<PAGE>


                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549


                            ---------------------


                                   FORM 10-K


                            ---------------------

(Mark One)

  X    Annual Report pursuant to Section 13 or 15(d) of the Securities
 ___   Exchange Act of 1934 For the Fiscal Year ended December 31, 1997.

 ___   Transition Report pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934

       Commission File Number: 1-14128

                             STERLING VISION, INC.
            (Exact name of Registrant as specified in its Charter)

                New York                              11-3096941
       (State of Incorporation)           (IRS Employer Identification Number)

                            1500 Hempstead Turnpike
                             East Meadow, NY 11554
                       Telephone Number: (516) 390-2100
                   (Address of Principal Executive Offices)

                            ---------------------

Securities registered pursuant to Section 12(b) of the Act: None

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

                  TITLE                             Exchange

Common Stock, par value $.01 per share        Nasdaq National Market System

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


                           Yes  X                    No
                               ---                      ---

Indicate by check mark if disclosure of delinquent filers 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 by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]


<PAGE>




      The aggregate market value of the Registrant's Common Stock, par value
$.01 per share (the "Common Stock") held by nonaffiliates of the Registrant as
of March 20, 1998, (based upon the closing price of $6.4375 per share as
quoted on the Nasdaq National Market System) was approximately $42,000,000.
For purposes of this computation, the shares of Common Stock held by
directors, executive officers and principal shareholders owning more than 5%
of the Registrant's outstanding Common Stock and for which a Schedule 13G was
filed, were deemed to be stock held by affiliates. As of March 20, 1998, there
were 6,533,771 outstanding shares of Common Stock held by nonaffiliates.

      As of March 20, 1998, there were 14,322,863 shares of the Registrant's
Common Stock outstanding.

      The Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders is incorporated herein by reference to Part III of this Annual
Report on Form 10-K.

                                       2


<PAGE>



Item 1.  Business

         All statements contained herein that are not historical facts
including, but not limited to, statements regarding the future development
plans of Sterling Vision, Inc. (the "Registrant" and, together with its
wholly-owned subsidiaries, collectively referred to as "Sterling" or the
"Company") and the Company's ability to generate cash from its operations, are
based upon current expectations. These statements are forward looking in
nature and involve a number of risks and uncertainties. Actual results may
differ materially. Among the factors that could cause actual results to differ
materially from the anticipated results or other expectations expressed in the
Company's forward- looking statements are the following: competition in the
retail optical industry; the ability of the Company to enter into third party,
managed care provider agreements on favorable terms; the ability of the
Company to acquire, at favorable prices, retail optical chains; the

uncertainty of the acceptance of Photorefractive Keratectomy ("PRK"); the
availability of new and better ophthalmic laser technologies or other
technologies that serve the same purpose as PRK; the inability of the Company
to finalize favorable agreements with ophthalmologists to utilize the
Company's excimer lasers to perform PRK procedures; competition in the PRK
market; the Company's ability to successfully operate an ambulatory surgery
center which the Company is under negotiations to acquire; and general
business and economic conditions.

General

       The Company is one of the largest chains of retail optical stores and
the second largest franchised optical chain in the United States based upon
domestic sales and number of locations of Company-owned and franchised stores
(collectively referred to herein as "Sterling Stores").

       As of December 31, 1997, there were 313 Sterling Stores in operation,
consisting of 50 Company-owned stores and 263 franchised stores. The Company
continually seeks to expand both its Company-owned and franchised store
operations. As of December 31, 1997, Sterling was constructing two additional
franchised stores, and had received commitments from existing franchisees to
develop an additional fourteen franchised Sterling Stores. Sterling Stores are
located in 27 states, the District of Columbia, Ontario, Canada, and the U.S.
Virgin Islands.

       Most Sterling Stores offer eyecare products and services such as
prescription and non-prescription eyeglasses, eyeglass frames, ophthalmic
lenses, contact lenses, sunglasses and a broad range of ancillary items. To
the extent permitted by individual state regulations, an optometrist is
employed by, or affiliated with, most Sterling Stores, which optometrist
provides professional eye examinations to the public. The Company fills
prescriptions from these employed or affiliated optometrists, as well as from
unaffiliated optometrists and ophthalmologists. Most Sterling Stores have an
inventory of ophthalmic and contact lenses, as well as on-site lab equipment
for cutting and edging ophthalmic lenses to fit into eyeglass frames, which
allows Sterling Stores to offer same-day service in many cases.

       Sterling views its Company-owned stores as "inventory" to be
strategically sold to qualified franchisees. By selling Company- owned
Sterling Stores to franchisees, the Company hopes to achieve two goals: to
recognize a gain on the conveyance of the assets of such stores, and to create
a stream of royalty payments based upon a percentage of the gross revenues of
the franchised locations. Sterling currently derives its revenues principally
from: the sale of eyecare products and services at Company-owned stores;
ongoing royalties based upon a percentage of gross revenues of franchised
stores; and the conveyance of Company-owned store assets to existing and new
franchisees.

       While most Sterling Stores presently operate under one of the
tradenames "Sterling Optical," "IPCO Optical," "Site For Sore Eyes," "Benson
Optical", "Southern Optical", "Superior Optical", "Nevada Optical", "Duling
Optical", Monfried Optical", "Kindly Optical", and "Singer Specs", the Company
is presently formulating plans to change the tradename of most Sterling Stores
to "Sterling Optical".


 In connection therewith, the Company intends to formulate and implement
additional advertising and marketing programs to create increased name
recognition throughout those areas of the United States where the Company is
currently operating under a tradename other than "Sterling Optical." The
Company also operates VisionCare of California ("VCC"), a specialized health
care maintenance organization licensed by the California Department of
Corporations. VCC employs licensed optometrists who render services in offices
located immediately adjacent to, or within, most Sterling Stores located in
California.

       The Company also affiliates with health care providers
(ophthalmologists) in offering PRK, a procedure performed with an excimer
laser for the correction of certain degrees of myopia (near-sightedness). In
connection therewith, the Company and such ophthalmologists enter into
agreements pursuant to which such ophthalmologists pay to the Company a fee
for each PRK procedure performed using an excimer laser installed by Insight
Laser Centers, Inc. ("Insight"), a wholly-owned subsidiary of the Company,
into offices utilized by such

                                       3


<PAGE>



ophthalmologists. As of December 31, 1997, the Company had leased six excimer
lasers, each with a purchase option for nominal consideration. The Company
currently owns and operates one Insight Laser Center located in New York City
and has placed its additional five excimer lasers into ophthalmological
offices located in New York, California, Pennsylvania, Delaware and New
Jersey.

Background of the Company

       Sterling was incorporated under the laws of the State of New York in
January 1992 and, in February 1992, purchased substantially all of the assets
(the "IPCO Acquisition") of Sterling Optical Corp., f/k/a IPCO Corporation
("IPCO"), a New York corporation then a debtor-in-possession under Chapter 11 of
the U.S. Bankruptcy Code. Subsequent to the IPCO Acquisition, the Company, in
October 1993, acquired, through a merger, 26 retail optical stores (both company
operated and franchised) operating under the name "Site For Sore Eyes" ("SFSE")
and located in Northern California (the "SFSE Merger"). In connection with the
SFSE Merger, the Company also acquired VCC, a specialized health care
maintenance organization licensed by the California Department of Corporations
under the California Knox Keene Health Care Service Plan Act of 1975. In
addition, the Company: (i) in August 1994, purchased the assets of eight
additional retail optical stores located in New York and New Jersey (the
"Pembridge Transaction") from Pembridge Optical Partners, Inc. ("Pembridge");
(ii) in November 1995, acquired, through one of its wholly-owned subsidiaries,
substantially all of the retail optical assets of Benson Optical Co., Inc., OCA
Acquisition Corp. and Superior Optical Company, Inc. (the "Benson Transaction"),
including the assets located in approximately 70 retail optical store locations,

a substantial number of which were subsequently closed by the Company; (iii) in
May 1996 acquired, through one of its wholly-owned subsidiaries sale (the "VCA
Transaction"), substantially all of the retail optical assets of Vision Centers
of America, Ltd., D & K Optical, Inc., Monfried Corporation and Duling Finance
Corporation (collectively, "VCA") including the assets located in approximately
13 company- operated stores and franchise agreements, together with related
agreements, with respect to approximately 75 additional franchised stores; and
(iv) in April 1997, acquired, in exchange for shares of its Common Stock, all of
the issued and outstanding capital stock of Singer Specs, Inc., a chain of
approximately 30 franchised retail optical stores (the "Singer Transaction").

    The following chart sets forth the breakdown of the Company's Sterling
Stores as of December 31, 1997:


                                                  STERLING STORES
                                              AS OF DECEMBER 31, 1997

I.  COMPANY-OWNED STORES:

       Total Stores in Operation...................... 50

       Stores Under Construction......................  0

       Leases Under Negotiation........................ 3

                  Total..............................  53

       Existing store locations: California (17), Illinois (2), Iowa (1),
       Kentucky (3), Michigan (2), Nevada (1), New Jersey (3), New York (16),
       Pennsylvania (3), and West Virginia (2).

                                       4


<PAGE>



II. FRANCHISED STORES:

       Total Stores in Operation........................................... 263

       Stores Under Construction...........................................   2


                                    Total..................................  265

       Existing store locations: California (21), Colorado (2), Connecticut
       (2), Delaware (6), Florida (1), Iowa (6), Illinois (8), Indiana (1),
       Kentucky (7), Maryland (16), Massachusetts (1), Michigan (4), Minnesota
       (21), Missouri (8), Montana (2), Nebraska (2), New Hampshire (1), New
       Jersey (9), New York (49), North Carolina (4), North Dakota (6),
       Pennsylvania (23), South Dakota (4), Virginia (10), Washington, D.C.

       (1), West Virginia (3), Wisconsin (32), Ontario, Canada (12), and U.S.
       Virgin Islands (1).

       Sterling Stores generally range in size from approximately 1,000 square
feet to 2,000 square feet, are substantially similar in appearance and are
operated under certain uniform standards and operating procedures. Many
Sterling Stores are located in enclosed regional shopping malls and smaller
strip centers. However, some Sterling Stores are located on the ground floor
of office buildings or other commercial structures. A limited number of
Sterling Stores are housed in freestanding buildings with adjacent parking
facilities, and certain Sterling Stores are situated in professional
optometric offices (such as facilities which also include sports therapy,
physical therapy and other medical services), clinics or hospitals. Sterling
Stores are generally clustered within geographic market areas so as to
maximize the benefit of advertising strategies and to minimize the cost of
supervising operations. Sterling Stores which are not clustered within
geographic market areas (e.g. Sterling Stores located in West Virginia and New
Hampshire) have not produced results from which any consistent performance
standards can be drawn by the Company.

       Most Sterling Stores offer a full line of prescription and
non-prescription eyeglasses, sunglasses and contact lenses, and, if permitted
under applicable law, professional eye examinations which are performed by
employed or affiliated optometrists. In response to the eyewear market
becoming increasingly fashion-oriented during the past decade, most Sterling
Stores carry a large selection of designer eyeglass frames. The Company
continually test-markets various brands of sunglasses, ophthalmic lenses,
contact lenses and designer frames in an attempt to maximize systemwide sales
and profits from these categories of merchandise. Small quantities of these
items are usually purchased for selected stores that test customer response
and interest and, if a product test is successful, the Company attempts to
negotiate a systemwide preferred vendor discount for such product, which
discount is then made available to the Company's franchisees. In addition, a
full line of eyeglass and contact lens accessories is also available at most
Sterling Stores. For the year ended December 31, 1997, net sales at
Company-owned stores were approximately $24,449,000.

       Most Sterling Stores maintain a working inventory of the most often
prescribed contact and ophthalmic lenses and an on-site facility for cutting
and edging ophthalmic lenses to fit into eyeglass frames, which enables most
Sterling Stores to offer same-day or next-day service for a majority of
customers ordering prescription eyeglasses.

Franchise Operations

       As of December 31, 1997, the Company had 263 franchised stores, as
compared to 257 franchised stores as of December 31, 1996. An integral part of
the Company's franchising system includes providing what the Company believes
to be a high level of marketing, financial, training and administrative
support to its franchisees. The Company provides "grand opening" assistance
for each new franchised location by consulting with its franchisees with
respect to store design, fixture and equipment requirements and sources,
inventory selection and initial marketing and promotional programs.
Specifically, the Company's grand opening assistance (i) helps to establish

business plans and budgets; (ii) provides preliminary store designs and plan
approval prior to construction of a franchised store; and (iii) provides
initial training, an operations manual and a comprehensive business review to
aid the franchisee in attempting to maximize its sales and profitability. In
addition, the Company generally restricts itself from operating or franchising
other Sterling Stores within a specified radius of each existing franchised
store. Furthermore, the Company, on an ongoing basis, provides training
through

                                       5


<PAGE>



regional seminars and an annual convention, offers assistance in marketing and
advertising programs and promotions, and consults with its franchisees as to
their management and operational strategies and business plans.

       Preferred Vendor Network. With the collective buying power of
Company-owned and franchised stores, the Company has established a network
(the "Preferred Vendor Network") of preferred vendors (the "Preferred
Vendors") whose products may be purchased directly by franchisees at group
discount prices, thereby providing such franchisees with the opportunity for
higher gross margins. In addition, many Preferred Vendors pay promotional fees
to the Company to be used to defray a portion of the Company's costs in
conducting certain meetings, training seminars, conventions and other
activities.

       Franchising Agreements. Each franchisee enters into a franchise
 agreement (the "Franchise Agreement") with the Company, the material terms of
 which are generally as follows:

       (a) Term. Generally, the term of each Franchise Agreement is ten years
and, subject to certain conditions, is renewable at the option of the
franchisee.

       (b) Initial Fees. Generally, all franchisees (except for any
franchisees converting their existing retail optical store to a Sterling Store
[a "Converted Store"] and those entering into agreements for more than one
location), must pay to the Company a non-recurring, initial franchise fee of
$20,000. The Company charges each franchisee of a Converted Store, a
non-recurring, initial franchise fee of $10,000 per location; and, for each
franchisee entering into agreements for more than one location, the Company
charges a non-recurring, initial franchise fee of $15,000 for the second
location, and $10,000 for each location in excess of two. Initial fees
collected by the Company for the year ended December 31, 1997 were
approximately $331,000.

       (c) Ongoing Royalties. Typically, all franchisees are obligated to pay
to the Company ongoing royalties in an amount equal to a percentage, generally
eight percent (8%), of the gross revenues of their Sterling Store. Franchisees
of Converted Stores, however, pay ongoing royalties on their store's

historical average base sales at reduced rates increasing, in most cases, from
two percent (2%) to six percent (6%) for the first four years of the term of
the Franchise Agreement. In addition, most of the franchise agreements
acquired by the Company in the Singer Transaction (the "Singer Franchise
Agreements") provide for ongoing royalty fees calculated at seven percent (7%)
of gross revenues. Franchise Agreements entered into prior to January 1994
provide for the payment of ongoing royalties on a monthly basis, while those
entered into after January 1994 provide for their payment on a weekly basis,
in each case, based upon the gross revenues for the preceding period. Gross
revenues generally include all revenues generated from the operation of the
Sterling Store in question, except for refunds to customers, sales taxes, a
limited amount of bad debts, and, to the extent required by state law, fees
charged by independent optometrists. Ongoing royalty fees paid by franchisees
to the Company for the year ended December 31, 1997 were approximately
$9,550,000.

       (d) Advertising Fund Contributions. Most franchisees must make ongoing
contributions to one of three advertising funds (the "Advertising Funds")
equal to a percentage of the store's gross revenues. Except for the Singer
Franchise Agreements, which generally provide for contributions equal to seven
percent (7%) of gross revenues, for Franchise Agreements entered into prior to
August 1993, the rate of contribution is generally four percent (4%) of the
store's gross revenues, while Franchise Agreements entered into after August
1993 generally provide for contributions equal to six percent (6%) of the
store's gross revenues. For the year ended December 31, 1997, the Company
received approximately $3,825,000 in Advertising Fund contributions from
franchisees.

       (e) Financing. Company-owned store assets are sold for cash although,
in most cases, the Company provides purchase money financing for all, or a
portion of, the purchase price thereof. The Company does not generally finance
the initial, non-recurring franchise fee or rent security deposits, which are
generally required under a franchisee's sublease. The purchase price is
generally based upon the historical and projected cash flow of the Sterling
Store in question and, in 1997, ranged from approximately $80,000 to $390,000.
The Company generally has financed up to 90% of the acquisition price, to be
repaid over a period of seven years, together with interest computed at the
rate of 12% per annum. However, the Company has, on occasion, financed, and
may, in the future, finance, up to 100% of the acquisition price of a
franchised store. Substantially all such financing is personally guaranteed by
the franchisee (or, if a corporation, by the principals owning in excess of
25% thereof) and is generally secured by all assets conveyed, as well as all
proceeds thereof. From time to time, certain franchisees obtain financing from
third parties. In such event, the Company generally subordinates its security
interest in the assets of the franchised location to the security interests
granted to the provider of such financing.

                                       6


<PAGE>




       (f) Termination. Franchise Agreements may be terminated if the
franchisee has defaulted in its payment of monies due the Company or in its
performance of the other terms and conditions of the Franchise Agreement.
During 1997, 16 franchised stores were closed, an additional 4 franchised
stores and substantially all of the assets located therein were voluntarily
surrendered and transferred back to the Company in connection with the
termination of the Franchise Agreements related thereto, and the Franchise
Agreements for an additional 26 franchised stores were terminated (due to
defaults by the franchisees thereunder) although the Company is presently
negotiating the reinstatement of 11 of such agreements. The Company has, in
many such instances, reconveyed the assets of certain of such stores to a new
franchisee, which new franchisee thereupon enters into Sterling's then current
form of Franchise Agreement.

New Acquisitions

       On April 1, 1997, the Registrant acquired all of the issued and
outstanding shares of the capital stock of Singer Specs, Inc., a Delaware
corporation, and certain of its wholly-owned subsidiaries (collectively,
"Singer"), pursuant to the terms of a certain Agreement and Plan of
Reorganization, dated February 19, 1997 (the "Singer Agreement"), between the
Registrant and the owners (collectively, the "Singer Shareholders") of all of
such capital stock of Singer Specs, Inc. As of the closing, Singer was the:
(i)operator of four retail optical stores (collectively, the "Singer Company
Stores"); (ii) franchisor of an additional, approximately 27 other retail
optical stores, all of which company operated and franchised stores are
located in the States of Pennsylvania, Delaware, New Jersey and Virginia, and
a store that opened in the U.S. Virgin Islands in July 1997; and (iii) owner
of a commercial building located in Philadelphia, Pennsylvania.

       The Singer Agreement provided for the Shareholders to convey all of
said capital stock to the Registrant, free and clear of any and all claims,
liens and/or encumbrances, in exchange for shares of the Company's Common
Stock.

       The Singer Agreement provided: (i) that the assets of each of the
Singer Company Stores be conveyed to corporations owned by one or more of the
Singer Shareholders, which entities, simultaneously with the closing, each
entered into a Franchise Agreement for each such Singer Company Store; (ii)
that the Registrant file, with the SEC, a registration statement seeking
registration of the Common Stock issued to the Singer Shareholders, as
discussed below; (iii) for the pledge, by the Singer Shareholders, of all of
their shares of the Registrant's Common Stock, to secure their obligations
under the Singer Agreement; (iv) that the Singer Shareholders being restricted
from selling a portion of their shares of said Common Stock, all as more
particularly set forth in the Singer Agreement; (v) the Company be required to
pay to the Singer Shareholders the difference between the market price of the
Registrant's Common Stock (upon which the purchase price was calculated) and
the selling price (net of 50% of commissions) of any such shares sold by the
Singer Shareholders; and (vi) for the possible recapture, by the Company, of
up to 12,182 shares of the Common Stock issued to the Singer Shareholders in
the event all of the Singer franchisees did not, within a specified period of
time after the closing, convert their existing Singer Franchise Agreement to
the Company's then current form of Franchise Agreement.


Insight Laser Centers

       An integral part of the Company's business strategy of becoming a
full-service eyecare company originally included developing and/or managing, a
chain of eyecare centers under the tradename "Insight Laser," offering PRK.
Published reports indicated that there are at least 50 million Americans who
are myopic (near-sighted). Management believes that some of these individuals
would prefer to correct their vision without a corrective appliance. PRK is an
outpatient procedure to be performed by ophthalmologists trained to perform
the procedure. During the PRK process, the shape of the cornea (the clear
outermost layer of the eye) is altered by a high-precision, computer
controlled excimer laser which ablates microscopic layers of corneal tissue in
a predetermined pattern to reshape the cornea in a manner that allows it to
focus light properly, thereby correcting, or treating, specific refractive
conditions. In 1995 and 1996, the United States Food and Drug Administration
("FDA") approved the use, in the United States, of excimer lasers manufactured
by Summit Technology, Inc. ("Summit") and VISX, Incorporated ("VISX"),
respectively, for use in connection with the PRK procedure to correct certain
degrees of myopia. Both Summit and VISX charge a royalty fee based on each
procedure performed utilizing their respective excimer lasers, which royalty
fee is currently $250 per procedure.

       During 1995, the Company leased five excimer lasers manufactured by
Summit, which were delivered to the Company during the third quarter of 1995,
and, in 1996, the Company leased one additional laser manufactured by VISX and
entered into two purchase orders to acquire one additional laser from each of
VISX and Summit. All of such leases contain a purchase option for nominal
consideration. During 1996, the Company opened a Company-owned Insight Laser
Center in New York City and installed an additional laser in San Francisco,
California; and, in 1997, the Company placed its four remaining excimer lasers
in ophthalmologist's offices located in Long

                                       7


<PAGE>



Island, New York, Newark, New Jersey, Doylestown, Pennsylvania and Wilmington,
Delaware under agreements with such ophthalmologists that they pay, to the
Company, a fee for each procedure performed with the excimer laser installed
by the Company in such ophthalmologists's offices.

       The Company initially believed that it was well positioned to
successfully develop its Insight Laser Centers by reason of, among other
things: (i) Sterling's and its franchisees' combined customer base, some of
which may be candidates for the PRK procedure; (ii) Sterling's access to
excimer lasers for performing the PRK procedure; and (iii) Sterling's
extensive experience in marketing eyecare products and services. Accordingly,
the Company created an internal organization and staff to develop, operate and
expand its Insight Laser Center business and, in connection therewith, from
time to time, offered educational programs to the optometrists employed by, or

affiliated with, Sterling Stores and stores operated and franchised by Cohen
Fashion Optical, Inc. ("CFO"), a retail optical chain owned by certain of the
Company's shareholders, as well as to unaffiliated ophthalmologists, on the
benefits of PRK.

       Because of the collective customer base of the Company and its
franchisees, the Company initially believed that its Insight Laser Centers
would have a competitive advantage as compared with other companies formed
specifically for this purpose. The Company was aware that the following
companies operate or plan to operate laser surgery centers in the United
States: American Laser Vision, Beacon Eye Institute, Eye Shaper Laser Centers,
Global Vision, Inc., Laser Focus, Inc., Refractive Laser Centers, Inc., The
Laser Center, Inc., Vision Correction Group, Inc., Vision Sculpting, 20/20
Laser Centers, Inc., Laser Vision Centers, Inc., Lasersight Centers, Inc., New
Vision Technology, Inc., LCA-Vision Inc., Summit and VISX. In addition, the
Company was also aware that numerous medical offices and hospitals located
throughout the United States had already installed, and/or were in the process
of installing, excimer lasers for performing the PRK procedure. Based upon the
Company's growth strategy, it was anticipated that the Company would derive a
substantial portion of its revenues from the following two businesses: (i) the
management and administration of its Insight Laser Centers; and, (ii) the
management of ophthalmological practices. However, revenues at such centers
have grown modestly and were predominately in the form of laser access (usage)
fees. Such fees were paid by ophthalmologists who utilized the Company's
excimer lasers to perform PRK procedures. During the latter part of 1996,
published reports concluded that consumer acceptance of PRK, as a vision
correction alternative, was below industry expectations despite aggressive
marketing and advertising programs conducted by the Company and other such
laser surgery companies.

       In 1997, the Company formulated a new business strategy for its Insight
operations, which the Company believes: (i) will continue to reduce the
Company's losses attributable to Insight; and (ii) is consistent with the
Company's plan to become a full-service eyecare company. Accordingly, the
Company has developed affiliations with refractive laser surgeons, whereby
such surgeons pay to the Company a laser access fee to utilize the Company's
excimer lasers, as well as a fee to utilize the Company's existing Insight
laser Center facility located in New York City. Moreover, the Company has
placed certain of its existing excimer lasers into various ophthamological
centers, at little or no risk to the Company, whereby the Company receives
laser access fees (from such ophthalmologists utilizing such excimer lasers to
perform PRK procedures) for each procedure performed with the Company's
excimer lasers. Notwithstanding the changes noted above, the Company
anticipates that Insight will continue to operate at a loss for the twelve
months ended December 31, 1998, however, at an amount substantially below that
for the year ended December 31, 1997.

       In October 1996, the Company and an ophthalmologist located in Long
Island, New York entered into various agreements which provided for, among
other things, the acquisition, by the Company, of such ophthalmologist's
medical practices and ambulatory surgery center; and in April, 1997, the
Company commenced litigation, against such ophthalmologist, seeking specific
performance of such agreements and/or damages in lieu thereof. As of the date
hereof, the Company has reached an agreement, in principle, with the estate of

such ophthalmologist, pursuant to which one of the Company's subsidiaries will
purchase such ophthalmologist's ambulatory surgery center located in Long
Island, New York and, in connection therewith, settle its action against the
estate of such individual.

Competition

       The optical business is highly competitive and includes chains of
retail optical stores, superstores, individual retail outlets, and a large
number of individual opticians, optometrists and ophthalmologists who provide
professional services or may, in connection therewith, dispense prescription
eyewear. As retailers of prescription eyewear generally service local markets,
competition varies substantially from one location or geographic area to
another. Since 1994, certain major competitors of the Company have been
offering promotional incentives to their customers and, in response thereto,
the Company has, from time to time, offered to its customers the same or
similar incentives. As such, there can be no assurance that these competitive
promotional incentives would not adversely affect the Company's results of
operations.

       The Company believes that the principal competitive factors in its
retail optical business are convenience of location, the on-site availability
of professional eye examinations, quality and consistency of product and
service, price, product warranties, a broad selection

                                       8


<PAGE>



of merchandise, and the participation in third party, managed care provider
agreements, and it believes that it competes favorably in each of these
respects.

       As of December 31, 1997, the Company owned and operated one Insight
Laser Center and had five excimer lasers placed in affiliated ophthalmological
offices. The Company believes that such Center and ophthalmological offices
experience competition from the various other companies noted above (see
"Insight Laser Centers") that have entered the business, in addition to many
existing ophthalmological offices and hospitals that are equipped with excimer
lasers that are adapted to perform the PRK procedure.

Marketing and Advertising

       The Company's marketing strategy emphasizes professional eye
examinations, value pricing (primarily through product promotions), convenient
locations, excellent customer service, customer-oriented store design and
product displays, knowledgeable sales associates and a broad range of quality
products in each of its Sterling Stores. Optometric examinations by licensed
optometrists are generally available on the premises of, or directly adjacent
to, all Sterling Stores, although future markets may call for some variation
due to regulatory constraints.


       The Company continually prepares and revises in-store point of purchase
displays, which provide various promotional messages to customers upon arrival
at Sterling Stores. Both Company-owned Sterling Stores and most franchised
stores participate in such advertising and in-store promotions, which include
visual merchandising techniques to draw attention to products displayed in
Sterling Stores. The Company, in many instances, also employs direct mail
advertising to reach prospective, as well as existing consumers.

       The Company annually budgets approximately 4% to 6% of systemwide sales
for advertising and promotional expenditures. Franchisees are obligated to
contribute a percentage of their stores' gross revenues to the Company's
segregated advertising fund accounts, which the Company maintains for such
advertising, promotions and public relations programs, fifty percent of which,
in most cases, the Company may expend, as it directly deems necessary or
appropriate, to advertise and promote all Sterling Stores.

Management Information Systems

       Over the past few years, management had conducted research into the
availability and development of a point-of-sale computer system (the "POS
System" or the "System"). The Company tested several existing systems
available in the marketplace, as well as developed and installed, on a trial
basis, its own Windows-based POS System. During 1995, as a result of this
research, the Company undertook the installation of ADD-POWER, a UNIX-based
POS System (the "A-P System"), that is presently utilized by various retail
optical chains in approximately 600 retail optical stores nationwide, to
provide, among other features, inventory and patient database management. The
Company has commenced utilization of the A-P System and anticipates that it
will take between one and two additional years to install the A-P System in
all existing Company-owned stores. As of December 31, 1997, the Company had
installed twenty such A-P Systems in existing Company-owned stores.

Government Regulation

       Ophthalmic excimer lasers are considered medical devices and are
subject to regulation by the FDA. The Company understands that Summit and
VISX, the manufacturers of the excimer laser systems that the Company
currently uses in its Company-owned Insight Laser Center or makes available to
its affiliated ophthalmologists, have received approval from the FDA for their
use to treat certain degrees of near-sightedness. This approval contains
restrictions on the use, labeling, promotion and advertising of the excimer
laser. In addition, as part of the FDA approval process, Summit and VISX have
agreed to conduct post-marketing studies on the long term safety of the
excimer laser, including continuing to follow patients treated in existing
studies, for at least four years after FDA approval, to assure that those
parties' vision remains stable over long periods of time.

       Manufacturers of lasers are also subject to regulation under the
Electronic Product Radiation Control Provisions of the Federal Food, Drug and
Cosmetic Act. This law requires laser manufacturers to file new product and
annual reports, to maintain quality control, product testing and sales
records, to incorporate certain design and operating features in lasers to
end-users and to certify and label each laser sold as belonging to one of four

classes, based on the level of radiation from the laser that is accessible to
users. Certain maintenance levels at the user level are also required. Various
warning labels must be affixed and certain protective devices installed,
depending on the class of the product. The Federal Food, Drug and Cosmetic Act
applicable to all medical devices, imposes fines and other remedies for
violations of the regulatory requirements.

                                       9


<PAGE>



       The Company and its operations are subject to extensive federal, state
and local laws, rules and regulations affecting the health care industry and
the delivery of health care, including laws and regulations prohibiting the
practice of medicine and optometry by persons not licensed to practice
medicine or optometry, prohibiting the unlawful rebate or unlawful division of
fees, and limiting the manner in which prospective patients may be solicited.
The regulatory requirements that the Company must satisfy to conduct its
business will vary from state to state. In particular, some states have
enacted laws governing the ability of ophthalmologists and optometrists to
enter into contracts to provide professional services with business
corporations or lay persons. and some states prohibit the Company from
computing its fee for its management services based upon a percentage of the
gross revenues of the ophthalmological practice being managed. It is possible
that, in certain other states, the proposed activities of the Company will not
be permissible on terms acceptable to the Company, in which case the Company
would not do business in such states. Various federal and state regulations
limit the financial and non-financial terms of agreements with these health
care providers; and the revenues potentially generated by the Company differ
among its various health care provider affiliations.

       The FDA and other United States, state or local governmental agencies
may amend current, or adopt new rules and regulations that could affect the
use of ophthalmic excimer lasers for PRK and thereby adversely affect the
business of the Company.

       The Company is also subject to certain regulations adopted under the
Federal Occupational Safety and Health Act with respect to its in-store
laboratory operations. The Company believes that it is in material compliance
with all such applicable laws and regulations.

       As a franchisor, the Company is subject to various registrations and
disclosure requirements imposed by the Federal Trade Commission and by many
states in which the Company conducts franchising operations. The Company
believes that it is in material compliance with all such applicable laws and
regulations.

Environmental Regulation

       The Company's business activities are not significantly affected by
environmental regulations, and no material expenditures are anticipated in

order for the Company to comply with environmental regulations. However, the
Company is subject to certain regulations promulgated under the Federal
Environmental Protection Act ("EPA") with respect to the grinding, tinting,
edging and disposal of ophthalmic lenses and solutions. In addition, the
Company is subject to additional EPA regulations as a result of its use of the
excimer laser approved by the FDA, the impact of which regulations have not
been determined at this time.

Seasonality

       The Company's retail optical and laser correction businesses are not
seasonal.

Patents and Trademarks

       The Company has registered the following trademarks and/or servicemarks
with the United States Patent and Trademark Office and the Canadian Registrar
of Trademarks: "Sterling Optical," "IPCO Optical," and "Site For Sore Eyes".
The Company believes that these trademarks and servicemarks have acquired
significant commercial value and have helped to promote the Company's
reputation, although the Company intends to change the tradename of most
Sterling Stores to "Sterling Optical". In connection with the Benson, VCA and
Singer Transactions, the Company acquired several additional trademarks,
certain of which the Company continues to utilize in connection with the
operation of its Sterling Stores.

Employees

       As of December 31, 1997, the Company employed approximately 500
individuals, of which approximately 85% were employed on a full-time basis. No
employees are covered by any collective bargaining agreement. The Company
considers its labor relations with its employees to be good and has not
experienced any interruption of its operations due to disagreements.

Item 2.  Properties.

       The Company's headquarters are comprised of approximately 21,950 square
feet (approximately 60%) located in an office building situated in East
Meadow, New York (which building is owned by certain of the Company's
principal shareholders), under a sublease which expires in 2006. This facility
houses the Company's principal executive and administrative offices.

                                      10


<PAGE>



       In April 1997, the Company, in connection with the Singer Transaction,
acquired a commercial building located in Philadelphia, Pennsylvania, which
building is suited for retail/office occupancy, is currently vacant, and is
being offered for sale by the Company.


       The Company leases the space occupied by all of its Company-owed stores
and the majority of its franchised stores. The balance of the leases for the
Sterling Stores are held in the name of the individual franchisee.

       Sterling Stores are generally located in commercial areas, including
major shopping malls, strip centers, free-standing buildings and other areas
conducive to retail trade. Certain Sterling Stores, not located in commercial
areas, are located in professional optometric offices, clinics and hospitals.

       The Company leases approximately 4,500 square feet of space in an
office building located in Trump Tower, New York, New York under a sublease
which expires on May 30, 2000, which houses the Company's Insight Laser
Center.

Item 3.  Legal Proceedings.

       As part of the IPCO Acquisition, Sterling acquired all of IPCO's
franchise notes receivable, some of which were subject to a pledge in favor of
Sanwa Business Credit Corporation ("Sanwa"). The Company is of the opinion
that, after payment of the indebtedness owed to Sanwa, it is entitled to a
return of such franchise notes, the residual value of which the Company
estimated to be approximately $883,000 as of December 31, 1997. Sanwa has
contested such claim by the Company and contends that it is not obligated to
return to Sterling the franchise notes remaining after Sanwa has been paid in
full. On January 9, 1995, Sterling filed a complaint in the United States
Bankruptcy Court, Southern District of New York (Case No. 91 B15944 (JLG))
seeking a judgment of the Court directing Sanwa to render an accounting of all
monies paid to Sanwa under such franchise notes and to declare the Company's
rights in such franchise notes receivable. Although management believes that
it will be successful in this action, no assurance can be given as to the
outcome thereof, and in the event such claim is denied by the Court, such
denial will result in a decrease of the Company's assets (as set forth in the
Company's Consolidated Financial Statements) for the full amount of such
estimated residual value of such franchise notes receivable pledged to Sanwa.

       The Company is a defendant in certain lawsuits alleging various claims
incurred in the ordinary course of business. These claims are generally
covered by various insurance policies, subject to certain deductible amounts
and maximum policy limits, and, in the opinion of management, the resolution
of existing lawsuits should not have a material adverse effect, individually
or in the aggregate, upon the Company's business or financial condition.
Management believes that there are no other legal proceedings pending or
threatened to which the Company is, or may be, a party or to which any of its
property is or may be subject which are likely to have a material adverse
effect on the Company.

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

       There were no matters submitted to a vote by the Company's shareholders
during the fourth quarter ended December 31, 1997.

       Executive Officers of the Registrant

       As of March 30, 1998, the executive officers and directors of the

Company were as follows:

<TABLE>
<CAPTION>
     Name                                 Age        Position
     ----                                 ---        --------
<S>                                       <C>        <C>
Robert Cohen, O.D.                        54         Chairman of the Board of Directors
Alan Cohen, O.D.                          47         Vice-Chairman of the Board of Directors
Jerry G. Lewis                            52         Chief Executive Officer, Chief Operating Officer and President
William J. Young                          48         Chief Financial Officer
Joseph Silver                             51         Executive Vice President, Secretary and General Counsel
Jerry R. Darnell                          47         Executive Vice President - Franchising
Edward Cohen, O.D.                        58         Director
Joel L. Gold                              56         Director
Jay Fabrikant                             41         Director
Nicholas Shashati O.D.                    38         President - VisionCare of California
Charles Raab                              49         Chief Financial Officer - Insight Laser Centers, Inc.
</TABLE>


                                      11


<PAGE>



       Dr. Robert Cohen has served as Chairman of the Board of Directors of
the Registrant since its inception. He also served as Chief Executive Officer
of Sterling from inception until October 1995. His principal office is located
at the Company's executive offices in East Meadow, New York. Dr. Robert Cohen
and his brothers, Drs. Edward Cohen and Alan Cohen, together with certain
members of their immediate families, are the principal shareholders of
Sterling. In addition, Dr. Robert Cohen, together with his brother, Dr. Alan
Cohen, are the sole members of Meadows Management, LLC ("Meadows") which, in
1997, rendered consulting services to the Company. From 1968 to the present,
Dr. Robert Cohen has been engaged in the retail and wholesale optical
business. For more than 10 years, Dr. Cohen has also served as President and a
director of CFO, which currently maintains its principal office in the
Company's executive offices in East Meadow, New York. Dr. Cohen and his
brothers, Drs. Edward Cohen and Alan Cohen, together with certain members of
their immediate families, also are the sole shareholders of CFO. CFO engages
in the operation and franchising of retail optical stores similar to those
operated and franchised by the Company. Dr. Cohen is a director of, and,
together with Dr. Alan Cohen and certain members of their respective immediate
families, is a shareholder of Fast Cast Corporation, f/k/a Rapid Cast ("Rapid
Cast") which offers for sale equipment and supplies to produce ophthalmic
lenses. Additionally, he, together with Jay Fabrikant, is a director of
National Health Plan Plus, Inc., a multi-state health, life, disability and
managed care Company, as well as a director of Daleen Technology, a computer
software company. Dr. Cohen is also an officer and a director of several
management and real estate companies and numerous other businesses.


       Dr. Alan Cohen has served as a Director of Sterling since its
inception. He also served as Chief Operating Officer of Sterling from 1992
until October, 1995, when he became Vice-Chairman of the Board of Directors of
Sterling. His principal office is located at the Company's executive offices
in East Meadow, New York. Dr. Alan Cohen and his brothers, Drs. Edward Cohen
and Robert Cohen, together with certain members of their immediate families,
are the principal shareholders of Sterling. In addition, Dr. Alan Cohen,
together with his brother, Dr. Robert Cohen, are the sole members of Meadows
which, in 1997, provided consulting services to the Company. From 1974 to the
present, Dr. Alan Cohen has been engaged in the retail and wholesale optical
business. For more than 10 years, Dr. Cohen has also been a director,
principal shareholder and officer of CFO. Dr. Cohen is a director of, and,
together with Dr. Robert Cohen and certain members of their respective
immediate families, is a shareholder of Rapid Cast. He is also an officer and
a director of several management and real estate companies and numerous other
businesses.

       Jerry G. Lewis was appointed President and Chief Operating Officer of
Sterling in May 1997, and Chief Executive Officer in January 1998. From 1990
through 1997, Mr. Lewis served as Managing Director of SpecSavers Optical
Superstores, a retail optical group doing business in the UK and Ireland. Mr.
Lewis is a qualified Optician, and previously held senior management positions
with Bausch & Lomb, Inc. and American Optical, Inc., both in the USA. During
his twenty years with both companies, he worked in most international markets
and was responsible for individual country operations for both sales and
manufacturing. Mr. Lewis has belonged to several professional organizations in
Europe and has been a speaker at International Optical Symposia. He directed
the Annual European Research Symposium on Contact Lenses, for Bausch & Lomb,
in 1984 and 1985.

       William J. Young was appointed Chief Financial Officer of the Company
as of March 30, 1998. From January 1988 through March 1998, Mr. Young served
in various capacities with Sbarro, Inc., a 700 store restaurant chain, first,
as its Director of Internal Audit, thereafter, as its Controller, and,
finally, as its Director of Corporate Finance. Mr. Young is a graduate of the
Adelphi University School of Business and is a member of the American
Institute of Certified Public Accountants.

       Joseph Silver has served as Executive Vice President and Secretary of,
and General Counsel to, the Company since March 1992. From May 1985 to
December 1991, Mr. Silver served as General Counsel to The Trump Organization,
located in New York, New York. Mr. Silver is a member of the New York State
Bar, and received a Juris Doctorate degree from Brooklyn Law School in 1969.
In addition to the services which Mr. Silver provides to the Company, he also
provided legal services to other persons or entities, including persons and
entities which are affiliates of the Company, although such legal services
(except with respect to two wholly-owned subsidiaries of the Company and
except for legal services rendered for no consideration) ceased upon
consummation of the Company's initial public offering. Mr. Silver, together
with his wife, are the principal stockholders of RJL Optical, Inc., the
franchisee of the Sterling Store located in Great Neck, New York, which is
presently being managed by the Company.

       Jerry Darnell has served as Sterling's Executive Vice President -

Franchising since July 1992. From February 1990 through December 1991, Mr.
Darnell served as Director of Franchise Development for Physicians Weight Loss
Centers, Inc., located in Akron, Ohio. From July 1989 to February 1990, he was
Senior Vice President of Formu-3 International, Inc., a company operating
company owned and franchised weight loss centers, located in Canton, Ohio.
From August 1988 to July 1989, Mr. Darnell was Vice President of Franchise
Development of Medicine Shoppe International, Inc., a company in the business
of franchising retail pharmaceutical stores, located in St. Louis, Missouri,
having first been associated with that company, as a consultant, in November
1987. Mr. Darnell is a member of the International Franchise Association,
served as Chairman of its trade show exhibit committee and has served as a
franchise

                                      12


<PAGE>



consultant to many franchise organizations where he has been a seminar leader.
He has also been a keynote speaker for national sales and business
organizations.

       Dr. Edward Cohen has served as a Director of Sterling since July 1992.
He also served as Vice President of Sterling from July 1992 until October
1995. Dr. Edward Cohen and his brothers, Drs. Robert Cohen and Alan Cohen,
together with certain members of their immediate families, are principal
shareholders of Sterling. For more than 16 years, Dr. Edward Cohen has also
been a director, shareholder and officer of CFO. Dr. Cohen is also an officer
and a director of several management and real estate companies and numerous
other businesses.

       Joel L. Gold has served as a Director of Sterling since December 1995.
He is currently a Senior Managing Director of Interbank Capital Group, LLC, an
investment banking firm located in New York City. From April, 1996 to
September, 1997, Mr. Gold was an Executive Vice President of LT Lawrence &
Co., and from March, 1995 to April, 1996, a Managing Director of Fechtor,
Detwiler & Co., Inc., a representative of the underwriters for the Company's
initial public offering. Mr. Gold was a Managing Director of Furman Selz
Incorporated from January 1992 until March 1995. From April 1990 until January
1992, Mr. Gold was a Managing Director of Bear Stearns and Co., Inc. ("Bear
Stearns"). For approximately 20 years before he became affiliated with Bear
Stearns, he held various positions with Drexel Burnham Lambert, Inc. He is
currently a director of Concord Camera Corp., a manufacturer and distributor
of cameras ("Concord"); Life Medical Sciences, a biotechnological company
("Life"); BCAM Corporation, a provider of ergonometric services ("BCAM"); and
PMCC Financial Corp., a specialty, consumer finance company. He currently
serves on the Compensation Committee of each of Concord, Life and BCAM.

       Jay Fabrikant has been actively engaged in the health care field for
over 15 years. Mr. Fabrikant, since 1983, has been the President of Medical
Development Systems, Inc., a health care consulting firm. Mr. Fabrikant has
been the Chairman and Chief Executive Officer of Total Health Systems, a

NASDAQ (NMS) traded firm, Chairman and Chief Executive Officer of Advanced
Healthcare Systems, Inc., a New Jersey State Certified Managed Care
Organization, President of The New York Health Plan, Inc., and the founder and
initial Chairman and Chief Executive Officer of National Health Plan Plus,
Inc., a multi-state health, life, disability, and managed care company.
Mr. Fabrikant has also been on several governmental panels for health care
regulation.

       Dr. Nicholas Shashati has been the Director of Professional Services of
the Company since July, 1992 and, since March 1, 1998, President of VCC. Dr.
Shashati earned a Doctor of Optometry degree from Pacific University of
California in 1984 and received a Bachelor of Science degree from Pacific
University and a Bachelor Science in Biology degree from San Diego State
University. Dr. Shashati is licensed as an optometrist in the States of New
York, California, Arizona and Oregon. He is Chairperson for the Quality
Assurance Committee of the Company, as well as a Practice Management
Consultant.

       Charles Raab has been employed by Insight since February 1996 and, in
March 1996, was elected as its Chief Financial Officer. Prior to joining
Insight, Mr. Raab served as President of Empire Fiscal Management, Inc., since
1986. Prior to Empire, he held CFO positions over a twelve year period with
the Osteopathic Hospital and Clinic in Queens, New York and the New York
Medical College/Flower Fifth Avenue Hospital in New York City. Mr. Raab holds
a Masters Degree in Accounting, a Graduate Degree in Public Health
Administration, and an Undergraduate Degree in International Business and
Finance.

                                      13


<PAGE>



                                    PART II

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

       The Registrant's Common Stock has been listed on the Nasdaq National
Market System ("Nasdaq") under the trading symbol "ISEE" since December 25,
1995. For the year ended December 31, 1997, the high and low sales prices for
the Registrant's Common Stock, as reported on Nasdaq, were $10.88 and $4.50,
respectively.

       The approximate number of recordholders of the Registrant's Common
Stock at March 20, 1998 was 400.

       Prior to its initial public offering (the "Offering"), the Company was
a Subchapter S corporation. In 1992, 1993, 1994, and 1995, the Company paid
cash dividends to its shareholders in the aggregate amounts of $124,000,
$3,943,000, $6,187,000, and $1,800,000, respectively, and immediately prior to
the consummation of its Offering, the Company authorized and declared the
payment of a dividend, in the aggregate amount of $1,450,000, to the

individuals who were shareholders of the Company immediately prior to the
Offering.

       The following table sets forth certain selected information with regard
to the high and low trading prices of the Registrant's Common Stock during the
year ended December 31, 1997:

                                                      Trading Prices

                                                   High             Low

         Year ended December 31, 1997:

         Quarter ended March 31, 1997              $10.88           $4.50

         Quarter ended June 30, 1997               $ 8.88           $6.25

         Quarter ended September 30, 1997          $ 8.63           $5.63

         Quarter ended December 31, 1997           $ 7.88           $5.50


       The Company has no intention to pay dividends in the foreseeable
future.

                                      14


<PAGE>



Item 6.  Selected Financial Data

              SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

       The selected consolidated financial data set forth below for the years
ended December 31, 1993, 1994, 1995, 1996, and 1997 were derived from the
audited consolidated financial statements of the Company. Systemwide sales and
Sterling Store Data is derived from the Company's records and is unaudited.
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes appearing elsewhere.

<TABLE>
<CAPTION>
                                                                                        Year Ended
                                                                                        December 31,
                                                          ----------------------------------------------------------------
                                                               1997         1996          1995       1994            1993
                                                              ------       ------         -----      -----           ----
Statement of Operations Data: (1)                              (In thousands except per share data and number of stores)
<S>                                                          <C>            <C>          <C>          <C>           <C> 
  Systemwide sales (2)                                       $ 146,333      $131,593     $112,258     $104,16 8     $84,272
                                                             =========      =========    ========     ========      =======
  Net sales - Company-owned stores                           $  24,449      $ 28,477     $ 25,773     $ 27,684      $22,820

  Franchise royalties                                            9,550         7,616        6,891        5,921        4,659
  Net gains and fees from the conveyance of 
    Company-owned store assets to
    Franchisees that are:

      Unrelated parties                                          1,462         1,963        2,197        2,832        3,044
      Related parties                                                           -            -             519         -
  Other income (3)                                               2,578         2,287        2,017        1,768        1,468
                                                            ----------    ----------   ----------    ---------    ---------
    Total revenues                                              38,039        40,343       36,878       38,724       31,991
                                                             ---------     ---------    ---------     --------     --------

  Cost of sales                                                  7,524         8,851        6,495        7,590        5,870
  Selling expenses                                              17,965        19,943       16,127       16,414       12,975
  General and administrative expenses                           17,859        16,743       10,529       11,321        6,155
  Provision for Store closings                                   1,336         -            -            -            -
   Amortization of Debt Discount                                 5,916         -            -            -            -
  Interest expense                                               1,601         1,297          831          647          786
                                                             ----------       ---------    --------    -------      -------
          Total costs and expenses                              52,201        46,834       33,982       35,972       25,786
                                                             ----------       ---------    --------    -------      -------
  Income (loss) before provision for income taxes
    and extraordinary item                                     (14,162)       (6,491)       2,896        2,752        6,205
  Provision (benefit) for income taxes (4)                           -        (2,001)       2,129          127          259
                                                             ----------       --------     --------   --------     --------
  Income (loss) before extraordinary item                    $ (14,162)      $(4,490)      $  767      $ 2,625      $ 5,946
                                                             ----------       --------     --------    -------      -------
  Income (loss) per share of common
    stock -  basic and diluted)                               $(  1.02)      $(  .36)      $  .08      $   .26      $   .60
  Weighted average common shares -
     basic and diluted (6)                                      13,883        12,341       10,031        9,963        9,963
                                                             ----------       ---------    --------    -------      -------

Pro forma statement of operations data (unaudited):(1)(5)
  Income before provision for income
    taxes and extraordinary item                                                          $ 2,896      $ 2,752      $ 6,205
  Pro forma provision for income taxes                                                      1,158        1,101        2,482
                                                                                        ---------       ------    ---------
  Pro forma net income before extraordinary item                                          $ 1,738      $ 1,651      $ 3,723
  Pro forma income per share of common
    stock - basic and diluted                                                            $    .17      $    .16     $   .37
  Weighted average common shares -
     basic and diluted  (6)                                                                10,031        10,031      10,031
</TABLE>

                                      15


<PAGE>


<TABLE>
<CAPTION>


                                                                     Year Ended
                                                                     December 31,

                                                 1997      1996         1995         1994       1993
                                                ------    -------      ------       ------     -----
                                            (In thousands except per share data and number of stores)
<S>                                           <C>         <C>         <C>          <C>        <C>
Sterling Store Data:

Company-owned stores bought, opened
  or reacquired                                      7          24          39          14          18
Company-owned stores sold or closed                (19)        (33)         (8)        (19)        (16)
Company-owned stores owned at end of period         50          62          71          40          45
Franchised stores at end of period                 263         257         150         141         126
Same store sales:(7)                              --          --          --          --          --
  Company-owned stores -                      $ 16,801    $ 17,441        --          --          --
                                                   --     $ 15,513     $ 16,050        --          --
                                                   --          --      $ 19,626    $ 19,411        --
                                                   --          --          --      $ 15,903    $ 15,520
  Franchised stores -                         $ 78,734    $ 80,216         --          --          --
                                                   --     $ 73,664     $ 74,453        --          --
                                                   --         --       $ 71,450    $ 69,818        --
                                                                                   $ 52,284    $ 50,378

Average sales per store: (8) (9)

  Company-owned stores                        $    424    $    395    $    659    $    637    $    594
  Franchised stores                           $    478    $    392    $    600    $    586    $    545
Average franchise royalties per franchised
  store (8)                                   $     37    $     43    $     48    $     45    $     41

<CAPTION>

                                                                                December 31,

Balance Sheet Data :(1)                              1997             1996         1995         1994       1993
                                                   -------          -------      ---------    --------   ------
<S>                                                <C>              <C>        <C>          <C>          <C>
    Working capital (deficit)                       $ 3,472         $(3,803)     $16,312      $ 1,750    $ 2,653
    Total assets                                     45,843          46,269       46,455       24,186     25,998
    Total debt                                       15,378          15,184       13,900        8,121      7,335
    Shareholders' Equity                             21,271          19,557       22,825       10,517     13,326
</TABLE>

--------------------------------

(1)  The financial data contained herein does not include information
     regarding stores previously licensed by IPCO (until such stores were
     acquired by the Company) since the Company believes that the information
     pertaining to such stores was not, and is not, material to the Company's
     results of operations.

(2)  Systemwide sales are unaudited and represent the combined retail sales of

     Company-owned and franchised stores, as well as revenues generated by
     VCC.

(3)  Other income consists primarily of interest income on franchise notes
     receivable and funds provided by certain Preferred Vendors for the
     Company's annual convention and regional seminars.

(4)  From May 1, 1992, until the consummation of the Company's Offering, the
     Company operated as an S Corporation for federal and state income tax
     purposes. As a result, the Company's 1992, 1993, 1994 and 1995 earnings
     through December 19, 1995, the day prior to the completion of the
     Company's Offering (at which date the Company's S Corporation status
     terminated), have been taxed, with certain exceptions, for federal and
     certain state income tax purposes, directly to the individuals who were
     shareholders of the Company immediately prior to the consummation of the
     Offering. The Company authorized and declared the payment of a dividend
     of $1,450,000, based upon the net income of the Company for the period
     January 1, 1995 to December 19, 1995, to such individuals immediately
     prior to the Offering.

                                      16


<PAGE>



(5)  Pro Forma Income Statement Data reflect adjustments to the historical
     income statement data assuming the Company had not elected S Corporation
     status for income tax purposes. The provision for federal and state
     income taxes assumes an effective tax rate of 40% for each of the
     following years: 1992, 1993, 1994 and 1995.

(6)  Assumes, as outstanding during the years ended 1993 and 1994, 9,963,495
     shares of Common Stock reflecting the 4,506.31-to-one stock split of the
     Company's outstanding Common Stock as of the date of the Offering; and
     12,207,495 shares of Common Stock, reflecting the stock split, for the
     year ended December 31, 1995. In accordance with FASB #128, as a result
     of losses from operations for the years ended December 31, 1997 and 1996,
     the inclusion of employee stock options were anti-dilutive and,
     therefore, were not utilized in the computation of dilutive earnings per
     share.

(7)  Same store sales represent sales generated by VCC and Company-owned or
     franchised stores which were open during the entirety of the one-year
     periods compared and are not necessarily comparable as between one-year
     periods.

(8)  Average sales per store and average franchise royalties per franchised
     store are computed based upon the weighted average number of
     Company-owned and franchised stores, respectively, for each of the
     specified periods. For periods less than a year, the averages have been
     annualized.


(9)  The decline in average sales per store for Company-owned and franchised
     stores was primarily from the impact of the Benson and DKM stores, which
     sales volumes were substantially lower than the typical Sterling Store.
     Excluding the Benson and DKM stores, average sales per store for Sterling
     Company-owned and franchised stores were $620,000 and $613,000,
     respectively, for the calendar year ended December 31, 1997.

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

       All statements contained herein (other than historical facts)
including, but not limited to, statements regarding the Company's future
development plans, the Company's ability to generate cash from its operations,
including the operations of the Registrant's subsidiary, Insight, and any
losses related thereto, are based upon current expectations. These statements
are forward looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially from the anticipated results or other
expectations expressed in the Company's forward looking statements. Generally,
the words "anticipate", "believe", "estimate", "expects" and similar
expressions, as they relate to the Company and/or its management, are intended
to identify forward looking statements. Among the factors that could cause
actual results to differ materially are the following: [the inability of the
Company to obtain a waiver from STI of its failure to comply with certain
covenants under its Loan Agreement]; the inability of the Company to enter
into third party, managed care provider agreements on favorable terms; the
inability of the Company to obtain additional financing to meet its capital
needs; competition in the retail optical industry; the ability of the Company
to acquire, at favorable prices, retail optical chains; the uncertainty of the
acceptance of PRK, a procedure being offered by Insight to correct the vision
of individuals experiencing certain degrees of myopia; the availability of new
and/or better ophthalmic laser technologies or other technologies that serve
the same purpose as PRK; the inability of the Company to finalize favorable
agreements with ophthalmologists to utilize the Company's excimer lasers to
perform PRK procedures; competition in the PRK market; the Company's ability
to successfully operate an ambulatory surgery center which the Company is
under negotiation to acquire; and general business and economic conditions.

General Overview

       In July 1992, the Company commenced operations by acquiring
substantially all of the assets comprising the retail optical business of
IPCO, including the assets then located in 58 company-owned stores, as well as
franchise agreements and related documents pertaining to 80 stores then
franchised by IPCO.

       The expansion of the Company's franchise system was primarily
attributable to the conveyance to franchisees, by the end of 1993, of the
assets of 31 of the 58 initially acquired Company-owned stores and the
acquisition, in April, 1997, of 30 franchised stores in connection with the
Singer Transaction. In October 1993, August 1994, November 1995, and May 1996,
respectively, the Company replenished its inventory of Company-owned stores
with the acquisition of 16 Company-owned stores as part of the SFSE Merger
(which 16 stores were in addition to ten stores then franchised by SFSE), the
acquisition of eight of the stores previously licensed by IPCO to Pembridge,

the acquisition of 32 Company-owned stores in connection with the Benson
Transaction, and the acquisition of 13 Company- owned stores (which 13 stores
were in addition to the 75 stores then franchised by VCA) in connection with
the VCA Transaction.

       The Company currently derives its revenues primarily from: (i) the sale
of eye care products (of which the sale of eyeglasses represented in excess of
70% of total sales for each period since inception) and by providing eye care
services at Company-owned stores

                                      17


<PAGE>



and in those franchised locations in which certain of the Company's VCC
operations are located; (ii) ongoing franchise royalties based upon the gross
revenue of franchised stores; (iii) the conveyance of Company-owned store
assets to franchisees; (iv) initial franchise fees; (v) interest income
derived primarily from purchase money financing provided by the Company on its
conveyance of Company-owned store assets to franchisees and on the proceeds of
the Offering, until such time that the proceeds were expended; and, (vi) laser
access fees paid by ophthalmologists utilizing the Company's excimer lasers to
perform PRK procedures.

       Management's growth strategy is to transform the Company from a
retailer of optical products into a full-service eye care company, including
the management of its existing Insight Laser Center and by developing
affiliations with ophthalmologists to utilize the Company's excimer lasers,
while at the same time expanding the Company's existing core business and
customer base. A key element of such strategy is to acquire existing retail
optical chains, convert independently owned retail optical stores to
franchised stores and open new stores.

       Average retail store sales and average ongoing franchise royalty
information described below is computed based upon the weighted average of
existing stores in each category. Since the Benson Transaction occurred in
November 1995, the number of Benson stores and the retail store sales
generated by such stores are not utilized in calculating the weighted average
of existing stores and average retail store sales for the calendar year ended
December 31, 1995.

       Same store sales represent sales generated by Company-owned or
franchised stores which were in operation during the entirety of the one-year
periods compared.

       Net gains on the conveyance of the assets of Company-owned stores to
franchisees vary depending upon the number of stores conveyed to franchisees,
the consideration paid for the assets of each such store and the Company's
basis (net book value) in the assets of the stores conveyed.

                                      18



<PAGE>




Results of Operations

For the Calendar-Year Ended December 31, 1997 compared to December 31, 1996

         Systemwide sales, which represent combined retail sales generated by
Company-owned and franchised stores, as well as revenues generated by VCC,
increased by $14,740,000, or 11.2%, to $146,333,000 for the calendar year
ended December 31, 1997, as compared to $131,593,000 for the same period in
1996. On a same store basis (for stores that operated as either a
Company-owned or franchised store during the entirety of both of the calendar
years ended December 31, 1997 and 1996), systemwide sales decreased by
$2,773,000, or 2.5%, to $108,094,000 for the calendar year ended December 31,
1997, as compared to $110,867,000 for the same period in 1996. There were 193
stores that operated as either a Company-owned or franchised store during the
entirety of both of the calendar years ended December 31, 1997 and 1996.

       Aggregate sales generated from the operation of Company-owned stores
decreased by $4,028,000, or 14.1%, to $24,449,000 for the calendar year ended
December 31, 1997, as compared to $28,477,000 for the same period in 1996.
Such decrease was primarily due to the conveyance of the assets of
Company-owned stores to franchisees, as well as the closing of certain
Company-owned stores. Historical comparisons of aggregate sales generated by
Company-owned stores can become distorted due to the conveyance of Company-
owned store assets to franchisees. When Company-owned store assets are
conveyed to franchisees, sales generated by such franchised store are no
longer reflected in Company-owned store sales; however, the Company receives
on-going royalties based upon a percentage of the sales generated by such
franchised stores. On a same store basis, aggregate sales generated by
Company-owned stores in operation during the entirety of both of the calendar
years ended December 31, 1997 and 1996, decreased by $640,000, or 3.7%, to
$16,801,000 for the calendar year ended December 31, 1997, as compared to
$17,441,000 for the same period in 1996.

       Aggregate sales generated from the operation of franchised stores
increased by $18,768,000, or 18.2% to $121,884,000 for the calendar year ended
December 31, 1997, as compared to $103,116,000 for the same period in 1996,
due primarily to the acquisition of certain franchised stores on: (i) May 30,
1996, from VCA and (ii) April 1, 1997 in connection with the Singer
Transaction. On a same store basis, aggregate sales generated by franchised
stores in operation during the entirety of both of the calendar years ended
December 31, 1997 and 1996, decreased by $1,482,000, or 1.8%, to $78,734,000
for the calendar year ended December 31, 1997, as compared to $80,216,000 for
the same period in 1996.

       Aggregate ongoing franchise royalties increased by $1,934,000, or
25.4%, to $9,550,000 for the calendar year ended December 31, 1997, as
compared to $7,616,000 for the same period in 1996, due primarily to an

increase in the number of Company-owned stores conveyed to franchisees and
certain franchised stores acquired in the VCA and Singer Transactions.

       Net gains on the conveyance of the assets of nine Company-owned stores
to franchisees decreased by $501,000, or 25.5%, to $1,462,000 for the calendar
year ended December 31, 1997, as compared to net gains on the conveyance of
the assets of 20 Company- owned stores to franchisees, in the aggregate amount
of $1,963,000 for the same period in 1996. Net gains on the conveyance of the
assets of Company-owned stores to franchisees vary depending upon the number
of stores conveyed to franchisees, the consideration paid for the assets of
such stores and the Company's basis (net book value) in the assets of the
stores conveyed.

       The Company's gross profit margin increased by .3 percentage points, to
69.2%, for the year ended December 31, 1997, as compared to 68.9% for the same
period in 1996. In the future, the Company's gross profit margin may fluctuate
depending upon the extent and timing of changes in the product mix in
Company-owned stores, competition and promotional incentives.

       Selling expenses decreased by $1,978,000, or 9.9%, to $17,965,000 for
the calendar year ended December 31, 1997, as compared to $19,943,000 for the
same period in 1996, due primarily from the conveyance of the assets of
Company-owned stores to franchisees, as well as the closure of certain
Company-owned stores.

       General and administrative expenses (including depreciation and
provision for doubtful accounts) increased by $1,116,000 or 6.7%, to
$17,859,000 for the calendar year ended December 31, 1997, as compared to
$16,743,000 for the same period in 1996. This increase was primarily due to
the following seven factors: (i) approximately $160,000 in higher occupancy
expenses in connection with the Company's relocation, in the second quarter of
1996, of its administrative offices; (ii) approximately $380,000 in costs
related to stock options granted to certain consultants to the Company; (iii)
approximately $188,000 in costs related to compensation paid to the Company's
new President and Chief Operating Officer; (iv) approximately $188,000 in
consulting fees paid to a company owned by two

                                      19


<PAGE>



of the Company's principal shareholders; (v) approximately $200,000 in costs
related to severance compensation paid to three former executives of the
Company; (vi) approximately $400,000 in amortization costs related to the
Singer Transaction and the shares of Common Stock issued to franchisees during
1996 and 1997; and (vii) an increase in the Company's provision for doubtful
accounts, as discussed below. This increase was partially offset by a decrease
in administrative costs of approximately $1,300,000 related to the business of
Insight. Interest expense, which is included in general and administrative
expenses, increased by approximately $304,000, or 23.4%, to $1,601,000 for the
calendar year ended December 31, 1997, as compared to $1,297,000 for the same

period in 1996, substantially due to the costs related to stock options
granted as consideration of certain loans made to the Company by certain of
its principal shareholders. The Company's provision for doubtful accounts,
which is included in general and administrative expenses, increased by
approximately $270,000, or 29.1%, to $1,198,000 for the calendar year ended
December 31, 1997, as compared to $928,000 for the same period in 1996, was
due primarily to the reduction of the residual value of franchisee notes
pledged to Sanwa.

       The Company's loss before income taxes benefit increased by $7,671,000,
 or 118.2%, to a loss of $14,162,000 for the calendar year ended December 31,
 1997, as compared to a loss of $6,491,000 for the same period in 1996. This
 increase was primarily due to

the following five factors:(i) a charge against earnings, in the approximate
amount of $5,916,000, the non cash portion which is $5,436,000 as  a result of
the Company's issuance and sale, in February, 1997, of its Convertible
Debentures Due August 25, 1998, which charge is being credited to the Company's
paid-in-capital (Shareholders' Equity) over the period of time that the holders
thereof actually convert the Debentures into shares of the Company's Common
Stock (See Note 15, "Shareholders' Equity"); (ii) approximately $772,000 in
lease termination costs related to the closure of eleven Company-owned stores;
(iii) the reduction in the net gains on the conveyance of Company-owned store
assets to franchisees; (iv) the increase in general and administrative costs as
discussed above; and (v) approximately $564,000 in asset impairment costs. This
increase was partially offset by the decrease in selling expenses and the
decrease in administrative costs related to the business of Insight.

For the Calendar-Year Ended December 31, 1996 compared to December 31, 1995

         Systemwide sales, which represent combined retail sales generated by
Company-owned and franchised stores, as well as revenues generated by VCC,
increased by $19,335,000, or 17.2%, to $131,593,000 for the calendar year
ended December 31, 1996, as compared to $112,258,000 for the same period in
1995. On a same store basis (for stores that operated as either a
Company-owned or franchised store during the entirety of both of the calendar
years ended December 31, 1996 and 1995), systemwide sales decreased by
$2,459,000, or 2.3%, to $105,630,000 for the calendar year ended December 31,
1996, as compared to $108,089,000 for the same period in 1995. There were 171
stores that operated as either a Company-owned or franchised store during the
entirety of both of the calendar years ended December 31, 1996 and 1995.

       Aggregate sales generated from the operation of Company-owned stores
increased by $2,704,000, or 10.5%, to $28,477,000 for the calendar year ended
December 31, 1996, as compared to $25,773,000 for the same period in 1995.
Such increase was primarily due to the VCA Transaction in the second quarter
of 1996), which resulted in the Company's acquisition, among other assets, of
the assets and leases for 13 company-owned stores, which was partially offset
by the decrease in aggregate sales resulting from the conveyance of the assets
of Company-owned stores to franchisees. Historical comparisons of aggregate
sales generated by Company-owned stores can become distorted due to the
conveyance of Company-owned store assets to franchisees. When Company-owned
store assets are conveyed to franchisees, sales generated by such franchised
store are no longer reflected in Company-owned store sales; however, the

Company receives on-going royalties based upon a percentage of the sales
generated by such franchised stores. On a same store basis, aggregate sales
generated by Company-owned stores in operation during the entirety of both of
the calendar years 1996 and 1995, decreased by $537,000, or 3.4%, to
$15,513,000 for the calendar year ended December 31, 1996, as compared to
$16,050,000 for the same period in 1995. The Company believes that such
decrease resulted, in part, from general business conditions and from the
Company's change in its employment arrangements with certain of its
optometrists from that of a salaried employee to an independent optometrist
subleasing the professional office located within the Sterling Store in
question. This change resulted in the loss of eye examination fee income for
the Company of approximately $290,000, since such doctors now collect such
fees as part of their income, although this contributed to the reduction in
selling expenses as described below.

       Aggregate sales generated from the operation of franchised stores
increased by $16,631,000, or 19.2%, to $103,116,000 for the calendar year
ended December 31, 1996, as compared to $86,485,000 for the same period in
1995, due primarily to an increase in the number of Company-owned stores
conveyed to franchisees and certain franchised stores acquired in the VCA
Transaction. On a same store basis, aggregate sales generated by franchised
stores in operation during the entirety of both of the calendar years 1996 and
1995, decreased by $789,000, or 1.1%, to $73,664,000 for the calendar year
ended December 31, 1996, as compared to $74,453,000 for the same period in
1995.

                                      20


<PAGE>



       Aggregate ongoing franchise royalties increased by $725,000, or 10.5%,
to $7,616,000 for the calendar year ended December 31, 1996, as compared to
$6,891,000 for the same period in 1995, due primarily to an increase in the
number of Company-owned stores conveyed to franchisees and certain franchised
stores acquired in the VCA Transaction.

       Net gains on the conveyance of the assets of 20 Company-owned stores to
franchisees decreased by $234,000, or 10.7%, to $1,963,000 for the calendar
year ended December 31, 1996, as compared to net gains on the conveyance of
the assets of eight Company- owned stores to franchisees in the aggregate
amount of $2,197,000 for the same period in 1995 (which included the gain on
the conveyance of the assets of one store, in the amount of $1,173,000).

       The Company's gross profit margin decreased by 6.2 percentage points,
to 68.9%, for the year ended December 31, 1996, as compared to 75.1% for the
same period in 1995. This decrease resulted primarily from the Company having
instituted, in the Fall of 1996, a promotional program in response to certain
promotional incentives offered by certain major competitors of the Company. To
match such incentives, the Company offered similar types of promotional
programs to its customers, which resulted in lower gross profit margins. In
the future, the Company's gross profit margin may fluctuate depending upon the

extent and timing of changes in the product mix in Company-owned stores,
competition and promotional incentives.

       Selling expenses increased by $3,816,000, or 23.7%, to $19,943,000 for
the calendar year ended December 31, 1996, as compared to $16,127,000 for the
same period in 1995, due to the inclusion of selling expenses of approximately
$5,488,000 incurred by the stores acquired in connection with the Benson and
VCA Transactions, and the operations of Insight, which were partially offset
by a decrease in selling expenses of approximately $1,332,000, due primarily
from the conveyance of the assets of Company-owned stores to franchisees, as
well as a decrease in selling expenses of approximately $330,000 in connection
with the change in the Company's employment arrangements (as described above)
with certain of its optometrists.

       General and administrative expenses (including interest expense,
depreciation and bad debt expense) increased by $6,680,000, or 58.8%, to
$18,040,000 for the calendar year ended December 31, 1996, as compared to
$11,360,000 for the same period in 1995. This increase was due primarily to
the following five factors: (i) an increase in administrative costs of
approximately $3,400,000 related to the business of Insight, which incurred
expenses of approximately $600,000 in 1995; (ii) approximately $535,000 in
administrative costs related to the Benson Transaction; (iii) approximately
$439,000 in administrative costs related to the VCA Transaction; (iv)
approximately $400,000 in occupancy and moving expenses related to the
Company's relocation, in the second quarter of 1996, of its administrative
offices; and (v) approximately $475,000 in costs related to operating as a
publicly held company. Interest expense, which is included in general and
administrative expenses, increased by $466,000, or 56.1%, to $1,297,000 for
the calendar year ended December 31, 1996, as compared to $831,000 for the
same period in 1995. This increase was due to increased indebtedness incurred
by the Company in connection with the leasing, in 1995, of five excimer lasers
and, in 1996, one additional excimer laser (which are capital leases and,
accordingly, such payments include interest expense), and an additional loan,
at the end of the fourth quarter of 1995, of $1,670,000 to fund the Benson
Transaction. The Company's provision for doubtful accounts, which is included
in general and administrative expenses, increased by $727,000, or 361.7%, to
$928,000 for the calendar year ended December 31, 1996, as compared to
$201,000 for the same period in 1995. This increase was due primarily to the
reduction in the residual value of the cash collateral and franchise notes
held by the CIT Group / Equipment Financing, Inc. ("CIT"). See Liquidity and
Capital Resources.

       The Company's income before income taxes decreased by $9,387,000, or
324.1%, to a loss of $6,491,000 for the calendar year ended December 31, 1996,
as compared to income of $2,896,000 for the same period in 1995. This decrease
was primarily due to the following three factors which were not comparable to
the Company's operations for the same period in 1995: (i) the Company
consummated the Benson Transaction during the fourth quarter of 1995 and thereby
acquired substantially all of the assets and certain continuing expenses of the
debtors. The Company incurred a loss of $2,312,000, for the calendar year ended
December 31, 1996, as compared to a loss of $520,000 for the same period in
1995, from the operation of the stores acquired in the Benson Transaction; (ii)
the Company incurred a loss of $3,330,000, for the calendar year ended December
31, 1996, as compared to a loss of $193,000 for the same period in 1995, in

establishing the operations of Insight, although Insight began generating
minimal revenues during the second quarter of 1996; and (iii) an increase in
general and administrative expenses as discussed above. This decrease was
partially offset by income of $1,112,000 generated from the operations of the
stores acquired (during the second quarter of 1996), in the VCA Transaction.
Income from the Company's operations (excluding the losses applicable to the
operations of the stores acquired in the Benson Transaction, Insight, and the
income applicable to the operation of the stores acquired in the VCA
Transaction) decreased by $5,583,000, or 285.4%, to a loss of $1,975,000 for the
calendar year ended December 31, 1996, as compared to income of $3,608,000 for
the same period in 1995. This decrease was primarily due to the increase in
general and administrative expenses (including interest expense, depreciation
and bad debt

                                      21


<PAGE>

expense), as explained above, (excluding such expenses applicable to the
operation of Insight and the stores acquired in the Benson and VCA
Transactions. This increase in general and administrative expenses was
partially offset by an increase in net gains from the conveyance of the assets
of Company-owned stores to franchisees, (excluding such gains applicable to
the conveyance of the assets of two Company-owned store acquired in the VCA
Transaction).

Liquidity and Capital Resources

       On February 26, 1997, the Registrant entered into Convertible
Debentures and Warrants Subscription Agreements with certain investors in
connection with the private placement (the "Private Placement") of units
(collectively, the "Units") consisting of an aggregate of $8,000,000 principal
amount of Convertible Debentures (collectively, the "1997 Debentures") and an
aggregate of 800,000 warrants (collectively, the "Warrants"), each Warrant
entitling the holder thereof to purchase one share of the Registrant's Common
Stock at a price to be determined in accordance with a specified formula and,
for each two Warrants exercised within a specified period of time, an additional
warrant (collectively, the "Bonus Warrants") to purchase one additional share of
Common Stock at a price of $7.50 per share. The Company used the net proceeds
(approximately $7,500,000) of the Private Placement to: (i) repay a portion of
the loans made to it by certain principal shareholders of the Company
($1,000,000, together with interest thereon, in the approximate amount of
$50,000), and (ii) pay down the Company's revolving line of credit ($1,000,000)
with the Chase Manhattan Bank (the "Bank").

       The 1997 Debentures bear no interest and mature on August 25, 1998, at
which time, subject to certain conditions, all 1997 Debentures not previously
converted and/or redeemed, shall automatically be converted into registered
shares of Common Stock. They are convertible at a price per share (the
"Conversion Price") equal to the lesser of $6.50 or 85% of the average closing
bid price of the Common Stock as reported on Nasdaq for the 5 trading days
immediately preceding the date of conversion; provided, however, that the
Company has the right to redeem that portion of the Debentures requested to be

converted in the event the Conversion Price is $6.00 or less. In such event,
the redemption price will be equal to 115% of the face amount of that portion
of the 1997 Debentures requested to be converted. The 1997 Debentures were
convertible subject to the following limitations: 25% of the original
principal amount became convertible beginning on the date of issuance; 50% of
the original principal amount became convertible beginning three months after
the date of issuance; 75% of the original principal amount became convertible
beginning six months after the date of issuance; and the entire original
principal amount became convertible beginning nine months after the date of
issuance.

       The 1997 Debentures are classified on the Company's Consolidated
Condensed Balance Sheet as a current liability. As of December 31, 1997, all
of the 1997 Debentures, except those with a carrying amount of $1,652,000, had
been converted to Common Stock by the holders thereof; and, as of March 31,
1998, the remaining balance of such 1997 Debentures had been converted.

       Utilizing the conversion terms most beneficial to the purchasers of the
Units, the Company has recorded in the accompanying financial statements
amortization of debt discount of approximately $5,916,000, which discount is
being credited to the Company's paid-in-capital (Shareholders' Equity) over
the period of time the holders of the 1997 Debentures actually convert the
same to Common Stock. The non-cash portion of the discount is $5,436,000.
Accordingly, once all of the 1997 Debentures have been so converted by the
holders thereof (March, 1998), such discount will have no effect on the
Company's Shareholders' Equity. This amount represents the intrinsic value of
the beneficial conversion feature inherent in the conversion rights of the
1997 Debenture, together with the fair market value of the Warrants (with an
assumed exercise price of $6.50) and the Bonus Warrants (with an assumed
exercise price of $7.50), both applied to the market price of the Company's
Common Stock, on the date of issuance, of $8.00 per share, together with the
issuance costs of the issuance of the Units. This discount is being amortized,
as additional interest expense, over 270 days, the period of the "phase-in" of
the conversion period.

       In July 1997, the Company elected, in connection with its Private
Placement, to pay to one of the holders of its 1997 Debentures the sum of
$460,000, which represented the redemption price for the conversion of
$400,000 principal amount of Debentures.

       The Warrants entitle the holders thereof to purchase an aggregate of
800,000 shares of Common Stock at an exercise price per share equal to the
lower of $6.50 or the average of the Conversion Price of any 1997 Debentures
converted, by the holder, prior to the date of exercise. The Warrants are
exercisable until February 26, 2000. If a holder of a Warrant exercises a
Warrant at any time during the 2 year period following the effectiveness of
the registration statement (referred to below), such holder will receive, for
each two Warrants exercised within such time, an additional Bonus Warrant
entitling the holder thereof to purchase one additional share of Common Stock
at an exercise price of $7.50 per share, which Bonus Warrants will have a term
of three years from the date of grant.

       In July 1997, the Company elected, in connection with its Private
Placement, to pay one of the holders of its 1997 Debentures the sum of

$460,000 which represented the redemption price for the conversion of $400,000
principal amount of Debentures.

                                      22


<PAGE>



       The Company has filed, and the U.S. Securities and Exchange Commission
(the "SEC") has declared effective, a registration statement on behalf of the
holders of the 1997 Debentures with respect to all of the shares of Common
Stock underlying the 1997 Debentures, the Warrants and the Bonus Warrants, not
to exceed, in any event, an aggregate amount equal to 19.999% of the number of
shares of Common Stock issued and outstanding on February 26, 1997; and the
Company has agreed to maintain the effectiveness of such registration
statement until the earlier of: (i) 3 years; and (ii) the date all of the
shares underlying the 1997 Debentures have been sold and the Warrants and the
Bonus Warrants have been exercised.

       The Company was required to obtain the consent of the Bank to complete
the Private Placement and, in connection therewith, the Bank, on February 26,
1997, amended the Company's Term Loan and Revolving Credit Agreement, dated
April 5, 1994, as amended, (the "Credit Agreement" which, as of the date of
this Annual Report, has been satisfied in full) by: (i) extending the maturity
date of the Company's line of credit to May 30, 1997; (ii) requiring a
$1,000,000 pay down of the line of credit; (iii) permanently reducing the line
of credit by such amount; (iv) granting waivers with respect to the Company's
anticipated non-compliance with certain financial covenants contained in the
Credit Agreement through February 26, 1997; and (v) amending, for the period
ending December 31, 1997, certain financial covenants contained in the Credit
Agreement.

       On June 30, 1997, the Company entered into a loan agreement (the "Loan
Agreement") with STI Credit Corporation ("STI") that: (i) established, in
favor of the Company, a $20,000,000 credit facility to finance a portion of
the Company's then existing and future franchise promissory notes receivable;
and (ii) funded $10,000,000, (although $1,000,000 [the "Additional Funds"] of
the funded amount was withheld pending disbursement and will be disbursed
promptly after the Company's satisfaction of a required collateral ratio with
respect to such credit facility (less a facility fee equal to two percent of
the amount of the loan). Sixty-five percent (65%) of the funded amount is to
be repaid by the Company over a term of 60 months, with a final balloon
payment at the expiration of the sixty-first month of the term of said loan.
The Company granted to STI a first priority, continuing security interest in a
substantial portion of its franchise notes and the proceeds related to such
notes. A portion of the net proceeds (approximately $6,100,000) of the loan
was used to satisfy, pay and discharge, in full, all amounts then due by the
Company to: (i) the Bank ($5,035,000, together with accrued interest thereon,
in the approximate amount of $37,000); and (ii) certain principal shareholders
of the Company ($1,000,000, together with accrued interest thereon, in the
approximate amount of $9,000). As a result of the foregoing: (i) the Bank's
lien upon, and security interest in, substantially all of the Company's assets

(previously securing the Bank's various loans to the Company) was discharged;
and (ii) restrictions previously imposed upon the Company (pursuant to the
Credit Agreement) are no longer applicable.

       On October 9, 1997, STI amended the Loan Agreement and disbursed a
portion of the Additional Funds to the Company. As of December 31, 1997, the
outstanding principal balance of such loan was approximately $8,600,000.
Pursuant to the terms of the Loan Agreement, the Company must comply with the
following financial covenants: (i) the maintenance of positive, annual net
income for each of its calendar years; (ii) working capital of not less than
$2 million; (iii) shareholders' equity of not less than $26 million; and (iv)
from and after June 30, 1998, a collateral ratio of 1.2 to 1.0. As of December
31, 1997, the Company was not in compliance with the financial covenants
described in clauses (i) and (iii) above, although STI subsequently waived
such non-compliance in exchange for the Company's agreement to, which Waiver
amended the Loan Agreement so as to: (i) waive the Company's compliance with
all of its financial covenants until December 31, 1998; (ii) reduced such
shareholders' equity requirement to $25 million; (iii) provide for a
prepayment penalty of $500,000; and (iv) require the Company to provide
certain additional documents to STI, as well as pay certain fees to STI, in
the aggregate amount of $70,000.

       On November 6, 1997, The Company entered into a Master Grid Note ("Grid
Note") with the Bank that provided the Company with a short-term loan of up to
$1,000,000. The maturity date of the Grid Note was February 6, 1998; however,
such maturity date was extended, by the Bank, to March 9, 1998, and was paid
by the Company on such date (see Note 20 of Notes to Consolidated Financial
Statements-Subsequent Events). Interest is calculated on the outstanding
principal balance at 3/4 of one percent over the prime rate (approximately 8
1/2% at December 31, 1997) then in effect from time to time. As of December
31, 1997, the outstanding principal balance of the Grid Note was $1,000,000.

       As of December 31, 1997 and December 31, 1996, the Company had
$3,472,000 and $(3,803,000), respectively, in working capital, and $334,000
and $868,000, respectively, of cash and cash equivalents. During the twelve
months ending December 31, 1998, the Company anticipates having the following
capital requirements: renovating one existing Company-owned store; the
continuing upgrade of the Company's management information system in
conjunction with the A-P Systems being installed in its Company-owned stores,
in the aggregate, approximate amount of $250,000; acquiring retail optical
stores, subject to the availability of qualified opportunities in furtherance
of the Company's business strategy, in amounts that cannot be projected by the
Company at this time; and acquiring an ambulatory surgery center, subject to
the Company's ability to finalize an agreement to acquire such center.

                                      23


<PAGE>



       The Company experienced negative cash flow from operations during the
twelve months ended December 31, 1997 resulting, primarily, from losses

attributable to the operations of Insight and a substantial reduction in the
Company's accounts payable earlier in the year. By the end of 1997, the
following measures were taken by the Company, which management believes will
reduce, in the future, the magnitude of the losses it sustained for the
calendar year ended December 31, 1997, as well as improve the Company's
operations and cash flow: (i) closed or did not renew the leases for 10 of its
Company-owned stores; and (ii) reduced a substantial amount of administrative
overhead expenses. Based, in part, upon the anticipated financial impact of
such measures on the Company's results of operations for the twelve months
ending December 31, 1998, the Company anticipates a positive cash flow for
such period, although there can be no assurance that such positive cash flow
will be obtained.

        In February , 1998, the Company entered into Convertible Debentures
and Warrants Subscription Agreements with certain investors in connection with
the private placement of units consisting of an aggregate of $3.5 million
principal amount of convertible debentures (as amended on March 25, 1998,
collectively, the "1998 Debentures") and an aggregate of 700,000 warrants
(collectively, the "1998 Warrants"), which 1998 Warrants entitled the holders
thereof to purchase up to 700,000 shares of the Company's Common Stock, at a
price of $5.00 per share. The Company used the net proceeds (approximately
$3.3 million) of the private placement: (i) to repay certain loans previously
made to it ($1,700,000), together with interest thereon; and (ii) the balance
for general corporate purposes.

       Subsequently to the date of the Company's issuance and sale of the 1998
Debentures and 1998 Warrants, the Company and the Holders thereof
(collectively, the "Original Holders"), determined that the issuance and sale
of such 1998 Debentures and 1998 Warrants was based upon a certain mutual
mistake of the Company and the Original Holders. Accordingly, on April
14,1998, the Company and the Original Holders entered into an Exchange
Agreement, effective as of February 17, 1998, pursuant to which the 1998
Debentures were exchanged for $3.5 million Stated Value of a series of the
Company's Preferred Stock, par value $.01 per share (the "Stock") and the 1998
Warrants were exchanged for new warrants (the "Warrants"), entitling holders
thereof to purchase up to 700,000 shares of Common Stock at a price of $5.00
per share (the "Conversion Price"), until February 17, 2001.

       The Preferred Stock: (i) requires the Company to pay quarterly
dividends thereon, commencing May 17, 1998, calculated at the rate of ten
(10%) percent per annum; (ii) permits the Company to pay such dividends in
registered shares of its Common Stock; (iii) permits the holders thereof, at
any time prior to redemption by the Company, to convert all or a portion of
the same into shares of Common Stock based upon the Conversion Price: (iv)
requires the Company to redeem, in either cash or registered shares of its
CommonStock, at the Company's option, all (but not less than all) of the
Debentures (at 105% of the then, outstanding Stated Value thereof, based upon
the Conversion Price; hereinafter the "Redemption Amount") at any time from
and after February 17, 1999 that a registration statement (pursuant to which
the Common Stock [into which the Preferred Stock may be converted] has been
registered) is effective; (v) permits the Company to redeem all (but not less
than all) of the Debentures, in cash and at the Redemption Amount, at any time
from and after February 17, 1999; and (vi) provides that from and after
February 18, 1999, the Company will be required to pay dividends thereon,

until the same are redeemed by the Company, at the rate of twenty-four (24%)
per annum.

       Although the Company believes that its financial condition will improve
for the twelve months ended December 31, 1998, there can be no assurance that
its financial condition will so improve. The Company was not in compliance
with certain of its existing financial covenants as contained in its Loan
Agreement with STI as of December 31, 1997, although the Company subsequently
received a waiver thereof. Although the Company believes that it will be in
compliance with such covenants by the end of 1998, there can be no assurance
that it will be able to do so and, in such event, STI will have the right to
accelerate the payment of the then outstanding principal amount then due under
the Company's Loan Agreement with STI. Accordingly, the Company believes that
its current cash resources and cash flow from operations would be sufficient
to fund its anticipated capital expenditures in 1998.

Impact of Inflation and Changing Prices

       Although the Company cannot accurately determine the precise effect of
inflation on its operations, it does not believe that inflation has had a
material effect on sales or results of operations.

Recent Accounting Requirements

       In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement is effective for financial statements issued for
periods beginning after December 15, 1997. Management is presently evaluating
the effect on the Company's financial reporting form the adoption of this
statement and does not expect it to have any material effect.

       In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," SFAS No. 131 requires the
reporting of profit and loss, specific revenue and expense items, and assets
for reportable segments. It also requires the

                                      24


<PAGE>



reconciliation of total segment revenues, total segment profit or loss, total
segment assets, and other amounts disclosed for segments to the corresponding
amounts in the general purpose financial statements. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company's operations
are presently classified into two principal industry segments:(i) the retail
optical segment, whereby the Company owns and operates, as well as franchises
a retail chain of optical stores which offer eyecare products and services
such as prescription and non-prescription eyeglasses, eyeglass frames,
ophthalmic lenses, contact lenses, sunglasses and a broad range of ancillary
items; and (ii) the Insight Laser segment, whereby the Company owns and
operates a laser surgery center and provides access, for a fee, to affiliated
ophthalmologists who utilize Insight's excimer lasers in offering PRK, a

procedure performed with such lasers for the correction of certain degrees of
myopia. Management is presently evaluating the impact on the Company's
financial reporting from the adoption of this statement.

Impact of the Year 2000 Issue

       The Year 2000 Issue is the result of potential problems with computer
systems and/or any equipment with computer chips that use dates, where the
date has been stored as just two digits (e.g. 97 for 1997). On January 1,
2000, any clock or date recording mechanism (including date sensitive
software) which uses only two digits to represent the year, may recognize a
date using 00 as the year 1900, rather than the year 2000. This could result
in a system failure or miscalculations, causing disruption of operations as
such systems may be unable to accurately process certain date-based
information.

       The Company has reviewed the Year 2000 Issue with its Management
Information Systems's providers and consultants. The Company believes that the
Year 2000 Issue will not have a material impact on the operations of the
Company since its computer programs were written utilizing four digits to
define the applicable year. The Company, however, cannot determine, as of the
date hereof, the impact of the Year 2000 Issue on any of its vendors and/or
franchisees, which might materially impact the operations of the Company.

                                      25


<PAGE>





Item 8.  Financial Statements and Supplementary Data

                    STERLING VISION, INC. AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS
                           FOR THE THREE YEARS ENDED
                             DECEMBER 31, 1997 AND
                         INDEPENDENT AUDITOR'S REPORT

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>


                                                                                                           PAGE
<S>                                                                                                       <C>
INDEPENDENT AUDITOR'S REPORT                                                                                27

CONSOLIDATED FINANCIAL STATEMENTS


    Consolidated Balance Sheets as of December 31, 1997 and 1996                                            28

    Consolidated Statements of Operations for the Years Ended December 31, 1997,
    1996 and 1995                                                                                           29

    Consolidated Statements of Shareholders' Equity for the Years Ended
    December 31, 1997, 1996 and 1995                                                                        30

    Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 
    1996 and 1995                                                                                           31

    Notes to Consolidated Financial Statements                                                              33
</TABLE>

                                      26


<PAGE>


                         INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Shareholders of
     Sterling Vision, Inc. and Subsidiaries

East Meadow, New York

We have audited the accompanying consolidated balance sheets of Sterling
Vision, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and
December 1996 and the related statements of operations, shareholders' equity,
and cash flows for the three years ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sterling Vision, Inc. and
Subsidiaries as of December 31, 1997 and December 31, 1996 and the results of
its operations and its cash flows for the three years ended December 31, 1997,
in conformity with generally accepted accounting principles.

Deloitte & Touche LLP
New York, New York


April 15, 1998

                                      27


<PAGE>





                    STERLING VISION, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)


<TABLE>
<CAPTION>                                                                                 December 31,
                                                                                        1997          1996
                                                                                       ------        -----
<S>                                                                                <C>             <C>
      A S S E T S

Current assets:

  Cash and cash equivalents                                                           $   334      $     868
  Accounts receivable, net of allowance for
    doubtful accounts of $514 and $557, respectively                                    8,446          7,911
  Franchise and other notes receivable - current                                        3,301          3,375
  Inventories                                                                           3,310          3,678
  Due from related parties - current                                                      110            124
  Prepaid expenses and other current assets                                               516            883
                                                                                  -----------      ---------
      Total current assets                                                             16,017         16,839

Property and equipment, net                                                             9,903         10,818

Franchise and other notes receivable - net of allowance

       for doubtful accounts of $562 for 1997 and 1996                                 14,884         16,089

Excess of cost over fair value of assets acquired                                       2,957            594
Restricted cash                                                                           550             50

Other assets                                                                            1,532          1,879
                                                                                   ----------       --------

        TOTAL                                                                         $45,843        $46,269
                                                                                      =======        =======

      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:


  Current portion of long-term debt                                                   $ 3,477        $ 9,151
  Convertible debentures due August 25, 1998                                            1,652           -
  Notes Payable - shareholders and directors                                             -             2,000
  Accounts payable and accrued liabilities                                              6,579          8,267
  Franchise related obligations - current                                                 837          1,224
                                                                                   ----------        -------
      Total current liabilities                                                        12,545         20,642

Long-term debt                                                                         10,249          4,033
Deferred franchise income                                                                  96            328
Excess of fair value of assets acquired over cost                                       1,362          1,709
Lease termination costs                                                                   320          -

Commitments and contingencies

Shareholders' equity:
  Preferred stock, $.01 par value per share;
    authorized 5,000,000 shares                                                            -            -
  Common stock, $.01 par value per share; authorized
   28,000,000 shares; issued 13,927,227 in 1997 and
   12,387,535 in 1996                                                                     139            124
  Additional paid-in capital                                                           40,843         24,982
  (Deficit)                                                                           (19,711)        (5,549)
                                                                                   -----------      ---------
                                                                                   $   21,271        $19,557
                                                                                   ----------        =======

      TOTAL                                                                          $ 45,843         $46,269
                                                                                     ========         =======

</TABLE>


                                      28


<PAGE>



The accompanying notes are an integral part of the consolidated financial
statements.

                    STERLING VISION, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (Dollars in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                                      For the year ended
                                                                        December 31,

                                                                1997         1996         1995
                                                             ---------    ---------   ----------

<S>                                                          <C>          <C>          <C>
Systemwide sales (Unaudited-See Note 12)                     $ 146,333    $ 131,593    $ 112,258
                                                             =========    =========    =========
Revenues:
   Net sales - Company owned stores                          $  24,449    $  28,477    $  25,773
   Franchise royalties                                           9,550        7,616        6,891
   Net gains and fees from the conveyance of Company-owned
     assets to franchisees                                       1,462        1,963        2,197
     Other income                                                2,578        2,287        2,017
                                                             ---------    ---------   ----------
Total Revenue                                                $  38,039    $  40,343    $  36,878
                                                             ---------    ---------   ----------

Costs and expenses:

    Cost of sales                                                7,524        8,851        6,495
    Selling expenses                                            17,965       19,943       16,127
    General and administrative expenses                         17,859       16,743       10,529
    Provision for store closings                                 1,336         --           --
    Interest expense                                             1,601        1,297          831
   Amortization of debt discount                                 5,916         --           --          
                                                             ---------    ---------   ----------
Total Costs and Expenses                                        52,201       46,834       33,982
                                                             ---------    ---------   ----------

(Loss) income before (benefit from) provision for
    income taxes                                               (14,162)      (6,491)       2,896
(Benefit from) provision for  income taxes                        --         (2,001)       2,129
                                                             ---------    ---------   ----------

Net (loss) income                                            $ (14,162)   $  (4,490)   $     767
                                                             =========    =========   ==========


Net  (loss) income per common share - basic and diluted      $   (1.02)   $    (.36)  $      .08
                                                             =========    =========   ==========

Pro forma statement of operations data (unaudited):
Income before provision for
 income taxes                                                                         $    2,896
Provision for income taxes                                                                 1,158

Net income                                                                            $    1,738
                                                                                      ==========

Earnings per common share- basic and diluted                                           $    .17
                                                                                       ========

</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                      29



<PAGE>



                    STERLING VISION, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                (Dollars in Thousands, Except Number of Shares)

<TABLE>
<CAPTION>
                                                                            Stock       Additional     Retained       Total
                                                 Common Stock           Subscription      Paid-In      Earnings   Shareholders'
                                              Shares         Amount       Receivable       Capital     (Deficit)     Equity
                                              ------         ------     ------------    ----------     --------   --------------
<S>                                         <C>            <C>        <C>           <C>            <C>           <C>
Balance - December 31, 1994                      2,211        1,211    $      (56)   $    7,938    $    1,424    $   10,517
Capitalization of additional corporations                         6            (6)         --            --            --
Stock Split                                  9,961,284       (1,055)                      1,055          --            --
Contribution of subsidiaries                                    (62)          --           --            --            --
Issuance of 2,200,000 common
   Shares in a public offering and
   44,000 shares to legal consultants        2,244,000           22          --          14,791                      14,791

Distributions                                     --           --            --            --          (3,250)       (3,250)
Net income                                        --           --            --            --             767           767
                                            ----------   ----------    ----------    ----------    ----------    ----------

Balance - December 31, 1995                 12,207,495   $      122    $     --      $   23,762    $   (1,059)   $   22,825
                                            ==========   ==========    ==========    ==========    ==========    ==========

Issuance of 100,000 common shares
in an over-allotment from the public
offering and 80,040 shares to
Franchisees                                    180,040            2          --           1,220          --          1,222
Net loss                                          --           --            --            --         (4,490)       (4,490)
                                            ----------   ----------    ----------    ----------    ----------    ----------
Balance - December 31, 1996                 12,387,535   $      124          --      $   24,982    $  (5,549)    $  19,557
                                            ==========   ==========    ==========    ==========    ==========    ==========

Issuance of  common
shares in exchange for debt                    144,916            1          --             973        --              974
Issuance of common shares
related to an acquisition                      305,747            3          --           2,293        --            2,296
Issuance of common shares
to franchisees                                   4,002         --            --              30        --               30
Issuance of shares upon
conversion of debentures                     1,085,027           11          --           6,348        --            6,359
Debt discount                                     --           --                         5,436        --            5,436
Non-employee stock options                        --           --            --             781        --              781
Net Loss                                          --           --         (14,162)                   (14,162)      (14,162)

                                            ----------   ----------    ----------    ----------    ----------    ----------
Balance - December 31, 1997                 13,927,227   $      139          --      $   40,843    $  (19,711)   $   21,271
                                            ==========   ==========    ==========    ==========    ==========    ==========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                      30


<PAGE>



                    STERLING VISION, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                                                 For the year ended
                                                                                    December 31,

                                                                          1997      1996         1995
                                                                        -------   ---------     ------
<S>                                                                   <C>         <C>           <C> 
Cash flows from operating activities:

   Net (loss) income                                                  $(14,162)   $ (4,490)    $   767

   Adjustments to reconcile net (loss) income to net cash (used in)
       provided by operating activities:

          Depreciation and amortization                                  2,310       1,481         793
          Allowance for doubtful accounts                                1,198         928         584
          Net gain from the conveyance
          of Company-owned assets
             to franchisees                                             (1,131)     (1,610)     (1,907)
          Deferred income taxes payable                                   --        (2,082)      1,968
          Accrued interest                                                  84         121        --
          Amortization of fair value of assets acquired over cost         (347)       (231)       --
          Amortization of debt discount                                  5,436        --          --
          Stock options charged to expense                                 781        --          --
   Changes in certain assets and liabilities:

             Accounts receivable                                          (477)     (4,541)     (1,400)
             Inventories                                                   368       1,168        (957)
             Prepaid expenses and other
               current assets                                              375        (478)       (238)
             Other assets                                                  223          50        (666)
             Accounts payable and accrued liabilities                   (1,988)        778       2,012
             Franchise related obligations                                (387)        400         202
             Deferred franchise income                                    (232)        328        --
             Reserve for store closings                                    320        --          --

                                                                      --------    --------    --------
Net cash (used in) provided by operating activities                   $ (7,629)   $ (8,178)   $  1,158
                                                                      --------    --------    --------
Cash flows from investing activities:
   Acquisition, net of cash acquired                                      --        (4,150)     (2,396)
   Franchise notes receivable issued                                    (2,658)     (3,901)     (4,764)
   Repayment of franchise and other notes receivable                     2,756       1,887       2,319
   Purchase of property and equipment                                   (1,992)     (5,607)     (4,187)
   Conveyance of property and equipment                                  2,517       3,536       2,548
                                                                      --------    --------    --------
Net cash provided by (used in) investing activities                   $    623    $ (8,235)   $ (6,480)
                                                                      --------    --------    --------
</TABLE>


                                                       Continued on next page

The accompanying notes are an integral part of the consolidated financial
statements.

                                      31


<PAGE>


                                       
                    STERLING VISION, INC. AND SUBSIDIARIES
              CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                            (Dollars in Thousands)
<TABLE>
<CAPTION>
                                                               For the year ended
                                                                   December 31,
                                                           1997        1996        1995
                                                         --------    --------    --------
<S>                                                      <C>         <C>         <C> 
Cash flows from financing activities:
   Sale of common stock and other capital contributions         0    $    625    $ 14,791
   Borrowings under STI Loan Agreement                      9,500        --          --
   Repayment on STI Loan Agreement                         (1,380)       --          --
   Borrowings under Chase Credit Agreement                  1,000         225       2,575
   Repayment on Chase Credit Agreement                     (7,015)       --          --
   Payments on other debt                                  (3,173)     (2,984)     (2,138)
   Issuance of convertible debenture                        7,540        --          --

Borrowings of other debt                                     --         3,922       5,342
   Distributions to shareholders                             --          --        (3,250)
                                                         --------    --------    --------

Net cash provided by (used in) financing activities      $  6,472    $  1,788    $(17,320)
                                                         --------    --------    --------


Net (decrease) increase in cash and
   cash equivalents                                          (534)    (14,625)     11,998

Cash and cash equivalents -
   beginning of period                                        868      15,493       3,495
                                                         --------    --------    --------

Cash and cash equivalents -
   end of period                                         $    334    $    868    $ 15,493
                                                         ========    ========    ========

Supplemental disclosure of cash flow information:

Cash paid during the period for:

   Interest                                              $  1,226    $  1,232    $    753
                                                         ========    ========    ========

   Taxes                                                 $     57    $    579    $    274
                                                         ========    ========    ========

Acquisitions, net of cash acquired:

   Working capital, other than cash                      $   (231)   $    807    $  1,227
   Property, plant and equipment                              200         600         800
   Excess of cost of assets acquired over fair value        2,541        --          --
     Excess of fair value of assets acquired over cost       --        (1,940)       --
   Other assets                                              --          --           369
    Franchise Notes                                          --         4,683        --
   Common Stock Issued                                     (2,510)       --          --
                                                         --------    --------    --------
   Acquisitions, net of cash acquired                           0    $  4,150    $  2,396
                                                         ========    ========    ========


The accompanying notes are an integral part of the consolidated financial
statements.

                                      32


<PAGE>



                    STERLING VISION, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (In Thousands, Except Number of Shares, Number of Stores, and Per Share Data)

NOTE 1  - BUSINESS ORGANIZATION:

        Sterling Vision, Inc. ("SVI") was incorporated under the laws of the
State of New York in January 1992 and , in February 1992, purchased

substantially all of the assets (the "IPCO Acquisition") of Sterling Optical
Corp., f/k/a IPCO Corporation ("IPCO"), a New York corporation then a
debtor-in-possession under Chapter 11 of the U. S. Bankruptcy Code.

       Sterling Vision, Inc. ("SVI") and its subsidiaries (collectively, the
"Company"), are engaged in operating and franchising retail optical stores.
Substantially all revenues result from the sale of optical products or the
rendering of eye examinations at store locations operated by the Company or
its franchisees. In June 1996, the Company commenced the operations of Insight
Laser Centers, Inc. ("Insight") to develop and/or manage a chain of eyecare
centers offering Photorefractive Keratectomy ("PRK").

       In October 1993, SVI acquired, through a merger, 26 retail optical
stores (both company operated and franchised) operating under the name "Site
for Sore Eyes" ("SFSE") and located in Northern California (the "SFSE
Merger"). In connection with the SFSE merger, the Company also acquired
VisionCare of California (" VCC"), a specialized health care maintenance
organization licensed by the California Department of Corporations under the
California Knox Keene Health Care Service Plan Act of 1975.

       On November 7, 1995, Sterling Vision BOS, Inc. ("BOS"), a subsidiary of
SVI, acquired, pursuant to a United States Bankruptcy Court Order,
substantially all of the assets of OCA Acquisition Corp., Benson Optical Co.,
Inc., and Superior Optical Company, Inc. (collectively, "Benson") consisting
principally of store cash, account receivable, inventory, furniture and
fixtures, equipment and store leases for 98 locations (the "Benson
Transaction"), subject to its right, in its sole discretion, to reject the
lease for any such location on or before December 6, 1995; provided that any
such rejection would not result in any purchase price adjustment. As of
December 6, 1995, BOS rejected the leases for 66 of such locations and assumed
the leases for the remaining 32 locations. Payment of the purchase price
consisted of approximately $1,570,000 in cash, as well as the forgiveness of
all sums then due by Benson to Benson Eyecare Corporation ("BEC"), which the
Company purchased from BEC in exchange for a Subordinated Debenture (see
Footnote 15 Shareholders Equity) in the original principal amount of
$5,900,000 and then having a discounted present value of approximately
$826,000. The sums forgiven represent the notes receivable and accounts
receivable in favor of BEC and acquired by the Company from BEC in exchange
for said Convertible Debenture. On November 15, 1995, the Company entered into
a one year non-compete and consulting agreement with one of the principals of
Benson for aggregate consideration of $150,000 which was included in the
purchase price. This transaction has been accounted for as a purchase, in
accordance with APB 16 and 17, with allocations made based upon the estimated
fair market value of the assets acquired.

       On May 30, 1996, SVI, through its wholly-owned subsidiary, Sterling
Vision DKM, Inc. ("DKM"), acquired all of the retail optical assets, other
than leases (which leases were assigned to the Company in three separate
agreements), of Vision Centers of America, Ltd., D & K Optical, Inc., Monfried
Corporation and Duling Finance Corporation (collectively, "VCA"), which assets
were subject to a lien in favor of Norwest Investment Services, Inc.
("Norwest") (the "VCA Transaction"). Norwest was entitled to exercise its
rights as a secured creditor of VCA as a result of VCA's default with respect
to its obligations to Norwest. The assets acquired consisted primarily of

inventory, the fixed assets of 13 company-owned and operated retail optical
stores, the fixed assets of an ophthalmic lens manufacturing facility and the
assets located at several warehouses, general intangibles (other than store
leases) including franchise agreements, promissory notes and accounts
receivable related to approximately 75 franchised retail optical storses.

 DKM purchased the assets at a private foreclosure sale subject to certain
liens, claims and encumbrances; however, Norwest indemnified DKM for certain
of such liens, claims and encumbrances. In addition, VCA assigned to DKM all
of its right, title and interest in and to each of the store leases in
exchange for DKM's payment to VCA of $50,000 and the assumption of all of the
obligations under such store leases, subject to DKM's right, in its sole
discretion, to reject the lease for any such locations on or before September
30, 1996. DKM also subsequently purchased from a bank, for the approximate sum
of $111,000, all of such bank's right, title and interest in and to certain
additional prior liens, held by such bank, against VCA's inventory, accounts
receivable and franchise agreements. This transaction has been accounted for
as a purchase in accordance with APB 16 and 17, with allocations made based
upon the estimated fair market value of the assets acquired.

       On April 1, 1997, SVI acquired all of the issued and outstanding shares
of the capital stock of Singer Specs, Inc., a Delaware corporation, and
certain of its wholly-owned subsidiaries (collectively, "Singer"), pursuant to
the terms of a certain Agreement and Plan of Reorganization, dated February
19, 1997 (the "Singer Agreement"), between the Company and the owners
(collectively, the "Singer

                                      33


<PAGE>



Shareholders") of all of such capital stock of Singer Specs, Inc. As of the
closing, Singer was the: (i) operator of four retail optical stores
(collectively, the "Singer Company Stores"); (ii) franchisor of an additional,
approximately27 other retail optical stores, all of which company operated and
franchised stores are located in the States of Pennsylvania, Delaware, New
Jersey and Virginia, and a store that opened in the U.S. Virgin Islands in
July 1997; and (iii) owner of a commercial building (the "Building") located
in Philadelphia, Pennsylvania (collectively, the "Singer Transaction").

       The Singer Agreement provided for the Singer Shareholders to convey all
of said capital stock to the Company, free and clear of any and all claims,
liens and/or encumbrances, in exchange for shares of the Company's Common
Stock, subject to certain post closing adjustments.

       The Singer Agreement provided: (i) that the assets of each of the
Singer Company Stores be conveyed to corporations owned by one or more of the
Singer Shareholders, which entities, simultaneously with the closing, each
entered into a Sterling Optical Center Franchise Agreement; (ii) for the
pledge, by the Singer Shareholders, of all of their shares of Common Stock, to
secure their obligations under the Singer Agreement; (iii) that the Singer

Shareholders be restricted from selling a portion of their shares of said
Common Stock, all as more particularly set forth in the Singer Agreement; (iv)
for the requirement that the Company, under certain circumstances, pay to the
Singer Shareholders the difference between the market price of its Common
Stock (upon which the purchase price was calculated) and the selling price
(net of 50% of commissions) of any such shares sold by the Singer
Shareholders; and (v) the possible recapture, by the Company, of up to 12,192
shares of the Common Stock issued to the Singer Shareholders in the event all
of the Singer franchisees did not, within a specified period of time after the
closing, convert their existing Singer Franchise Agreement to the Company's
then current form of Franchise Agreement. This transaction has been accounted
for as a purchase, effective April 1, 1997, in accordance with APB 16 and 17,
with allocations made based upon the estimated, fair market value of the
assets acquired. Franchise agreements are being amortized over a period of ten
years.

       The Company, under the terms of the Singer Agreement, paid to the
Singer Shareholders approximately $143,000, which represented the difference
between the market price of its Common Stock (upon which the purchase price
for the capital stock of Singer was calculated) and the selling price (net of
50% of commissions) generated from their sale of approximately 100,000 shares
of the Company's Common Stock.

       The following table reflects the unaudited pro forma combined results
of operations of the Company, assuming that the

acquisition of Singer had taken place on January 1, 1996.

(Dollars in thousands, except per
      common share amounts)


</TABLE>
<TABLE>
<CAPTION>
                                                                      Twelve Months Ended
                                                                         December 31,

                                                                      1997             1996
                                                                     -----             ----
<S>                                                            <C>              <C> 
Revenues                                                           $38,240          $41,141
                                                                  =========         ========
Loss before provision for                                         
   income taxes and extraordinary item                            $(14,029)         $(5,927)
Benefit from income taxes                                            -               (2,001)
Net loss                                                          $(14,029)         $(3,926)
                                                                  =========         ========
Net loss per Common Share-basic and undiluted                   $    (1.01)       $    (.32)
                                                                ===========       ==========


NOTE 2  - INITIAL PUBLIC OFFERING:

          Reorganization


          In December 1995, SVI issued 2,200,000 shares of its Common Stock at
$7.50 per share in an initial public offering (the "Offering"). Proceeds from
the Offering as of December 31, 1995, net of commissions and other related
expenses totaling

                                      34


<PAGE>



$1,855,000, were $14,791,000.

           Immediately prior to the Offering, the Company effected a
4,506.33:1 stock split (subject to rounding upward in the case of any
fractional shares held by any shareholder) in the form of a Common Stock
dividend. In addition, the shareholders of the Company approved an amendment
to SVI's Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 5,000, no par value, to 33,000,000 shares, of
which 28,000,000 are Common Stock, par value $.01 per share, and 5,000,000
shares are Preferred Stock, par value $.01 per share. All share and per share
data included in these financial statements have been restated to reflect the
stock split.

           As part of the Offering, the Company issued 44,000 shares of Common
Stock to certain legal consultants to the Company in consideration for past
services rendered to the Company in connection with the Company's 1992
acquisition of IPCO Corporation ("IPCO). The Company capitalized the sums not
previously expressed, in the amount of $175,000, which sum is being amortized
over seven years.

           The Company issued 4,002 and 80,040 shares of its Common Stock
during the calendar years ended December 31, 1997 and December 31, 1996,
respectively, to the franchisees of those franchised stores in existence on
the date of the consummation of the Offering, in consideration of future
performance in accordance with the terms of their respective Franchise
Agreements. The fair value of such shares is being amortized over the vesting
period of three years.

NOTE 3  - SIGNIFICANT ACCOUNTING POLICIES:

          Principles of Consolidation

          The consolidated financial statements include the accounts of SVI
and its subsidiaries, all of which are wholly owned.

          All significant intercompany balances and transactions have been
eliminated in consolidation.

          Revenue recognition

          Except in limited circumstances, the Company charges each
franchisee a nonrefundable initial franchise fee. This fee is used, in part,

to defray certain costs and expenses incurred by the Company in connection
with its franchising activities. Initial franchise fees are recognized at the
time all material services required to be provided by the Company have been
substantially performed. Franchise royalties are based upon the gross revenues
of each location and are recorded as earned.

         Interest earned on franchise notes receivable is recorded as earned
and is included in other income. Gains or losses from the conveyance of
Company-owned store assets to franchisees are recognized upon closing, net of
applicable reserves for collectibility.

          Allowance for possible losses

        The Company follows Statement of Financial Accounting Standards
("SFAS") No. 114 ("SFAS 114"), "Accounting by Creditors for Impairment of a
Loan". SFAS 114 defines impairment as the probability that all amounts due
under a loan agreement will not be collected according to the contractual
terms, and requires the valuation of impaired loans based on either the
present value of expected future cash flows, discounted at the loan's
effective interest rate, or the fair value of the collateral if the loan is
collateral dependent. The Company measures the impairment of its notes
receivable based upon the fair market value of the underlying collateral,
which is determined on an individual note basis. In arriving at the fair
market value of the collateral, numerous factors are considered, including
market evaluations of the underlying collateral and franchise fees collected
from the franchisee, less selling costs, discounted at market discount rates.
If, upon completion of the valuations, the fair market value of the underlying
collateral securing the impaired note is less than the recorded investment in
the note, an allowance is created with a corresponding charge to expense. The
adequacy of the allowance is predicated on the assumption that the Company
will be able to hold these assets, dispose of them, and realize the fair
market value of these assets in the ordinary course of business. Adjustments
may be necessary in the event that effective interest rates, future
performance, economic conditions or other relevant factors vary significantly
from those assumed in estimating the allowance for possible losses. The
existing allowances will be either increased or decreased based upon future
valuations, with a corresponding

                                      35


<PAGE>



increase or reduction in the provision for note losses.

           Cash and cash equivalents

           Cash and cash equivalents includes cash and any investment with a
maturity of 90 days or less.

           Fair value of financial instruments


           At December 31, 1997 and 1996, the carrying value of financial
instruments, such as cash and cash equivalents, accounts receivables and
credit facilities, approximated their fair value, based on the short-term
maturities of these instruments.

           Inventories

           Inventories are stated at the lower of cost (determined on a
first-in, first-out basis) or market value, and consist primarily of contact
lenses, ophthalmic lenses, eyeglass frames and sunglasses.

           Earnings per share

           Effective December 15, 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings per Share". Statement No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Under the new requirements for
calculating earnings per share, the dilutive effect of stock options will be
excluded from basic earnings per share but included in the computation of
diluted earnings per share. All earnings per share amounts have been restated
so as to comply with Statement No. 128.

           Property and equipment

           Property and equipment acquired in an acquisition are recorded
at their fair market value as of the date of acquisition. Other fixed asset
acquisitions are carried at cost. Stores reacquired by the Company are
recorded at the lower of their fair market value or the book value of the
assets exchanged for the store in question. Depreciation is provided on a
straight-line basis over the estimated life of the respective classes of
assets.

           Income taxes

           The Company accounts for income taxes in accordance with SFAS
109, "Accounting for Income Taxes". Under SFAS 109, a deferred tax liability
or asset is recognized for the estimated future tax consequences of temporary
differences between the carrying amounts of assets and liabilities in the
financial statements, and their respective tax bases.

           Accounting estimates

           The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities as
well as disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.

           Amortization of debt discount

           At the March 13, 1997 meeting of the Emerging Issues Task Force,
the staff of the Securities and Exchange Commission (the "SEC") issued an
announcement regarding accounting for the issuance of convertible debt

securities. The announcement dealt with, among other things, the belief, by
the SEC, that any beneficial conversion features on future conversions of debt
securities increase the effective interest rate of the securities and should,
therefor, be reflected as a charge to earnings. During the quarter ended March
31, 1997, the Company issued $8 million principal amount of its Convertible
Debentures Due August 25, 1998 (the "Debentures"), which Debentures provide
for conversion features that permit the holders thereof to convert their
Debentures to shares of the Company's Common Stock at a discount from the
market price at the time the Debentures were issued (see Note 15). Although
the date of this pronouncement was subsequent to the Company's issuance of the
Debentures, it is the Company's opinion that the SEC intended this
announcement to apply retroactively.

                                      36


<PAGE>





           Amortization of intangibles

           Debt issuance costs are amortized over the life of the applicable
financing agreement. Excess of cost over net assets acquired, in the
approximate amount of $2,500,000, is being amortized over ten years. Deferred
leasing costs are amortized over the remaining life of the lease. Excess of
fair value of assets acquired over cost is being amortized over five years.
All amortization is on a straight line basis.

       Pro forma tax provision  (unaudited)

       The unaudited pro forma income tax provision presented for the year
ended December 31, 1995 was prepared assuming an effective combined federal
and state tax rate of 40%.

       Accounting for long-lived assets

       Effective for the calendar year ended December 31, 1996, the Company
adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). The Company has recorded an
asset impairment loss for the year ended December 31, 1997 (see Note 6 -
Property and Equipment).

       Recent Accounting Requirements

       In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement is effective for financial statements issued for
periods beginning after December 15, 1997. Management is presently evaluating
the effect on the Company's financial reporting requirements from the adoption
of this statement, and does not expect that it will have any material effect.

       In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments

of an Enterprise and Related Information, "SFAS No. 131 requires the reporting
of profit and loss, specific revenue and expense items, and assets for
reportable segments. It also requires the reconciliation of total segment
revenues, total segment profit or loss, total segment assets, and other
amounts disclosed for segments to the corresponding amounts in the general
purpose financial statements. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. Management is presently evaluating the
impact on the Company's financial reporting requirements from the adoption of
this statement.

       Reclassifications

       Certain reclassifications have been made to the prior period financial
statements in order to maintain consistency for comparative purposes. These
reclassifications had no effect on the net income for any period.

NOTE 4 - INCOME TAXES:

       For periods prior to the Offering, the Company was an S Corporation for
federal tax purposes and in certain state tax jurisdictions. The Company's
income for such periods was included in the individual income tax returns of
the Company's shareholders. Accordingly, the tax provisions for such periods
reflect only state and local taxes in those jurisdictions not recognizing S
Corporation status.

       The Company's status as an S Corporation was terminated as a result of
the Offering. Consequently, in accordance with SFAS 109, a deferred tax
liability was recognized for the estimated future tax effect of temporary
differences between the financial statement carrying values of assets and
liabilities and their respective tax bases. Such taxes, which prior to the
Offering would have been paid by such shareholders, became a future obligation
of the Company. Substantially all of the tax provision for the calendar year
ended December 31, 1995 is attributable to this deferred tax liability.

                                      37


<PAGE>





       A reconciliation of the income tax expense (benefit) is as follows:

                                                                         1997               1996               1995
                                                                         ----               ----               ----
<S>                                                              <C>                   <C>                  <C>   
             Current:

                 Federal                                         $       0             $      -             $    -

                 State and Local                                         0                    81                161
                                                                   ----------          ---------             ------


                                                                         0                    81                161
                                                                   ----------          ---------             ------

             Deferred:

                 Federal                                                 0                 (1,770)             1,770

                 State and Local                                         0                   (312)               198
                                                                    ---------            --------            -------
                                                                         0                 (2,082)             1,968
                                                                   ----------            --------            -------

                   Total                                            $    0                $(2,001)            $2,129
                                                                    =========             =======             ======
</TABLE>

       The appropriate tax effect of each type of temporary difference and
carryforward that gives rise to significant portions of the deferred tax
assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                         1997               1996
                                                                         ----               ----
<S>                                                                  <C>                  <C>   
Deferred tax asset:
   Net operating loss                                                $  6,322            $ 2,856
   Other temporary differences                                            585                481
                                                                     --------            -------
   Subtotal                                                             6,907              3,337
   Valuation allowance                                                 (4,195)              (905)
                                                                      --------           --------

                                                                        2,712              2,432
                                                                     ========            =======
Deferred tax liability:
Deferred gain on conveyance of assets to franchisees                  $ 2,712            $ 2,432
                                                                     --------            -------

                                                                        2,712              2,432
                                                                      -------              -----
Net deferred tax asset / (liability)                                  $    0             $     0
                                                                      =======            =======

       Under SFAS 109, the Company cannot recognize a deferred tax asset for
the future benefit of its net operating loss carryfowards unless it concludes
that it is "more likely than not" that the deferred tax asset would be
realized. Although the Company believes it has taken measures to improve the
financial performance of the Company in 1998, the Company has recorded a full
valuation allowance against its otherwise recognizable deferred tax asset
until such time that the Company demonstrates profitability, which would
enable it to realize such deferred tax asset.


       At December 31, 1997 the Company had a net operating loss carryforward
of approximately $16,500,000 available to offset future taxable income. The
net operating loss carryforward expires in varying amounts through 2,012 and
may be limited in certain circumstances.

                                                                38


<PAGE>





       A reconciliation between the statutory Federal income tax rate and the
effective income tax rate based on continuing operations is as follows:


</TABLE>
<TABLE>
<CAPTION>

                                                                            1997         1996        1995
                                                                            ----         ----        ----
<S>                                                                         <C>          <C>         <C> 
               Statutory Federal income tax rate                            (34)%        (34)%         34%

               State and local income taxes, net of
                  Federal tax benefit                                       (5)           (5)           6

               Reduction in tax liability due to status
                  Federal and certain state taxes as 
                  Subchapter S Corporation for

                                                                             -            -          (35)

                  Amortization of debt discount                             15            -            -

               Change in the effective tax rates applicable to
                  the recognition of a deferred tax liability due 
                  to termination of Subchapter S election in 
                  conjunction with the Offering                            -             -            69
                                                                          ----         ----           --

               Valuation Allowance                                          24            8           -
                                                                           ---          ---          --

                Effective income tax rate                                     0%         (31)%         74%
                                                                             ==          ===           ==
</TABLE>


NOTE 5 - NOTES RECEIVABLE:

               Notes receivable consist of the following:


<TABLE>
<CAPTION>

                                                                                       As of
                                                                                     December 31,

                                                                                   1997        1996
<S>                                                                              <C>        <C>    
Franchise notes held by the Company                                              $17,649    $18,500

Sanwa notes - net residual on franchise notes held
              as collateral                                                          883      1,325

CIT notes accumulating interest at 9.5%                                              325        325

                                                                                  18,857     20,150

               Less allowance for doubtful accounts                                 (562)      (562)
                                                                                ---------  ---------
                                                                                  18,295     19,588
               Less current portion                                               (3,411)    (3,499)
                                                                               ----------   -------
                                                                                $ 14,884    $16,089
                                                                                ========    =======
</TABLE>


       Company held franchise notes receivable consist primarily of purchase
money notes relating to Company-financed conveyances of Company store asset,
to franchisees, as well as certain franchise notes receivable acquired by the
Company, and are secured by the underlying assets of the franchised store in
question, as well as, in most instances, personal guarantees of the principal
owners of the franchise. Interest is charged at various rates, commensurate
with the year of issue. Complete collection of these receivables is expected
by September 2004.

                                      39


<PAGE>





       The residual value of franchise notes receivable represent notes
acquired from IPCO and are currently being held as collateral by Sanwa
Business Credit Corporation ("Sanwa") and The CIT Group/Equipment Financing
Inc. ("CIT") securing obligations incurred by IPCO, which obligations the
Company did not assume. The collateral held by CIT was scheduled to be
returned to the Company on or about July 2000. However, the Company's residual
value of the cash collateral and franchise notes pledged to CIT have been
reduced due to the application, by CIT, of such collateral to offset certain

franchise note forgiveness. The collateral held by Sanwa is the subject of
litigation between Sanwa and the Company. The Company maintains that it is
entitled to the residual value of such franchise notes pledged to Sanwa by
IPCO, and that the carrying amount thereof is collectible. However, such
litigation makes the Company unable to estimate the date that such residual
value will be returned to it.

    Franchise Notes Receivable of approximately $12,400,000, at December 31,
1997, are pledged in connection with the STI Credit Agreement (see Note 9 -
Debt).

Valuation and Qualifying Accounts

    Accounts and Notes Receivable are shown in the Consolidated Balance Sheets
net of allowance for doubtful accounts.

    Accounts Receivable

                                                 Years Ended December
                                               1997     1996       1995
                                               ----     ----       ----
    Balance, beginning of year                 $557     $422       $356
    Charged to Expense                          756      928        267
    Reductions, principally write-offs         (799)    (793)      (201)
                                               -----    -----      -----
    Balance, end of year                       $514     $557       $422
                                               ====     ====       ====

    Notes Receivable

                                                 Years Ended December
                                               1997     1996       1995
                                               ----     ----       ----
    Balance, beginning of year                 $562     $712     $3,612
    Charged to Expense                          442     -           584
    Reductions, principally write-offs         (442)    (150)    (3,484)
                                               -----  -------    -------
    Balance, end of year                      $ 562    $ 562       $712
                                             ======   ======      =====

NOTE 6  -     PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

                                              As of                  Estimated
                                            December 31,               Useful
                                        1997         1996              Lives
                                       -------      ------           ---------

Furniture and fixtures                 $ 1,361      $1,383           7    years

Machinery and equipment                  9,595       8,889           5-7 years

Leasehold improvements                   3,274       3,234           10  years*

                                      --------     -------

                                        14,230      13,506

  Less accumulated depreciation         (4,327)     (2,688)
                                       --------    -------



                                      40


<PAGE>



                                       $ 9,903     $10,818
                                       =======     =======


*Useful lives of leasehold improvements are the lesser of the asset's useful
life or the term of the lease of the property in which such leasehold
improvements were made.

       Effective for the calendar year ended December 31, 1996, the Company
adopted SFAS 121, which requires that long-lived assets and certain
identifiable intangibles to be held and used by the Company, be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of the assets exceeds the expected cash flows associated with
such assets and may not be recoverable.

       As of December 31, 1997, the Company identified certain long-lived
assets, principally Company-owned stores, where there has been, or there is
expected to be, a change in circumstances which would affect the
recoverability of such long-lived assets. The Company has closed or will be
closing certain of its Company-owned stores; and, as such, the Company has
recorded a provision for closed stores of $1,336,000. Such amount includes
$564,000 in asset impairment costs in accordance with SFAS 121, and $772,000
in lease termination costs, of which $452,000 in lease termination costs are
included in current liabilities, and $320,000 is included in non- current
liabilities. In 1996 and 1995 costs related to closed stores were not
significant.

NOTE 7  -     OTHER ASSETS:

       Other assets consist of the following components:

                                                                As of
                                                           December 31,

                                                        1997             1996
                                                       -----            -----

             Deposits and escrows                     $   377      $   456

             Unamortized capitalized debt closing
               costs                                      201           58

             Other                                        954        1,365
                                                     --------   ----------
                                                       $1,532       $1,879
                                                     ========   ==========
NOTE 8  -      ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:

               Accounts payable and accrued liabilities consist of the
following:

                                                       1997           1996
                                                      ------         -----

               Accounts payable                       $4,591         $6,742
               Accrued rent                              418            408
               Accrued payroll and fringe benefits       502            417
               Lease termination costs                   453          -
               Other accrued expenses                    615            700
                                                     -------       --------

                                                      $6,579         $8,267
                                                    ========       ========

                                      41


<PAGE>



NOTE 9 - DEBT:

       Principal payments due on the Company's notes payable, as of December
31, 1997, are as follows:

<TABLE>
<CAPTION>
                                     STI        Chase
                 For the Years       Credit     Credit     Capital
               Ended December 31,  Agreement   Agreement   Leases    Other Notes  Total
               ------------------  ---------   ---------   ------    -----------  -----

<S>                 <C>             <C>         <C>       <C>          <C>       <C>    
                    1998            $ 1,444     $ 1,000   $ 1,002      $    31   $ 3,477
                    1999              1,336           0       939           84     2,359
                    2000              1,479           0       724           14     2,217
                    2001              1,638           0       208           16     1,862
                    2002              2,723           0       --            34     2,757
                 Thereafter                                   --         1,054     1,054
                                    -------     -------   -------      -------   -------
                                    $ 8,620     $ 1,000   $ 2,873      $ 1,233   $13,726
                                    =======     =======   =======      =======   =======


</TABLE>

             On November 6, 1997, the Company entered into a Master Grid Note
("Grid Note") with Chase Manhattan Bank (the "Bank") that provided the Company
with a short-term loan of up to $1,000,000. The maturity date of the Grid Note
was February 6, 1998; however, such maturity date was extended, by the Bank,
to March 9, 1998 and was paid by the Company on such date (see Note 19 -
Subsequent Events). Interest was calculated on the outstanding principal
balance at 3/4 of one percent over the prime rate (approximately 8 1/2 % at
December 31, 1997) then in effect from time to time. As of December 31, 1997,
the outstanding principal balance of the Grid Note was $1,000,000.

             On June 30, 1997, the Company entered into a loan agreement (the
"Loan Agreement") with STI Credit Corporation ("STI") that: (i) established,
in favor of the Company, a $20,000,000 credit facility to finance a portion of
the Company's currently existing and future franchise promissory notes
receivable; and, (ii) funded $10,000,000, although $1,000,000 [the "Additional
Funds"] of the funded amount was withheld pending the Company's satisfaction
of a required collateral ratio with respect to such credit facility (less a
facility fee equal to two percent of the amount of the loan). Sixty-five
percent (65%) of the funded amount is to be repaid by the Company over a term
of 60 months, with a final balloon payment at the expiration of the
sixty-first month of the term of said loan. The Company granted to STI a first
priority, continuing security interest in a substantial portion of its
franchise notes and the proceeds related to such notes. A portion of the net
proceeds (approximately $6,100,000) of the loan was used to satisfy, pay and
discharge, in full, all amounts then due by the Company to: (i) the Bank
($5,035,000, together with accrued interest thereon, in the approximate amount
of $37,000); and (ii) certain principal shareholders of the Company
($1,000,000, together with accrued interest thereon, in the approximate amount
of $9,000). As a result of the foregoing: (i) the Bank's lien upon, and
security interest in, substantially all of the Company's assets (previously
securing the Bank's various loans to the Company) was discharged; and (ii)
restrictions previously imposed upon the Company (pursuant to the Company's
Credit Agreement with the Bank) are no longer applicable.

           On October 9, 1997, STI amended the Loan Agreement and disbursed a
portion of the Additional Funds to the Company. As of December 31, 1997, the
outstanding principal balance of such loan was approximately $8,600,000.
Pursuant to the terms of the Loan Agreement, the Company must comply with the
following financial covenants: (i) the maintenance of positive, annual net
income for each of its calendar years; (ii) working capital of not less than
$2 million; (iii) shareholders' equity of not less than $26 million; and (iv)
from and after June 30, 1998, a collateral ratio of 1.2 to 1.0. As of December
31, 1997, the Company was not in compliance with the financial covenants
described in clauses (i) and (iii) above, although STI subsequently waived
such non-compliance in exchange for the Company's agreement to, which Waiver
amended the Loan Agreement so as to: (i) waive the Company's compliance with
all of its financial covenants until December 31, 1998; (ii) reduced such
shareholders' equity requirement to $25 million; (iii) provide for a
prepayment penalty of $500,000; and (iv) require the Company to provide
certain additional documents to STI, as well as pay certain fees to STI, in
the aggregate amount of $70,000.


           As of December 31, 1997, the Company was the lessee of six excimer
lasers and ancillary equipment under capital leases expiring in various years
through 2001. The assets and liabilities under capital leases are recorded at
the lower of the present value of the minimum lease payments or the fair value
of the asset.

       On April 21, 1997, the Company entered in a Note Amendment and
Conversion Agreement (the "BEC Agreement") with BEC, the holder of two
promissory notes (each having an original term of 25 months and in the
original principal amounts of $1,050,000 and $200,000, respectively) issued by
the Company in connection with its acquisition (the "Pembridge Transaction"),
on August 26, 1994, from Pembridge Optical Partners, Inc. ("Pembridge"), of
the assets of eight retail optical stores. Pursuant to the BEC Agreement: (i)
the Company, on June 9, 1997, prepaid the principal balance of (but not
accrued interest on) each of said promissory

                                      42


<PAGE>



notes in registered shares of its Common Stock; and (ii) the Company, was
required to pay to BEC the difference between the market price of its Common
Stock (upon which the number of shares issued to BEC was calculated) and the
selling price of any such shares sold by BEC.

       The Company, under the terms of the BEC Agreement, paid to BEC
approximately $167,000, which represents the difference between the market
price of its Common Stock (upon which the number of shares issued to BEC, in
prepayment of the promissory notes discussed above, was calculated) and the
selling price of a portion of such shares issued to BEC.

       As part of the Benson Transaction, the Company issued a non-negotiable,
subordinated convertible debenture (the "Benson Debenture") in the principal
amount of $5,900,000, subject to reduction and payable, without interest, on
September 15, 2015. The Benson Debenture is subordinated to all existing and
future indebtedness, debts and obligations of the Company. The Company had a
right of offset against the principal amount of the Benson Debenture in the
event the Company did not retain at least 40 of the 98 Benson stores acquired
by the Company in the Benson Transaction, which right of offset was equal to
$147,000 for each store less than 40 that the Company retained. In December
1995, the Company elected to assume the leases for 32 stores and,
consequently, was entitled to reduce the principal amount of the Benson
Debenture by the sum of $1,176,000 from $5,900,000 to $4,724.000. The Benson
Debenture is included in long-term debt is recorded at its present value of
$1,053,000 using an imputed internal interest rate of 8.5% (see Footnote 15 -
Shareholders' Equity).

       Minimum future lease payments (principally for excimer laser equipment)
under capital leases as of December 31, 1997 are as follows:


                 Years Ending
                 December 31,

                    1998                                          $ 1,248
                    1999                                            1,063
                    2000                                              767
                    2001                                              218
                    2002                                              ---
               Total minimum lease payments                         3,296
                 Less: Amount representing interest                  (423)
                                                                   ------

                   Present value of net minimum lease payments    $ 2,873
                                                                  =======


       Net book value of assets held under capital leases included in property
and equipment amounted to $3,268,00 and $3,898,000 (net of accumulated
depreciation of $1,448,000 and $729,000) for the years ended December 31, 1997
and 1996, respectively.

NOTE 10 - COMMITMENTS AND CONTINGENCIES:

       The Company is, from time to time, a party to litigation arising in the
ordinary course of its business. In the opinion of management, there are no
significant claims outstanding that are likely to have a material adverse
effect upon the consolidated financial statements of the Company.

       The Company leases locations for the majority of both its operated and
franchised stores. Minimum future rental payments as of December 31, 1997 for
Company operated stores and stores subleased to franchisees, for five years
and thereafter, in the aggregate, are approximately:

<TABLE>
<CAPTION>
       For the
     Years Ending                           Total                  Sublease                 Net
     December 31,                           Amount                 Rentals                Rentals
    -------------                          -------                 --------               -------
      <S>                                <C>                      <C>                    <C>                    
        1998                              $ 10,236                 $ 7,860                $ 2.376
        1999                                 9,214                   7,017                  2,197
        2000                                 7,800                   5,999                  1,801
        2001                                 6,424                   4,844                  1,580
        2002                                 5,037                   3,937                  1,100
        Thereafter                          11,397                   8,499                  2,898
                                           --------              ---------              ---------
                                           $50,108                 $38,156                $11,952
                                           =======                 =======               ========

</TABLE>

                                      43



<PAGE>




       The Company holds the master lease on substantially all franchised
locations and, as part of the franchise agreement, sublets the subject
premises to the franchisee. Most master leases are subject to common area
charges and additional rent based upon sales volume. As required by SFAS 13
"Accounting for Leases", the Company amortizes its rent expense on a
straight-line basis over the life of the related lease. Rent expense was
$5,554,000, $5,185,000 and $3,810,000, net of sublease rentals of
approximately $8,190,000, $9,279,000 and $8,052,000, for the years ended
December 31, 1997, 1996 and 1995, respectively. Such rent expense includes
additional rent expense, based upon sales volumes of $52,000, $108,000 and
$117,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company is a guarantor of indebtedness of two separate loans by two
franchisees to third party lenders in the principal amounts of $425,000 and
$250,000, respectively.

NOTE 11  - CONCENTRATION OF RISK:

       The Company operates retail optical stores in North America,
predominantly in the United States. Profitability of the Company and
collectibility of all receivables from franchisees is contingent upon the
financial condition of the industry, as well as the overall economic
environment.

       In addition, as of December 31, 1997, the Company had deposits in banks
that are in excess of the $100,000 of depository insurance provided by the
Federal Depository Insurance Corporation.

NOTE 12 - SYSTEMWIDE SALES (UNAUDITED):

       Systemwide sales represent the combined retail sales of Company owned
and franchised stores, as well as revenues generated by the Company's health
maintenance organization, Vision Care of California.

NOTE 13 - RETAIL  OUTLET  COMPOSITION (UNAUDITED):

       The number of Company-owned and franchised stores was as follows:


                                                     As of December 31,
                                              1997         1996         1995
                                              ----         ----         ----

Company-owned                                   50           62           71
Franchised                                     263          257          150
                                               ---          ---          ---
                                               313          319          221
                                               ===          ===          ===


       The Company has an option, but not an obligation, to reacquire a
franchised store upon the occurrence of a default under the applicable
Franchise Agreement. The Company reacquired the assets of four, eight and four
franchised stores in 1997, 1996 and 1995, respectively. Losses of
approximately $453,000, 101,000 and $98,000 were recognized in 1997, 1996 and
1995, respectively, on these reacquired stores due to the write-off of
accounts receivable from the franchisees thereunder. In addition, as of
December 31, 1997, the Company is managing six franchised stores on behalf of
certain of its franchisees.

NOTE 14 - RELATED PARTY TRANSACTIONS:

       Included in indebtedness from related parties are $110,000 and
$124,000, in loans to a former officer of the Company at December 31, 1997 and
1996, respectively, bearing interest at the prime rate.

       On October 31, 1995, as a condition of the contemplated Offering, the
Company agreed to require three related party franchisees to reconvey their
franchises to independent franchisees, which related party franchisees agreed
to do. During 1996, two stores were sold by the related party franchisees
thereof, and the Company continues to manage the remaining store for an
officer of the Company. The franchisees of this Company managed store have
agreed to be liable for any cash losses up to their equity, if any, in the
franchise as of the date such franchise may be sold by the Company to an
independent franchisee.

       In November 1996, certain of the Company's principal shareholders
provided short-term financing to the Company of approximately $2,000,000,
which was repaid by the Company (see Note 9 - Debt and Note 15 - Shareholders'
Equity). In partial consideration thereof, such principal shareholders
received options, under the Company's Stock Incentive Plan, to purchase an
aggregate of 200,001 shares of the Company's Common Stock at an exercise price
of $6.4375, which options expire on December 31, 2000.

                                      44


<PAGE>



       In March, 1996, the Company entered into an agreement with a director
of the Company pursuant to which he agreed to serve as an advisor to, and as
the Chairman of the Board of Directors of, Insight, in exchange for annual
compensation of $75,000. In connection therewith, the Company granted to such
director, under its Stock Incentive Plan, options to purchase up to an
aggregate of 310,000 shares of the Company's Common Stock at an exercise price
of $6.00, which options have a term of ten years. As of December 31, 1997,
160,000 of such options had vested and, in February, 1998, the balance of such
options were cancelled.

       On April 7, 1997, the Company entered into an Option and Consulting
Agreement with Meadows Management, LLC, a limited liability company owned by
two of the Company's principal shareholders and directors ("Meadows"). Said

agreement provided for the Company's payment, to Meadows, of consulting fees
of $25,000 per month through the expiration date thereof, December 31, 1997.
As additional consideration, the Company also granted to such principal
shareholders, under its Stock Incentive Plan, an aggregate of 300,000
qualified stock options, which options have a term of five years and are
exercisable at $8.9375.

       On December 12, 1997, the Company granted, under its Stock Incentive
Plan, an aggregate of 200,000 options to a director of the Company in exchange
for his providing and continuing to provide assistance to the Company with
respect to its third party, managed care programs. One third of such options
immediately vested, with the balance to vest in November, 1998. The options
have a term of five years and are exercisable at $6.4375.

       The Company shares an office building with a retail optical company,
both of which are owned by certain of the principal shareholders and directors
of the Company. Occupancy costs are appropriately allocated based upon the
applicable square footage leased by the respective tenants.

NOTE 15 - SHAREHOLDERS' EQUITY:

       On February 26, 1997, the Company entered into Convertible Debentures
and Warrants Subscription Agreements with certain investors in connection with
the private placement (the "Private Placement") of units (collectively, the
"Units") consisting of an aggregate of $8,000,000 principal amount of the
Company's Debentures and an aggregate of 800,000 warrants (collectively, the
"Warrants"), each Warrant entitling the holder thereof to purchase one share
of SVI's Common Stock, at a price to be determined in accordance with a
specified formula and, for each two Warrants exercised within a specified
period of time, an additional warrant (collectively, the "Bonus Warrants") to
purchase one additional share of Common Stock at a price of $7.50 per share.
The Company used the net proceeds (approximately $7,500,000) of the Private
Placement to: (i) repay a portion of the loans made to it by certain principal
shareholders of the Company ($1,000,000, together with interest thereon, in
the approximate amount of $50,000), and (ii) pay down the Company's revolving
line of credit ($1,000,000) with the Bank.

       The Debentures bear no interest and mature on August 25, 1998, at which
time, subject to certain conditions, all Debentures not previously converted
or redeemed, shall automatically be converted into registered shares of Common
Stock.

       In July 1997, the Company elected, in connection with its Private
Placement, to pay one of the holders of its 1997 Debentures the sum of
$460,000, which represented the redemption price for the conversion of
$400,000 principal amount of Debentures.

       The Debentures are convertible at a price per share (the
"Conversion Price") equal to the lesser of $6.50 or 85% of the average closing
bid price of the Common Stock as reported on the Nasdaq National Market System
("Nasdaq") for the 5 trading days immediately preceding the date of
conversion; provided, however, that the Company has the right to redeem that
portion of the Debentures requested to be converted in the event the
Conversion Price is $6.00 or less. In such event, the redemption price will be

equal to 115% of the face amount of that portion of the Debentures requested
to be converted. As of December 31, 1997, all of the Debentures, except those
with a carrying amount of $1,652,000, were converted by the holders thereof;
and, as of March 31, 1998, the remaining balance of such Debentures had been
converted.

       The Warrants are exercisable until February 26, 2000. If a holder
of a Warrant exercises a Warrant at any time during the 2 year period
following the effectiveness of the Company's registration statement with
respect thereto, which registration statement was declared effective by the
SEC on May 30, 1997, such holder will receive, for each two Warrants exercised
within such time, an additional Bonus Warrant entitling the holder thereof to
purchase one additional share of Common Stock at an exercise price of $7.50
per share, which Bonus Warrants have a term of 3 years from the date of grant
and the Company has agreed to maintain the

                                      45


<PAGE>



effectiveness of such registration statement until the earlier of: (i) 3
years; and (ii) the date all of the shares underlying the Debentures have been
sold and the Warrants and the Bonus Warrants have been exercised.

       Utilizing the conversion terms most beneficial to the purchasers of
the Units, the Company has recorded in the accompanying financial statements
amortization of debt discount of approximately $5,916,000, which charge is
being credited to the Company's paid-in-capital (Shareholders' Equity) over
the period of time that the holders of the Debentures actually convert the
same into shares of the Company's Common Stock. The non-cash portion of the
discount is $5,436,000. Accordingly, once all of the Debentures have been so
converted by the holders thereof (March, 1998) such discount will have no
effect on the Company's Shareholders' Equity. This amount represents the 
intrinsic value of the beneficial conversion feature which is inherent in the 
conversion term of the Debenture, and the fair value of the Warrants (with an 
assumed exercise price of $6.50) and the Bonus Warrants (with an assumed 
exercise price of $7.50), issued with the debentures and the issuance cost of 
the Units. This discount was amortized, as additional interest expense, over 
the minimum period the debentures became convertible.

            On May 9, 1997, the Company filed, with the SEC, a registration
statement on Form S-3 seeking registration, under the Act, of an aggregate of
3,213,464 shares of its Common Stock, 2,477,506 shares being registered on
behalf of the investors in the Private Placement (see Note 4) and the balance
being registered on behalf of the holders of the warrants issued to the
underwriters of the Offering and to the Company's former president.

            In April 1995, the Company adopted a Stock Incentive Plan (the
"Plan") which permits the issuance of options to selected employees of, and

consultants to, the Company. The Plan, as amended in 1996 and 1997, reserves
3.5 million shares, of Common Stock for grant and provides that the term of
each award be determined by the Compensation Committee of the Board of
Directors (the "Committee") charged with administering the Plan. Under the
terms of the Plan, options may be qualified or non-qualified and granted at
exercise prices and for terms to be determined by the Committee.

            The following information pertains to stock options granted by
the Company in 1996 and 1997:

                                Number of  Option Price    Total
                                 Shares     Per Share       Price
                                             (Average)
                                ---------  ------------   ----------

Shares under option at
    December 31, 1995           851,694      $   6.00  $  5,110,164
Granted                         629,500      $   6.27     3,947,500

Exercised                             0          0                0

Forfeited                       (18,500)     $   7.50      (138,750)
                              ---------      --------  ------------

Shares under option at
   December 31, 1996          1,462,694      $   6.10  $  8,918,914
Granted                         952,501      $   7.54     7,279,850

Exercised                             0          0                0
Forfeited                      (239,893)     $   6.15  $ (1,475,108)
                              ---------      --------  ------------

Shares under option at
   December 31, 1997          2,175,302      $   6.76  $ 14,723,656
                           ============      ========  ============

Shares exercisable at
   December 31, 1996            972,341      $   6.15  $  5,976,796
                              ---------      --------  ------------

Shares exercisable at
   December 31, 1997          1,771,181      $   6.93  $ 12,269,792
                           ============      ========  ============


                                      46


<PAGE>



            All outstanding options, except for 300,000, were non-qualified
options. During 1997, the Company recognized $755,000 of expense related to

its issuance of stock options to certain consultants to the Company and in
consideration of certain loans made to the Company by certain of its principal
shareholders.

             In addition to stock options, the following outstanding item may
effect the number of common shares outstanding in future periods: 800,000
warrants and 400,000 bonus warrants which were issued in connection with the
Company's issuance and sale of $8,000,000 principal amount of its Debentures
(see Note 15-Shareholders' Equity) and, upon exercise, would result in the
issuance of 1,200,000 shares of Common Stock.

            At any time prior to the maturity date of the Benson Debenture,
the Company may, upon 30 days' prior written notice to Benson, exchange the
Benson Debenture for shares of its Common Stock at a ratio equal to the then
principal amount of the Benson Debenture, which, as of December 31, 1997, was
$1,054,000, divided by the average of the previous 20 days trading price of
the Common Stock. In the event that the average trading price of the Common
Stock is 350% or greater than $7.50, for a period in excess of 60 consecutive
business days, Benson may, upon 30 days prior written notice to the Company,
thereafter convert the Benson Debenture into Common Stock of the Company based
upon the above described ratios. In addition, the Benson Debenture affords
Benson certain "piggyback" registration rights covering the Common Stock into
which the Benson Debenture may be convertible, (see Note 9 - Debt).

Additional Stock Plan Information

            The Company continues to account for its stock-based awards using
the intrinsic value method in accordance with APB 25, "Accounting for Stock
Issued to Employees" and it related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.

            SFAS 123, "Accounting for Stock-Based Compensation", requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of January 1, 1996. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, varying between 36 and 60 months following
vesting; stock volatility, 32% and 21% in 1997 and 1996, respectively, risk
free interest rates, 6% and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
award had been amortized to expense over the vesting period of the awards, the
pro forma net income(loss) and earnings (loss) for common shares for the
calendar years ended December 31, 1997 and 1996, would have been $(15,510,000)
or $(1.12) per share, basic and diluted, and ($5,229,000) or ($.42) per share,
basic and diluted, respectively.


NOTE 16 - 401(K) EMPLOYEE SAVINGS PLANS:

            On December 28, 1994, by unanimous written consent of the Board of
Directors of each of Sterling Vision, Inc., Sterling Vision of California,
Inc. and VisionCare of California, each such Company separately approved and
adopted, effective January 1, 1995, a 401(k) Employee Savings Plan (the
"401(k) Plan") to provide all qualified employees of these entities with
retirement benefits. Presently, each such company pays the administrative
costs of each such 401(k) Plan, but does not provide any matching
contributions to any participants in any of the 401(k) Plans. It is the
opinion of management that the 401(k) Plan is in compliance with all ERISA
regulations.

NOTE 17- SEGMENT INFORMATION:

            For the calendar year ended December 31, 1997, the Company's
operations were classified into two principal industry segments: (i) the
retail optical segment, whereby the Company owns and operates, as well as
franchises a retail chain of optical stores which offer eyecare products and
services such as prescription and non-prescription eyeglasses, eyeglass
frames, ophthalmic lenses, contact lenses, sunglasses and a broad range of
ancillary items; and (ii) the Insight Laser segment, whereby the Company owns
and operates a laser surgery center and provides access, for a fee, to
affiliated ophthalmologists to utilize Insight's excimer lasers in offering
PRK, a procedure performed with such laser for the correction of certain
degrees of myopia. Prior to 1996, the Company's operations were limited to the 
retail optical segment.

                                      47


<PAGE>



            There were no intersegment sales for the calendar years ended
December 31, 1997 and December 31, 1996. No single customer represented more
than ten percent of consolidated sales for the calendar years ended December
31, 1997 and December 31, 1996.

                                     December      December 
                                     31, 1997      31, 1996
                                    ---------     ----------

Income (loss) from operations:
Retail Optical                      $  2,141      $  4,158
Insight Laser                         (1,493)       (3,331)
                                    --------      --------

General and administrative           (14,810)       (7,318)
                                    --------      --------

(Loss) before tax provision,
as reported in the accompanying

income statements                   $(14,162)     $ (6,491)
                                    ========      ========
Identifiable assets:
  Retail Optical                    $ 36,915      $ 36,392
Insight Laser                          4,108         4,270
General corporate assets               4,820         5,607
                                    --------      --------

Total assets as reported in the
accompanying balance sheet          $ 45,843      $ 46,269
                                    ========      ========

Capital expenditures:
Retail Optical                      $  1,668      $  3,467
Insight Laser                             76         1,883
Corporate                                248           257
                                    --------      --------

Total capital expenditures          $  1,992      $  5,607
                                    ========      ========

Depreciation:

    Retail Optical                  $    960      $    792
Insight Laser                            760           490
   Corporate                             590           173
                                    --------      --------

Total Depreciation                  $  2,310      $  1,455
                                    ========      ========



       Loss from operations represents net sales less operating expenses and
those general and administrative expenses that can be specifically identified
as pertaining to each segment, but excluding general and administrative
expenses that are general in nature or cannot be specifically attributed to a
particular segment. Identifiable assets by segment are those assets that are
used in the Company's operations within the particular segment. General
corporate assets consist primarily of cash, goodwill and the residual of
franchise notes held by The CIT Group/Equipment Financing, Inc. and Sanwa
Business Credit Corporation.

NOTE 18 - EARNINGS PER SHARE:

           The following table sets forth the computation of basic and diluted
loss per share:


<TABLE>
<CAPTION>
                                                                  Years Ended
                                                 -------------------------------------------     
                                                 December 31,     December 31    December 31,

                                                     1997            1996           1995
                                                 ----------      -----------     ------------
                                                    (in thousands, except share data)


                                      48


<PAGE>


<S>                                              <C>              <C>            <C>
Numerator:

   Net (loss) income from continuing
     operations - numerator for
     Basic and diluted loss per share            $  (14,162)     $    (4,490)     $   767
                                                 ==========      ===========      =======

Denominator:
   Denominator for basic loss
     per share - weighted average shares             13,883           12,342       10,031

Effect of dilutive securities -
    Stock options                                      --               --             33
                                                 ----------      -----------      -------

Denominator for diluted earnings per share -
   Weighted average shares and dilutive
   potential common shares                           13,883           12,342       10,064
                                                 ==========      ===========      =======

Earnings (Loss) per share:

   Basic                                         $    (1.02)     $      (.36)         .08
                                                 ==========      ===========      =======

   Diluted                                       $    (1.02)     $      (.36)         .08
                                                 ==========      ===========      =======

In accordance with FASB No. 128, as a result of losses from continuing
operations, the inclusion of employee stock options were antidilutive and,
therefore, were not utilized in the computation of diluted earnings per share
for the years ended December 31, 1997 and 1996, respectively.

NOTE 19 - SUBSEQUENT EVENTS:

       On February 17, 1998, the Company entered into Convertible Debentures
and Warrants Subscription Agreements with certain investors in connection with
the private placement of units consisting of an aggregate of $3.5 million
principal amount of convertible debentures (as amended on March 25, 1998,
collectively, the "1998 Debentures") and an aggregate of 700,000 warrants
(collectively, the" 1998 Warrants"), which 1998 Warrants entitled the holders
thereof to purchase up to 700,000 shares of the Company's Common Stock, at a

price of $5.00 per share. The Company used the net proceeds (approximately
$3.3 million) of the private placement: (i) to repay certain loans previously
made to it ($1,700,000), together with interest thereon; and (ii) the balance
for general corporate purposes.

       Subsequent to the date of the Company's issuance and sale of the 1998
Debentures and 1998 Warrants, the Company and the Holders thereof
(collectively, the "Original Holders"), determined that the issuance and sale
of such 1998 Debentures and 1998 Warrants was based upon a certain mutual
mistake of the Company and the Original Holders. Accordingly, on April 14,
1998, the Company and Original Holders entered into an Exchange Agreement,
effective as of February 17, 1998, pursuant to which the 1998 Debentures were
exchanged for $3.5 million Stated Value of a series of the Company's Preferred
Stock, par value $.01 per share, (the "Preferred Stock") and the 1998 Warrants
were exchanged for new warrants (the "Warrants"), entitling the holders
thereof to purchase up to 700,000 shares of Common Stock at a price of $5.00
per share (the "Conversion Price'), until February 17, 2001.

       The Preferred Stock: (i) requires the Company to pay quarterly
dividends thereon, commencing May 17, 1998, calculated at the rate of ten
(10%) percent per annum; (ii) permits the Company to pay such dividends in
registered shares of its Common Stock; (iii) permits the holders thereof, at
any time prior to redemption by the Company, to convert all or a portion of
the same into shares of Common Stock based upon the Conversion Price; (iv)
requires the Company to redeem in either cash or registered shares of its Common
Stock, at the company's option, all (but not less than all) of the Debentures, 
all of the same(at 105% of the then, outstanding Stated Value thereof, based
upon the Conversion Price; hereinafter, the "Redemption Amount") at any time
from and after February 17, 1999 that a registration statement (pursuant to
which the Common Stock [into which the Preferred Stock may be converted] has
been registered) is effective; (v) permits the Company to redeem all (but not
less than all) of the Debentures, in cash and at the Redemption  Amount, at any
time from and after February 17, 1999; and (vi)provides that from and after
February 18, 1999, the Company will be required to pay dividends thereon, until
the same are redeemed by the Company, at the rate of twenty-four (24%) percent
per annum.

                                      49


<PAGE>



       The Company is required to file with the SEC a Registration Statement
on behalf of the holders of the Preferred Stock with respect to all of the
shares of Common Stock into which the same may be converted, as well as all of
the Common Stock underlying the Warrants;; and the Company has agreed to
maintain the effectiveness of such Registration Statement until the earlier
of: (i) three years; and (ii) the date that all of the shares of Common Stock
(into which the Preferred Stock may be converted) are sold and the Warrants
have been exercised.

       On March 9, 1998, the Company paid, in full, the entire amount
$1,000,000 of the Grid Note due by the Company to the Bank.


NOTE 20 - RESULTS OF OPERATIONS AND MANAGEMENT PLANS:

       For the calendar year ended December 31, 1997, the Company incurred a
loss of approximately $14,162,000, which was primarily due to the following
eleven factors: (i) a charge against earnings, in the approximate amount of
$5,916,000, as a result of the Company's issuance, in February, 1997, of the
Debentures, the non-cash portion of which charge ($5,436,000) which discount
is being credited to the Company's paid-in-capital (Shareholders' Equity) over
the period of time that the holders of the Company's Debentures actually
convert the same to shares of the Company's Common Stock (see Note 15); (ii) a
loss of approximately $1,400,000 from the operations of Insight which the
Company believes will be substantially reduced in 1998; (iii) approximately
$772,000 in lease termination costs related to planned store closings; (iv)
approximately $564,00 in asset impairment costs; (v) approximately $850,000 in
the writedown of the carrying value of slow moving inventory; (vi)
approximately $550,000 in operating losses relating to the Company's
management of six stores, previously operated by the franchisees of such
stores; (vii) approximately $755,000 in costs related to stock options granted
to certain consultants to the Company and in consideration of certain loans
made to the Company by certain of its principal shareholders; (viii)
approximately $200,000 in costs related to severance compensation paid to
three former executives; (ix) approximately $188,000 in consulting fees paid
to Meadows; (x) approximately $188,000 in costs related to compensation paid
to the Company's new President and Chief Operating Officer; and (xi)
approximately $270,000, representing an increase in the Company's provision
for doubtful accounts.

       The Company has taken the following measures which it believes will
improve its operations and cash flow in 1998: (i) closed five Company-owned
underperforming stores and planned to close an additional six Company-owned
underperforming stores in the first quarter of 1998; and (ii) reduced or
eliminated certain administrative overhead expenses.

       In 1997, the Company formulated a new business strategy for Insight's
operations, which the Company believes: (i) will continue to reduce the
Company's losses attributable to Insight; and (ii) is consistent with the
Company's plan to become a full-service eyecare company. Accordingly, the
Company has developed affiliations with refractive laser surgeons, whereby
such surgeons pay to the Company a laser access fee to utilize the Company's
excimer laser, as well as a fee to utilize the Company's existing Insight
Laser Center facility located in New York City. Notwithstanding such changes,
the Company anticipates that Insight will continue to operate at a loss for
the twelve months ended December 31, 1998, however at an amount substantially
below that for the year ended December 31, 1997.

       Although the Company believes that its financial condition will improve
for the twelve months ended December 31, 1998, and anticipates that it will
generate a positive cash flow for such period, the Company, as of December 31,
1997, was not in compliance with certain of its existing financial covenants
as contained in its Loan Agreement with STI, which defaults were subsequently
waived by STI (see Note 9 - Debt).

       In February 1998, the Company entered into a Convertible Preferred
Stock and Warrants Subscription Agreement which provided net proceeds of

approximately $3,300,000 to the Company (see Note 19 - Subsequent Events).

                                      50


<PAGE>



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

       Janover Rubinroit, LLC ("Janover Rubinroit") was previously the
principal accountant for the Company that audited the Company's financial
statements. In connection with the Company's Offering, the Company and its
Underwriters agreed that it would be in the best interests of the Company to
retain a "big six" accounting firm as the Company's principal accountants,
effective for the audit of the Company's financial statements for the fiscal
year ended December 31, 1995. Accordingly, the Audit Committee of the
Company's Board of Directors, on February 23, 1996, determined to engage
Deloitte & Touche LLP ("Deloitte"). On March 4, 1996, Janover Rubinroit's
appointment as principal accountant was terminated by the Company and Deloitte
was engaged as the Company's principal accountants, although Janover Rubinroit
continues to provide certain tax and advisory services to the Company.

       In connection with the audit for the year ended December 31, 1994, the
Janover Rubinroit report contained no adverse opinion or disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope or
accounting principles. For the last two fiscal years ended December 31, 1995
and the subsequent period ended March 4, 1996, there were no disagreements
with Janover Rubinroit on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope of procedure, which
disagreements, if not resolved to the satisfaction of Janover Rubinroit, would
have caused it to make reference to the subject matter of the disagreements in
connection with its reports.

                                      51


<PAGE>





                                   PART III

       Certain information required by Part III is omitted from this Report in
that the Registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, not later
than 120 days after the end of the fiscal year covered by this Report, and
certain information included therein is incorporated herein by reference.

Item 10.  Directors and Executive Officers of the Registrant


       The information required by this Item regarding Directors, Executive
Officers, Promoters and Control Persons is set forth in Part I of this Report
under the heading "Executive Officers of the Registrant". The additional
information required by this Item will be set forth in the Company's Proxy
Statement for the 1998 Annual Meeting of Shareholders, which information is
hereby incorporated herein by reference.

Item 11.  Executive Compensation

       The information required by this Item will be set forth in the
Company's Proxy Statement for the 1998 Annual Meeting of Shareholders, which
information is hereby incorporated herein by reference, excluding the Stock
Price Performance Graph and the Compensation Committee Report on Executive
Compensation.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

       The information required by this Item will be set forth in the
Company's Proxy Statement for the 1998 Annual Meeting of Shareholders, which
information is hereby incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

       The information required by this Item will be set forth in the
Company's Proxy Statement for the 1998 Annual Meeting of Shareholders, which
information is hereby incorporated herein by reference.

                                      52


<PAGE>




                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

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

1.  Financial Statements.

         Consolidated Balance Sheets as of December 31, 1997 and 1996

         Consolidated Statements of Income for the Years Ended December 31, 1997
         1996 and 1995

         Consolidated Statements of Shareholders' Equity for the Years Ended
         December 31, 1997, 1996 and 1995

         Consolidated Statements of Cash Flows for the Years Ended December 31,
         1997, 1996 and 1995


         Notes to Consolidated Financial Statements

2.  Financial Statement Schedules:

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

3.  Exhibits

                                 EXHIBIT INDEX

Exhibit
Number

3.1   -  Amended and Restated Certificate of Incorporation of Sterling
         Vision, Inc., dated December 18, 1995 (incorporated by reference
         to Exhibit 3.1 to the Company's Annual Report on Form 10K/A
         for the calendar year ended December 31, 1995, File No. 1-14128).

3.2   -  Amended and Restated By-Laws of Sterling Vision, Inc., dated
         December 18, 1995 (incorporated by reference to Exhibit 3.2 to
         the Company's Annual Report on Form 10K/A for the calendar
         year ended December 31, 1995, File No. 1-14128).

4.1   -  Specimen of Common Stock Certificate (incorporated by reference to
         Exhibit 4.1 to the Company's Registration Statement No. 33-98368).

10.1  -  Credit Agreement between Sterling Vision, Inc. and Chemical Bank,
         dated as of April 5, 1994 (the "Credit Agreement") (incorporated
         by reference to Exhibit 10.1 to the Company's Registration
         Statement No. 33-98368).

----------------------------------------

   *     Constitutes a management contract or compensatory plan or arrangement

                                      53


<PAGE>



10.2  -  Sterling Vision, Inc.'s 1995 Stock Incentive Plan (incorporated by
         reference to Exhibit 10.2 to the Company's Registration Statement No.
         33-98368).

10.3  -  Form of Sterling Vision, Inc.'s Franchise Agreement (incorporated
         by reference to Exhibit 10.3 to the Company's Registration
         Statement No. 33-98368).

10.4  -  Settlement Agreement between Sterling Vision, Inc. and Neal Polan,

         dated as of August 31, 1994 (incorporated by reference to
         Exhibit 10.4 to the Company's Registration Statement No. 33-98368)

10.5  -  Lease Agreements between Neptune Technology Leasing Corp. and
         Sterling Vision, Inc., Sterling Vision of California, Inc. and
         Sterling Vision, Inc., as successor in interest to CFO (incorporated
         by reference to Exhibit 10.5 to the Company's Registration
         Statement No. 33-98368).

10.6  -  Assignment and Assumption of Equipment Lease by and between Cohen
         Fashion Optical, Inc. and Sterling Vision, Inc. (incorporated
         by reference to Exhibit 10.6 to the Company's Registration
         Statement No. 33-98368).

10.7  -  Form of Purchase Order between Summit Technology, Inc. and
         Sterling Vision, Inc. (incorporated by reference to
         Exhibit 10.7 to the Company's Registration Statement No. 33-98368).

10.8  -  Form of Summit Laser Patent License Agreement (incorporated
         by reference to Exhibit 10.8 to the Company's Registration
         Statement No. 33-98368).

10.9  -  Lease of 10 Peninsula Blvd., Lynbrook, N.Y. (incorporated
         by reference to Exhibit 10.9 to the Company's Registration
         Statement No. 33-98368).

10.10 -  Underwriters' Warrant Agreement, including form of Warrant
         (incorporated by reference to Exhibit 10.10 to the Company's
         Registration Statement No. 33-98368).

10.11 -  Referral Agreement between Cohen Fashion Optical, Inc. and Sterling
         Vision, Inc. (incorporated by reference to Exhibit 10.11 to
         the Company's Registration Statement No. 33-98368).

10.12    - Robert Greenberg Promissory Notes, dated August 19, 1994, as
         amended, August 19, 1994, and August 31, 1994, respectively
         (incorporated by reference to Exhibit 10.12 to the Company's
         Registration Statement No. 33-98368).

10.13 -  Purchase Agreement between Sterling Vision, Inc. and RJL Optical,
         Inc. and Franchise Agreement related thereto (incorporated
         by reference to Exhibit 10.13 to the Company's Registration
         Statement No. 33-98368).

----------------------------------------

   *     Constitutes a management contract or compensatory plan or arrangement

                                      54


<PAGE>




10.14 -  Purchase Agreement between Sterling Vision, Inc. and Dani-Marc
         Optical, Inc. and Franchise Agreement related thereto
         (incorporated by reference to Exhibit 10.14 to the Company's
         Registration Statement No. 33-98368).

10.15 -  Purchase Agreement between Sterling Vision, Inc. and Jeffrey Rubin,
         and Franchise Agreement and Management Agreement related thereto
         (incorporated by reference to Exhibit 10.15 to the Company's
         Registration Statement No. 33-98368).

10.16'-  Management Agreement, dated October 31, 1995, between Sterling
         Vision, Inc. and RJL Optical, Inc. (incorporated by reference to
         Exhibit 10.16 to the Company's Registration Statement No. 33-98368).

10.17'-  Amended and Restated Management Agreement, dated October 31, 1995,
         between Sterling Vision, Inc. and Jeffrey Rubin (incorporated by
         reference to Exhibit 10.17 to the Company's Registration Statement
         No. 33-98368).

10.18*-  Employment Agreement, dated November 27, 1995, between Sterling
         Vision, Inc. and Joseph Silver (incorporated by reference to Exhibit
         10.18 to the Company's Registration Statement No. 33-98368).

10.19*-  Employment Agreement, dated November 18, 1995, between Sterling
         Vision, Inc. and Kevin Cambra (incorporated by reference to Exhibit
         10.19 to the Company's Registration Statement No. 33-98368).

10.20*-  Employment Agreement, dated November 18, 1995, between Sterling
         Vision, Inc. and Sebastian Giordano (incorporated by reference to
         Exhibit 10.20 to the Company's Registration Statement No. 33-98368).

10.21*-  Employment Agreement, dated November 27, 1995, between Sterling
         Vision, Inc. and Jerry Darnell (incorporated by reference to Exhibit
         10.21 to the Company's Registration Statement No. 33-98368).

10.22*-  Employment Agreement, dated November 27, 1995, between Sterling
         Vision, Inc. and Robert Greenberg (incorporated by reference to
         Exhibit 10.22 to the Company's Registration Statement No. 33-98368).

10.23*-  Legal Fee Retainer Agreement, dated November 27, 1995, between
         Sterling Vision BOS, Inc. and Sterling Vision of California, Inc.,
         and Joseph Silver (incorporated by reference to Exhibit 10.23 to
         the Company's Registration Statement No. 33-98368).

----------------------------------------

   *     Constitutes a management contract or compensatory plan or arrangement

                                      55


<PAGE>




10.24 -  Seventh Amendment to the Credit Agreement between Sterling Vision,
         Inc. Chemical Bank (incorporated by reference to Exhibit 10.24 to the
         Company's Registration Statement No. 33-98368).

10.25 -  Waiver, dated as of November 28, 1995, to the Credit Agreement,
         between Sterling Vision, Inc. and Chemical Bank (incorporated by
         reference to Exhibit 10.25 to the Company's Registration Statement
         No. 33-98368).

10.26 -  Sixth Amendment, dated as of October 24, 1995, to the Credit
         Agreement between Sterling Vision, Inc. and Chemical Bank
         (incorporated by reference to Exhibit 10.26 to the Company's
         Registration Statement No. 33-98368).

10.27 -  Fifth Amendment and Waiver, dated as of September 15, 1995, to the
         Credit Agreement between Sterling Vision, Inc. and Chemical Bank
         (incorporated by reference to Exhibit 10.27 to the Company's
         Registration Statement No. 33-98368).

10.28 -  Waiver, dated as of August 8, 1995, to the Credit Agreement between
         Sterling Vision, Inc. and Chemical Bank (incorporated by reference to
         Exhibit 10.28 to the Company's Registration Statement No. 33-98368).

10.29 -  Fourth Agreement and Waiver, dated as of April 25, 1995, to the
         Credit Agreement between Sterling Vision, Inc. and Chemical Bank
         (incorporated by reference to Exhibit 10.29 to the Company's
         Registration Statement No. 33-98368).

10.30 -  Third Amendment and Waiver, dated as of March 30, 1995, to the
         Credit Agreement between Sterling Vision, Inc. and Chemical Bank
         (incorporated by reference to Exhibit 10.30 to the Company's
         Registration Statement No. 33-98368).

10.31 -  Second Amendment and Waiver, dated as of September 30, 1994, to the
         Credit Agreement between Sterling Vision, Inc. and Chemical Bank
         (incorporated by reference to Exhibit 10.31 to the Company's
         Registration Statement No. 33-98368).

10.32 -  First Amendment and Waiver, dated as of July 26, 1994, to the
         Credit Agreement between Sterling Vision, Inc. and Chemical Bank
         (incorporated by reference to Exhibit 10.32 to the Company's
         Registration Statement No. 33-98368).

10.33 -  Schedule No. 2 to Master Lease Agreement No. 1580, dated as of
         August 31, 1995, between BLT Leasing Corp. and Sterling Vision,
         Inc. (incorporated by reference to Exhibit 10.33 to the Company's
         Registration Statement No. 33-98368).

----------------------------------------

   *     Constitutes a management contract or compensatory plan or arrangement


                                      56


<PAGE>



10.34 -  Order (1) Approving Sale of Assets and (2) Granting Related Relief
         in Re: OCA Acquisition, Inc. Case No. 395-35856-RCM 11 and Benson
         Optical Co., Inc. Case NO. 395-35857-SAF-11 and Superior Optical
         Company, Inc. Case No. 395-36572-SAF 11, Jointly Administered under
         Case No. 395-35856-RCM-11, filed November 6, 1995 in the Bankruptcy
         Court for the Northern District of Texas, Dallas Division
         (incorporated by reference to Exhibit 10.34 to the Company's
         Registration Statement No. 33-98368).

10.35 -  Asset Purchase Agreement, dated August 26, 1994, between Pembridge
         Optical Partners, Inc. and Sterling Vision, Inc. (incorporated
         by reference to Exhibit 10.35 to the Company's Registration
         Statement No. 33-98368).

10.36 -  Asset Purchase Agreement, dated October 24, 1995, between Sterling
         Vision BOS, Inc. and Benson Optical Co., Inc., OCA Acquisition,
         Inc. n/k/a Optical Corporation of America, and Superior Optical
         Company, Inc. (incorporated by reference to Exhibit 10.36 to the
         Company's Registration Statement No. 33-98368).

10.37 -  Convertible, Callable, Subordinated Debenture Due September 15, 2015,
         made by Sterling Vision, Inc. and payable to Benson Eyecare Corp.
         (incorporated by reference to Exhibit 10.37 to the Company's
         Registration Statement No. 33-98368).

10.38 -  Assignment, by Benson Eyecare Corp. to Sterling Vision, Inc., of that
         certain Security Agreement, dated October 20, 1994, between Benson
         Eyecare Corp. and OCA Acquisition, Inc., dated September 15, 1995
         (incorporated by reference to Exhibit 10.38 to the Company's
         Registration Statement No. 33-98368).

10.39 -  Assignment, dated September 15, 1995, by Benson Eyecare Corporation
         to Sterling Vision, Inc. of that certain Revolving Credit Note
         (incorporated by reference to Exhibit 10.39 to the Company's
         Registration Statement No. 33-98368).

10.40 -  Assignment, dated September 15, 1995, by Benson Eyecare Corporation
         to Sterling Vision, Inc. of that certain Subordinated Promissory Note
         made by OCA Acquisition Inc. (incorporated by reference to Exhibit
         10.40 to the Company's Registration Statement No. 33-98368).

10.41 -  Assignment, dated September 15, 1995, by Benson Eyecare Corporation
         to Sterling Vision, Inc. of Benson Eyecare Corporation's rights,
         title and interest in certain trade receivables (incorporated by
         reference to Exhibit 10.41 to the Company's Registration Statement
         No. 33-98368).


10.42 -  Note Purchase Agreement, dated September 15, 1995, between Benson
         Eyecare Corporation and Sterling Vision, Inc. (incorporated by
         reference to Exhibit 10.42 to the Company's Registration Statement
         No. 33-98368).

----------------------------------------

   *     Constitutes a management contract or compensatory plan or arrangement

                                      57


<PAGE>



10.43*-  Employment Agreement, dated as of April 1, 1994, between VisionCare
         of California and Martin J. Shoman, as amended by a Letter Agreement,
         dated May 12, 1994 (incorporated by reference to Exhibit 10.44 to the
         Company's Registration Statement No. 33-98368).

10.44 -  Eighth Amendment and Waiver, dated as of December 19, 1995, to the
         Credit Agreement, between Sterling Vision, Inc. and Chemical Bank
         (incorporated by reference to Exhibit 10.45 to the Company's
         Registration Statement No. 33-98368).

10.45 -  Tax Agreement, dated as of December 19, 1995, between Sterling
         Vision, Inc. and the shareholders of Sterling Vision, Inc.
         (incorporated by reference to Exhibit 10.46 to the Company's
         Registration Statement No. 33-98368).

10.46 -  Form of Franchisee Stockholder Agreement to be entered into between
         Sterling Vision, Inc. and certain of its Franchisees (incorporated by
         reference to Exhibit 10.47 to the Company's Registration Statement
         No. 33-98368).

10.47 -  Non-Qualified Stock Option Agreement between Sterling Vision, Inc.
         and Neal Polan (incorporated by reference to Exhibit 10.48
         to the Company's Registration Statement No. 33-98368).

10.48*-  Stock Purchase Agreement, dated as of December 18, 1995, between
         Sterling Vision, Inc. and Robert Cohen, Alan Cohen, Edward Cohen,
         Stefanie Cohen Rubin, Allyson Cohen, Jeffrey Cohen, Richard Cohen,
         Abby Cohen May, Jennifer Cohen, Meryl Cohen a/c/f Gabrielle Cohen and
         Meryl Cohen a/c/f Jaclyn Cohen (incorporated by reference to Exhibit
         10.49 to the Company's Registration Statement No. 33-98368).

10.50 -  Stock Purchase Agreement, dated as of December 18, 1995, between
         Sterling Vision, Inc. and Neal Polan (incorporated by reference to
         Exhibit 10.51 to the Company's Registration Statement No. 33-98368).

10.51 -  Multiple Franchise Agreement, dated February 7, 1996, between
         Leonard Vainio and the Company (incorporated by reference to Exhibit
         10.51 to the Company's Annual Report on Form 10K/A for the calendar

         year ended December 31, 1995, File No. 1-14128).

10.52 -   Sublease, dated November 29, 1995, as amended, between Conopco,
          Inc. and the Company with respect to the Insight Laser Center to be
          located at 725 Fifth Avenue, New York, New York (incorporated by 
          reference to Exhibit 10.52 to the Company's Annual Report on Form
          10K/A for the calendar year ended December 31, 1995, File No.
          1-14128).

10.53 -   Sublease, dated February 27, 1996, between 1500 Hempstead Tpke.,
          L.L.C. and the Company with respect to the Company's new office
          facilities to be located at 1500 Hempstead Turnpike, East Meadow, New
          York (incorporated by reference to Exhibit 10.53 to the Company's
          Annual Report on Form 10 K/A for the calendar year ended December 31,
          1995, File No. 1-14128).

----------------------------------------

   *     Constitutes a management contract or compensatory plan or arrangement

                                      58


<PAGE>



10.54 -  Sales Agreement, dated January 31, 1996, between Insight Laser Centers,
         Inc. and VISX Incorporated, together with the form of VISX Patent and
         Software License Agreement to be entered into in connection
         therewith (incorporated by reference to Exhibit 10.54 to the
         Company's Annual Report on Form 10K/A for the calendar year ended
         December 31, 1995, File No. 1-14128).

10.55 -  Waiver, dated as of March 25, 1996, to the Credit Agreement between
         Sterling Vision, Inc. and Chemical Bank (incorporated by reference to
         Exhibit 10.55 to the Company's Annual Report on Form 10K/A for the
         calendar year ended December 31, 1995, File No. 1-14128).

10.56*-  Employment Agreement, dated March 8, 1996, between Sterling Vision,
         Inc. and Mr. Ali Akbar (incorporated by reference to Exhibit 10.56 to
         the Company's Quarterly Report on Form 10-Q for the quarter ended
         March 31, 1996, File No. 1-14128).

10.57 -  Employment Agreement, dated March 29, 1996, between Sterling
         Vision, Inc., Insight Laser Centers, Inc. and Dr. Francis A.
         L'Esperance, Jr., M.D. (Incorporated by reference to Exhibit 10.57 to
         the Company's Quarterly Report on Form 10-Q for the quarter ended
         March 31, 1996, File No. 1-14128).

10.58 -  Laser Access Agreement, dated March 28, 1996, between Insight Laser
         Centers, Inc. and Nassau Ophthalmic Services, P.C. (incorporated by 
         reference to Exhibit 10.58 to the Company's Quarterly Report on Form
         10-Q for the quarter ended March 31, 1996, File No. 1-14128).


10.59 -  Assignment and Assumption of Lease Agreement ("VCA" Company Store
         Leases"), dated June 7, 1996, between VCA and certain of its
         affiliates and DKM (incorporated by reference to Exhibit 10.59 to the
         Company's Quarterly Report on Form 10-Q for the quarter ended June
         30, 1996, File No. 1-14128).

10.60 -  Assignment and Assumption of Lease Agreement ("VCA" Company Store
         Leases"), as amended by a Letter Agreement, dated June 10, 1996, between
         VCA and certain of its affiliates and DKM (incorporated by reference by
         to Exhibit 10.60 to the Company's Quarterly Report on Form 10-Q for the
         quarter ended June 30, 1996, File No. 1-14128).

10.61 -  Assignment and Assumption of Lease Agreement ("VCA Franchised Store
         Leases") as amended by a Letter Agreement, dated July 11, 1996
         (incorporated by reference to Exhibit 10.61 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
         File No. 1-14128).

10.62 -  Assignment, dated June 19, 1996, by Bank One Kentucky, N.A. (Assignor")
         to DKM, all of Assignor's right, title and interest in and to that
         certain Revolving Credit Loan Agreement and Security Agreement,
         dated January 10, 1992, between the Assignor and Duling Optical
         Corporation, et. al. (incorporated by reference to Exhibit 10.62 to
         the Company's Quarterly Report on Form 10-Q for the quarter ended
         June 30, 1996, File No. 1-14128).

10.63 -  First Amendment to the Company's 1995 Stock Incentive Plan
         (incorporated by reference to Exhibit 10.63 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
         File No. 1-14128).

----------------------------------------

   *     Constitutes a management contract or compensatory plan or arrangement

                                      59


<PAGE>



10.64 -  Purchase and Sale Agreement, dated September 30, 1996, between Eye
         Site (Ontario) Ltd. And the Company (incorporated by reference to
         Exhibit 10.64 to the Company's Quarterly Report on Form 10-Q for the
         quarter ended September 30, 1996 , File No. 1-14128).

10.65 -  Master Franchise Agreement, dated September 30, 1996, between Eye
         Site, Inc., and Eye Site (Ontario) Ltd. and the Company (incorporated
         by reference to Exhibit 10.65 to the Company's Quarterly Report on
         Form 10-Q for the quarter ended September 30, 1996, File No.
         1-14128).


10.66 -  Form of Promissory Notes, dated November 29, 1996, between
         the Company and each of Drs. Edward, Robert and Alan Cohen.
         (incorporated by reference to the Company's Annual Report on Form
         10-K for the Year Ended December 31, 1996).

10.67 -  Ninth Amendment, dated November 29, 1996, to the Credit
         Agreement between the Company and Chase Manhattan Bank.
         (incorporated by reference to the Company's Current Report on Form
         8-K, dated November 29, 1996).

10.68 -  Tenth Amendment and Waiver, dated February 26, 1997, to the Credit
         Agreement between the Company and Chase Manhattan Bank.
         (incorporated by reference to the Company's Annual Report on Form
         10-K for the Year Ended December 31, 1996).

10.69 -  Form of Convertible Debentures and Warrants Subscription Agreement,
         dated February 26, 1997 (incorporated by reference to Exhibit 4.1 to
         the Company's Current Report on Form 8-K, dated February 26, 1997).

16.1  -  Letter, dated March 4, 1996, from Janover Rubinroit LLC, the former
         independent certified public accountant for the Company (incorporated
         by reference to Exhibit 16 to the Company's Current Report on Form
         8-K dated March 7, 1996).

10.70    Eleventh Amendment and Waiver, dated April 1, 1997, to the Credit
         Agreement between the Company and Chase Manhattan Bank (incorporated
         by reference to Exhibit 10.70 to the Company's Current Report on Form
         8-K, dated April 7, 1997).

10.71    Agreement and Plan of Reorganization, dated February 19, 1997, as
         amended, among the Company and Messrs., David, Alan and Sidney Singer
         (incorporated by reference to Exhibit 10.71 to the Company's Current
         Report on Form 8-K, dated April 7, 1997).

10.72    Loan Agreement, dated June 30, 1997, between the Company and STI
         Credit Corporation (incorporated by reference to Exhibit 10.72 to the
         Company's Current Report on Form 8-K, dated June 30, 1997).

10.73    Letter Agreement, dated July 2, 1997, among the Company and Messrs.
         Sidney, Alan and David Singer (incorporated by referenced to Exhibit
         10.73 to the Company's Current Report on Form 8-K, dated June 30,
         1997).

10.74    Form of Non-Negotiable Judgment Note, dated July 1, 1997, among the
         Company and Messrs. Sidney, Alan and David Singer (incorporated by
         reference to Exhibit 10.74 to the Company's Current Report on Form
         8-K, dated June 30, 1997).

10.75    First Amendment to Loan Agreement, dated October 9, 1997, between the
         Company and STI Credit Corporation (Incorporated by reference to
         Exhibit 10.75 to the Company's Current Report on Form 8-K, dated
         September 30, 1997).

----------------------------------------


   *  Constitutes a management contract or compensatory plan or arrangement

                                          60


<PAGE>




10.76    Stock Option Recision Letters, dated August 13, 1997, from each of
         Drs. Robert, Alan and Edward Cohen and Mr. Jay Fabrikant
         (Incorporated by reference to Exhibit 10.76 to the Company's Current
         Report on Form 10-Q, dated September 30, 1997).

10.77    Waiver, dated April 14, 1998, to the Company's Loan Agreement, dated 
         June 30, 1997, as previously amended  on October 9, 1997.

21        List of Subsidiaries.

27        Financial Data Schedule.

b.) Reports on Form 8-K

    1)  On February 26, 1997, the Registrant filed a Report on Form 8-K with
        respect to its Private Placement.

    2)  On June 30, 1997, the Registrant filed a Report on Form 8-K with respect
        to the Loan Agreement.

    3)  On August 11, 1997, the Registrant filed a Report on Form 8-K with
        respect to the Private Placement, the Singer Transaction and the BEC 
        Agreement.



---------------------------------------

   *     Constitutes a management contract or compensatory plan or arrangement

                                      61


<PAGE>

SIGNATURES

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

                                                     STERLING VISION, INC.

                                                     By: /s/ Jerry Lewis,
                                                         -----------------------
                                                           Jerry Lewis,
                                                           President and Chief 
                                                             Executive Officer

                                                     Date: April 15, 1998

       Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.

Signature                                   Title                                       Date

/s/ Robert Cohen                            Chairman of the Board                       April 10, 1998
------------------------                     of Directors
Robert Cohen                                                                            April 10, 1998
                                             


/s/ Alan Cohen                              Vice Chairman of the                        April 14, 1998
------------------------                     Board of Directors
Alan Cohen                                


/s/ Jerry Lewis                             Chief Executive Officer,                    
------------------------                    Chief Operating Officer,
Jerry Lewis                                 President and Director,
                                            Principal Executive Officer                 April 15, 1998

                                            
/s/ Mary Ellen Lyons
--------------------------------
Mary Ellen Lyons                            Controller and Chief Accounting             April 15, 1998
                                            Officer

--------------------------------  
Edward Cohen                                Director                                    April   , 1998

-------------------------------- 
Joel Gold                                   Director                                    April   , 1998

/s/ Jay Fabrikant
-------------------------------- 
Jay Fabrikant                               Director                                    April 14, 1998


                                                               66





</TABLE>