per month, following the effective date of a registration statementcovering those shares; and

 

•                    at a rate ofnine percent of the aggregate number of shares of Refocus common stock issuedto the stockholder for his shares of Presby Series B preferred stock in themerger (calculated at the date of the closing of the initial private placement)per month, subject to applicable securities laws, beginning six months afterthe effective date of a registration statement covering those shares.

 

These agreements between Refocus and the stockholders will terminatetwo years after the date of closing of the merger.

 

                Pursuant to theterms of the private placement, Refocus agreed to register for resale under theSecurities Act of 1933 the shares of Refocus common stock and shares of Refocuscommon stock acquirable upon exercise of the warrants issued in the privateplacement no later than the earlier of:

 

•                    180 days afterthe closing of the merger, or

 

•                    the earlierof:

 

•                    90 days afterapproval for listing on the American Stock Exchange, or

 

•                    180 days afterapproval for quotation on  the NasdaqSmallCap Market.

 

Additionally, as consideration for entering into the agreementsrestricting transfer, Refocus agreed to register for resale under theSecurities Act of 1933 the shares of Refocus common stock received by holdersof Presby common stock, Series B preferred stock and Series C preferred stockin connection with merger at the same time as the shares of Refocus commonstock issued in the private placement were registered for resale.

 

**ITEM 6.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**PRESBYCORP AND SUBSIDIARIES**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**DECEMBER31, 2002**

 

The following discussionand analysis of the financial condition and results of operations of Presby andits subsidiaries should be read in conjunction with the financial statementsand related footnotes included in Item 7. All dollar amounts presented in this section have been rounded tothousands, except per share amounts.

 

***Overview***

 

Since its incorporationin August 1994, Presby Corp has been primarily engaged in the research anddevelopment of the PresVIEW device and the related technology for the treatmentof presbyopia, ocular hypertension and primary open angle glaucoma.  We have also conducted research anddevelopment activities directed toward the eventual commercialization of othermedical and optical products.  Althoughwe first recorded revenues in the quarter ended December 31, 1997, we expect tocontinue to incur substantial losses until sufficient revenue can be generatedto offset expenses.

 

The research,manufacture, sale and distribution of medical devices, such as the PresVIEWdevice, are subject to numerous regulations, imposed by governmentalauthorities, principally the FDA, and corresponding state and foreignagencies.  The regulatory process islengthy, expensive and uncertain, and the requirements vary significantly indifferent jurisdictions around the world. We obtained CE Mark certification tosell the PresVIEW device in the European Union in 1997.  Since 1997, we also obtained approval tosell the PresVIEW device in Mexico, Israel, South Korea, South Africa andcertain other countries outside the United States.  We obtained significant and valuable clinical information fromthe resulting surgical procedures, which resulted in material improvements tothe PresVIEW device and the related surgical technique.

 

A portion of our revenuefrom 1997 to date has been generated from fees charged to physicians foreducation about the PresVIEW technology during seminars sponsored by us.  Virtually all of the remainder of ourrevenues from 1997 to date have been generated by the sale of surgical kits tophysicians.  A surgical kit consists ofa number of surgical instruments and quantities of PresVIEW devices required toperform the PresVIEW Procedure.  Asignificant number of these surgical kits have been purchased by physicians,which may have clinical facilities in

 

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the United States, butpurchase our products for shipment to and use in Mexico and other countriesoutside of the United States.

 

In March 2002, we awardedCIBA Vision Corp., or CIBA, the right to obtain an exclusive worldwide licenseto market and distribute the PresVIEW device and the related specializedautomated incision device, or the PresVIEW Incision System, and related disposableblades for use in the treatment of presbyopia, ocular hypertension and primaryopen angle glaucoma.  Under theagreement with CIBA, CIBA has agreed to assume responsibility for productcommercialization worldwide, and will provide adequate resources for marketing,mutually agreed upon patent protection, international regulatory approvals andmanufacturing.  CIBA has also committedits considerable expertise to co-manage, with us, the FDA approval process inthe United States.  Under the agreementwith CIBA, we will receive a percentage royalty on CIBA’s worldwide net salesof the PresVIEW device and related products. CIBA has the option to make minimum royalty payments totaling$13,585,000 in the initial five years of the agreement if CIBA wishes tomaintain its rights to an exclusive license. In connection with signing the agreement, we received a $2,000,000advance royalty payment from CIBA.  CIBAhas also committed to purchase up to $5,000,000 in common equity under certainconditions, including $1,250,000 it purchased in the initial tranche of theprivate placement that closed on March 6, 2003.  CIBA has committed an additional $1,250,000 to be funded underthe second tranche of the private placement (See “*Liquidity and Capital Resources*”).  In addition, CIBA has agreed to pay usadditional amounts of up to $4,000,000 in conjunction with the achievement ofcertain FDA-related milestones.

 

As a result of the CIBAagreement and as long as CIBA maintains its exclusive rights under its licenseagreement, we will not be generating future revenues from either seminars orkit sales for the PresVIEW device and related products.  We anticipate that future revenues will begenerated from royalties on PresVIEW products sales by CIBA and from milestonepayments CIBA makes under the agreement.

 

See *“Liquidity and Capital Resources”* belowfor a discussion of our expected cash inflows, cash requirements, and operatingplan for the next twelve months.

 

***Application of Critical Accounting Policies***

 

The process of preparingfinancial statements in conformity with accounting principles generallyaccepted in the United States requires the use of estimates and assumptions to determinecertain of the assets, liabilities, revenues and expenses.  These estimates and assumptions are basedupon the best information available at the time.  These estimates and assumptions could change materially asconditions within and beyond our control change.  Accordingly, actual results could differ materially from theseestimates.  The following are the mostsignificant accounts affected by these estimates.

 

*Revenue recognition*– Revenue from the sale of products is recognized upon shipment of the productto the customer.  Seminar revenue isrecognized upon performance of the service. Royalty and milestone revenue will be recognized when earned.  Under the agreement with CIBA, CIBA is notrequired to provide information with respect to the calculation of the royaltypayment until 60 days after the end of each quarter.  CIBA has indicated that it will provide the necessary informationon a timely basis to allow us to file quarterly statements with the U.S. Securitiesand Exchange Commission (the “SEC”) as required.  However, to the extent that CIBA does not provide royaltyinformation in time for us to meet our required financial reporting deadlines,we may be required to estimate the amount of royalties earned each quarter,which may differ from the actual royalties earned when finally reported byCIBA.  The differences could be materialespecially in the start-up phase of sales when volumes are small and there isno history on which to base royalty earnings.

 

As a result of thesuspension of sales in 2001, as discussed below, and the agreement with CIBA,certain PresVIEW devices that were already in the hands of customers may haveto be replaced.  We have encouragedthese customers not to use their current devices until the PresVIEW IncisionSystem is available.  The sterilitydating on packaging of the PresVIEW devices may be expired by the time they areonce again prepared to perform the PresVIEW Procedure.  An estimated total liability of $50,000 hasbeen recorded for the replacement of such PresVIEW devices at their estimatedmanufacturing cost.  However, actualclaims by customers may exceed this amount and additional charges may have tobe taken.

 

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In addition, certainphysicians may have purchased surgical kits in anticipation of taking part inthe FDA trials.  As a result of theagreement with CIBA, CIBA will be selecting those physicians who actuallyparticipate.  While the physicians wereaware that the product was not yet approved for use in the United States, andwe did not sell the surgical kit with a right of refund, several of thesephysicians have informed us that if they are not selected to participate in theclinical trials, they will be seeking a refund. Currently, we are unable to determinethe amount of liability, if any, to these physicians.

 

*Income taxes* –Deferred income taxes are provided for temporary differences between the basisof assets and liabilities for tax and financial reporting purposes.  A valuation allowance is established for anyportion of a deferred tax asset for which realization is not likely.  We maintain a 100% valuation allowance ofour deferred tax asset.  The valuationallowance is subject to periodic review, and we may determine that a portion ofthe deferred tax asset may be realizable in the future.

 

*Patentcosts, trademarks, and property and equipment* – These assetsare subject to periodic review to determine our ability to recover theircost.  We must make estimates about suchrecovery based on future cash flows and other subjective data.  We, in the future, may determine that someof these costs may not be recoverable, which may require us to adjust thecarrying value by writing off all or a portion of the value of these assets.

 

# **Results of Operations**

 

*The Year Ended December 31, 2002Compared to the Year Ended December 31, 2001*

 

**Revenues. **There were no revenues for the year endedDecember 31, 2002.  Revenues for theyear ended December 31, 2001 of $230,000 consisted of seminar revenues of$67,000 and $163,000 in sales of PresVIEW devices and surgical kits.

 

The decrease in productsales resulted from our decision to suspend sales of PresVIEW devices and surgicalkits in early 2001 in order to develop an automated incision making tool, thePresVIEW Incision System, for use in the PresVIEW Procedure.  Since seminars were used by us to promotethe sale of the PresVIEW technology, these were also suspended in 2001.  In addition, as a result of the agreementwith CIBA in March 2002 discussed above, CIBA is to be responsible for allPresVIEW devices and surgical kit sales and seminars in the future.  We will not be generating future revenuesfrom either seminars or from direct product sales for the PresVIEW device andrelated products as long as CIBA maintains its exclusive rights under thelicense agreement.  We anticipate futurerevenues will be generated from royalties on product sales and from milestonepayments CIBA makes under the agreement with us.

 

**Cost of Sales. **There were no cost ofsales for the year ended December 31, 2002 as there were no revenues, asdiscussed above.  Cost of sales were$223,000 for the year ended December 31, 2001 of which $182,000 related toseminar fees and $41,000 to sales of PresVIEW devices and surgical kits.

 

**Selling, General and AdministrativeExpenses.**  For theyear ended December 31, 2002, selling, general and administrative (“ SG&A”)expenses were $952,000 compared to $1,231,000 for the same period in 2001.  SG&A expenses decreased as a result ofthe agreement with CIBA, which caused us to reduce the size of our operationssince we would no longer be responsible for sales, marketing and manufacturing.

 

Future SG&A expenseswill reflect a full year of our decreased size.  However, costs associated with the FDA trials are expected toincrease substantially once those trials are fully underway.  In addition, public company costs related topublic relations, board of director costs and transfer agent costs willincrease substantially after the merger discussed in *“Liquidity and Capital Resources”* below.

 

**Salary and Related Expenses. **For the year endedDecember 31, 2002, these expenses were $1,178,000 compared to $1,446,000 forthe year ended December 31, 2001. Salaries in 2001 reflected the additional staff hired in associationwith the FDA feasibility clinical trials and the development of the PresVIEWIncision System in 2001.  As a result ofthe agreement with CIBA, staffing was reduced for marketing, administration,FDA clinical trials and engineering functions. The full impact of these reductions will be recognized in futureperiods.

 

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**Instrument Upgrade Costs. **Instrument upgrade costswere $365,000 for the year ended December 31, 2001.  The expenses primarily related to additions and modifications tothe associated hand-held instruments provided in a surgical kit.  Instrument modifications or additions to thesurgical kit were generally provided at no charge to physicians that had previouslypurchased the surgical kit.  We wantedto ensure that physicians were using the latest instrumentation in performingthe PresVIEW Procedure.  These costsshould not be material in any future period.

 

**Inventory Adjustment Costs. **Inventory adjustment costs were $128,000 for the year endedDecember 31, 2002.  The cost primarilyrepresented inventory write-downs related to the transfer of sales andmarketing to CIBA under the agreement with CIBA discussed above.  Since the PresVIEW devices will bemanufactured by CIBA and packaged under the PresVIEW brand name, and since thesurgical instruments in our inventory will be replaced by the PresVIEW IncisionSystem or by instruments branded by CIBA, we wrote off our remaining inventoryless any expected recoveries.  Nofurther write-downs are expected in future periods.

 

**Professional Services. **Professional services feeswere $534,000 in 2002 and $1,231,000 in 2001. The decrease in professional service fees related primarily to decreasedcost of litigation initiated by us against companies and individuals allegedlyinfringing upon our patent rights partially offset by higher accounting andconsulting fees.  In the future, weexpect public company costs related to consulting fees, legal fees and auditfees will increase substantially after the merger.

 

**Research and Development Expense.** Research and development expense decreased to$167,000 for the year ended December 31, 2002 compared to $339,000 for the forthe year ended December 31, 2001.  Thedecrease was primarily related to the design, development and production ofprototypes of the PresVIEW Incision System that started in 2001.  The level of spending in 2002 decreased asmost of the engineering had been done in 2001. In the near future, research anddevelopment expenses are expected to decrease even further as testing andengineering on the PresVIEW Incision System is nearing completion.  However, we may spend additional amounts oncommercial development of the SEVFL and MED devices, as additional research anddevelopment funds become available.

 

**Depreciation and AmortizationExpense. **Depreciationand amortization expense was $123,000 for the year ended December 31, 2002compared to $119,000 for the year ended December 31, 2001.  Of the $4,000 increase for the year endedDecember 31, 2002, amortization of patents and trademarks increasedapproximately $18,000 due to patent and trademark additions during 2002 whiledepreciation decreased approximately $14,000 primarily due to the write-off ofsurplus furniture and equipment.

 

**Other Income (Expense), Net. **Other income decreased to$20,000 for the year ended December 31, 2002, compared to $273,000 for the yearended December 31, 2001.  Interestincome decreased to $21,000 from $171,000 due to the decrease in interest ratesand in cash available for investment. We have had to use our cash reserves for operations due to the lack ofrevenue after we suspended product sales. The $115,000 in other income from a legal settlement in 2001 alsocontributed to the decrease.

 

**Income Taxes.** We recorded no income tax benefit for eitherperiod.  Any benefit related to thecurrent or prior year’s loss was offset by a corresponding increase in thedeferred tax asset valuation allowance. Future use of the loss carryforwards generated during these periods maybe limited as a result of the merger of us with and into a wholly-ownedsubsidiary of Refocus.

 

**Preferred Dividends.** Preferred dividends and the accretion of thediscount on the preferred stock were $2,801,000 for the year ended December 31,2002 compared to $618,000 for the year ended December 31, 2001.  The increase was due to the July 2002agreement with the Series B preferred stockholders whereby the Series Bpreferred stockholders received approximately 1,199,837 shares of Series B preferredstock, valued at $2,455,000, in lieu of any future dividends on their shares.

 

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*The Year Ended December 31, 2001Compared to the Year Ended December 31, 2000*

 

**Revenues. **Revenues for the year ended December 31, 2001decreased to $230,000 from $1,312,000 for the year ended December 31,2000.  Seminar revenues decreased to$67,000 for the current year from $304,000 in the prior year.  The remaining decrease in revenues for theyear resulted from fewer sales of PresVIEW devices and surgical kits.

 

The decrease in seminarrevenues and product sales resulted from our decision to suspend sales of PresVIEWdevices and surgical kits in early 2001 in order to develop an automatedincision making tool, the PresVIEW Incision System, for use in the PresVIEWProcedure.  Seminars were used by us topromote the sale of the PresVIEW technology and generally were notprofitable.  Physicians paid one seminarfee and could attend any number of subsequent seminars at no charge to stay apprisedof any changes in the PresVIEW Procedure. As a result of our decision to suspend sales in 2001, substantiallyfewer first-time physicians paid for attendance at seminars in 2001.

 

**Cost of Sales. **Cost of sales decreased to$223,000 for the year ended December 31, 2001 from $523,000 for the year endedDecember 31, 2000.  Cost of salesrelated to seminar fees were $182,000 for the year ended December 31, 2001,compared to $292,000 in 2000.  Cost ofsales decreased for both seminars and product sales in line with the decreasein revenues related to our decision to suspend sales in early 2001.

 

**Selling, General and AdministrativeExpenses.**  For theyear ended December 31, 2001, SG&A expenses were $1,231,000 compared to$1,211,000 for the same period in 2000. SG&A expenses did not change materially between the periods.

 

**Salary and Related Expenses.**Forthe year ended December 31, 2001, these expenses were $1,446,000 compared to$946,000 for the year ended December 31, 2000. The increase related to additional staff hired in association with theFDA feasibility clinical trials and the development of the PresVIEW IncisionSystem.

 

**Instrument Upgrade Costs. **Instrument upgrade costsincreased to $365,000 for the year ended December 31, 2001, from $100,000 forthe same period in 2000.  The increaseprimarily related to additions and modifications to the associated hand-heldinstruments provided in a surgical kit. Instrument modifications or additions to the surgical kit were generallyprovided at no charge to physicians that had previously purchased the surgicalkit.  We wanted to ensure thatphysicians were using the latest instrumentation in performing the PresVIEWProcedure.

 

**Professional services. **Professional services increased to $1,231,000 for the year ended December31, 2001 compared to $696,000 for the year ended December 31, 2000.  The increase in professional serviceexpenses related primarily to increased cost of litigation initiated by usagainst companies and individuals allegedly infringing upon our patent rights.

 

**Research and Development Expense.** Research and development expense increased to$339,000 for the year ended December 31, 2001, compared to $213,000 for thesame period in 2000.  The increase wasprimarily related to the design, development and production of prototypes ofthe PresVIEW Incision System.

 

**Depreciation and AmortizationExpense. **Depreciationand amortization expense was $119,000 for the year ended December 31, 2001,compared to $97,000 for the year ended December 31, 2000.  Of the $22,000 increase for the year ended December31, 2001, $8,000 was from depreciation of property and equipment and $14,000was due to increased amortization of patents and trademarks.

 

**Other Income (Expense), Net. **Other income decreased to$273,000 for the year ended December 31, 2001, compared to $284,000 for theyear ended December 31, 2000.  Interestincome decreased to $171,000 from $265,000 due to the decrease in interestrates and in cash available for investment. We had to use our cash reserves foroperations due to the lack of revenue after we suspended product sales.  There was also a decrease of $32,000 inother miscellaneous income and expense items. The decreases were partially offset by $115,000 in other income from alegal settlement in 2001.

 

**Income Taxes. **We recorded no income taxbenefit for either period.  Any benefitrelated to the current or prior year’s loss was offset by a correspondingincrease in the deferred tax asset valuation allowance.

 

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**Preferred Dividends.** Preferred dividends and the accretion of thediscount on the preferred stock were $618,000 for the year ended December 31,2001 compared to $438,000 for the year ended December 31, 2000.  The increase was due principally to theincrease in the dividend rate to 12% during 2001 and the increase in the numberof Series B preferred stock outstanding after April 2000.

 

***Liquidity And Capital Resources***

 

Cash and cash equivalentswere $267,000 at December 31, 2002. This represents a decrease of $1,184,000 since December 31, 2001.  We were able to continue to fund our ongoingoperations as a result of our agreement with CIBA that was entered into inMarch 2002, pursuant to which we received a $2,000,000 advance royalty payment.  Additions to patents and trademarks were$366,000 for the year ended December 31, 2002. In addition, we spent $194,000 on expenses related to the private placementdiscussed below.

 

During 2002, we took thefollowing steps to try to reduce our cash needs:

 

•                 We entered into the agreement withCIBA, whereby CIBA agreed to assume responsibility for productcommercialization worldwide, and provide adequate resources for marketing,mutually agreed upon patent protection, international regulatory approvals andmanufacturing.  CIBA has also committedits considerable expertise to co-manage with us the FDA approval process in theUnited States.  This allowed us toreduce our staff and will relieve us of substantial future cash expenditures.

 

•                 In July 2002, RAS Service, LP (“RASService”) and we terminated our agreement in which RAS Service received aportion of all sales revenue for PresVIEW devices.  The $112,000 due to RAS Service as of the termination of thecontract was paid in additional shares of Series B preferred stock of PresbyCorp.

 

While these steps reducepotential cash needs in the immediate future, they do not provide sources ofcash to fund the FDA trials and our continued operations until adequate revenuefrom the agreement with CIBA is available. Although the PresVIEW device may be marketed in Europe and several othercountries in 2003 or 2004, eventual FDA approval for sale of PresVIEW devicesin the United States for treating presbyopia, primary open angle glaucoma andocular hypertension is considered essential for our success.

 

Therefore, in order toprovide additional funding to allow us to continue to operate and to providefunds that are needed for the FDA trials, we completed a merger with Refocusand a private placement of Refocus shares simultaneously with the closing ofthe merger.

 

On March 6, 2003, Refocusentered into a merger agreement with us. On March 6, 2003 (the “Merger Closing Date”), a newly createdwholly-owned subsidiary of Refocus was merged with and into us.  We were the surviving company and became awholly-owned subsidiary of Refocus.  Asa result of the private placement discussed below, immediately before themerger, the holders of our Series B preferred stock and our Series C preferredstock converted their shares into our common stock.  At the same time, we did a 2.14-to-1 reverse split resulting in11,940,144 shares of our common stock outstanding prior to the merger.  Each of our shares of  common stock then outstanding was convertedinto common stock of Refocus on a one-for-one basis.  Therefore, on the Merger Closing Date, Refocus issued 11,940,144shares of common stock to our stockholders, representing approximately 63% ofRefocus’ outstanding common stock following the merger and the funding of theinitial tranche of the private placement, in exchange for 100% of our outstandingcapital stock, subject to the assertion of appraisal rights by our former stockholders.  Following the merger, all of Refocus’business operations are conducted through us.

 

Since our formerstockholders own a majority of the issued and outstanding shares of commonstock of Refocus after the merger and the private placement, this transactionis being accounted for as a reverse merger whereby Presby is deemed, for accountingpurposes, to be the acquirer of Refocus. Because Refocus did not have any significant business prior to themerger and its former operations are being discontinued, there is no goodwillor other intangibles that will arise from the merger.

 

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Our stock optionsoutstanding at the time of the merger were assumed by Refocus when it adoptedour amended and restated stock option plan.

 

In connection with themerger, Refocus completed a private placement of shares of its common stockthat is being consummated in two tranches with 50% of the total subscribed paidwith each tranche.  The first trancheclosed on the Merger Closing Date. Refocus received approximately $5,148,000 for 2,875,000 shares ofRefocus common stock, net of agent and finder fees.  An estimated $570,000 in additional costs for legal, audit, andother private placement costs are to be offset against the proceeds receivedfrom the common stock issued.  Inaddition, each share of common stock issued carried a detachable warrant topurchase one-half share of Refocus common stock at $2.50 per share.  Total warrants for 1,437,500 shares ofRefocus common stock were issued to these investors.  In addition, 12,500 shares of Refocus common stock, warrants topurchase 1,250,000 shares of Refocus common stock at $2.50 per share andwarrants to purchase 50,000 shares of Refocus common stock at $2.00 per sharewere issued to agents and others involved in the private placement.  Therefore, with the 4,097,107 shares ofRefocus common stock outstanding prior to the merger and private placement,there are a total of 18,924,751 shares of Refocus common stockoutstanding.  There are warrants topurchase a total of 2,737,500 shares of Refocus common stock and options topurchase 719,486 shares of Refocus common stock outstanding at the MergerClosing Date.

 

Investors whoparticipated in the first tranche were required to irrevocably commit to thesecond tranche, with the remaining 50% being funded at the closing of thesecond tranche.  The closing of thesecond tranche will occur when certain milestones are met.  The date on which these milestones will beachieved is not known, but it could be some time before we receive suchfunds.  The second tranche investmentcommitment is secured by the shares issued in the first tranche.  Upon the closing of the second tranche, anadditional 2,912,500 shares of common stock with warrants attached for1,437,500 shares of common stock at $2.50 per share are expected to be issuedfor proceeds of approximately $5,650,000, net of agent and finders fees andbefore offering expenses.

 

Finally, Refocus willseek to find an agent to conduct a post-closing private placement.  The post-closing private placement offeringmay include the sale of up to $2,500,000 of Refocus common stock andwarrants.  In the event that at least$1,000,000 is not raised within six months of the Merger Closing Date, an agenthas subscribed to purchase that number of shares of our common stock at $2.00per share in order to satisfy the deficiency between the amount of additionalcapital successfully raised and $1,000,000. We expect that at least 500,000 shares of Refocus common stock with250,000 warrants attached will be issued. It is expected that additional warrants to purchase 400,000 shares ofcommon stock at $2.50 per share will be issued to the agents involved in thepost-closing private placement.

 

While we have generatedsubstantial income tax loss carryforwards of approximately $9,955,000, the availabilityof such loss carryforwards to reduce future income tax liabilities is subjectto various limitations under the Internal Revenue Code of 1986 (the “Code”) includinglimitations upon the utilization of loss carryforwards in the event of anownership change (as defined in the Code). We believe that an ownership change may have occurred as a result of themerger.  As a result, there will beannual limitations on the amount of tax loss carryforwards that can beutilized.  The exact annual limitationdepends on the value of the transaction and current interest rates as of thetime of the merger.

 

On February 25, 2003, Dr.Ronald A. Schachar, our founder and Chief Scientist, entered into a Severance,Release and Consulting Agreement with us. In accordance with such agreement, Dr.Schachar resigned as an officer, director and employee as of the date of theclosing of the merger.  We agreed toretain Dr. Schachar as a consultant for a period of up to five years, and heagreed not to compete with us during that time.  Dr. Schachar will assist us for a limited time in conductingresearch and development on our products for the treatment of ARMD, maintenanceof our patent portfolio and other matters. Subject to certain conditions, Dr. Schachar will be paid an aggregate of$1,750,000 over the consulting period of which $950,000 will be paid in thefirst two years.  The timing of theremaining $800,000 due in years three through five is partially dependent onour profitability in those years; however, Dr. Schachar is guaranteed to receivea minimum of $250,000 but not more than $400,000 for each of the third andfourth years with the remainder, if any, to be paid in the fifth year.  As security for the payment of hisconsulting fees, we granted Dr. Schachar a security interest in our patentrights relating to the SEVFL and ARMD devices and patent applications.  Dr. Schachar also received from us anassignment of our patents for the ARMD

 

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device outside the UnitedStates, which is revocable upon certain conditions.  At December 31, 2002, the carrying value of the patents wetransferred was approximately $121,000.

 

In order to provide fundsto continue our operations until the Merger Closing Date, certain shareholders,directors and others provided a bridge loan of $250,000 on February 26, 2003 tothe Company.  The loan accrued interestat 12% and matured at the Merger Closing Date. Except for $25,000 which was repaid in cash, the remainder of the bridgeloan was used to purchase shares in the initial tranche of the privateplacement.

 

We have estimated thatadditional legal, audit, consulting, transfer agent and other public companycosts would be approximately $1,470,000 during the first year after the mergerand private placement. Included in these cost are consulting fees to two of theagents involved in the private placement. In addition to the fees and warrants received by these agents, the Companyhas signed one-year consulting agreements with the agents to provide certainservices related to long-range financial planning and investor relations.  Each of the firms will be paid $180,000 plusexpenses over a period of twelve months for their services.  We have also agreed to register for resaleunder the Securities Act of 1933 the shares of Refocus common stock and sharesof Refocus common stock acquirable upon exercise of the warrants issued in theprivate placement within 180 days of the Merger Closing Date, or sooner uponcertain conditions being met. Additionally, as consideration for entering into agreements restrictingthe transfer of their securities, we have agreed to register the securitiesreceived by our former stockholders. Therefore, besides the additional public company costs that will be incurredby us after the merger, we will also incur costs associated with registeringthese shares.

 

We expect to useapproximately $3,400,000 over the next 15 months to fund our FDA clinicaltrials.  This will be the main focus ofour operations for the next year.  Theremaining proceeds of the private placement, as long as they are available,will be used to fund operations, any cost overruns on the FDA trials, investorrelations and SEC compliance costs and research and development costs for othernew products, such as the SEVFL and ARMD products.  However, we believe these research and development costs will bevery limited until adequate cash flow is achieved under our CIBA agreement and,therefore, believe the research will not result in a new revenue source in thenear future.

 

We cannot be assured thatthe funds received in the initial tranche of the private placement, and thefunds to be received within six months from the post-closing private placement,will be adequate to complete the FDA trials and pay other operating expenses untiladequate revenues are achieved from royalties and milestone payments fromCIBA.  We also cannot be assured that bythe time we need additional funds, that the milestones required before thesecond tranche is funded will have been met. Nor can we be assured that we may not need to find additional financingand that this additional financing will be available on terms acceptable to us.

 

***Other***

 

In June 2001, theFinancial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“ SFAS”)No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other IntangibleAssets”.  SFAS No. 141, among otherthings, eliminates the pooling of interests method of accounting for businessacquisitions entered into after June 30, 2001. SFAS No. 142 requires companies to use a fair-value approach todetermine whether there is impairment of existing and future goodwill.  In August 2001, FASB issued SFAS No. 144“Accounting for Impairment of Long-Lived Assets”.  SFAS No. 144 supersedes SFAS No. 121 “Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and APB No.30 “Reporting the Effects of Disposal of a Segment of a Business andExtraordinary, Unusual and Infrequently Occurring Events and Transactions” andcombines the two accounting models into a single model based on the frameworkestablished in SFAS No. 121.  We wererequired to implement these pronouncements for the fiscal year beginningJanuary 1, 2002.  The implementation ofthese pronouncements did not have a material impact on our results ofoperations or financial condition.

 

In June 2001, FASB alsoissued SFAS No. 143 “Accounting for Asset Retirement Obligations” that addressesasset retirement obligations that result from the acquisition, construction ornormal operation of long-lived assets. It requires companies to recognize asset retirement obligations as aliability when the liability is incurred at its fair value.  We have elected the early adoption of thisstandard effective January 1, 2002. There was no impact on our results of operations or financial conditionas a result of the early adoption of the standard.

 

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In April 2002, FASBissued SFAS No. 145 “Rescission of FASB Statements No. 4, 44 and 64, Amendmentof FASB Statement No. 13, and Technical Corrections”.        SFAS No. 13 is amended to eliminate any inconsistency betweenthe required accounting for sale leaseback transactions and the requiredaccounting for certain lease modifications that have economic effects that aresimilar to leaseback transactions.  Thisstatement also amends other existing authoritative pronouncements to makevarious technical corrections, clarify meanings, or describe theirapplicability under changed conditions. We will be required to adopt this standard in our fiscal year beginningJanuary 1, 2003.  We do not believe thatthere will be a material impact on our results of operations or financialcondition as a result of the adoption of this standard.

 

In June 2002, FASB issuedSFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”.  This statement requires recording costsassociated with exit or disposal activities at their fair value when aliability has been incurred.  Under previousguidance, certain exit costs were accrued upon management’s commitment to anexit plan, which is generally before an actual liability has beenincurred.  The provisions of thisstatement are effective for exit or disposal activities that are initiatedafter December 31, 2002.  This standardwill not have a material impact on our results of operations or financialcondition.

 

In November 2002, theFASB issued Interpretation No. 45 (“FIN45”) “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers”.  This interpretation elaborateson the disclosures to be made by a guarantor in its interim and annualfinancial statements about its obligations under certain guarantees that it hasissued.  It also clarifies that aguarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  The disclosure requirementsand initial measurement requirements of FIN45 are effective prospectively forguarantees issued or modified after December 31, 2002.  We are not a party to any agreement in whichwe are a guarantor of indebtedness of others. Accordingly, the pronouncement is currently not applicable to us.

 

In December 2002, FASBissued SFAS No. 148 “Accounting for Stock-Based Compensation – Transition andDisclosure”.  This statement amends SFASNo. 123 “Accounting for Stock-Based Compensation” and provides alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  This statement also amends the disclosure requirements of SFASNo. 123 to require more prominent and frequent disclosures in financialstatements about the effects of stock-based compensation.  The transition guidance and annualdisclosure provisions of SFAS No. 148 are effective for financial statements issuedfor fiscal years ending after December 15, 2002.  We adopted this pronouncement effective January 1, 2002.  The adoption did not have a material impacton our results of operations or financial condition.

 

**ITEM 7. FINANCIAL STATEMENTS**

 

The audited financialstatements and related footnotes of Presby Corp and Subsidiaries can be foundbeginning with the Index to Consolidated Financial Statements following PartIII of this Annual Report on page F-1.

 

**ITEM 8.****    CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE**

 

The information requiredby this item has been previously disclosed by the registrant.

 

**PART III**

 

The information called for byPart III Items 9, 10, 11 and 12 is incorporated herein by reference to ourdefinitive Proxy Statement for our Annual Meeting of Stockholders which isexpected to be filed with the Securities and Exchange Commission within 120days of December 31, 2002.

 

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**ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)                                  Exhibits

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                   |
|-----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                              |
| 2.1             |   | Agreement of Merger and  Plan of Reorganization, dated as of March 6, 2003, by and among the  Registrant, Refocus Acquisition Corp. and Presby Corp  (Filed as Exhibit 2.1 to the registrant’s  Current Report on Form 8-K filed March 12, 2003 and incorporated herein by  reference.) |
|            |   |                                                                                                                                                                                                                                                                                              |
| 3.1             |   | Certificate of  Incorporation of the Registrant, dated as of January 10, 2003.  (Filed as Exhibit 3.1 to the registrant’s  Current Report on Form 8-K filed March 12, 2003 and incorporated herein by  reference.)                                                                      |
|            |   |                                                                                                                                                                                                                                                                                              |
| 3.2             |   | Bylaws of the  Registrant.  (Filed as Exhibit 3.2 to  the registrant’s Current Report on Form 8-K filed March 12, 2003 and  incorporated herein by reference.)                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                              |
| 4.1             |   | Form of common stock  certificate.  (Filed as Exhibit 4.1 to  the registrant’s Current Report on Form 8-K filed March 12, 2003 and  incorporated herein by reference.)                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                              |
| 4.2             |   | Form of Warrant to  Purchase Common Stock, issued to certain investors, at $2.50 per share,  expiring March 6, 2006.  (Filed as  Exhibit 4.2 to the registrant’s Current Report on Form 8-K filed March 12,  2003 and incorporated herein by reference.)                                |
|            |   |                                                                                                                                                                                                                                                                                              |
| 4.3             |   | Form of Warrant to  Purchase Common Stock, issued to certain advisors, at $2.50 per share, expiring  March 6, 2006.  *                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                              |
| 4.4             |   | Form of Warrant to  Purchase Common Stock, issued to certain advisors, at $2.50 per share, expiring  March 6, 2006.  *                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                              |
| 4.5             |   | Form of Warrant to  Purchase Common Stock, issued to an advisor, at $2.00 per share, expiring  March 6, 2008.  *                                                                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                              |
| 10.1            |   | Amended and Restated  Presby Corp 1997 Stock Option Plan.   (Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed  March 12, 2003 and incorporated herein by reference.)                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                              |
| 10.2            |   | Presby Corp Employees  Savings Plan.  (Filed as Exhibit 10.2  to the registrant’s Current Report on Form 8-K filed March 12, 2003 and  incorporated herein by reference.)                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                              |
| 10.3            |   | Confidentiality Letter  Agreement, dated as of May 5, 1999, by and between RAS Holding Corp. and CIBA  Vision Corporation.  (Filed as Exhibit  10.3 to the registrant’s Current Report on Form 8-K filed March 12, 2003 and  incorporated herein by reference.)                         |
|            |   |                                                                                                                                                                                                                                                                                              |
| 10.4            |   | Secrecy Agreement,  dated as of August 21, 2001, by and among CIBA Vision Corporation, RAS  Holding Corp. and Presby Corp  (Filed  as Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed March  12, 2003 and incorporated herein by reference.)                          |
|            |   |                                                                                                                                                                                                                                                                                              |
| 10.5.1          |   | License Agreement,  dated as of March 6, 2002, by and between Presby Corp and CIBA Vision  AG.  (Filed as Exhibit 10.5.1 to the  registrant’s Current Report on Form 8-K filed March 12, 2003 and incorporated  herein by reference.)                                                   |
|            |   |                                                                                                                                                                                                                                                                                              |
| 10.5.2          |   | First Amendment to  License Agreement, dated as of March 11, 2003, by and between Presby Corp and  CIBA Vision AG.  (Filed as Exhibit  10.5.2 to the registrant’s Current Report on Form                                                                                                |

 

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|   |   | 8-K filed March 12,  2003 and incorporated herein by reference.)                                                                                                                                                                                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.6   |   | Employment Agreement,  dated as of April 24, 1998, by and between RAS Holding Corp. and Mark A. Cox,  and  as amended December 1, 2002.  (Filed as Exhibit 10.6 to the registrant’s  Current Report on Form 8-K filed March 12, 2003 and incorporated herein by  reference.)    |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.7   |   | Employee  Confidentiality and IP Rights Agreement, dated July 1997, by and between  Presby Corp. and Mark A. Cox.  (Filed  as Exhibit 10.7 to the registrant’s Current Report on Form 8-K filed March  12, 2003 and incorporated herein by reference.)                               |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.8   |   | Employment Agreement,  dated as of September 5, 2002, by and between Presby Corp and Terence A.  Walts.  (Filed as Exhibit 10.8 to the  registrant’s Current Report on Form 8-K filed March 12, 2003 and incorporated  herein by reference.)                                         |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.9   |   | Non-Qualified Stock  Option Agreement with Terence A. Walts, dated as of September 1, 2002.  (Filed as Exhibit 10.9 to the registrant’s  Current Report on Form 8-K filed March 12, 2003 and incorporated herein by  reference.)                                                     |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.10  |   | Severance, Release and  Consulting Agreement, dated as of February 25, 2003, by and between Presby  Corp and Ronald A. Schachar, M.D., Ph.D.   (Filed as Exhibit 10.10 to the registrant’s Current Report on Form 8-K  filed March 12, 2003 and incorporated herein by reference.)   |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.11  |   | Amended and Restated  Registration Rights Agreement, dated as of June 22, 2000, by and among RAS  Holding Corp. and the parties named therein.   (Filed as Exhibit 10.11 to the registrant’s Current Report on Form 8-K  filed March 12, 2003 and incorporated herein by reference.) |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.12  |   | Form of Promissory  Note, dated as of February 26, 2003, made by Presby Corp in favor of six  lenders for $250,000 aggregate principal amount.  (Filed as Exhibit 10.12 to the registrant’s Current Report on  Form 8-K filed March 12, 2003 and incorporated herein by reference.)  |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.13  |   | Advisory Agreement,  dated as of March 3, 2003, by and between the Registrant and Verus Support  Services Inc.  (Filed as Exhibit 10.13  to the registrant’s Current Report on Form 8-K filed March 12, 2003 and  incorporated herein by reference.)                                 |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.14  |   | Advisory Agreement,  dated as of March 4, 2003, by and among the Registrant and Kingsdale Capital  Corporation and its affiliates.   (Filed as Exhibit 10.14 to the registrant’s Current Report on Form 8-K  filed March 12, 2003 and incorporated herein by reference.)             |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.15  |   | Indemnification  Agreement, dated as of March 6, 2003, by and among the Registrant, Daniel  Gunter and Adrienne Beam.  (Filed as  Exhibit 10.15 to the registrant’s Current Report on Form 8-K filed March 12,  2003 and incorporated herein by reference.)                          |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.16  |   | Form of Lock-Up Letter  by and between the Registrant and holders of Presby Corp common stock.  (Filed as Exhibit 10.16 to the  registrant’s Current Report on Form 8-K filed March 12, 2003 and incorporated  herein by reference.)                                                 |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.17  |   | Form of Lock-Up Letter  by and between the Registrant and holders of Presby Corp Series B preferred  stock.  (Filed as Exhibit 10.17 to the  registrant’s Current Report on Form 8-K filed March 12, 2003 and incorporated  herein by reference.)                                    |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.18  |   | Form of Lock-Up Letter  by and between the Registrant and holders of Presby Corp Series C preferred  stock.  (Filed as Exhibit 10.18 to the  registrant’s Current Report on Form 8-K filed March 12, 2003 and incorporated  herein by reference.)                                    |
|   |   |                                                                                                                                                                                                                                                                                           |
| 10.19  |   | Form of Subscription  Agreement.  (Filed as Exhibit 10.19 to  the registrant’s Current Report on Form 8-K filed March 12, 2003 and  incorporated herein by reference.)                                                                                                               |

 

39

----

 
| 10.20  |   | Letter Agreement, dated  as of March 6, 2003, by Verus Support Services Inc. and acknowledged by the  Registrant relating Verus’s contingent subscription.  (Filed as Exhibit 10.20 to the  registrant’s Current Report on Form 8-K filed March 12, 2003 and incorporated  herein by reference.) |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                            |
| 10.21  |   | Letter Agreement, dated  as of March 4, 2003, by and between Registrant and Insite Productions,  LLC.  (Filed as Exhibit 10.21 to the  registrant’s Current Report on Form 8-K filed March 12, 2003 and incorporated  herein by reference.)                                                           |
|   |   |                                                                                                                                                                                                                                                                                                            |
| 21.1   |   | Subsidiaries of the  Registrant. *                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                            |
| 99.1   |   | Financial Statements  and Independent Auditor’s Report of Refocus Group, Inc. for December 31, 2002  and 2001.  *                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                            |
| 99.2   |   | Certification of Chief  Executive Officer required by Sarbanes-Oxley Act of 2002.  *                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                            |
| 99.3   |   | Certification of Chief  Financial Officer required by Sarbanes-Oxley Act of 2002.  *                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                            |
|        |
|   |   | * Filed herewith.                                                                                                                                                                                                                                                                                               |

 

(b)           Reports on Form 8-K

 

During the three monthsended December 31, 2002, we did not file any Current Reports on Form 8-K.

 

Since December 31, 2002until the date of the filing of this Annual Report on 10-KSB, we have filed thefollowing reports on Form 8-K:

 

Form 8-K dated March 6,2003 (filed on March 11,2003) which announced the merger of Presby Corp into asubsidiary of Refocus Group, Inc. and the private placement of Refocus commonstock.

 

Form 8-K dated March 6,2003 (filed on March 12, 2003) which contained, among other things, a detaileddescription of the acquisition by merger of Presby Corp, the private placementconsummated by the company, the business of the company and the company’s boardof directors, executive officers and principal stockholders following themerger.

 

Form 8-K/A dated March 6,2003 (filed on March 19, 2003) which contained the audited financial statementsof Presby Corp for the three fiscal years ended December 31, 2002, management’sdiscussion and analysis of Presby Corp’s results of operations and financialcondition, and the pro forma financial information of the combined Presby andRefocus.

 

Form 8-K dated March 14,2003 (filed March 19, 2003) which announced the change in the independentpublic accountants of Refocus Group, Inc..

 

**ITEM 14.   CONTROLS ANDPROCEDURES.**

 

Within 90 days prior tothe date of this annual report, an evaluation was performed under thesupervision and with the participation of Company’s management, including theChief Executive Officer and Chief Financial

 

40

----

 

Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Exchange Act rules 13a-14 and 15d-14).  Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective in timely accumulating andcommunicating to them material information related to the Company and itsconsolidated subsidiaries that are required to be included in our periodicreports to the Securities and Exchange Commission.  There have been no significant changes in the Company’s internalcontrols, or in other factors that could significantly affect these controls,subsequent to the date the Chief Executive Officer and Chief Financial Officercompleted their evaluation.

 

41

----

 

**SIGNATURES**

 

In accordance withSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|           |   | Refocus Group, Inc.                                                                                  |
|----------------|--------|------------------------------------------------------------------------------------------------------|
|           |   |                                                                                                 |
|           |   |                                                                                                 |
|           | By     | /s/ Mark A. Cox                                                                                      |
|           |   | Mark A. Cox                                                                                          |
| March 28, 2003 |   | Vice  President, Secretary and Chief Financial Officer  (Principal Financial and Accounting Officer) |
|           |   |                                                                                                 |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Corporation and in thecapacities and on the dates indicated.

 

**PrincipalExecutive Officers:**

 

 
| /s/ Terence A. Walts       |   |                                                                                                 |           |
|----------------------------|--------|------------------------------------------------------------------------------------------------------|----------------|
| Terence A. Walts           |   | Director, Chief  Executive Officer  and President (Principal Executive Officer)                      | March 28, 2003 |
| /s/Mark A. Cox             |   |                                                                                                 |           |
| Mark A. Cox                |   | Vice President,  Secretary and Chief Financial Officer  (Principal Financial and Accounting Officer) | March 28, 2003 |
|                       |   |                                                                                                 |           |
| **Additional Directors:**  |   |                                                                                                 |           |
|                       |   |                                                                                                 |           |
| /s/ C. Glenn Bradley       |   |                                                                                                 |           |
| C. Glenn Bradley, Ph.D.    |   | Director                                                                                             | March 28, 2003 |
|                       |   |                                                                                                 |           |
| /s/Abbey J. Butler         |   |                                                                                                 |           |
| Abbey J. Butler            |   | Director                                                                                             | March 28, 2003 |
|                       |   |                                                                                                 |           |
| /s/ Melvyn J. Estrin       |   |                                                                                                 |           |
| Melvyn J. Estrin           |   | Director                                                                                             | March 28, 2003 |
|                       |   |                                                                                                 |           |
|  /s/ Peter C. Hobbins |   |                                                                                                 |           |
| Peter C. Hobbins, Ph.D.    |   | Director                                                                                             | March 28, 2003 |
|                       |   |                                                                                                 |           |
| /s/ Grady E. Schleier      |   |                                                                                                 |           |
| Grady E. Schleier          |   | Director                                                                                             | March 28, 2003 |
|                       |   |                                                                                                 |           |
| /s/ Robin G. Terrell       |   |                                                                                                 |           |
| Robin G. Terrell           |   | Director                                                                                             | March 28, 2003 |
|                       |   |                                                                                                 |           |
| /s/ David A. Williams      |   |                                                                                                 |           |
| David A. Williams          |   | Director                                                                                             | March 28, 2003 |

 

42

----

 

###### **CERTIFICATION OF CHIEF EXECUTIVE OFFICER**

 

I,Terence A. Walts, certify that:

 

1.               I have reviewedthis annual report on Form 10-KSB of Refocus Group, Inc.;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of a materialfact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              Presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              All significantdeficiencies in the design or operation of internal controls which could adverselyaffect the registrant’s ability to record, process, summarize and reportfinancial data and have identified for the registrant’s auditors any materialweaknesses in internal controls; and

 

b)             Any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Dated: March 28, 2003

 

 
|   | /s/ Terence A. Walts    |   |
|--------|-------------------------|--------|
|   | Terence A. Walts        |
|   | Chief Executive Officer |

 

43

----

 

**CERTIFICATIONOF CHIEF FINANCIAL OFFICER**

 

I,Mark A. Cox, certify that:

 

1.               I have reviewedthis annual report on Form 10-KSB of Refocus Group, Inc.;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of a materialfact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              Presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              All significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

b)             Any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Dated: March 28, 2003

 

 
|   | /s/ Mark A. Cox         |   |
|--------|-------------------------|--------|
|   | Mark A. Cox             |
|   | Chief Financial Officer |

 

44

----

 

**PRESBYCORP AND SUBSIDIARIES**

 

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Independent Auditors’  Report                                                                                      |
|-------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                    |
| Consolidated Balance Sheets  - December 31, 2002 and 2001                                                               |
|                                                                                                                    |
| Consolidated  Statements of Operations - For the Three Years Ended December 31, 2002                                    |
|                                                                                                                    |
| Consolidated  Statements of Shareholders’ Equity (Deficiency) - For the Three Years Ended  Ended December 31, 2002 |
|                                                                                                                    |
| Consolidated  Statements of Cash Flows - For the Three Years Ended December 31, 2002                                    |
|                                                                                                                    |
| Notes to  Consolidated Financial Statements - For the Three Years Ended December 31,  2002                              |

 

F-1

----

 

INDEPENDENT AUDITORS’ REPORT

 

Board of DirectorsPresby Corp

 

We have audited theaccompanying consolidated balance sheets of Presby Corp and subsidiaries (the“Company”), as of December 31, 2002 and 2001 and the related consolidatedstatements of operations, shareholders’ equity (deficiency), and cash flows foreach of the three years in the period ended December 31, 2002.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America.  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, theconsolidated financial position of Presby Corp and subsidiaries as ofDecember 31, 2002 and 2001 and the results of their operations and theircash flows for each of the three years in the period ended December 31,2002, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

As discussed in Note 10to the financial statements, on March 6, 2003, a newly createdwholly-owned subsidiary of Refocus Group, Inc. (“Refocus”) was merged with andinto Presby Corp, with Presby Corp surviving as a wholly-owned subsidiary of Refocus.

 

 
| Deloitte & Touche  LLP |
|----------------------------|
| Ft. Worth, Texas           |
| March 6, 2003              |

 

F-2

----

 

**PRESBY CORP AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                 |   | **December  31,** |      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|
|                                                                                                                                                                                 |   | **2002**          |      | **2001** |   |
| **ASSETS**                                                                                                                                                                           |   |              |      |   |   |
|                                                                                                                                                                                 |   |              |      |   |   |
| CURRENT ASSETS:                                                                                                                                                                      |   |              |      |   |   |
| Cash and cash equivalents                                                                                                                                                            |   | $                 | 267,180   |   | $ | 1,450,712 |   |
| Accounts receivable                                                                                                                                                                  |   | 27,068            |      | 150,833 |   |
| Inventories, net                                                                                                                                                                     |   | —            |      | 132,591 |   |
| Prepaid expenses                                                                                                                                                                     |   | 83,733            |      | 54,553 |   |
| Total current assets                                                                                                                                                                 |   | 377,981           |      | 1,788,689 |   |
|                                                                                                                                                                                 |   |              |      |   |   |
| PROPERTY AND EQUIPMENT -  Net                                                                                                                                                        |   | 22,595            |      | 116,836 |   |
|                                                                                                                                                                                 |   |              |      |   |   |
| PATENT COSTS AND TRADEMARKS  - Net                                                                                                                                                   |   | 1,277,198         |      | 991,351 |   |
|                                                                                                                                                                                 |   |              |      |   |   |
| DEFERRED OFFERING EXPENSES                                                                                                                                                           |   | 194,447           |      | 128,200 |   |
|                                                                                                                                                                                 |   |              |      |   |   |
| TOTAL ASSETS                                                                                                                                                                         |   | $                 | 1,872,221 |   | $ | 3,025,076 |   |
|                                                                                                                                                                                 |   |              |      |   |   |
| **LIABILITIES  & SHAREHOLDERS' EQUITY (DEFICIENCY)**                                                                                                                             |   |              |      |   |   |
|                                                                                                                                                                                 |   |              |      |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                 |   |              |      |   |   |
| Accounts payable                                                                                                                                                                     |   | $                 | 104,194   |   | $ | 264,959 |   |
| Accrued expenses                                                                                                                                                                     |   | 190,983           |      | 232,017 |   |
| Customer deposits                                                                                                                                                                    |   | 23,000            |      | 30,000 |   |
| Total current liabilities                                                                                                                                                            |   | 318,177           |      | 526,976 |   |
|                                                                                                                                                                                 |   |              |      |   |   |
| LONG TERM LIABILITIES:                                                                                                                                                               |   |              |      |   |   |
| Advance royalty payment                                                                                                                                                              |   | 2,000,000         |      | — |   |
|                                                                                                                                                                                 |   |              |      |   |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                       |   | —            |      | — |   |
|                                                                                                                                                                                 |   |              |      |   |   |
| REDEEMABLE SERIES B  PREFERRED STOCK - 4,500,000 shares of $.001 par value authorized, 4,481,396  shares and 2,443,815 shares issued and outstanding in 2002 and 2001,  respectively |   | 9,114,144         |      | 6,261,965 |   |
|                                                                                                                                                                                 |   |              |      |   |   |
| SHAREHOLDERS' EQUITY  (DEFICIENCY):                                                                                                                                                  |   |              |      |   |   |
| Series C preferred stock:  65,000 shares of $.001 par value authorized, 21,614 shares issued and  outstanding                                                                        |   | 1,049,104         |      | 1,049,104 |   |
| Warrants for purchase of  200 shares of Series C preferred stock in 2001                                                                                                             |   | —            |      | 4,566 |   |
| Common stock: 15,000,000  shares of $.001 par value authorized, 8,830,546 shares issued and outstanding  in 2001 - PC Lens Corp                                                      |   | —            |      | 1,286 |   |
| Common stock: 30,000,000  shares of $.001 par value authorized, 13,804,699 shares issued and  outstanding                                                                            |   | 13,805            |      | 13,805 |   |
| Paid-in capital                                                                                                                                                                      |   | 6,237,651         |      | 6,164,389 |   |
| Accumulated deficit                                                                                                                                                                  |   | (16,860,660       | )         | (10,997,015 | ) |
| Total shareholders' equity  (deficiency)                                                                                                                                             |   | (9,560,100        | )         | (3,763,865 | ) |
|                                                                                                                                                                                 |   |              |      |   |   |
| TOTAL LIABILITIES AND  SHAREHOLDERS' EQUITY (DEFICIENCY)                                                                                                                             |   | $                 | 1,872,221 |   | $ | 3,025,076 |   |

 

See notes to consolidatedfinancial statements.

 

F-3

----

 

**PRESBYCORP AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
|                                                                |   | **Years ended December 31,** |       |
|---------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                |   | **2002**                     |       | **2001** | ** ** | **2000** | ** ** |
| REVENUES                                                            |   | $                            | —     |   | $ | 230,250 |   | $ | 1,311,918 |   |
|                                                                |   |                         |       |   |   |   |   |
| COST OF SALES                                                       |   | —                       |       | 223,575 |   | 522,856 |   |
|                                                                |   |                         |       |   |   |   |   |
| GROSS PROFIT                                                        |   | —                       |       | 6,675 |   | 789,062 |   |
|                                                                |   |                         |       |   |   |   |   |
| OPERATING EXPENSES:                                                 |   |                         |       |   |   |   |   |
| Selling, general and  administrative                                |   | 952,422                      |       | 1,230,541 |   | 1,210,592 |   |
| Salary and related expenses                                         |   | 1,178,088                    |       | 1,446,157 |   | 946,313 |   |
| Instrument upgrade costs                                            |   | —                       |       | 364,695 |   | 100,215 |   |
| Inventory adjustment costs                                          |   | 128,059                      |       | — |   | — |   |
| Professional services                                               |   | 534,432                      |       | 1,231,176 |   | 696,188 |   |
| Research and development                                            |   | 166,949                      |       | 339,289 |   | 213,058 |   |
| Depreciation and  amortization                                      |   | 123,403                      |       | 118,789 |   | 96,509 |   |
|                                                                |   |                         |       |   |   |   |   |
| LOSS FROM OPERATIONS                                                |   | (3,083,353                   | )          | (4,723,972 | ) | (2,473,813 | ) |
|                                                                |   |                         |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                                             |   |                         |       |   |   |   |   |
| Interest income                                                     |   | 20,577                       |       | 171,367 |   | 265,130 |   |
| Legal settlement                                                    |   | —                       |       | 115,094 |   | — |   |
| Other income (expense)                                              |   | (325                         | )          | (13,600 | ) | 18,497 |   |
| Total                                                               |   | 20,252                       |       | 272,861 |   | 283,627 |   |
| NET LOSS                                                            |   | (3,063,101                   | )          | (4,451,111 | ) | (2,190,186 | ) |
|                                                                |   |                         |       |   |   |   |   |
| Accretion of discount on  preferred stock                           |   | (23,482                      | )          | (23,501 | ) | (35,708 | ) |
| Accrued dividends on  preferred stock                               |   | (2,777,062                   | )          | (594,106 | ) | (402,595 | ) |
|                                                                |   |                         |       |   |   |   |   |
| NET LOSS APPLICABLE TO  COMMON SHARES                               |   | $                            | (5,863,645 | ) | $ | (5,068,718 | ) | $ | (2,628,489 | ) |
|                                                                |   |                         |       |   |   |   |   |
| NET LOSS PER SHARE  APPLICABLE TO COMMON SHARES - BASIC AND DILUTED |   | $                            | (0.42      | ) | $ | (0.37 | ) | $ | (0.19 | ) |
|                                                                |   |                         |       |   |   |   |   |
| AVERAGE NUMBER OF COMMON  SHARES OUTSTANDING - BASIC AND DILUTED    |   | 13,804,699                   |       | 13,796,931 |   | 13,539,053 |   |

 

See notes to consolidated financial statements.

 

F-4

----

 

**PRESBYCORP AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)**

**FOR THETHREE YEARS ENDED DECEMBER 31, 2002**

 
|                                                                                              |   | **Series B  Preferred Stock  Warrants** |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   |        |   |       |   |
|---------------------------------------------------------------------------------------------------|--------|-----------------------------------------|-------------------------------|--------|-----------------------------------------|-----------|--------------------------------|------------|-------------------------------|------------|----------------------|------------|--------------------------|------------|--------|--------|--------|------------|--------|-------------|--------|------------|--------|
|                                                                                              |   |                                    | **Series C  Preferred Stock** |   | **Series C  Preferred Stock  Warrants** |      | **PC Lens Corp  Common Stock** |       | **Presby Corp  Common Stock** |       | **Paid-in  Capital** |       | **Accumulated  Deficit** |       |   |   |
|                                                                                              |   |                                    | **Shares**                    |   | **Amount**                              |      |                           | **Shares** |                          | **Amount** |                 | **Shares** |                     | **Amount** |   |   |   | **Total**  |   |
|                                                                                              |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   |        |   |       |   |
| **COM BINED BALANCES AT  DECEM BER 31, 1999**                                                     |   | $                                       | 188,565                       |   | —                                  |      | $                              | —     |                          | $          | —               |       | 8,830,546                |       | $      | 1,286  |   | 13,164,340 |   | $           | 13,164 |       | $      | 1,676,507 |   | $ | (3,299,808 | ) | $ | (1,420,286 | ) |
| Exercise of Series B preferred stock  warrants                                                    |   | (188,565                                | )                             |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   |        |   | (188,565   | )      |
| Sales of Series C preferred stock and warrants (net of $200,867 of expenses)                      |   |                                    |                          | 21,400 |                                    |      |                           | 913,386    |                          |       |                 |       |                     |       |   |   |   | 1,025,747  |   |        |   | 1,939,133  |   |
| Beneficial conversion feature of Series C  preferred stock                                        |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   | (1,025,747 | )      |        |   | (1,025,747 | )      |
| Accretion of Series C preferred stock  beneficial conversion feature                              |   |                                    |                          |   |                                    | 1,025,747 |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   |        |   | 1,025,747  |   |
| Sale of common stock (net of $217,299 of  expenses)                                               |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     | 621,609    |   | 622    |   | 3,359,931  |   |        |   | 3,360,553  |   |
| Exercise of stock options                                                                         |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     | 2,000      |   | 2      |   | 84         |   |        |   | 86         |   |
| Accretion of discount on Series B preferred  stock                                                |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   | (35,708     | )      | (35,708    | )      |
| Accrued dividends on Series B preferred  stock                                                    |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   | (402,595    | )      | (402,595   | )      |
| Net loss                                                                                          |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   | (2,190,186  | )      | (2,190,186 | )      |
| **COM BINED BALANCES AT  DECEM BER 31, 2000**                                                     |   | —                                  |                          | 21,400 |                                    | 1,025,747 |                           | 913,386    |                          | 8,830,546  |                 | 1,286      |                     | 13,787,949 |   | 13,788 |   | 5,036,522  |   | (5,928,297  | )      | 1,062,432  |   |
| Exercise of Series C preferred stock  warrants (net of $2,609 of expenses)                        |   |                                    |                          | 214    |                                    | 23,357    |                           | (4,566     | )                             |       |                 |       |                     |       |   |   |   |       |   |        |   | 18,791     |   |
| Expiration of Series C preferred stock  warrants                                                  |   |                                    |                          |   |                                    |      |                           | (904,254   | )                             |       |                 |       |                     |       |   |   |   | 904,254    |   |        |   | —     |   |
| Sale of common stock (net of $11,595 of  expenses)                                                |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     | 11,500     |   | 12     |   | 63,143     |   |        |   | 63,155     |   |
| Exercise of stock options                                                                         |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     | 5,250      |   | 5      |   | 220        |   |        |   | 225        |   |
| Stock options granted                                                                             |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   | 160,250    |   |        |   | 160,250    |   |
| Accretion of discount on Series B preferred  stock                                                |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   | (23,501     | )      | (23,501    | )      |
| Accrued dividends on Series B preferred  stock                                                    |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   | (594,106    | )      | (594,106   | )      |
| Net loss                                                                                          |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   | (4,451,111  | )      | (4,451,111 | )      |
| **COM BINED BALANCES AT  DECEM BER 31, 2001**                                                     |   | —                                  |                          | 21,614 |                                    | 1,049,104 |                           | 4,566      |                          | 8,830,546  |                 | 1,286      |                     | 13,804,699 |   | 13,805 |   | 6,164,389  |   | (10,997,015 | )      | (3,763,865 | )      |
| Accrued dividends on Series B preferred  stock                                                    |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   | (322,195    | )      | (322,195   | )      |
| Series B preferred stock issued in lieu of  accrued dividends and in lieu of payment of dividends |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   | (2,454,867  | )      | (2,454,867 | )      |
| Series B preferred stock issued in lieu of  service fee due to RAS Service LP                     |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   | 60,642     |   |        |   | 60,642     |   |
| Expiration of Series C preferred stock  warrants                                                  |   |                                    |                          |   |                                    |      |                           | (4,566     | )                             |       |                 |       |                     |       |   |   |   | 4,566      |   |        |   | —     |   |
| Stock options granted                                                                             |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   | 7,650      |   |        |   | 7,650      |   |
| Acquisition of common stock of PC Lens Corp  by Presby Corp                                       |   |                                    |                          |   |                                    |      |                           |       |                          | (8,830,546 | )                    | (1,286     | )                        |       |   |   |   | 404        |   |        |   | (882       | )      |
| Accretion of discount on Series B preferred  stock                                                |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   | (23,482     | )      | (23,482    | )      |
| Net loss                                                                                          |   |                                    |                          |   |                                    |      |                           |       |                          |       |                 |       |                     |       |   |   |   |       |   | (3,063,101  | )      | (3,063,101 | )      |
| **CONSOLIDATED BALANCES AT  DECEM BER 31, 2002**                                                  |   | $                                       | —                        |   | 21,614                                  |      | $                              | 1,049,104  |                          | $          | —               |       | —                   |       | $      | — |   | 13,804,699 |   | $           | 13,805 |       | $      | 6,237,651 |   | $ | (16,860,660 | ) | $ | (9,560,100 | ) |

 

See notes to consolidated financial statements.

 

F-5

----

 

**PRESBYCORP AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
|                                                                         |   | **Years ended December 31,**  |       |
|------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                         |   | **2002**                           |       | **2001** | ** ** | **2000** | ** ** |
| **Cash Flows from Operating Activities:**                                    |   |                               | ** ** |   | ** ** |   | ** ** |
| Net loss                                                                     |   | $                                  | (3,063,101 | ) | $ | (4,451,111 | ) | (2,190,186 | ) |
| Adjustments to reconcile net loss to net cash used by operating  activities: |   |                               |       |   |   |   |   |
| Non-cash items in net loss:                                                  |   |                               |       |   |   |   |   |
| Depreciation and amortization                                                |   | 123,403                            |       | 118,789 |   | 96,509 |   |
| Loss on disposal of equipment                                                |   | 66,951                             |       | 600 |   | 15,026 |   |
| Loss on write-down of inventory                                              |   | 128,059                            |       | — |   | — |   |
| Loss on write-down of deferred offering expenses                             |   | 128,200                            |       | — |   | — |   |
| Compensation cost due to stock options granted                               |   | 7,650                              |       | 160,250 |   | — |   |
| Reserve on notes receivable                                                  |   | —                             |       | — |   | 25,000 |   |
| Cash provided (used) by working capital items:                               |   |                               |       |   |   |   |   |
| Accounts receivable                                                          |   | 123,765                            |       | (101,544 | ) | 67,957 |   |
| Inventories                                                                  |   | 4,532                              |       | 307,878 |   | (70,922 | ) |
| Prepaid expenses                                                             |   | (29,180                            | )          | (150,417 | ) | 9,894 |   |
| Accounts payable, accrued expenses and other liabilities                     |   | (96,522                            | )          | 125,662 |   | 10,155 |   |
| Advance royalty                                                              |   | 2,000,000                          |       | — |   | — |   |
| **Net Cash Used by Operating Activities**                                    |   | (606,243                           | )          | (3,989,893 | ) | (2,036,567 | ) |
|                                                                         |   |                               |       |   |   |   |   |
| **Cash Flows from Investing Activities:**                                    |   |                               |       |   |   |   |   |
| Additions to property and equipment                                          |   | (16,155                            | )          | (99,802 | ) | (68,347 | ) |
| Additions to patents costs and trademarks                                    |   | (365,805                           | )          | (269,558 | ) | (197,856 | ) |
| Purchase of common stock of PC Lens Corp                                     |   | (882                               | )          | — |   | — |   |
| **Net Cash Used by Investing Activities**                                    |   | (382,842                           | )          | (369,360 | ) | (266,203 | ) |
|                                                                         |   |                               |       |   |   |   |   |
| **Cash Flows from Financing Activities:**                                    |   |                               |       |   |   |   |   |
| Sale of Series B preferred stock                                             |   | —                             |       | — |   | 1,999,878 |   |
| Sale of Series C preferred stock and warrants                                |   | —                             |       | 18,791 |   | 1,939,133 |   |
| Sale of common stock                                                         |   | —                             |       | 63,155 |   | 3,360,553 |   |
| Exercise of common stock options                                             |   | —                             |       | 225 |   | 86 |   |
| Deferred offering expenses                                                   |   | (194,447                           | )          | — |   | — |   |
| **Net Cash Provided (Used) by Financing Activities**                         |   | (194,447                           | )          | 82,171 |   | 7,299,650 |   |
|                                                                         |   |                               |       |   |   |   |   |
| **Net Increase (Decrease) in Cash and Cash Equivalents**                     |   | (1,183,532                         | )          | (4,277,082 | ) | 4,996,880 |   |
| Cash and Cash Equivalents, beginning of year                                 |   | 1,450,712                          |       | 5,727,794 |   | 730,914 |   |
| **Cash and Cash Equivalents, end of year**                                   |   | $                                  | 267,180    |   | $ | 1,450,712 |   | $ | 5,727,794 |   |
|                                                                              |        |                                    |            |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

F-6

----

 

### ***PRESBYCORP AND SUBSIDIARIES***

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**FOR THE YEARS ENDED DECEMBER 2002,2001 AND 2000**

 

# **NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Principles of Consolidation:*** Theconsolidated financial statements include the accounts of Presby Corp (“Presby”)and PC Lens Corp (“PCL”) (collectively referred to as the “Company”).  The financial statements are consolidatedbecause Presby reacquired all the outstanding stock of PCL in August 2002.  The reacquisition of PCL was accounted foras a pooling since the acquisition was of an entity under common control.  All significant intercompany accounts andtransactions have been eliminated in the consolidated financial statements.

 

***Business:***  Presby was formed primarily to develop a patented medical deviceand the surgical technique to treat presbyopia, primary open angle glaucoma andocular hypertension in the human eye. Presby conducted training seminars and sold the device and the surgicalinstruments necessary to optimize the surgical technique.  Presby conducted research and development,packaging and shipping activities at its Denison, Texas facility and at itsDallas, Texas headquarters.  Sale ofPresby’s medical device product is currently restricted to internationalmarkets while Presby seeks approval of the device in the United States by theFood and Drug Administration (the “FDA”). Presby is also developing a device to be used in the treatment ofage-related macular degeneration (“ARMD”).

 

In March 2002, Presbyexecuted an agreement to license its primary intellectual property and productsto CIBA Vision (“CIBA”), the eye care unit of Novartis AG.  Under the agreement (the “CIBA Agreement”),CIBA has licensed exclusive rights in international markets to Presby’s patentsrelated to the treatment of presbyopia, ocular hypertension and primary openangle glaucoma.  At closing, CIBA paid$2,000,000 in advance royalties and has certain rights to purchase equity inPresby if Presby obtains certain investments from third parties.  Subject to certain conditions, CIBA mustpurchase equity in Presby to obtain exclusive license rights to Presby’spatents in the United States.  CIBA willmarket and sell the products worldwide at its expense, participate in themanagement of and participate in the cost of FDA clinical trials and fundpotential costs associated with mutually agreed legal protection of the relatedpatents.  CIBA will pay Presby a percentageroyalty on its net sales of all patented products and make certain payments onmilestones achieved by Presby.  CIBA isalso required to pay Presby certain minimum royalties to maintain its exclusivelicense rights.  After a transitionperiod, CIBA will also assume manufacturing and all associated costs.  Presby continues to own all of its patentrights and did not license to CIBA the patent rights associated with itsmacular degeneration device.  Inconjunction with this agreement, Presby ceased all direct marketing of the licensedproducts.  CIBA intends to marketPresby’s products under its own brand with reference to Presby on thepackaging.

 

PCL was formed primarilyto develop a patented single element variable focus lens (“SEVFL”) technology.  PCL has had no revenue for the three yearsended December 31, 2002.  In August2002, a contract with a licensing agent to market the technology expired.  During 2002, Presby determined that itshould no longer continue to fund the operations of PCL on a promissory notebasis and that it should repurchase the outstanding stock of PCL.  PCL had no source of funding other thanPresby.  The holders of PCL common stockagreed to sell the common stock back to Presby at a price per share less thanpar value.  Presby completed thepurchase of all the outstanding common stock of PCL in August 2002 at a totalcost of $882.

 

The Company hasdetermined that it currently operates in one segment, development of opticaltechnologies.

 

***Management Estimates and Significant Risks andUncertainties:*** The preparation of the financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assetsand liabilities, and the disclosure of contingent assets and liabilities, atthe dates of the financial statements and the reported amounts of revenues andexpenses during the reporting periods. Actual results could differ from these estimates.

 

F-7

----

 

The Company is subject toa number of risks and can be affected by a variety of factors.  For example, management of the Companybelieves that any of the following factors could have a significant negativeeffect on the Company’s future financial position, results of operations andcash flows: failure to keep pace with changes in the marketplace; failure todevelop and commercialize new products or product enhancements; lack of growthin demand or future acceptance of the Company’s products;  risks associated with product liability andproduct defects and errors; intense competition with other companies withgreater financial, technical and marketing resources; failure of the Company orCIBA to obtain or maintain necessary FDA clearances or approvals for products;failure to protect intellectual property; and litigation or other claimsagainst the Company.  Management of theCompany did not believe that, at December 31, 2002, the Company had adequatefunds to enable it to continue as a going concern beyond the end of 2003.  However, in March 2003, Presby completed amerger with another company and a private placement of stock as part of aseries of transactions and, as a result, the Company now has adequate funds tocontinue operations through 2003 including the ability to continue to fundPresby’s FDA trials (see Note 10).

 

***Cash and Cash Equivalents:***  Cash and cash equivalents consistprincipally of amounts held in demand deposit accounts and amounts invested infinancial instruments with initial maturities of three months or less at thetime of purchase.

 

***Inventories:***  Inventories were valued at the lower of cost (determined using anaverage cost method) or market.  During2002, as a result of the CIBA Agreement, Presby wrote off its remaininginventory at a cost of $128,059 as CIBA will be producing the devices andsurgical instruments under their brand name and, for the most part, will not beusing any of the devices or surgical instruments in Presby’s inventory.

 

***Property and Equipment:***  Property and equipment is stated atcost.  Depreciation is computed once anasset is placed in service using the straight-line method at rates designed todistribute the cost of the asset over its estimated useful life of 3 to 10years for furniture and equipment. Amortization of leasehold improvements is included in depreciation andamortization expense and is based on the lesser of the asset’s useful life orthe projected term of the lease.  Costto maintain property and equipment are charged to expense as incurred.  During 2002, the Company wrote off asubstantial portion of its fixed assets as a result of downsizing its staff andoffice space in conjunction with the business changes contemplated in the CIBAAgreement.  The loss from the disposalof excess fixed assets was $66,951. Property and equipment consisted of the following at December 31, 2002and 2001:

 

|                                           |   | **2002** |   | **2001** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|
| Furniture  and equipment                       |   | $        | 51,614 |     | $      | 251,873 |   |
| Leasehold  improvements                        |   | —   |   | 33,901   |   |
| Total                                          |   | 51,614   |   | 285,774  |   |
| Less  accumulated deprecation and amortization |   | 29,019   |   | 168,938  |   |
| Property  and equipment, net                   |   | $        | 22,595 |     | $      | 116,836 |   |

 

***Deferred Patent and Trademark Costs:***  Costs incurred in relation to patent andtrademark applications are capitalized as deferred patent and trademark costsand amortized over 17 years or the legal life of the patent or trademark.  If it is determined that a patent ortrademark will not be issued, the related application costs are charged toexpense at the time such determination is made.

 
|                          |   | **Costs** |      | **Amortization** |   | **Net** |   |
|-------------------------------|--------|-----------|-----------|------------------|--------|---------|--------|
| Presby  Patents               |   | $         | 1,167,714 |             | $      | 188,981 |   | $ | 978,733 |   |
| Presby  Trademarks            |   | 123,415   |      | 29,036           |   | 94,379  |   |
| PCL  Patents                  |   | 250,892   |      | 46,806           |   | 204,086 |   |
| Balance  at December 31, 2002 |   | $         | 1,542,021 |             | $      | 264,823 |   | $ | 1,277,198 |   |
|                          |   |      |      |             |   |    |   |
| Presby  Patents               |   | $         | 867,727   |             | $      | 129,115 |   | $ | 738,612 |   |
| Presby  Trademarks            |   | 112,158   |      | 22,114           |   | 90,044  |   |
| PCL  Patents                  |   | 196,347   |      | 33,652           |   | 162,695 |   |
| Balance  at December 31, 2001 |   | $         | 1,176,232 |             | $      | 184,881 |   | $ | 991,351 |   |

 

F-8

----

Amortization expense was$79,958, $61,262 and $47,515 for the years ended December 31, 2002, 2001 and2000, respectively.  The estimatedaggregate amortization expense for each of the succeeding five fiscal yearswill be approximately $90,700 each year.

 

***Long-Lived Assets:***  The Company reviews long-lived assets andidentifiable intangibles for impairment whenever events or circumstancesindicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and usedis measured by a comparison of the carrying value of an asset to the undiscountedexpected future cash flows generated by the asset.  If the carrying value of the asset exceeds the expected futurecash flows, an impairment exists and is measured by the amount by which thecarrying value exceeds the estimated fair value of the asset.  Management believes that no impairmentexisted at December 31, 2002.  Assets tobe disposed of are reported at the lower of their carrying value or fair valueless costs to sell.

 

***Fair Value of Financial Instruments:***  The fair value of financial instruments isdetermined by reference to various market data and other valuation techniques,as appropriate.  Unless otherwisedisclosed, the fair value of financial instruments approximates their recordedvalue due primarily to their short-term nature.

 

***Revenue Recognition:***  Presby has three main sources ofrevenue:  product sales and seminarrevenues prior to 2002 and royalty revenues beginning with the CIBA contractthat was effective in March 2002. Revenue in each of these categories is recognized when the followingfour criteria are met:

 

•                  Persuasiveevidence of an arrangement exits;

•                  Deliveryhas occurred or services have been rendered;

•                  Theselling price is fixed or determinable; and

•                  Collectibilityis reasonably assured.

 

Title passes to the buyerwhen goods are shipped for product sales. Seminar revenue is recognized upon performance of the service.  Royalty and milestone revenue will berecognized when earned under the CIBA agreement.  Presby’s products are sold without warranty or the right toreturn.  However, Presby has establisheda liability of $50,000 for possible replacement, at cost, of the patentedmedical device previously shipped which may not be usable due to package datingor as a result of the CIBA Agreement.

 

In March 2002, Presby received $2,000,000 in advanceroyalties that have been deferred.  Thisamount will be deducted from Presby’s future earned royalties at the rate of$125,000 per quarter starting in the second year after the date of the CIBAAgreement.

 

***Research and Development Costs:***  Research and development costs, includingthe costs of certain specialized equipment, are incurred to establishfeasibility and to develop the Company’s products and are charged to operations.

 

***Stock-Based Compensation:***  In January 2002, Presby elected to adopt thefair value based method of accounting for stock-based compensation as definedin Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting forStock-Based Compensation”.  Presby haselected to report the change in accounting principle using the modifiedprospective method as outlined in SFAS. No. 148 “Accounting for Stock-BasedCompensation – Transition and Disclosure” (see below).  Under this method, the stock-based employeecompensation expense charged against earnings for the year ended December 31,2002, is computed as if the fair value based accounting method had been used toaccount for all employee awards granted, modified or settled in fiscal yearsbeginning after December 15, 1994.  Forthe years ended December 31, 2001 and 2000, the compensation expense recordedwith respect to stock option grants to Presby’s employees used the intrinsicvalue method as prescribed by Accounting Principles Board Opinion No. 25“Accounting for Stock Issued to Employees” (“APB 25”).

 

The fair value of eachoption grant was estimated on the date of grant by using the Black-Scholesoption-pricing model.  The followingweighted average assumptions were used in valuing options granted in 2002 and2001 (there were no grants in 2000):

 

 

|                     |   | **2002**    |   | **2001**    |   |
|--------------------------|--------|-------------|--------|-------------|--------|
| Expected  dividend yield |   | 0.00        | %      | 0.00        | %      |
| Expected  volatility     |   | 69.80       | %      | 49.90       | %      |
| Risk-free  interest rate |   | 4.88        | %      | 4.26        | %      |
| Expected  option lives   |   | 10.00 years |   | 10.00 years |   |

 

The fair value of optionsissued in 2002 was approximately $0.51 per share and in 2001 was approximately$6.44 per share.

 

SFAS No. 123 requiresdisclosure of the pro forma effect on net income if a company continues toaccount for stock options under the provisions of APB 25 rather than thealternative fair value accounting provided under SFAS No. 123.  As a result of adopting SFAS No. 123 in 2002using the modified prospective method under the provisions of SFAS No. 148, thenet loss for the year ended December 31, 2002, which includes a charge of$7,650 related to stock-based compensation, is not different from the net lossthat would have been recognized had SFAS No. 123 been adopted at its inception.  The following table illustrates the effecton net loss and net loss per share had compensation cost for Presby’s stock optionsbeen determined based upon the fair value at the date of grant for such awardsconsistent with the provisions of SFAS No. 123.

 
|                                                                                                                                 |   | **Year ended  December 31,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                                                 |   | **2002**                     |       | **2001** | ** ** | **2000** | ** ** |
| Net  loss applicable to common shares as reported                                                                                    |   | $                            | (5,863,645 | ) | $ | (5,068,718 | ) | $ | (2,628,489 | ) |
| Add:       Stock-based employee compensation  expense included in net loss applicable to common shares |   | 7,650                        |       | 160,250 |   | — |   |
| Deduct:  Stock-based employee compensation  expense determined under fair value based methods                              |   | (7,650                       | )          | (161,000 | ) | — |   |
| Pro  forma net loss applicable to common shares                                                                                      |   | $                            | (5,863,645 | ) | $ | (5,069,468 | ) | $ | (2,628,489 | ) |
|                                                                                                                                 |   |                         |       |   |   |   |   |
| Net  loss per share applicable to common shares – basic and diluted                                                             |   | $                            | (0.42      | ) | $ | (0.37 | ) | $ | (0.19 | ) |

 

***Income Taxes:***  Deferred tax assets and liabilities areestablished for temporary differences between financial statement carryingamounts and the taxable basis of assets and liabilities using rates currentlyin effect.  A valuation allowance isestablished for any portion of a deferred tax asset for which realization isnot likely.  The deferred tax asset isreviewed periodically to determine the amount considered realizable.

 

F-9

----

 

***Loss per share:***  The net loss applicable to common shares wasused in the calculation of earnings per share for both basic and diluted lossper share.  There was no adjustment forthe calculation of diluted loss per share for dividends accrued on the sharesof  Series B convertible preferred stockoutstanding as they were anti-dilutive for the three years ended December 31,2002.  The weighted average number of commonshares outstanding for calculation of basic and diluted earnings per share wasalso the same.  Options to purchase346,350 shares in 2002, 406,425 in 2001 and 386,675 in 2000 were not includedin the computation of diluted earnings per share as the effect of including theoptions in the calculation would be anti-dilutive.  Conversion of the Company’s preferred stock was also not includedin the calculation of diluted earnings per share as it would also have beenanti-dilutive.

 

***Comprehensive Loss:***  For all years presented, comprehensive lossis equal to net loss.

 

***Reclassifications:***  Certain previously reported amounts havebeen reclassified to conform to current year presentations.

 

***Deferred Offering Expenses:***  Presby has deferred certain costs associatedwith common and preferred stock offerings until the offers are completed andthe deferred expenses are offset against the proceeds received from theofferings.  The balance of deferredoffering expenses outstanding at December 31, 2001 was written-off during theyear ended December 31, 2002 as a result of the cancellation of theoffering.  Deferred offering expenses atDecember 31, 2002 relate to a transaction whereby Presby, for accountingpurposes, acquired another company in March 2003.  See Note 10.

 

***Recently Issued Accounting Pronouncements:***  In June 2001, the FASB issued SFAS No. 141“Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets”.  SFAS No. 141, among other things, eliminatesthe pooling of interests method of accounting for business acquisitions enteredinto after June 30, 2001.  SFAS No. 142requires companies to use a fair-value approach to determine whether there isimpairment of existing and future goodwill. In August 2001, the FASB issued SFAS No. 144 “Accounting for Impairmentof Long-Lived Assets”.  SFAS No. 144supersedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets andfor Long-Lived Assets to be Disposed Of” and APB No. 30 “Reporting the Effectsof Disposal of a Segment of a Business and Extraordinary, Unusual and InfrequentlyOccurring Events and Transactions” and combines the two accounting models intoa single model based on the framework established in SFAS No. 121.  The Company was required to implement thesepronouncements for the fiscal year beginning January 1, 2002.  The implementation of these pronouncementsdid not have a material impact on the Company’s results of operations or financialcondition.

 

In June 2001, the FASBalso issued SFAS No. 143 “Accounting for Asset Retirement Obligations” whichaddresses asset retirement obligations that result from the acquisition,construction or normal operation of long-lived assets.  It requires companies to recognize assetretirement obligations as a liability when the liability is incurred at itsfair value.  The Company has elected theearly adoption of this standard effective January 1, 2002.  There was no impact on the Company’s resultsof operations or financial condition as a result of the early adoption of thestandard.

 

In April 2002, the FASBissued SFAS No. 145 “Rescission of FASB Statements No. 4, 44 and 64, Amendmentof FASB Statement No. 13, and Technical Corrections”.  SFAS No. 13 is amended to eliminate any inconsistency between therequired accounting for sale leaseback transactions and the required accountingfor certain lease modifications that have economic effects that are similar toleaseback transactions.  This statementsalso amends other existing authoritative pronouncements to make varioustechnical corrections, clarify meanings, or describe their applicability underchanged conditions.  The Company will berequired to adopt this standard in its fiscal year beginning January 1,2003.  The Company does not believe thatthere will be a material impact on its results of operations or financialcondition as a result of the adoption of this standard.

 

In June 2002, the FASBissued SFAS No. 146 “Accounting for Costs Associated with Exit or DisposalActivities”.  This statement requiresrecording costs associated with exit or disposal activities at their fair valuewhen a liability has been incurred. Under previous guidance, certain exit costs were accrued uponmanagement’s commitment to an exit plan, which is generally before an actualliability has been incurred.  Theprovisions of this statement are effective for exit or disposal activities thatare initiated after December 31, 2002. This standard will not have a material impact on the Company’s resultsof operations or financial condition.

 

F-10

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In November 2002, theFASB issued Interpretation No. 45 (“FIN45”) “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others”.  Thisinterpretation elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under certainguarantees that it has issued.  It also clarifiesthat a guarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  The disclosure requirementsand initial measurement requirements of FIN45 are effective prospectively forguarantees issued or modified after December 31, 2002.  The Company is not a party to any agreementin which it is a guarantor of indebtedness of others.  Accordingly, the pronouncement is currently not applicable to theCompany.

 

In December 2002, theFASB issued SFAS No. 148 “Accounting for Stock-Based Compensation – Transitionand Disclosure”.  This statement amendsSFAS No. 123 (see “Stock-Based Compensation” above) and provides for alternatemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  This statement also amends the disclosure requirements of SFASNo. 123 to require more prominent and frequent disclosures in financialstatements about the effects of stock-based compensation.  The transition guidance and annualdisclosure provisions of SFAS No. 148 are effective for fiscal years endingafter December 15, 2002.  Presby adoptedthis pronouncement effective January 1, 2002. The adoption did not have a material impact on the Company’s results ofoperations or financial condition.

 

# **NOTE 2.    SUPPLEMENTAL CASH FLOW AND BALANCE SHEETINFORMATION**

 

The Company did not payany interest expense or income taxes during the three years ended December 31,2002.  The following  non-cash activities occurred during theyears ended December 31, 2002, 2001 and 2000:

 
|                                                                          |   | **2002**  |   | **2001** |   | **2000**  |   |
|-------------------------------------------------------------------------------|--------|-----------|--------|----------|--------|-----------|--------|
| Accretion  of discount on Series B preferred stock                            |   | $         | 23,482 |     | $      | 23,501    |   | $ | 35,708 |   |
| Accrual  of dividends on Series B preferred stock                             |   | 322,195   |   | 594,106  |   | 402,595   |   |
| Preferred  stock issued in lieu of dividends on Series B preferred stock      |   | 2,454,867 |   | —   |   | —    |   |
| Series  B preferred stock issued to RAS Service LP in lieu of service fee due |   | 112,277   |   | —   |   | —    |   |
| Accretion  of beneficial conversion feature on Series C preferred stock       |   | —    |   | —   |   | 1,025,747 |   |
|                                                                               |        |           |        |          |        |           |        |  |  |  |

 

The following are thedetails of accrued expenses at December 31, 2002 and 2001:

 
|                                                                        |   | **2002** |    | **2001** |   |
|-----------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Accrued  salaries, wages and benefits                                       |   | $        | 46,848  |     | $      | 39,990 |   |
| Liability  for possible replacement of product already shipped (see Note 1) |   | 50,000   |    | 50,000   |   |
| Accrued  fees due to RAS Service LP                                         |   | —   |    | 112,277  |   |
| Audit  fee accrual                                                          |   | 45,000   |    | 26,000   |   |
| Accrual  of amount due on former office lease                               |   | 48,000   |    | —   |   |
| Other                                                                       |   | 1,135    |    | 3,750    |   |
| Total  accrued expenses                                                     |   | $        | 190,983 |     | $      | 232,017 |   |

 

# **NOTE 3.    REDEEMABLE PREFERRED STOCK**

 

In April 1998, Presbydesignated 4,400,000 shares of $.001 par value preferred stock as Series B andentered into a securities purchase agreement (the “Agreement”) with certaininvestors (the “Investors”).  Under thisAgreement, Presby sold 977,526 shares of Series B preferred stock and 977,526warrants for a total of $2,000,018 in 1998. The Series B preferred stock was originally presented net of issue expensesand the value assigned to the warrants together aggregating $421,528.  In February 1999, Presby sold an additional488,763 shares of Series B preferred stock for $1,000,009 under theAgreement.  In April 2000, the holdersof the Series B warrants exercised their option to purchase 977,526 shares ofSeries B preferred stock for approximately $2,000,000.  The remaining discount of $54,791 atDecember 31, 2002 will be accreted through May 2005.

 

F-11

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Each share of votingSeries B preferred stock was initially convertible at any time into 2.1 sharesof Presby’s common stock (increased to 2.52 shares during 2001 related toPresby not achieving certain performance goals) and will automatically beconverted into 2.52 shares of Presby’s common stock upon the closing of apublic offering of Presby’s stock with proceeds exceeding $20 million.  Each share initially bore cumulative annualdividends of 10% (increased to 12% in 2001 related to Presby not achieving certainperformance goals and subject to decrease for payments related to a serviceagreement (see below).  Dividends wereaccrued for payment but deferred until October 31, 2002.  In the event of liquidation of Presby,whether voluntary or involuntary, the holders of the Series B preferred stockare entitled to receive $2.046 per share (subject to adjustment) plus unpaiddividends prior to any distributions to the common stockholders.  Presby could distribute the dividends incash or additional shares of Series B preferred stock.  The Series B preferred stock is redeemableat the option of the holders after May 1, 2005.

 

Presby reached anagreement with the Investors in July 2002 (the “New Agreement”) whereby Presbyissued 2,012,344 shares of Series B preferred stock in lieu of accrueddividends on the Series B preferred stock and in lieu of any future dividendson the Series B preferred stock.  Theshares issued were valued at par value and the value of the shares over theamount of dividends accrued as of July 15, 2002 of $2,454,867 was accounted foras additional dividends on the Series B preferred stock.  The New Agreement did not change the conversionratio or the date at which the Series B preferred stock could be redeemed.  However, under the New Agreement, no futuredividends will be accrued.  Presbydesignated an additional 100,000 shares of $.001 par value preferred stock asSeries B at the time of this transaction.

 

In addition, the NewAgreement amended the automatic conversion feature of the Series B preferredstock by adding a provision that if the Company completed a sale of commonstock where the aggregate gross proceeds to the Company were at least $5 million,the Series B preferred stock would automatically be converted.  The private placement discussed in Note 10triggered the automatic conversion in March 2003.

 

Presby also entered intoa service agreement with an entity, RAS Service LP (“Service LP”), owned by theInvestors and certain employees and shareholders of Presby.  The service agreement required payments toService LP by Presby based on Presby’s sales levels.  The dividends on the Series B preferred stock were reduced by 85%of these payments.  At December 31, 2001accrued expenses included $112,277 due under the service agreement.  In conjunction with the deferral of thedividend until October 31, 2002, the payments under the service agreement werealso deferred until October 31, 2002, and the term of the service agreement wasextended until December 31, 2006.  InJuly 2002, the service agreement was cancelled, and Presby issued 25,237 sharesto Service LP in lieu of the $112,277 service fee due.  The difference in the value of the shares atpar value and the amount due Service LP of $60,642 was added to paid-incapital.

 

# **NOTE 4.    SHAREHOLDERS’ EQUITY**

 

Presby had authorized65,000 shares of Series C preferred stock and 30,000,000 shares of common stockat December 31, 2002.

 

In June 2000, Presbydesignated 65,000 shares of $.001 par value preferred stock as Series C andentered into a securities purchase agreement (the “C Agreement”) with certaininvestors.  Under the C Agreement,Presby sold 21,400 shares of Series C preferred stock and warrants exercisablefor 40,000 additional shares of Series C preferred stock for a total of$2,140,000 before expenses of $200,867 in 2000.  In determining the value of the Series C preferred stock and theSeries C warrants, the net proceeds were allocated based on their relative fairvalues.  Presby allocated $913,386 ofthe proceeds to the warrants and $1,025,747 to a beneficial conversion featurecalculated at the issuance date of the Series C preferred stock based on thedifference between the conversion price per share and the estimated marketvalue of Presby’s common stock in June 2000. Presby has accreted $1,025,747 related to the beneficial conversionfeature of the Series C preferred stock during 2000.  The Series C preferred stockholders have the right to convert atthe option of each holder into shares of Presby’s common stock.

 

Each share of votingSeries C preferred stock is initially convertible at any time into 21 shares ofPresby’s common stock and will automatically be converted into 21 shares ofPresby’s common stock upon the closing of a public offering of Presby’s stock,the defined trading of Presby’s common stock, or the conversion of a majorityof

 

F-12

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the Series B preferredstock into common stock.  In the eventof liquidation of Presby, whether voluntary or involuntary, the holders of theSeries C preferred stock are entitled to receive $100 per share (subject toadjustment) after required distributions to holders of Series B Preferred stockbut prior to any distributions to the common stockholders.  In June 2001, the holders exercised warrantsfor the purchase of 214 shares of Series C preferred stock at $100 pershare.  At December 31, 2002, nowarrants to purchase Series C preferred stock remained outstanding.

 

# **NOTE 5.    STOCK OPTION PLAN**

 

In July 1997, Presby’sBoard of Directors adopted the 1997 Stock Option Plan (the “Plan”).  The Plan provides for the issuance ofincentive stock options and non-qualified stock options to key employees,directors and independent contractors of Presby.  The total number of shares of common stock authorized andreserved for issuance under the Plan is 1,680,000 shares.  The exercise price for each incentive stockoption granted under the Plan may not be less than the fair market value of thecommon stock on the date of the grant (unless the optionee owns greater than 10% of the total combined votingpower of all classes of capital stock of Presby, in which case the exerciseprice may not be less than 110% of the fair market value of the common stock onthe date of the grant).  Unless otherwisedetermined by the Board, incentive and non-qualified stock options grantedunder the Plan have a maximum duration of ten and fifteen years, respectively,and vest in up to four equal installments.

 

In April 2001, Presbyawarded options to purchase 25,000 shares of common stock at $.09 per commonshare to an officer in conjunction with an employment agreement.  The employment agreement also requiredPresby to issue options to purchase up to an additional 25,000 common sharesdepending on certain performance criteria. In March 2002, options to purchase an additional 15,000 shares were issuedas certain performance criteria were met. As a result of the adoption of SFAS 123, the options issued in March2002 were valued using the fair value based accounting method prescribed bySFAS 123.  Compensation expense of $7,650was recognized for the year ended December 31, 2002 related to the stockoptions issued.  The options issued inApril 2001 were valued using the intrinsic value method specified by APB 25 asthe difference between the exercise price and the most recent sale price, $6.41per share, of the underlying shares subject to purchase under theagreement.  Presby recorded $160,250 incompensation expense in conjunction with the issuance of the options awarded inApril 2001.

 

The following tablesummarizes the information with respect to stock options for the three yearsended December 31, 2002 and changes during the years then ended:

 
|                            |   | **Year Ended  December 31,** |   |
|---------------------------------|--------|------------------------------|--------|
|                            |   | **2002**                     |   | **2001** |   | **2000** |   |
|                            |   | **Shares**                   |   | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   | **Shares** |   | **Weighted  Average  Exercise  Price** |   |
| Outstanding,  beginning of year |   | 406,425                      |   | $ | 0.046 |   | 386,675 |   | $ | 0.043 |   | 388,675 |   | $ | 0.043 |   |
| Granted                         |   | 15,000                       |   | $ | 0.090 |   | 25,000 |   | $ | 0.090 |   | — |   |   |   |
| Exercised                       |   | —                       |   |   |   | (5,250 | ) | $ | 0.043 |   | (2,000 | ) | $ | 0.043 |   |
| Canceled  or expired            |   | (75,075                      | )      | $ | 0.043 |   | — |   |   |   | — |   |   |   |
| Outstanding,  end of year       |   | 346,350                      |   | $ | 0.048 |   | 406,425 |   | $ | 0.046 |   | 386,675 |   | $ | 0.043 |   |
|                            |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Exercisable,  end of year       |   | 306,350                      |   |   |   | 381,425 |   |   |   | 386,675 |   |   |   |

 

 

F-13

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The following tablesummarizes outstanding options by exercise price and by weighted average yearsleft to exercise:

 
|                            |   | **December  31, 2002**   |   |
|---------------------------------|--------|--------------------------|--------|
|                            |   | **Options  Outstanding** |   | **Options  Exercisable** |   |
| **Exercise Prices**             |   | **Shares**               |   | **Weighted  Average  Years Left to Exercise** |   | **Shares** |   | **Weighted  Average  Years Left to Exercise** |   |
| $0.043                          |   | 306,350                  |   | 4.6 |   | 306,350 |   | 4.6 |   |
| $0.090                          |   | 40,000                   |   | 8.6 |   | — |   |   |   |
|                            |   | 346,350                  |   | 5.0 |   | 306,350 |   | 4.6 |   |
| Weighted average exercise price |   | $                        | 0.048  |   |   |   | $ | 0.043 |   |   |   |
|                                 |        |                          |        |  |  |  |  |  |  |  |  |

 

# **NOTE 6.    COMMITMENTS AND CONTINGENCIES**

 

The Company is involvedin various legal proceedings arising in the normal course of business.  Management believes the outcome of thesematters will not materially affect the financials position, operating resultsor cash flows of the Company.

 

Presby leases itsfacilities in Dallas, Texas and Denison, Texas.  Total lease expense was approximately $204,000, $141,000 and$117,000 for the years ended December 31, 2002, 2001 and 2000, respectively.  There were no leases with remaining terms ofone year or more at December 31, 2002.

 

F-14

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In 2001, the Companyreceived $115,094, net of legal fees, related to a legal settlement in defenseof one of the Company’s patents.  Twoadditional settlements also in the defense of the Company’s patents resulted ina net expense when netted against the associated legal expenses incurred in2001.

 

Presby carries productliability insurance coverage with a limit of $10,000,000 per occurrence and inthe aggregate.

 

A supplier has indicatedto Presby that it believes Presby has a firm order for 150 surgicalinstruments.  Management of Presby doesnot believe that there is a firm order and that it has no obligation to thesupplier.

 

Certain physicians mayhave purchased surgical kits in anticipation of taking part in future FDAtrials.  As a result of the CIBAAgreement, CIBA will be selecting those physicians who actuallyparticipate.  While the physicians wereaware that the product was not yet approved for use in the United States, andthat Presby did not sell the surgical kit with a right of refund, several ofthese physicians have informed Presby that if they are not selected toparticipate in the clinical trials, they will be seeking a refund.  Presby is currently unable to determine theamount of liability, if any, that may arise from these claims.

 

# **NOTE 7.    OTHER RELATED PARTY TRANSACTIONS**

 

Presby leases itsDenison, Texas facility under a monthly operating lease agreement with certainshareholders.  Total rent expense forthe operating lease amounted to $48,000 for each of the three years endedDecember 31, 2002.

 

Presby’s leased itsformer Dallas, Texas facilities from a substantial holder of its Series Bpreferred stock.  Due to downsizing ofits staff in conjunction with the business changes contemplated in the CIBAAgreement, Presby negotiated a settlement with its former lessor to abandonthat lease for a smaller facility. Under the contract, lease payments to the lessor of approximately$98,000 for the period from January through December 2003 were still due.  Presby negotiated a reduced lease payment of$48,000 to the lessor.  The $48,000liability was accrued in other accrued liabilities at December 31, 2002.

 

# **NOTE 8.    INCOME TAXES**

 

No provision for incometaxes has been recognized for the three years ended December 31, 2002 as theCompany incurred net operating losses for income tax purposes.  The Company did not record any federalincome tax benefit for its losses because of the uncertainty of realizing itsdeferred tax assets.  The Company hasadjusted the valuation allowance to maintain a full valuation allowance againstthe net deferred tax assets.

 

Deferred tax assets andliabilities consist of the following:

 
|                               |   | **Year Ended  December 31,** |      |
|------------------------------------|--------|------------------------------|-----------|
|                               |   | **2002**                     |      | **2001** | ** ** |
| Deferred  tax assets:              |   |                         |      |   |   |
| Net  operating loss carryforwards  |   | $                            | 3,384,800 |   | $ | 2,997,300 |   |
| Advance  royalty                   |   | 680,000                      |      | — |   |
| Stock  option compensation         |   | 57,100                       |      | 54,500 |   |
| Fixed  assets and reserves         |   | 20,000                       |      | 48,600 |   |
| Net  deferred tax asset            |   | 4,141,900                    |      | 3,100,400 |   |
| Valuation  allowance               |   | (4,141,900                   | )         | (3,100,400 | ) |
| Recognized  net deferred tax asset |   | $                            | —    |   | $ | — |   |

 

The increase in thedeferred tax asset valuation allowance for the year ended December 31, 2002 was$1,041,500.

 

F-15

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At December 31, 2002, theCompany has net operating loss carryforwards of approximately $10.0 million forincome tax purposes.  These netoperating loss carryforwards begin to expire in 2009 and may be limited intheir use due to significant changes in the Company’s ownership (see Note 10).

 

The difference betweenthe Company’s effective tax rate and the federal statutory rate of 34% are asfollows:

 
|                                  |   | **Year Ended  December 31,** |   |
|---------------------------------------|--------|------------------------------|--------|
|                                  |   | **2002**                     |   | **2001** | ** ** | **2000** | ** ** |
| Income  tax benefit at statutory rate |   | (34                          | )%     | (34 | )% | (34 | )% |
| Valuation  allowance                  |   | 34                           |   | 34 |   | 34 |   |
| Total  income tax expense             |   | 0                            | %      | 0 | % | 0 | % |

 

# **NOTE 9.    EMPLOYEE BENEFIT PLAN**

 

Presby has a retirementsavings plan under Section 401(k) of the Internal Revenue Code coveringsubstantially all employees.  Contributionsto the plan totaled $14,713, $2,500 and $0 for the years ended December 31,2002, 2001 and 2000, respectively.

 

# **NOTE 10.  SUBSEQUENT EVENTS**

 

On February 25, 2003, Dr.Ronald A. Schachar, our founder and Chief Scientist, and Presby entered into aSeverance, Release and Consulting Agreement. In accordance with such agreement, Dr. Schachar resigned as an officer,director and employee of Presby as of the date of the closing of the mergerdiscussed below.  Presby agreed toretain Dr. Schachar as a consultant for a period of up to five years, and heagreed not to compete with the Company during that time.  Dr. Schachar will assist Presby for alimited time in conducting research and development on its products for thetreatment of ARMD, maintenance of its patent portfolio and other matters.  Subject to certain conditions, Dr. Schacharwill be paid an aggregate of $1,750,000 over the consulting period of which$950,000 will be paid in the first two years. The timing of the remaining $800,000 due in years three through five ispartially dependent on the Company’s profitability in those years; however, Dr.Schachar is guaranteed to receive a minimum of $250,000 but not more than$400,000 for each of the third and fourth years with the remainder, if any, tobe paid in the fifth year.  As securityfor the payment of his consulting fees, Presby granted Dr. Schachar a securityinterest in its patent rights relating to the SEVFL and ARMD devices and patentapplications.  Dr. Schachar alsoreceived from Presby an assignment of its patents for the ARMD device outsidethe United States, which is revocable upon certain conditions.  At December 31, 2002, the carrying value ofthe patents the Company transferred was approximately $121,000.

 

On March 6, 2003, RefocusGroup, Inc. (“Refocus”) and Presby entered into a merger agreement.  On March 6, 2003 (the “Merger ClosingDate”), a newly created wholly-owned subsidiary of Refocus was merged with andinto Presby, with Presby surviving as a wholly-owned subsidiary ofRefocus.  As a result of the privateplacement discussed below, immediately before the merger, the holders of theSeries B preferred stock and the Series C preferred stock converted theirshares into common stock of Presby.  Atthe same time, Presby did a 2.14-to-1 reverse split resulting in 11,940,144shares of Presby common stock outstanding. Each of the shares of  Presbycommon stock then outstanding was converted into common stock of Refocus on aone-for-one basis.  Therefore, on theMerger Closing Date, Refocus issued 11,940,144 shares of common stock tostockholders of Presby, representing approximately 63% of Refocus’ outstandingcommon stock following the merger and the funding of the initial tranche of theprivate placement, in exchange for 100% of the outstanding capital stock ofPresby, subject to the assertion of appraisal rights by former Presbystockholders.  Following the merger, allof Refocus’ business operations are conducted through its wholly-ownedsubsidiary, Presby.

 

Since the stockholders ofPresby own a majority of the issued and outstanding shares of common stock ofRefocus after the merger and the private placement, this transaction is beingaccounted for as a reverse merger whereby Presby is deemed to be the accountingacquirer of Refocus.  Because Refocusdid not have any significant

 

F-16

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business prior to themerger and its former operations are being discontinued, there is no goodwillor other intangibles that will arise from the merger.

 

The Presby stock optionsoutstanding at December 31, 2002 were converted into options to acquire 161,851shares of Presby after the 2.14-to-1 reverse split.  The exercise price was also adjusted by multiplying the oldoption price by 2.14 to determine the new price.  In February 2003, before the Merger Closing Date, Presby adoptedan amendment to its 1997 Stock Option Plan which, for the most part, increasedthe number of shares available for issuance under the plan to 4.1 millionshares (after the 2.14-to-1 reverse split). In addition, Presby issued options to purchase 557,635 shares of commonstock of Presby (after the 2.14-to-1 reverse split) to its Chief ExecutiveOfficer as part of his employment contract. These shares were issued at the fair market value of the Refocus sharesat the Merger Closing Date.  Refocusadopted the amended and restated Presby stock option plan and all outstandingoptions were converted into the same number of options of Refocus.

 

In connection with themerger, Refocus completed a private placement of shares of its common stockthat is being consummated in two tranches with 50% of the total subscribed paidwith each tranche.  The first trancheclosed on the Merger Closing Date. Refocus received $5,147,500 for 2,875,000 shares of Refocus commonstock, net of agent and finder fees. The deferred offering costs at December 31, 2002 of $194,447 plus anestimated $570,000 in additional costs for legal, audit, and other private placementcosts are to be offset against the proceeds received from the common stockissued.  In addition, each share ofcommon stock issued carried a detachable warrant to purchase one-half share ofRefocus common stock at $2.50 per share. Total warrants for 1,437,500 shares of Refocus common stock were issuedto these investors.  In addition, 12,500shares of Refocus common stock, warrants to purchase 1,250,000 shares ofRefocus common stock at $2.50 per share and warrants to purchase 50,000 sharesof Refocus common stock at $2.00 per share were issued to agents and others involvedin the private placement.  Therefore,with the 4,097,107 shares of Refocus common stock outstanding prior to themerger and private placement, there are a total of 18,924,751 shares of Refocuscommon stock outstanding.  There arewarrants to purchase a total of 2,737,500 shares of Refocus common stock andoptions to purchase 719,486 shares of Refocus common stock outstanding at theMerger Closing Date.

 

Investors whoparticipated in the first tranche were required to irrevocably commit to thesecond tranche, with the remaining 50% being funded at the closing of thesecond tranche. The closing of the second tranche (and the funding of investorfunds in connection with the second tranche) is contingent on: (i) the  initiation of Presby’s Phase II FDA clinicaltrial for the treatment of presbyopia, (ii) the earlier of (a) approval from Health Canada (the Canadianequivalent of the FDA) to commercialize Presby’s treatment for primary openangle glaucoma and/or ocular hypertension or, (b) the completion, after theMerger Closing Date, of 500 surgical procedures in Canada and/or the EuropeanUnion for the treatment of primary open angle glaucoma or ocular hypertension.and (iii) the concurrent second tranche investment by CIBA of $1,250,000.  The second tranche investment commitment issecured by the shares issued in the first tranche. Upon the closing of the secondtranche, an additional 2,875,000 shares of common stock with warrants attachedfor 1,437,500 shares of common stock at $2.50 per share are expected to be issuedfor proceeds of approximately $5,650,000, net of agent and finders fees andbefore offering expenses.  In addition,37,500 shares of Refocus common stock are expected to be issued to agents andothers involved in the private placement.

 

Finally, Refocus willseek to find an agent to conduct a post-closing private placement.  The post-closing private placement offeringmay include the sale of up to $2,500,000 of Refocus common stock andwarrants.  In the event that at least$1,000,000 is not raised within six months of the Merger Closing Date, an agenthas subscribed to purchase that number of shares of our common stock at $2.00per share in order to satisfy the deficiency between the amount of additionalcapital successfully raised and $1,000,000. The Company expects that at least 500,000 shares of Refocus with 250,000warrants attached will be issued.  It isexpected that additional warrants to purchase 400,000 shares of common stock at$2.50 per share will be issued to the agents involved in the post-closing privateplacement.

 

While Presby hasgenerated substantial tax loss carryforwards in prior years, management ofPresby believes these loss carryforwards may be substantially reduced as aresult of an ownership change (as defined in the Internal Revenue Code of 1986,as amended) that may have occurred in connection with the merger.  However, additional work will need to bedone to determine whether an actual ownership change has occurred and theamount of loss carryforwards that would be available as a result.

 

F-17

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In order to provide fundsto the Company to continue its operations until the Merger Closing Date,certain shareholders, directors and others provided a bridge loan of $250,000on February 26, 2003 to the Company. The loan accrued interest at 12% and matured at the Merger ClosingDate.  Except for $25,000 which wasrepaid in cash, the remainder of the bridge loan was used to purchase shares inthe initial tranche of the private placement.

 

In addition to fees andwarrants received by agents involved in the private placement, the Company hassigned one-year consulting agreements with two of the agents to provide certainservices related to long-range financial planning and investor relations.  Each of the firms will be paid $180,000 plusexpenses over a period of twelve months for their services.

 

The difference in the netloss of the Company as presented and the pro forma net loss as if the mergerhad taken place at the beginning of the year ended December 31, 2002 orDecember 31, 2001 are immaterial as the loss reported by Refocus was $60,640and $25,584 for the years ended December 31, 2002 and 2001, respectively.  Refocus had no revenues and had no provisionsfor income taxes in either of those years. However, the net loss applicable to common shares would be significantlylower assuming the Company’s preferred stock would have been converted tocommon in connection with the merger. In addition, the pro forma loss would have been materially higher if theprivate placement had occurred during either of those years based on additionalcosts related to consulting, legal, audit, public relations and transfer agentexpenses which would have been incurred by the Company as a result of theprivate placement and being a public company. The Company estimates that an additional $1,470,000 would have beenspent in the first year for these type expenses.  The following tables present the unaudited pro forma results ofoperations had the merger occurred on January 1 of each year and the additionalprivate placement and public company expenses had been incurred (in thousands,except per share amounts):

 
|                                                                  |   | **For the  year ended  December 31, 2002** |   |
|-----------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                  |   | **As reported**                            |   | **Pro forma** | ** ** |
| Revenues                                                              |   | $                                          | — |   | $ | — |   |
| Loss  from operations                                                 |   | (3,083                                     | )      | (4,580 | ) |
| Net  loss                                                             |   | (3,063                                     | )      | (4,594 | ) |
| Net  loss applicable to common shares                                 |   | (5,864                                     | )      | (4,594 | ) |
| Net  loss per share – basic and diluted                          |   | $                                          | (0.42  | ) | $ | (0.24 | ) |
| Average  number of common shares outstanding – basic and diluted |   | 13,805                                     |   | 18,925 |   |

 
|                                                                  |   | **For the  year ended  December 31, 2001** |   |
|-----------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                  |   | **As reported**                            |   | **Pro forma** | ** ** |
| Revenues                                                              |   | $                                          | 230    |   | $ | 230 |   |
| Loss  from operations                                                 |   | (4,724                                     | )      | (6,219 | ) |
| Net  loss                                                             |   | (4,451                                     | )      | (5,947 | ) |
| Net  loss applicable to common shares                                 |   | (5,069                                     | )      | (5,947 | ) |
| Net  loss per share – basic and diluted                          |   | $                                          | (0.37  | ) | $ | (0.31 | ) |
| Average  number of common shares outstanding – basic and diluted |   | 13,797                                     |   | 18,925 |   |

 

F-18

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