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U.S.Securities and Exchange Commission Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant toSection 13 or 15 (d) of the Securities and Exchange Act of 1934

For the fiscal year ended December 31, 2004

Commission File Number 1-14128

EMERGING VISION, INC.

(Exactname of Registrant as specified in its Charter)

|                         |  |                                        |  |  |  |  |
|-------------------------|--|----------------------------------------|--|--|--|--|
| NEWYORK                 |  | 11-3096941                             |
| (State ofincorporation) |  | (I.R.S. Employer IdentificationNumber) |
|                         |

100 Quentin Roosevelt BoulevardGarden City, NY 11530 Telephone Number: (516) 390-2100(Address and Telephone Number of Principal ExecutiveOffices)

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Securitiesregistered pursuant to Section 12(b) of the Act:    **None**

Securities registered pursuant to Section 12(g) of theAct:    **Common Stock, par value $0.01 per share**

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

Yes                 No

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein,and will not be contained, to the best of Registrant's knowledge,in the definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K. 

Indicate by check mark whether the registrant isan accelerated filer as defined in Rule 12b-2 of the Act.

Yes                 No 

The aggregate market value of the voting and non-voting commonequity held by non-affiliates computed by reference to the price atwhich the common equity was last sold, as of June 30, 2004, was$10,081,337.

Number of shares outstanding as of March 29,2005:

70,323,698 shares of Common Stock, par value$0.01 per share

Documents incorporated byreference:    None

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PartI

Item 1.    Business

GENERAL

Emerging Vision, Inc. (the "Registrant"and, together with its subsidiaries, hereinafter the"Company" or"Emerging") is one of the largest chains ofretail optical stores and one of the largest franchise optical chainsin the United States, based upon management's beliefs, domesticsales and the number of locations of Company-owned and franchisedstores (collectively referred to hereinafter as "SterlingStores"). The Registrant was incorporated under the lawsof the State of New York in January 1992 and, in July 1992, purchasedsubstantially all of the assets of Sterling Optical Corp., a New Yorkcorporation then a debtor-in-possession under Chapter 11 of the U.S.Bankruptcy Code.

STORE OPERATIONS

The Companyand its franchisees operate retail optical stores under the trade names"Sterling Optical," "Site ForSore Eyes," "Duling Optical" and"Singer Specs," although most stores (otherthan the Company's Site for Sore Eyes stores located in NorthernCalifornia) operate under the name "SterlingOptical." The Company also operates VisionCare ofCalifornia, Inc. ("VCC"), a specializedhealth care maintenance organization licensed by the State ofCalifornia, Department of Managed Health Care, which employs licensedoptometrists who render services in offices located immediatelyadjacent to, or within, most Sterling Stores located in California.

Most Sterling Stores offer eye care products and services such asprescription and non-prescription eyeglasses, eyeglass frames,ophthalmic lenses, contact lenses, sunglasses and a broad range ofancillary items. To the extent permitted by individual stateregulations, an optometrist is employed by, or affiliated with, mostSterling Stores to provide professional eye examinations to the public.The Company fills prescriptions from these employed or affiliatedoptometrists, as well as from unaffiliated optometrists andophthalmologists. Most Sterling Stores have an inventory of ophthalmicand contact lenses, as well as on-site lab equipment for cutting andedging ophthalmic lenses to fit into eyeglass frames, which, in manycases, allows Sterling Stores to offer same-day service.

Occasionally, the Company sells the assets of certain of itsCompany-owned stores to qualified franchisees and, in certaininstances, realizes a profit on the conveyance of the assets of suchstores. Through these sales, along with the opening of new stores byqualified franchisees, the Company seeks to create a stream of royaltypayments based upon a percentage of the gross revenues of thefranchised locations, and grow both the Sterling Optical and Site ForSore Eyes brand names. The Company currently derives its revenues fromthe sale of eye care products and services at Company-owned stores,membership fees paid to VCC, and ongoing royalty fees based upon apercentage of the gross revenues of its franchised stores.

As ofDecember 31, 2004, there were 165 Sterling Stores in operation,consisting of 11 Company-owned stores (two of which were being managedby franchisees) and 154 franchised stores. Sterling Stores are locatedin 17 states, the District of Columbia, Canada and the U.S. VirginIslands.

The following chart sets forth the breakdown ofSterling Stores in operation as of December 31, 2004 and2003:

|                                                                  |  |              |        |        |  |        |        |        |  |  |
|------------------------------------------------------------------|--|--------------|--------|--------|--|--------|--------|--------|--|--|
|                                                             |  | December 31, |
|                                                             |  | 2004(*)      |        | 2003   |
| I.       COMPANY-OWNEDSTORES: |  |         |   |   |  |   |   |   |
| Company-ownedstores                                              |  |         | 9      |   |  |   | 9      |   |
| Company-ownedstores managed byfranchisees                        |  |         | 2      |   |  |   | 5      |   |
| Total                                                            |  |         | 11     |   |  |   | 14     |   |
|                                                                  |

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|     |                                                                                            |
|-----|--------------------------------------------------------------------------------------------|
| (*) | Existingstore locations: California (1), New York (7), North Dakota (1), andWisconsin (2). |

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|                                                                |  |        |        |        |  |        |        |        |  |  |
|----------------------------------------------------------------|--|--------|--------|--------|--|--------|--------|--------|--|--|
| II.       FRANCHISEDSTORES: |  |   |   |   |  |   |   |   |
| Franchisedstores                                               |  |   | 154    |   |  |   | 158    |   |
|                                                                |

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|     |                                                                                                                                                                                                                                                                                                                                                                      |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (*) | Existing store locations: California (40), Delaware (6),Florida (1), Illinois (1), Maryland (14), Massachusetts (1), Montana(1), Nevada (1), New Jersey (7), New York (41), North Dakota (3),Ontario, Canada (2), Pennsylvania (13), South Dakota (1), Texas(1),Virginia (8), Washington, D.C. (2), West Virginia (1), Wisconsin(8) and the U.S. Virgin Islands (2). |

Sterling Storesgenerally range in size from approximately 1,000 square feet to 2,000square feet, are similar in appearance and are operated under certainuniform standards and operating procedures. Many Sterling Stores arelocated in enclosed regional shopping malls and smaller strip centers,with a limited number of Sterling Stores being housed in freestandingbuildings with adjacent parking facilities. Sterling Stores aregenerally clustered within geographic market areas to maximize thebenefit of advertising strategies and minimize the cost of supervisingoperations.

In response to the eyewear market becomingincreasingly fashion-oriented during the past decade, most SterlingStores carry a large selection of ophthalmic eyeglass frames. TheCompany frequently test-markets various brands of sunglasses,ophthalmic lenses, contact lenses and designer frames. Small quantitiesof these items are usually purchased for selected stores that testcustomer response and interest. If a product test is successful, theCompany attempts to negotiate a system-wide preferred vendor discountfor the product in an effort to maximize system-wide sales andprofits.

FRANCHISE SYSTEM

An integral part ofthe Company's franchise system includes providing a high level ofmarketing, financial, training and administrative support to itsfranchisees. The Company provides "grandopening" assistance for each new franchised location byconsulting with its franchisees with respect to store design, fixtureand equipment requirements and sources, inventory selection andsources, and marketing and promotional programs, as well as assistancein obtaining managed care contracts. Specifically, the Company'sgrand opening assistance helps to establish business plans and budgets,provides preliminary store design and plan approval prior toconstruction of a franchised store, and provides training, anoperations manual and a comprehensive business review to aid thefranchisee in attempting to maximize its sales and profitability.Further, on an ongoing basis, the Company provides training throughregional and national seminars, offers assistance in marketing andadvertising programs and promotions, offers online communication,franchisee group discussion as well as updated training modules andproduct information through its interactive Franchisee Intranet, andconsults with its franchisees as to their management and operationalstrategies and business plans.

Preferred VendorNetwork.    With the collective buying power of Company-owned andfranchised Sterling Stores, the Company has established a network ofpreferred vendors (the "Preferred Vendors")whose products may be purchased directly by franchisees at groupdiscount prices, thereby providing such franchisees with theopportunity for higher gross margins. Additionally, the Companynegotiates and executes cooperative advertising programs with itsPreferred Vendors for the benefit of all Company-owned and franchisedstores.

Franchise Agreements.    Each franchisee entersinto a franchise agreement (the "FranchiseAgreement") with the Company, the material terms of whichare as follows:

|          |                                                                                                                                                                           |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| a.  | Term.    Generally, the termof each Franchise Agreement is ten years and, subject to certainconditions, is renewable at the option of the franchisee. |

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| b.  | Initial Fees.    Generally,franchisees (except for any franchisees converting their existingretail optical store to a Sterling Store (a "ConvertedStore"), and those entering into agreements for more thanone location) must pay the Company a non-recurring, initial franchisefee of $20,000. The Company charges each franchisee of a ConvertedStore a non-recurring, initial franchise fee of $10,000 per location.For each franchisee entering into agreements for more than onelocation, the Company charges a non-recurring, initial franchise fee of$15,000 for the second location, and $10,000 for each location inexcess of two. |

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|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| c.  | OngoingRoyalties.    Franchisees are obligated to pay the Companyongoing royalties in an amount equal to a percentage (generally8%) of the gross revenues generated by their Sterling Store.Franchisees of Converted Stores, however, pay ongoing royalties, ontheir store's historical average base sales, at reduced ratesincreasing (in most cases) from 2% to 6% for the firstthree years of the term of the Franchise Agreement. In addition, mostof the Franchise Agreements acquired by the Company from Singer Specs,Inc. (the "Singer Franchise Agreements")provide for ongoing royalties calculated at 7% of grossrevenues. Franchise Agreements entered into prior to January 1994provide for the payment of ongoing royalties on a monthly basis, whilethose entered into after January 1994 provide for their payment on aweekly basis, in each case, based upon the gross revenues for thepreceding period. Gross revenues generally include all revenuesgenerated from the operation of the Sterling Store in question,excluding refunds to customers, sales taxes, a limited amount of baddebts and, to the extent required by state law, fees charged byindependent optometrists. |

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| d.  | Advertising FundContributions.    Most franchisees must make ongoingcontributions to an advertising fund (the "AdvertisingFund") equal to a percentage of their store's grossrevenues. Except for the Singer Franchise Agreements, which generallyprovide for contributions equal to 7% of gross revenues, forFranchise Agreements entered into prior to August 1993, the rate ofcontribution is generally 4% of the store's grossrevenues, while Franchise Agreements entered into after August 1993generally provide for contributions equal to 6% of thestore's gross revenues. Generally, 50% of these funds areexpended at the direction of each individual franchisee (for theparticular Sterling Store in question), with the balance being expendedon joint advertising campaigns for all franchisees located withinspecific geographic areas. |

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| e.  | Termination.    FranchiseAgreements may be terminated if a franchisee has defaulted on itspayment of monies due to the Company, or in its performance of theother terms and conditions of the Franchise Agreement. During 2004, theassets of (as well as possession of) two franchised stores werereacquired by the Company. Substantially all of the assets located insuch stores were voluntarily surrendered and transferred back to theCompany in connection with the termination of the related FranchiseAgreements. In such instances, it is generally the Company'sintention to re-convey the assets of such a store to a new franchisee,requiring the new franchisee to enter into the Company's thencurrent form of Franchise Agreement. |

MARKETING ANDADVERTISING

The Company's marketing strategy emphasizesprofessional eye examinations, competitive pricing (primarily throughproduct promotions), convenient locations, excellent customer service,customer-oriented store design and product displays, knowledgeablesales associates, and a broad range of quality products, includingprivately-labeled contact lenses presently being offered by the Companyand certain of its franchisees. Examinations by licensed optometristsare generally available on the premises of, or directly adjacent to,substantially all Sterling Stores.

The Company continuallyprepares and revises its in-store, point-of-purchase displays, whichprovide various promotional messages to customers. Both Company-ownedand franchised Sterling Stores participate in advertising and in-storepromotions, which include visual merchandising techniques to drawattention to the products displayed in the Sterling Store in question.The Company is also continually refining its interactive web site,which further markets the "Sterling Optical"and "Site for Sore Eyes" brands in an effortto increase traffic to its stores and, in many instances, also usesdirect mail advertising as well as opt-in email advertising to reachprospective, as well as existing, consumers.

The Companyannually budgets approximately 4% to 6% of system-widesales for advertising and promotional expenditures. Generally,franchisees are obligated to contribute a percentage of their SterlingStore's gross revenues to the Company's segregatedadvertising fund accounts, which the Company maintains for advertising,promotional and public relations programs. In most cases, the Companypermits each franchisee to direct the expenditure of approximately50% of such 

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contributions, with the balance being expendedto advertise and promote all Sterling Stores located within thegeographic area of the Sterling Store in question, and/or on nationalpromotions and campaigns.

INSIGHT MANAGED VISIONCARE

Managed care is a substantial and growing segment of theretail optical business. The Company, under the trade name"Insight Managed Vision Care," contracts withpayors (i.e. health maintenance organizations, preferred providerorganizations, insurance companies, Taft-Hartley unions, and mid-sizedto large companies) that offer eye care benefits to their coveredparticipants. When Sterling Stores provide services or products to acovered participant, it is generally at a discount from the everydayadvertised retail price. Typically, participants will be eligible forgreater eye care benefits at Sterling Stores than those offered at eyecare providers that are not participating in a managed care program.The Company believes that the additional customer traffic generated bycovered participants, along with purchases by covered participantsabove and beyond their eye care benefits, more than offsets the reducedgross margins being realized on these sales. The Company believes thatconvenience of store locations and hours of operation are key factorsin attracting managed care business. As the Company increases itspresence within markets it has already entered, as well as expands intonew markets, it believes it will be more attractive to managed carepayors due to the additional Sterling Stores being operated by theCompany and its franchisees.

COMPETITION

Theoptical business is highly competitive and includes chains of retailoptical stores, superstores, individual retail outlets, the operatorsof web sites and a large number of independent opticians, optometristsand ophthalmologists who provide professional services and may, inconnection therewith, dispense prescription eyewear. As retailers ofprescription eyewear generally service local markets, competitionvaries substantially from one location or geographic area to another.Since 1994, certain major competitors of the Company have been offeringpromotional incentives to their customers and, in response thereto, theCompany generally offers the same or similar incentives to itscustomers.

The Company believes that the principal competitivefactors in the retail optical business are convenience of location,on-site availability of professional eye examinations, rapid service,quality and consistency of product and service, price, productwarranties, a broad selection of merchandise, the participation inthird-party managed care provider programs and the general consumeracceptance of refractive laser surgery. The Company believes that itcompetes favorably in each of these areas, except in regards to lasersurgery as the Company discontinued the operations of its laser visioncorrection centers.

GOVERNMENT REGULATION

TheCompany and its operations are subject to extensive federal, state andlocal laws, rules and regulations affecting the health care industryand the delivery of health care, including laws and regulationsprohibiting the practice of medicine and optometry by persons notlicensed to practice medicine or optometry, prohibiting the unlawfulrebate or unlawful division of fees, and limiting the manner in whichprospective patients may be solicited. The regulatory requirements thatthe Company must satisfy to conduct its business vary from state tostate. In particular, some states have enacted laws governing theability of ophthalmologists and optometrists to enter into contracts toprovide professional services with business corporations or laypersons, and some states prohibit the Company from computing itscontinuing royalty fees based upon a percentage of the gross revenuesof the fees collected by affiliated optometrists. Various federal andstate regulations limit the financial and non-financial terms ofagreements with these health care providers; and the revenuespotentially generated by the Company differ among its various healthcare provider affiliations.

The Company is also subject tocertain regulations adopted under the Federal Occupational Safety andHealth Act with respect to its in-store laboratory operations. TheCompany believes that it is in material compliance with all suchapplicable laws and regulations.

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As a franchisor, the Company is subject tovarious registration and disclosure requirements imposed by the FederalTrade Commission and by many states in which the Company conductsfranchising operations. The Company believes that it is in materialcompliance with all such applicable laws and regulations.

TheCompany must comply with the Health Insurance Portability andAccountability Act of 1996 ("HIPAA"), whichgoverns our participation in managed care programs. We also must complywith the privacy regulations under HIPAA, which went into effect inApril 2003. In addition, all states have passed laws that govern oraffect our arrangements with the optometrists who practice in ourvision centers. Some states, such as California, have particularlyextensive and burdensome requirements that affect the way we dobusiness. In California, optometrists who practice adjacent to ourretail locations are providers to, and subtenants of, a subsidiary,which is licensed as a single-service HMO.

ENVIRONMENTALREGULATION

The Company's business activities are notsignificantly affected by environmental regulations, and no materialexpenditures are anticipated in order for the Company to comply withany such environmental regulations. However, the Company is subject tocertain regulations promulgated under the Federal EnvironmentalProtection Act with respect to the grinding, tinting, edging anddisposal of ophthalmic lenses and solutions, with which the Companybelieves it is in material compliance.

EMPLOYEES

As of March 29, 2005, the Company employed approximately 124individuals, of which approximately 80% were employed on afull-time basis. No employees are covered by any collective bargainingagreement. The Company considers its labor relations with itsassociates to be in good standing and has not experienced anyinterruption of its operations due to disagreements. The Company is inthe process of negotiating employment agreements with its keyexecutives.

Item 2.    Properties

The Company'sheadquarters, consisting of approximately 7,000 square feet, arelocated in an office building situated at 100 Quentin RooseveltBoulevard, Garden City, New York 11530, under a sublease that expiresin November 2006. This facility houses the Company's principalexecutive and administrative offices.

VCC's headquarters,consisting of approximately 1,200 square feet, are located in an officebuilding situated at 9663 Tierre Grande Street, Suite 203, San Diego,CA 92126, under a lease that expires on March 31, 2005. VCC iscurrently negotiating the terms of a one-year lease extension.

The Company leases the space occupied by all of its Company-ownedSterling Stores and certain of its franchised Sterling Stores. Theremaining leases for its franchised Sterling Stores are held in thenames of the respective franchisees, of which the Company holds acollateral assignment on certain of those leases.

SterlingStores are generally located in commercial areas, including majorshopping malls, strip centers, freestanding buildings and other areasconducive to retail trade. Generally, Sterling Stores range in sizefrom 1,000 to 2,000 square feet.

Item 3.    LegalProceedings

Information with respect to the Company'slegal proceedings required by Item 103 of Regulation S-K is set forthin Note 11 to the Consolidated Financial Statements included in Item 8of this Report, and is incorporated by reference herein.

Item4.    Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote by the Company'sshareholders during the fourth quarter ended December 31,2004.

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PARTII

Item 5.    Market for Registrant's Common Equity,Related Stockholder Matters and Issuer Purchases of EquitySecurities

The Registrant's Common Stock is traded in theover-the-counter market and quoted on the OTC Bulletin Board under thetrading symbol "ISEE". Over-the-countermarket quotations reflect inter-dealer prices, without retail mark-up,mark-down or commission and may not necessarily represent actualtransactions. The range of the high and low closing bid prices for theRegistrant's Common Stock for each quarterly period of the lasttwo years, is as follows:

|               |  |      |      |        |  |      |      |        |  |   |      |        |  |   |      |        |  |  |
|---------------|--|------|------|--------|--|------|------|--------|--|---|------|--------|--|---|------|--------|--|--|
|          |  | 2004 |      | 2003   |
| QuarterEnded: |  | High |      | Low    |  | High |      | Low    |
| March31       |  | $    | 0.19 |   |  | $    | 0.09 |   |  | $ | 0.13 |   |  | $ | 0.04 |   |
| June30        |  | $    | 0.17 |   |  | $    | 0.08 |   |  | $ | 0.09 |   |  | $ | 0.04 |   |
| September30   |  | $    | 0.20 |   |  | $    | 0.13 |   |  | $ | 0.17 |   |  | $ | 0.06 |   |
| December31    |  | $    | 0.19 |   |  | $    | 0.13 |   |  | $ | 0.25 |   |  | $ | 0.09 |   |
|               |

Theapproximate number of shareholders of record of the Company'sCommon Stock as of March 11, 2005 was 302.

There was oneshareholder of record of the Company's Senior ConvertiblePreferred Stock as of March 29, 2005.

Historically, the Companyhas not paid dividends on its Common Stock, and has no intention to paydividends on its Common Stock in the foreseeable future. It is thepresent policy of the Registrant's Board of Directors to retainearnings, if any, to finance the Company's future operations andgrowth.

Item 6.    Selected Financial Data

USE OF NON-GAAP FINANCIAL MEASURE

In this document,at times we refer to EBITDA. EBITDA is calculated as net earningsbefore interest, taxes, depreciation and amortization, andextraordinary items, and excludes non-cash charges related to equitysecurities. We refer to EBITDA because it is a widely acceptedfinancial indicator of a company's ability to service or incurindebtedness.

EBITDA does not represent cash flow fromoperations as defined by generally accepted accounting principles, isnot necessarily indicative of cash available to fund all cash flowneeds, should not be considered an alternative to net income or to cashflow from operations (as determined in accordance with GAAP) and shouldnot be considered an indication of our operating performance or as ameasure of liquidity. EBITDA is not necessarily comparable to similarlytitled measures for other companies.

SELECTEDCONSOLIDATED FINANCIAL AND OPERATING DATA

The followingSelected Financial Data has been derived from the audited consolidatedfinancial statements of the Company and should be read in conjunctionwith those statements, which are included in this Report. Theconsolidated financial statements were audited by Arthur Andersen LLP,independent public accountants, with respect to the years endedDecember 31, 2001 and 2000. The consolidated financial statements forthe years ended December 31, 2004, 2003 and 2002 were audited by MillerEllin & Company LLP, independent publicaccountants.

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|                                               |  |                                         |         |           |  |        |         |         |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|-----------------------------------------------|--|-----------------------------------------|---------|-----------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                          |  | (Inthousands, except for per sharedata) |
|                                          |  | Year Ended December31,                  |
| Statementof OperationsData:                   |  | 2004                                    |         | 2003      |  | 2002   |         | 2001    |  | 2000   |
| System-widesales(1)                           |  | $                                       | 92,534  |      |  | $      | 93,731  |    |  | $      | 105,726 |    |  | $      | 126,277 |    |  | $      | 130,382 |    |
| Totalrevenues                                 |  | $                                       | 14,484  |      |  | $      | 14,546  |    |  | $      | 18,703  |    |  | $      | 22,341  |    |  | $      | 24,665  |    |
| Income(loss) from continuingoperations        |  | $                                       | 884     |      |  | $      | (2,948  | )  |  | $      | (4,721  | )  |  | $      | (5,088  | )  |  | $      | (14,628 | )  |
| (Loss)income from discontinuedoperations      |  | $                                       | — |      |  | $      | (19     | )  |  | $      | 74      |    |  | $      | 1,312   |    |  | $      | (15,533 | )  |
| Losson disposal of discontinuedoperations     |  | $                                       | — |      |  | $      | — |    |  | $      | — |    |  | $      | — |    |  | $      | (8,831  | )  |
| Netincome(loss)                               |  | $                                       | 884     |      |  | $      | (2,967  | )  |  | $      | (4,647  | )  |  | $      | (3,776  | )  |  | $      | (38,992 | )  |
| PerShare Information – basic anddiluted |  |
| Income (loss) from continuingoperations       |  | $                                       | 0.01    |      |  | $      | (0.05   | )  |  | $      | (0.17   | )  |  | $      | (0.19   | )  |  | $      | (2.04   | )  |
| (Loss)income from discontinued operations     |  | $                                       | — |      |  | $      | — |    |  | $      | 0.01    |    |  | $      | 0.05    |    |  | $      | (0.66   | )  |
| Losson disposal of discontinued operations    |  | $                                       | — |      |  | $      | — |    |  | $      | — |    |  | $      | — |    |  | $      | (0.37   | )  |
| Net income (loss) pershare                    |  | $                                       | 0.01    |      |  | $      | (0.05   | )  |  | $      | (0.16   | )  |  | $      | (0.14   | )  |  | $      | (3.07   | )  |
| Weighted-averagecommon sharesoutstanding:     |  |
| Basic                                         |  |                                    | 69,475  |      |  |   | 56,507  |    |  |   | 28,641  |    |  |   | 26,409  |    |  |   | 23,627  |    |
| Diluted                                       |  |                                    | 113,696 |      |  |   | 56,507  |    |  |   | 28,641  |    |  |   | 26,409  |    |  |   | 23,627  |    |
| **BalanceSheet Data:**                        |  |
| Working capitaldeficit                        |  | $                                       | (603    | )    |  | $      | (1,590  | )  |  | $      | (4,632  | )  |  | $      | (1,011  | )  |  | $      | (3,987  | )  |
| Totalassets                                   |  |                                    | 5,989   |      |  |   | 6,639   |    |  |   | 6,650   |    |  |   | 11,057  |    |  |   | 22,531  |    |
| Totaldebt                                     |  |                                    | 658     |      |  |   | 931     |    |  |   | 1,494   |    |  |   | 1,299   |    |  |   | 754     |    |
| **OtherData:**                                |  |
| EBITDA(2)                                     |  |                                    | 1,388   | (a)  |  |   | 2,220   |    |  |   | (3,897  | )  |  |   | (3,400  | )  |  |   | (12,592 | )  |
|                                               |

QuarterlyData:

|                                            |  |              |         |                |  |              |       |               |  |      |         |        |  |      |       |        |  |   |         |        |  |   |       |        |  |   |         |         |  |   |        |         |  |  |
|--------------------------------------------|--|--------------|---------|----------------|--|--------------|-------|---------------|--|------|---------|--------|--|------|-------|--------|--|---|---------|--------|--|---|-------|--------|--|---|---------|---------|--|---|--------|---------|--|--|
|                                       |  | FirstQuarter |         | Second Quarter |  | ThirdQuarter |       | FourthQuarter |
|                                       |  | 2004         |         | 2003           |  | 2004         |       | 2003          |  | 2004 |         | 2003   |  | 2004 |       | 2003   |
| Netrevenues                                |  | $            | 3,768   |           |  | $            | 3,894 |          |  | $    | 3,619   |   |  | $    | 3,530 |   |  | $ | 3,627   |   |  | $ | 3,628 |   |  | $ | 3,470   |    |  | $ | 3,494  |    |
| Netincome (loss) from continuingoperations |  | $            | 648     |           |  | $            | 581   |          |  | $    | 35      |   |  | $    | 511   |   |  | $ | 229     |   |  | $ | 543   |   |  | $ | (28     | )  |  | $ | (4,583 | )  |
| (Loss)income from discontinuedoperations   |  | $            | — |           |  | $            | (222  | )        |  | $    | — |   |  | $    | 2     |   |  | $ | — |   |  | $ | 56    |   |  | $ | — |    |  | $ | 145    |    |
| Netincome(loss)                            |  | $            | 648     |           |  | $            | 359   |          |  | $    | 35      |   |  | $    | 513   |   |  | $ | 229     |   |  | $ | 599   |   |  | $ | (28     | )  |  | $ | (4,438 | )  |
| EBITDA(2)                                  |  | $            | 717     |           |  | $            | 718   |          |  | $    | 112     |   |  | $    | 722   |   |  | $ | 319     |   |  | $ | 588   |   |  | $ | 240     |    |  | $ | 192    |    |
|                                            |

8

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Sterling Store Data:

|                                                                  |  |                                                                  |         |         |  |        |         |         |  |        |         |         |  |        |     |         |  |        |     |         |  |  |
|------------------------------------------------------------------|--|------------------------------------------------------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--------|-----|---------|--|--------|-----|---------|--|--|
|                                                             |  | (Inthousands, except for number of stores)Year Ended December31, |
|                                                             |  | 2004                                                             |         | 2003    |  | 2002   |         | 2001    |  | 2000   |
| Company-ownedstores bought, opened orreacquired                  |  |                                                             | 2       |    |  |   | 3       |    |  |   | 4       |    |  |   | 15  |    |  |   | 3   |    |
| Company-ownedstores sold orclosed                                |  |                                                             | (2      | )  |  |   | (9      | )  |  |   | (14     | )  |  |   | (10 | )  |  |   | (13 | )  |
| Company-ownedstores at end ofperiod                              |  |                                                             | 9       |    |  |   | 9       |    |  |   | 15      |    |  |   | 25  |    |  |   | 20  |    |
| Company-ownedstores being managed by Franchisees at end ofperiod |  |                                                             | 2       |    |  |   | 5       |    |  |   | 8       |    |  |   | 9   |    |  |   | 12  |    |
| Franchisedstores being managed by Company at end ofperiod        |  |                                                             | — |    |  |   | — |    |  |   | — |    |  |   | 1   |    |  |   | 3   |    |
| Franchisedstores at end ofperiod                                 |  |                                                             | 154     |    |  |   | 158     |    |  |   | 159     |    |  |   | 169 |    |  |   | 201 |    |
| Averagesales per store (3):                                      |  |
| Company-ownedstores                                              |  | $                                                                | 467     |    |  | $      | 408     |    |  | $      | 394     |    |  | $      | 434 |    |  | $      | 453 |    |
| Franchisedstores                                                 |  | $                                                                | 545     |    |  | $      | 545     |    |  | $      | 591     |    |  | $      | 564 |    |  | $      | 546 |    |
| Averagefranchise royalties per franchised store(3)               |  | $                                                                | 42      |    |  | $      | 40      |    |  | $      | 47      |    |  | $      | 43  |    |  | $      | 42  |    |
|                                                                  |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                         |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------|
| (1) | System-widesales represent combined retail sales generated by Company-owned andfranchised stores, as well as revenues generated by VCC. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                       |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | EBITDA is calculated as net earningsbefore interest, taxes, depreciation and amortization, andextraordinary items, and excludes non-cash charges related to equitysecurities (see "Management's Discussion andAnalysis of Financial Condition and Results of Operations — Useof Non-GAAP Financial Measures"). The following is areconciliation of net income to EBITDA (amounts in thousands): |

|          |                                                                                                                                                                                                                                                    |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| a)  | The 2004 calculation of EBITDA doesnot include an add-back of $581,000 of costs incurred in connectionwith the proxy contest and related litigation. Had these costs not beenincurred, the Company would have had an adjusted EBITDA of$1,970,000. |

Reconciliation of Non-GAAP Financial Measure

This table includes the reconciliation of net income (loss) fromcontinuing operations to EBITDA for the years ended December 31, 2004,2003 and2002.

|                                            |  |        |       |        |  |        |        |         |  |        |         |         |  |  |
|--------------------------------------------|--|--------|-------|--------|--|--------|--------|---------|--|--------|---------|---------|--|--|
|                                       |  | 2004   |       | 2003   |  | 2002   |
| Netincome (loss) from continuingoperations |  | $      | 884   |   |  | $      | (2,948 | )  |  | $      | (4,647  | )  |
| Addback:                                   |  |
| Interestexpense                            |  |   | 59    |   |  |   | 197    |    |  |   | 207     |    |
| Taxes                                      |  |   | 75    |   |  |   | 57     |    |  |   | 54      |    |
| Non-cashequitycharges                      |  |   | 143   |   |  |   | 4,636  |    |  |   | — |    |
| Depreciationandamortization                |  |   | 227   |   |  |   | 278    |    |  |   | 489     |    |
| EBITDA                                     |  | $      | 1,388 |   |  | $      | 2,220  |    |  | $      | (3,897  | )  |
|                                            |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                       |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Averagesales per store and average franchise royalties per franchised storeare computed based upon the weighted-average number of Company-ownedand franchised stores in operation, respectively, for each of thespecified periods. For periods of less than a year, the averages havebeen annualized. |

Item 7.    Management'sDiscussion and Analysis of Financial Condition and Results ofOperations

This Report contains certain forward-lookingstatements and information relating to the Company that is based on thebeliefs of the Company's management, as well as assumptions madeby, and 

9

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information currently available to, theCompany's management. When used in this Report, the words"anticipate","believe","estimate","expect", "there can be noassurance", "may","could", "would","might", "intends"and similar expressions, as they relate to the Company or theCompany's management, are intended to identify forward-lookingstatements. Such statements reflect the view of the Company at the datethey are made with respect to future events, are not guarantees offuture performance and are subject to various risks and uncertainties.These risks and uncertainties may include, among other items: potentialconflicts of interest that could occur with certain of our directors;the retention of certain members of our management team; our inabilityto control the management of our franchised stores; the effects of newfederal, state and local regulations that affect the health careindustry; insured health plan reimbursement policies and practices withrespect to our products and services; our ability to continue to enterfavorable arrangements with health care providers; increasedcompetition from other eyewear providers; the general consumeracceptance of refractive laser surgery; product demand and marketacceptance risks; the effect of general economic conditions; the impactof competitive products, services and pricing; product development,commercialization and technological difficulties; our ability, or lackthereof, to secure additional equity or debt financing in the future,if necessary, due to the potential lack of liquidity of our commonstock; the potential limitation on the use of our net operating losscarry-forwards in accordance with Section 382 of the Internal RevenueCode of 1986, as amended, based on certain changes in ownership thathave occurred or could in the future occur; the possibility that wewill be unable to successfully execute our business plan; and theoutcome of pending and future litigation. Should one or more of theserisks or uncertainties materialize, or should underlying assumptionsprove incorrect, actual results may vary materially from thosedescribed herein with the forward-looking statements referred to above.The Company does not intend to update these forward-looking statementsfor the occurrence of events or developments not within theCompany's control.

COMPARISON OF OPERATING RESULTS FORTHE YEARS ENDED DECEMBER 31, 2004 AND 2003

Net sales forCompany-owned stores, including revenues generated by VCC decreased by$88,000, or 1.2%, to $7,525,000 for the year ended December 31,2004, as compared to $7,613,000 for the comparable period in 2003. Thedecrease in net sales was a direct result of a decrease inCompany-owned store sales primarily due to a lower average number ofstores over the course of the full fiscal year during the comparableperiods, offset by an increase in membership fees generated by VCC. Ona same store basis (for stores that operated as a Company-owned storeduring the entirety of both of the years ended December 31, 2004 and2003), comparative net sales decreased by $99,000, or 2.8%, to$3,437,000 for the year ended December 31, 2004, as compared to$3,536,000 for the comparable period in 2003. Management believes thatthis decrease was a direct result of generally weak sales levelsexperienced in the upstate New York market, where the majority of theCompany-owned stores are located, combined with the effects of employeeturnover in certain of the stores.

Franchise royalties increasedby $163,000, or 2.5%, to $6,588,000 for the year ended December31, 2004, as compared to $6,425,000 for the comparable period in 2003.Management believes this increase was a result of a slight increase infranchise sales for the stores that were open during both of thecomparable periods, increased levels of field support to franchiseesand the success of the Company's audits of franchise locations,which generated additional revenues.

Other franchise relatedfees (which includes initial franchise fees, renewal fees and feesrelated to the transfer of store ownership from one franchisee toanother) decreased by $86,000, or 30.0%, to $201,000 for theyear ended December 31, 2004, as compared to $287,000 for thecomparable period in 2003. This decrease was primarily attributable tothe Company entering into fourteen new franchise agreements during theyear ended December 31, 2003, as opposed to five new franchiseagreements during the comparable period in 2004.

Interest onfranchise notes receivable decreased by $63,000, or 41.7%, to$88,000 for the year ended December 31, 2004, as compared to $151,000for the comparable period in 2003. This decrease was primarily due tonumerous franchise notes maturing during the past 12 months, offset, inpart, by three new interest-bearing notes being generated during2004.

10

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Excluding revenues generated by VCC andexam fee income generated by the Company stores, the Company'sgross profit margin decreased by 5.5%, to 71.1% for theyear ended December 31, 2004, as compared to 76.6% for thecomparable period in 2003. This decrease was mainly a result of thefact that, in 2003, the Company settled liabilities with certain of itsvendors at lower amounts than originally anticipated, which had apositive effect on its gross profit margin during the year endedDecember 31, 2003. No such settlements occurred in 2004. In the future,the Company's gross profit margin may fluctuate depending uponthe extent and timing of changes in the product mix in Company-ownedstores, competitive pricing, and promotional incentives, among otherthings.

Selling, general and administrative expenses increasedby $46,000, or 0.4%, to $11,853,000 for the year ended December31, 2004, as compared to $11,807,000 for the comparable period in 2003.This increase was a result of increases in facility and other overheadcharges of $121,000 and increases in professional fees of $46,000,offset, in part, by decreases in salaries and related expenses of$61,000. Additionally, during 2003, the Company incurred approximately$140,000 of costs related to an unsolicited offer to acquire all theoutstanding Capital Stock of the Company. No such costs were incurredduring 2004.

Interest expense decreased by $138,000, or70.1%, to $59,000, for the year ended December 31, 2004, ascompared to $197,000 for the comparable period in 2003. The decreasewas primarily due to the amortization of the discount associated withcertain financing during 2003.

COMPARISON OF OPERATINGRESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

Netsales for Company-owned stores, including revenues generated by VCC, aspecialized health care maintenance organization licensed by the Stateof California Department of Managed Health Care, decreased by$3,571,000, or 31.9%, to $7,613,000 for the year ended December31, 2003, as compared to $11,184,000 for the comparable period in 2002.The decrease in net sales was a direct result of management'scommitment to continue to close non-profitable Company-owned stores.There were 9 stores being operated by the Company as of December 31,2003 compared to 15 stores as of December 31, 2002. On a same storebasis (for stores that operated as a Company-owned store during theentirety of both of the years ended December 31, 2003 and 2002),comparative net sales decreased by $179,000, or 4.8%, to$3,536,000 for the year ended December 31, 2003, as compared to$3,715,000 for the comparable period in 2002. Management believes thisdecrease was primarily a result of the struggling U.S. economy.

Franchise royalties decreased by $391,000, or 5.7%, to$6,425,000 for the year ended December 31, 2003, as compared to$6,816,000 for the comparable period in 2002. Management believes thisdecrease was primarily a result of the struggling U.S. economy,particularly the weak retail sales experienced during the months of theWar in Iraq, combined with increased competition in capturing customerson certain managed care programs.

Other franchise related fees(which includes initial franchise fees, renewal fees and fees relatedto the transfer of store ownership from one franchisee to another)increased by $216,000, or 304.2%, to $287,000 for the year endedDecember 31, 2003, as compared to $71,000 for the comparable period in2002. This increase was a direct result of the Company entering into 14new franchise agreements for the year ended December 31, 2003.

Interest on franchise notes receivable decreased by $161,000, or51.6%, to $151,000 for the year ended December 31, 2003, ascompared to $312,000 for the comparable period in 2002. This decreasewas primarily due to numerous franchise notes maturing during the past12 months and only two new notes being generated during 2003.

Other income decreased by $250,000, to $70,000, for the year endedDecember 31, 2003, as compared to $320,000 for the comparable period in2002. This decrease was primarily a result of one-time sales of certainassets of the Company to third parties during 2002 that did not occurduring 2003.

Excluding revenues generated by VCC, theCompany's gross profit margin decreased by 0.4%, to76.6% for the year ended December 31, 2003, as compared to77.0% for the comparable period in 

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2002. The gross profit margin remainedconsistent with prior year. The Company continued to effectively manageand control its inventory, continued purchasing at lower averageproduct costs, and continued receiving strong discounts from certain ofthe Company's key vendors. In the future, the Company'sgross profit margin may fluctuate depending upon the extent and timingof changes in the product mix in Company-owned stores, competitivepricing, and promotional incentives.

Selling, general andadministrative expenses decreased by $8,035,000, or 40.5%, to$11,807,000 for the year ended December 31, 2003, as compared to$19,842,000 for the comparable period in 2002. This decrease wasprimarily due to management's continuing plans to reduceadministrative expenses and to close non-profitable Company-ownedstores. Included were reductions in salaries and related expenses of$2,446,000, facility and other overhead charges of $3,117,000 andprofessional fees of $684,000. Additionally, the provision for doubtfulaccounts decreased by $1,651,000 as certain large notes receivable weredeemed uncollectible in 2002. The Company did not experience a similarsituation in 2003.

Provision for store closings decreased by$920,000, or 100.0%, to $0 for the year ended December 31, 2003,as compared to $920,000 for the comparable period in 2002. In 2002,management made the decision to close 15 of its Company-owned stores.In connection therewith, the Company recorded a provision based on theestimated costs (including lease termination costs and other expenses)that would be incurred in the closing of the stores. The Company didnot incur any additional costs related to these store closures during2003, nor did management make the decision to close any additionalstores.

Charges related to long-lived assets decreased by$163,000, or 94.2%, to $10,000 for the year ended December 31,2003, as compared to $173,000 for the comparable period in 2002. Inconnection with management's decision to close non-profitableCompany-owned stores, the Company impaired assets related to thosestores during 2002. No such assets were deemed impaired during2003.

Interest expense decreased by $10,000, or 4.8%, to$197,000, for the year ended December 31, 2003, as compared to $207,000for the comparable period in 2002. The decrease was a result of theCompany paying off certain of its debt obligations in April 2003 withthe proceeds received from its shareholder rights offering, offset bythe amortization of the remaining debt discount resulting from theaforementioned debt payment in April 2003.

USE OF NON-GAAPFINANCIAL MEASURE

In this document, at times we refer toEBITDA. EBITDA is calculated as net earnings before interest, taxes,depreciation and amortization, and extraordinary items, and excludesnon-cash charges related to equity securities. We refer to EBITDAbecause it is a widely accepted financial indicator of acompany's ability to service or incur indebtedness.

EBITDAdoes not represent cash flow from operations as defined by generallyaccepted accounting principles, is not necessarily indicative of cashavailable to fund all cash flow needs, should not be considered analternative to net income or to cash flow from operations (asdetermined in accordance with GAAP) and should not be considered anindication of our operating performance or as a measure of liquidity.EBITDA is not necessarily comparable to similarly titled measures forother companies.

12

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Reconciliation of Non-GAAP FinancialMeasure

This table includes the reconciliation of net income(loss) from continuing operations to EBITDA for the years endedDecember 31, 2004, 2003 and2002.

|                                            |  |        |       |        |  |        |        |         |  |        |         |         |  |  |
|--------------------------------------------|--|--------|-------|--------|--|--------|--------|---------|--|--------|---------|---------|--|--|
|                                       |  | 2004   |       | 2003   |  | 2002   |
| Netincome (loss) from continuingoperations |  | $      | 884   |   |  | $      | (2,948 | )  |  | $      | (4,647  | )  |
| Addback:                                   |  |
| Interestexpense                            |  |   | 59    |   |  |   | 197    |    |  |   | 207     |    |
| Taxes                                      |  |   | 75    |   |  |   | 57     |    |  |   | 54      |    |
| Non-cashequitycharges                      |  |   | 143   |   |  |   | 4,636  |    |  |   | — |    |
| Depreciationandamortization                |  |   | 227   |   |  |   | 278    |    |  |   | 489     |    |
| EBITDA(1)                                  |  | $      | 1,388 |   |  | $      | 2,220  |    |  | $      | (3,897  | )  |
|                                            |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                    |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | The 2004calculation of EBITDA does not include an add-back of $581,000 of costsincurred in connection with the proxy contest and related litigation.Had these costs not been incurred, the Company would have had anadjusted EBITDA of $1,970,000. |

LIQUIDITY AND CAPITALRESOURCES

For the year ended December 31, 2004, cash flowsused in investing activities were $266,000, primarily due to theissuance of franchise promissory notes and by capital expenditures madeby the Company during 2004, offset, in part, by proceeds received oncertain franchise notes.

For the year ended December 31, 2004,cash flows used in financing activities were $140,000, principally dueto the repayment of the Company's debt and related partyborrowings, offset by the proceeds from the exercise of stock optionsand warrants.

As of December 31, 2004, the Company had negativeworking capital of $603,000 (compared to $1,590,000 as of December 31,2003) and cash on hand of $880,000. During 2004, the Company used$97,000 of cash in its operating activities. This usage was principallya result of a net decrease of $1,227,000 in accounts payable andaccrued liabilities that existed as of December 31, 2003, offset byEBITDA of $1,388,000 for the year ended December 31, 2004.Additionally, the Company incurred $581,000 of costs related to theproxy contest and related litigation during 2004. If the proxy contesthadn't occurred, the Company would have had an adjusted EBITDA of$1,970,000.

The Company plans to increase its cash flows during2005 by improving store profitability through increased monitoring ofstore-by-store operations, continuing to reduce administrative overheadexpenses where necessary and feasible, actively supporting developmentprograms for franchisees, and adding new franchised stores to thesystem. Management believes that with the successful execution of theaforementioned plans to improve cash flows, its existing cash and thecollection of outstanding receivables, there will be sufficientliquidity available for the Company to continue in operation throughthe first quarter of 2006. However, there can be no assurance that theCompany will be able to successfully execute the aforementionedplans.

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CONTRACTUAL OBLIGATIONS

Payments due under contractual obligations as of December  31,2004 were as follows (in thousands):

|                              |  |              |         |           |  |              |         |        |  |        |         |        |  |        |        |        |  |  |
|------------------------------|--|--------------|---------|-----------|--|--------------|---------|--------|--|--------|---------|--------|--|--------|--------|--------|--|--|
|                         |  | Within1 year |         | 1-3 years |  | After 3years |         | Total  |
| Long-term debt(a)            |  | $            | 39      |      |  | $            | 619     |   |  | $      | — |   |  | $      | 658    |   |
| Intereston long-term debt(a) |  |         | — |      |  |         | 125     |   |  |   | — |   |  |   | 125    |   |
| Employmentagreements         |  |         | 21      |      |  |         | — |   |  |   | — |   |  |   | 21     |   |
| Operatingleases              |  |         | 5,007   |      |  |         | 5,789   |   |  |   | 3,046   |   |  |   | 13,842 |   |
|                         |  |         | 5,067   |      |  |         | 6,533   |   |  |   | 3,046   |   |  |   | 14,646 |   |
|                              |

|  |
|--|
|  |  |  |
|  |

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| a)  | EffectiveApril 14, 2003, in connection with certain Rescission Transactionsconsummated by the Company on December 31, 2003, the Company signednumerous promissory notes with certain of its shareholders, two of whomare also directors of the Company. The notes, which aggregate $520,000,bear interest at a rate of 6% per annum, and all sums (principaland interest) under the notes are due and payable in April 2007.Information with respect to the Company's contractual obligationsis set forth in the Notes to the Consolidated Financial Statementsincluded in Item 8 of this Report. |

OFF-BALANCE SHEETARRANGEMENTS

An off-balance sheet arrangement is anycontractual arrangement involving an unconsolidated entity under whicha company has (a)  made guarantees, (b)  a retained or acontingent interest in transferred assets, (c)  any obligationunder certain derivative instruments or (d)  any obligation undera material variable interest in an unconsolidated entity that providesfinancing, liquidity, market risk, or credit risk support to thecompany, or engages in leasing, hedging, or research and developmentservices within the company.

The Company does not have anyoff-balance sheet financing or unconsolidated variable interestentities, with the exception of certain guarantees on leases. We referthe reader to the Notes of the Consolidated Financial Statementsincluded in Item 8 of this Report for information regarding theCompany's lease guarantees.

MANAGEMENT'SDISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

High-quality financial statements require rigorous application ofhigh-quality accounting policies. Management believes that its policiesrelated to revenue recognition, legal contingencies and allowances onfranchise, notes and other receivables are critical to an understandingof the Company's consolidated financial statements because theirapplication places the most significant demands on management'sjudgment, with financial reporting results relying on estimation aboutthe effect of matters that are inherently uncertain.

Management's estimate of the allowances on receivables isbased on historical sales, historical loss levels, and an analysis ofthe collectibility of individual accounts.   To the extent thatactual bad debts differed from management's estimates by 10percent, consolidated net income would be an estimated $24,000higher/lower, based upon 2004 results, depending upon whetherthe actual write-offs are greater or lesser than estimated.

Management's estimate of the valuation allowance on deferredtax assets is based on whether it is more likely than not that theCompany's net operating loss carry-forwards will beutilized.   Factors that could impact estimated utilization ofthe Company's net operating loss carry-forwards are the successof its stores and franchisees, as well as the Company's operatingefficiencies, which would allow it to generate taxable income in thefuture.   To the extent that management lowered its valuationallowance on deferred tax assets by 10 percent, consolidated net incomewould be an estimated $2,000,000 higher, based on 2004 results.

The Company recognizes revenues in accordance with SEC StaffAccounting Bulletin ("SAB") No. 103.Accordingly, revenues are recorded when persuasive evidence of anarrangement exists, delivery 

14

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has occurred or services have been rendered,the Company's price to the buyer is fixed or determinable, andcollectibility is reasonably assured. To the extent that collectibilityof royalties and/or interest on franchise notes is not reasonablyassured, the Company recognizes such revenues when the cash isreceived. To the extent that revenues that were recognized on a cashbasis were recognized on an accrual basis, consolidated net incomewould be an estimated $399,000 higher, based upon 2004 results.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

InventoryCosts

In November 2004, the Financial Accounting StandardsBoard ("FASB") issued Statement of FinancialAccounting Standards ("SFAS") No. 151,"Inventory Costs," as amendment to AccountingPrinciples Board ("APB") No. 43, Chapter 4,which clarifies the accounting for abnormal amounts of idle facilityexpenses, freight, handling costs, and wasted material. This Statementrequires that those items be recognized as current-period chargesregardless of whether they meet the criterion "soabnormal," as that term is used in paragraph 5 of APB No.43, Chapter 4. The adoption of this Statement did not have, nor is itexpected to have, a material impact on the Company's financialposition or results of operations.

Stock BasedCompensation

In December 2004, the FASB revised SFAS No.123. This revision establishes standards for accounting fortransactions in which an entity exchanges its equity instruments forgoods or services, including those granted to employees. The Companyadopted the revision of SFAS No. 123, SFAS No. 123R,"Share-Based Payment," which revises the fairvalue method of accounting recommended by SFAS No. 123 for stock-basedemployee compensation. The Company now accounts for stock-basedcompensation in accordance with the provisions of SFAS No. 123R toapply a modified retroactive application of fair value based accountingto prior periods. SFAS No. 123R supercedes SFAS No. 148. All suchtransactions are accounted for accordingly in the Company'sresults of operations.

Real Estate Time-Sharing

InDecember 2004, the FASB issued SFAS No. 152, "Accountingfor Real Estate Time-Sharing Transactions," which amendsFASB SFAS 66 and SFAS 67. This Statement establishes standards foraccounting and reporting on real estate time-sharing transactions. ThisStatement is effective for financial statements for fiscal yearsbeginning after June 15, 2005. As the Company is not involved in anyreal estate time-sharing transactions, the Company has determined theStatement does not have a material impact on its financial position orresults of operations.

Exchanges of NonmonetaryAssets

In December 2004, the FASB issued SFAS No. 153,"Exchanges of Nonmonetary Assets," whichamends APB Opinion No. 29, "Accounting for NonmonetaryTransactions". This Statement eliminates the exception fornonmonetary exchanges of similar productive assets and replaces it witha general exception for exchanges of nonmonetary assets that do nothave commercial substance. The Company is not currently involved inexchanges of nonmonetary assets; thus, the Company has determined theStatement does not have a material impact on its financial position orresults of operations.

Item 7A.    Quantitative andQualitative Disclosures about Market Risk

The Company presentlyhas outstanding certain equity instruments with beneficial conversionterms. Accordingly, the Company, in the future, could incur non-cashcharges to equity (as a result of the exercise of such beneficialconversion terms), which would have a negative impact on future pershare calculations.

The Company believes that the level of riskrelated to its cash equivalents is not material to the Company'sfinancial condition or results of operations.

15

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Item8.    Financial Statements and Supplementary Data

TABLE OFCONTENTS

|                                                                                                             |  |        |        |        |  |  |
|-------------------------------------------------------------------------------------------------------------|--|--------|--------|--------|--|--|
|                                                                                                        |  | PAGE   |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM                                                      |  |   | 17     |   |
|                                                                                                        |  |   |   |   |
| CONSOLIDATEDFINANCIALSTATEMENTS                                                                             |  |   |   |   |
|                                                                                                        |  |   |   |   |
| ConsolidatedBalance Sheets as of December 31, 2004 and2003                                                  |  |   | 18     |   |
|                                                                                                        |  |   |   |   |
| ConsolidatedStatements of Operations for the Years Ended December 31, 2004, 2003and2002                     |  |   | 19     |   |
|                                                                                                        |  |   |   |   |
| ConsolidatedStatements of Shareholders' Equity (Deficit) for the Years EndedDecember 31, 2004, 2003 and2002 |  |   | 20     |   |
|                                                                                                        |  |   |   |   |
| ConsolidatedStatements of Cash Flows for the Years Ended December 31, 2004, 2003and2002                     |  |   | 21     |   |
|                                                                                                        |  |   |   |   |
| Notesto Consolidated FinancialStatements                                                                    |  |   | 22     |   |
|                                                                                                             |

Information requiredby schedules called for under Regulation S-X is either not applicableor is included in the consolidated financial statements or notesthereto.

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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Boardof Directors and Shareholders of Emerging Vision, Inc. andSubsidiaries:

We have audited the accompanying consolidatedbalance sheets of Emerging Vision, Inc. (a New York corporation) andsubsidiaries (the "Company") as of December31, 2004 and 2003, and the related consolidated statements ofoperations, shareholders' equity (deficit) and cash flows foreach of the three years ended December 31, 2004. These financialstatements are the responsibility of the Company's management.Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits inaccordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we planand perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis forour opinion.

In our opinion, the financial statements referredto above present fairly, in all material respects, the financialposition of Emerging Vision, Inc. and subsidiaries as of December 31,2004 and 2003, and the results of their operations and their cash flowsfor each of the three years ended December 31, 2004 in conformity withaccounting principles generally accepted in the United States.

/S/ MILLER, ELLIN & COMPANY LLP

New York,New YorkMarch 21, 2005

17

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EMERGING VISION, INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In Thousands, ExceptShareData)

|                                                                                                                                                                                           |  |             |          |         |  |        |          |         |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------|----------|---------|--|--------|----------|---------|--|--|
|                                                                                                                                                                                      |  | December31, |
|                                                                                                                                                                                      |  | 2004        |          | 2003    |
| ASSETS                                                                                                                                                                                    |  |        |     |    |  |   |     |    |
| Currentassets:                                                                                                                                                                            |  |        |     |    |  |   |     |    |
| Cash and cashequivalents                                                                                                                                                                  |  | $           | 880      |    |  | $      | 1,383    |    |
| Franchisereceivables, net of allowance of $114 and $844,respectively                                                                                                                      |  |        | 1,512    |    |  |   | 1,281    |    |
| Otherreceivables, net of allowance of $47 and $118,respectively                                                                                                                           |  |        | 113      |    |  |   | 291      |    |
| Currentportion of franchise notes receivable, net of allowance of $58 and$241,respectively                                                                                                |  |        | 379      |    |  |   | 449      |    |
| Inventories,net                                                                                                                                                                           |  |        | 396      |    |  |   | 392      |    |
| Prepaid expensesand other currentassets                                                                                                                                                   |  |        | 452      |    |  |   | 389      |    |
| Totalcurrentassets                                                                                                                                                                        |  |        | 3,732    |    |  |   | 4,185    |    |
|                                                                                                                                                                                      |  |        |     |    |  |   |     |    |
| Propertyand equipment, net                                                                                                                                                                |  |        | 487      |    |  |   | 481      |    |
| Franchisenotes receivable, net of allowance of $22 and $541,respectively                                                                                                                  |  |        | 295      |    |  |   | 470      |    |
| Goodwill                                                                                                                                                                                  |  |        | 1,266    |    |  |   | 1,266    |    |
| Otherassets                                                                                                                                                                               |  |        | 209      |    |  |   | 237      |    |
| Totalassets                                                                                                                                                                               |  | $           | 5,989    |    |  | $      | 6,639    |    |
|                                                                                                                                                                                      |  |        |     |    |  |   |     |    |
| LIABILITIESAND SHAREHOLDERS' EQUITY(DEFICIT)                                                                                                                                              |  |        |     |    |  |   |     |    |
| Currentliabilities:                                                                                                                                                                       |  |        |     |    |  |   |     |    |
| Currentportion of long-termdebt                                                                                                                                                           |  | $           | —  |    |  | $      | 207      |    |
| Accountspayable and accruedliabilities                                                                                                                                                    |  |        | 4,162    |    |  |   | 5,389    |    |
| Payablesassociated with proxy contest and relatedlitigation                                                                                                                               |  |        | 92       |    |  |   | —  |    |
| Accrualfor storeclosings                                                                                                                                                                  |  |        | 42       |    |  |   | 144      |    |
| Related partyborrowings                                                                                                                                                                   |  |        | 39       |    |  |   | 35       |    |
| Totalcurrentliabilities                                                                                                                                                                   |  |        | 4,335    |    |  |   | 5,775    |    |
|                                                                                                                                                                                      |  |        |     |    |  |   |     |    |
| Long-termdebt                                                                                                                                                                             |  |        | 385      |    |  |   | 143      |    |
| Relatedpartyborrowings                                                                                                                                                                    |  |        | 234      |    |  |   | 546      |    |
| Franchisedeposits and otherliabilities                                                                                                                                                    |  |        | 659      |    |  |   | 937      |    |
|                                                                                                                                                                                      |  |        |     |    |  |   |     |    |
| Commitmentsandcontingencies                                                                                                                                                               |  |        |     |    |  |   |     |    |
|                                                                                                                                                                                      |  |        |     |    |  |   |     |    |
| Shareholders'equity (deficit):                                                                                                                                                            |  |        |     |    |  |   |     |    |
| Preferredstock, $0.01 par value per share; 5,000,000 sharesauthorized:Senior Convertible Preferred Stock, $100,000liquidation preference per share; 0.74 shares issued andoutstanding     |  |        | 74       |    |  |   | 74       |    |
| Commonstock, $0.01 par value per share; 150,000,000 shares authorized;70,506,035 and 67,682,087 shares issued, respectively, and70,323,698 and 67,499,750 shares outstanding,respectively |  |        | 705      |    |  |   | 677      |    |
| Treasurystock, at cost, 182,337shares                                                                                                                                                     |  |        | (204     | )  |  |   | (204     | )  |
| Additionalpaid-incapital                                                                                                                                                                  |  |        | 126,213  |    |  |   | 125,987  |    |
| Accumulateddeficit                                                                                                                                                                        |  |        | (126,412 | )  |  |   | (127,296 | )  |
| Totalshareholders' equity(deficit)                                                                                                                                                        |  |        | 376      |    |  |   | (762     | )  |
| Totalliabilities and shareholders' equity(deficit)                                                                                                                                        |  | $           | 5,989    |    |  | $      | 6,639    |    |
|                                                                                                                                                                                      |  |        |     |    |  |   |     |    |
|                                                                                                                                                                                           |

Theaccompanying notes are an integral part of these consolidated balancesheets.

18

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EMERGING VISION, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(InThousands, Except Per ShareData)

|                                                                               |  |                               |         |        |  |        |         |         |  |        |         |         |  |  |
|-------------------------------------------------------------------------------|--|-------------------------------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                          |  | Forthe Year Ended December31, |
|                                                                          |  | 2004                          |         | 2003   |  | 2002   |
|                                                                          |  |                          |    |   |  |   |    |    |  |   |    |    |
| **Revenues:**                                                                 |  |                          |    |   |  |   |    |    |  |   |    |    |
| Netsales                                                                      |  | $                             | 7,525   |   |  | $      | 7,613   |    |  | $      | 11,184  |    |
| Franchiseroyalties                                                            |  |                          | 6,588   |   |  |   | 6,425   |    |  |   | 6,816   |    |
| Otherfranchise relatedfees                                                    |  |                          | 201     |   |  |   | 287     |    |  |   | 71      |    |
| Intereston franchise notesreceivable                                          |  |                          | 88      |   |  |   | 151     |    |  |   | 312     |    |
| Otherincome                                                                   |  |                          | 82      |   |  |   | 70      |    |  |   | 320     |    |
|                                                                          |  |                          | 14,484  |   |  |   | 14,546  |    |  |   | 18,703  |    |
| **Costsandexpenses:**                                                         |  |                          |    |   |  |   |    |    |  |   |    |    |
|                                                                          |  |                          |    |   |  |   |    |    |  |   |    |    |
| Costofsales                                                                   |  |                          | 964     |   |  |   | 844     |    |  |   | 2,282   |    |
| Selling,general and administrativeexpenses                                    |  |                          | 11,853  |   |  |   | 11,807  |    |  |   | 19,842  |    |
| Costsfor proxy contest and relatedlitigation                                  |  |                          | 581     |   |  |   | — |    |  |   | — |    |
| Provisionfor storeclosings                                                    |  |                          | — |   |  |   | — |    |  |   | 920     |    |
| Chargesrelated to long-livedassets                                            |  |                          | — |   |  |   | 10      |    |  |   | 173     |    |
| Non-cashcharge for issuance of options andwarrants                            |  |                          | 143     |   |  |   | 92      |    |  |   | — |    |
| Non-cashcharge for issuance of warrants as a result of RescissionTransactions |  |                          | — |   |  |   | 4,544   |    |  |   | — |    |
| Interestexpense                                                               |  |                          | 59      |   |  |   | 197     |    |  |   | 207     |    |
|                                                                          |  |                          | 13,600  |   |  |   | 17,494  |    |  |   | 23,424  |    |
|                                                                          |  |                          |    |   |  |   |    |    |  |   |    |    |
| Income(loss) from continuing operations before provision for incometaxes      |  |                          | 884     |   |  |   | (2,948  | )  |  |   | (4,721  | )  |
| Provisionfor income taxes                                                     |  |                          | — |   |  |   | — |    |  |   | — |    |
| Income(loss) from continuingoperations                                        |  |                          | 884     |   |  |   | (2,948  | )  |  |   | (4,721  | )  |
|                                                                          |  |                          |    |   |  |   |    |    |  |   |    |    |
| (Loss)income from discontinuedoperations                                      |  |                          | — |   |  |   | (19     | )  |  |   | 74      |    |
|                                                                          |  |                          |    |   |  |   |    |    |  |   |    |    |
| Netincome(loss)                                                               |  | $                             | 884     |   |  | $      | (2,967  | )  |  | $      | (4,647  | )  |
|                                                                          |  |                          |    |   |  |   |    |    |  |   |    |    |
| Pershare information —basic:                                            |  |                          |    |   |  |   |    |    |  |   |    |    |
| Income(loss) from continuingoperations                                        |  | $                             | 0.01    |   |  | $      | (0.05   | )  |  | $      | (0.17   | )  |
| Incomefrom discontinuedoperations                                             |  |                          | — |   |  |   | — |    |  |   | 0.01    |    |
| Net income(loss) pershare                                                     |  | $                             | 0.01    |   |  | $      | (0.05   | )  |  | $      | (0.16   | )  |
|                                                                          |  |                          |    |   |  |   |    |    |  |   |    |    |
| Weighted-averagenumber of common shares outstanding—                    |  |                          |    |   |  |   |    |    |  |   |    |    |
| Basic                                                                         |  |                          | 69,475  |   |  |   | 56,507  |    |  |   | 28,641  |    |
| Diluted                                                                       |  |                          | 113,696 |   |  |   | 56,507  |    |  |   | 28,641  |    |
|                                                                               |

Theaccompanying notes are an integral part of these consolidatedstatements.

19

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EMERGING VISION, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(DEFICIT)FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND2002(In Thousands, Except ShareData)

|                                                                               |  |                                  |         |             |  |                       |         |         |  |        |             |         |  |                          |         |                    |  |                                   |         |        |  |        |         |         |  |        |         |         |  |        |          |         |  |        |         |         |  |  |
|-------------------------------------------------------------------------------|--|----------------------------------|---------|-------------|--|-----------------------|---------|---------|--|--------|-------------|---------|--|--------------------------|---------|--------------------|--|-----------------------------------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--------|----------|---------|--|--------|---------|---------|--|--|
|                                                                          |  | SeniorConvertiblePreferred Stock |         | CommonStock |  | Treasury Stock,atcost |         |
|                                                                          |  | Shares                           |         | Amount      |  | Shares                |         | Amount  |  | Shares |             | Amount  |  | AdditionalPaid-InCapital |         | AccumulatedDeficit |  | TotalShareholders'Equity(Deficit) |
|                                                                          |  |                             |    |        |  |                  |    |    |  |   |        |    |  |                     |    |               |  |                              |    |   |  |   |    |    |  |   |    |    |  |   |     |    |  |   |    |    |
| Balance— December 31, 2001                                              |  |                             | 3       |        |  | $                     | 287     |    |  |   | 27,187,309  |    |  | $                        | 272     |               |  |                              | 182,337 |   |  | $      | (204    | )  |  | $      | 119,926 |    |  | $      | (119,664 | )  |  | $      | 617     |    |
| Issuanceof warrants in connection with financingarrangements                  |  |                             | — |        |  |                  | — |    |  |   | —     |    |  |                     | — |               |  |                              | — |   |  |   | — |    |  |   | 190     |    |  |   | —  |    |  |   | 190     |    |
| Exerciseof stock warrants                                                     |  |                             | — |        |  |                  | — |    |  |   | 2,500,000   |    |  |                     | 25      |               |  |                              | — |   |  |   | — |    |  |   | — |    |  |   | —  |    |  |   | 25      |    |
| Issuanceof common shares upon conversion of Senior Convertible PreferredStock |  |                             | (2      | )      |  |                  | (213    | )  |  |   | 235,648     |    |  |                     | 2       |               |  |                              | — |   |  |   | — |    |  |   | 229     |    |  |   | (18      | )  |  |   | — |    |
| Netloss                                                                       |  |                             | — |        |  |                  | — |    |  |   | —     |    |  |                     | — |               |  |                              | — |   |  |   | — |    |  |   | — |    |  |   | (4,647   | )  |  |   | (4,647  | )  |
| Balance— December 31, 2002                                              |  |                             | 1       |        |  | $                     | 74      |    |  |   | 29,922,957  |    |  | $                        | 299     |               |  |                              | 182,337 |   |  | $      | (204    | )  |  | $      | 120,345 |    |  | $      | (124,329 | )  |  | $      | (3,815  | )  |
| Exerciseof stock options and warrants                                         |  |                             | — |        |  |                  | — |    |  |   | 759,130     |    |  |                     | 8       |               |  |                              | — |   |  |   | — |    |  |   | 37      |    |  |   | —  |    |  |   | 45      |    |
| Issuanceof common shares in connection with RightsOffering                    |  |                             | — |        |  |                  | — |    |  |   | 50,000,000  |    |  |                     | 500     |               |  |                              | — |   |  |   | — |    |  |   | 838     |    |  |   | —  |    |  |   | 1,338   |    |
| Issuanceof warrants in connection with RightsOffering                         |  |                             | — |        |  |                  | — |    |  |   | —     |    |  |                     | — |               |  |                              | — |   |  |   | — |    |  |   | 521     |    |  |   | —  |    |  |   | 521     |    |
| Issuanceof stock options to Officers and Directors                            |  |                             | — |        |  |                  | — |    |  |   | —     |    |  |                     | — |               |  |                              | — |   |  |   | — |    |  |   | 13      |    |  |   | —  |    |  |   | 13      |    |
| Rescissionof common shares and warrants issued in RightsOffering              |  |                             | — |        |  |                  | — |    |  |   | (13,000,000 | )  |  |                     | (130    | )             |  |                              | — |   |  |   | — |    |  |   | (390    | )  |  |   | —  |    |  |   | (520    | )  |
| Issuanceof warrants as a result of RescissionTransactions                     |  |                             | — |        |  |                  | — |    |  |   | —     |    |  |                     | — |               |  |                              | — |   |  |   | — |    |  |   | 4,544   |    |  |   | —  |    |  |   | 4,544   |    |
| Vestingof warrants issued to Balfour & Goldin                             |  |                             | — |        |  |                  | — |    |  |   | —     |    |  |                     | — |               |  |                              | — |   |  |   | — |    |  |   | 79      |    |  |   | —  |    |  |   | 79      |    |
| Netloss                                                                       |  |                             | — |        |  |                  | — |    |  |   | —     |    |  |                     | — |               |  |                              | — |   |  |   | — |    |  |   | — |    |  |   | (2,967   | )  |  |   | (2,967  | )  |
| Balance— December 31, 2003                                              |  |                             | 1       |        |  | $                     | 74      |    |  |   | 67,682,087  |    |  | $                        | 677     |               |  |                              | 182,337 |   |  | $      | (204    | )  |  | $      | 125,987 |    |  | $      | (127,296 | )  |  | $      | (762    | )  |
| Exerciseof stock options and warrants                                         |  |                             | — |        |  |                  | — |    |  |   | 2,823,948   |    |  |                     | 28      |               |  |                              | — |   |  |   | — |    |  |   | 78      |    |  |   | —  |    |  |   | 106     |    |
| Issuanceof warrants for services rendered in connection with ProxyContest     |  |                             | — |        |  |                  | — |    |  |   | —     |    |  |                     | — |               |  |                              | — |   |  |   | — |    |  |   | 5       |    |  |   | —  |    |  |   | 5       |    |
| Issuanceof stock options and warrants                                         |  |                             | — |        |  |                  | — |    |  |   | —     |    |  |                     | — |               |  |                              | — |   |  |   | — |    |  |   | 143     |    |  |   | —  |    |  |   | 143     |    |
| Netincome                                                                     |  |                             | — |        |  |                  | — |    |  |   | —     |    |  |                     | — |               |  |                              | — |   |  |   | — |    |  |   | — |    |  |   | 884      |    |  |   | 884     |    |
| Balance— December 31, 2004                                              |  |                             | 1       |        |  | $                     | 74      |    |  |   | 70,506,035  |    |  | $                        | 705     |               |  |                              | 182,337 |   |  | $      | (204    | )  |  | $      | 126,213 |    |  | $      | (126,412 | )  |  | $      | 376     |    |
|                                                                          |  |                             |    |        |  |                  |    |    |  |   |        |    |  |                     |    |               |  |                              |    |   |  |   |    |    |  |   |    |    |  |   |     |    |  |   |    |    |
|                                                                               |

Theaccompanying notes are an integral part of these consolidatedstatements.

20

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EMERGING VISION, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars inThousands)

|                                                                                                              |  |                               |         |         |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------------------------------------------------------------------------------|--|-------------------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                                         |  | Forthe Year Ended December31, |
|                                                                                                         |  | 2004                          |         | 2003    |  | 2002   |
| **Cashflows from operatingactivities:**                                                                      |  |                          |    |    |  |   |    |    |  |   |    |    |
| Netincome (loss) from continuingoperations                                                                   |  | $                             | 884     |    |  | $      | (2,948  | )  |  | $      | (4,721  | )  |
| Adjustmentsto reconcile net income (loss) from continuing operations to net cashused in operatingactivities: |  |                          |    |    |  |   |    |    |  |   |    |    |
| Depreciationandamortization                                                                                  |  |                          | 227     |    |  |   | 278     |    |  |   | 489     |    |
| Provisionfor doubtfulaccounts                                                                                |  |                          | 353     |    |  |   | 179     |    |  |   | 1,829   |    |
| Provisionfor storeclosings                                                                                   |  |                          | — |    |  |   | — |    |  |   | 920     |    |
| Non-cashcompensation charges related to options andwarrants                                                  |  |                          | 148     |    |  |   | 4,739   |    |  |   | 87      |    |
| Chargesrelated to long-livedassets                                                                           |  |                          | — |    |  |   | 10      |    |  |   | 173     |    |
| Changesin operating assets andliabilities:                                                                   |  |                          |    |    |  |   |    |    |  |   |    |    |
| Franchiseand otherreceivables                                                                                |  |                          | (128    | )  |  |   | (234    | )  |  |   | 328     |    |
| Inventories                                                                                                  |  |                          | (4      | )  |  |   | 64      |    |  |   | 290     |    |
| Prepaidexpenses and other currentassets                                                                      |  |                          | (63     | )  |  |   | (68     | )  |  |   | (227    | )  |
| Otherassets                                                                                                  |  |                          | 28      |    |  |   | 32      |    |  |   | 78      |    |
| Accountspayable and accruedliabilities                                                                       |  |                          | (1,254  | )  |  |   | (556    | )  |  |   | (430    | )  |
| Payablesassociated with proxy contest and relatedlitigation                                                  |  |                          | 92      |    |  |   | — |    |  |   | — |    |
| Franchisedeposits and otherliabilities                                                                       |  |                          | (278    | )  |  |   | (980    | )  |  |   | 142     |    |
| Accrualfor storeclosings                                                                                     |  |                          | (102    | )  |  |   | (965    | )  |  |   | (775    | )  |
| Netcash used in operatingactivities                                                                          |  |                          | (97     | )  |  |   | (449    | )  |  |   | (1,817  | )  |
|                                                                                                         |  |                          |    |    |  |   |    |    |  |   |    |    |
| **Cashflows from investingactivities:**                                                                      |  |                          |    |    |  |   |    |    |  |   |    |    |
| Franchisenotes receivableissued                                                                              |  |                          | (377    | )  |  |   | (21     | )  |  |   | (71     | )  |
| Proceedsfrom franchise and other notesreceivable                                                             |  |                          | 344     |    |  |   | 558     |    |  |   | 1,409   |    |
| Purchasesof property andequipment                                                                            |  |                          | (233    | )  |  |   | (68     | )  |  |   | (280    | )  |
| Netcash (used in) provided by investingactivities                                                            |  |                          | (266    | )  |  |   | 469     |    |  |   | 1,058   |    |
|                                                                                                         |  |                          |    |    |  |   |    |    |  |   |    |    |
| **Cashflows from financingactivities:**                                                                      |  |                          |    |    |  |   |    |    |  |   |    |    |
| Proceedsfrom the issuance of common stock upon the exercise of stockoptions andwarrants                      |  |                          | 106     |    |  |   | 45      |    |  |   | 25      |    |
| Proceedsfromborrowings                                                                                       |  |                          | — |    |  |   | 769     |    |  |   | 2,141   |    |
| Paymentsonborrowings                                                                                         |  |                          | (246    | )  |  |   | (1,435  | )  |  |   | (1,843  | )  |
| Netproceeds from RightsOffering                                                                              |  |                          | — |    |  |   | 1,339   |    |  |   | — |    |
| **Netcash (used in) provided by financingactivities**                                                        |  |                          | (140    | )  |  |   | 718     |    |  |   | 323     |    |
| **Netcash (used in) provided by continuingoperations**                                                       |  |                          | (503    | )  |  |   | 738     |    |  |   | (436    | )  |
| **Netcash (used in) provided by discontinuedoperations**                                                     |  |                          | — |    |  |   | (19     | )  |  |   | 47      |    |
| **Net(decrease) increase in cash and cashequivalents**                                                       |  |                          | (503    | )  |  |   | 719     |    |  |   | (389    | )  |
| **Cashand cash equivalents — beginning ofyear**                                                        |  |                          | 1,383   |    |  |   | 664     |    |  |   | 1,053   |    |
| **Cashand cash equivalents — end ofyear**                                                              |  | $                             | 880     |    |  | $      | 1,383   |    |  | $      | 664     |    |
|                                                                                                         |  |                          |    |    |  |   |    |    |  |   |    |    |
| **Supplementaldisclosures of cash flowinformation:**                                                         |  |                          |    |    |  |   |    |    |  |   |    |    |
| Cashpaid during the yearfor:                                                                                 |  |                          |    |    |  |   |    |    |  |   |    |    |
| Interest                                                                                                     |  | $                             | 25      |    |  | $      | 71      |    |  | $      | 118     |    |
| Taxes                                                                                                        |  | $                             | 93      |    |  | $      | 72      |    |  | $      | 75      |    |
|                                                                                                         |  |                          |    |    |  |   |    |    |  |   |    |    |
| Non-cashinvesting and financingactivities:                                                                   |  |                          |    |    |  |   |    |    |  |   |    |    |
| Issuanceof promissory notes in exchange for rescission ofunits                                               |  | $                             | — |    |  | $      | 520     |    |  | $      | — |    |
|                                                                                                              |

Theaccompanying notes are an integral part of these consolidatedstatements.

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EMERGINGVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

NOTE 1 – ORGANIZATION AND BUSINESS:

Business

Emerging Vision, Inc. (the"Registrant" and, together with itssubsidiaries, hereinafter the "Company" or"Emerging") is one of the largest chains ofretail optical stores and one of the largest franchise optical chainsin the United States, based upon management's beliefs, domesticsales and the number of locations of Company-owned and franchisedstores (collectively referred to hereinafter as "SterlingStores"). The Registrant was incorporated under the lawsof the State of New York in January 1992 and, in July 1992, purchasedsubstantially all of the assets of Sterling Optical Corp., a New Yorkcorporation then a debtor-in-possession under Chapter 11 of the U.S.Bankruptcy Code.

As of December 31, 2004, there were 165Sterling Stores in operation, consisting of 11 Company-owned stores(two of which were being managed by franchisees) and 154 franchisedstores.

Basis of Presentation

TheConsolidated Financial Statements reflect the operations of theCompany's retail optical store operation as continuingoperations. The results of operations and cash flows of Insight LaserCenters, Inc. ("Insight Laser") – whichoperated three laser vision correction centers in the New Yorkmetropolitan area, Insight Laser Centers N.Y.I, Inc. (the"Ambulatory Center") – the owner of theassets of an ambulatory surgery center located in Garden City, NewYork, and its Internet Division – which was to provide aweb-based portal designed to take advantage of business-to-businessopportunities in the optical industry, are reflected as discontinuedoperations in accordance with Accounting Principles Board("APB") Opinion No. 30,"Reporting the Results of Operations – Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary,Unusual and Infrequently Occurring Events andTransactions."

NOTE 2 – SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES:

Use ofEstimates

The preparation of financial statements inconformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reportedamount of assets and liabilities and the disclosure of contingentassets and liabilities as of the dates of such financial statements,and the reported amounts of revenues and expenses during the reportingperiods. Actual results could differ from those estimates. Significantestimates made by management include, but are not limited to,allowances on franchise, notes and other receivables, accruals forstore closings, and costs of current and potential litigation.

Principles of Consolidation

The ConsolidatedFinancial Statements include the accounts of Emerging Vision, Inc. andits operating subsidiaries, all of which are wholly-owned. Allintercompany balances and transactions have been eliminated inconsolidation.

Revenue Recognition

TheCompany charges franchisees a nonrefundable initial franchise fee.Initial franchise fees are recognized at the time all material servicesrequired to be provided by the Company have been substantiallyperformed. Continuing franchise royalty fees are based upon apercentage of the gross revenues generated by each franchised locationand are recorded as earned, subject to meeting all of the requirementsof SEC Staff Accounting Bulletin ("SAB") No.103, "Update of Codification of Staff AccountingBulletins," and SAB 104, "RevenueRecognition." SAB 103 superceded SAB 101,"Revenue Recognition in FinancialStatements," and replaced it, as well as other previouslyissued bulletins, with a codified format for the updated information.SAB 104 revised or rescinded portions of the interpretative guidanceincluded in SAB 103.

22

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The Company derives its revenues from thefollowing three principal sources:

Netsales – Represents sales from eye care products and relatedservices;

Franchise royalties –Represents continuing franchise royalty fees based upon a percentage ofthe gross revenues generated by each franchised location;

Other franchise related fees –Represents the net gains from the sale of Company-owned store assets tofranchisees; and certain fees collected by the Company under the termsof franchise agreements (including, but not limited to, initialfranchise fees, transfer fees and renewal fees).

The Companyrecognizes revenues in accordance with SAB 103 and SAB 104.Accordingly, revenues are recorded when persuasive evidence of anarrangement exists, delivery has occurred or services have beenrendered, the Company's price to the buyer is fixed ordeterminable, and collectibility is reasonably assured. To the extentthat collectibility of royalties and/or interest on franchise notes isnot reasonably assured, the Company recognizes such revenue when thecash is received.

The Company also follows the provisions ofEmerging Issue Task Force ("EITF") Issue01-09, "Accounting for Consideration Given by a Vendor toa Customer (Including a Reseller of the Vendor'sProducts)," and accordingly, accounts for discounts,coupons and promotions (that are offered to its customers) as a directreduction of sales.

Cash and CashEquivalents

Cash represents cash on hand at Company-ownedstores and cash on deposit with financial institutions. All highlyliquid investments with an original maturity (from date of purchase) ofthree months or less are considered to be cash equivalents. TheCompany's cash equivalents are invested in variousinvestment-grade money market accounts.

Fair Value ofFinancial Instruments

In determining the fair value of itsfinancial instruments, the Company uses a variety of methods andassumptions that are based on market conditions and risks existing asof each balance sheet date. For the majority of financial instruments,including receivables, long-term debt, and stock options and warrants,standard market conventions and techniques, such as discounted cashflow analysis, option pricing models, replacement cost and terminationcost, are used to determine fair value. All methods of assessing fairvalue result in a general approximation of value, and such value maynever actually be realized.

Inventories, net

Inventories, net, are stated at the lower of cost or market value,and consist primarily of contact lenses, ophthalmic lenses, eyeglassframes and sunglasses.

Property and Equipment,net

Property and equipment, net, are recorded at cost, lessaccumulated depreciation and amortization. Depreciation is recorded ona straight-line basis over the estimated useful lives of the respectiveclasses of assets.

Goodwill

ThroughDecember 31, 2001, goodwill was being amortized, on a straight-linebasis, over its estimated useful life of 20 years, and, as of December31, 2001, accumulated amortization of the goodwill was approximately$1,297,000.

In 2001, the Financial Accounting Standards Board("FASB") issued SFAS No. 142,"Goodwill and Other Intangible Assets." ThisStatement provided that goodwill and intangible assets with indefinitelives should no longer be amortized, but should be reviewed, at leastannually, for impairment. In accordance with the adoption of SFAS No.142, beginning January 1, 2002, the Company ceased amortizing itsexisting net goodwill of $1,266,000, resulting in the exclusion ofapproximately $268,000 of amortization expense for each of the yearsended December 31, 2004, 2003 and 2002. Management performed a reviewof its existing goodwill and determined that it is not impaired as ofDecember 31, 2004.

23

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Impairment of Long-LivedAssets

The Company follows the provisions of SFAS No. 144,"Accounting for the Impairment or Disposal of Long-LivedAssets." This Statement requires that long-lived assetsand certain identifiable intangibles be reviewed for impairmentwhenever events or changes in circumstances indicate that the carryingamount of the assets may not be recoverable, but amends the prioraccounting and reporting standards for segments of a business to bedisposed of. The Company periodically evaluates its long-lived assets(on a store-by-store basis) based on, among other factors, theestimated, undiscounted future cash flows expected to be generated fromsuch assets in order to determine if an impairment exists. For theyears ended December 31, 2004, 2003 and 2002, the Company did notrecord any impairment charges for stores it will continue to operate,and wrote off $0, $0 and $173,000, respectively, of long-lived assetsrelated to stores that management has made the decision to close (Note7). All of the aforementioned amounts are reflected in the ConsolidatedStatements of Operations for the years ended December 31, 2004, 2003and 2002, respectively, and a new basis, if any, for the impairedassets was established.

Advertising Costs

The Company expenses advertising costs as incurred. Advertisingcosts for Company-owned stores aggregated approximately $185,000,$177,000 and $364,000 for the years ended December 31, 2004, 2003 and2002, respectively.

Comprehensive Income

The Company follows the provisions of SFAS No. 130,"Reporting Comprehensive Income," whichestablishes rules for the reporting of comprehensive income (loss) andits components. For the years ended December 31, 2004, 2003 and 2002,the Company's operations did not give rise to items includible incomprehensive income (loss) that were not already included in netincome (loss). Therefore, the Company's comprehensive income(loss) is the same as its net income (loss) for all periodspresented.

Income Taxes

The Companyaccounts for income taxes in accordance with SFAS No. 109,"Accounting for Income Taxes." Under theasset and liability method specified by SFAS No. 109, the deferredincome tax amounts included in the Consolidated Balance Sheets aredetermined based on the differences between the financial statement andtax basis of assets and liabilities, as measured by the enacted taxrates, that will be in effect when these differences reverse.Differences between assets and liabilities for financial statement andtax return purposes are principally related to accrued expenses, theallowances for receivable, equity-based awards and net operating losscarry-forwards.

Guarantee Disclosures

TheCompany follows the provision of FASB Interpretation("FIN") No. 45,"Guarantor's Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness ofOthers," which clarifies the required disclosures to bemade by a guarantor in their interim and annual financial statementsabout its obligations under certain guarantees that it has issued. FINNo. 45 also requires a guarantor to recognize, at the inception of theguarantee, a liability for the fair value of the obligation undertaken.The provisions of this Interpretation did not have a material impact onthe Company's financial position or results of operations.

Stock-Based Compensation

Since January 1,2003, the Company has accounted for stock-based compensation inaccordance with the provisions of SFAS No. 123,"Accounting for Stock-Based Compensation,"which provided guidance for the recognition of compensation expense asit related to the issuance of stock options and warrants. In addition,the Company adopted the provisions of SFAS No. 148,"Accounting for Stock-Based Compensation –Transition and Disclosure – an amendment of SFAS No.123." SFAS No. 148 amended SFAS No. 123 to providealternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensationprovided by SFAS No. 

24

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123. In addition, SFAS No. 148 amended thedisclosure requirements of SFAS No. 123 to require prominentdisclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and theeffect of the method used on reported results. SFAS No. 148 alsoamended the manner by which a company accounts for the transition tothe fair value based method recommended by SFAS No. 123. As permittedby SFAS No. 148, the Company has adopted the fair value methodrecommended by SFAS No. 123 to effect a change in accounting forstock-based employee compensation. Prior to 2003, the Company accountedfor stock-based employee compensation under the recognition andmeasurement provisions of Accounting Principles Board Opinion No. 25,"Accounting for Stock Issued to Employees,"and related Interpretations. 

Stock-based compensationcost of approximately $129,000, $13,000 and $0 is reflected in theaccompanying Statement of Operations for the years ended December 31,2004, 2003 and 2002, respectively. The following table illustrates theeffect on net income (loss) and net income (loss) per share as if thefair value method had been applied to all outstanding and unvestedawards granted prior to January 1, 2003 in each yearpresented:

|                                                                               |  |        |      |         |  |        |        |         |  |        |         |         |  |  |
|-------------------------------------------------------------------------------|--|--------|------|---------|--|--------|--------|---------|--|--------|---------|---------|--|--|
|                                                                          |  | 2004   |      | 2003    |  | 2002   |
| Netincome (loss), asreported                                                  |  | $      | 884  |    |  | $      | (2,967 | )  |  | $      | (4,647  | )  |
| Add:Stock-based compensation expense included in reported net income(loss)    |  |   | 148  |    |  |   | 13     |    |  |   | — |    |
| Deduct:Stock-based compensation expense determined under the fair valuemethod |  |   | (190 | )  |  |   | (917   | )  |  |   | (3,653  | )  |
| Proforma                                                                      |  | $      | 842  |    |  | $      | (3,871 | )  |  | $      | (8,300  | )  |
| Netincome (loss) per share – basic and diluted, asreported              |  | $      | 0.01 |    |  | $      | (0.05  | )  |  | $      | (0.16   | )  |
| Proforma                                                                      |  | $      | 0.01 |    |  | $      | (0.07  | )  |  | $      | (0.29   | )  |
|                                                                               |

TheCompany recognized $19,000, $0, and $0 of expenses related to itsissuance of stock options and warrants to certain non-employeeconsultants to the Company in 2004, 2003 or 2002, respectively.

Concentration of Credit Risk

Cash

The Company maintains cash balances with various financialinstitutions, which, at times, may exceed the Federal Deposit InsuranceCorporation limit. The Company has not experienced any losses to dateas a result of this policy, and management believes there is littlerisk of loss.

Receivables

The Company operatesretail optical stores in North America, predominantly in the UnitedStates, and its receivables are primarily from franchisees that alsooperate retail optical stores in the United States. The Companyestimates allowances for doubtful accounts based on itsfranchisees' financial condition and collection history.Management believes the Company's allowances are sufficient tocover any losses related to its inability to collect its accounts andnotes receivables. Accounts are written-off when significantly past dueand deemed uncollectible by management. At times, the Companyexperiences difficulties with the collection of amounts due fromcertain franchisees and with certain franchisees' reporting ofrevenues subject to royalties. This is a common problem forfranchisors, and the Company has taken steps designed to improve thereporting by, and collection from, its franchisees.

Segment Information

SFAS No. 131,"Disclosures about Segments of an Enterprise and RelatedInformation," establishes annual and interim reportingstandards for an enterprise's operating segments, and relateddisclosures about its products, services, geographic areas and majorcustomers. For the years ended December 31, 2004, 2003 and 2002, theCompany's continuing operations were classified into oneprincipal industry segment – retail optical (Note 1).Accordingly, the disclosures required by SFAS No. 131 have not beenprovided.

25

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Reclassifications

Certain reclassifications have been made to prior years'consolidated financial statements to conform to the current yearpresentation.

New Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151,"Inventory Costs," as amendment to AccountingPrinciples Board ("APB") No. 43, Chapter 4,which clarifies the accounting for abnormal amounts of idle facilityexpenses, freight, handling costs, and wasted material. This Statementrequires that those items be recognized as current-period chargesregardless of whether they meet the criterion "soabnormal," as that term is used in paragraph 5 of APB No.43, Chapter 4. The adoption of this Statement did not have, nor is itexpected to have, a material impact on the Company's financialposition or results of operations.

In December 2004, the FASBrevised SFAS No. 123. This revision establishes standards foraccounting for transactions in which an entity exchanges its equityinstruments for goods or services, including those granted toemployees. The Company adopted the revision of SFAS No. 123, SFAS No.123R, "Share-Based Payment," which revisesthe fair value method of accounting recommended by SFAS No. 123 forstock-based employee compensation. The Company now accounts forstock-based compensation in accordance with the provisions of SFAS No.123R to apply a modified retroactive application of fair value basedaccounting to prior periods. SFAS No. 123R supercedes SFAS No. 148. Allsuch transactions are accounted for accordingly in the Company'sresults of operations.

In December 2004, the FASB issued SFASNo. 152, "Accounting for Real Estate Time-SharingTransactions," which amends FASB SFAS 66 and SFAS 67. ThisStatement establishes standards for accounting and reporting on realestate time-sharing transactions. This Statement is effective forfinancial statements for fiscal years beginning after June 15, 2005. Asthe Company is not involved in any real estate time-sharingtransactions, the Company has determined the Statement will not have amaterial impact on its financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153,"Exchanges of Nonmonetary Assets," whichamends APB Opinion No. 29, "Accounting for NonmonetaryTransactions". This Statement eliminates the exception fornonmonetary exchanges of similar productive assets and replaces it witha general exception for exchanges of nonmonetary assets that do nothave commercial substance. The Company is not currently involved inexchanges of nonmonetary assets; thus, the Company has determined theStatement does not have a material impact on its financial position orresults of operations.

NOTE 3 – PER SHAREINFORMATION:

In accordance with SFAS No. 128,"Earnings Per Share", basic net income (loss)per common share ("Basic EPS") is computed bydividing the net income (loss) attributable to common shareholders bythe weighted-average number of common shares outstanding. Diluted netincome (loss) per common share ("DilutedEPS") is computed by dividing the net income (loss)attributable to common shareholders by the weighted-average number ofcommon shares and dilutive common share equivalents and convertiblesecurities then outstanding. SFAS No. 128 requires the presentation ofboth Basic EPS and Diluted EPS on the face of the Company'sConsolidated Statements of Operations. There were 5,340,153, 9,223,227and 7,783,205, and stock options and warrants excluded from thecomputation of Diluted EPS for the years ended December 31, 2004, 2003and 2002, respectively, as their effect on the computation of DilutedEPS would have been anti-dilutive. Additionally, for the years endedDecember 31, 2004, 2003 and 2002, respectively, there were 0.74 sharesof our Senior Convertible Preferred Stock outstanding, convertible into98,519 shares of the Company's Common Stock. Similarly, thesepreferred shares were not "assumed converted"as the effect on the computation of Diluted EPS would also have beenanti-dilutive.

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The following table sets forth thecomputation of basic and diluted per shareinformation:

|                                                                                                                |  |               |         |        |  |        |         |         |  |        |         |         |  |  |
|----------------------------------------------------------------------------------------------------------------|--|---------------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                                                                                                           |  | (Inthousands) |
|                                                                                                           |  | 2004          |         | 2003   |  | 2002   |
| **Numerator:**                                                                                                 |  |          |    |   |  |   |    |    |  |   |    |    |
| Income(loss) from continuingoperations                                                                         |  | $             | 884     |   |  | $      | (2,948  | )  |  | $      | (4,721  | )  |
| Inducedconversion of Senior Convertible PreferredStock                                                         |  |          | — |   |  |   | — |    |  |   | (18     | )  |
| Numeratorfor basic and diluted income (loss) per share – Income (loss)attributable to commonshareholders |  |          | 884     |   |  |   | (2,948  | )  |  |   | (4,739  | )  |
|                                                                                                           |  |          |    |   |  |   |    |    |  |   |    |    |
| Basicand Diluted:                                                                                              |  |          |    |   |  |   |    |    |  |   |    |    |
| Income(loss) attributable to commonshareholders                                                                |  |          | 884     |   |  |   | (2,948  | )  |  |   | (4,739  | )  |
| Income(loss) from discontinuedoperations                                                                       |  |          | — |   |  |   | (19     | )  |  |   | 74      |    |
| Netincome (loss) attributable to commonshareholders                                                            |  | $             | 884     |   |  | $      | (2,967  | )  |  | $      | (4,665  | )  |
|                                                                                                           |  |          |    |   |  |   |    |    |  |   |    |    |
| **Denominator:**                                                                                               |  |          |    |   |  |   |    |    |  |   |    |    |
| Weightedaverage common sharesoutstanding                                                                       |  |          | 69,475  |   |  |   | 56,507  |    |  |   | 28,641  |    |
| Dilutiveeffect of stock options andwarrants                                                                    |  |          | 44,221  |   |  |   | — |    |  |   | — |    |
| Weightedaverage common shares outstanding, assumingdilution                                                    |  |          | 113,696 |   |  |   | 56,507  |    |  |   | 28,641  |    |
|                                                                                                           |  |          |    |   |  |   |    |    |  |   |    |    |
| Basicand Diluted Per ShareInformation:                                                                         |  |          |    |   |  |   |    |    |  |   |    |    |
| Income(loss) attributable to commonshareholders                                                                |  | $             | 0.01    |   |  | $      | (0.05   | )  |  | $      | (0.17   | )  |
| Incomefrom discontinuedoperations                                                                              |  |          | — |   |  |   | — |    |  |   | 0.01    |    |
| Netincome (loss) attributable to commonshareholders                                                            |  | $             | 0.01    |   |  | $      | (0.05   | )  |  | $      | (0.16   | )  |
|                                                                                                                |

NOTE4 – FRANCHISE NOTES RECEIVABLE:

Franchise notes held bythe Company consist primarily of purchase money notes related toCompany-financed conveyances of Company-owned store assets tofranchisees, and certain franchise notes receivable obtained by theCompany in connection with acquisitions in prior years. Substantiallyall notes are secured by the underlying assets of the relatedfranchised store, as well as the personal guarantee of the principalowners of the franchise. As of December 31, 2004, these notes generallyprovided for interest at 12%.

Scheduled maturities ofnotes receivable as of December 31, 2004, are as follows (inthousands):

|                                     |  |        |     |         |  |  |
|-------------------------------------|--|--------|-----|---------|--|--|
| 2005                                |  | $      | 437 |    |
| 2006                                |  |   | 109 |    |
| 2007                                |  |   | 42  |    |
| 2008                                |  |   | 164 |    |
| 2009                                |  |   | 2   |    |
|                                |  |   | 754 |    |
| Less:allowance for doubtfulaccounts |  |   | (80 | )  |
|                                |  | $      | 674 |    |
|                                     |

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NOTE 5 – VALUATION AND QUALIFYINGACCOUNTS:

Franchise receivables, franchise notes receivable,and other Company receivables, are shown on the Consolidated BalanceSheets net of allowances for doubtful accounts. The following is abreakdown, by major component, of the change in those allowances, alongwith the accruals for store closings:

|                                |  |                                |         |         |  |        |         |         |  |        |        |         |  |  |
|--------------------------------|--|--------------------------------|---------|---------|--|--------|---------|---------|--|--------|--------|---------|--|--|
|                           |  | (Inthousands)As of December31, |
|                           |  | 2004                           |         | 2003    |  | 2002   |
| **FranchiseReceivables:**      |  |                           |    |    |  |   |    |    |  |   |   |    |
| Balance,beginning ofyear       |  | $                              | 844     |    |  | $      | 1,063   |    |  | $      | 3,095  |    |
| Chargedtoexpense               |  |                           | 206     |    |  |   | 84      |    |  |   | 484    |    |
| Reductions,includingwrite-offs |  |                           | (975    | )  |  |   | (303    | )  |  |   | (4,293 | )  |
| Additions                      |  |                           | 39      |    |  |   | — |    |  |   | 1,777  |    |
| Balance,end ofyear             |  | $                              | 114     |    |  | $      | 844     |    |  | $      | 1,063  |    |
| **FranchiseNotesReceivables:** |  |                           |    |    |  |   |    |    |  |   |   |    |
| Balance,beginning ofyear       |  | $                              | 782     |    |  | $      | 1,928   |    |  | $      | 3,326  |    |
| Chargedtoexpense               |  |                           | 37      |    |  |   | 20      |    |  |   | 1,195  |    |
| Reductions,includingwrite-offs |  |                           | (739    | )  |  |   | (1,173  | )  |  |   | (2,788 | )  |
| Additions                      |  |                           | — |    |  |   | 7       |    |  |   | 195    |    |
| Balance,end ofyear             |  | $                              | 80      |    |  | $      | 782     |    |  | $      | 1,928  |    |
| **OtherCompanyReceivables:**   |  |                           |    |    |  |   |    |    |  |   |   |    |
| Balance,beginning ofyear       |  | $                              | 118     |    |  | $      | 101     |    |  | $      | 171    |    |
| Chargedtoexpense               |  |                           | 109     |    |  |   | 75      |    |  |   | 150    |    |
| Reductions,includingwrite-offs |  |                           | (180    | )  |  |   | (117    | )  |  |   | (249   | )  |
| Additions                      |  |                           | — |    |  |   | 59      |    |  |   | 29     |    |
| Balance,end ofyear             |  | $                              | 47      |    |  | $      | 118     |    |  | $      | 101    |    |
| **Accrualfor StoreClosings:**  |  |                           |    |    |  |   |    |    |  |   |   |    |
| Balance,beginning ofyear       |  | $                              | 144     |    |  | $      | 1,109   |    |  | $      | 964    |    |
| Chargedtoexpense               |  |                           | — |    |  |   | — |    |  |   | 920    |    |
| Reductions                     |  |                           | (102    | )  |  |   | (965    | )  |  |   | (775   | )  |
| Balance,end ofyear             |  | $                              | 42      |    |  | $      | 144     |    |  | $      | 1,109  |    |
|                                |

NOTE6 – PROPERTY AND EQUIPMENT, NET:

Property and equipment,net, consists of thefollowing:

|                              |  |                                |        |                      |  |        |        |         |  |          |  |  |  |  |
|------------------------------|--|--------------------------------|--------|----------------------|--|--------|--------|---------|--|----------|--|--|--|--|
|                         |  | (Inthousands)As of December31, |        | EstimatedUsefulLives |
|                         |  | 2004                           |        | 2003                 |  |
| Furnitureandfixtures         |  | $                              | 256    |                 |  | $      | 256    |    |  | 5years   |
| Machinery andequipment       |  |                           | 1,591  |                 |  |   | 1,379  |    |  | 3-5years |
| Leaseholdimprovements        |  |                           | 981    |                 |  |   | 981    |    |  | 10years* |
|                         |  |                           | 2,828  |                 |  |   | 2,616  |    |  |     |
| Less:accumulateddepreciation |  |                           | (2,341 | )               |  |   | (2,135 | )  |  |     |
| Propertyand equipment,net    |  | $                              | 487    |                 |  | $      | 481    |    |  |     |
|                              |

|  |
|--|
|  |  |
|  |

|         |                                                                                                   |
|---------|---------------------------------------------------------------------------------------------------|
| *  | Basedupon the lesser of the assets' useful lives or the term of thelease of the related property. |

The net book value of assets heldunder capital leases included in property and equipment aggregated$5,000 and $21,000 (net of accumulated depreciation of $92,000 and$76,000) as of December 31, 2004 and 2003, respectively. Depreciationexpense for the years ended December 31, 2004, 2003 and 2002 was$227,000, $268,000 and $463,000, respectively.

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NOTE 7 – ACCRUAL FOR STORECLOSINGS:

Effective January 1, 2003, the Company adopted theprovisions of SFAS No. 146, "Accounting for CostsAssociated with Exit or Disposal Activities," whichsuperceded EITF Issue 94-3, "Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit anActivity." In accordance therewith, the Company records aliability for the cost associated with an exit or disposal activitywhen the liability is incurred. Prior to January 1, 2003, a provisionwas recorded at the time the determination was made to close aparticular store and was based on the expected net proceeds, if any, tobe generated from the disposition of the store's assets, ascompared to the carrying value (after consideration of impairment, ifany) of such store's assets and the estimated costs (includinglease termination costs and other expenses) that were anticipated to beincurred in the closing of the store in question. For the year endedDecember 31, 2002, the Company recorded a provision for 15 storeclosings totaling approximately $920,000 (comprised of $792,000 inlease termination costs and $128,000 for other associated expenses),which provision is separately stated in the accompanying ConsolidatedStatements of Operations for the year ended 2002. As of December 31,2004, all such stores were closed, and $42,000 remained accrued asaccrual for store closings on the accompanying Consolidated BalanceSheet. No provision for store closings was provided for during the yearended December 31, 2004.

NOTE 8 – ACCOUNTS PAYABLE ANDACCRUED LIABILITIES:

Accounts payable and accrued liabilitiesconsist of the following (in thousands):

|                                   |  |                  |       |        |  |        |       |        |  |  |
|-----------------------------------|--|------------------|-------|--------|--|--------|-------|--------|--|--|
|                              |  | Asof December31, |
|                              |  | 2004             |       | 2003   |
| Accountspayable                   |  | $                | 1,804 |   |  | $      | 2,460 |   |
| Accruedpayroll and fringebenefits |  |             | 351   |   |  |   | 569   |   |
| Accruedprofessional fees          |  |             | 164   |   |  |   | 260   |   |
| Accruedadvertising                |  |             | 1,327 |   |  |   | 1,346 |   |
| Accrued rentunder sublease        |  |             | 246   |   |  |   | 262   |   |
| Other accruedexpenses             |  |             | 270   |   |  |   | 492   |   |
|                              |  | $                | 4,162 |   |  | $      | 5,389 |   |
|                                   |

NOTE9 – INCOME TAXES:

The Company's effective tax ratediffers from the statutory Federal income tax rate of 34%,primarily due to the effect of state and income taxes and the impact ofrecording a valuation allowance to offset the potential future taxbenefit resulting from net operating loss carry-forwards for all yearspresented.

As of December 31, 2004 and 2003, net deferred taxassets were approximately $20,200,000 and $21,600,000, respectively,resulting primarily from the future tax benefit of net operating losscarry-forwards. In accordance with SFAS No. 109, the Company hasprovided a full valuation allowance against its net deferred tax assetsas of December 31, 2004 and 2003, due to the uncertainty as to theirfuture realizability. The valuation allowance against the net deferredtax assets decreased by approximately $1,400,000 during the year endedDecember 31, 2004 and increased by approximately $1,000,000 during theyear ended December 31, 2003.

As of December 31, 2004, theCompany had net operating loss carry-forwards totaling approximately$45,500,000 available to offset future taxable income for federalincome tax purposes. The net operating loss carry-forwards expire invarying amounts through 2022 and may be limited in accordance withSection 382 of the Internal Revenue Code of 1986, as amended, based oncertain changes in ownership that have occurred, or could in the futureoccur.

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NOTE 10 – LONG-TERM DEBT (INCLUDINGRELATED PARTY BORROWINGS):

As of December 31, 2004, principalpayments due on the Company's long-term debt and related partyborrowings are as follows (in thousands):

|        |  |                                   |     |              |  |        |         |        |  |  |
|--------|--|-----------------------------------|-----|--------------|--|--------|---------|--------|--|--|
| Year   |  | RelatedPartyBorrowings(1)&(2) |     | OtherDebt(2) |
| 2005   |  | $                                 | 39  |         |  | $      | — |   |
| 2006   |  |                              | 43  |         |  |   | — |   |
| 2007   |  |                              | 183 |         |  |   | 385     |   |
| 2008   |  |                              | 8   |         |  |   | — |   |
|   |  | $                                 | 273 |         |  | $      | 385     |   |
|        |

|          |                                                                                                                                                                                                                                                                                                                                                       |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1)  | OnDecember 31, 2002, the Company refinanced certain past due amounts owedto Cohen's Fashion Optical ("CF"), aretail optical chain owned by certain of the principal shareholders anddirectors of the Company (Note 13). As a result, the Company signed a5-year, $200,000 promissory note, in favor of CF, bearing interest at arate of 10% perannum. |

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2)  | Effective April 14, 2003, inconnection with certain Rescission Transactions consummated by theCompany on December 31, 2003 (Note 14), the Company signed numerouspromissory notes with certain of its shareholders, two of whom are alsodirectors of the Company. The notes, which aggregate $520,000, bearinterest at a rate of 6% per annum, and all sums (principal andinterest) under the notes are due and payable in April 2007. |

NOTE 11 – COMMITMENTS AND CONTINGENCIES:

Operating Lease Commitments

The Companyleases locations for both its Company-owned and franchised stores, aswell as its executive and administrative offices. As of December 31,2004, minimum future rental payments for Company-owned stores and theCompany's executive and administrative offices, as well as forstores leased by the Company and subleased to franchisees, in theaggregate, are as follows (in thousands):

|            |  |                       |        |                 |  |                       |        |        |  |        |       |        |  |  |
|------------|--|-----------------------|--------|-----------------|--|-----------------------|--------|--------|--|--------|-------|--------|--|--|
|       |  | TotalLeaseObligations |        | SubleaseRentals |  | NetCompanyObligations |
| 2005       |  | $                     | 5,007  |            |  | $                     | 4,530  |   |  | $      | 477   |   |
| 2006       |  |                  | 2,572  |            |  |                  | 2,225  |   |  |   | 347   |   |
| 2007       |  |                  | 1,868  |            |  |                  | 1,668  |   |  |   | 200   |   |
| 2008       |  |                  | 1,349  |            |  |                  | 1,199  |   |  |   | 150   |   |
| 2009       |  |                  | 1,093  |            |  |                  | 964    |   |  |   | 129   |   |
| Thereafter |  |                  | 1,953  |            |  |                  | 1,809  |   |  |   | 144   |   |
|       |  | $                     | 13,842 |            |  | $                     | 12,395 |   |  | $      | 1,447 |   |
|            |

TheCompany holds the master lease on certain of its franchised locationsand, as part of the franchise agreement, sublets the subject premisesto the franchisee. In addition to the fixed rent payable under suchmaster leases, most master leases require payment of a pro rata portionof common area maintenance expenses and real estate taxes, as well aspercentage rent based upon the sales volume of the store in question.As required by SFAS No. 13 "Accounting forLeases," the Company recognizes its rent expense on astraight-line basis over the life of the related lease. In most cases,however, the Company's obligations are limited due to the holdingof leases in a leasehold corporation with limited guarantees from theCompany. Rent expense (which was net of sublease rentals ofapproximately $6,561,000, $6,697,000 and $7,676,000, respectively) wasapproximately $921,000, $812,000 and $1,740,000 for the years endedDecember 31, 2004, 2003 and 2002, respectively.

Litigation

In 1999, Apryl Robinson commencedan action in Kentucky against, among others, the Company, seeking anunspecified amount of damages and alleging numerous claims, includingfraud and 

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misrepresentation. The claims that are thesubject of this action were subsequently tried in an action in New Yorkthat resulted in a judgment in favor of the Company, and against Ms.Robinson and Dr. Larry Joel, a co-defendant in such action.Subsequently, Ms. Robinson and Dr. Joel filed for bankruptcy inKentucky, and received a discharge from the trustee. Presently, thereis a motion pending in the U.S. Bankruptcy Court to vacate Dr.Joel's discharge based upon, among other things, fraud on theBankruptcy Court. The Court has postponed a trial on this motion.

In 1999, Berenter Greenhouse and Webster, the advertising agencypreviously utilized by the Company, commenced an action, against theCompany, in the New York State Supreme Court, New York County, foramounts alleged to be due for advertising and related fees. The amountsclaimed by the plaintiff are in excess of $200,000. In response to thisaction, the Company filed counterclaims of approximately $500,000,based upon estimated overpayments allegedly made by the Companypursuant to the agreement previously entered into between the parties.As of the date hereof, these proceedings were still in the discoverystage.

In July 2001, the Company commenced an ArbitrationProceeding, in the Ontario Superior Court of Justice, against Eye-Site,Inc. and Eye Site (Ontario), Ltd., as the makers of two promissorynotes (in the aggregate original principal amount of $600,000) made byone or more of the makers in favor of the Company, as well as againstMohammed Ali, as the guarantor of the obligations of each maker undereach note. The notes were issued, by the makers, in connection with themakers' acquisition of a Master Franchise Agreement for theProvince of Ontario, Canada, as well as their purchase of the assetsof, and a Sterling Optical Center Franchise for, four of theCompany's retail optical stores then located in Ontario, Canada.In response, the defendants counterclaimed for damages, in the amountof $1,500,000, based upon, among other items, allegedmisrepresentations made by representatives of the Company in connectionwith these transactions. The Company believes that it has a meritoriousdefense to each counterclaim. As of the date hereof, these proceedingswere in the discovery stage.

In February 2002, Kaye Scholer,LLP, the law firm previously retained by the Company as its outsidecounsel, commenced an action in the New York State Supreme Courtseeking unpaid legal fees of approximately $122,000. The Companyanswered the complaint in such action, and has heard nothing since. TheCompany believes that it has a meritorious defense to such claim.

On May 20, 2003, Irondequoit Mall, LLC commenced an action againstthe Company and Sterling Vision of Irondequoit, Inc.("SVI") alleging, among other things, thatthe Company had breached its obligations under its guaranty of thelease for the former Sterling Optical store located in Rochester, NewYork. The Company and SVI believe that they have a meritorious defenseto such action. As of the date hereof, these proceedings were in thediscovery stage.

In October 2003, Luzerne Optical Laboratories,Ltd. ("Luzerne") commenced an action againstthe Company in the Court of Common Pleas of the County of Luzerne,State of Pennsylvania, which action was thereafter removed to theFederal Court, Middle District of Pennsylvania. In this action,plaintiff seeks to recover, from the Company, the approximate sum of$240,000 for certain laboratory services allegedly provided to theCompany. The Company believes that is has a meritorious defense to suchaction. As of the date hereof, these proceedings were in the discoverystage.

In December 2003, Westminster Mall Company commenced anaction against the Company and Sterling Vision of Westminster, Inc.,the Company's wholly-owned subsidiary, in the District Court ofthe County of Jefferson, State of Colorado, in which the plaintiff, asthe Landlord of the Company's former Sterling Optical storelocated in Westminster, Colorado, is seeking, among other things,damages against such subsidiary under the lease for such store in theapproximate amount of $229,000, and damages against the Company underits guaranty of such lease, in the approximate amount of $110,000. TheLandlord was granted a default judgment against such subsidiary, whichdefault judgment was uncontested by such subsidiary. The Company hasanswered the Landlord's complaint in this action and believesthat it has a meritorious defense to such action. As of the datehereof, these proceedings were in the discovery stage, and a trial datehas been scheduled for April 19, 2005.

In January 2005, theCompany commenced an action against Cherello, Inc., Theodore Cherofskyand Jimmy Choello, in the Supreme Court of the State of New York,County of Nassau, seeking, among 

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other things, injunctive relief and monetarydamages, in an amount not less than $100,000, as a result of thedefendants' alleged breach of the terms of the Sterling OpticalCenter Franchise Agreement (and related documents) with the Company towhich they are parties. The defendants then asserted counterclaimsagainst the Company, seeking, among other things, money damages undersuch Franchise Agreement, as a result of the Company's allegedviolation of such Franchise Agreements. The Company believes that ishas a meritorious defense to such claims. As of the date hereof, theseproceedings were in the discovery stage.

In February 2005, theCompany commenced an action against Abell Vision, Inc., Excel of BeaverDam, Inc., The Visions Group, Inc., John Bellotti and Anne Bellotti, inthe Supreme Court of the State of New York, County of Nassau, seeking,among other things, monetary damages, in the approximate amount of$100,000, as a result of the defendants' alleged breach of theterms of the Sterling Optical Center Franchise Agreements (and relateddocuments) with the Company to which they are parties. The Defendantsthen asserted counterclaims against the Company, seeking, among otherthings, rescission of such Franchise Agreements, and money damagesthereunder, as a result of the Company's alleged violation ofsuch Franchise Agreements, as well as applicable franchise laws. TheCompany believes that is has a meritorious defense to such claims. Asof the date hereof, these proceedings were in the discovery stage.

In addition to the foregoing, in the ordinary course of business theCompany is a defendant in certain lawsuits alleging various claimsincurred, certain of which claims are covered by various insurancepolicies, subject to certain deductible amounts and maximum policylimits. In the opinion of management, the resolution of these claimsshould not have a material adverse effect, individually or in theaggregate, upon the Company's business or financial condition.Other than as set forth above, management believes that there are noother legal proceedings, pending or threatened, to which the Companyis, or may be, a party, or to which any of its properties are or may besubject to, which, in the opinion of management, will have a materialadverse effect on the Company.

Additionally, with respect to thelandlord-tenant actions described herein, the Company has alreadyaccounted for the estimated possible costs (including possiblejudgments) associated with such actions as part of accounts payable andaccrued liabilities, and the accrual for store closings as of December31, 2004.

Guarantees

In connection withthe Company's sale of one of its laser vision correction centers,Insight Laser Centers N.Y.I., Inc. (the "AmbulatoryCenter") on May 31, 2001, the Company agreed to guaranteecertain of the potential ongoing liabilities of the Ambulatory Center.As of December 31, 2003, the Company had accrued $225,000 for estimatedguaranteed liabilities in 2003, all of which were paid in 2004. No suchguaranteed liabilities were accrued for during the ended December 31,2004.

In September 2003, the Company entered into a series ofagreements, with the owner of the Ambulatory Center and the landlord ofthe premises, pursuant to which the Company's future guarantee isnow expressly limited to that of the minimum base rent and additionalrent, payable under the lease for the premises, as adjusted inaccordance with the agreements. In connection with the agreements, theCompany agreed to settle its outstanding liabilities allegedly dueunder its guarantee, which liabilities were settled at lower amountsthan the Company had originally accrued for. As of December 31, 2004,the Company had no remaining amounts owed relating to this guarantee.However, there can be no assurance that future liabilities will notarise in connection with this guarantee.

As of December 31,2004, the Company was a guarantor of certain leases of retail opticalstores franchised and subleased to its franchisees. In the event thatall of such franchisees defaulted on their respective subleases, theCompany would be obligated for aggregate lease obligations ofapproximately $4,135,000. The Company continually evaluates thecredit-worthiness of its franchisees in order to determine theirability to continue to perform under their respective subleases.Additionally, in the event that a franchisee defaults under itssublease, the Company has the right to take over operation of therespective location.

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NOTE 12 – EXECUTIVECOMPENSATION:

On December 30, 2004, the Compensation Committee(the "Committee") of the Board granted anaggregate of 13,284,114 stock options to each of the four executiveofficers of the Company. The options have an exercise price of $0.14, aterm of 10 years, and vest on various dates through December 30, 2006.The Company's Chief Executive Officer("CEO") had an employment agreement, whichhas since expired, that provided for an incentive bonus based on theCompany's achievement of certain earnings targets, as defined inhis agreement. The two Co-Chief Operating Officers also receive anincentive bonus based on substantially the same terms as provided tothe CEO. For the years ended December 31, 2004, 2003 and 2002, therewas an aggregate of $0, $77,924 and $0 of such bonuses reflected in theaccompanying Consolidated Statement of Operations, respectively. Suchbonuses achieved during 2003 were paid to the officers in April2004.

NOTE 13 – RELATED PARTY TRANSACTIONS:

InJune 2001, due to the significant losses being incurred by the Companyin connection with the operation thereof, the Company subleased itsstore (together with certain of the assets located therein) in Nyack,New York to General Vision Services LLC("GVS"), a retail optical chain owned bycertain of the principal shareholders and directors of the Company, andmembers of their respective immediate families. In connection with thistransfer, the Company agreed to provide a rent subsidy of $2,500 permonth through May 31, 2003.

During 2004, 2003 and 2002, theCompany purchased from City Lens, Inc. ("CityLens"), an ophthalmic lens laboratory owned, directly orindirectly, by certain of the principal shareholders and directors ofthe Company, together with certain members of their immediate families,ophthalmic lenses and certain lens refinishing services for itsCompany-owned stores. For the years ended December 31, 2004, 2003 and2002, respectively, the total cost of such lenses and servicespurchased from City Lens, was approximately $1,000, $26,000 and$228,000. The Company believes that the cost of such lenses andservices were as favorable to the Company as those which could havebeen obtained from an unrelated third party.

In April 2002, theCompany sold substantially all of the assets of one of its storeslocated in New York City, together with all of the capital stock of itswholly-owned subsidiary, Sterling Vision of 125th Street,Inc., which is the tenant under the master lease for such store, toGVS, for the sum of $55,000.

On July 23, 2002, the Board ofDirectors authorized the Company to borrow $300,000 from one of itsprincipal shareholders and directors. The loan was payable on August10, 2002, together with interest in an amount equal to 1% of theprincipal amount of such loan. The Company repaid this loan, in full,on August 8, 2002.

On December 31, 2002, the Companyrefinanced certain past due amounts, owed to CF. In connectiontherewith, the Company signed a 5-year, $200,000 promissory note, infavor of CF, bearing interest at a rate of 10% per annum.

On April 4, 2003, the Board of Directors authorized the Company toborrow $100,000 from one of its principal shareholders and directors.The loan was payable immediately after the closing of theCompany's Rights Offering (Note 14), together with interest in anamount equal to 1% of the principal amount of such loan. TheCompany repaid this loan, in full, on April 22, 2003, with a portion ofthe proceeds from the Rights Offering.

Effective April 14, 2003,in connection with certain Rescission Transactions consummated by theCompany on December 31, 2003, the Company signed promissory notes withtwo of its current directors, who are also shareholders, of theCompany. The notes, which aggregate $135,000, bear interest at a rateof 6% per annum, and all sums (principal and interest) under thenotes are due and payable in April 2007.

On January 10, 2002,the Company relocated to an office building located in Garden City, NewYork, and entered into a sublease with CF for one of the two floorsthen being subleased to CF. Occupancy costs are being allocated betweenthe Company and CF based upon the respective square footages

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being occupied. For the years ended December31, 2004, 2003 and 2002, the Company paid approximately $156,000,$171,000 and $158,000, respectively, for rent and related charges underthis sublease. Management believes that the sublease is at fair marketvalue.

The Company's Chief Executive Officer serves on theBoard of Directors of Newtek Business Services, Inc.("NBSI"), a company that provides variousfinancial services to both small and mid-sized businesses. The Companyutilizes the bank and non-bank card processing services of one ofNBSI's affiliated companies. During the years ended December 31,2004 and 2003, the Company paid approximately $65,000 and $23,000,respectively, to such affiliate for such services provided.Additionally, the Company has begun utilizing insurance administrativeservices of one of NBSI's affiliated companies. No payments aremade directly to that affiliate. The Company believes that the cost ofsuch services were as favorable to the Company as those which couldhave been obtained from an unrelated third party.

During theordinary course of business, primarily due to the fact that theentities occupy office space in the same building, and in an effort toobtain savings with respect to certain administrative costs, theCompany and CF will at times share in the costs of minor expenses.Management believes that these expenses have been appropriatelyaccounted for herein.

In the opinion of the Company'smanagement, all of the above transactions were conducted at"arms-length."

NOTE 14 –SHAREHOLDERS' EQUITY:

Conversion of SeniorConvertible Preferred Stock

In April 1998, the Companyissued a series of its Preferred Stock, par value $0.01 per share (the"Senior Convertible Preferred Stock"),together with warrants (all of which expired in February 2001) toacquire shares of its Common Stock. Each share of Senior ConvertiblePreferred Stock had a liquidation preference of $100,000, and wasoriginally convertible into Common Stock at a price of $5.00 per share.In December 1999, the conversion price was reduced to $0.75 per sharefor all of the remaining holders of Senior Convertible PreferredStock.

On June 8, 2002, one of the remaining two holders of theCompany's Senior Convertible Preferred Stock exercised its rightto convert an aggregate of approximately $177,000 stated value ofSenior Convertible Preferred Stock, into an aggregate of 235,648 sharesof the Company's Common Stock.

As of December 31, 2004,there were approximately 0.74 shares of Senior Convertible PreferredStock outstanding with a stated value of approximately $74,000,convertible into Common Stock at a rate of $0.75. The sole remainingholder of the Company's Senior Convertible Preferred Stock hasthe right to vote, as a single class, with the Common Stock, on anas-converted basis, on all matters on which the holders of theCompany's Common Stock are entitled to vote.

Issuance of Common Stock for Consulting Services

On January 16, 2001, the Company entered into an agreement withGoldin Associates, LLC ("Goldin") wherebyGoldin agreed to provide interim management services to the Company,for an initial six-month period, all at the direction of the Board ofDirectors of the Company or its other officers, pursuant to delegatedauthority. The fee for such services was $50,000 per month, plus anadditional fee comprised of unregistered shares totaling 1.65%of the outstanding Common Stock of the Company as of January 22, 2001,and warrants to purchase up to an aggregate of 3.35% of theoutstanding Common Stock of the Company. As a result, the Companyissued 418,719 unregistered shares of its Common Stock (the fair valueof which was approximately $108,000 and was charged directly tooperations) to Goldin, along with warrants to purchase up to anadditional 850,126 shares of Common Stock, all at an exercise price of$0.01, subject to the Company achieving certain earnings targets (the"Incentive Fee").

The terms of theIncentive Fee provided that the warrants may only be exercisedaccording to the following schedule: (1) warrants to purchase 279,146shares of the Company's Common Stock immediately following a yearin which the Company shall realize earnings before interest, taxes,

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depreciation and amortization and certainother items ("EBITDA"), as defined, of atleast $1,000,000; (2) warrants to purchase an additional 279,146 sharesof the Company's Common Stock immediately following a year inwhich the Company shall realize EBITDA of at least $2,000,000; and (3)warrants to purchase an additional 291,834 shares of theCompany's Common Stock immediately following a year in which theCompany shall realize EBITDA of at least $3,000,000. On December 31,2003, 558,292 of Goldin's warrants vested as the Company achieved$2,000,000 of EBITDA, as defined, for the year ended December 31, 2003.As a result of the vesting of these warrants, the Company incurred acharge to earnings of approximately $53,000, representing the value ofthe warrants that vested. On May 20, 2004, Goldin exercised all suchwarrants. The remaining warrants did not vest and expired on December31, 2004.

On April 26, 2001, the Company's Board ofDirectors approved the terms of an agreement whereby it agreed to issueto Balfour Investors Incorporated("Balfour"), in exchange for certain advisoryservices rendered to the Company's Board of Directors, 209,359unregistered shares of its Common Stock (the fair value of which wasapproximately $57,000 and was charged directly to operations), togetherwith warrants to purchase up to 425,063 additional shares of CommonStock at an exercise price of $0.01. The warrants were exercisableaccording to the following schedule: (1) warrants to purchase 139,573shares of the Company's Common Stock immediately following a yearin which the Company shall realize EBITDA, as defined, of at least$1,000,000; (2) warrants to purchase an additional 139,573 shares ofthe Company's Common Stock immediately following a year in whichthe Company shall realize EBITDA of at least $2,000,000; and (3)warrants to purchase an additional 145,917 shares of theCompany's Common Stock immediately following a year in which theCompany shall realize EBITDA of at least $3,000,000. Further, thesewarrants would become exercisable only if the applicable EBITDA targetswere achieved prior to December 31, 2004. On December 31, 2003, 279,146of Balfour's warrants vested as the Company achieved $2,000,000of EBITDA, as defined, for the year ended December 31, 2003. As aresult of the vesting of these warrants, the Company incurred a chargeto earnings of approximately $27,000, representing the fair value ofthe warrants that vested. On May 20, 2004, Balfour exercised all suchwarrants. The remaining warrants did not vest and expired on December31, 2004.

On September 7, 2004, the Company's Board ofDirectors approved the terms of an agreement whereby it agreed to issueto Greenberg Traurig LLP, in exchange for certain legal servicesrendered in connection with the Company's proxy contest (Note16), warrants to purchase up to 100,000 shares of the Company'sCommon Stock at an exercise price per share of $0.25. The warrants areimmediately exercisable and will expire on September 6, 2014. As aresult of this issuance, the Company incurred a charge to earnings ofapproximately $5,000, representing the fair value of the warrantsissued.

Shareholder Rights Offering

OnApril 29, 2002, the Board unanimously approved of the Company'sinitiation of a shareholder rights offering (the "RightsOffering"), whereby the Company would attempt to raiseapproximately $2,000,000 of gross proceeds.

On February 12,2003, a registration statement filed by the Company in connection withits Rights Offering was declared effective by the Securities andExchange Commission. The Rights Offering consisted of 50,000,000 units,with each unit consisting of one share of the Company's CommonStock, and a warrant, having a term of 12 months, to purchase oneadditional share of Common Stock at an exercise price of $0.05, whichwas determined based on certain closing price and volume requirementsduring the subscription period. The terms of the Rights Offeringprovided that each shareholder was granted 1.67 non-transferable rightsfor every share of Common Stock owned as of the record date, February25, 2003. Each right was exercisable for one unit at a price of$0.04.

On April 14, 2003, the subscription period ended and theCompany completed the Rights Offering. Approximately 92,700,000 unitswere subscribed for in the Rights Offering, and, as a result,50,000,000 new shares of Common Stock, and warrants to purchase50,000,000 additional shares of Common Stock, were issued, resulting ingross proceeds of $2,000,000. The issuance costs associated with theRights Offering were approximately $141,000. The net proceeds receivedin the Rights Offering 

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(approximately $1,859,000) were allocatedbased on the relative fair values of the Common Stock and the warrants.Accordingly, approximately $1,338,000 was allocated to the Common Stockand approximately $521,000 was allocated to the warrants. On December31, 2003, effective April 14, 2003, 13,000,000 of the units wererescinded by the Company, and the Company made promissory notes of$520,000 in the aggregate to such shareholders to repay the originalsubscription price paid (see "Rescission of Units andWarrants" below).

On various dates prior to April14, 2004, holders of warrants issued in connection with the RightsOffering exercised 1,886,510 warrants at an exercise price of$0.05.

Rescission of Units and Warrants

Subsequent to the Rights Offering, the Company determined that theuse of certain of its tax attributes, including its net operating losscarry-forwards, may have been substantially restricted as a result ofthe consummation of certain transactions in the Rights Offering. In aneffort to avoid such restrictions, on December 31, 2003 (effectiveApril 14, 2003), the Company and certain of its shareholders (the"Subject Shareholders") agreed to, andeffectuated, (a) the rescission, ab initio, of the exercise, bythe Subject Shareholders, of 13,000,000 of the oversubscription rightsof the Subject Shareholders (and, accordingly, of the issuance, to suchSubject Shareholders, of the units associated therewith), and (b) therescission, surrender and cancellation of all of the remaining warrants(33,210,028 in the aggregate) that were acquired by the SubjectShareholders in the Rights Offering (collectively, the"Rescission Transactions"). In connectionwith the Rescission Transactions, the Company agreed to repay eachSubject Shareholder the original subscription amount of $0.04(previously paid by each Subject Shareholder) for each of the rescindedunits (together with interest at a rate of 6% per annum from thedate of the original acquisition thereof), which, in the aggregate forall of the Subject Shareholders, totaled $520,000. This sum (plusinterest) is payable, by the Company, on or before April 14, 2007,pursuant to a series of promissory notes issued to the SubjectShareholders. Additionally, as a result of the Rescission Transactions,the Company's outstanding Common Stock decreased by 13,000,000shares.

Furthermore, in order to limit the potential that futuretransactions could have a similar effect on the Company's taxattributes, the Company amended its by-laws to provide the Board ofDirectors with the ability to void certain transactions in Companysecurities that may impair or limit the future utilization of its taxattributes, including its net operating loss carry-forwards.

Notwithstanding the consummation of the Rescission Transactions andthe amendment of the by-laws, there can be no assurance that theCompany has been, or will in the future be, successful in preventing anevent which could materially impair or limit the Company'sutilization of its net operating loss carry-forwards and other taxattributes.

Settlement with SubjectShareholders

Recognizing that the Subject Shareholders thatparticipated in the Rescission Transactions (see"Rescission of Units and Warrants" above)suffered certain damages in connection therewith, on December 31, 2003,the Company granted to the Subject Shareholders, in the aggregate, newwarrants to purchase 59,210,028 shares of Company Common Stock. Theexercise prices of the new warrants issued to each of the SubjectShareholders ranged from $0.0465 to $0.0489. These exercise prices werecalculated with the intention of allowing the Subject Shareholders topurchase equity of the Company on substantially the same economic termsthat they would have been originally entitled pursuant to the RightsOffering, but for the Rescission Transactions. The new warrants are notexercisable until April 15, 2006. In connection with the issuance ofthe new warrants to the Subject Shareholders, the Company incurred aone-time, non-cash charge of approximately $4,544,000, which isreflected as non-cash charge for issuance of warrants as a result ofRescission Transactions on the accompanying Statement of Operations forthe year ended December 31, 2003.

NOTE 15 – STOCK OPTIONSAND WARRANTS:

Sterling Stock Option Plan

In April 1995, the Company adopted a Stock Incentive Plan (the"Plan") that permits the issuance of optionsto selected employees and directors of, and consultants to, theCompany. The Plan, as 

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amended, reserves 7,000,000 shares of CommonStock for issuance underlying grants of stock options, and providesthat the term of each award be determined by the Committee, which ischarged with administering the Plan. The Plan provides the Board withthe ability to grant options in excess of the number of shares reservedfor issuance in connection with the Plan, provided that the Boardobtains shareholder approval to amend the Plan to increase the sharesreserved for issuance underlying option grants within 12 months of thedate of grant. Under the terms of the Plan, options may be qualified ornon-qualified and granted at exercise prices and for terms to bedetermined by the Committee. Additionally, certain options previouslyissued under the Plan provide that notwithstanding the termination ofthe Company's employment of any such employee/holder, he/she willretain the right to exercise those options that have previously vestedin his/her favor until such time that the options expire in accordancewith the terms of the original grant.

A summary of the optionsissued under the Plan is presented in the table below:

|                                        |  |        |            |                              |  |        |        |                              |  |        |           |                              |  |        |        |        |  |        |            |         |  |        |         |        |  |  |
|----------------------------------------|--|--------|------------|------------------------------|--|--------|--------|------------------------------|--|--------|-----------|------------------------------|--|--------|--------|--------|--|--------|------------|---------|--|--------|---------|--------|--|--|
|                                   |  | 2004   |            | 2003                         |  | 2002   |
|                                   |  | Shares |            | WeightedAverageExercisePrice |  | Shares |        | WeightedAverageExercisePrice |  | Shares |           | WeightedAverageExercisePrice |
| Optionsoutstanding, beginning ofperiod |  |   | 4,605,635  |                         |  | $      | 3.69   |                         |  |   | 4,270,468 |                         |  | $      | 3.98   |   |  |   | 5,398,133  |    |  | $      | 4.07    |   |
| Granted                                |  |   | 13,284,114 |                         |  | $      | 0.14   |                         |  |   | 700,000   |                         |  | $      | 0.05   |   |  |   | 150,000    |    |  | $      | 0.08    |   |
| Exercised                              |  |   | (100,000   | )                       |  | $      | 0.05   |                         |  |   | (350,000  | )                       |  | $      | 0.06   |   |  |   | —    |    |  | $      | — |   |
| Canceled, forfeited orexpired          |  |   | (1,141,001 | )                       |  | $      | 5.85   |                         |  |   | (14,833   | )                       |  | $      | 0.33   |   |  |   | (1,277,665 | )  |  | $      | 3.90    |   |
|                                   |  |   |       |                         |  |   |   |                         |  |   |      |                         |  |   |   |   |  |   |       |    |  |   |    |   |
| Optionsoutstanding, end ofperiod       |  |   | 16,648,748 |                         |  | $      | 0.62   |                         |  |   | 4,605,635 |                         |  | $      | 3.69   |   |  |   | 4,270,468  |    |  | $      | 3.98    |   |
|                                   |  |   |       |                         |  |   |   |                         |  |   |      |                         |  |   |   |   |  |   |       |    |  |   |    |   |
| Optionsexercisable, end ofperiod       |  |   | 5,769,634  |                         |  | $      | 1.79   |                         |  |   | 4,545,140 |                         |  | $      | 3.74   |   |  |   | 4,118,809  |    |  | $      | 4.12    |   |
|                                        |

Ofthe total options outstanding as of December 31, 2004, there were13,629,114 held by current employees of the Company, and 3,019,634 heldby outside directors of the Company, outside consultants and formeremployees. Of the total options granted during 2004, 13,284,114 weregranted to employees of the Company. There were no grants during 2004to outside consultants or former employees.

On December 30,2004, the Committee granted an aggregate of 13,284,114 stock options tothe Company's executive officers, all at an exercise price of$0.14, which was the closing price on the date of grant. The sharesunderlying 9,784,114 of these options are subject to shareholderapproval of an amendment to the plan to increase the shares reservedfor issuance thereunder. The stock options vest according to thefollowing schedule: (1) 2,405,000 are immediately vested; (2) 2,405,000vest on December 30, 2005; (3) 6,069,114 vest on April 16, 2006; and(4) 2,405,000 vest on December 30, 2006. The Company incurred anon-cash charge to earnings of approximately $129,000, representing thefair value of the immediately vested options. All of these optionsexpire 10 years from the date of grant.

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The following table summarizesinformation about stock options outstanding and exercisable as ofDecember 31,2004:

|                       |  |                    |            |                                          |  |                               |       |             |  |                               |      |        |  |        |           |        |  |   |      |        |  |  |
|-----------------------|--|--------------------|------------|------------------------------------------|--|-------------------------------|-------|-------------|--|-------------------------------|------|--------|--|--------|-----------|--------|--|---|------|--------|--|--|
|                  |  | OptionsOutstanding |            | OptionsExercisable                       |
| RangeofExercisePrices |  | Outstanding        |            | Weighted-AverageRemainingContractualLife |  | Weighted-AverageExercisePrice |       | Exercisable |  | Weighted-AverageExercisePrice |
| $0.05to$0.08          |  |               | 400,000    |                                     |  |                          | 8.41  |        |  | $                             | 0.05 |   |  |   | 400,000   |   |  | $ | 0.05 |   |
| $0.09to$0.14          |  |               | 13,284,114 |                                     |  |                          | 10.00 |        |  | $                             | 0.14 |   |  |   | 2,405,000 |   |  | $ | 0.14 |   |
| $0.15to$0.23          |  |               | 150,000    |                                     |  |                          | 6.22  |        |  | $                             | 0.22 |   |  |   | 150,000   |   |  | $ | 0.22 |   |
| $0.24to$0.36          |  |               | 1,297,500  |                                     |  |                          | 5.61  |        |  | $                             | 0.29 |   |  |   | 1,297,500 |   |  | $ | 0.29 |   |
| $1.32to$1.98          |  |               | 5,000      |                                     |  |                          | 4.83  |        |  | $                             | 1.88 |   |  |   | 5,000     |   |  | $ | 1.88 |   |
| $3.00to$4.50          |  |               | 95,000     |                                     |  |                          | 4.45  |        |  | $                             | 3.37 |   |  |   | 95,000    |   |  | $ | 3.37 |   |
| $4.51to$6.77          |  |               | 890,467    |                                     |  |                          | 2.81  |        |  | $                             | 5.97 |   |  |   | 890,467   |   |  | $ | 5.97 |   |
| $6.78to$8.25          |  |               | 526,667    |                                     |  |                          | 3.75  |        |  | $                             | 8.08 |   |  |   | 526,667   |   |  | $ | 8.08 |   |
|                       |

Thefair value of each option grant is estimated on the date of grant usingthe Black-Scholes option-pricing model with the followingassumptions:

|                      |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|----------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                 |  | 2004   |         | 2003    |  | 2002   |
| Expectedlife (years) |  |   | 1       |    |  |   | 1       |    |  |   | 1       |    |
| Interestrate         |  |   | 3.00    | %  |  |   | 2.20    | %  |  |   | 2.21    | %  |
| Volatility           |  |   | 98      | %  |  |   | 98      | %  |  |   | 114     | %  |
| Dividendyield        |  |   | — |    |  |   | — |    |  |   | — |    |
|                      |

StockPurchase Warrants

In December 1999, the Company issued2,500,000 warrants to MY2000, LLC, an entity acting as an independentadvisor to the Company in connection with its planned Internet businessand strategy to purchase 2,500,000 shares of the Company's CommonStock at a price of $2.00 per share, the fair value on the date ofissuance, 1,500,000 of which remained unexercised and expired onDecember 2, 2004.

In the first quarter of 2000, the Companyissued 1,677,570 warrants to investors that participated in a certainprivate placement by the Company. The exercise price of the warrantswas $7.59 and they were all exercisable. The warrants expired onvarious dates between February 13, 2005 and March 22, 2005.Additionally, the Company issued an aggregate of 500,000 warrants tothe placement agents. These warrants also had an exercise price of$7.59, were currently exercisable, and expired on February 13,2005.

In January 2001, the Company issued 850,126 warrants toGoldin (Note 14), 558,292 of which vested on December 31, 2003. On May20, 2004, Golden exercised the vested warrants. The remaining warrantsdid not vest and expired on December 31, 2004.

In April 2001,the Company issued 425,063 warrants to Balfour (Note 14), 279,146 ofwhich vested on December 31, 2003. On May 20, 2004, Balfour exercisedthe vested warrants. The remaining warrants did not vest and expired onDecember 31, 2004.

In connection with the Rights Offering, theCompany issued 50,000,000 warrants, exercisable immediately at anexercise price of $0.05, and expiring on April 14, 2004. Subsequently,13,000,000 of such warrants were rescinded and 33,210,028 weresurrendered. Additionally, on various dates prior to April 14, 2004,holders of warrants issued in connection with the Rights Offeringexercised 1,886,510 warrants at an exercise price of $0.05. Theremaining 1,903,462 warrants expired on April 14, 2004.

As aresult of certain Rescission Transactions entered into by the Companyon December 31, 2003 (Note 14), the Company issued warrants to purchase59,210,028 shares of Company Common Stock to certain SubjectShareholders. The exercise prices of the warrants issued ranged from$0.0465 to $0.0489, are not exercisable until April 15, 2006, andexpire on April 14, 2008.

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In September 2004, the Company issued100,000 warrants to Greenberg Traurig LLP (Note 14) at an exerciseprice of $0.25, all of which were immediately exercisable and willexpire on September 6, 2014.

On December 30, 2004, the Committeemade two issuances, to the Company's general counsel, of warrantsto purchase an aggregate of 1,380,885 shares of Common Stock at anexercise price of $0.14, which was the closing price on the date ofgrant. The warrants will vest according to the following schedule: (1)warrants to purchase 250,000 shares are immediately vested; (2)warrants to purchase an additional 250,000 shares vest on December 30,2005; (3) warrants to purchase an additional 630,885 shares vest onApril 16, 2006; and (4) warrants to purchase an additional 250,000 veston December 30, 2006. The Company incurred a non-cash charge toearnings of approximately $14,000, representing the fair value of thewarrants vested. All such warrants expire 10 years from the date ofissuance.

NOTE 16 — THE PROXY CONTEST AND RELATEDLITIGATION

In May 2004, Benito R. Fernandez, a former directorof the Company, and Horizons Investors Corporation("Horizons"), a company controlled by Mr.Fernandez, commenced an action in New York Supreme Court against theCompany and four of his then fellow directors, which action was removedby the Company to the United States District Court for the EasternDistrict of New York. In their action, the plaintiffs allegedviolations of state law arising the Company's purported failureto provide plaintiffs with a complete and current list of theCompany's shareholders, and alleged breaches of fiduciary duty bydirectors of the Company in connection with the setting of the recorddate and Annual Meeting.

On June 2, 2004, Mr. Fernandez, throughHorizons, filed a preliminary proxy statement with the SEC inopposition to the Company's director nominees, soliciting proxiesin support of a slate of six insurgent director nominees hand-picked byFernandez. On June 16, 2004, Fernandez amended his preliminary proxystatement to, among other things, exclude one of his original nomineesfrom his slate and ultimately filed a definitive proxy statement withthe SEC on June 25, 2004.

The Company's 2004 AnnualMeeting of Shareholders (the "AnnualMeeting") was held on July 14, 2004 and, on July 26, 2004,the independent inspectors of election, IVS Associates, Inc., certifiedthe voting results. The Company's nominees received 36,013,976(approximately 56.6%) of the votes cast for the contestedelection of directors. There were 63,582,913 (approximately90.3%) votes cast at the Annual Meeting out of a possible70,422,217 voting shares. The insurgent nominees of Horizons, the ownerof 23,726,531 (approximately 33.7%) shares of the Company,received only 3,796,925 (approximately 6.0% of the total votescast) additional votes, for a total of 27,523,456 (approximately43.3%) of the votes cast.

Accordingly, theCompany's director nominees, Seymour G. Siegel, Alan Cohen andHarvey Ross, were elected to serve as Class I directors of the Company,for a term of one year expiring in 2005, and Joel L. Gold, Robert Cohenand Christopher G. Payan were elected as Class II directors of theCompany, for a term of two years expiring in 2006.

On July 28,2004, the aforementioned action was dismissed by Horizons, withoutprejudice, on consent.

During the year ended December 31, 2004,the Company incurred approximately $581,000 of costs associated withthe proxy contest and related litigation, of which, as of December 31,2004, approximately $92,000 remained due and is included in payablesassociated with proxy contest and related litigation on theaccompanying Consolidated Balance Sheet.

NOTE 17 – 401(K)EMPLOYEE SAVINGS PLANS:

Emerging Vision, Inc. and VisionCare ofCalifornia, Inc., each sponsor a 401(k) Employee Savings Plan (the"401(k) Plan") to provide all qualifiedemployees of these entities with retirement benefits. Presently, theadministrative costs of each 401(k) Plan are paid entirely by suchqualified employees, no matching contributions having been provided bythe Company.

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NOTE 18 – FOURTH QUARTERCHARGES:

In the fourth quarter of 2004, the Company recognizednon-cash equity compensation charges of approximately $143,000 relatedto the issuance of stock options and warrants (Notes 14 & 15).Additionally, the Company recorded a provision for doubtful accounts ofapproximately $188,000 related to certain of its franchise, notes andmanaged care receivables that management deemeduncollectible.

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Item 9.    Changes in andDisagreements with Accountants on Accounting and FinancialDisclosure

Not applicable.

Item 9A.    Controls andProcedures

The Company's Chief Executive Officer("CEO") and Chief Financial Officer("CFO") conducted an evaluation of theeffectiveness of the Company's disclosure controls andprocedures. Based on this evaluation, the Company's CEO and CFOconcluded that the Company's disclosure controls and procedureswere effective as of December 31, 2004 in alerting them in a timelymanner to material information required to be included in our SECreports. In addition, no change in the Company's internal controlover financial reporting occurred during the fourth quarter of thefiscal year ended December 31, 2004 that has materially affected, or isreasonably likely to materially affect, the Company's internalcontrol over financial reporting.

Item 9B. OtherInformation

Not applicable.

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PARTIII

Item 10.    Directors and Executive Officers of theRegistrant

The Board presently consists of six directors. Thedirectors of Emerging Vision, Inc. ("EVI" orthe "Company") are divided into two classes,designated as Class 1 and Class 2, respectively. Directors of eachClass are elected at the Annual Meeting of the Shareholders of EVI heldin the year in which the term of such Class expires, and servethereafter for two years, or until their respective successors are dulyelected and qualified or their earlier resignation, removal fromoffice, retirement or death. Dr. Alan Cohen, Mr. Seymour G. Siegel andMr. Harvey Ross presently serve as Class 1 Directors and are scheduledto hold office until the 2005 Annual Meeting of Shareholders. Drs.Robert Cohen, Mr. Joel L. Gold and Mr. Christopher G. Payan presentlyserve as Class 2 Directors and are scheduled to hold office until the2006 Annual Meeting of Shareholders.

INFORMATION CONCERNINGDIRECTORS AND EXECUTIVE OFFICERS

The directors and executiveofficers of EVI are asfollows:

|                       |  |        |    |          |  |                                                                                 |  |  |  |  |
|-----------------------|--|--------|----|----------|--|---------------------------------------------------------------------------------|--|--|--|--|
| Name                  |  | Age    |    | Position |
| Alan Cohen,O.D.       |  |   | 54 |     |  | Chairmanof the Board of Directors                                               |
| Robert Cohen,O.D.     |  |   | 61 |     |  | Director                                                                        |
| Joel L. Gold          |  |   | 63 |     |  | Director                                                                        |
| HarveyRoss            |  |   | 60 |     |  | Director                                                                        |
| Seymour G.Siegel      |  |   | 60 |     |  | Director                                                                        |
| Christopher G.Payan   |  |   | 30 |     |  | Chief Executive Officer andDirector                                             |
| Myles Lewis           |  |   | 37 |     |  | Co-ChiefOperating Officer and Senior Vice President – BusinessDevelopment |
| Samuel Z.Herskowitz   |  |   | 35 |     |  | Co-Chief Operating Officer and ChiefMarketing Officer                           |
| Brian P.Alessi        |  |   | 29 |     |  | Chief Financial Officer andTreasurer                                            |
| Dr. Nicholas Shashati |  |   | 45 |     |  | President – VisionCare of California, Inc.("VCC")                         |
|                       |

**Dr.Alan Cohen** has served as a director of the Company since itsinception; and, as of May 31, 2002, became the Company's Chairmanof the Board of Directors. He also served as Chief Operating Officer ofthe Company from 1992 until October 1995, when he became Vice Chairmanof the Board of Directors, and as the Company's President, ChiefExecutive Officer and Chief Operating Officer from October 1998 throughApril 17, 2000, when he became President of the Company's retailoptical store division, which position Dr. Cohen resigned from onJanuary 9, 2001. Dr. Cohen, together with his brother, Dr. RobertCohen, is the owner of Meadows Management, LLC("Meadows"), which, until April 9, 2000,rendered consulting services to the Company. From 1974 to the present,Dr.  Alan Cohen has been engaged in the retail and wholesaleoptical business. For more than 10 years, Dr.  Cohen has alsobeen a director, principal shareholder and officer of Cohen FashionOptical, Inc. and its affiliates ("CF"),which currently maintains its principal offices in Garden City, NewYork. Since January 15, 2001, Dr. Cohen has served as President ofGeneral Vision Services, LLC ("GVS"), and,since October 2003, has served as an officer of Vision World, LLC("Vision World"), each of which currentlymaintains its principal offices in New York City. Dr.  Cohen andhis brother, Dr.  Robert Cohen, are also shareholders of CF andmembers of GVS and Vision World. CF and GVS each engage in, among otherthings, the operation (and, in the case of CF, franchising) of retailoptical stores similar to those operated and franchised by the Company.GVS and Vision World also administer third party benefit programssimilar to those being administered by the Company. Dr. Cohen is alsoan officer and a director of several privately held management and realestate companies and other businesses. Dr. Cohen graduated from thePennsylvania School of Optometry in 1972, where he received a Doctor ofOptometry degree.

**Dr. Robert Cohen**had served as Chairmanof the Board of Directors of the Company from its inception throughApril 7, 2000, when he resigned as Chairman, but not as a director. Healso served 

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as Chief Executive Officer of the Companyfrom its inception until October 1995. Dr. Cohen, together with hisbrother, Dr. Alan Cohen, is the owner of Meadows, which, until April 9,2000, rendered consulting services to the Company. From 1968 to thepresent, Dr. Robert Cohen has been engaged in the retail and wholesaleoptical business. For more than 10 years, Dr. Cohen has also served asPresident and a director of CF. Since January 15, 2001, Dr. Cohen hasserved as the Chief Executive Officer of GVS, and, since October 2003,has served as an officer of Vision World. Dr. Cohen and his brother,Dr. Alan Cohen, are also shareholders of CF and members of GVS andVision World. Dr. Cohen is also an officer and a director of severalprivately held management and real estate companies and otherbusinesses. Dr. Cohen graduated from the Pennsylvania School ofOptometry in 1968, where he received a Doctor of Optometry degree.

**Joel L. Gold** has served as a director of the Company sinceDecember 1995. He is currently Head of Investment Banking at AndrewGarrett Inc. ("AGI"), an investment-bankingfirm located in New York City. Joel has been with AGI since October2004. From January 2000 until September 2004, he served as ExecutiveVice President of Investment Banking of Berry Shino Securities, Inc.,an investment-banking firm also located in New York City. From January1999 until December 1999, he was an Executive Vice President of SolidCapital Markets, an investment-banking firm also located in New YorkCity. From September 1997 to January 1999, he served as a SeniorManaging Director of Interbank Capital Group, LLC, an investmentbanking firm also located in New York City. From April 1996 toSeptember 1997, Mr. Gold was an Executive Vice President of LT Lawrence& Co., and from March 1995 to April 1996, a Managing Director ofFechtor Detwiler & Co., Inc., a representative of the underwritersfor the Company's initial public offering. Mr. Gold was aManaging Director of Furman Selz Incorporated from January 1992 untilMarch 1995. From April 1990 until January 1992, Mr. Gold was a ManagingDirector of Bear Stearns and Co., Inc. ("BearStearns"). For approximately 20 years before he becameaffiliated with Bear Stearns, he held various positions with DrexelBurnham Lambert, Inc. He is currently a director, and serves on theAudit and Compensation Committees, of Geneva Financial Corp., apublicly held specialty, consumer finance company.

**HarveyRoss** has served as a director of the Company since July 2004. Mr.Ross was Chairman and Chief Executive Officer of Viva InternationalGroup ("Viva") until February 2005 and has inexcess of thirty-five years of experience in the optical industry. Mr.Ross currently serves as a consultant to High Mark, the Company thatacquired Viva. From 1974 through 1977, Mr. Ross served as President ofJan Optical, a retail distributor of optical frames. In 1978, Mr. Rossfounded Viva, a company he grew into one of the world's largestand most successful manufacturers and distributors of fashion eyewearin the United States and abroad, which include offices in Australia,Brazil, Canada, France, Germany, Hong Kong, Italy, Japan, Mexico, Spainand the United Kingdom. Viva's distribution of designer eyewearto more than 50 countries around the world, and throughout the U.S.,include such brands as Guess, Tommy Hilfiger, Gant, Candies, EllenTracy, Harley Davidson, Bongo, Marc Ecko Scopes, Catherine Deneuve,Viva and Savvy. From 1989 through 2003 Mr. Ross also served as adirector of several corporations including, from 1989 through 2003,Ashton Imports, a leading distributor of Luxury Eyewear. From 1994through 2003, Mr. Ross served as a director of Vision Council ofAmerica, a national association for Vision Care and Education formed toassist frame and lens manufacturers and distributors. Mr. Ross alsoserves as an officer and director of several real estate investmentcompanies.

**Seymour G. Siegel** has served as a director ofthe Company since July 2004. Mr. Siegel is a certified publicaccountant and a principal in the Siegel Rich Division of Rothstein,Kass & Company, P.C., an accounting and consulting firm. From 1974to 1990 he was managing partner and founder of Siegel Rich and Co.,P.C., CPAs, which merged into M.R. Weiser & Co., LLC where he was asenior partner. He formed Siegel Rich Inc. in 1994, which in April 2000became a division of Rothstein, Kass & Company, P.C. Mr. Siegel hasbeen a director, trustee and officer of numerous businesses,philanthropic and civic organizations. He has served as a director andmember of the audit committees of Barpoint.com, Oak Hall Capital Fund,Prime Motor Inns Limited Partnership and Noise CancellationTechnologies, all public companies. Mr. Siegel currently serves as adirector and chairman of the audit committee of Hauppauge Digital,Inc.

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**Christopher G. Payan** joined theCompany as its Vice President of Finance in July 2001. In October 2001,he was appointed as its Senior Vice President, Chief Financial Officer,Secretary and Treasurer; and, on April 29, 2002, was appointed as oneof its Chief Operating Officers. On March 24, 2004, Mr. Payan wasappointed to the Company's board of directors and resigned as itsTreasurer. On June 7, 2004, Mr. Payan was appointed Chief ExecutiveOfficer and resigned from all of his other offices. From March 1995through July 2001, Mr. Payan was employed by Arthur Andersen LLP, atthe time, one of the world's largest professional services firms,where he provided various audit, accounting, operational consulting andadvisory services to various small and mid-sized private and publiccompanies in various industries. Mr. Payan also serves on the boards ofdirectors of Hauppauge Digital, Inc. and Newtek Business Services,Inc., both public companies. Mr. Payan is a certified publicaccountant.

**Samuel Z. Herskowitz**joined the Company inJanuary 1996 and, effective April 29, 2002, was appointed as one of itsChief Operating Officers, as well as its Chief Marketing Officer. From1996 to April 1997, Mr. Herskowitz served as the Director of Operationsof EVI's then wholly owned subsidiary, Insight Laser Centers,Inc. In April 1997, Mr. Herskowitz became responsible for theCompany's corporate communications and, in January 1998, wasappointed to the position of Director of Marketing and Advertising ofthe Company, in which position he served until April 1999, when hebecame the Company's Vice President – Marketing andAdvertising. From 1993 to December 1995, Mr. Herskowitz was theDirector of Public Relations for Rosenblum Eye Centers located in NewYork City. Mr. Herskowitz received a Masters in Business Administrationfrom Baruch College of the City University of New York.

**MylesS. Lewis**joined the Company in October 1999 as its Vice President– Managed Care and, effective April 29, 2002, was appointed asone of the Company's Chief Operating Officers and its Senior VicePresident – Business Development. From October 1998 to September1999, Mr. Lewis served as Vice President of Managed Care for VistaEyecare, Inc., located in Lawrenceville, Georgia, as well as Presidentof ProCare Eye Exam, Inc., Vista's health maintenanceorganization located in the State of California. From January 1993 toSeptember 1998, Mr. Lewis was employed by New West Eyeworks, located inTempe, Arizona, in various executive capacities, including VicePresident – Managed Care, President of Vista Eyecare Network,LLC, a managed care company owned by New West Eyeworks, and Director ofStrategic Projects and Operations. Mr. Lewis graduated from ArizonaState University, where he received a Bachelors of Science degree inManagement. Mr. Lewis also serves on the boards of directors of severalreal estate companies.

**Brian P. Alessi** joined the Companyas its Assistant Controller in October 2001. In February 2002, he wasappointed as its Controller, and on March 24, 2004 was appointedTreasurer of the Company. On June 7, 2004, Mr. Alessi was appointedChief Financial Officer. From December 1999 through October 2001, Mr.Alessi was employed by Arthur Andersen LLP, where he provided audit,accounting and consulting services to small and mid-sized companies invarious industries. From August 1997 through December 1999, Mr. Alessiwas employed by Yohalem Gillman & Company LLP, where he providedaudit and accounting services to small and mid-sized private companies,and tax services to individuals. Mr. Alessi graduated from theUniversity of Miami, where he received a Bachelors of BusinessAdministration degree in Accounting.

**Dr. NicholasShashati** has been the Director of Professional Services of theCompany since July 1992 and, since March 1, 1998, the President of theCompany's wholly owned subsidiary, VCC. Dr. Shashati earned aDoctor of Optometry degree from Pacific University of California in1984, and received a Bachelor of Visual Science degree from PacificUniversity and a Bachelor of Science degree in Biology from San DiegoState University. Dr. Shashati is licensed as an optometrist in theStates of New York, California, Arizona and Oregon. He is Chairpersonfor the Quality Assurance Committee of the Company, as well as aPractice Management Consultant.

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AUDIT COMMITTEE

The AuditCommittee of the Board of Directors is responsible for recommendingindependent accountants to the Board, reviewing our financialstatements with management and the independent accountants, making anappraisal of our audit effort and the effectiveness of our financialpolicies and practices and consulting with management and ourindependent accountants with regard to the adequacy of internalaccounting controls. The members of the Audit Committee currently areJoel L. Gold, Harvey Ross and Seymour G. Siegel. The Company'sBoard of Directors has determined that Seymour G. Siegel, a member ofthe Audit Committee of the Board, is an "audit committeefinancial expert," as that term is defined in Item 401(h)of Regulation S-K. The directors who serve on the Audit Committee are"independent" directors based on thedefinition of independence in the listing standards of the NationalAssociation of Securities Dealers.

SECTION 16(a) BENEFICALOWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the SecuritiesExchange Act of 1934, as amended, requires EVI's executiveofficers and directors, and persons who own more than ten percent of aregistered class of EVI's equity securities, to file reports ofownership and changes in ownership with the Securities and ExchangeCommission (the "SEC"). Executive officers,directors and greater than ten percent shareholders are required, bySEC regulation, to furnish EVI with copies of all Section 16(a) formsthey may file.

Based solely on a review of the copies of suchforms furnished to EVI, or written representations that no Forms 5 wererequired, EVI believes that, during the year ended December 31, 2004,all Section 16(a) filing requirements applicable to its executiveofficers, directors and greater than ten percent beneficial owners werecomplied with.

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Item11.    Executive Compensation

The following SummaryCompensation Table sets forth the compensation, for the three yearsended December 31, 2004, of each of the Company's five mosthighly compensated executive officers that were serving as executiveofficers of the Company and/or VCC as of December 31, 2004(collectively, the "Named ExecutiveOfficers"):

SUMMARY COMPENSATIONTABLE

|                                |  |            |  |                     |         |                                  |  |                       |         |           |  |        |           |            |  |   |         |            |
|--------------------------------|--|------------|--|---------------------|---------|----------------------------------|--|-----------------------|---------|-----------|--|--------|-----------|------------|--|---|---------|------------|
|                           |  |       |  |                |         |                             |  | Long-TermCompensation |         |      |
| Nameand Principal Position     |  | FiscalYear |  | Annual Compensation |         | SecuritiesUnderlyingStockOptions |  | AllOtherCompensation  |
| Salary                         |  | Bonus      |  |
| Christopher G. Payan,          |  | 2004       |  | $                   | 275,000 | (2)                         |  | $                     | — |      |  |   | 7,208,220 | (4)   |  | $ | 7,200   | (7)   |
| Chief Executive Officer and    |  | 2003       |  | $                   | 175,000 | (2)                         |  | $                     | 26,000  | (3)  |  |   | 100,000   | (5)   |  | $ | 32,200  | (8)   |
| Director(1)                    |  | 2002       |  | $                   | 169,000 | (2)                         |  | $                     | — |      |  |   | 100,000   | (6)   |  | $ | 6,000   | (7)   |
| MylesS. Lewis,                 |  | 2004       |  | $                   | 190,000 | (9)                         |  | $                     | — |      |  |   | 3,314,124 | (10)  |  | $ | 6,000   | (12)  |
| Co-ChiefOperating Officer and  |  | 2003       |  | $                   | 156,000 | (9)                         |  | $                     | 26,000  | (3)  |  |   | 100,000   | (11)  |  | $ | 6,000   | (12)  |
| Senior Vice President –  |  | 2002       |  | $                   | 156,000 | (9)                         |  | $                     | — |      |  |   | —   |       |  | $ | 3,000   | (12)  |
| BusinessDevelopment            |  |
| Samuel Z. Herskowitz,          |  | 2004       |  | $                   | 190,000 | (13)                        |  | $                     | — |      |  |   | 1,841,180 | (14)  |  | $ | 10,000  | (15)  |
| Co-Chief Operating Officer and |  | 2003       |  | $                   | 125,000 | (13)                        |  | $                     | 26,000  | (3)  |  |   | 100,000   | (12)  |  | $ | 10,000  | (15)  |
| Chief Marketing Officer        |  | 2002       |  | $                   | 125,000 | (13)                        |  | $                     | — |      |  |   | —   |       |  | $ | 11,000  | (15)  |
| Brian P.Alessi,                |  | 2004       |  | $                   | 121,000 | (17)                        |  | $                     | — |      |  |   | 920,950   | (18)  |  | $ | — |       |
| ChiefFinancial Officer and     |  | 2003       |  | $                   | 94,000  | (17)                        |  | $                     | — |      |  |   | —   |       |  | $ | — |       |
| Treasurer(16)                  |  | 2002       |  | $                   | 77,000  | (17)                        |  | $                     | — |      |  |   | —   |       |  | $ | — |       |
| Dr.Nicholas Shashati,          |  | 2004       |  | $                   | 137,000 | (19)                        |  | $                     | — |      |  |   | —   |       |  | $ | — |       |
| President – VisionCareof |  | 2003       |  | $                   | 125,000 | (19)                        |  | $                     | — |      |  |   | —   |       |  | $ | — |       |
| California                     |  | 2002       |  | $                   | 125,000 | (19)                        |  | $                     | — |      |  |   | —   |       |  | $ | — |       |
|                                |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                                           |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Mr.Payan became Vice President of Finance on July 16, 2001, Senior VicePresident, Chief Financial Officer, Treasurer and Secretary in October2001, and Co-Chief Operating Officer on April 29, 2002. On March 24,2004, Mr. Payan resigned as Treasurer and was appointed a director ofthe Company. On June 7, 2004, Mr. Payan was appointed Chief ExecutiveOfficer and resigned all of his other offices. |

|     |                                     |
|-----|-------------------------------------|
| (2) | Represents salary paid to Mr.Payan. |

|     |                                                                   |
|-----|-------------------------------------------------------------------|
| (3) | Represents bonuspaid related to the year ended December 31, 2003. |

|     |                                                                                                                                                                                                                |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Represents 1,305,000 optionsthat are fully vested and exercisable, and 5,903,220 (the underlyingshares of which are subject to shareholder approval) that will vest atvarious dates through December 31, 2006. |

|     |                                                     |
|-----|-----------------------------------------------------|
| (5) | All of these options wereexercised on May 20, 2004. |

|     |                                                      |
|-----|------------------------------------------------------|
| (6) | All of these options wereexercised in February 2003. |

|     |                                                     |
|-----|-----------------------------------------------------|
| (7) | Represents car allowancepayments made to Mr. Payan. |

|     |                                                                                                                                                                                                                                                                                                                                                          |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (8) | Represents car allowancepayments made to Mr. Payan, along with the payment for certainadditional services provided in connection with the Company'sevaluation of an offer, during 2003, by certain of its directors andprincipal shareholders, and some of their immediate family members, toacquire all of the outstanding capital stock of theCompany. |

|     |                                     |
|-----|-------------------------------------|
| (9) | Representssalary paid to Mr. Lewis. |

|      |                                                                                                                                                                                                                     |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10) | Represents 600,000 options thatare fully vested and exercisable, and 2,714,124 options (the underlyingshares of which are subject to shareholder approval) that will vest atvarious dates through December 31,2006. |

|      |                                                     |
|------|-----------------------------------------------------|
| (11) | All of theseoptions were exercised in November2003. |

|      |                                                    |
|------|----------------------------------------------------|
| (12) | Represents carallowance payments made to Mr.Lewis. |

|      |                                          |
|------|------------------------------------------|
| (13) | Represents salarypaid to Mr. Herskowitz. |

46

----

|      |                                                                                                                                                                                                                     |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (14) | Represents333,334 options that are fully vested and exercisable, and 1,507,846options (the underlying shares of which are subject to shareholderapproval) that will vest at various dates through December 31,2006. |

|      |                                                         |
|------|---------------------------------------------------------|
| (15) | Represents carallowance payments made to Mr.Herskowitz. |

|      |                                                                                                                                                        |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| (16) | Mr. Alessiserved as Controller of the Company until June 7, 2004, when he becameChief Financial Officer. Mr. Alessi became Treasurer on March 24,2004. |

|      |                                     |
|------|-------------------------------------|
| (17) | Represents salarypaid to Mr.Alessi. |

|      |                                                                                                                                                                                                                   |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (18) | Represents166,666 options that are fully vested and exercisable, and 754,284options (the underlying shares of which are subject to shareholderapproval) that will vest at various dates through December 31,2006. |

|      |                                        |
|------|----------------------------------------|
| (19) | Represents salarypaid to Dr. Shashati. |

OPTION GRANTS IN LAST FISCALYEAR

On December 30, 2004, the Compensation Committee of theBoard granted an aggregate of 13,284,114 stock options to the NamedExecutive Officers of the Company. The options have an exercise priceof $0.14, a term of 10 years, and vest at various dates throughDecember 30, 2006.

The following table sets forth informationconcerning the options granted, during 2004, to the Named ExecutiveOfficers of theCompany:

|                    |  |                                           |           |                                                       |  |                        |        |                |  |                                                                                             |        |        |  |        |          |        |  |        |         |        |  |        |           |        |  |  |
|--------------------|--|-------------------------------------------|-----------|-------------------------------------------------------|--|------------------------|--------|----------------|--|---------------------------------------------------------------------------------------------|--------|--------|--|--------|----------|--------|--|--------|---------|--------|--|--------|-----------|--------|--|--|
| Name               |  | Numberof Shares Underlying OptionsGranted |           | % of Total Options Grantedto Employees in Fiscal Year |  | ExercisePricePer Share |        | ExpirationDate |  | Potential Realizable Value of AssumedAnnual Rates of Stock Price Appreciationfor OptionTerm |
| 5%                 |  | 10%                                       |           |
| ChristopherG.Payan |  |                                      | 7,208,220 |                                                  |  |                   | 54.3   | %         |  | $                                                                                           | 0.14   |   |  |   | 12/30/14 |   |  | $      | 649,000 |   |  | $      | 1,586,000 |   |
| MylesS.Lewis       |  |                                      | 3,314,124 |                                                  |  |                   | 24.9   | %         |  | $                                                                                           | 0.14   |   |  |   | 12/30/14 |   |  | $      | 298,000 |   |  | $      | 729,000   |   |
| SamuelZ.Herskowitz |  |                                      | 1,841,180 |                                                  |  |                   | 13.9   | %         |  | $                                                                                           | 0.14   |   |  |   | 12/30/14 |   |  | $      | 166,000 |   |  | $      | 405,000   |   |
| BrianP.Alessi      |  |                                      | 920,590   |                                                  |  |                   | 6.9    | %         |  | $                                                                                           | 0.14   |   |  |   | 12/30/14 |   |  | $      | 83,000  |   |  | $      | 203,000   |   |
|               |  |                                      |      |                                                  |  |                   |   |           |  |                                                                                        |   |   |  |   |     |   |  |   |    |   |  |   |      |   |
|                    |

Referenceis made to Note 15 to the Consolidated Financial Statements for moredetailed information regarding the Company's equity compensationplans. The following provides certain information with respect to theCompany's equity compensation plans as of December 312004:

|                              |  |                                                                                    |            |                                                                   |  |                                                                                                                              |      |        |  |        |         |        |  |  |
|------------------------------|--|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|--|------------------------------------------------------------------------------------------------------------------------------|------|--------|--|--------|---------|--------|--|--|
|                         |  | (A)                                                                                |            | (B)                                                               |  | (C)                                                                                                                          |
| PlanCategory                 |  | Number of securities to be issued upon exerciseof outstanding options and warrants |            | Weighted-averageexercise price of outstanding options andwarrants |  | Number of securities available for futureissuance under equity compensation plan (excludessecurities reflected in column (A) |
| Authorizedbyshareholders     |  |                                                                               | 6,864,634  |                                                              |  | $                                                                                                                            | 1.50 |   |  |   | 135,366 |   |
| Notauthorized byshareholders |  |                                                                               | 72,652,027 |                                                              |  | $                                                                                                                            | 0.64 |   |  |   | — |   |
|                              |

47

----

AGGREGATE OPTIONS EXERCISED IN LASTFISCAL YEAR AND FISCAL YEAR-END OPTIONVALUES

|                      |  |                               |  |                   |  |                                                                                           |  |                                                                                 |  |  |  |  |  |  |  |  |  |  |
|----------------------|--|-------------------------------|--|-------------------|--|-------------------------------------------------------------------------------------------|--|---------------------------------------------------------------------------------|--|--|--|--|--|--|--|--|--|--|
| Name                 |  | SharesAcquiredon Exercise (#) |  | Value Realized($) |  | Number of Securities Underlying UnexercisedOptions at FY-End (#)Exercisable/Unexercisable |  | Value ofUnexercised In-the-Money Options at FY-End($)*Exercisable/Unexercisable |
| Christopher G.Payan  |  | 100,000                       |  | $9,000            |  | 1,355,000/5,903,220                                                                       |  | $13,050/$59,032                                                                 |
| MylesS. Lewis        |  | —                       |  | $—          |  | 650,000/2,714,124                                                                         |  | $6,000/$27,141                                                                  |
| SamuelZ. Herskowitz  |  | —                       |  | $—          |  | 400,834/1,507,846                                                                         |  | $3,333/$15,078                                                                  |
| BrianP. Alessi       |  | —                       |  | $—          |  | 166,666/753,924                                                                           |  | $1,666/$7,539                                                                   |
| Dr.Nicholas Shashati |  | —                       |  | $—          |  | 140,000/-0-                                                                               |  | $0/$0                                                                           |
|                      |

|  |
|--|
|  |  |
|  |

*    Basedon the OTC Bulletin Board closing price for the last business day ofthe fiscal year ($0.15).

The stock options granted to the NamedExecutive Officers have exercise prices as follows: Christopher G.Payan: 7,208,220 options at $0.14 and 50,000 options at $0.26; Myles S.Lewis: 3,314,124 options at $0.14; Samuel Z. Herskowitz: 1,841,180options at $0.14, 20,000 options at $6.31, and 10,000 options at $3.25;Dr. Nicholas Shashati: 100,000 options at $0.33, 20,000 options at$6.31, 10,000 options at $3.25, and 10,000 options at $7.50; and BrianP. Alessi: 920,590 options at $0.14.

DIRECTOR COMPENSATION

Directors who are not employees or executive officers of the Companyreceive $20,000 per annum, payable in equal, quarterly installments of$5,000, $1,500 for each in person meeting, and no additionalcompensation for telephonic meetings or actions taken by writtenconsent in lieu of a meeting. In the event that multiple meetings areheld on the same day, directors will receive compensation for onemeeting. Further, all directors are reimbursed for certain expenses inconnection with their attendance at board and committee meetings.

Other than with respect to the reimbursement of expenses, directorswho are employees or executive officers of the Company will not receiveadditional compensation for serving as a director.

48

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Item 12.    Security Ownershipof Certain Beneficial Owners, Management and Related StockholderMatters

I.    COMMON STOCK:

The followingtable sets forth information, as of March 31, 2005, regarding thebeneficial ownership of our common stock by: (i) each shareholder knownby us to be the beneficial owner of more than five percent of theoutstanding shares of our common stock; (ii) each of our directors;(iii) each of our Named Executive Officers (as said term is definedunder the caption "Executive Compensation"below); and (iv) all directors and executive officers of the Company asa group, in each case, based on 70,323,698 total number of common stockoutstanding as of that date.

The percentages in the"Percent of Class" column are calculated inaccordance with the rules of the SEC, under which a person may bedeemed to be the beneficial owner of shares if that person has orshares the power to vote or dispose of those shares or has the right toacquire beneficial ownership of those shares within 60 days (forexample, through the exercise of an option or warrant). Accordingly,the shares shown in the table as beneficially owned by certainindividuals may include shares owned by certain members of theirrespective families. Because of these rules, more than one person maybe deemed to be the beneficial owner of the same shares. The inclusionof the shares shown in the table is not necessarily an admission ofbeneficial ownership of those shares by the person indicated. Theaddress of Horizons Investors Corp. is 2830 Pitkin Avenue, Brooklyn,New York 11208. The address of Joel L. Gold is c/o Andrew Garrett, 425Park Avenue, 22nd Floor, New York, New York 10022. Theaddress of Nicholas Shashati is c/o Sterling VisionCare, 9663 TierraGrande Street, San Diego, California 92126. The address of Lou Weisbachis c/o Teamscape, LLC, 3100 Dundee Road, Suite 704, Northbrook, IL60062. The address of all other persons listed below is 100 QuentinRoosevelt Boulevard, Garden City, New York11530.

|                                                        |  |                     |            |                  |  |        |      |         |  |  |
|--------------------------------------------------------|--|---------------------|------------|------------------|--|--------|------|---------|--|--|
| Name                                                   |  | BeneficialOwnership |            | Percent of Class |
| Christopher G.Payan (a) (b)                            |  |                | 2,567,500  | (1)         |  |   | 3.6  | %  |
| Myles S. Lewis(b)                                      |  |                | 750,000    | (2)         |  |   | 1.1  | %  |
| SamuelZ. Herskowitz (b)                                |  |                | 500,834    | (3)         |  |   |      | *  |
| Brian P. Alessi (b)                                    |  |                | 166,666    | (4)         |  |   |      | *  |
| Dr. Nicholas Shashati(b)                               |  |                | 140,000    | (5)         |  |   |      | *  |
| Dr. Alan Cohen(a)                                      |  |                | 2,850,469  | (6)         |  |   | 4.0  | %  |
| Dr.Robert Cohen (a)                                    |  |                | 2,473,859  | (7)         |  |   | 3.5  | %  |
| Joel L. Gold(a)                                        |  |                | 221,500    | (8)         |  |   |      | *  |
| Harvey Ross(a)                                         |  |                | 977,011    |             |  |   | 1.4  | %  |
| HorizonsInvestors Corp.                                |  |                | 23,926,531 | (9)         |  |   | 34.0 | %  |
| LouWeisbach                                            |  |                | 4,085,000  |             |  |   | 5.8  | %  |
| Allcurrent directors and executive officers as a group |  |                | 10,647,839 | (10)        |  |   | 14.6 | %  |
|                                                        |

|  |
|--|
|  |  |
|  |

|   |            |
|---|------------|
| * | lessthan1% |

|     |          |
|-----|----------|
| (a) | Director |

|     |                  |
|-----|------------------|
| (b) | Executiveofficer |

|     |                                                                                                                                                                                                                                                                                                                                                                       |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Includes the right toacquire 1,355,000 shares of common stock upon the exercise of presentlyexercisable, outstanding options, but excludes the right to acquire1,305,000, 3,293,220 and 1,305,000 shares of common stock upon theexercise of outstanding options that are not exercisable until December30, 2005, April 16, 2006 and December 30, 2006, respectively. |

|     |                                                                                                                                                                                                                                                                                                                                                                 |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes the right to acquire 650,000shares of common stock upon the exercise of presently exercisable,outstanding options, but excludes the right to acquire 600,000,1,514,124 and 600,000 shares of common stock upon the exercise ofoutstanding options that are not exercisable until December 30, 2005,April 16, 2006 and December 30, 2006, respectively. |

49

----

|     |                                                                                                                                                                                                                                                                                                                                                              |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Includes theright to acquire 400,834 shares of common stock upon the exercise ofpresently exercisable, outstanding options, but excludes the right toacquire 333,333, 841,180 and 333,333 shares of common stock upon theexercise of outstanding options that are not exercisable until December30, 2005, April 16, 2006 and December 30, 2006,respectively. |

|     |                                                                                                                                                                                                                                                                                                                                                               |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Includes the rightto acquire 166,666 shares of common stock upon the exercise ofpresently exercisable, outstanding options, but excludes the right toacquire 166,667, 420,950 and 166,667 shares of common stock upon theexercise of outstanding options that are not exercisable until December30, 2005, April 16, 2006 and December 30, 2006, respectively. |

|     |                                                                                                                               |
|-----|-------------------------------------------------------------------------------------------------------------------------------|
| (5) | Represents the right to acquire 140,000shares of common stock upon the exercise of presently exercisable,outstanding options. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (6) | Includes(i) the right to acquire 200,000 shares of common stock upon theexercise of presently exercisable, outstanding options, and (ii) 26,700shares owned by Dr. Cohen, as custodian for each of Erica and NicoleCohen (Dr. Cohen's children, as to which Dr. Cohen disclaimsbeneficial ownership), but excludes (i) 8,973,800 shares, in theaggregate, held in trust for Dr. Cohen's minor children, Erica,Nicole, Jaclyn and Gabrielle, as beneficiaries, in respect of which Dr.Cohen is not a trustee and has no dispositive or investment authority,and as to which he disclaims beneficial ownership and (ii) the right toacquire 5,562,753 (and, in the case of Dr. Cohen's childrentrusts, 9,200,864) shares of common stock upon the exercise ofoutstanding warrants that are not exercisable until April 15,2006. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (7) | Includes the right toacquire 200,000 shares of common stock upon the exercise of presentlyexercisable, outstanding options, but excludes (i) 8,766,566 shares, inthe aggregate, owned by Dr. Cohen's adult children, Allyson,Jeffrey and Stefanie, as to which Dr. Cohen has no dispositive orinvestment authority and disclaims beneficial ownership and (ii) theright to acquire 4,293,729 (and, in the case of Dr. Cohen'schildren, 9,084,906) shares of common stock upon the exercise ofoutstanding warrants that are not exercisable until April 15,2006. |

|     |                                                                                                                                                                                                                                                                                                                              |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (8) | Includes 1,500 shares ofcommon stock owned by Mr. Gold's children and the right toacquire 220,000 shares of common stock upon the exercise of presentlyexercisable, outstanding options, but excludes an additional 5,000shares of common stock owned by Mr. Gold's wife, as to which Mr.Gold disclaims beneficialownership. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (9) | Represents shares ofcommon stock owned by Horizons Investors Corp., or Horizons, a New Yorkcorporation principally owned by Mr. Fernandez, and includes the rightto acquire 100,000 shares of common stock upon the exercise ofpresently exercisable, outstanding options, but excludes the right toacquire 31,067,776 shares of common stock upon the exercise ofoutstanding warrants that are not exercisable until April 15,2006. |

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10) | Includes (i) the right toacquire 3,332,500 shares of common stock upon the exercise of presentlyexercisable, outstanding options, and (ii) 26,700 shares owned by Dr.Cohen, as custodian for each of Erica and Nicole Cohen (as to which Dr.Cohen disclaims beneficial ownership), but excludes the right toacquire 2,405,000, 15,925,596, and 2,405,000 shares of common stockupon the exercise of options and/or warrants that are not exercisableuntil December 30, 2005, April 15, 2006, and December 30, 2006,respectively. In accordance with Rule 13d-3(d)(1) under the SecuritiesExchange Act of 1934, as amended, the 3,332,500 shares of common stockfor which the Company's directors and executive officers, as agroup, hold currently exercisable options and warrants, have been addedto the total number of issued and outstanding shares of common stocksolely for the purpose of calculating the percentage of such totalnumber of issued and outstanding shares of common stock beneficiallyowned by such directors and executive officers as agroup. |

50

----

II.    SENIOR CONVERTIBLE PREFERREDSTOCK:

Set forth below is the name, address, stockownership and voting power of each person or group of persons known bythe Company to beneficially own more than 5% of the outstandingshares of its Senior Convertible PreferredStock:

|                                                  |  |                     |      |                  |  |        |     |         |  |  |
|--------------------------------------------------|--|---------------------|------|------------------|--|--------|-----|---------|--|--|
| Name                                             |  | BeneficialOwnership |      | Percent of Class |
| RitaFolger1257 East 24th StreetBrooklyn, NY11210 |  |                | 0.74 | (1)         |  |   | 100 | %  |
|                                                  |

|     |                                                                                                                                                                                    |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Theseshares are convertible into an aggregate of 98,519 shares of CommonStock; and the holder thereof will be entitled to cast that number ofvotes at any meeting of shareholders. |

Item13.    Certain Relationships and Related Transactions

Cohen's Fashion Optical

Drs. Robert and Alan Cohenare officers and directors of Cohen Fashion Optical, Inc., or CF,including its affiliate, Real Optical, LLC.("REAL"). CF, which has been in existencesince 1978, owns a chain of company-operated and franchised retailoptical stores doing business under the name"Cohen's Fashion Optical." As of March31, 2005, CF had 70 franchised stores and 12 company-owned stores. Inaddition, CF also licenses to retail optical stores the right tooperate under the name "Cohen's KidsOptical" or "UltimateSpectacle." As of March 31, 2005, there were 2 UltimateSpectacle stores located in the State of New York; and REAL, as of suchdate, operated 3 stores (under the name "Cohen'sFashion Optical"), all of which were located in New YorkState. CF and REAL stores are similar to the Company's retailoptical stores. CF has been offering franchises since 1979 andcurrently has retail optical stores in the States of Connecticut,Florida, New Hampshire, Massachusetts, New Jersey and New York. In thefuture, Cohen's Fashion Optical, Cohen's Kids Optical orUltimate Spectacle stores may be located in additional states. As ofMarch 31, 2005, approximately 15 CF stores were located in the sameshopping center or mall as, or in close proximity to, certain of theCompany's retail optical stores. It is possible that one or moreadditional Cohen's Fashion Optical stores, Cohen's KidsOptical stores or Ultimate Spectacle stores may, in the future, belocated near one or more of the Company's retail optical stores,thereby competing directly with such Company stores. In addition, theCompany's stores and certain of CF's stores jointlyparticipate, as providers, under certain third party benefit plansobtained by either the Company or CF, which arrangement is anticipatedto continue in the future.

In January 2002, the Companysubleased from CF, for a term of five years, a portion of the spacethen being leased by CF in a building located at 100 Quentin RooseveltBoulevard, Garden City, New York and, in connection therewith,relocated its principal executive offices to such premises. Occupancycosts are being allocated between the Company and CF based upon therespective square footages being occupied. The Company believes thatits rent with respect to such premises is equal to the fair marketrental value of such space.

On December 31, 2002, the Companyrefinanced certain past due amounts, owed to CF, in an effort toimprove its current cash flow position. As a result, the Company signeda 5-year, $200,000 promissory note, in favor of CF, bearing interest ata rate of 10% per annum, and which is payable in equal monthlyinstallments of principal and interest.

In the ordinary courseof business, largely due to the fact that the entities occupy officespace in the same building, and in an effort to obtain savings withrespect to certain administrative costs, the Company and CF will attimes share in the costs of minor expenses. Management believes it hasappropriately accounted for these expenses.

General VisionServices

In January 2001, General Vision Services, LLC, or GVS,a Delaware limited liability company located in New York City andbeneficially owned, in principal part, by Drs. Robert and Alan Cohenand 

51

----

certain members of their respective immediatefamilies (collectively, the "Cohen Family"),acquired substantially all of the assets of General Vision Services,Inc. As of March 31, 2005, GVS operated approximately 22 retail opticalstores, principally located in New Jersey and in the New Yorkmetropolitan area, which stores are similar to the retail opticalstores operated and franchised by the Company. In addition, GVSsolicits and administers third party benefit programs similar to thosebeing administered by the Company. GVS does not franchise any retailoptical stores. It is possible that a GVS store, or another retailoptical store which provides third party benefit plans administered byGVS, may now or in the future be located near one or more of theCompany's retail optical stores and may be competing directlywith such store.

Furthermore, the Company, CF and GVS jointlyparticipate in certain third party benefit plans, and certain of theCompany's retail optical stores, CF's stores and GVS'stores participate as providers under third party benefit plansobtained by either the Company, CF or GVS and, in all likelihood, willcontinue to do so in the future.

In June 2001, the Companysubleased to GVS its retail optical store (and the furniture, fixturesand equipment located therein), located in Nyack, New York, at a rentper month equal to the rent and additional rent payable under theMaster Lease for such store, less a monthly rental credit, until May31, 2003, of $2,500. Pursuant to the terms of such sublease, theCompany transferred and conveyed to GVS all of such store'sfurniture, fixtures and equipment from and after June 15, 2003. TheCompany continues to sublet this store to GVS, however the Company nolonger provides a rent subsidy.

Further, in April 2002, EVI soldto GVS, for the sum of $55,000, substantially all of the assets of oneof its stores located in New York City, together with all of thecapital stock of its wholly-owned subsidiary, Sterling Vision of 125thStreet, Inc., which is the tenant under the Master Lease for suchstore.

During 2004, 2003 and 2002, the Company purchased fromCity Lens, Inc., or City Lens, an ophthalmic lens laboratory owned byGVS, ophthalmic lenses and certain lens refinishing services for itsCompany-owned stores. For the years ended December 31, 2004, 2003 and2002, the total cost of such lenses and services purchased from CityLens was approximately $1,000, $26,000 and $228,000, respectively. TheCompany believes that the cost of such lenses and services were asfavorable to the Company as those which could have been obtained froman unrelated third party.

Vision World

In October 2003,Vision World, LLC, a Delaware limited liability company located in NewYork City and beneficially owned, in principal part, by Drs. Robert andAlan Cohen and certain members of the Cohen Family, acquiredsubstantially all of the assets of Eyeglass Services Industries,Inc.'s third party administration business. Vision World solicitsand administers third party benefit programs similar to those beingadministered by the Company. It is possible that a Vision World store,or another retail optical store which provides third party benefitplans administered by Vision World, may now or in the future be locatednear one or more of the Company's retail optical stores and maybe competing directly with such store.

Additional Agreementsand Transactions Between the Company and the Cohen Family

OnDecember 6, 2001, the Company borrowed from Broadway Partners, LLC("Broadway"), a New York partnership owned bycertain of Dr. Robert and Alan Cohen's children, the sum of$300,000, which loan, together with interest thereon, calculated at1% above the prime rate of interest, was repaid to Broadway, infull, on January 23, 2002.

On July 23, 2002, the Boardauthorized the Company to borrow $300,000 from Dr. Robert Cohen. Theloan was payable on August 10, 2002, together with interest in anamount equal to 1% of the principal amount of such loan. TheCompany repaid this loan, in full, on August 8, 2002.

On April4, 2003, the Board authorized the Company to borrow $100,000 from Dr.Robert Cohen. The loan was payable immediately after the closing of theCompany's Rights Offering, together with interest in an amountequal to 1% of the principal amount of such loan. The Companyrepaid this loan, in full, on April 22, 2003, with a portion of theproceeds from the Rights Offering.

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Newtek Business Services

Christopher G. Payan, the Company's Chief Executive Officerand a director of the Company, serves on the board of directors ofNewtek Business Services, Inc., or NBSI, a company that providesvarious financial services to both small and mid-sized businesses. TheCompany utilizes the bank and non-bank card processing services of oneof NBSI's affiliated companies. During the years ended December31, 2004 and 2003, the Company paid approximately $65,000 and $23,000,respectively, to such affiliate for such services provided. The Companybelieves that the cost of such services was as favorable to the Companyas those that could have been obtained from an unrelated thirdparty.

Transactions Among the Company and the Cohen Family

On December 31, 2003, the Company entered into agreements, withcertain of the members of the Cohen Family (collectively, the"Subject Shareholders"), pursuant to whichthe Company and each of the Subject Shareholders agreed to, andeffectuated, (a) the rescission, ab initio, of the exercise, bythe Subject Shareholders, of 6,178,840 of the over-subscription rightsof the Subject Shareholders (and, accordingly, of the issuance, to suchSubject Shareholders, of the units associated therewith) granted tothem in the Rights Offering, and (b) the rescission, surrender andcancellation of all of the remaining warrants (15,784,572 in theaggregate) that were acquired by the Subject Shareholders in the RightsOffering (collectively, the "RescissionTransactions"). In connection with the RescissionTransactions, the Company agreed to repay each Subject Shareholder theoriginal subscription amount of $0.04 (previously paid by each SubjectShareholder) for each of the rescinded units (together with interest ata rate of 6% per annum from the date of the original acquisitionthereof), which, in the aggregate for all of the Subject Shareholders,totaled $247,154. This sum (plus interest) is payable, by the Company,on or before April 14, 2007, pursuant to a series of promissory notesissued to the Subject Shareholders.

Recognizing that the SubjectShareholders suffered certain damages in connection with the RescissionTransactions, on December 31, 2003, (i) the Company and theShareholders entered into settlement agreements with each of theSubject Shareholders, pursuant to which the Subject Shareholdersreleased any and all claims that they may have had against the Companyas a result of the consummation of the Rescission Transactions, and(ii) the Company, in consideration for such releases, granted to theSubject Shareholders, in the aggregate, new warrants to purchase28,142,252 shares of the Company's common stock. The exerciseprices of the new warrants issued to each of the Subject Shareholdersranged from $0.0465 to $0.0489. These exercise prices were calculatedwith the intention of allowing the Subject Shareholders to purchaseequity of the Company on substantially the same economic terms thatthey would have been originally entitled pursuant to the RightsOffering, but for the Rescission Transactions. The new warrants are notexercisable until April 15, 2006, and expire on April 14, 2008.

Item 14.    Principal Accountant Fees and Services

Thefollowing is a summary of the fees billed to us by Miller, Ellin &Company LLP, our independent auditors, for professional servicesrendered for the years ended December 31, 2004 and2003:

|                   |  |        |         |        |  |        |         |        |  |  |
|-------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|
| FeeCategory       |  | 2004   |         | 2003   |
| Audit fees(1)     |  | $      | 102,500 |   |  | $      | 92,500  |   |
| Audit-relatedfees |  |   | — |   |  |   | — |   |
| Tax fees(2)       |  |   | — |   |  |   | — |   |
| All otherfees     |  |   | 13,270  |   |  |   | 9,532   |   |
| Totalfees         |  | $      | 115,770 |   |  | $      | 102,032 |   |
|                   |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                              |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Auditfees consist of aggregate fees billed for professional servicesrendered for the audit of our annual financial statements and review ofthe interim financial statements included in quarterly reports orservices that are normally provided by the independent auditors inconnection with statutory and regulatory filings or engagements for theyears ended December 31, 2004 and 2003. |

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|     |                                                                                                                                                                                                                                                                        |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The Companyuses a different accounting firm to prepare its consolidated federaland state tax returns in connection with IRS regulations. For the yearsended December 31, 2004 and 2003, the fees billed to us for suchservices were $30,000 and $30,000, respectively. |

Policy onAudit Committee Pre-Approval of Audit and Permissible Non-AuditServices of Independent Auditor

The Audit Committee isresponsible for the appointment, compensation and oversight of the workof the independent auditors and approves in advance any services to beperformed by the independent auditors, whether audit-related or not.The Audit Committee reviews each proposed engagement to determinewhether the provision of services is compatible with maintaining theindependence of the independent auditors. All of the fees shown abovewere pre-approved by the AuditCommittee.

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PART IV

Item15.    Exhibits and Financial Statement Schedules

(a)The following documents are filed as a part of this Report:

1.    Financial Statements.

Consolidated BalanceSheets as of December 31, 2004 and 2003

Consolidated Statementsof Operations for the Years Ended December 31, 2004, 2003 and 2002

Consolidated Statements of Shareholders' Equity(Deficit) for the Years Ended December 31, 2004, 2003 and 2002

Consolidated Statements of Cash Flows for the Years Ended December31, 2004, 2003 and 2002

Notes to Consolidated FinancialStatements

2.    Financial Statement Schedules:

All financial statement schedules have been omitted because they arenot applicable, are not required, or the information required to be setforth therein is included in the Consolidated Financial Statements orNotes thereto.

3.    Exhibits

EXHIBITINDEX

|               |  |                                                                                                                                                                                                                                           |  |  |  |  |
|---------------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNumber |  |
| 3.1           |  | RestatedCertificate of Incorporation of Sterling Vision, Inc., filed onDecember 20, 1995 (incorporated by reference to Exhibit 3.1 to theCompany's Annual Report on Form 10-K/A for the year endedDecember 31, 1995)                      |
| 3.2           |  | Amended and RestatedBy-Laws of Sterling Vision, Inc., dated December 18, 1995 (incorporatedby reference to Exhibit 3.2 to the Company's Annual Report onForm 10-K/A for the year ended December 31, 1995)                                 |
| 3.3           |  | Certificate of Amendment of the Certificate ofIncorporation of Sterling Vision, Inc., filed on January 26, 2000(incorporated by reference to Exhibit 3.3 to the Company's AnnualReport on Form 10-K for the year ended December 31, 2002) |
| 3.4           |  | Form of Certificate of Amendment of theCertificate of Incorporation of Sterling Vision, Inc., filed onFebruary 8, 2000 (incorporated by reference to Exhibit 10.94 to theCompany's Current Report on Form 8-K, dated February 8,2000)     |
| 3.5           |  | Form of Certificate of Amendmentof the Certificate of Incorporation of Sterling Vision, Inc., filed onFebruary 10, 2000 (incorporated by reference to Exhibit 10.96 to theCompany's Current Report on Form 8-K, dated February 8,2000)    |
| 3.6           |  | Certificate of Amendment of theCertificate of Incorporation of Sterling Vision, Inc., filed on April17, 2000 (incorporated by reference to Exhibit 3.6 to theCompany's Annual Report on Form 10-K for the year ended December31, 2002)    |
| 3.7           |  | Certificate of Amendment ofthe Certificate of Incorporation of Emerging Vision, Inc., filed onJuly 15, 2002 (incorporated by reference to Exhibit 3.7 to theCompany's Annual Report on Form 10-K for the year ended December31, 2002)     |
|               |

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|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |  |  |
|---------------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNumber |  |
| 3.8           |  | First Amendment toAmended and Restated By-Laws of Emerging Vision Inc., dated November13, 2003 (incorporated by reference to Exhibit 3.8 to theCompany's Current Report in Form 8-K, dated December 31,2003.                                                                                                                                                                                                                           |
| 4.1           |  | Specimen of Common StockCertificate (incorporated by reference to Exhibit 4.1 to theCompany's Registration Statement No. 33-98368)                                                                                                                                                                                                                                                                                                     |
| 4.2           |  | Form of Warrant issued to Subject Shareholders inconnection with Settlement Agreements (incorporated by reference toExhibit 4.8 to the Company's Annual Report on Form 10-K for theyear ended December 31, 2003)                                                                                                                                                                                                                       |
| 10.1          |  | SterlingVision, Inc.'s 1995 Stock Incentive Plan (incorporated byreference to Exhibit 10.2 to the Company's Registration StatementNo. 33-98368)                                                                                                                                                                                                                                                                                        |
| 10.2          |  | Form of Sterling Vision,Inc.'s Franchise Agreement (incorporated by reference to Exhibit10.3 to the Company's Registration Statement No.33-98368)                                                                                                                                                                                                                                                                                      |
| 10.3          |  | Form of FranchiseeStockholder Agreement to be entered into between Sterling Vision, Inc.and certain of its Franchisees (incorporated by reference to Exhibit10.47 to the Company's Registration Statement No.33-98368)                                                                                                                                                                                                                 |
| 10.4          |  | First Amendment to SterlingVision, Inc.'s 1995 Stock Incentive Plan (incorporated byreference to Exhibit 10.63 to the Company's Quarterly Report onForm 10-Q for the quarter ended June 30, 1996, File No.1-14128)                                                                                                                                                                                                                     |
| 10.5          |  | Exchange Agreement, datedApril 14, 1998, between the Company and the Original Holders of theRegistrant's Convertible Debentures Due February 17, 1999(incorporated by reference to Exhibit 10.78 to the Company'sCurrent Form on 8-K, dated April 14, 1998)                                                                                                                                                                            |
| 10.6          |  | First Amendment to Convertible Preferred Stockand Warrants Subscription Agreement, dated January 4, 1999(incorporated by reference to Exhibit 10.78 to the Company'sCurrent Report on Form 8-K, dated January 4, 1999)                                                                                                                                                                                                                 |
| 10.7          |  | Second Amendment to Convertible Preferred Stockand Warrants Subscription Agreement, dated March 4, 1999 (incorporatedby reference to Exhibit 10.79 to the Company's Current Report onForm 8-K, dated March 4, 1999)                                                                                                                                                                                                                    |
| 10.8          |  | ThirdAmendment to Convertible Preferred Stock and Warrants SubscriptionAgreement, dated December 7, 1999 (incorporated by reference to Exhibit10.90 to the Company's Current Report on Form 8-K, dated December7, 1999)                                                                                                                                                                                                                |
| 10.9          |  | Asset Purchase Agreement,dated as of May 31, 2001, by and among Insight Laser Centers N.Y.I,Inc., Insight Amsurg Centers, Inc., Emerging Vision, Inc. and AmsurgAcquisition Corp. (incorporated by reference to Exhibit 10.114 to theCompany's Current Report on Form 8-K, dated June 13,2001)                                                                                                                                         |
| 10.10         |  | Form of Settlement Agreementand General Release, dated as of April 1, 2002, between EmergingVision, Inc. and each of V.C. Enterprises, Inc., Bridget Licht,Sitescope, Inc., Eyemagination Eyeworks, Inc. and Susan Assael,including the form of Area Representation Agreement annexed thereto asan Exhibit (incorporated by reference to Exhibit 10.37 to theCompany's Annual Report on Form 10-K for the year ended December31, 2001) |
| 10.11         |  | Form of Rescission Agreementbetween the Company and certain Subject Shareholders (incorporated byreference to Exhibit 10.13 to the Company's Annual Report on Form10-K for the year ended December 31, 2003)                                                                                                                                                                                                                           |
|               |

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|               |  |                                                                                                                                                                                                                                                    |  |  |  |  |
|---------------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNumber |  |
| 10.12         |  | Form of PromissoryNote made by the Company in favor of Subject Shareholders in connectionwith Rescission Agreements (incorporated by reference to Exhibit 10.14to the Company's Annual Report on Form 10-K for the year endedDecember 31, 2003)    |
| 10.13         |  | Form of SettlementAgreement between the Company and certain Subject Shareholders as aresult of Rescission Transactions (incorporated by reference to Exhibit10.15 to the Company's Annual Report on Form 10-K for the yearended December 31, 2003) |
| 21.1*         |  | List ofSubsidiaries                                                                                                                                                                                                                                |
| 23.1*         |  | Consent of IndependentPublic Accountants                                                                                                                                                                                                           |
| 31.1*         |  | Certification ofChief Executive Officer pursuant to Securities Exchange Act Rules13a-14 and 15d-14                                                                                                                                                 |
| 31.2*         |  | Certification ofChief Financial Officer pursuant to Securities Exchange Act Rules13a-14 and 15d-14                                                                                                                                                 |
| 32.1*         |  | Certification ofChief Executive Officer and Chief Financial Officer pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of2002                                                                          |
|               |

|  |
|--|
|  |  |
|  |

|   |                             |
|---|-----------------------------|
| * | Exhibitbeing filed herewith |

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SIGNATURES

Pursuant to the requirements of Securities Exchange Act of1934, as amended, the Registrant has duly caused this Report to besigned on its behalf by the undersigned, thereunto duly authorized.

|        |  |                                                    |  |                                             |  |  |  |  |  |  |
|--------|--|----------------------------------------------------|--|---------------------------------------------|--|--|--|--|--|--|
|   |  | **EMERGINGVISION, INC.**                           |
|   |  | By:    /s/Christopher G. Payan |
|   |  |                                               |  | Christopher G.Payan Chief Executive Officer |
|   |  | Date: March 31,2005                                |
|        |

Pursuant to the requirements of theSecurities Exchange Act of 1934, as amended, this Report has beensigned below by the following persons on behalf of the Registrant andin the capacities and on the datesindicated.

|                         |  |                                                                                  |  |                |
|-------------------------|--|----------------------------------------------------------------------------------|--|----------------|
| Signature               |  | Title                                                                            |  | Date           |
|                         |
| /s/Christopher G. Payan |  | Chief Executive Officer and Director (Principal ExecutiveOfficer)                |  | March 31, 2005 |
|                         |
| Christopher G. Payan    |
|                         |
| /s/Brian P. Alessi      |  | ChiefFinancial Officer and Treasurer (Principal Financial andAccounting Officer) |  | March 31, 2005 |
|                         |
| Brian P. Alessi         |
|                         |
| /s/ Dr. Alan Cohen      |  | Chairman of the Board of Directors                                               |  | March 31,2005  |
|                         |
| Dr. Alan Cohen          |
|                         |
| /s/ Dr. Robert Cohen    |  | Director                                                                         |  | March 31,2005  |
|                         |
| Dr.Robert Cohen         |
|                         |
| /s/ Joel L. Gold        |  | Director                                                                         |  | March 31,2005  |
|                         |
| Joel L.Gold             |
|                         |
| /s/ Harvey Ross         |  | Director                                                                         |  | March 31,2005  |
|                         |
| HarveyRoss              |
|                         |
| /s/ Seymour G.Siegel    |  | Director                                                                         |  | March 31, 2005 |
|                         |
| Seymour G. Siegel       |
|                         |

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