Edgar Filing: OPTICARE HEALTH SYSTEMS INC

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, 2002
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 001-15223

OPTICARE HEALTH SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 76-0453392
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

87 GRANDVIEW AVENUE, WATERBURY, CONNECTICUT 06708
(Address of Principal (Zip Code)
Executive Offices)

(203) 596-2236
Registrant's Telephone Number, Including Area Code:

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

Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.001 par value American Stock Exchange

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

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.

[X] Yes [ ] 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 definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ] Yes [X] No

The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation as an affiliate) computed by reference to
the closing market price as reported on the American Stock Exchange on June 28,
2002, the last business day of the registrant's most recently completed second
fiscal quarter, was $3,276,409.

The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share, as of February 28, 2003, was 30,038,990 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required in Part III of this Annual Report on Form 10-K is
incorporated herein by reference to the registrant's Proxy Statement for the
2003 Annual Meeting of Stockholders.

OPTICARE HEALTH SYSTEMS, INC.

FORM 10-K

TABLE OF CONTENTS

PAGE
PART I

ITEM 1. BUSINESS............................................................3
ITEM 2. PROPERTIES.........................................................19
ITEM 3. LEGAL PROCEEDINGS..................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................22

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................26
ITEM 6. SELECTED FINANCIAL DATA............................................28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.............................................................43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................43

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY....................43
ITEM 11. EXECUTIVE COMPENSATION.............................................44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.......................44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................44
ITEM 14. CONTROLS AND PROCEDURES............................................44

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K .............................45

SIGNATURES...................................................................51
CERTIFICATIONS...............................................................52

PART I

ITEM 1. BUSINESS

GENERAL

OptiCare Health Systems, Inc. is an integrated eye care services company
focused on providing managed vision and professional eye care products and
services. We operate in three distinct segments of the eye care market which,
together, cover virtually every major sector of that market:

o Our Managed Vision Division contracts with insurers, insurance fronting
companies, employer groups, managed care plans, HMOs and other third
party payers to manage claims payment administration of eye health
benefits for contracting parties in eight states and to provide
insurance coverage relating to certain eye care products and services.

o Our Consumer Vision Division sells retail optical products to consumers
and owns and/or operates integrated eye health centers, professional
optometric practices and surgical facilities in Connecticut where
comprehensive eye care services are provided to patients.

o Our Distribution & Technology Division serves the professional eye care
market through (i) Wise Optical, a distributor of contact and
ophthalmic lenses and other eye care accessories and supplies (see
"--Recent Developments"); (ii) a Buying Group program, which provides
group purchasing arrangements for optical and ophthalmic goods and
supplies to ophthalmologists, optometrists and opticians, and (iii) CC
Systems, which provides systems and software solutions, including
production, management and inventory systems, for eye care
professionals and for eyeglass manufacturing laboratories.

Our principal executive offices are located at 87 Grandview Avenue,
Waterbury, Connecticut, 06708. Our telephone number is (203) 596-2236 and our
web site address is www.opticare.com. We include our web site address in this
Annual Report on Form 10-K only as an inactive textual reference and do not
intend it to be an active link to our web site.

We make available free of charge through the Investor Relations section of
our web site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission (the "SEC"). The public may
read and copy any materials we file with the SEC at the SEC's Public Reference
Room, 450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Because we file reports and other information with the SEC
electronically, the public may obtain access to those documents at the SEC's
Internet web site: http://www.sec.gov.

RECENT DEVELOPMENTS

Acquisition of the Business of Wise Optical Vision Group, Inc.

On February 7, 2003, we acquired all of the assets and certain liabilities
of Wise Optical Vision Group, Inc. a Yonkers, New York-based distributor of
contact and ophthalmic lenses to the professional eye care market. Wise Optical
is one of the largest contact lens distributors in the U.S., with FY 2002 sales
in excess of $65 million.

Wise Optical, which carries a large and diverse inventory, has an account
base of approximately 22,500 customers, most of whom are independent eye-care
practitioners. Such practitioners also constitute one of the major market
sectors served by our other operations. Our acquisition of Wise Optical puts at
our disposal a field

sales/customer service force of nearly 60 individuals nationwide.

The purchase price consisted of approximately $7.3 million of cash, 750,000
shares of our common stock and our assumption of certain liabilities. Funds for
the acquisition were obtained from our revolving line of credit, which was
increased from $10 million to $15 million.

Managed Vision Division Enters Direct-to-Employer Market

In February 2003, our Managed Vision Division entered the
"direct-to-employer" market through the launch of a new suite of vision benefit
plans. The new plans, which provide for eye exams and optical hardware
(eyeglasses and contact lenses), allow OptiCare, for the first time, to market
eye care benefits directly to employers, unions, trade organizations,
municipalities and other qualified groups.

The new suite of eye care benefit products includes an insured plan,
underwritten on behalf of OptiCare by Fidelity Security Life Insurance Company;
an administrative services only product for self-insured groups; and a "Section
125" (before-tax, voluntary, employee contribution) product. The insured plan
will be offered by means of a new, wholly owned subsidiary, OptiCare Vision
Insurance Company, Inc. (OVIC). OVIC is domiciled in South Carolina and recently
received approval to operate as a captive insurance company from the South
Carolina Department of Insurance.

After administering eye care benefits of this nature for more than a decade
for insurance companies and HMOs--currently to approximately 2 million benefit
lives--we are now able to offer these products in our own name and to offer them
to a much broader spectrum of clients.

OTHER SIGNIFICANT DEVELOPMENTS IN FISCAL 2002

Changes in the Board of Directors and Management

At the Annual Meeting of Stockholders, held on May 21, 2002, the following
individuals were elected to serve as directors until the next annual meeting or
their successor is duly appointed: Dean J. Yimoyines, M.D., Chairman; Norman S.
Drubner, Esq.; Melvin Meskin; Mark S. Hoffman; Eric J. Bertrand; David B.
Cornstein; Clark A. Johnson; and Mark S. Newman. On July 16, 2002, Richard L.
Huber was elected by the Board of Directors to serve as a director until the
next annual meeting.

On June 10, 2002, Lance A. Wilkes, formerly Senior Vice President of
Business Development of CIGNA Health Services, joined OptiCare as our President
and Chief Operating Officer. On November 18, 2002, T. Gregory Eastburn, formerly
President of Axiom Laboratories, Inc., was named President of the distribution
sector of our Distribution & Technology Division. On January 22, 2003, James
Carmona, Jr., former President and Chief Operating Officer of Forte Information
Services, Inc., was named our Chief Information Officer and President of the
technology sector of our Distribution & Technology Division.

New Capital Structure and Steps to Strengthen Balance Sheet

New Capital Structure - On January 25, 2002, we completed a series of
transactions which resulted in a major restructuring of our debt, equity and
voting capital stock. We refer to these as the Capital Restructuring
Transactions and they are described in detail in "Management's Discussion and
Analysis of Financial Condition and Results of Operations --The Capital
Restructuring Transactions." Taken together, the Capital Restructuring
Transactions lowered our long-term debt by approximately $10.3 million and
increased our equity by approximately $6.9 million. As a result of the Capital
Restructuring Transactions, Palisade Concentrated Equity Partnership, L.P., a
fund manager and a stockholder prior to the restructuring, increased its
beneficial ownership of our voting stock from approximately 16% to approximately
81.8%.

Sale of Our North Carolina Retail Operations - On August 12, 2002, we sold
substantially all of the assets relating to the professional optometry practice
locations and retail optical business we owned or operated in the State of North
Carolina to Optometric Eye Care Center, P.A. Excluded from the sale were our
other North

Carolina operations (i.e., our Managed Vision Division and Buying Group). The
aggregate consideration we received was approximately $5.7 million, consisting
of approximately $4.2 million of cash, a $1.0 million promissory note, due and
payable on August 1, 2007, the return of 1.3 million shares of our common stock
formerly held by the principal shareholders of Optometric Eye Care Center, P.A.
and Optometric Eye Care Center, P.A.'s assumption of certain liabilities. We
used the cash proceeds from the sale to reduce bank debt and to provide working
capital.

The principal shareholders of Optometric Eye Care Center, P.A. are D. Blair
Harrold, O.D., and Allan L. M. Barker, O.D., two former officers of OptiCare. In
connection with the consummation of the sale, Drs. Harrold and Barker resigned
their positions with OptiCare. The sale of the assets resolved certain claims
that may have existed between us and Optometric Eye Care Center, P.A. and our
respective affiliates arising from previous contractual agreements between us.
The purchase price and all negotiations relating to the transaction were on an
arm's length basis. The sale was unanimously approved by the North Carolina
State Board of Examiners in Optometry.

Key Shareholders Exercise Warrants - In December 2002, two shareholders,
including our majority shareholder, Palisade, exercised warrants which generated
cash proceeds to us of $2,450,000. The proceeds were used in part to pay down
our senior bank debt.

Palisade exercised for cash warrants to purchase 17,375,000 shares of
common stock that it purchased as part of the Capital Restructuring
Transactions. In addition, Linda Yimoyines, wife of Dean J. Yimoyines, M.D., our
Chairman and Chief Executive Officer, exercised for cash warrants to purchase
125,000 shares of common stock. The warrants which were exercised by these
shareholders for $0.14 per share, were scheduled to expire on January 24, 2012.
The portion of our voting stock which Palisade beneficially owns, approximately
81.8%, did not change as a result of this exercise of its warrants.

Re-Alignment of Reporting Segments

During the third quarter of 2002, consistent with a revised strategic
vision, we realigned our business into the following three reportable operating
segments: (1) Managed Vision, (2) Consumer Vision, and (3) Distribution &
Technology. In connection with this re-alignment, historical amounts previously
reported have been restated to conform to our new operating segment
presentation.

THE EYE CARE INDUSTRY

Overview

The eye care market includes both eye care services (including the systems
and equipment for delivering such services) and optical products.

In the eye care services sector, eye health professionals, including
ophthalmologists and optometrists, provide diagnostic eye examinations and
treatment interventions to address complex eye and vision conditions, including
disease and/or lack of functionality of the eyes. The most common conditions
addressed by eye care professionals are nearsightedness, farsightedness and
astigmatism. These eye and vision conditions are treated with surgical
intervention (notably, laser surgery), prescription glasses, contact lenses or
some combination of these treatments.

The optical products sector of the eye care market consists of the
manufacture, distribution and sale of corrective lenses, eyeglasses, frames,
contact lenses and other related optical products.

In the U.S., eye care services have traditionally been delivered by
ophthalmologists and optometrists. Eye wear is typically dispensed by opticians.
Ophthalmologists are specifically trained physicians who have completed four
years of medical school, obtained a medical degree and have received specialty
training in ophthalmology. Ophthalmologists are licensed to conduct diagnostic
examinations and to perform ophthalmic surgery. Optometrists

complete four years of optometry school and are generally licensed to perform
routine eye examinations and prescribe corrective optical devices (principally
eyeglasses and contact lenses). Optometrists do not perform surgery, but often
provide pre- and post-operative care. Opticians measure, fabricate, fit and
adjust glasses as requested by patients and as prescribed by doctors. They also
perform routine repairs and dispense eyeglasses and contact lenses. There are
approximately 20,000 practicing ophthalmologists and 31,000 practicing
optometrists in the U.S.

The U.S. market for eye care services and optical products is very large
and growing. Approximately 61% of the U.S. population--169 million
people--require some form of vision correction; and over 100 million--or some
60% of those consumers--purchase eye wear each year. Annual market growth rates
of 2% to 5% are expected to continue for the next several years. The single most
compelling explanation for such growth is demographics, and, specifically the
aging baby boom segment of the population. The need for corrective lenses is
highly correlated with age. While 63% of 25-44 year-olds need such lenses, 95%
of 45-64 year-olds require them. As the median age of the population increases
(the portion of the U.S. population age 45 and over is projected to grow 21%
from 2001 to 2010), the number of Americans requiring vision correction is
expected to grow. Further, the rise of third-party plan providers continues to
fuel growth in the industry. Since 1989, the portion of the eye care population
covered by third-party plan providers has grown from 40% to 54%.

Eye care in the U.S. is a $45 billion market. Of that, approximately $29
billion is spent annually on health care services related to eye care. In
addition, consumers spend approximately $16 billion annually on retail optical
products, of which approximately 84%--or $14 billion--is spent on lenses and
frames, while approximately 12%--or $2 billion--is spent on contact lenses (with
the balance, approximately 4% or $0.6 million, being spent on sunglasses).

We do business in both sectors of this market (i.e., by providing eye care
services and selling optical products). We also do business across both sectors
of this market (i.e., by providing managed vision services with respect to both
eye care services and optical products).

Eye Care Services and Products

We expect the demand for medical intervention and eye surgery to show
steady growth. We believe that the aging of the population, including the "baby
boom" generation, will increase the demand for medical and surgical treatment of
such common disorders as glaucoma, macular degeneration, diabetic retinopathy
and cataracts. Glaucoma affects approximately 3 million people in the U.S. and
is projected by industry sources to double by 2030. 2.7 million cataract
surgeries were performed in 2002, and that number is expected to increase to
approximately 3.2 million by 2007. Since patients over the age of 65 are most
affected by these eye disorders, the Medicare program is the primary payer for
treatment, including surgical treatment, of these disorders.

Managed Vision Services

According to InterStudy, a health care research firm, as of January 2002,
total U.S. enrollment in health maintenance organizations was 76.1 million.
Additionally, approximately 80 million Americans are enrolled in preferred
provider organizations. Almost all health care insurance plans cover
medical/surgical treatment of eye disorders and many also provide vision care
benefits, including routine eye exams and optical products.

We believe that enrollment in health care insurance plans which provide
coverage of eye care services will continue to grow. We expect this trend will
be supported by managed care plans offering enhanced vision and eye care
benefits in order to more aggressively compete for potential membership.

Further, vision care coverage is the fastest growing employee benefit.
Vision is a low-cost, high perceived value benefit, rated by employees as one of
the three most important benefits. The percentage of employers offering vision
benefits rose from 34% in 1996 to 56% in 2000, the latest year for which such
statistics are available.

DESCRIPTION OF BUSINESS DIVISIONS

Our business operations are managed through three divisions which,
together, cover virtually every major sector of the eye care market: Managed
Vision; Consumer Vision; and Distribution & Technology.

Managed Vision Division
-----------------------

Description

Our Managed Vision Division contracts with insurers, insurance fronting
companies, employer groups, managed care plans, HMOs and other third party
payers to manage claims payment and administration of eye health benefits for
those contracting parties in Texas and seven other states. The typical range of
benefits administered include well eye exams, prescription optical products, and
medical and surgical services related to eye care.

We have leveraged our leadership position in key markets to build a strong
provider base of eye care professionals: ophthalmologists, optometrists and
opticians. We verify and approve the credentials of these providers, ensuring
they meet plan and regulatory standards. We educate these providers concerning
the plan benefits which we administer and then streamline the authorization and
claims payment process.

We believe that our managed care services provide significant value to
third-party payers by delivering high quality managed eye care benefits to plan
members and comprehensive, cost-effective administrative services to the
third-party payers. We believe that we are well positioned to compete for all
types of eye care contracts because of our managed care expertise, sophisticated
information systems and operating history.

Strategy

Recognizing the significant growth potential of this market segment, we
are:

o Expanding our sales and marketing capabilities to organically grow in
the Texas-Virginia-Florida triangle;

o Positioning ourselves to contract for business directly with employer
groups and similar associations, thereby reaching another sector of the
third party payer market and broadening the base of our revenue stream;

o Increasing our market density, which will enable us to offer cost
advantages by directing volume to targeted manufacturers, thereby
increasing the value of our services to the practitioners who contract
with us; and

o Offering non-insurance related products, including Administrative
Services Only (ASO) and IRC Section 125 plans, with benefits that
include the administration of well eye examinations and prescription
optical products.

Market Position

As of December 31, 2002, we administered eye care benefit programs,
delivered through networks of eye care professionals nationwide, for 2 million
benefit enrollees under capitation (i.e., payment by an insurer to a managed
care entity or network of a fixed amount per member or per enrollee each month,
quarter or year) and fee-for-service arrangements.

Customers

Our Managed Care Vision Benefits' customers include insurers, managed care
plans, HMOs and other third party payers. With the advent of our
Direct-to-Employer suite of products, our customer base is being enlarged to
include, among others, employers, employer groups, unions, trade organizations
and municipalities. We have multiple contracts with one insurer, which accounted
for 11% of our consolidated revenue in 2002.

Most of our contracts have terms of one to three years and contain an
automatic renewal provision for additional one-year periods and grant either
party the right to terminate the contract upon 90-180 days' notice.

Products & Services

OptiCare is unique in the eye care insurance industry because it offers a
number of different risk-bearing contractual relationships for its clients. As
of the end of 2002, we provided only traditional "Managed Care Vision Benefits,"
described in the first point below. In February 2003, we began offering a new
suite of products, which we refer to as our "Direct-to-Employer" products,
described in the second, third and fourth points below.

o Managed Care Vision Benefits - We administer vision benefits for health
plans to over 2 million benefit lives under capitation and fee for
service arrangements. Benefits administered under these programs are
for well vision, preventive exams and optical hardware in addition to
medical and surgical eye care benefits. We assume partial or full
financial risk with respect to nearly all of the lives for which we
administer vision benefits. We have been administering benefits of this
nature for more than ten years.

o Insured Vision Plan - We provide insurance coverage for well vision,
preventive examinations and optical hardware through Fidelity Security
Life Insurance Company and through our captive insurance company,
OptiCare Vision Insurance Company, Inc. We began offering this product
in the first quarter of 2003.

o Section 125 Vision Plan - This vision benefit allows qualified groups
and individuals to participate in vision programs for well vision,
preventive examinations and optical hardware on a pretax basis. We
began offering this product in the first quarter of 2003.

o ASO Vision Plan - We administer benefits on a fee basis for well
vision, preventive examinations and optical hardware for qualified
groups which are self-funded. We began offering this product in the
first quarter of 2003.

Operations

The following are the principal components of our Managed Vision
operations:

o Provider Contracting - Upon obtaining a managed care contract, we
typically develop a network of optometrists, ophthalmologists and
opticians to provide the eye care services required under the contract.
Generally, we attempt to contract first with eye care professionals
with whom we have an existing contractual relationship. Additionally,
we seek to enter into contracts with independent eye care professionals
as well as to work in conjunction with our partners to build networks
that meet set access standards.

o Provider Credentialing - Under most contracts, we "credential" eye care
professionals (i.e., establish to both our, and the third-party
payer's, satisfaction the credentials of such professionals) who
provide the eye care services specified under the contract to the
third-party payer's members. In those instances, we undertake a
thorough review process on each prospective eye care professional,
which includes obtaining a copy of the state license and Drug
Enforcement Agency number, verifying hospital privileges, liability
insurance and board certification, and reviewing work history.

In conducting our credentialing reviews, we apply the national
standards--set by the National Committee for Quality Assurance--by
which health plans are measured for compliance with quality assurance
initiatives. OptiCare was re-awarded accreditation in 2002 as a
Credentialing Verification Organization by the National Committee for
Quality Assurance for 11 out of 11 elements. Eye care professionals,
who are credentialed for our panels, are currently re-credentialed
every two years.

o Claims Payment - For most contracted payers, we pay claims to
contracted providers for services rendered in the fulfillment of vision
benefits for members. We also have Internet capabilities for
authorizations (if needed), direct claim submission and claim tracking.
Additionally, we accept claims via

electronic data interchange, allowing providers to send claims through
their own practice management software. We believe these enhancements
have continued to help lower our cost of operations, improve service,
and speed the payment cycle to our providers.

To enhance our claims payment administration, we utilize proprietary
systems, which allow us to strictly follow Center for Medicare and
Medicaid Services' rules for payment of eye care claims. In addition,
we have posted on-line our clinical criteria for treatment of every eye
care condition for which we provide covered services. Our providers can
use our secure web server to check these criteria and to inform
themselves of new or modified criteria as changes occur.

o Utilization Management - Our Utilization Management staff ensures that
established clinical criteria are followed in provision of services and
benefits to members. Using proprietary clinical criteria for eye care
procedures that are based on Center for Medicare and Medicaid Services'
local carrier policy and the American Academy of Ophthalmology's
guidelines, we work with eye care professionals to determine
appropriate eye care treatments. While these practices are intended to
reduce unnecessary procedures--hence costs--there can be no assurance
that costs may not become excessive.

o Plan Member Relations - Service representatives answer plan members'
questions relating to their benefits and the status of their claims and
help resolve complaints relating to their eye care treatment. We
believe that our issue-resolution structure is unique to the industry
and increases plan members' satisfaction with their eye care benefits.

o Provider Relations - We continuously educate providers concerning the
various plan benefits being administered. In addition, with the
assistance of our staff, providers may obtain required authorizations
prior to performing certain eye care procedures.

o Quality Management - Our Quality Management Department tracks
complaints and concerns and conducts surveys for members, providers and
payers to ensure that all parties are satisfied with the services and
the service levels provided. Department personnel also recommend, or
take, steps to address conditions from which valid complaints have
arisen. In addition, we perform prospective-outcome studies and other
quality assessment studies on the care rendered by our network of
providers.

o Claim Data Analysis - Our financial analysts review claim and other
data to provide feedback to management and to the insurance companies
and other payers with which we have claims payment contracts concerning
our performance, enabling management to maintain profitability while
providing excellent service.

Legal & Compliance

Our Managed Vision Division is subject to the following legal requirements
and regulations:

Licensing Requirements. Most states impose strict licensure requirements on
health insurance companies, HMOs, and other companies that engage in the
business of insurance or pre-paid health care. In most states, these laws do not
apply to the discounted fee-for-service or capitation programs, which are our
primary sources of revenue.

Certain states, however, such as Texas, where we work strictly on a
capitated basis, require that the risk-bearing entity (e.g., the managed care
company) be licensed for capitated arrangements unless that entity qualifies
under certain exceptions (such as that it be a professional corporation which is
owned by eye care providers). We do not qualify for such an exception. As a
risk-bearing entity, we are currently licensed only in Texas and operate our
capitated arrangements through a wholly-owned, single-service HMO subsidiary,
AECC Total Vision Health Plan of Texas, Inc. (See "--Regulation of Our HMO
Subsidiary")

We also hold a license as a third-party administrator in Florida and are a
licensed utilization review agent in Texas, Tennessee and New York.

If we are required to become licensed under the laws of states other than
Texas for our Managed Care Vision Benefits products, the licensure process can
be lengthy and time consuming. In states where we already are conducting such
business, unless the regulatory authority permits us to continue to operate
while the licensure process is progressing, we could suffer losses of revenue
that would result in material adverse changes in our business while the
licensing process is pending. In addition, licensing requirements may mandate
strict financial and other requirements we may not immediately be able to meet
and which, if waivers or other exemptions are not available, might cause us to
withdraw from those states or otherwise cause a material adverse change to our
business, operations, or financial position. (The same risks may not apply to
the same degree for our Direct-to-Employer suite of products due to our
relationship with Fidelity Security Life Insurance Company, which is licensed to
write life and health insurance in all 50 states (New York, reinsurance only).)
Once licensed, we would be subject to regulatory compliance and required to
report to the licensing authority.

These same requirements, it should be noted, can also serve as a barrier to
entry to competition in states where such licensure is required.

Regulation of Our HMO Subsidiary. Our Texas HMO subsidiary, AECC Total
Vision Health Plan of Texas, Inc. is a licensed single service HMO. It is
subject to regulation and supervision by the Texas Department of Insurance,
which has broad administrative powers relating to standards of solvency, minimum
capital and surplus requirements, maintenance of required reserves, payment of
dividends, statutory accounting and reporting practices, and other financial and
operational matters. The Texas Department of Insurance requires that stipulated
amounts of paid-in-capital and surplus be maintained at all times. Our Texas HMO
subsidiary is required by terms of an Order of the Commissioner of Insurance,
dated August 12, 1999, as modified on February 8, 2001, to maintain a minimum
net worth of $1,000,000. Dividends payable to us by our Texas HMO subsidiary are
generally limited to the lesser of 10% of statutory-basis capital and surplus or
net income of the preceding year excluding realized capital gains.

Third Party Administration Licensing. Some states require licensing for
companies providing administrative services in connection with managed care
business. We currently hold a third party administrator license only in Florida.
We may seek licenses in the states where they are required for eye care
networks, if needed. In the event such licensure is required and we are unable
to obtain a license, we may be forced to withdraw from that state, which could
have a material adverse effect on our business.

Direct-to-Employer Insurance Products. Fidelity Security Life Insurance
Company, a carrier licensed to write life and health insurance in all 50 states
(New York, reinsurance only), underwrites our insured product. Fidelity has been
rated A- (Excellent), based on an analysis of financial position and operating
performance by A.M. Best Company, an independent analyst of the insurance
industry. Our insured product is offered by means of a wholly owned subsidiary,
OptiCare Vision Insurance Company, Inc., which is domiciled in South Carolina
and has received approval to operate as a captive insurance company from the
South Carolina Department of Insurance.

Preferred Provider Networks. In Connecticut, the sponsors of preferred
provider networks are required to register and file annual updates with the
Office of Health Care Access. Disclosure of a number of enumerated items is
required. Newspaper publication is required for the expansion of such a network
into a new county. Among other things, a network is to submit to the Office of
Health Care Access and make available upon request to providers its general
criteria for the selection or termination of health care providers. A provider
cannot be rejected or terminated until the provider has been advised of the
criteria his or her practice fails to meet.

"Any Willing Provider" Laws. Some states have adopted, and others are
considering, legislation that requires managed care networks to include any
qualified and licensed provider who is willing to abide by the terms of the
network's contracts. These laws could limit our ability to develop effective
managed care networks in such states. We believe that the medical management and
eye care claim data analysis services we offer would provide greater value to
our clients if such legislation were adopted in states where we do business.
There are currently no states in which we operate our managed care business that
have "any willing provider" requirements, although Texas does impose certain
anti-discrimination requirements for optometrists and ophthalmologists. Further,
with introduction of our Direct-to-Employer suite of products, we have added
business lines which would not be directly affected by adoption of "any willing
provider" requirements in the states in which we do such business.

Health Insurance Portability and Accountability Act - Administrative
Simplification. The Health Insurance Portability and Accountability Act
(referred to as "HIPAA"), passed in 1996 by Congress, requires the Department of
Health and Human Services (referred to as "HHS") to enact standards for
information sharing, security and patient confidentiality. The HHS, in its
administrative simplification provisions, has published two sets of final
regulations implementing healthcare transactions and privacy standards under
HIPAA. These regulations apply to what are termed "covered entities" and, under
terms of the regulations, OptiCare is a covered entity.

The first set of final regulations requires covered entities to use uniform
standards, including data reporting, formatting, and coding, for common
healthcare transactions. The Standards for Electronic Transactions Final Rule
was published August 2000 and became effective October 2000 with a compliance
date of October 2002. This effective date has now been delayed to October 2003.

The second set of final regulations imposes new standards relating to the
privacy of individually identifiable health information. The Standards for
Privacy and Individually Identifiable Health Information Final Rule was
published December 2000 and became effective April 2001 with a compliance date
of April 2003. These standards require covered entities to comply with rules
governing the use and disclosure of protected health information. The standards
also require covered entities to enter into certain contractual provisions with
any business associate to whom individually identifiable information is
disclosed.

A third set of regulations under HIPAA, the Final Rule for Security
Standards, was published in February 2003 with a compliance date of April 2005.
The Final Rule establishes minimum security requirements for covered entities to
protect health information in electronic form. In some cases, we will also have
to comply with applicable state regulations regarding privacy and medical
information.

We are currently assessing the privacy and security standards to ensure
that we have the required systems and procedures in place to comply with the new
HIPPA regulations. While we will incur costs to become compliant with the HIPAA
regulations for electronic transaction processing, we believe this will not have
a significant overall impact on our results of operations.

In addition to its administrative simplification provisions, HIPAA also
imposes criminal penalties for fraud against any healthcare benefit program, for
theft or embezzlement involving healthcare and for false statements in
connection with the payment of any health benefits. These HIPAA fraud and abuse
provisions apply not only to federal programs, but also to private health
benefit programs. HIPAA also broadened the authority of the Department of Health
and Human Services Office of Inspector General, or OIG, to exclude participants
from federal healthcare programs. Although we do not know of any current
violations of the fraud and abuse provisions of HIPAA, if we were found to be in
violation of these provisions, the government could seek penalties against us
including exclusion from participation in government payer programs. Significant
fines could cause liquidity problems and adversely affect our results of
operations.

Interpretation and Implications. The laws described above have civil and
criminal penalties and have been subject to limited judicial and regulatory
interpretation. They are enforced by regulatory agencies that are vested with
broad discretion in interpreting their meaning. Our agreements and activities
have not been examined by federal or state authorities under these laws and
regulations. There can be no assurance that review of our business arrangements
will not result in determinations that adversely affect our operations or that
certain material agreements between us and eye care providers or third-party
payers will not be held invalid and unenforceable.

In addition, these laws and their interpretation vary from state to state.
The regulatory framework of certain jurisdictions may limit our expansion into,
or ability to continue operations within, such jurisdictions if we are unable to
modify our operational structure to conform to such regulatory framework. Any
limitation on our ability to continue operating in the manner in which we have
operated in the past could have an adverse effect on our business, financial
condition and results of operations.

Competition

Our Managed Vision Division competes with several regional and national eye
health companies, which provide services to health plans, associations, employer
groups and various other payers. Our largest competitor is Vision Service Plan
of America. We also compete for managed care contracts with HMOs, PPOs and
private insurers, many of which have larger provider networks and greater
financial and other resources than we do. Managed care organizations compete on
the basis of administrative strength, size, quality and geographic coverage of
their provider networks, marketing abilities, information systems, operating
efficiencies and price.

Consumer Vision Division
------------------------

Description

The Consumer Vision Division provides eye care services and products to
consumers through a total of 18 integrated eye health centers and professional
optometric practices, a surgery center and a laser correction center we own
and/or operate in Connecticut. (In the integrated eye health centers,
comprehensive eye care services are provided by ophthalmologists and
optometrists.) We also conduct all management, billing, systems and related
procedures for the operation of all centers.

Strategy

We are seeking to improve the profitability of our Consumer Vision Division
by generating higher volume through existing locations. To do so, we are trading
on our promise of "better doctors, better training, better care" and our wide
selection of quality brand name and private label products which span a wide
range of price points. Further, we are developing and executing test marketing
programs to increase optical sales and implementing profit improvement plans
throughout the Consumer Vision Division.

Market Position

We are the second largest optical retailer in Connecticut.

Customers

Our customers and patients are individuals who come to us for eye exams,
corrective lenses, surgery and non-prescription eyewear, such as sunglasses. We
are not dependent upon customers or patients of any particular age, gender,
ethnic origin or from any particular community or economic strata.

Products & Services

Integrated Eye Health Centers. Through our nine integrated eye health
centers, comprehensive eye care services are provided to individual patients.
Such services include medical and surgical treatment of eye diseases and
disorders by ophthalmologists, and vision measuring and non-surgical eye care
correction and treatment services by optometrists.

Professional Optometric Practices. Our professional optometric practice
locations provide vision correction services by optometrists, and/or sell
eyeglasses and other optical products. These facilities are either free-standing
or are located within our fully integrated eye health centers. Our professional
optometric practices provide all customary optical goods and are supported by
our billing, collection, and information systems. We operate 18 retail optical
locations in Connecticut (nine of those facilities also offer medical services
and are referred to as the "integrated eye health centers" discussed above).

Surgical Centers. We own and operate two surgery centers in Connecticut,
one of which is a laser correction center. In our ambulatory surgery center in
Waterbury, Connecticut, ophthalmic surgeons perform a range of eye

care surgical procedures, including cataract surgery, and surgical treatment of
glaucoma, macular degeneration and diabetic retinopathy. In our laser center in
Danbury, Connecticut, we use a VISX excimer laser for the correction of
nearsightedness, farsightedness and astigmatism. In these centers, we bill
patients (or their insurers, HMOs, Medicare, Medicaid or other responsible
third-party payers) for use of the surgery facility. Our surgeons bill the
patients separately for their services. For laser correction, patients are
billed directly and, generally, we are not reimbursed by third-party payers. Our
ambulatory facility in Waterbury is state licensed, approved for the payment of
facility fees by most health plans and is Medicare approved.

Manufacturing Laboratory. We also have a complete manufacturing facility in
Connecticut, with state of the art equipment, in which lenses are manufactured,
surfaced and ground to specifications and supplied to all of our Connecticut
locations. Additionally, our lab manufacturing services are integrated into some
of our Managed Vision programs that are administered in Connecticut.

Operations

For our integrated eye health centers, professional optometric practices
and surgical centers, we contract with a professional corporation, OptiCare,
P.C., which employs ophthalmologists and optometrists, to provide surgical,
medical, optometric and other professional services to patients. We provide
management services to OptiCare P.C. under a renewable professional services and
support agreement. We refer to OptiCare, P.C. as our "professional affiliate."

We purchase most of our eyeglasses, contact lenses and other optical goods
and devices through our Buying Group and/or Wise Optical, our optical product
distribution company (See "--Distribution & Technology Division").

Legal & Compliance

The federal and state governments extensively regulate the health care
industry. Our business is subject to numerous federal and state laws and
regulations, including the following:

Surgical Facility Regulations. Our licensed ophthalmic outpatient surgical
facility in Waterbury, Connecticut is subject to the terms of Certificate of
Need approvals from the Office of Health Care Access and licensure under the
provisions of the Connecticut Public Health Code. The facility also is a
participating provider under the federal Medicare and Connecticut Medicaid
programs and has provider agreements with various commercial and governmental
third-party payers. Violation of any of the terms and conditions of the
Certificate of Need approvals and the Connecticut Public Health Code license
governing the facility's operation could result in fines or other sanctions
against the facility and its operators, including OptiCare being enjoined or
precluded from further operation of the facility. Failure to adhere to the terms
of participation for the Medicare or Medicaid programs or a violation of billing
or other requirements for the public and private third-party payment programs
governing the facility could result in civil or criminal sanctions against the
facility and its operators, refund obligations or claims denials and/or
termination or exclusion from participation in Medicare, Medicaid or other payer
programs. The structure of relationships involving the facility and clinicians
providing services in conjunction with the facility also is subject to the
federal fraud and abuse statute (the anti-kickback statute) and related state
and federal authorities.

Excimer Laser Regulation. Medical devices, including the excimer laser used
in our Danbury, Connecticut laser surgery center, are subject to regulation by
the U.S. Food and Drug Administration, referred to as the FDA. Failure to comply
with applicable FDA requirements could subject us, our affiliated providers or
laser manufacturers to enforcement action, product seizures, recalls, withdrawal
of approvals and civil and criminal penalties. Further, failure to comply with
regulatory requirements, or any adverse regulatory action--including a reversal
of the FDA's current position that the use of excimer lasers by physicians
outside FDA approved guidelines is a "practice of medicine" decision, which the
FDA is not authorized to regulate--could result in a limitation on, or
prohibition of, our use of excimer lasers.

Regulation of Laser Vision Marketing. The marketing and promotion of laser
correction and other vision

correction surgery procedures in the U.S. is subject to regulation by the FDA
and the Federal Trade Commission, referred to as the FTC. The FDA and FTC have
released a joint communique on the requirements for marketing these procedures
in compliance with the laws administered by both agencies. The FTC staff also
issued more detailed staff guidance on the marketing and promotion of these
procedures. It has been monitoring marketing activities in this area through a
non-public inquiry to identify activities that may require further FTC
attention. The FDA has traditionally taken the position that the promotion and
advertising of lasers by manufacturers and physicians should be limited to the
uses approved by the FDA. Although the FDA does not prevent non-approved uses of
excimer lasers, the FDA reserves the right to regulate advertising and promotion
of non-FDA-approved uses.

Corporate Practice of Optometry and Ophthalmology. The laws of a number of
states prohibit corporations that are not owned entirely by eye care
professionals from:

o Employing eye care professionals;

o Receiving for their own account reimbursements from third-party payers
for health care services rendered by licensed professionals;

o Controlling clinical decision-making; or

o Engaging in other activities that constitute the practice of optometry
or ophthalmology.

To comply with these requirements, we:

o Perform only non-professional services;

o Contract with our professional affiliate (which is owned by one or more
licensed optometrists or ophthalmologists), which in turn employs or
contracts with licensed optometrists or ophthalmologists to provide
professional services to patients;

o Do not represent to the public or customers that we provide
professional eye care services (which is done by the professional
affiliate); and

o Do not exercise influence or control over the practices of the eye care
practitioners employed by the professional corporation.

Our agreement with our professional affiliate specifically provides that
all decisions required by law to be made by licensed ophthalmologists or
optometrists shall be made only by such licensed persons, and that we shall not
engage in any services or activities which would constitute the practice of
ophthalmology or optometry. If health care regulations and their interpretations
change in the future, we may have to revise the terms of such agreement to
comply with regulatory changes.

Prohibitions of Certain Referrals. The Omnibus Budget Reconciliation Act of
1993 includes a provision that significantly expands the scope of the Ethics in
Patient Referral Act, also known as "Stark." The provisions of Stark originally
prohibited a physician from referring a Medicare or Medicaid patient to any
entity for the provision of clinical laboratory services if the physician or a
family member of the physician had an ownership interest in or compensation
relationship with the entity. The revisions to Stark prohibit a referral to an
entity in which the physician or a family member has a prohibited ownership
interest or compensation relationship if the referral is for any of a list of
"designated health services." This list of designated health services includes
"prosthetic devices," which the Stark regulations define to include one pair of
conventional eyeglasses and contact lenses for patients who have undergone
certain ophthalmic procedures. The Stark regulations provide that the
prohibition of referrals for these types of eyewear does not apply if the
arrangement between the physician and the eyewear seller conforms to the
Anti-Kickback Law and other regulatory requirements. There can be no assurance
that future interpretations of such laws and future regulations promulgated
thereunder will not affect our existing relationship with our professional
affiliate.

State Fee-Splitting and Anti-Kickback Law. Most states have laws which
prohibit the paying or receiving of any remuneration, direct or indirect, that
is intended to induce referrals for health care products or services and
prohibit "fee-splitting" by health care professionals with any party except
other health care professionals in the same professional corporation or practice
association. In most cases, these laws apply to the paying of a fee to another
person for referring a patient or otherwise generating business, and do not
prohibit payment of reasonable compensation for facilities and services other
than the generation of business, even if the payment is based on a percentage of
the revenues of the professional practice.

Federal Anti-Kickback Law. Federal law prohibits the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of "federal health care program" patients, or in return for the purchase, lease
or order of any item or service that is covered by a "federal health care
program." A "federal health care program" includes Medicare, Medicaid,
TriCare/CHAMPUS, and certain other state programs funded by the federal
government, among others. Pursuant to this law, the federal government has
pursued a policy of increased scrutiny of transactions among health care
providers in an effort to reduce potential fraud and abuse relating to
government health care costs. The Medicare and Medicaid anti-kickback statute,
referred to as the Anti-Kickback Statute, provides criminal penalties for
individuals or entities participating in federal health care programs who
knowingly and willfully offer, pay, solicit or receive remuneration in order to
induce referrals for items or services reimbursed under such programs. In
addition to federal criminal penalties, the Social Security Act provides for
civil monetary penalties and exclusion of violators from participation in
federal health care programs. A violation of the Anti-Kickback Statute requires
the existence of all of these elements: (i) the offer, payment, solicitation or
receipt of remuneration; (ii) the intent to induce referrals; (iii) the ability
of the parties to make or influence referrals of patients; (iv) the provision of
services that are reimbursable under any federal health care programs; and (v)
patient coverage under any federal health care program.

To our knowledge, there have been no case law decisions regarding service
agreements similar to that which we have with our professional affiliate that
would indicate that such agreements violate the Anti-Kickback Statute. Because
of the breadth of the Anti-Kickback Statute and the government's active
enforcement thereof, there can be no assurance, however, that future
interpretations of such laws will not require modification of our existing
relationship with our professional affiliate. If our services agreement is ever
determined to be in violation of the Anti-Kickback Statute, it is likely that
there would be a material adverse impact on our business, financial condition
and results of operation.

Advertising Restrictions. Many states have laws which prohibit licensed eye
care professionals from using advertising which includes any name other than
their own, or from advertising in any manner that is likely to mislead a person
to believe that a non-licensed professional is eligible to be engaged in the
delivery of eye care services. Our services agreement with our professional
affiliate provides that all advertising shall conform to these requirements, but
there can be no assurance that the interpretation of the applicable laws or our
advertising will not inhibit us or result in legal violations that could have a
material adverse effect on us.

Health Insurance Portability and Accountability Act - Administrative
Simplification. This federal statute and its regulations, discussed above in
"--Managed Vision Division" is applicable to the Consumer Vision Division as
well.

In addition, these laws and their interpretation vary from state to state.
The regulatory framework of certain jurisdictions may limit our expansion into
such jurisdictions if we are unable to modify our operational structure to
conform to such regulatory framework.

Competition

The most direct competition for our Consumer Vision Division is with
independent ophthalmologists and optometrists, as well as with regional
operators of retail optical locations. On a national basis, companies that
compete in this sector include retail optical chains, such as LensCrafters, Cole
Vision, Pearle Vision, Wal-Mart, Eye Care Centers of America, Eyecare,
Consolidated Vision Group, Costco Wholesale, U.S. Vision, and D.O.C. Optics.
Retail optical operators compete on price, service, product availability and
location.

Several of our competitors have greater financial and other resources than
we have or may charge less for certain services than we do. However, we believe
the integrated nature of our business model provides significant competitive
advantages in the marketplace.

Distribution & Technology Division
----------------------------------

Our Distribution & Technology Division serves the professional eye care
practitioner market in the U.S. and Canada with optical products, collective
buying arrangements and software systems and support. We are establishing a
sales function, which will be equipped to communicate, and deliver, to the
professional eye care practitioner market the full range of our Distribution &
Technology Division's products and services.

Description

We sell optical and ophthalmic goods and related medical supplies to
professional eye care practitioners directly, through Wise Optical, one of the
largest contact lens distributors in the U.S. (See "--Recent Developments") and,
indirectly, through a "Buying Group" program, which is a specialized group
purchasing arrangement for ophthalmologists, optometrists and opticians. Under
the tradename CC Systems, OptiCare also designs, develops and markets advanced
practice management / point-of-sale computer systems for optometry and
ophthalmology practices and for retail optical locations as well as management
information systems for optical manufacturing laboratories.

Strategy

As a provider to the professional eye care practitioner of substantially
all of the products, services and software needed to successfully operate an eye
care practice, we intend to capitalize on the uniquely integrated nature of our
business.

We intend to expand our distribution of optical and ophthalmic goods and
medical supplies through leveraging Wise Optical's field sales/customer service
force of nearly 60 individuals nationwide. We also seek--through acquisition and
further internal development--to be in a position to offer a comprehensive suite
of computer software products specifically designed for a professional eye care
practice and/or an optical products manufacturing laboratory.

We further intend to develop a unified selling strategy, which cross-sells
products and services to customers within the Distribution & Technology Division
and which makes such products and services available to our other divisions and
their customers, as well. A common theme of that selling strategy is "operating
efficiency." Through Wise Optical and our Buying Group, we can provide our
professional eye care practitioner customers with one-stop-shopping--enabling
them to compete more effectively. Through CC Systems, we can provide many of
those same customers with the operating efficiencies which arise from
utilization of a fully-integrated suite of practice management and eyeglass
manufacturing software products.

We intend to expand our Buying Group and Wise Optical volume by directing,
as appropriate, our Consumer Vision Division's purchasing requirements through
the Buying Group or Wise Optical and by cross-selling such products and services
to professional eye care practitioners who are members of our Managed Vision
Division provider panels.

Market Position

We are one of the leading integrated providers in the U.S. of optical and
ophthalmic goods and related medical supplies and of software systems designed
for eye care practitioners and eyeglass manufacturing laboratories. Within the
contact lens market, Wise Optical is one of the largest distributors (to eye
care professionals) in the U.S. Wise Optical is also a distributor of ophthalmic
lenses, and sales of such lenses are the fastest growing segment of Wise
Optical's distribution business. Our Buying Group is also one of the largest of
its kind in the U.S. wholesale optical goods market. CC Systems' market share
for its practice management / point-of-sale and fabricating management operating
and information systems places it among the top five vendors in North America of
comparable products to the optical industry.

Customers

Our Wise Optical and Buying Group customers include independent
ophthalmology and optometric practices and opticians as well as the integrated
eye health centers and professional optometric practices of our Consumer Vision
Division. Wise Optical has an account base of approximately 22,500 customers,
most of whom are independent eye care practitioners. Over 3,500 eye care
professionals nationwide participate in our Buying Group. While we believe there
is some overlap between these groups of customers, we have not yet determined
its magnitude and potential impact on our operations.

Similarly, our software systems' customers are ophthalmology and optometry
practices, optical product dispensaries, and optical laboratories, based mainly
in North America. As of February 28, 2003, we had approximately 110 retail, 130
lens manufacturing, and 146 other customers using our eye care systems and
software services throughout the U.S. and Canada. The "other" category is
largely comprised of ophthalmology and optometry practices which use our remote
entry software to place with laboratories, which also use our software, orders
for custom manufactured lenses for their patients. We are not dependent on any
one, or on several, large customers. We believe that there will be increasing
demand for management and information systems solutions for independent
practitioners (who comprise the majority of practicing ophthalmologists and
optometrists) as well as for group practices. We believe these doctors and
opticians have the potential to benefit from our services in this area.

Products & Services

We sell optical and ophthalmic goods (e.g., contact lenses, ophthalmic
lenses, eyeglass frames and accessories) and related medical supplies to
professional eye care practitioners directly, through Wise Optical, and,
indirectly, through a "Buying Group" program, which is a specialized group
purchasing arrangement for ophthalmologists, optometrists and opticians. Wise
Optical is an authorized distributor of contact and ophthalmic lenses
manufactured by such major vendors as: Johnson & Johnson, Ciba Vision, Bausch &
Lomb, CooperVision, Ocular Sciences and Essilor. Wise Optical also sells Gelflex
contact lenses, manufactured by Gelflex Laboratories, and Extreme H2O, a contact
lens designed to withstand dehydration. Wise Optical is also an authorized Hilco
distributor, carrying its optical supplies, eyewear accessories, tools and
consumer products.

We also sell practice management and point-of-sale software, including
Internet-based remote order entry software, which captures and links patient
data, provides such data to a remote manufacturing location for immediate custom
processing of optical goods, such as eyeglasses and contact lenses, and
generates invoices and other record-keeping data. This software supports such
aspects of eye health practice management as: billing, collections,
record-keeping, production control and inventory control. Our systems work on a
stand-alone basis or can be integrated as "partners" with the proprietary
products of other manufacturers. One of the advantages of these systems is that
they involve a seamless interface from the point at which the patient orders
glasses, to the computer-driven eyeglass manufacturing phase, and to the billing
phase--reducing expense and minimizing the possibility of error.

Operations

Wise Optical purchases and takes possession of inventory and offers it for
sale via catalog and on its web site. Orders are taken by customer service
representatives, who are our employees, or are submitted by customers on-line.
To accommodate time-zone differences and to stay closer to its customers, Wise
Optical has customer service offices through which orders may be placed in
California, Oregon, Texas, Kansas and North Carolina. Orders are immediately
processed, picked, packed and shipped from the Wise Optical warehouse in
Yonkers, New York, on the same day they are received. Most orders are delivered
to customers the day after the orders were placed.

Our Buying Group leverages the purchasing strength of its approximately
3,500 members, making it possible for them to purchase goods on a discounted
basis from one or more suppliers chosen from our national panel of approximately
280 vendors. We enter into a non-exclusive account relationship with each of the
ophthalmologists, optometrists and opticians who are members of the Group. These
members may then place orders directly with our contracted vendors. The vendors
are required to furnish a discount to the purchasers, ship the product directly
to the practice and bill us at the predetermined price. We, in turn, bill the
participating practices and bear the credit risk. Earnings of the Buying Group
are based on the spread between the merchandise cost to us and the prices paid
for the merchandise by Buying Group members. Among our vendors, two, Marchon
Eyewear, Inc., and Safilo USA, Inc., receive approximately 25% of the business
of our Buying Group members. Five others, Silhouette Optical Ltd., Essilor of
America, Inc., Ciba Vision, Coopervision, Inc. and Viva International Group,
account for another 25% of such business. If one or more of these vendors should
cease to allow our members to purchase products from them through our Buying
Group, it could have a material adverse effect on our business.

CC Systems' sales are made on a direct basis and leads are developed
through various sources. These include: customer word-of-mouth and software
partner leads (Misys, IDX, Gerber Coburn, etc.) as well as trade show
attendance. Products are delivered, installed and supported by our installation
and support group and by our subcontractors. We also re-market computer and
network hardware, adding value through our software installation and
configuration.

Competition

There are 17 primary contact lens distributors in the U.S., with Wise
Optical being, we believe, the largest distributor of soft contact lenses. These
distributors compete on price and variety of products, which are based, in part,
on allowances and authorizations from the contact lens manufacturers. Buying
group organizations compete on the basis of price, size and purchasing power of
their members, the strength of their credit, and the strength of their supplier
agreements and relationships. We also compete with a range of systems and
software vendors which cater to eye health professionals. We believe we are
distinguished from our competition by our software products' sophisticated
interfaces, scalability and ease of modification.

While some of our competitors have greater financial and other resources
than we do, we believe that the comprehensive range of products, services and
software, which we offer to the professional eye care practitioner,
distinguishes us from many of those competitors. .

TRADEMARKS, DOMAIN NAMES AND ASSUMED NAMES

We own the following U.S. trademark registrations: OPTICARE(R)and the
miscellaneous curve design, which is the OptiCare Health Systems, Inc. logo; EYE
CARE FOR A LIFETIME(R); EYEWEAR AND EYE CARE FOR A LIFETIME(R); CONNECTICUT
VISION CORRECTION(R); LOSE THE GLASSES, KEEP THE VISION(R); THE DIFFERENCE IS
CLEAR(R); and KEEPING YOU AHEAD OF THE CURVE(R). Other trademarks for which
applications for U.S. registration are pending are: THE VISION OF HEALTH(TM)and
DOCTOR'S EXPRESS(TM). We also maintain a common law trademark in CLAIM IT(TM).

We own the following domain names: opticare.com; opticareeye.com;
opticare.net; opticare-ehn.com; opticarenas.net; opticareonline.com;
optical-online.com, wiseoptical.com, wisecontactus.com, yourlens.com,
wisevisiongroup.com, and wiseopticalonline.com.

We operate under the following assumed names: Wise Optical; Wise Optical
Vision Group; Wise/Corniche (California); Wise/Gulf Coast (Florida); Wise/North
Central (Minnesota); Wise/Contact US (New York); Wise/North West (Oregon);
Wise/South West (Texas); Wise/South East (North Carolina); Wise/Mid West
(Kansas).

We consider these trademarks, domain names and assumed names important to
our business. However, our business is not dependent on any individual trademark
or trade name.

EMPLOYEES

We and our professional affiliate have approximately 485 employees,
including 50 licensed ophthalmologists, optometrists and opticians and 39
ophthalmic assistants. These numbers include an aggregate of approximately 55
part-time personnel who work fewer than 30 hours per week. We believe that our
relations with our employees are good. We are not a party to any collective
bargaining agreement.

ITEM 2. PROPERTIES

We have executive offices in Waterbury, Connecticut; Yonkers, New York; and
Rocky Mount, North Carolina.

The Waterbury, CT facility, which contains corporate offices and an
integrated eye health center, is leased under three separate leases with
remaining terms of seven, nine, and nine years, respectively. These leases have
renewal options of 20, 20, and 10 years, respectively. The combined base rent is
$807,364 per year for a total of 43,592 square feet.

The facilities in Rocky Mount, NC, which contain offices for our Managed
Vision Division and Buying Group, are leased under one lease which began on
August 1, 2002 and which has a remaining term of five years. The base rent for
this facility is $184,000 per year for 19,355 square feet.

The Yonkers, NY facility, which contains offices for our Distribution &
Technology Division and a sales, service and fulfillment center for our Wise
Optical business, is leased under one lease which began in August 2000 and which
has a remaining term of eight years. The base rent for this facility is $415,875
per year for 27,575 square feet.

Our Distribution & Technology Division's CC Systems business is primarily
conducted from offices in Largo, Florida, which are leased under one lease which
began on October 1, 1999 and which has a remaining term of 18 months. The base
rent for this facility is $27,000 per year for 2,520 square feet.

The facilities in Waterbury, Connecticut, Rocky Mount, North Carolina and
Largo, Florida, described above, are each leased from parties that are
affiliated or associated with one or more of our present or former directors or
executive officers.

We lease 26 additional offices in the states of Connecticut, North
Carolina, Florida, Minnesota, California, Oregon, Kansas and Texas, principally
for our Consumer Vision and Distribution & Technology Division operations. These
leases have remaining terms of up to ten years. Many of these leases are also
subject to renewal options. We believe our properties are adequate and suitable
for our business as presently conducted.

ITEM 3. LEGAL PROCEEDINGS

HEALTH SERVICE ORGANIZATION LAWSUITS

In September and October 2001, the following actions were commenced:
Charles Retina Institute, P.C. and Steven T. Charles, M.D. v. OptiCare Health
Systems, Inc., filed in Chancery Court of Tennessee for the Thirtieth Judicial
District at Memphis; Eye Associates of Southern Indiana, P.C. and Bradley C.
Black, M.D. v. PrimeVision Health, Inc., filed in United States District Court,
Southern District of Indiana; and Huntington & Distler, P.S.C., John A. Distler,
M.D. and Anne C. Huntington, M.D. v. PrimeVision Health, Inc., filed in United
States District Court, Western District of Kentucky. Plaintiffs (ophthalmology
or optometry practices) in each of these actions alleged that our subsidiary,
PrimeVision Health, Inc. (referred to as "PrimeVision") defaulted under
agreements effective as of April 1, 1999 entitled Services Agreement (HSO Model)
(referred to as "Services Agreements") by failing to provide the services
allegedly required under those agreements in exchange for annual fees (referred
to as "HSO Fees") to be paid to PrimeVision. Plaintiffs also alleged that
PrimeVision repudiated any duty to perform meaningful services under the
agreements and never intended to provide meaningful services. Plaintiffs seek
declaratory relief that they are not required to make any payments of HSO Fees
to PrimeVision under the Services Agreements for a variety of reasons, including
that plaintiffs are discharged of any duty to make payments, there was no
termination of the agreements that would trigger an obligation by plaintiffs to
pay PrimeVision the amounts designated in the agreements as being owed upon
early termination (referred to as the "Buy-out Price"), the agreements contained
an unenforceable penalty, there was lack of consideration, and there was a
mutual and material misunderstanding. Plaintiffs also seek damages for
non-performance and breach of duty of good faith and fair dealing, and seek to
rescind the agreements for fraud in the inducement, material misrepresentation,
and mistake. Finally, plaintiffs seek punitive damages and attorneys' fees,
interest and costs.

In November 2001, PrimeVision commenced the following action: PrimeVision
Health, Inc. v. Charles Retina Institute and Steven T. Charles, M.D. filed in
United States District Court for the Eastern District of North Carolina, Western
District. In this action, PrimeVision sued in North Carolina, which is its
principal place of business, one of the practices which had, in an action cited
above, sued it in Tennessee. PrimeVision alleged that the Services Agreement and
a Transition Agreement, also entered into by Defendant and PrimeVision in April
1999, were part of an integrated transaction in which many practices (referred
to as the "Practices") that had previously entered into a physician practice
management (referred to as "PPM") arrangement with PrimeVision converted to a
health service organization (referred to as "HSO") model. As part of that
integrated transaction, the Practices (including Defendant) repurchased assets
that they had sold to PrimeVision in or about 1996 and were able to terminate
agreements entered into with PrimeVision in 1996 and the obligations thereunder.
PrimeVision sought a declaratory judgment that the Services Agreement is
enforceable and that Defendant must pay to PrimeVision the annual HSO Fees
required under the agreement or, alternatively, the Buy-out Price. PrimeVision
also filed denials of all of the material allegations of the complaints in the
Huntington & Distler and Eye Associates of Southern Indiana cases, and asserted
counterclaims to recover HSO Fees and the Buy-out Price.

The Multidistrict Litigation. On March 18, 2002, PrimeVision filed a motion
with the Judicial Panel on Multidistrict Litigation in Washington, D.C.
(referred to as the "Judicial Panel") to transfer the foregoing litigation to a
single federal district court for consolidated or coordinated pretrial
proceedings. Over the opposition of the plaintiffs, the Judicial Panel granted
the motion and ordered that all of the cases be consolidated in the U.S.
District Court for the Western District of Kentucky under the caption In re
PrimeVision Health, Inc. Contract Litigation, MDL 1466 ("MDL 1466").

In October and November 2002, PrimeVision commenced the following actions:

1. PrimeVision Health, Inc. v. The Brinkenhoff Medical Center, Inc.,
Michael Brinkenhoff, M.D., Tri-County Eye Institute, and Mark E. Schneider,
M.D., filed in the United States District Court for the Central District of
California;

2. PrimeVision Health, Inc. v. Robert M. Thomas, Jr., M.D., a medical
corporation, Robert M. Thomas, Jr., M.D., Jeffrey P. Wasserstrom, M.D., a
medical corporation, Jeffrey P. Wasserstrom, M.D., Lawrence S. Rice, a medical
corporation and Lawrence S. Rice, M.D., filed in the United States District
Court for the Southern District of California;

3. PrimeVision Health, Inc. v. The Milne Eye Medical Center, P.C. and
Milton J. Milne, M.D., filed in the United States District Court for the
District of Maryland;

4. PrimeVision Health, Inc. v. Eye Surgeons of Indiana, P.C., Michael G.
Orr, M.D., Kevin L. Waltz, M.D. and Surgical Care, Inc., in the United States
District Court for the Southern District of Indiana, Indianapolis Division;

5. PrimeVision Health, Inc. v. Downing-McPeak Vision Centers, P.S.C. and
John E. Downing, M.D., in the United States District Court for the Western
District of Kentucky, Bowling Green Division;

6. Prime Vision Health, Inc. v. HCS Eye Institute, P.C., Midwest Eye
Institute of Kansas City, John C. Hagan, III, M.D. and Michael Somers, M.D.,
filed in the United States District Court for the Western District of Missouri;
and

7. PrimeVision Health, Inc. v. Delaware Eye Care Center, P.A., a
professional corporation; and Gary Markowitz, M.D., filed in the Superior Court
of the State of Delaware, New Castle County.

PrimeVision requested the Judicial Panel to transfer all of the actions
except No. 7 to Kentucky and consolidate them as part of MDL 1466. (Action 7
could not be transferred because it was filed in state court.) The Judicial
Panel entered a conditional transfer order for such actions, and because there
was no opposition to transfer and consolidation in Actions 4, 5 and 6, they are
now part of MDL 1466. One practice defendant in Action 1, and the defendants in
Actions 2 and 3, have opposed transfer to MDL 1466. The issue of whether those
actions should be transferred has been fully briefed and is on the Judicial
Panel's hearing calendar for March 27, 2003. The Judicial Panel has ordered that
the issue will be determined without oral argument.

The actions filed by PrimeVision contain similar allegations as the action
PrimeVision filed against Charles Retina Institute in North Carolina District
Court as described above. Instead of declaratory relief, however, PrimeVision
seeks money damages for payment of the contractual buy-out price.

All of the defendants have denied the material allegations of the
complaints, and the defendants in Milne, Eye Surgeons of Indiana,
Downing-McPeak, HCS Eye Institute and Delaware Eye Institute have asserted
counterclaims and seek relief similar to the claims asserted and relief sought
by the practices in the Charles Retina, Eye Associates of Southern Indiana and
Huntington & Distler cases. PrimeVision has denied all of the material
allegations of the counterclaims.

Under the Court's scheduling order in MDL 1466, discovery is to be
completed by December 1, 2003. Discovery is currently in its initial stages.
Disclosures under Rule 26(a)(1) of the Federal Rules of Civil Procedure,
requests for the production of documents and interrogatories, and written
responses thereto have been exchanged among the parties in the cases initially
made part of MDL 1466, although no documents have yet been produced by any
party. The second wave of cases made part of MDL 1466 are not as far along in
discovery, and there has been no discovery yet in the cases where transfer is
being opposed nor in action No. 7 referred to above. PrimeVision intends to
vigorously defend against the Practices' claims and vigorously prosecute its
claims against the Practices. PrimeVision also is willing to discuss a potential
settlement with any or all of the Practices, although there is no indication
that the Practices are prepared to discuss settlement on the same general basis
or terms as PrimeVision. Because these actions are in their initial stages, we
are unable to form an opinion as to the likely outcome or the amount or range of
potential loss, if any.

During 2002, we reached settlement with one HSO Practice with which we were
in litigation and with 11 other practices with which we were not in litigation
but where there was a mutual desire to disengage from the Services Agreements.
While we continue to meet our contractual obligations by providing the requisite
services under our Services Agreements, we are in the process of disengaging
from a number of these arrangements.

OTHER LITIGATION

in investigating a potential purchase of certain assets, that we misled it with
respect to our financial condition, and, as a result, Plaintiff has suffered
damages. Plaintiff seeks specific performance of the Asset Purchase Agreement
and an injunction prohibiting us from interfering with concluding the
transactions contemplated by the Asset Purchase Agreement. Further, Plaintiff
alleges a breach of contract with regard to the Asset Purchase Agreement.
Plaintiff further alleges we engaged in innocent misrepresentation, negligent
misrepresentation, intentional and fraudulent misrepresentation, and unfair
trade practices with respect to the Asset Purchase Agreement.

We filed an answer to the complaint denying Plaintiff's allegations and
indicating we believe they are baseless and without merit. We also met with
Plaintiff in an unsuccessful settlement effort. As of February 28, 2003, we were
preparing for discovery. We intend to vigorously defend our position, but the
case is in its early stages and, therefore, no assurance can be given of a
favorable outcome.

THREATENED LITIGATION

In the fourth quarter of 2002, we received notice from an attorney
representing a physician employed by our professional affiliate regarding a
possible employment claim and expressing disagreement with the computation of
physicians' salaries in the professional affiliate, alleged mismanagement of our
company and/or the professional affiliate, possible conflicts of interests and
unlawful practice and/or compensation issues. We have reviewed these allegations
and believe they are unmeritorious, however, should such a claim proceed there
can be no assurance of a favorable outcome. In an attempt to amicably resolve
these issues, the parties have agreed to non-binding mediation which is
currently scheduled in the second quarter of 2003.

REGULATORY PROCEEDINGS

North Carolina Board of Optometry Proceedings

On August 2, 2002, the North Carolina Board of Optometry approved the sale
of our North Carolina retail optometry operations to Optometric Eye Care
Centers, P.A. Although regulatory proceedings convened by the North Carolina
Board of Optometry in exercise of its continuing authority to oversee
implementation of a consent order entered in December 1999 remain pending, we
believe our involvement in this matter is at a conclusion.

Optometric Eye Care Center, P.A. Claim

On August 12, 2002, OptiCare and Optometric Eye Care Centers, P.A.
consummated a transaction for the sale of the assets and certain liabilities of
our North Carolina retail optometry operations that resolved a dispute between
us, which had centered on our performance under a services agreement we entered
into with Optometric Eye Care Centers, P.A. in 1999.

Billing Communication Error in Connecticut

OptiCare Eye Health Centers, Inc., our Connecticut subsidiary, and the
Attorney General of Connecticut have agreed to terms of a consensual
administrative order relating to confusing statements sent to certain of our
customers in the 1995-99 period showing balances due to us. Although we deny
liability and believe that any amounts mistakenly paid to us were refunded in
full as soon as the error was discovered, we have agreed to pay a fine
equivalent to $133,047 ($100,462 in cash and $32,585 in glasses for the visually
impaired).

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

We did not submit any matters to a vote of security holders in the fourth
quarter of 2002.

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the name, age and position of each of our
directors and executive officers. Each director will hold office until the next
annual meeting of stockholders or until his or her successor has been elected
and qualified. Our executive officers are appointed by and serve at the
discretion of the Board of Directors.

NAME AGE POSITION

Dean J. Yimoyines, M.D. 55 Chairman of the Board of Directors and Chief Executive Officer

Eric J. Bertrand 30 Director

Gordon A. Bishop 54 President of Consumer Vision Division

William A. Blaskiewicz 40 Vice President and Chief Financial Officer

James Carmona, Jr. 53 Chief Information Officer
President of technology sector of Distribution & Technology Division

Stephen Cohen 55 President of CC Systems

David B. Cornstein 63 Director

Norman S. Drubner, Esq. 62 Director

T. Gregory Eastburn 46 President of distribution sector of Distribution & Technology Division

Jason M. Harrold 33 President of Managed Vision Division

Mark S. Hoffman 41 Director

Richard L. Huber 66 Director

Clark A. Johnson 71 Director

Melvin Meskin 58 Director

Mark S. Newman 53 Director

Christopher J. Walls 39 Vice President and General Counsel

Lance A. Wilkes 36 President and Chief Operating Officer

Dr. Yimoyines has served as Chairman of the Board and Chief Executive
Officer since August 13, 1999. Dr. Yimoyines also served as our President from
August 13, 1999 to June 10, 2002. Dr. Yimoyines is a founder of OptiCare Eye
Health Centers, Inc. and has served as the Chairman, President and Chief
Executive Officer of OptiCare Eye Health Centers, Inc. since 1985. Dr. Yimoyines
has been instrumental in the development and implementation of OptiCare Eye
Health Centers, Inc.'s business for nearly 20 years. He graduated with
distinction from the George Washington School of Medicine. He completed his
ophthalmology residency at the Massachusetts Eye and Ear Infirmary, Harvard
Medical School. Dr. Yimoyines completed fellowship training in vitreoretinal
surgery at the Retina Associates in Boston. He is a graduate of the OPM (Owner /
President Management) program at Harvard Business School and is a Fellow of the
American Academy of Ophthalmology.

Mr. Blaskiewicz has served as Chief Financial Officer of OptiCare since
September 2001. Prior to that, he was Director of Finance, Corporate Controller,
Vice President of Finance and, most recently, Chief Accounting Officer for
OptiCare from February 1998 to August 2001. Prior to joining OptiCare, Mr.
Blaskiewicz held various positions, including Director of Budgeting, with
Massachusetts Mutual Life Insurance Company (1993 to 1998), Manager with Ernst &
Young (1989 to 1993) and Field Auditor with the Internal Revenue Service (1986
to 1989). He holds a Master of Business Administration from the University of
Hartford and a Bachelor of Science in Accounting from Central Connecticut State
University, and is a member of the American Institute of Certified Public
Accountants (AICPA), the Connecticut Society of Certified Public Accountants
(CSCPA) and the Institute of Management Accountants (IMA). Mr. Blaskiewicz is a
certified public accountant in Connecticut and holds Certified Management
Accountant (CMA) and Certified in Financial Management (CFM) designations from
the IMA.

Mr. Bertrand has been a member of the Board of Directors since January 2002
and is a Vice President of Palisade Capital Management, LLC, an affiliate of
Palisade Concentrated Equity Partnership, L.P., where he has held a series of
positions of increasing responsibility since 1997. From 1996 to 1997, Mr.
Bertrand held a position with Townsend Frew & Company, a healthcare-focused
investment banking boutique. From 1994 to 1996, he held positions with

Aetna, Inc.'s private equity group, focusing on middle market leveraged buy-outs
and larger private equity investments. Mr. Bertrand is a Director of Versura,
Inc. and Control F-1. He holds a Bachelor of Science in Business Administration
from Bryant College and a Master of Business Administration in Finance and
Entrepreneurship with a certificate in the Digital Economy from New York
University.

Mr. Bishop has served as President of our Consumer Vision Division since
May 2001. From August 1999 to November 2002, he also was President of our Buying
Group. From June 1998 to August 1999, Mr. Bishop directed the retail operations
of OptiCare Eye Health Centers, Inc. Mr. Bishop has over 30 years' of experience
in the optical industry, having served in a variety of capacities with companies
in the U.S. and Canada. From August 1997 to April 1998, he served as Vice
President of Operations for Public Optical. From July 1994 to April 1997, he
served as Operations Manager for Vogue Optical. From June 1990 to July 1994, he
held positions of increasing responsibility with Standard Optical Ltd.,
ultimately holding the position of Vice President of Operations for that
company. Mr. Bishop received his Business Administration Diploma from
Confederation College of Applied Arts and Technology and subsequently obtained
an Ophthalmic Dispensing Diploma from Ryerson Polytechnic University. He holds a
variety of eye care professional certifications, including certification by the
American Board of Opticianry. He holds a Fellowship in the National Academy of
Opticianry.

Mr. Carmona has served as Chief Information Officer for OptiCare and
President of the technology sector of our Distribution & Technology Division
since January 2003. From May 2000 to September 2002, Mr. Carmona served two
related companies, KPC Information Technologies and Forte Information Services,
Inc., as President and President and Chief Operating Officer, respectively.
Forte Information Services, Inc. is a healthcare information technology and
outsourcing company. From 1998 to 2000, Mr. Carmona was Executive Vice President
and Chief Operating Officer of International Systems Consultants, Inc. While in
that capacity, from September 1999 to April 2000, under a contract between
International Systems Consultants, Inc. and KPC Medical Management, Mr. Carmona
served as Chief Information Officer of the latter. Prior to that, Mr. Carmona
was Vice President and Chief Information Officer for First Physician Care, Inc.
and Chief Information Officer for Blue Cross Blue Shield of Massachusetts. Mr.
Carmona earned a Bachelor of Science degree in Economics and Business
Administration from Park University in Kansas City, Missouri.

Mr. Cohen has served as President of CC Systems, since October 1999. CC
Systems develops and markets software for the ophthalmologic industry, including
production, management and inventory systems for laboratories, ophthalmologists,
optometrists and opticians. Prior to founding CC Systems in 1986, Mr. Cohen was,
from 1981 to 1985, General Manager at Welling International, an optical frame
and lens distributor; from 1976 to 1980, President of Plastic Plus in Toronto,
one of the first plastic lens fabricators in Canada; and, from 1972 to 1975,
National Sales Manager for Monarch Optical, a distributor of frames, lenses and
supplies to the optical industry in Canada. Mr. Cohen has over 30 years' of
experience in the optical industry.

Mr. Cornstein has been a member of the Board of Directors since May 2002
and is Chairman Emeritus and remains a Director of Finlay Enterprises, Inc., one
of the leading retailers of fine jewelry in the United States. He served as
Chairman of Finlay Enterprises from May 1993 until his retirement in 1999, and
has been a Director of Finlay Enterprises since its inception in 1988. From
December 1988 to January 1996, Mr. Cornstein was President and Chief Executive
Officer of Finlay Enterprises, Inc. Mr. Cornstein is a Principal of Pinnacle
Advisors Limited and a Director of TeleHubLink Corporation. Mr. Cornstein is
Chairman of the New York City Off-Track Betting Corporation; Vice Chairman of
the New York City Economic Development Corporation; Chairman of the New York
Olympic Games Commission; and a Commissioner of the Battery Park City Authority.
He is a member of the Board of Trustees of the New York Law School.

Mr. Drubner has been a member of the Board of Directors since November
2001; is senior partner in the law firm of Drubner, Hartley & O'Connor, which he
founded in 1971; and is the owner of Drubner Industrials, a commercial real
estate brokerage firm. Mr. Drubner has been practicing law in Connecticut since
1963, specializing in real estate, zoning, and commercial transactions. He is a
member of the Connecticut Bar and the Waterbury, Connecticut Bar Association.
Mr. Drubner has been admitted to practice before the U.S. District Court,
District of Connecticut. He is a former trustee of Teikyo Post University. Mr.
Drubner holds a Bachelor of Arts degree from Boston University and received his
Juris Doctor degree from Columbia University in 1963.

Mr. Eastburn has served as President of the distribution sector of our
Distribution & Technology Division since joining the company in November 2002.
From 1999 to November 2002, Mr. Eastburn was President of Axiom Laboratories,
Inc., a distributor of patented nutritional and personal care products. From
1997 to 1999, Mr. Eastburn was Senior Vice President, Sales and Marketing for
Amrion, Inc., a manufacturer and marketer of dietary supplements and a division
of Whole Foods Markets, Inc. He spent the first 16 years of his career with
Playtex Products, Inc., where he served as Vice President, Field Sales from 1992
to 1996. He holds a Bachelor of Arts degree in communications from California
State University, Northridge.

Mr. Harrold has served as President of the Managed Vision Division since
August 2000. Mr. Harrold served as Chief Operating Officer of the Managed Vision
Division from January 2000 through July 2000, before being appointed its
President. Mr. Harrold served as Vice President of Operations from July 1999 to
December, 1999, and Vice President of Quality Management from July 1996 to June
1999 for the Managed Vision Division. From November 1993 to July 1996, Mr.
Harrold was employed by Alcon Laboratories as a sales representative for its
vision care division. Mr. Harrold graduated from the University of South
Carolina in 1992 with a Bachelor of Science degree with dual majors in Business
Administration for Management Science and Insurance and Economic Security. He
earned a Masters degree in Business Administration from Appalachian State
University in 1993.

Mr. Huber has been a member of the Board of Directors since July 2002; is a
Senior Director of Kissinger McLarty Associates, an international advisory
partnership led by Henry Kissinger and Mack McLarty; and is Chief Executive
Officer of Norte Sur, a private equity firm targeting Latin America. Mr. Huber
is former Chairman, President and Chief Executive Officer of Aetna, Inc., the
Hartford, CT-based insurance company, which he joined in 1995. At Aetna, Mr.
Huber was responsible for a number of strategic acquisitions, such as NYLCare,
PruCare and USHealthcare, making Aetna the largest healthcare insurer in the
world. Prior to Aetna, Mr. Huber had a 35-year career in banking, including four
years as Vice Chairman and Director of Continental Bank and senior management
positions at Chase Manhattan and Citibank. Mr. Huber serves as Director of
Danielson Holding Company and was a member of the Congressional International
Financial Institutions Advisory Commission. He is a former Coast Guard officer
and holds a Bachelor of Arts degree from Harvard College.

Mr. Hoffman has been a member of the Board of Directors since January 2002
and is a Managing Director of Palisade Capital Management, LLC, an affiliate of
Palisade Concentrated Equity Partnership, L.P., which he joined upon its
formation in 1995. He is a Director of Refac, a publicly-traded company, as well
as several privately held companies, including Berdy Medical Systems, C3I,
Telelogue, Marco Group and Neurologix. Mr. Hoffman is a graduate of the Wharton
School at the University of Pennsylvania.

Mr. Johnson has been a member of the Board of Directors since May 2002 and
is Chairman of PSS World Medical, Inc., a national distributor of medical
equipment and supplies to physicians, hospitals, nursing homes, and diagnostic
imaging facilities. He is a Director of MetroMedia International Group,
Neurologix, Inc., World Factory, Inc. and Refac; is retired Chairman and Chief
Executive Officer of Pier 1 Imports; and is former Executive Vice President and
Director of the Wickes Companies, Inc. Mr. Johnson, who attended the University
of Iowa, completed the Advanced Management Program at the Harvard Business
School. He is former Chairman of the American Business Conference, former
trustee of Texas Christian University and is a former Chief Executive Officer
Participant in the National Conference on Ethics in America.

Mr. Meskin has been a member of the Board of Directors since January 2002
and is retired Vice President-Finance-National Operations of Verizon, the
combined Bell Atlantic/GTE telecommunications company. Mr. Meskin joined New
York Telephone in 1970 and held a variety of line and staff assignments with the
company over a 31-year career. In 1994, he was named Vice President-Finance and
Treasurer for NYNEX Telecommunications. When Bell Atlantic and NYNEX merged, he
was appointed Vice President-Finance and Comptroller of Bell Atlantic. Mr.
Meskin is a member of the Board of Trustees of Nyack (New York) Hospital and the
Board of Trustees of the Post Graduate Center for Mental Health.

Mr. Newman has been a member of the Board of Directors since May 2002 and
is Chairman of the Board, President and Chief Executive Officer of DRS
Technologies, Inc., a leading supplier of defense electronics

systems to government and commercial customers worldwide. Mr. Newman joined DRS
Technologies in 1973, served many years as its Chief Financial Officer, was
named a Director in 1988, became President and Chief Executive Officer in 1994,
and was elected Chairman of the Board. Mr. Newman serves as Vice Chairman of the
American Electronics Association, and as a Director of the New Jersey Technology
Council, SSG Precision Optronics and the Congoleum Corporation where he chairs
the Audit Committee. He is a member of the Board of Governors of the Aerospace
Industries Association of America, and also serves as a member of the Navy
League of the United States, the National Defense Industrial Association, the
Association of the U.S. Army, and the American Institute of Certified Public
Accountants, among other professional affiliations. Mr. Newman holds a Bachelor
of Arts degree in Economics from the State University of New York at Binghamton
and a Master of Business Administration from Pace University. He is also a
C.P.A.

Mr. Walls has served as Vice President and General Counsel of OptiCare
since February 2002. Prior to joining OptiCare, from December 2000 to February
2002, Mr. Walls was Vice President, Corporate Counsel and Corporate Secretary
for Outpost.com, a technology company in Connecticut. Prior to that, from
October 1999 to December 2000, he was Corporate Counsel, Vice President of
Business Affairs and Assistant Corporate Secretary with Real Media Inc., an
international technology start-up. From December 1995 to October 1999, Mr. Walls
served as an in-house litigator with St. Paul Fire and Marine Insurance Company.
His professional career also included private practice concentrating on
litigation that included medical malpractice defense and complex insurance
administrative proceedings. Mr. Walls received his Bachelor of Arts degree from
the University of Dayton and his Juris Doctor degree from Widener University
School of Law.

Mr. Wilkes has served as President and Chief Operating Officer of OptiCare
since June 10, 2002. From 2001 to June 2002, Mr. Wilkes served as Senior Vice
President of Business Development for CIGNA Health Services, a unit of CIGNA
Corp. During his tenure with CIGNA, Mr. Wilkes was responsible for the
development of new specialty healthcare businesses, including the founding of
CIGNA Vision Care. From 1999 to 2001, Mr. Wilkes was head of strategy and
mergers & acquisitions for Aetna USHealthcare, a unit of Aetna Inc. From 1989 to
1999, Mr. Wilkes held a variety of other executive positions at Aetna in
finance, marketing and business development. A graduate of Brown University, Mr.
Wilkes holds a Masters degree in Economics and Corporate Finance from Trinity
College.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Trading in OptiCare Common Stock

Our common stock is traded on the American Stock Exchange under the symbol
"OPT". The high and low closing prices for the periods presented are based on
trades effected on the American Stock Exchange.

2002 HIGH LOW
---- ---- ---
4th Quarter $0.44 $ 0.23
3rd Quarter 0.31 0.20
2nd Quarter 0.45 0.15
1st Quarter 0.45 0.13

2001 HIGH LOW
---- ---- ---
4th Quarter * $0.160 $0.100
3rd Quarter * - -
2nd Quarter * 0.290 0.200
1st Quarter 0.625 0.320

* Trading in our common stock was suspended by the American Stock Exchange from
April 20, 2001 through December 11, 2001.

On February 28, 2003, the last reported sale price of our common stock on
the American Stock Exchange was $0.65 per share. As of February 28, 2003, there
were approximately 200 stockholders of record of our common stock. The number of
record holders was determined from the records of our transfer agent, Mellon
Investor Services, LLC, and does not include beneficial owners of our common
stock whose shares are held in the names of various securities brokers, dealers
and registered clearing agencies. We believe the number of beneficial holders of
our common stock is approximately 1,500.

We have never paid any cash dividends on our common stock and do not intend
to pay any cash dividends on our common stock for the foreseeable future. It is
our present policy that any retained earnings will be used for repayment of
indebtedness, working capital, capital expenditures and general corporate
purposes. Furthermore, we are precluded from declaring or paying any cash
dividends on our common stock, or making a distribution to our stockholders
under the covenants of our loan agreement with our senior lender, until the
termination of such agreement and the repayment of all amounts due to such
lender. Additionally, we are precluded from declaring or paying any cash
dividends on our common stock, or making a distribution to our stockholders
under the terms of a senior subordinated secured note issued to Palisade
Concentrated Equity Partnership, L.P., our majority shareholder, until the
termination of such note and the repayment of all amounts due to Palisade. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources")

American Stock Exchange Listing

On April 20, 2001, the American Stock Exchange suspended trading of our
common stock. The exchange did not permit trading in the stock from that date
until December 12, 2001 principally because we had not filed our Annual Report
on Form 10-K for the year ended December 31, 2000, or our Quarterly Reports on
Form 10-Q for the quarters ended March 31, June 30 and September 30, 2001. We
filed all those reports by December 3, 2001, and the exchange thereafter
permitted trading to resume on December 12, 2001.

By letter dated November 19, 2001, the staff of the American Stock Exchange
advised us that it would recommend to the exchange's Committee on Securities the
delisting of our common stock. We appealed such recommendation and a hearing on
the appeal was held before the Committee on Securities on January 29, 2002. The
Committee decided at that time to postpone a determination of whether or not to
delist our common stock pending timely receipt of our Annual Report on Form 10-K
for the year ended December 31, 2001, and review of that report by the Committee
and the staff of the exchange. On April 12, 2002, the American Stock Exchange
advised us that its Committee on Securities had determined not to recommend to
its Adjudicatory Council to file an application with the Securities and Exchange
Commission to strike our common stock from listing and registration on the
exchange. It did so based upon information we presented, including our Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 and information
concerning our Capital Restructuring Transactions, which were completed on
January 25, 2002. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources") We
remain subject to a 12-

month follow-up period during which we are subject to review by the exchange to
ensure that we do not fall below any of the exchange's continued listing
requirements. As of February 28, 2003, we believe we are in compliance with
these requirements.

We cannot provide assurances that our common stock will continue to be
listed without further suspensions, or that the exchange will not de-list our
common stock in the future. The exchange's rules for continued listing include
stockholders' equity requirements, which we may not meet if we experience
further losses; and market value requirements, which we may not meet if the
price of our common stock does not increase.

Recent Sales of Unregistered Securities

In December 2002, we issued an aggregate of 17,500,000 shares of common
stock to two of our shareholders, including Palisade, upon their exercise of
warrants at an exercise price of $0.14 per share. We received proceeds from the
exercise of these warrants totaling $2,450,000.

On December 20, 2002, we granted options to purchase 710,000 shares of
common stock under our Amended and Restated 2002 Stock Incentive Plan, at an
exercise price of $0.36 per share.

On February 7, 2003, we issued 750,000 shares of common stock, with an
estimated fair value of approximately $330,000, as part of the purchase price
consideration for our acquisition of Wise Optical.

On February 28, 2003, under our Amended and Restated 2002 Stock Incentive
Plan, we granted an aggregate of 225,000 shares of restricted stock, with an
estimated fair value of $146,250, and options to purchase an aggregate of
773,000 shares of common stock at an exercise price of $0.65 per share.

The above were private transactions not involving a public offering and
were exempt from the registration provisions of the Securities Act pursuant to
Section 4(2) thereof. No underwriter was engaged in connection with the
foregoing sales of securities. We have reason to believe that: (i) all of the
foregoing purchasers were familiar with or had access to information concerning
our operations and financial condition, (ii) all of those individuals purchasing
securities represented that they acquired the shares for investment and not with
a view to the distribution thereof, and (iii) other than with respect to the
options, the foregoing purchasers are accredited investors within the meaning of
Regulation D promulgated under the Securities Act. At the time of issuance, all
of the foregoing securities were deemed to be restricted securities for purposes
of the Securities Act and the certificates representing such securities bear, or
will bear, legends to that effect.

ITEM 6. SELECTED FINANCIAL DATA

The following selected historical consolidated financial data has been
derived from audited historical financial statements and should be read in
conjunction with our consolidated financial statements and the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

OptiCare in its present form is the result of mergers completed on August
13, 1999 among Saratoga Resources, Inc., PrimeVision Health, Inc. and OptiCare
Eye Health Centers, Inc. For accounting purposes, PrimeVision was treated as the
accounting acquirer and, therefore, the predecessor business for historical
financial statement reporting purposes. During 2002, we sold the net assets of
our retail optometry operations in North Carolina and accounted for the sale as
a discontinued operation. Accordingly, historical amounts presented below have
been restated to reflect discontinued operations treatment. On February 7, 2003
we acquired Wise Optical. (See "Business --Recent Developments") The historical
results presented below do not include the results of Wise Optical and are not
indicative of our future financial condition or results of operations.

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
(in thousands, except per share data) 2002 2001 2000 1999 (1) 1998
---- ---- ---- -------- ----

STATEMENT OF OPERATIONS DATA:
Total net revenues $91,531 $94,082 $109,346 $66,944 $44,926
Income (loss) from continuing operations
available to common stockholders (2) $(979) $2,687 $(14,686) $(578) $(6,131)
Weighted average shares outstanding (3):
Basic 12,552 12,795 12,354 4,776 2,256
Diluted 12,552 13,214 12,354 4,776 2,256
Income (loss) from continuing operations
per share available to common stockholders (2) :
Basic and diluted $(0.07) $0.21 $(1.19) $(0.12) $(2.72)

(1) We acquired OptiCare Eye Health Centers, Inc. on August 13, 1999 and Cohen
Systems, Inc. (now doing business as "CC Systems") on October 1, 1999,
which were accounted for as purchases. Accordingly, the results of
operations of OptiCare Eye Health Centers, Inc. and Cohen Systems, Inc. are
included in the historical results of operations since September 1, 1999
and October 1, 1999, respectively, the deemed effective dates of the
acquisitions for accounting purposes.

(2) Includes the effect of goodwill amortization of $943, $943, $605 and $284
in 2001, 2000, 1999 and 1998, respectively. The amortization of goodwill
was discontinued in 2002 pursuant to SFAS No. 142. Also includes preferred
stock dividends of $531, $600 and $1,200 in 2002, 1999 and 1998,
respectively.

(3) The weighted averages of common shares outstanding prior to 2000 have been
adjusted to reflect the conversion associated with the reverse merger with
Saratoga in 1999.

AS OF DECEMBER 31,
-------------------------------------------------------------------
(in thousands) 2002 2001 2000 1999 1998
---- ---- ---- ---- ----

BALANCE SHEET DATA:
Net assets of discontinued operations $ - $ 9,494 $10,051 $10,647 $ 10,078
Total current assets 12,904 20,583 14,913 21,345 20,237
Goodwill and other intangibles, net 21,869 22,050 23,161 25,207 595
Total assets 45,105 59,742 55,513 66,740 26,556
Total current liabilities 10,668 17,128 49,454 20,654 51,198
Total debt (including current portion) 19,486 34,393 34,058 42,956 39,750
Mandatorily redeemable preferred stock 4,487 - - - 9,200
Total stockholders' equity (deficit) $ 10,652 $ 6,982 $ 3,877 $ 5,274 $(34,690)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with
our consolidated financial statements and notes thereto which are included
elsewhere in this Annual Report on Form 10-K. (See "Index to Financial
Statements" beginning at page F-1.)

Overview. We are an integrated eye care services company focused on vision
benefits management (managed vision), the distribution of products and software
services to eye care professionals, and consumer vision services, which includes
retail optical sales and eye care services to patients.

In May 2002, our Board of Directors approved management's plan to dispose
of substantially all of the net assets relating to our retail optometry
operations in North Carolina. The sale was completed in August 2002 and

was accounted for as a discontinued operation.

In addition, during the third quarter of 2002, we modified our strategic
vision and realigned our business into the following three reportable operating
segments: (1) Managed Vision, (2) Consumer Vision, and (3) Distribution &
Technology. Our Managed Vision Division contracts with insurers, managed care
plans and other third party payers to manage claims payment administration of
eye health benefits for contracting parties. Our Consumer Vision Division sells
retail optical products to consumers and operates integrated eye health centers
and surgical facilities in Connecticut where comprehensive eye care services are
provided to patients. Our Distribution & Technology Division provides products
and services to eye care professionals (ophthalmologists, optometrists and
opticians). This division operates a Buying Group program for optical and
ophthalmic goods and medical supplies, and develops and sells technology systems
and software to eye care professionals.

In addition to these divisions, we receive income from other non-core
operations and transactions, including our health service organization ("HSO")
operation which receives fee income for providing certain support services to
individual ophthalmology and optometry practices. While we continue to provide
the obligatory services to these practices, we are in the process of generally
disengaging from a number of these operations. (See "Legal Proceedings --Health
Services Organization Lawsuits")

As a result of the sale of our retail optometry division in North Carolina
and the realignment of our business into these three reportable operating
segments, historical amounts previously reported have been restated to reflect
discontinued operations treatment and to conform to our current operating
segment presentation.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at the
date of our financial statements. Actual results may differ from these estimates
under different assumptions or conditions.

For a detailed discussion on the application of these and other accounting
policies, see Note 2 in the "Notes to the Consolidated Financial Statements." We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.

Services Revenue

Through our affiliated professional corporation, our Consumer Vision
Division provides to consumers comprehensive eye care services, including
medical and surgical treatment of eye diseases and disorders by
ophthalmologists, and vision measuring and non-surgical treatments and
correction services by optometrists. We charge a fee for providing the use of
our ambulatory surgery center to professionals for surgical procedures. Our
ophthalmic, optometric and ambulatory surgery center services are recorded at
established rates, reduced by an estimate for contractual allowances and
doubtful accounts. Contractual allowances arise due to the terms of certain
reimbursement contracts with third-party payers that provide for payments to us
at amounts different from our established rates. The contractual allowance
represents the difference between the charges at established rates and estimated
recoverable amounts and is recognized in the period the services are rendered.
The contractual allowance recorded is estimated based on an analysis of
collection experience in relation to amounts billed and other relevant
information. Any differences between estimated contractual adjustments and
actual final settlements under reimbursement contracts are recognized as
contractual adjustments in the period of final settlements.

Medical Claims Expense

Claims expense is recorded as provider services are rendered and includes
an estimate for claims incurred but not reported. Reserves for estimated
insurance losses are determined on a case by case basis for reported claims,

and on estimates based on our experience for loss adjustment expenses and
incurred but not reported claims. These liabilities give effect to trends in
claims severity and other factors which may vary as the losses are ultimately
settled. We believe that our estimates of the reserves for losses and loss
adjustment expenses are reasonable; however, there is considerable variability
inherent in the reserve estimates. These estimates are continually reviewed and,
as adjustments to these liabilities become necessary, such adjustments are
reflected in current operations in the period of the adjustment.

Goodwill

Goodwill, which arises from the purchase price exceeding the assigned value
of net assets of acquired businesses, represents the value attributable to
unidentifiable intangible elements being acquired. Of the total goodwill
included on our consolidated balance sheet, approximately 58% is recorded in our
Managed Vision segment, 22% in our Consumer Vision segment and 20% in our
Distribution & Technology segment.

On an annual basis, or as circumstances dictate, management reviews
goodwill and evaluates events or other developments that may indicate impairment
in the carrying value. The evaluation methodology for potential impairment is
inherently complex, and involves significant management judgement in the use of
estimates and assumptions. We use multiples of revenue and earnings before
interest, taxes, depreciation and amortization of comparable entities to value
the reporting unit being evaluated for goodwill impairment.

We evaluate impairment using a two-step process. First, we compare the
aggregate fair value of the reporting unit to its carrying amount, including
goodwill. If the fair value exceeds the carrying amount, no impairment exists.
If the carrying amount of the reporting unit exceeds the fair value, then we
compare the implied fair value of the reporting unit's goodwill with its
carrying amount. The implied fair value is determined by allocating the fair
value of the reporting unit to all the assets and liabilities of that unit, as
if the unit had been acquired in a business combination and the fair value of
the unit was the purchase price. If the carrying amount of the goodwill exceeds
the implied fair value, then goodwill impairment is recognized by writing the
goodwill down to the implied fair value.

Events that may indicate goodwill impairment include significant or adverse
changes in business or economic climate, an adverse action or assessment by a
regulator, unanticipated competition, loss of key personnel, and the sale or
expected sale/disposal of a reporting unit. Due to uncertain market conditions
it is possible that that the financial information used to support our goodwill
may change in the future, which could result in non-cash charges that would
adversely affect our results of operations and financial condition.

Income Taxes

We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" which requires an
asset and liability method of accounting for deferred income taxes. Under the
asset and liability method, deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis using enacted tax rates expected to apply to taxable
income in the years the temporary differences are expected to reverse. Our
determination of the likelihood that deferred tax assets can be realized is
based on our examination of available evidence, which involves estimates and
assumptions . We consider future market growth, forecasted earnings, future
taxable income and known future events in determining the need for a valuation
allowance. In the event we were to determine that we would not be able to
realize all or part of our net deferred tax assets in the future, an adjustment
to the deferred tax assets would be charged to earnings in the period such
determination is made.

RESULTS OF OPERATIONS

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Managed Vision revenue. Managed Vision revenue represents fees received
under our managed care contracts.

Managed Vision revenue increased to $29.4 million for the year ended December
31, 2002, from $29.0 million for the year ended December 31, 2001, an increase
of $0.4 million or 1.5%. Managed Vision revenue increased due to new contracts
and growth within existing contracts, partially offset by a decrease in revenue
largely due to the non-renewal of three contracts.

Product sales revenue. Product sales primarily include the retail sale of
optical products in our Consumer Vision segment and the sale of optical products
through our Buying Group. Product sales revenue decreased to $39.4 million for
the year ended December 31, 2002, from $44.4 million for the year ended December
31, 2001, a decrease of $5.0 million or 11.1%. Of this decrease, $4.5 million
represents a decrease in Buying Group revenue and $0.5 million represents a
decrease in retail optical revenue resulting from a decrease in purchasing
volume. The decrease in Buying Group volume is primarily due to consolidation in
the eye care industry whereby smaller independent eye care businesses are being
replaced by larger eye care chains that purchase directly from vendors. We
expect this shift to continue and potentially further reduce the Buying Group's
market share and revenue, however, we do not expect this trend to have a
material impact on our overall profitability.

Other services revenue. Other services revenue includes revenue earned from
providing eye care services in our Consumer Vision segment, software services in
our Distribution & Technology segment and HSO services. Services revenue
decreased to $20.4 million for the year ended December 31, 2002, from $20.7
million for the year ended December 31, 2001, a decrease of $0.3 million or
1.9%. This decrease includes a $1.6 million decrease in health service
organization revenue, which was offset by a $0.8 million increase in Consumer
Vision services revenue and a $0.5 million increase in software services
revenue. Our revenue stream from fees collected under our health service
organization agreements has been decreasing due to disputes with certain
physician practices which are parties to these agreements. We are in litigation
with several of these practices and intend to continue to pursue settlement of
these matters in the future. While a continued decrease in these contractual
fees could negatively impact our cash flows, we are currently focusing on
resolving the disputes with these practices and believe we will receive cash
payments and/or other consideration in settlement of these disputes. The $0.8
million increase in Consumer Vision services was due to increased services
volume in the optometry and ophthalmology areas. The $0.5 million increase in
software services revenue was primarily due to an increase in sales volume.

Other income. Other income for the year ended December 31, 2002 of $2.3
million represents non-recurring settlements on health service organization
contracts. We had no other income in 2001.

Medical claims expense. Medical claims expense decreased to $22.3 million
for the year ended December 31, 2002, from $23.0 million for the year ended
December 31, 2001, a decrease of $0.7 million. This decrease was primarily due
to a $0.6 million favorable adjustment to the reserve in 2002. The medical
claims expense loss ratio (MLR) representing medical claims expense as a
percentage of Managed Vision revenue improved to 75.9% in 2002, from 79.2% in
2001, primarily due to the favorable adjustment of $0.6 million in 2002.
Excluding this adjustment, MLR for 2002 would have been 77.9% compared to 79.2%
for 2001.

Cost of product sales. Cost of product sales decreased to $31.1 million for
the year ended December 31, 2002, from $35.5 million for the year ended December
31, 2001, a decrease of $4.4 million or 12.6%. This decrease in cost of sales is
due to decreases in sales volume in our Buying Group and retail optometry
operations.

Cost of services. Cost of services decreased to $8.2 million for the year
ended December 31, 2002, compared to $8.8 million for the year ended December
31, 2001, a decrease of $0.6 million or 7.7%. This decrease was comprised of a
$0.9 million decrease in cost of services associated with Consumer Vision
services as a result of cost containment initiatives, partially offset by a $0.3
million increase in technology services expense associated with an increase in
sales.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $26.3 million for the year ended December
31, 2002, from $25.1 million for the year ended December 31, 2001, an increase
of $1.2 million or 4.6%. Of this increase, approximately $0.2 million represents
an increase in corporate overhead and primarily relates to increased
compensation expense associated with the addition of executive and managerial
personnel. The remaining increase primarily represents increases in professional
fees, principally legal

and consulting.

Restructuring and other one-time charges. In 2001, we recorded $1.0 million
for professional fees, primarily non-deferrable legal and workout costs,
associated with our capital restructuring. No such charges were recorded in
2002.

Depreciation. Depreciation expense was $1.9 million for the year ended
December 31, 2002 compared to $1.8 million for the year ended December 31, 2001.
The $0.1 million increase represents depreciation expense on new fixed assets
purchased during the year.

Amortization. Amortization expense decreased to $0.2 million for the year
ended December 31, 2002 from $1.1 million for the year ended December 31, 2001
due to the discontinuation of the amortization of goodwill effective January 1,
2002 in accordance with Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets."

Interest expense. Interest expense remained unchanged at approximately $3.0
million for each of the years ended December 31, 2002 and 2001. Although we
reduced our outstanding indebtedness during 2002, interest expense associated
with the decrease in debt was offset by an increase in the interest rate charged
on our restructured debt.

Income tax benefit. We recorded an income tax benefit of $0.9 million for
the year ended December 31, 2002 and $8.0 million for the year ended December
31, 2001. The 2002 tax benefit represents the tax benefit on the loss from
continuing operations at an effective rate of 67.9%. Our 2002 effective tax rate
differs from the federal statutory rate primarily due to non-deductible
expenses. The tax benefit in 2001 was primarily due to the reversal of the
valuation allowance against our deferred tax assets based on our expected
ability to utilize our net operating loss carryforwards in the future.

Discontinued operations. In May 2002, our Board of Directors approved our
plan to dispose of the net assets used in the retail optical and optometry
practice locations we operated in North Carolina. On August 12, 2002, we
consummated the sale of those assets, which resulted in a $4.4 million loss on
disposal in 2002, including income tax expense of $0.3 million. We reported $0.3
million of income from discontinued operations, net of tax, for each of the
years ended December 31, 2002 and 2001, representing income from this operation
prior to disposal.

Extraordinary item. We reported a $5.3 million net gain on early
extinguishment of debt in 2002. The gain was reported in the first quarter of
2002 and was comprised of approximately $10.0 million of forgiveness of
principal and interest by Bank Austria, our former senior secured lender, and
was partially offset by the write-off of $1.2 million of related unamortized
deferred financing fees and debt discount, and $3.5 million of income taxes.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Managed Vision revenue. Managed Vision revenue decreased to $29.0 million
for the year ended December 31, 2001, from $38.3 million for the year ended
December 31, 2000, a decrease of $9.3 million or 24.2%. This decrease was
primarily due to two managed care contracts that were not renewed in December
2000 by Anthem Blue Cross and Blue Shield of Connecticut ("Anthem"). In
addition, our contract with ConnectiCare was amended in April 2001, allowing
ConnectiCare to resume administration of the contract, further reducing managed
care revenue. These decreases were partially offset by negotiated increases in
capitation revenue on existing contracts.

Product sales revenue. Product sales revenue decreased to $44.4 million for
the year ended December 31, 2001, from $48.8 million for the year ended December
31, 2000, a decrease of $4.4 million or 9.2%. Of this decrease, $3.1 million
represents a decrease in Buying Group revenue resulting from decreases in
purchasing volume. This decrease in volume is primarily due to consolidation in
the eye care industry whereby the smaller independent eye care businesses are
being replaced by larger eye care chains that purchase directly from vendors.
The remaining $1.3 million decrease represents a decrease in retail optometry
sales primarily due to the closure of certain optometry facilities in connection
with the restructuring of our operations in Connecticut during 2000.

Other services revenue. Services revenue decreased to $20.7 million for the
year ended December 31, 2001, from $22.2 million for the year ended December 31,
2000, a decrease of $1.5 million or 6.8%. This decrease in revenue is primarily
due to the closure of certain ophthalmology and ambulatory surgery centers in
Connecticut as a result of restructuring our operations, which began in 2000 and
ended in 2001.

Medical claims expense. Medical claims expense decreased to $23.0 million
for the year ended December 31, 2001, from $32.2 million for the year ended
December 31, 2000, a decrease of $9.2 million or 29%. Our MLR improved to 79.2%
in 2001, from 84.0% in 2000. This improvement in MLR is primarily due to the two
Anthem contracts and the ConnectiCare contract that are no longer managed by us,
which had higher MLRs than the average of our remaining contracts, and to
negotiated increases in capitation rates on existing managed care contracts.

Cost of product sales. Cost of product sales decreased to $35.5 million for
the year ended December 31, 2001, from $38.6 million for the year ended December
31, 2000, a decrease of $3.1 million or 7.9%. This decrease in cost of sales is
due to decreases in sales volume in our Buying Group and retail optometry
operations.

Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $25.1 million for the year ended December
31, 2001, from $29.7 million for the year ended December 31, 2000, a decrease of
$4.6 million or 15.5%. Of this decrease, approximately $4.1 million represents
decreases in compensation, marketing, rent and utilities primarily as a result
of restructuring our operations in 2000, which involved closing facilities and
reducing overhead. The remaining decrease of approximately $0.5 million
represents a decrease in corporate overhead and primarily relates to
compensation of executive and managerial personnel.

Restructuring and other one-time charges. In 2001, we recorded a $1.0
million charge for professional fees, primarily non-deferrable legal and workout
costs, associated with our capital restructuring. In 2000, we recorded a $4.3
million charge comprised of $2.3 million for operations restructuring, $1.8
million for terminated merger costs and $0.2 million of other non-recurring
charges. The $2.3 million operations restructuring charge was recorded to cover
costs associated with restructuring our operations in Connecticut, which
included closing and consolidating certain facilities, reducing overhead and
streamlining operations, and was comprised of $0.2 million of employee
termination costs, $1.2 million of lease related charges, $0.8 million of fixed
asset write-offs and $0.1 million of other related expenses. The terminated
merger costs represent non-recurring costs associated with a proposed merger
with Vision Twenty-One, which was terminated in June 2000. We also recorded a
$0.2 million charge consisting of one-time costs related to the canceled sale of
our Connecticut operations. These costs consisted primarily of professional fees
and related transaction expenses.

Write-off of goodwill. In the fourth quarter of 2000, we recorded a $1.3
million charge for a write-off of a portion of our goodwill, which represented
the unamortized goodwill balance allocated to managed care operations in
Connecticut, which were closed in 2000. We had no such charges in 2001.

Depreciation. Depreciation expense decreased to $1.8 million for the year
ended December 31, 2001, from $2.1 million for the year ended December 31, 2000,
a decrease of $0.3 million. This decrease is primarily related to fixed assets
that were disposed of in 2000, in the course of the corporate restructuring
activities that year.

Amortization. Amortization remained relatively unchanged at $1.1 million
for the year ended December 31, 2001 compared to $1.2 million for the year ended
December 31, 2000, a decrease of $0.1 million.

Interest expense. Interest expense decreased to $3.0 million for the year
ended December 31, 2001, from $3.5 million for the year ended December 31, 2000,
a decrease of $0.5 million. The decrease is primarily due to a decrease in the
average interest rate associated with our bank indebtedness.

Income tax expense (benefit). We recorded income tax expense of $2.6
million for the year ended December 31, 2000, primarily due to the establishment
of a valuation allowance against our deferred tax assets due to the uncertainty,
at that time, regarding our ability to utilize our net operating loss
carryforwards. The income tax benefit of $8.0 million in 2001 was primarily due
to the reversal of the valuation allowance against our deferred tax assets,
based on our expected ability to utilize our net operating loss carryforwards in
the future.

Income from discontinued operations. Discontinued operations represent our
retail optometry operation in North Carolina that we disposed of in 2002. Income
from discontinued operations net of tax was $0.3 million for the year ended
December 31, 2001 compared to $0.5 million for the year ended December 31, 2000
and represents net income from these operations prior to their disposal in 2002.

NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2002, we adopted Statement of Financial Accounting
Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets". This standard
changes the accounting for goodwill and intangible assets with an indefinite
life whereby such assets will no longer be amortized; however, the standard does
require, at least annually, an evaluation for impairment, and a corresponding
write-down, if appropriate. SFAS No. 142 requires a transitional goodwill
impairment test six months from the date of adoption. We completed our
transitional impairment test during the quarter ended June 30, 2002 and the
annual test for impairment during the fourth quarter of 2002 and no impairment
write-downs were required.

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting For Asset Retirement Obligations." This statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. We are required to adopt the provisions of SFAS No. 143 at the beginning
of fiscal 2003. We have determined that the adoption of this statement will not
have a material impact on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. This statement also broadens
the definition of discontinued operations to include more disposal transactions.
We adopted the provisions of this statement on January 1, 2002. We applied SFAS
No. 144 to the sale of our North Carolina retail optical and optometry assets
and reported a loss on disposal of $4.4 million for the year ended December 31,
2002.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections." SFAS
No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No.13 to require
that certain lease modifications be treated as sale leaseback transactions. The

provisions of SFAS No.145 related to classification of debt extinguishment are
effective for fiscal years beginning after May 15, 2002. The provisions of SFAS
No.145 related to lease modification are effective for transactions occurring
after May 15, 2002. In 2003, we will reclassify our previously reported gain
from extinguishment of debt of $8.8 million and related income tax expense of
$3.5 million from an extraordinary item to continuing operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" and nullified EITF Issue No. 94-3.
SFAS No.146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, whereas EITF No
94-3 had recognized the liability at the commitment date of an exit plan. We are
required to adopt the provisions of SFAS No. 146 effective for exit or disposal
activities initiated after December 31, 2002. We do not expect the provisions of
SFAS No. 146 to have a material impact on our financial position or results of
operations.

In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. This interpretation provides
guidance on the guarantor's accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. We adopted
the disclosure requirements of the interpretation as of December 31, 2002. The
accounting guidelines are applicable to guarantees issued after December 31,
2002 and require that we record a liability for the fair value of such
guarantees in our balance sheet. We do not expect the provisions of FIN No. 45
to have a material impact on our financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an Amendment of Statement of Financial
Accounting Standard No. 123." This statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This statement also amends the disclosure
requirements of SFAS No. 123 and Accounting Principles Board Opinion No. 28,
"Interim Financial Reporting," to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. We
will implement the amended disclosure requirements effective December 31, 2002.
We have not yet determined whether we will voluntarily change to the fair value
based method of accounting for stock-based employee compensation.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires an investor with
a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling interest or
the equity investment at risk is insufficient to finance the entity's activities
without receiving additional subordinated financial support from the other
parties. The interpretation is not expected to have a material effect on the
Company's financial position or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash flows generated from operations
and borrowings under our credit facility. Our principal uses of liquidity are to
provide working capital, meet debt service requirements and finance capital
expenditures.

On January 25, 2002, as more fully described below, we completed a series
of transactions (which we refer to as the Capital Restructuring Transactions)
which resulted in a major restructuring of our debt, equity and voting capital
stock. (See "--The Capital Restructuring Transactions") Taking into account the
impact of that restructuring, among other factors, we believe that our cash flow
from operations, borrowings under our credit facility, and operating and capital
lease financing will provide us with sufficient funds to finance our operations
for the next 12 months. If however, additional funds are needed, we may attempt
to raise such funds through the issuance of equity or convertible debt
securities. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders will
be reduced and our stockholders may experience dilution of their interest in us.
If additional funds are needed and are not available or are not available on
acceptable terms, our ability to fund our operations, take advantage of
unanticipated opportunities, develop or enhance services or products or
otherwise respond to competitive pressures may be significantly limited.

As of December 31, 2002, we had cash and cash equivalents of approximately
$3.1 million, $2.3 million of borrowings outstanding under our term loan with
CapitalSource Finance LLC, and $1.6 million of advances outstanding under our
revolving credit facility with CapitalSource.

On February 7, 2003, in connection with our acquisition of the assets of
Wise Optical Vision Group, Inc., our revolving credit facility with
CapitalSource was increased from $10 million to $15 million. As of February 28,
2003, we had $8.2 million outstanding under our revolving credit facility, with
approximately $3.6 million of additional availability. (Although we may borrow
up to $15 million under the revolving credit facility, availability is based on
the value of the collateral underlying the facility at any given time and on the
amount outstanding under the facility at such time.)

In February 2003, we received approval from the South Carolina Department
of Insurance to operate a captive insurance company domiciled in South Carolina.
We obtained $0.6 million in letters of credit to capitalize a new wholly owned
subsidiary, OptiCare Vision Insurance Company, Inc., to operate as the captive
insurance company, as part of our Managed Vision Division's entrance into the
"direct-to-employer" market.

Cash Flows from Operations

Net cash used in operating activities was $0.2 million for the year ended
December 31, 2002, as compared to net cash provided from operations of $1.5
million for the year ended December 31, 2001. Net cash used in operating
activities for the year ended December 31, 2002 was primarily driven by a $3.3
million reduction in accounts payable, accrued expenses and other liabilities as
a result of our improved liquidity after the Capital Restructuring Transactions
in January 2002 and increases in inventory and other assets of $0.4 million.
These changes were offset by $1.3 million of net income from continuing
operations after adding back non-cash charges , $1.0 million in cash provided
from discontinued operations and a $1.2 decrease in accounts receivable and
other assets. For the year ended December 31, 2001, net cash provided from
operations was primarily driven by a $1.4 million net increase in accounts
payable, accrued expenses and other liabilities, cash provided by discontinued
operations of $1.0 million and a reduction in accounts receivable, inventory and
other current assets of $0.1 million. These changes were offset by $1.1 million
of net loss from continuing operations after adding back non-cash charges for
depreciation, amortization, deferred taxes and interest.

Net cash provided by investing activities was $2.4 million for the year
ended December 31, 2002 compared to $0.4 million used in investing activities
for the year ended December 31, 2001. Net cash provided by investing activities
in 2002 consisted principally of $3.9 million in net cash received from the sale
of discontinued operations and $0.7 million received from notes receivable
payments, which were offset by $1.4 million paid to reacquire

certain notes receivable and contractual rights as part of the Capital
Restructuring Transactions and $0.8 million paid for the purchase of fixed
assets. Net cash used in investing activities for the year ended December 31,
2001 was $0.4 million for the purchase of fixed assets.

Net cash used in financing activities was $1.7 million for the year ended
December 31, 2002 compared to $0.1 million for the year ended December 31, 2001.
Net cash provided by financing activities in 2002 consisted of approximately
$27.5 million from the issuance of debt and preferred stock in connection with
our Capital Restructuring Transactions and $2.5 million in proceeds from the
exercise of stock warrants. These sources of cash were offset by approximately
$25.1 million of principal payments on long-term debt (primarily related to our
Capital Restructuring Transactions), a $4.9 million net decrease in our
revolving credit facility and $1.5 million in financing costs. Net cash provided
by financing activities in 2001 consisted of $0.5 million of net proceeds from
funds borrowed under through an amendment to our then existing bridge loan,
which was partially offset by approximately $0.5 million of principal payments
on long term debt and $0.1 million of capital lease payments.

The Capital Restructuring Transactions

On January 25, 2002, we (including certain of our subsidiaries) completed a
series of transactions, which resulted in a major reduction in, and
restructuring of, our outstanding debt as well as our issuance of equity and
voting capital stock.

The Capital Restructuring Transactions included, among other things, the
following:

1. Our obligations under the outstanding bridge loan (referred to as the
Bridge Loan) with Alexander Enterprises, Palisade Concentrated Equity
Partnership, L.P. and Linda Yimoyines, wife of Dean J. Yimoyines, M.D.,
our Chairman and Chief Executive Officer, were satisfied in full.

2. Bank Austria, our senior bank lender at the time, forgave the portion
of our indebtedness to it in excess of $21.8 million and sold our loans
and other obligations with Bank Austria, including security agreements,
pledges of stock by certain of our subsidiaries and guarantees of loans
and other obligations, to CapitalSource Finance LLC, a Delaware limited
liability company.

3. We amended and restated the terms of the debt acquired by CapitalSource
from Bank Austria by entering into an Amended and Restated Revolving
Credit, Term Loan and Security Agreement, referred to as the Loan and
Security Agreement.

4. Palisade and Ms. Yimoyines made subordinated loans to us of $13.9
million and $100,000, respectively, which loans are evidenced by senior
subordinated secured notes, the terms of which are described in more
detail below. We applied a portion of the proceeds of the Palisade loan
to pay down a portion of our debt under the Loan and Security Agreement
with CapitalSource.

5. We reacquired from Bank Austria, for a cash payment of $1.35 million,
certain notes and contractual rights originally issued or made to
OptiCare in connection with our transfers of certain medical practice
assets to physicians engaged in such practices.

6. Without further consideration, Bank Austria returned warrants
previously issued to it to purchase 100,000 shares of our common stock;
returned to us 418,803 shares of our Series A convertible preferred
stock; and returned to us 56,900 shares of our common stock. Each of
these equity instruments was cancelled and retired by us.

7. We issued (i) Palisade and Ms. Yimoyines 2,571,429 and 285,714 shares
of Series B 12.5% Voting Cumulative Convertible Preferred Stock
(referred to as the Series B Preferred Stock), respectively, for a
purchase price of $3.6 million and $0.4 million, respectively, (ii)
Palisade and Ms. Yimoyines 309,170.5 and 38,646.3 shares of Series B
Preferred Stock, respectively, as satisfaction of our obligations under
the Bridge Loan and (iii) Palisade, Ms. Yimoyines and CapitalSource
warrants to purchase up to 17,375,000, 125,000 and 250,000 shares of
our common stock, respectively, at an exercise price of $0.14 per share

(subject to anti-dilution provisions). In December 2002, Palisade and
Ms. Yimoyines exercised their respective warrants to purchase an
aggregate of 17,500,000 shares of our common stock, resulting in
proceeds of $2.5 million to OptiCare.

8. We granted Palisade, Ms. Yimoyines and CapitalSource certain piggy-back
registration rights. We are liable for all expenses in connection with
the required registrations but other participants to the registration
would pay underwriting commissions and transfer taxes attributable to
the securities to be sold by them.

9. As of the closing of the Capital Restructuring Transactions on January
25, 2002, Palisade held (i) 2,000,000 shares of our common stock which
were previously acquired, (ii) 2,880,599.5 shares of Series B Preferred
Stock, immediately convertible into 28,805,995 shares of common stock,
and (iii) immediately exercisable warrants to purchase up to an
additional 17,775,000 shares of common stock, of which warrants to
purchase 400,000 shares at $0.40 per share were previously acquired.
Thus, 44,864,690 shares of our common stock (including 12,815,092
shares of common stock outstanding as of January 25, 2002 (i.e., prior
to the Capital Restructuring Transactions), and 32,049,598 shares of
common stock issuable upon conversion of the Series B Preferred Stock
held by Palisade and Ms. Yimoyines) would be outstanding in the event
that all of the shares of Series B Preferred Stock are converted.
Without giving effect to any warrants, Palisade was deemed to
beneficially own 74.0% of our common stock. Giving effect to the
warrants held by Palisade, Palisade was deemed to beneficially own
81.8% of our common stock.

The CapitalSource Loan and Security Agreement

The term loan and credit facility with CapitalSource are subject to a Loan and
Security Agreement. The Loan and Security Agreement contains certain
restrictions on the conduct of our business, including, among other things,
restrictions on incurring debt, purchasing or investing in the securities of, or
acquiring any other interest in, all or substantially all of the assets of any
person or joint venture, declaring or paying any cash dividends or making any
other payment or distribution on our capital stock, and creating or suffering
liens on our assets. We are required to maintain certain financial covenants,
including a minimum fixed charge ratio and to maintain a minimum net worth. As
of February 28, 2003, we believe we are in compliance with the covenants.

Our subsidiaries guarantee payments and other obligations under the credit
facility and we (including certain subsidiaries) have granted a security
interest in substantially all our assets to CapitalSource. We also pledged the
capital stock of certain of our subsidiaries to CapitalSource.

o Upon the occurrence of certain events or conditions described in the
Loan and Security Agreement (subject to grace periods in certain
cases), the entire outstanding balance of principal and interest would
become immediately due and payable.

The Palisade and Yimoyines Senior Subordinated Secured Loans

The subordinated secured loans from Palisade and Ms. Yimoyines are
evidenced by senior subordinated secured notes that rank pari passu with each
other. The notes are subordinate to our indebtedness to CapitalSource and are
secured by second-priority security interests in substantially all of our assets
(the first-priority security interest is held by CapitalSource).

Principal is due to be paid in 10 years (i.e., on January 25, 2012) and
interest is payable quarterly at the rate of 11.5%. In the first and second
years, we have the right to defer 100% and 50%, respectively, of interest to
maturity by increasing the principal amount of the note by the amount of
interest so deferred. In the third through tenth years, the holder of the note
has the right to require us to defer interest to maturity by increasing the
principal amount of the note by the amount of interest so deferred. As of
December 31, 2002, we deferred the payment of interest on these senior notes to
maturity by increasing the aggregate principal balance of these notes by
$1,588,000.

The notes contain certain restrictions on the conduct of our business,
including, among other things, restrictions on incurring debt, becoming a party
to a merger, selling or transferring substantially all of our assets, declaring
or paying any cash dividends or making any other payment or distribution on our
capital stock or purchasing or redeeming such stock, entering into any
agreements inconsistent with our obligations under the notes, making any
redemption or prepayment of any subordinated debt, creating or suffering liens
on our assets, or materially changing the nature of our business.

Upon the occurrence of certain events or conditions described in the notes
(subject to grace periods in certain cases), the entire outstanding balance of
principal and interest would become immediately due and payable.

The Series B Preferred Stock

As of December 31, 2002, we had 3,204,959 shares of Series B Preferred
Stock issued and outstanding. The Series B Preferred Stock ranks senior to all
other currently issued and outstanding classes or series of our stock with
respect to dividends, redemption rights and rights on liquidation, winding up,
corporate reorganization and dissolution. The Series B Preferred Stock accrues
dividends at an annual rate of 12.5%. As of December 31, 2002, accrued and
unpaid dividends on the Preferred Stock were approximately $531,000.

If our assets are insufficient to pay the full amount payable to the
holders of the Series B Preferred Stock with respect to dividends, redemption
rights or liquidation preferences, then such holders will share ratably in the
distribution of assets.

Working Capital Constraint and Contingencies

As of December 31, 2002, under an agreement with the Texas Department of
Insurance, we were required to maintain restricted investments of $250,000,
thereby resulting in a restriction upon working capital.

In addition, our cash flows could be negatively affected if the parties who
dispute their Health Services Organization agreements continue their cessation
of payments or other parties cease making payments required under the
agreements. Further, in the event we are required to utilize funds to provide
cash collateral in connection with certain contractual arrangements, our cash
flows could be negatively affected.

Contractual Obligations

The following table summarizes our significant contractual obligations (in
thousands) at December 31, 2002 that impact our liquidity.

CONTRACTUAL
OBLIGATIONS 2003 2004 2005 2006 2007 THEREAFTER TOTAL
----------------- ------- ------- ------- ------- ------- ---------- -------

Long-term debt $ 1,266 $ 2,257 $ 1,556 $ -- $ -- $14,339 $19,418
Operating leases 1,839 1,667 1,534 1,389 1,209 2,762 10,400
Capital Leases 61 7 -- -- -- -- 68
------- ------- ------- ------- ------- ------- -------
Total $ 3,166 $ 3,931 $ 3,090 $ 1,389 $ 1,209 $17,101 $29,886
======= ======= ======= ======= ======= ======= =======

On February 7, 2003, in connection with our acquisition of Wise Optical, we
assumed certain operating lease obligations and increased our outstanding
balance under our revolving credit facility with CapitalSource. The future
minimum lease payments of those lease obligations by year, which are not
included in the above table, are (in thousands): 2003: $495; 2004: $459; 2005:
$485; 2006: $465; 2007: $465; and thereafter: $2,015 for a total of $4,384. Our
additional borrowings of $7.3 million under our revolving credit facility are
due in 2005.

Our long-term debt and capital restructuring are explained in detail in
Notes 3 and 11 to the consolidated financial statements. Operating leases and
capital leases are explained in detail in Note 12 to the consolidated financial

statements.

SIGNIFICANT RELATED PARTY TRANSACTIONS

We maintain a substantial number of real estate leases with various terms
with related parties for properties located in Connecticut and Florida.
Generally, the leases are for property that is used for executive offices and
for the practice of ophthalmology, optometry, sale of eyeglasses, or other
operating and administrative functions. We believe that these leases reflect the
fair market value and contain customary terms for leased commercial real estate
in the geographic area where they are located.

In January 2002, we entered into a $14 million loan agreement with Palisade
and Linda Yimoyines and issued 3.2 million shares of Series B Preferred Stock
and warrants to purchase 17.5 million shares of our common stock to them as part
of our Capital Restructuring Transactions. In connection with these Capital
Restructuring Transactions, we received an opinion given by Legg Mason Wood
Walker Incorporated that the consideration given and received by us in the
capital restructuring was fair, from a financial point of view, to us and our
stockholders. A special committee of the Board of Directors, comprised of
independent directors, approved the Capital Restructuring Transactions and our
stockholders also approved the various equity-related components of the Capital
Restructuring Transactions by written consent. We believe that the Capital
Restructuring Transactions were fair to us as of the time they were authorized
and entered into. (See "--Liquidity and Capital Resources --The Capital
Restructuring Transactions")

We have an unsecured promissory note payable to an officer of the Company
related to an amount owed in connection with our purchase of Cohen Systems (now
"CC Systems") in 1999. The note, which accrues interest at 7.50% and matures on
December 1, 2004 had an outstanding balance of $204 at December 31, 2002

IMPACT OF INFLATION AND CHANGING PRICES

Our revenue is subject to pre-determined Medicare reimbursement rates
which, for certain products and services, have decreased over the past three
years. Decreases in Medicare reimbursement rates could have an adverse effect on
our results of operations if we cannot offset these reductions through increases
in revenues or decreases in operating costs. To some degree, prices for health
care services and products are driven by Medicare reimbursement rates, so that
our non-Medicare business is also affected by changes in Medicare reimbursement
rates.

We believe that inflation has not had a material effect on our revenues
during 2002.

FORWARD-LOOKING INFORMATION AND RISK FACTORS

The statements in this Annual Report on Form 10-K and elsewhere (such as in
our other filings with the Securities and Exchange Commission, press releases,
presentations by us or our management and oral statements) that relate to
matters that are not historical facts are "forward-looking statements" within
the meaning of Section 27A of the Securities Exchange Act of 1934. When used in
this document and elsewhere, words such as "anticipate," "believe," "expect,"
"plan," "intend," "estimate," "project," "will," "could," "may," "predict" and
similar expressions are intended to identify forward-looking statements. Such
forward-looking statements include those relating to:

o Our new financial structure;

o The continued listing of our common stock on the American Stock
Exchange;

o Future opportunities;

o The outlook of customers;

o The reception of new services, technologies and pricing methods;

o Existing and potential strategic alliances;

o The likelihood of incremental revenues offsetting expense related to
new initiatives;

o Expected improvements in our financial condition as a result of the
Capital Restructuring Transactions;

o The impact of consolidation in the eye care industry on product sales
revenue and our overall profitability; and

o The sufficiency of our capital to finance our operations for the next
12 months.

In addition, such forward-looking statements involve known and unknown
risks, uncertainties, and other factors which may cause our actual results,
performance or achievements to be materially different from any future results
expressed or implied by such forward-looking statements. Also, our business
could be materially adversely affected and the trading price of our common stock
could decline if any of the following risks and uncertainties develop into
actual events. Such risk factors, uncertainties and the other factors include:

o Changes in the regulatory environment applicable to our business,
including health-care cost containment efforts by Medicare, Medicaid
and other third-party payers;

o Reduction in demand and increased competition for our products and
services;

o General economic conditions;

o Risks related to the eye care industry, including the cost and
availability of medical malpractice insurance, and possible adverse
long-term experience with laser and other surgical vision correction;

o Risks related to the managed care and insurance industries, including
risks relating to class action litigation seeking to broaden the scope
of covered services;

o Our ability to successfully integrate and profitably manage our
operations;

o Loss of the services of key management personnel;

o Our ability to execute our growth strategy, without which we may not
become profitable or sustain our profitability;

o Our ability to obtain additional capital, without which our growth
could be limited;

o The fact that we have a history of losses and may incur further losses
in the future;

o The fact that if we default on our debt, our creditors could foreclose
on our assets;

o The possibility that we may not compete effectively with other eye care
services companies which have more resources and experience than us;

o Failure to negotiate profitable capitated fee arrangements;

o The possibility that we may have potential conflicts of interests with
respect to related party transactions which could result in certain of
our officers, directors and key employees having interests that differ
from us and our stockholders;

o Health care regulations or health care reform initiatives, which could
materially adversely affect our business, financial condition and
results of operations;

o The fact that the nature of our business could subject us to potential
malpractice, product liability and other claims;

o The fact that managed care companies face increasing threats of
private-party litigation, including class actions, over the scope of
care that the managed care companies must pay for;

o The fact that we are dependent upon letters of credit or other forms of
third party security in connection with certain of our contractual
arrangements and, thus, would be adversely affected in the event we are
unable to obtain such credit as needed;

o The fact that certain parties are challenging the validity of and/or
our compliance with Health Service Organization contracts and have
ceased or may cease making payments under such contracts, jeopardizing
our cash flow;

o Failure to timely and effectively integrate our acquisition of Wise
Optical;

o Failure to effectively compete in the marketplace with other
distributors, including an entity created by the former owner of Wise
Optical; and

o Other risks and uncertainties discussed in this Form 10-K and detailed
from time to time in our periodic reports filed with the Securities and
Exchange Commission.

We undertake no obligation to publicly update or revise forward looking
statements to reflect events or circumstances after the date of this Form 10-K
or to reflect the occurrence of unanticipated events.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risk from exposure to changes in interest rates
based on our financing activities under our credit facility with CapitalSource,
due to its variable interest rate. The nature and amount of our indebtedness may
vary as a result of future business requirements, market conditions and other
factors. The extent of our interest rate risk is not quantifiable or predictable
due to the variability of future interest rates and financing needs.

We do not expect changes in interest rates to have a material effect on
income or cash flows in the year 2003, although there can be no assurances that
interest rates will not significantly change. A 10% change in the interest rate
payable by us on our variable rate debt would have increased or decreased the
annual interest expense by $0.1 million, assuming our borrowing level is
unchanged. We did not use derivative instruments to adjust our interest rate
risk profile during the year ended December 31, 2002.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and the reports of independent
certified public accountants thereon are set forth herein beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The information regarding directors and executive officers required by Item
10, appearing under the caption "Election of Directors," "Executive Officers of
the Company" and "Section 16(A) Beneficial Ownership Reporting Compliance" of
our Proxy Statement for the 2003 Annual Meeting of Stockholders, is incorporated
herein by reference.

Information regarding our directors and executive officers is included in
Part I of this Form 10-K as permitted by General Instruction G(3).

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 appearing under the caption "Executive
Compensation" of our Proxy Statement for the 2003 Annual Meeting of Stockholders
is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by Item 12 appearing under the caption "Security
Ownership of Certain Beneficial Owners and Management" of our Proxy Statement
for the 2003 Annual Meeting of Stockholders is incorporated herein by reference.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides certain aggregate information with respect to
all of our equity compensation plans in effect as of December 31, 2002:

--------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER EQUITY
NUMBER OF SECURITIES TO WEIGHTED AVERAGE COMPENSATION PLANS
BE ISSUED UPON EXERCISE EXERCISE PRICE OF (EXCLUDING SECURITIES
PLAN CATEGORY OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN FIRST COLUMN)
--------------------------------------------------------------------------------------------------------------

Equity Compensation Plans
Approved by Stockholders
(1) 5,584,066 $1.14 5,327,346 (3)
--------------------------------------------------------------------------------------------------------------
Equity Compensation Plans
Not Approved by
Stockholders (2) - - -
--------------------------------------------------------------------------------------------------------------
Total 5,584,066 $1.14 5,327,346 (3)
--------------------------------------------------------------------------------------------------------------

(1) These plans consist of the 1999 Performance Stock Program, the 1999
Employee Stock Purchase Plan, the 2002 Professional Employee Stock Purchase
Plan and the Amended and Restated 2002 Stock Incentive Plan.

(2) We currently do not have any equity compensation plans not approved by
stockholders.

(3) The remaining shares available for issuance represents the difference
between the 69,672,654 issued and/or reserved for issuance compared to the
total authorized common stock of 75,000,000. Under the various equity
compensation plans, we are authorized to grant an additional 4,015,934
shares. We intend to seek shareholder approval to increase our authorized
common stock at out 2003 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by Item 13 appearing under the caption "Certain
Relationships and Related Transactions" of our Proxy Statement for the 2003
Annual Meeting of the Stockholders is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

During the 90-day period prior to the filing date of this report,
management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon, and as of the date of, that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were adequate and effective to ensure that

material information required to be disclosed in our reports filed and submitted
under the Exchange Act is recorded, processed, summarized and reported as, and
when, required.

There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date we carried out our evaluation. There were no significant deficiencies or
material weaknesses identified in the evaluation and, therefore, no corrective
actions were taken.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K

(a) LIST OF FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS

1. FINANCIAL STATEMENTS:

See the "Index to Financial Statements" beginning on page F-1.

2. FINANCIAL STATEMENT SCHEDULES:

Required schedules have been omitted because they are either not applicable
or the required information has been disclosed in the consolidated financial
statements or notes thereto.

3. EXHIBITS:

EXHIBIT DESCRIPTION
------- -----------
3.1 Certificate of Incorporation of Registrant, incorporated
herein by reference to Exhibit 3.1 to the Registrant's
Annual Report on Form 10-KSB filed February 3, 1995.

3.2 Certificate of Amendment of the Certificate of
Incorporation, dated as of August 13, 1999, as filed with
the Delaware Secretary of State on August 13, 1999,
incorporated herein by reference to Exhibit 3.1 to
Registrant's Current Report on Form 8-K filed on August 30,
1999.

3.3 Amended and Restated By-laws of Registrant adopted March 27,
2000, incorporated herein by reference to Exhibit 3.3 to
Registrant's Annual Report on Form 10-K filed on March 30,
2000.

3.4 Certificate of Designation with respect to the Registrant's
Series A Convertible Preferred Stock, as filed with the
Delaware Secretary of State on August 13, 1999, incorporated
herein by reference to Exhibit 3.2 to Registrant's Current
Report on Form 8-K filed on August 30, 1999.

3.5 Certificate of Amendment of the Certificate of
Incorporation, dated as of January 21, 2002, increasing the
authorized common stock of the Company from 50,000,000 to
75,000,000 shares, incorporated herein by reference to the
Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 3.1.

3.6 Certificate of Designation, Rights and Preferences of the
Series B 12.5% Voting Cumulative Convertible Participating
Preferred Stock of the Company, as filed with the Delaware
Secretary of State on January 23, 2002, incorporated herein
by reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 3.2.

EXHIBIT DESCRIPTION
------- -----------

3.7 Amendment No. 1 to the Amended and Restated Bylaws of
OptiCare Health Systems, Inc., incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 3.3.

4.1 Form of Warrant to purchase 2,250,000 shares of common stock
issued in connection with the Secured Promissory Note issued
as of October 10, 2000, by OptiCare Eye Health Centers,
Inc., PrimeVision Health, Inc. and OptiCare Eye Health
Network, Inc. to Medici Investment Corp., incorporated
herein by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000, Exhibit
10.54.

4.2 Form of Warrant to purchase 300,000 shares and 2,000,000
shares of common stock issued in connection with the Amended
and Restated Secured Promissory Note issued as of October
10, 2000, by OptiCare Eye Health Centers, Inc., PrimeVision
Health, Inc. and OptiCare Eye Health Network, Inc. to Medici
Investment Corp., incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000, Exhibit 10.55.

4.3 Form of Warrant to purchase 50,000 shares of common stock
issued in connection with the Amended and Restated Secured
Promissory Note issued as of October 10, 2000, by OptiCare
Eye Health Centers, Inc., PrimeVision Health, Inc. and
OptiCare Eye Health Network, Inc. to Dean J. Yimoyines,
M.D., incorporated herein by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
2000, Exhibit 10.56.

4.4 Form of Warrant to purchase 400,000 shares of common stock
issued in connection with the Amended and Restated Secured
Promissory Note issued as of October 10, 2000, by OptiCare
Eye Health Centers, Inc., PrimeVision Health, Inc. and
OptiCare Eye Health Network, Inc. to Palisade Concentrated
Equity Partnership, L.P., incorporated herein by reference
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000, Exhibit 10.57.

4.5 Form of Warrant dated January 25, 2002, issued to Palisade
Concentrated Equity Partnership, L.P., for the purchase of
up to 17,375,000 shares of common stock., incorporated
herein by reference to the Registrant's Current Report on
Form 8-K dated January 25, 2002, Exhibit 3.4.

4.6 Form of Warrant dated January 25, 2002, issued to Linda
Yimoyines, for the purchase of up to 125,000 shares of
common stock, incorporated herein by reference to the
Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 3.5.

4.7 Form of Warrant dated January 25, 2002, issued to
CapitalSource Finance, LLC, for the purchase of up to
250,000 shares of common stock, incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 3.6.

10.1 Performance Stock Program, incorporated herein by reference
to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-4, registration no. 333-78501, first filed on May 14,
1999, as amended (the "Registration Statement 333-78501"). +

10.2 Amended and Restated 1999 Employee Stock Purchase Plan,
incorporated herein by reference to Exhibit 4.2 to
Registrant's Annual Report on Form 10-K filed on March 30,
2000. +

10.3 2000 Professional Employee Stock Purchase Plan incorporated
herein by reference to Exhibit 4.3 to Registrant's Annual
Report on Form 10-K filed on March 30, 2000. +

EXHIBIT DESCRIPTION
------- -----------

10.4 Amended and Restated 2002 Stock Incentive Plan incorporated
herein by reference to Registrant's Quarterly Report on Form
10-Q filed August 14, 2002.+

10.5 Vision care capitation agreement between OptiCare Eye Health
Centers, Inc. and Blue Cross & Blue Shield of Connecticut,
Inc. (and its affiliates) dated October 23, 1999,
incorporated herein by reference to Exhibit 10.9 to the
Registration Statement 333-78501.

10.6 Eye care services agreement between OptiCare Eye Health
Centers, Inc. and Anthem Health Plans, Inc. (d/b/a Anthem
Blue Cross and Blue Shield of Connecticut), effective
November 1, 1998, incorporated herein by reference to
Exhibit 10.10 to the Registration Statement 333-78501.

10.7 Contracting provider services agreement dated April 26,
1996, and amendment thereto dated as of January 1, 1999,
between Blue Cross and Blue Shield of Connecticut, Inc., and
OptiCare Eye Health Centers, Inc., incorporated herein by
reference to Exhibit 10.11 to the Registration Statement
333-78501.

10.8 Form of employment agreement between the Registrant and Dean
J. Yimoyines, M.D., effective August 13, 1999, incorporated
herein by reference to Exhibit 10.12 to the Registration
Statement 333-78501.+

10.9 Lease agreement dated September 1, 1995 by and between
French's Mill Associates, as landlord, and OptiCare Eye
Health Centers, Inc. as tenant, for premises located at 87
Grandview Avenue, Waterbury, Connecticut incorporated herein
by reference to Exhibit 10.17 to the Registration Statement
333-78501.

10.10 Lease agreement dated September 30, 1997 by and between
French's Mill Associates II, LLP, as landlord, and OptiCare
Eye Health Center, P.C., as tenant, for premises located at
160 Robbins Street, Waterbury, Connecticut (upper level),
incorporated herein by reference to Exhibit 10.18 to the
Registration Statement 333-78501.

10.11 Lease agreement dated September 1, 1995 and amendment to
lease dated September 30, 1997 by and between French's Mill
Associates II, LLP, as landlord, and OptiCare Eye Health
Center, P.C., as tenant, for premises located at 160 Robbins
Street, Waterbury, Connecticut (lower level), incorporated
herein by reference to Exhibit 10.19 to the Registration
Statement 333-78501.

10.12 Lease agreement dated August 1, 2002 by and between Harrold-
Barker Investment Company, as landlord, and OptiCare Health
Systems, Inc., as tenant, for premises located at 110 and
112 Zebulon Court, Rocky Mount, North Carolina, filed
herewith. *

10.13 Form of health services organization agreement between
PrimeVision Health, Inc. and eye care providers,
incorporated herein by reference to Exhibit 10.21 to the
Registration Statement 333-78501.

10.14 Professional Services and Support Agreement dated December
1, 1995 between OptiCare Eye Health Centers, Inc. and
OptiCare P.C., a Connecticut professional corporation,
incorporated herein by reference to Exhibit 10.22 to the
Registration Statement 333-78501.

10.15 Stock Purchase Agreement dated October 1, 1999, among the
Registrant, Stephen Cohen, Robert Airola, Gerald Mandel and
Reginald Westbrook (excluding schedules and other
attachments thereto), incorporated herein by reference to
Exhibit 10.10 to the Registrant's Quarterly Report on Form
10-Q filed on November 15, 1999.

10.16 Employment agreement between the Registrant as employer and
Gordon A. Bishop,

EXHIBIT DESCRIPTION
------- -----------

dated August, 13, 1999, incorporated herein by reference to
Exhibit 10.41 to the Registration Statement 333-93043. +

10.17 Employment Agreement between the Registrant and Jason M.
Harrold, effective July 1, 2000, incorporated herein by
reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000, Exhibit 10.10. +

10.18 OptiCare Directors' and Officers' Trust Agreement dated
November 7, 2001, between the Registrant and Norman S.
Drubner, Esq., as Trustee, incorporated herein by reference
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000, Exhibit 10.52. +

10.19 Agreement for Consulting Services between Morris Anderson
and Associates, Ltd. and OptiCare Health Systems, Inc. dated
April 16, 2001, incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000, Exhibit 10.53.

10.20 Restructure Agreement dated December 17, 2001, among
Palisade Concentrated Equity Partnership, L.P., Dean J.
Yimoyines, M.D. and the Company, incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.1.

10.21 Amendment No. 1, dated January 5, 2002, to the Restructure
Agreement dated December 17, 2001, among Palisade
Concentrated Equity Partnership. L.P., Dean J. Yimoyines,
M.D. and the Company, incorporated herein by reference to
the Registrant's Current Report on Form 8-K dated January
25, 2002, Exhibit 10.2.

10.22 Amendment No. 2, dated January 22, 2002, to the Restructure
Agreement dated December 17, 2001, among Palisade
Concentrated Equity Partnership, L.P. Dean J. Yimoyines,
M.D. and the Company, incorporated herein by reference to
the Registrant's Current Report on Form 8-K dated January
25, 2002, Exhibit 10.3.

10.23 Senior Secured Subordinated Note dated January 25, 2002, in
the principal sum of $13,900,000, issued by the Company to
Palisade Concentrated Equity Partnership, L.P., incorporated
herein by reference to the Registrant's Current Report on
Form 8-K dated January 25, 2002, Exhibit 10.4.

10.24 Senior Secured Subordinated Note dated January 25, 2002, in
the principal sum of $100,000, issued by the Company to
Linda Yimoyines, incorporated herein by reference to the
Registrant's Current Report on Form 8-K dated January 25,
2002, Exhibit 10.5.

10.25 Subordinated Pledge and Security Agreement dated as of
January 25, 2002, by the Company (including certain of its
subsidiaries) as grantor, and Palisade Concentrated Equity
Partnership, L.P., as secured party and agent for the other
secured party (Linda Yimoyines), securing the senior secured
subordinated notes made by the Company to the secured
parties dated January 25, 2002, incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.6.

10.26 Registration Rights Agreement dated January 25, 2002,
covering common stock held by Palisade, common stock
issuable on conversion of the Series B Preferred Stock and
exercise of the warrants issued to Palisade, Linda Yimoyines
and CapitalSource Finance, L.L.C., incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.7.

10.27 Subordination Agreement dated January 25, 2002, among
Palisade Concentrated Equity Partnership, L.P., Linda
Yimoyines, CapitalSource Finance, L.L.C. and the Company,
incorporated herein by reference to the Registrant's Current
Report on Form

EXHIBIT DESCRIPTION
------- -----------

8-K dated January 25, 2002, Exhibit 10.8.

10.29 Amended and Restated Revolving Credit, Term Loan and
Security Agreement dated as of January 25, 2002, between
CapitalSource Finance, L.L.C. and the Company, including
Annex I, Financial Covenants, and Appendix I, Definitions,
incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated January 25, 2002, Exhibit 10.9.

10.30 Reassignment of Rights to Payments under Services
Agreements, Physician Notes and Physician Security
Agreements, between Bank Austria Creditanstalt Corporate
Finance, Inc., and the Company, dated January 25, 2002,
incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated January 25, 2002, Exhibit 10.10.

10.31 Assignment and Assumption Agreement dated January 25, 2002,
between Bank Austria Creditanstalt Corporate Finance, Inc.,
and CapitalSource Finance, L.L.C., incorporated herein by
reference to the Registrant's Current Report on Form 8-K
dated January 25, 2002, Exhibit 10.11.

10.32 OptiCare Directors' & Officers' Tail Policy Trust dated
January 10, 2002, between the Registrant and Norman S.
Drubner, Esq.,as trustee. * +

10.33 Employment Agreement dated as of September 1, 2001, between
the Registrant and William Blaskiewicz, incorporated herein
by reference to Exhibit 10.21 of the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 2001.+

10.34 Employment Letter Agreement, dated as of February 18, 2002,
between the Registrant and Christopher J. Walls,
incorporated herein by reference to Exhibit 10.76 of the
Registrant's Quarterly Report on Form 10-Q filed May 15,
2002.+

10.35 Employment Letter Agreement, dated as of May 21, 2002,
between the Registrant and Lance A. Wilkes, incorporated
herein by reference to Exhibit 10.77 of the Registrant's
Quarterly Report on Form 10-Q filed August 14, 2002.+

10.36 Asset Purchase Agreement, dated as of August 1, 2002, by and
among the Registrant, PrimeVision Health, Inc. and
Optometric Eye Care Center, P.A., incorporated herein by
reference to Exhibit 2 of the Registrant's Current Report on
Form 8-K filed August 27, 2002.

10.37 Asset Purchase Agreement, dated as of February 7, 2003, by
and among the Wise Optical Vision Group, Inc. and OptiCare
Acquisition Corp., incorporated herein by reference to
Exhibit 2 of the Registrant's Current Report on Form 8-K
filed February 10, 2003.

10.38 Joinder Agreement and First Amendment, dated as of February
7, 2003, to the Amended and Restated Revolving Credit, Term
Loan and Security Agreement, originally dated as of January
25, 2003, by and between the Registrant, OptiCare Eye Health
Centers, Inc., PrimeVision Health, Inc. and CapitalSource
Finance LLC, incorporated herein by reference to Exhibit
99.2 of the Registrant's Current Report on Form 8-K filed
February 10, 2003.

10.39 Lease agreement dated August 7, 2000 and amendment to lease
dated August 1, 2001, by and between Mack-Cali So. West
Realty Associates L.L.C., as landlord, and Wise/Contact US
Optical Corporation, as tenant, for premises located at 4
Executive Plaza, Yonkers, New York, filed herewith. *

21 List of Subsidiaries of the Registrant. *

23 Consent of Deloitte & Touche regarding its report on our
financial statements as of December 31, 2002 and 2001, and
for each of the three years in the period ended December 31,
2002. *

* Filed herewith.
+ Management or compensatory plan.

(b) REPORTS ON FORM 8-K

The registrant did not file any reports on Form 8-K during the calendar
quarter ended December 31, 2002.

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.

March 18, 2003 OPTICARE HEALTH SYSTEMS, INC.

By: /s/ Dean J. Yimoyines
----------------------
Dean J. Yimoyines, M.D.
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ Dean J. Yimoyines Director, Chairman of the March 18, 2003
------------------------------- Board and Chief Executive
Dean J. Yimoyines, M.D. Officer (Principal Executive
Officer)

/s/ William A. Blaskiewicz Vice President and Chief March 18, 2003
------------------------------- Financial Officer
William A. Blaskiewicz (Principal Financial and
Accounting Officer)

/s/ Eric J. Bertrand Director March 18, 2003
-------------------------------
Eric J. Bertrand

/s/ David B. Cornstein Director March 18, 2003
-------------------------------
David B. Cornstein

/s/ Norman S. Drubner Director March 18, 2003
-------------------------------
Norman S. Drubner, Esq.

/s/ Mark S. Hoffman Director March 18, 2003
-------------------------------
Mark S. Hoffman

/s/ Richard L. Huber Director March 18, 2003
-------------------------------
Richard L. Huber

/s/ Clark A. Johnson Director March 18, 2003
-------------------------------
Clark A. Johnson

/s/ Melvin Meskin Director March 18, 2003
-------------------------------
Melvin Meskin

/s/ Mark S. Newman Director March 18, 2003
-------------------------------
Mark S. Newman

CERTIFICATION

I, Dean J. Yimoyines, certify that:

1. I have reviewed this annual report on Form 10-K of OptiCare Health Systems,
Inc.;

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

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's Board of Directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

March 18, 2003

By: /s/ Dean J. Yimoyines
-----------------------------------
Dean J. Yimoyines, M.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)

CERTIFICATION

I, William A. Blaskiewicz, certify that:

1. I have reviewed this annual report on Form 10-K of OptiCare Health Systems,
Inc.;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

March 18, 2003
By: /s/ William A. Blaskiewicz
--------------------------------------------
William A. Blaskiewicz
Vice President and Chief Financial Officer
(Principal Financial Officer)

INDEX TO FINANCIAL STATEMENTS

Report of Independent Auditors F-2

Consolidated Balance Sheets as of December 31, 2002 and 2001 F-3

Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 F-5

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000 F-6

Notes to Consolidated Financial Statements F-7

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
OptiCare Health Systems, Inc.
Waterbury, Connecticut

We have audited the accompanying consolidated balance sheets of OptiCare Health
Systems, Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 OptiCare Health Systems, Inc. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years then ended in
conformity with accounting principles generally accepted in the United States of
America.

As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets to
conform to Statement of Financial Accounting Standard No. 142.

/s/ Deloitte & Touche LLP

Stamford, Connecticut
March 13, 2003

F-2

OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

DECEMBER 31,
-----------------------------
2002 2001
----------- -----------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,086 $ 2,536
Accounts receivable, net 5,273 6,915
Inventories 2,000 1,787
Deferred income taxes, current 1,660 6,000
Notes receivable 516 -
Assets held for sale - 2,729
Other current assets 369 616
----------- -----------
Total Current Assets 12,904 20,583
----------- -----------
Property and equipment, net 3,337 4,446
Deferred debt issuance costs, net 1,187 706
Goodwill, net 20,516 20,516
Intangible assets, net 1,353 1,534
Deferred income taxes, non-current 3,140 1,800
Notes receivable, less current portion 838
Assets held for sale, non-current - 9,000
Other assets 1,830 1,157
----------- -----------
TOTAL ASSETS $ 45,105 $ 59,742
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 2,902 4,045
Claims payable and IBNR 2,143 3,398
Accrued salaries and related expenses 1,838 1,790
Accrued expenses 1,274 2,816
Current portion of long-term debt 1,266 1,729
Current portion of capital lease obligations 61 71
Liabilities of held for sale business - 1,978
Unearned revenue 1,053 567
Other current liabilities 131 734
----------- -----------
Total Current Liabilities 10,668 17,128

Long-term debt - related party 15,588 450
Other long-term debt, less current portion 2,564 32,058
Capital lease obligations, less current portion 7 85
Liabilities of held for sale business - 257
Other liabilities 1,139 2,782
----------- -----------
TOTAL NON-CURRENT LIABILITIES 19,298 35,632
----------- -----------

COMMITMENTS AND CONTINGENCIES (Notes 11, 12, and 19)

SERIES B 12.5% REDEEMABLE PREFERRED STOCK-RELATED PARTY (AT REDEMPTION VALUE OF
$1.40 PER SHARE) 4,487 -

STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, $.001 par value, 550,000 shares
authorized; no shares outstanding at December 31, 2002; 418,803 shares 1
outstanding at December 31, 2001 -
Common Stock, $0.001 par value; 75,000,000 shares authorized; 28,913,990 and
12,815,092 shares outstanding at December 31, 2002 and 2001, respectively 29 13
Additional paid-in-capital 63,589 60,679
Accumulated deficit (52,966) (53,711)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,652 6,982
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,105 $ 59,742
=========== ===========

See notes to consolidated financial statements.

F-3

OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
--------- --------- ---------

NET REVENUES:
Managed vision $ 29,426 $ 28,988 $ 38,260
Product sales 39,409 44,352 48,841
Other services 20,350 20,742 22,245
Other income 2,346 -- --
--------- --------- ---------
Total net revenues 91,531 94,082 109,346
--------- --------- ---------

OPERATING EXPENSES:
Medical claims expense 22,326 22,966 32,178
Cost of product sales 31,064 35,545 38,600
Cost of services 8,158 8,840 8,354
Selling, general and administrative 26,298 25,134 29,739
Restructuring and one-time charges -- 1,017 4,346
Write-off of goodwill -- -- 1,341
Depreciation 1,851 1,773 2,142
Amortization 181 1,124 1,194
Interest 3,048 3,022 3,500
--------- --------- ---------
Total operating expenses 92,926 99,421 121,394
--------- --------- ---------

Income (loss) from continuing operations before taxes (1,395) (5,339) (12,048)
Income tax expense (benefit) (947) (8,026) 2,638
--------- --------- ---------

Income (loss) from continuing operations (448) 2,687 (14,686)
Income from discontinued operations, net of income taxes 313 293 515
Loss on disposal of discontinued operations, net of income
tax expense of $342 (4,434) -- --
--------- --------- ---------
Income (loss) before extraordinary gain (4,569) 2,980 (14,171)
Extraordinary gain on early extinguishment of debt, net of
Income taxes of $3,475 5,314 -- --
--------- --------- ---------
Net Income (loss) $ 745 $ 2,980 $ (14,171)
Preferred stock dividends (531) -- --
--------- --------- ---------

Net income (loss) available to common stockholders $ 214 $ 2,980 $ (14,171)
========= ========= =========

EARNINGS (LOSS) PER SHARE--BASIC AND DILUTED:
Income (loss) from continuing operations available to common
stockholders $ (0.07) $ 0.21 $ (1.19)
Discontinued operations (0.33) 0.02 0.04
Extraordinary gain .42 -- --
--------- --------- ---------
Net income (loss) available to common stockholders $ 0.02 $ 0.23 $ (1.15)
========= ========= =========

See notes to consolidated financial statements.

F-4

OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
-------- -------- --------

OPERATING ACTIVITIES:
Net income (loss) $ 745 $ 2,980 $(14,171)
Extraordinary (gain) on early extinguishment of debt (5,314) -- --
(Income) loss on discontinued operations 4,121 (293) (515)
-------- -------- --------
Income (loss) from continuing operations (448) 2,687 (14,686)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 1,851 1,773 2,142
Amortization 181 1,124 2,535
Deferred income taxes (817) (7,800) 3,015
Bad debt expense 323 498 426
Non-cash interest expense 258 556 351
Non-cash restructuring charge -- -- 782
Loss on disposal of fixed assets -- 73 --
Changes in operating assets and liabilities
Accounts receivable 1,166 636 817
Inventories (213) 21 (171)
Other assets (168) (519) 701
Accounts payable and accrued expenses (3,192) (1,018) (528)
Other liabilities (136) 2,401 (116)
Cash provided by discontinued operations 992 1,020 1,228
-------- -------- --------
Net cash provided by (used in) operating activities (203) 1,452 (3,504)
-------- -------- --------

INVESTING ACTIVITIES:
Purchases of property and equipment (765) (317) (1,621)
Purchase of notes receivable (1,350) -- --
Payments received on notes receivable 658 -- --
Net proceeds from sale of discontinued operations 3,862 -- --
-------- -------- --------
Net cash provided by (used in) investing activities 2,405 (317) (1,621)
-------- -------- --------

FINANCING ACTIVITIES:
Proceeds from long-term debt 23,474 500 3,050
Net decrease in revolving credit facility (4,917) -- --
Proceeds from exercise of warrants 2,450 -- --
Proceeds from issuance of stock 4,000 9 10,135
Principal payments on long-term debt (25,143) (488) (9,445)
Payment of financing costs (1,445) -- --
Principal payments on capital lease obligations (71) (65) (91)
-------- -------- --------
Net cash provided by (used in) financing activities (1,652) (44) 3,649
-------- -------- --------
Increase (decrease) in cash and cash equivalents 550 1,091 (1,476)
Cash and cash equivalents at beginning of year 2,536 1,445 2,921
-------- -------- --------
Cash and cash equivalents at end of year $ 3,086 $ 2,536 $ 1,445
======== ======== ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,359 $ 432 $ 3,029
Cash paid (received) for income taxes $ 45 $ (109) $ (861)
Reduction of debt in exchange for reduction of receivables $ 1,011 -- --

See notes to consolidated financial statements.

F-5

OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

SERIES A RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS
---------------------- ----------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------------ --------- ------------ ---------- ------------ --------------- ----------

Balance at December 31, 1999 418,803 $ 1 8,972,128 $ 9 $ 47,784 $ (42,520) $ 5,274
Sale of registered shares 3,571,429 4 11,963 11,967
Exercise of options 35,209 89 89
Issuance of common stock
under employee stock
purchase plan 105,808 79 79
Issuance of common stock 62,750 86 86
Issuance of warrants 553 553
Net loss for 2000 (14,171) (14,171)
------------ --------- ------------ ---------- ------------ --------------- ----------
Balance at December 31, 2000 418,803 $ 1 12,747,324 $ 13 $ 60,554 $ (56,691) $ 3,877
Issuance of common stock
under employee stock
purchase plan 33,458 9 9
Issuance of common stock 34,310 8 8
Issuance of warrants 108 108
Net income for 2001 2,980 2,980
------------ --------- ------------ ---------- ------------ --------------- ----------
Balance at December 31, 2001 418,803 $ 1 12,815,092 $ 13 $ 60,679 $ (53,711) $ 6,982
Issuance of common stock 17,525,000 17 2,433 2,450
Cancelation of shares (418,803) (1) (1,426,102) (1) (375) (377)
Issuance of warrants 1,383 1,383
Dividends on redeemable
preferred stock (531) (531)
Net income for 2002 745 745
------------ --------- ------------ ---------- ------------ --------------- ----------
Balance at December 31, 2002 - $ - 28,913,990 $ 29 $ 63,589 $ (52,966) $10,652
============ ========= ============ ========== ============ =============== ==========

See notes to consolidated financial statements.

F-6

OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)

1. ORGANIZATION AND BASIS OF PRESENTATION

OptiCare Health Systems, Inc. and subsidiaries (the "Company") is an
integrated eye care services company focused on vision benefits management
(managed vision), the distribution of products and software services to eye care
professionals, and consumer vision services, including medical, surgical and
optometric services and optical retail. The Company contracts with OptiCare,
P.C.--a professional corporation--which employs ophthalmologists and
optometrists to provide the surgical, medical, optometric and other professional
services to patients.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company,
its affiliates OptiCare P.C. and Optometric Eye Care Centers P.A. All
intercompany accounts and transactions have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

The Company considers investments purchased with an original maturity of
three months or less when purchased to be cash equivalents.

RECEIVABLES

Receivables are stated net of allowances for doubtful accounts. Gross
receivables are stated net of contractual allowances and insurance
disallowances.

INVENTORIES

Inventories primarily consist of eyeglass frames, lenses, sunglasses,
contact lenses and surgical supplies. Inventories are valued at the lower of
cost or market, determined on the first-in, first-out (FIFO) basis.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Leasehold improvements are
being amortized over the term of the lease or the life of the improvement,
whichever is shorter. Depreciation and amortization are provided primarily using
the straight-line method over the estimated useful lives of the respective
assets as follows:

CLASSIFICATION ESTIMATED USEFUL LIFE
-------------- ---------------------
Furniture, fixtures and equipment 5 - 7 years
Leasehold improvements 3 - 5 years
Computer hardware and software 3 - 5 years

DEFERRED DEBT ISSUANCE COSTS

Deferred debt issuance costs are being amortized on the straight-line
method, which approximates the interest method, over the term of the related
debt and such amortization is included in interest expense. Amortization

F-7

expense of deferred debt issuance costs totaled $258 and $ 265 for the years
ended December 31, 2002 and 2001, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS

The Company accounts for goodwill and intangible assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" (see "New Accounting Pronouncements"), which was
adopted by the Company on January 1, 2002. In accordance with this standard,
goodwill and other intangible assets with indefinite useful lives are no longer
subject to amortization, but are reviewed by the Company for impairment at least
annually. Goodwill represents the excess of the purchase price over the fair
value of identifiable net assets acquired in business combinations accounted for
as a purchase. For the years 2001 and 2000, goodwill was amortized using the
straight-line method, generally over a period of 25 years. Intangible assets,
which represent purchased service and non-compete agreements, are amortized over
their contract life and are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. The weighted average amortization period for intangibles is
approximately 13 years.

MANAGED VISION REVENUE

The Company provides vision care services, through its managed vision care
business, as a preferred provider to HMOs, PPOs, third party administrators and
insurance indemnity programs. The contractual arrangements with these entities
operate primarily under capitated programs. Capitation payments are accrued when
they are due under the related contracts at the agreed-upon per-member,
per-month rates. Revenue from non-capitated services, such as fee for service
and other preferred provider arrangements, is recognized when the services are
provided and the Company's customers are obligated to pay for such services.

PRODUCT SALES REVENUE

The Company recognizes revenue on product sales at the time of delivery to
the customer. Product sales revenue includes sales of optical products to
customers through the retail optometry centers that the Company manages and to
affiliated and non-affiliated ophthalmologists and optometrists through the
Company's buying group. The buying group negotiates volume buying discounts with
optical product suppliers. Products sold through the buying group are shipped
directly to the buying group's customers from the supplier. The Company bills
the customer and bears the credit risk. All sales to affiliated ophthalmologists
and optometrists are eliminated in consolidation.

SERVICES REVENUE

The Company (through its affiliated professional corporation) provides
comprehensive eye care services to consumers, including medical and surgical
treatment of eye diseases and disorders by ophthalmologists, and vision
measuring and non-surgical correction services by optometrists. The Company also
charges a fee for providing the use of its ambulatory surgery center to
professionals for surgical procedures. The Company's ophthalmic, optometric and
ambulatory surgery center services are recorded at established rates reduced by
an estimate for contractual allowances and doubtful accounts. Contractual
allowances arise due to the terms of certain reimbursement contracts with
third-party payors that provide for payments to the Company at amounts different
from its established rates. The contractual allowance represents the difference
between the charges at established rates and estimated recoverable amounts and
is recognized in the period the services are rendered. The contractual allowance
recorded is estimated based on an analysis of collection experience in relation
to amounts billed and other relevant information. Any differences between
estimated contractual adjustments and actual final settlements under
reimbursement contracts are recognized as contractual adjustments in the period
of final settlements.

The Company's Health Services Organization ("HSO") provides marketing,
managed care and other administrative services to individual ophthalmology and
optometry practices under agreements between the Company and each practice. HSO
revenue is recognized monthly at a contractually agreed upon fee, based on a
percentage of cash collections by the HSO practices.

F-8

The Company sells and installs software systems that support eye health
practice management to optometry practices, retail optical locations and
manufacturing laboratories. Revenue associated with sales of software systems is
recognized upon delivery and acceptance by the customer.

OTHER INCOME

Revenue from Health Service Organization settlements are recognized in
other income when received ("IBNR").

MEDICAL CLAIMS EXPENSE

Claims expense is recorded as provider services are rendered and includes
an estimate for claims incurred but not reported ("IBNR").

Reserves for estimated insurance losses are determined on a case by case
basis for reported claims, and on estimates based on company experience for loss
adjustment expenses and incurred but not reported claims. These liabilities give
effect to trends in claims severity and other factors which may vary as the
losses are ultimately settled. The Company's management believes that the
estimates of the reserves for losses and loss adjustment expenses are
reasonable; however, there is considerable variability inherent in the reserve
estimates. These estimates are continually reviewed and, as adjustments to these
liabilities become necessary, such adjustments are reflected in current
operations in the period of the adjustment.

COST OF PRODUCT SALES

Cost of product sales is comprised of optical products including
eyeglasses, contact lenses and other optical goods.

COST OF SERVICES

Cost of services represents the direct costs associated with services
revenue. These costs are primarily comprised of medical and other service
provider wages, as well as medical and other supplies and costs incidental to
other services revenue.

MALPRACTICE CLAIMS

The Company purchases insurance to cover medical malpractice claims. There
are known claims and incidents as well as potential claims from unknown
incidents that may be asserted from past services provided. Management believes
that these claims, if asserted, would be settled within the limits of insurance
coverage.

INSURANCE OPERATIONS

The Company's managed vision care business includes a wholly-owned
subsidiary which is a licensed single service HMO in Texas (the "Texas HMO").
The Texas HMO is subject to regulation and supervision by the Texas Department
of Insurance, which has broad administrative powers relating to standards of
solvency, minimum capital and surplus requirements, maintenance of required
reserves, payments of dividends, statutory accounting and reporting practices,
and other financial and operational matters. The Texas Department of Insurance
requires that stipulated amounts of paid-in-capital and surplus be maintained at
all times. Dividends payable by the Texas HMO to the Company are generally
limited to the lesser of 10% of statutory-basis capital and surplus or net
income of the preceding year excluding realized capital gains.

Under the Company's agreement with the Texas Department of Insurance, the
Company was required to pledge investments of $250 at December 31, 2002 and
2001.

F-9

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires an asset and liability method of accounting for deferred income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis using enacted tax rates expected to
apply to taxable income in the years the temporary differences are expected to
reverse.

STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. As
permitted under SFAS 123 and as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an Amendment of Statement
of Financial Accounting Standard No. 123", the Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion (APB) No. 25 "Accounting for Stock Issued to Employees"
and related interpretations, and provides the pro forma disclosure. Accordingly,
compensation cost for the stock options is measured as the excess, if any, of
the fair value of the Company's stock at the date of the grant over the amount
an employee must pay to acquire the stock.

Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company accounted for its employee
stock options granted subsequent to December 31, 1995, under the fair value
method of SFAS 123. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 2002 and 2000 (there were no options granted in 2001):

2002 2000
--------------- -------------
Risk free interest rate 3.0% 5.50%
Dividends - -
Volatility factor .60 .55
Expected Life 5 years 5 years

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
------ ------ --------

Net income (loss) available to common stockholders,
as reported $ 214 $2,980 $(14,171)
Less: Total stock-based employee compensation
expense determined under Black-Scholes
option pricing model, net of related tax effects (519) (321) (364)
------ ------ --------

Pro forma net income (loss) $ (305) $2,659 $(14,535)
====== ====== ========

Earnings (loss) per share - As reported:
Basic and Diluted $ 0.02 $ 0.23 $ (1.15)
Earnings (loss) per share - Pro forma:
Basic $(0.02) $ 0.21 $ (1.18)
Diluted $(0.02) $ 0.20 $ (1.18)

F-10

FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, as amended, "Disclosures about Fair Value of Financial
Instruments," requires the disclosure of fair value information for certain
assets and liabilities for which it is practicable to estimate that value. The
Company's financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, long-term debt and redeemable
preferred stock.

The company considers the carrying amount of cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, accrued liabilities and
long-term debt, excluding senior subordinated debt, to approximate their fair
values because of the short period of time between the origination of such
instruments and their expected realization or their current market rate of
interest. Using available market information, the Company determined that the
fair value at December 31, 2002 of senior subordinated debt was $ 7,798 compared
to a carrying value of $15,588 and the fair value of redeemable preferred stock
was $12,179 compared to a carrying value of $4,487.

CONCENTRATIONS

The Company's principal financial instrument subject to potential
concentration of credit risk is accounts receivable which are unsecured. The
Company records receivables from patients and third party payors related to eye
health services rendered. The Company does not believe that there are any
substantial credit risks associated with receivables due from governmental
agencies and any concentration of credit risk from other third party payors is
limited by the number of patients and payors. The Company does not believe that
there are any substantial credit risks associated with other receivables due
from buying group members or other customers. The Company has eight managed
vision contracts with three insurers which account for 23% and 20% of the
Company's consolidated revenue in 2002 and 2001, respectively.

ESTIMATES

In preparing financial statements, management is required to make estimates
and assumptions, particularly in determining the adequacy of the allowance for
doubtful accounts, insurance disallowances and managed care claims accrual and
in evaluating goodwill and intangibles for impairment, that affect the reported
amounts of assets and liabilities as of the balance sheet date and results of
operations for the year. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified in order to conform to
the current year presentation. (See also Notes 4 and 6.)

NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
The standard changes the accounting for goodwill and intangible assets with an
indefinite life whereby such assets will no longer be amortized; however the
standard does require, at least annually, an evaluation for impairment, and a
corresponding write-down, if appropriate. SFAS No. 142 requires a transitional
goodwill impairment test six months from the date of adoption. The Company
completed its transitional impairment test during the quarter ended June 30,
2002 and the annual test for impairment during the fourth quarter of 2002. No
impairment write-downs were required in connection with these tests.

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting For Asset Retirement Obligations". This statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Company is required to adopt the provisions of SFAS No. 143 at the
beginning of fiscal 2003. The Company has determined that the adoption of this
statement will not have a material impact on its financial position or results
of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement requires that one
accounting model be used for long-lived assets to be disposed of by sale,

F-11

whether previously held and used or newly acquired. This statement also broadens
the definition of discontinued operations to include more disposal transactions.
The provisions of this statement were adopted by the Company on January 1, 2002.
The Company applied SFAS No. 144 to the sale of its North Carolina retail
optical and optometry assets and reported a loss on disposal of $4,434 for the
year ended December 31, 2002.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections". SFAS
No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No.13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No.145 related to classification of debt extinguishment are
effective for fiscal years beginning after May 15, 2002. The provisions of SFAS
No.145 related to lease modification are effective for transactions occurring
after May 15, 2002. In 2003, the Company will reclassify its previously reported
gain from extinguishment of debt of $8,789 and related income tax expense of
$3,475 from an extraordinary item to continuing operations.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" and nullified EITF Issue No. 94-3.
SFAS No.146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred, whereas EITF No
94-3 had recognized the liability at the commitment date of an exit plan. The
Company is required to adopt the provisions of SFAS No. 146 effective for exit
or disposal activities initiated after December 31, 2002. The Company does not
expect the provisions of SFAS No. 146 to have a material impact on its financial
position or results of operations.

In November 2002, FASB Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. The interpretation provides
guidance on the guarantor's accounting and disclosure requirements for
guarantees, including indirect guarantees of indebtedness of others. The Company
has adopted the disclosure requirements of the interpretation as of December 31,
2002. The accounting guidelines are applicable to guarantees issued after
December 31, 2002 and require that the Company record a liability for the fair
value of such guarantees in the balance sheet. The Company does not expect the
provisions of FIN No. 45 to have a material impact on its financial position or
results of operations.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of Statement of Financial
Accounting Standard No. 123." This statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This statement also amends the disclosure
requirements of SFAS No. 123 and Accounting Principles Board Opinion No. 28,
"Interim Financial Reporting," to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company implemented the amended disclosure requirements effective December 31,
2002. The Company has not yet determined whether it will voluntarily change to
the fair value based method of accounting for stock-based employee compensation.

3. CAPITAL RESTRUCTURING

On January 25, 2002, the Company closed a series of transactions which
resulted in a major restructuring of its debt, equity and voting capital stock
(the "Capital Restructuring Transactions"). The Capital Restructuring
Transactions included, among other things, the following:

Palisade Concentrated Equity Partnership, L.P. ("Palisade"), a fund manager
and stockholder of the Company, purchased, for $3,600 in cash, 2,571,429 shares
of the Company's Series B 12.5% Voting Cumulative Convertible Participating
Preferred Stock (the "Series B Preferred Stock"), par value $.001 per share and
Linda Yimoyines, wife of Dean J. Yimoyines, M.D., Chairman of the Board and
Chief Executive Officer of the Company, purchased for a $400 cash payment
285,714 shares of Series B Preferred Stock. Each share of Series B Preferred
Stock is

F-12

immediately convertible into ten shares of common stock and has the voting power
equivalent to ten shares of common stock; accrues cumulative dividends at an
annual rate of 12.5%; must be redeemed in full by the Company on December 31,
2008; and with respect to dividends, redemption rights, and rights on
liquidation, winding up, corporate reorganization and dissolution, ranks senior
to the Company's common stock.

Bank Austria Creditanstalt Corporate Finance, Inc. ("Bank Austria"), which
was, until January 25, 2002, the Company's senior secured lender, forgave
approximately $10,000 of debt and accrued interest due to it and sold the loans
and other obligations of the Company which Bank Austria then held, including
security agreements, pledges of stock by certain of the Company's subsidiaries
and guarantees of loans and other obligations, to CapitalSource Finance LLC
("CapitalSource"), an asset-based lender specializing in the health care
industry.

CapitalSource, as lender, and the Company, as borrower, amended and
restated the terms of the indebtedness acquired by CapitalSource from Bank
Austria by entering into an Amended and Restated Revolving Credit, Term Loan and
Security Agreement, referred to herein as the Loan and Security Agreement or
Amended Credit Facility.

Palisade made a subordinated loan to the Company of $13,900, and Linda
Yimoyines made a subordinated loan to the Company of $100, which loans are
evidenced by senior subordinated secured notes. These notes are subordinate to
the Company's indebtedness to its senior lender, CapitalSource, and are secured
by second-priority security interests in substantially all of the Company's
assets (the first-priority security interest is held by CapitalSource).

In connection with providing the $13,900 subordinated loan to the Company,
Palisade received warrants to purchase up to 17,375,000 shares of common stock.
In connection with providing the $100 subordinated loan to the Company, Ms.
Yimoyines received warrants to purchase up to 125,000 shares of common stock. In
conjunction with the amendment and restatement of the credit facility,
CapitalSource received warrants to purchase 250,000 shares of common stock. The
warrants were issued at an exercise price of $0.14 per share and are exercisable
during a ten-year period expiring January 24, 2012. The estimated fair value of
the warrants of approximately $1,380 was recorded as a debt discount and is
being amortized on the interest method over the term of the related debt.
Palisade and Ms. Yimoyines exercised 17,375,000 and 125,000, respectively, of
these warrants in December 2002.

A bridge financing arrangement (the "Bridge Loan") from Alexander
Enterprise Holdings Corp. ("Alexander Enterprise"), Palisade and Ms. Yimoyines
was satisfied in full, as follows: (i) $2,546 in cash was paid to Alexander
Enterprise in full satisfaction of the $2,300 of principal and $246 of accrued
interest due to Alexander Enterprise under the Bridge Loan after which Alexander
Enterprise relinquished its security interest in the assets of the Company (the
cash was provided by the $3,600 purchase by Palisade of Series B Preferred
Stock); (ii) the Company issued 309,170.5 shares of Series B Preferred Stock to
Palisade to satisfy the $400 of principal and $33 of accrued interest due to
Palisade as a participant under the Bridge Loan; and (iii) the Company issued
38,646.3 shares of Series B Preferred Stock to Ms. Yimoyines to satisfy the $50
of principal and $4 of accrued interest due to Ms. Yimoyines as a participant
under the Bridge Loan. Alexander Enterprise has no further claims against the
Company.

The Company reacquired from Bank Austria, for a cash payment of $1,350,
certain notes and contractual rights originally issued or made to the Company in
connection with the Company's transfers of certain medical practice assets to
physicians engaged in such practices.

Without further consideration, Bank Austria surrendered warrants previously
issued to it to purchase 100,000 shares of the Company's common stock;
surrendered to the Company (for retirement) 418,803 shares of Series A
Convertible Preferred Stock of the Company; and surrendered to the Company (for
the Company to retire) 56,900 shares of common stock.

In connection with the Capital Restructuring Transactions, the number of
shares of authorized common stock was increased from 50,000,000 to 75,000,000.
The additional authorized shares provide, among other things, for the
availability of common stock to be issued upon conversion of the Series B
Preferred Stock and exercise of the warrants issued.

F-13

4. DISCONTINUED OPERATIONS

In May 2002, the Company's Board of Directors approved management's plan to
dispose of substantially all of the net assets relating to the retail optical
business and professional optometry practice locations it operated in North
Carolina ("NCOP"). Accordingly, during the quarter ended June 30, 2002 the
Company recorded a $3,940 loss on disposal of discontinued operations based on
the estimated fair value of the net assets held for sale. On August 12, 2002 the
Company consummated the sale of the NCOP net assets to Optometric Eye Care
Center, P.A. ("OECC"), an independent professional association owned by two
former officers of the Company and recorded an additional loss on disposal of
$494, including income tax expense of $342. In connection with the sale, the
Company received $4,200 in cash and a $1,000 promissory note. Additional
consideration included OECC's surrender of 1,321,010 shares of the Company's
common stock (for retirement) with an estimated fair market value of $357 and
OECC's assumption of $135 of certain other liabilities. The aggregate gross
consideration from the sale of approximately $5,692 was offset by approximately
$477 of closing and other direct costs associated with the sale. The Company
paid $3,074 to its bank from the proceeds it received from the sale, of which
$500 was applied as a payment on the term loan and $2,574 was applied as a
payment on the outstanding credit facility.

This sale was accounted for as a disposal group under SFAS No. 144.
Accordingly, amounts in the financial statements and related notes for all
periods presented have been reclassified to reflect SFAS No. 144 treatment.

The carrying amounts of the assets and liabilities of the disposal group at
December 31, 2001 were as follows:

Assets:
Accounts receivable $ 1,350
Inventory 1,259
Property and equipment, net 1,846
Intangible assets, net 6,545
Goodwill 60
Other assets 669
----------------
Total assets $11,729
================

Liabilities:
Accounts Payable $ 963
Accrued Expenses 938
Other liabilities 334
----------------
Total liabilities $ 2,235
================

Operating results of the discontinued operations are as follows:

2002 2001 2000
-------- -------- --------

External revenue $ 16,771 $ 17,985 $ 18,537
======== ======== ========

Intercompany revenue $ 4,875 $ 9,602 $ 8,814
======== ======== ========

Income from discontinued operations before taxes $ 523 $ 489 $ 858
Income tax expense 210 196 343
-------- -------- --------

Income from discontinued operations 313 293 515
Loss on disposal of discontinued operations, net of
income taxes of $342 (4,434) -- --

-------- -------- --------
Total income (loss) from discontinued operations $ (4,121) $ 293 $ 515
======== ======== ========

Income (loss) per share from discontinued operations $ (0.33) $ 0.02 $ 0.04
======== ======== ========

F-14

5. EXTRAORDINARY ITEM

On January 25, 2002, the Company recorded a gain on the early
extinguishment of debt of $8,789 before income tax of $3,475 as a result of the
Company's Capital Restructuring Transactions. The $8,789 gain was comprised
principally of approximately $10,000 of debt and interest forgiveness by Bank
Austria, the Company's former senior secured lender, which was partially offset
by $1,200 of unamortized deferred financing fees and debt discount.

6. SEGMENT INFORMATION

During the third quarter of 2002, the Company sold its retail optometry
division in North Carolina and modified the Company's strategic vision to
reflect that of the Company's new President. Accordingly, the Company realigned
its business into the following three reportable operating segments: (1) Managed
Vision, (2) Consumer Vision, and (3) Distribution and Technology. These
operating segments are managed separately, offer separate and distinct products
and services, and serve different customers and markets. Discrete financial
information is available for each of these segments and the Company's President
assesses performance and allocates resources among these three operating
segments.

The Managed Vision segment contracts with insurers, managed care plans and
other third party payors to manage claims payment administration of eye health
benefits for those contracting parties. The Consumer Vision segment sells retail
optical products to consumers and operates integrated eye health centers and
surgical facilities where comprehensive eye care services are provided to
patients. The Distribution and Technology segment provides products and services
to eye care professionals (ophthalmologists, optometrists and opticians). This
segment operates a buying group program for optical and ophthalmic goods and
medical supplies, and develops and sells technology systems and software, to eye
care professionals. The Company had multiple contracts with one insurer, which
accounted for 11% of the Company's consolidated revenue in 2002.

In addition to its reportable operating segments, the Company's "All Other"
category includes other non-core operations and transactions, which do not meet
the quantitative thresholds for a reportable segment. Included in the "All
Other" category is revenue earned under the Company's Health Service
Organization ("HSO") operation, which receives fee income for providing certain
support services to individual ophthalmology and optometry practices. While the
Company continues to meet its contractual obligations by providing the requisite
services under its HSO agreements, the Company is in the process of disengaging
from a number of these arrangements.

As a result of the changes discussed above, historical amounts previously
reported have been restated to conform to the Company's current operating
segment presentation.

F-15

Management assesses the performance of its segments based on income before
income taxes, interest expense, depreciation and amortization, and other
corporate overhead. Summarized financial information, by segment, for the years
ended December 31, 2002, 2001 and 2000 is as follows:

YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------

REVENUES:
Managed vision $ 29,426 $ 28,988 $ 38,260
Consumer vision 28,834 28,606 32,445
Distribution and technology 35,029 38,721 40,937
--------- --------- ---------
Reportable segment totals 93,289 96,315 111,642
All other 3,283 2,568 2,788
Elimination of inter-segment revenues (5,041) (4,801) (5,084)
--------- --------- ---------

Total net revenue $ 91,531 $ 94,082 $ 109,346
========= ========= =========

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAX:
Managed vision $ 2,630(a) $ 2,018 $ 1,644
Consumer vision 1,463 385 (391)
Distribution and technology 267 (71) 649
--------- --------- ---------
Reportable segment totals 4,360 2,332 1,902
All other 2,335 2,041 1,798
Depreciation (1,851) (1,773) (2,142)
Amortization expense and write-off of goodwill (181) (1,124) (2,535)
Interest expense (3,048) (3,022) (3,500)
Corporate (3,010) (2,776) (3,225)
Restructuring and other one-time charges -- (1,017) (4,346)
--------- --------- ---------
(Loss) from continuing operations before tax $ (1,395) $ (5,339) $ (12,048)
========= ========= =========

ASSETS:
Managed vision $ 15,133 $ 14,435 $ 17,748
Consumer vision 10,200 11,767 12,463
Distribution and technology 7,456 7,652 8,551
--------- --------- ---------

Segment totals 32,789 33,854 38,762
Discontinued operations -- 11,729 12,685
Corporate and other 12,316 14,159 4,066
--------- --------- ---------
Total $ 45,105 $ 59,742 $ 55,513
========= ========= =========

CAPITAL EXPENDITURES:
Managed vision $ 51 $ 25 $ 198
Consumer vision 518 143 442
Distribution and technology 12 36 59
--------- --------- ---------

Segment totals 581 204 699
Discontinued operations 379 306 185
Corporate and other 184 113 922
--------- --------- ---------
Total $ 1,144 $ 623 $ 1,806
========= ========= =========

(a) Includes a $600 reduction in claims expense due to a favorable adjustment to
the reserve.

F-16

7. RESTRUCTURING AND OTHER ONE-TIME CHARGES

DEBT AND EQUITY RESTRUCTURING

In the fourth quarter of 2001, the Company recorded approximately $1,017 of
professional fees, primarily legal and work-out related non-deferrable costs,
associated with the restructure of the Company's long-term debt.

OPERATIONS RESTRUCTURING

In the fourth quarter of 2000, the Company recorded $2,306 of restructuring
charges and $230 of charges related to the canceled sale of the Connecticut
operations. The Company's restructuring plans included closing and consolidating
facilities, reducing overhead and streamlining operations and was completed in
2001. The restructuring charge in 2000 of $2,306 was comprised of $242 of
employee termination costs for six employees, $1,160 of lease related charges,
$782 of fixed asset write-offs and $122 of other related expenses.

During the year ended December 31, 2000, the restructuring liability was
reduced by $1,074, of which $292 represented cash payments and $782 were
non-cash related charges from the write-off of assets related to facilities that
were closed as part of its restructuring activities. During the year ended
December 31, 2001 and 2002, $436 and $119, respectively, was charged against the
restructuring accrual, representing primarily severance and lease related
payments on vacant facilities that were closed as part of the Company's
restructuring activities. The remaining restructuring liability at December 31,
2002 of $677 principally relates to lease obligations on excess office space
that are not expected to be utilized over the terms of the remaining leases.

TERMINATED MERGER

In June 2000, the Company terminated a merger agreement it had entered into
in February 2000 with Vision Twenty-One, Inc. The Company recorded a charge of
$1,810 of merger related costs, primarily professional fees, associated with the
terminated merger with Vision Twenty-One.

8. RECEIVABLES

Activity in the allowance for doubtful accounts consisted of the following for
the years ended December 31:

2002 2001 2000
----------- ----------- ------------
Balance at beginning of period $ 501 $ 558 $ 523
Additions charged to expense 323 498 426
Deductions (237) (555) (391)
----------- ----------- ------------
Balance at end of period $587 $ 501 $ 558
=========== =========== ============

9. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

DECEMBER 31,
--------------------------------
2002 2001
------------- -------------
Leasehold improvements $ 3,166 $ 2,580
Furniture and equipment 5,043 4,367
Computer hardware and software 3,828 3,532
------------- -------------
Total 12,037 10,479
Accumulated depreciation and amortization (8,700) (6,033)
------------- -------------
Property and equipment, net $ 3,337 $ 4,446
============= =============

F-17

10. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets". The standard changes the accounting for goodwill and
intangible assets with an indefinite life whereby such assets will no longer be
amortized; however the standard does require at least annually an evaluation for
impairment, and a corresponding write-down, if appropriate. The Company
completed its transitional test for impairment in the second quarter of 2002 and
its annual test for impairment during the fourth quarter of 2002. No impairment
charges were required in connection with these tests. There were no changes to
the carrying value of goodwill during 2002. The carrying value of goodwill by
reportable segment at December 31, 2002 was as follows: Managed Vision $11,820,
Consumer Vision $4,746 and Distribution and Technology $3,950, for an aggregate
carrying value of $20,516.

Comparative information as if goodwill had not been amortized is as
follows:

2002 2001 2000
-------- -------- --------

Net income (loss) as reported $ 745 $ 2,980 $(14,171)
Add back: goodwill amortization -- 943 943
-------- -------- --------
Adjusted net income (loss) 745 3,923 (13,228)
Preferred stock dividend (531) -- --
-------- -------- --------
Adjusted net income (loss) available to common
Stockholders $ 214 $ 3,923 $(13,228)
======== ======== ========

Earnings (loss) per common share - basic and diluted:
Net income (loss) available to common stockholders $ 0.02 $ 0.23 $ (1.15)
Goodwill amortization -- 0.07 0.08
-------- -------- --------
Adjusted net income (loss) per share $ 0.02 $ 0.30 $ (1.07)
======== ======== ========

Intangible assets subject to amortization are as follows as of December 31:

2002 2001
--------------------------------------- --------------------------------------
Gross Accumulated Net Gross Accumulated Net
Amount Amortization Balance Amount Amortization Balance
--------------------------------------- --------------------------------------

Service Agreement 1,658 (368) 1,290 1,658 (258) 1,400
Non-compete agreements 265 (202) 63 265 (131) 134
--------------------------------------- --------------------------------------
Total 1,923 (570) 1,353 1,923 (389) 1,534
======================================= ======================================

Amortization expense for the year ended December 31, 2002 was $181.
Amortization expense for the year ended December 31, 2001 was $1,124, of which
$181 was amortization of intangibles and $943 was amortization of goodwill.
Estimated annual amortization expense is expected to be $172 in 2003 and $111
for each of the years 2004 through 2007.

F-18

11. LONG-TERM DEBT

The details of the Company's long-term debt at December 31, 2002 and 2001 are as
follows:

2002 2001
----------- -----------

Term note payable to CapitalSource in principal amounts of $50 per quarter. The
final principal payment is due and payable on January 25, 2004. $ 2,333 $ -

Revolving credit note to CapitalSource, due January 25, 2005. 1,557 -

Senior subordinated secured notes payable due January 24, 2012. 15,588 -

Subordinated notes payable due at various dates through 2004. Principal and
interest payments are due monthly or annually. Interest is payable at rates
ranging from 7% to 11.4%. 954 1,824

Notepayable from practice acquisition due in annual installments of $240
plus interest at 7.0% per year, through October 2003, collateralized
by specific assets of the Company. (Satisfied in January 2003) 235 480

Term note and revolving credit note to Bank Austria (Satisfied in January 2002) - 29,675

Promissory note payable due June 1, 2003 (Satisfied in January 2002) 2,750

Unamortized discounts (1,249) (492)
----------- -----------
Total 19,418 34,237
Less current portion 1,266 1,729
----------- -----------
$18,152 $32,508
=========== ===========

Aggregate maturities of long-term debt by year are 2003 - $1,266; 2004 -
$2,257; 2005 - $1,556; 2006 and 2007 - $0; and $14,339 thereafter.

In January 2002, in connection with the Capital Restructuring Transactions,
the Company entered into an Amended and Restated Revolving Credit, Term Loan and
Security Agreement (the "Amended Credit Facility") with CapitalSource Finance,
LLC. CapitalSource acquired this agreement from the Company's previous senior
secured lender, Bank Austria, discussed below (see Note 3). The Amended Credit
Facility made available to the Company a $3,000 term loan and up to a $ 10,000
revolving loan facility (the "Revolver") secured by a security interest in
substantially all of the assets of the Company. The outstanding borrowings under
the Amended Credit Facility are individually and collectively limited to
specific available borrowing base amounts, as defined in the agreement. The
interest rate applicable to the term loan under the Amended Credit Facility
equals the prime rate plus 3.5%. The interest rate applicable to the Revolver is
prime rate plus 1.5%. During 2002, the Company's average borrowing rate was
approximately 9.32%. The Company pays a monthly unused line fee that equals the
excess, if any, of $3,000 over all interest accrued for such month. Although the
Company may borrow up to $10 million under the Revolver, availability is based
on the value of the collateral underlying the facility at any given time and on
the amount outstanding under the facility at such time. As of December 31, 2002
the Company had $2,540 of availability under its Revolver.

The Amended Credit Facility contains certain restrictions on the conduct of
the Company's business, including, among other things, restrictions on incurring
debt, purchasing or investing in the securities of, or acquiring any other
interest in, all or substantially all of the assets of any person or joint
venture, declaring or paying any cash dividends or making any other payment or
distribution on capital stock, and creating or suffering liens on the Company's
assets. The Company is required to maintain certain financial covenants,
including a minimum fixed charge coverage ratio and minimum net worth.

In January 2002, Palisade made a subordinated loan to the Company of
$13,900 and Ms. Yimoyines made a subordinated loan to the Company of $100 which
loans are evidenced by senior subordinated secured notes. These notes are
subordinated to the Company's senior indebtedness with CapitalSource, and are
secured second priority security interests in substantially all of the Company's
assets. Principal is due to be paid on January 25, 2012. The notes bear interest
at a rate of 11.5% per annum, payable on the last day of each calendar quarter.
In the first and

F-19

second years of the notes, the Company has the right to defer 100% and 50%,
respectively, of interest to maturity by increasing the principal amount of the
note by the amount of interest so deferred. In the third through tenth years,
the holder of the note has the right to require the Company to defer interest to
maturity by increasing the principal amount of the note by the amount of
interest so deferred. The principal balance at December 31, 2002 includes $1,588
of interest paid in kind.

Prior to January 2002, the Company was a party to a loan agreement (the
"Credit Facility") with Bank Austria. The Credit Facility made available to the
Company a $21,500 term loan and up to a $12,700 revolving loan facility secured
by a security interest in substantially all of the assets of the Company. The
outstanding borrowings under the revolving loan facility and the term loan were
individually and collectively limited to specific available borrowing base
amounts, as defined in the agreement. The interest rate applicable to the Credit
Facility was the base rate or the eurodollar rate (each as defined in the Credit
Facility). The base rate was generally the higher of the prime rate for domestic
commercial loans in effect on such applicable day, or the federal funds rate in
effect on such applicable day plus one-half of one percent (1/2 of 1%). The
Company was charged a commitment fee of one-half of one percent (1/2 of 1%) per
annum of the sum of the aggregate average daily unused amount of the Company's
revolving loan facility. During 2001, the Company's average borrowing rate was
approximately 7.0%. As previously discussed, on January 25, 2002 Bank Austria
forgave approximately $10,000 of principal and interest and sold this loan to
CapitalSource. CapitalSource, as lender, and the Company, as borrower, amended
and restated the terms of the indebtedness as described above (see also Notes 3
and 5).

On October 10, 2000, the Company obtained $2,250 through the Bridge Loan
with Alexander Enterprise, which was secured through a security interest in
substantially all of the assets of the Company. In connection with the Bridge
Loan, the Company entered into an amendment to the Credit Facility with Bank
Austria, which provided, among other things, that the Company pay $1,200 to Bank
Austria as repayment of principal and interest. Of the $1,200 paid to Bank
Austria, $300 was applied to past due interest, $400 was used to repay principal
and $500 was applied as a prepayment of interest. The remaining proceeds of
$1,050 were used for general working capital purposes.

On January 5, 2001, the Bridge Loan was amended and the Company received an
additional $500 of cash. Of this additional cash, $50 was provided by Alexander
Enterprises, $400 was provided by Palisade and $50 was provided by Ms.
Yimoyines. In connection with the additional funds provided to the Company under
the amendment to the Bridge Loan, the Company issued additional warrants with an
estimated fair value at the date of issuance of $108. The estimated fair value
of the warrants issued were determined using the Black-Scholes pricing model and
was recorded as a discount to the Bridge Loan. In connection with the
restructuring of the Company's debt, on January 25, 2002, the Bridge Loan was
fully satisfied by a payment by the Company of $2,546 to Alexander Enterprise
and the issuance of 309,170.5 and 38,646.3 shares of Series B Preferred Stock to
Palisade and Ms. Yimoyines, respectively (see Note 3).

At December 31, 2002 and 2001 the Company had standby letters of credit
outstanding in the amount of $400.

12. LEASES

The Company leases certain furniture, machinery and equipment under capital
lease agreements that expire through 2005. The Company primarily leases its
facilities under cancelable and noncancelable operating leases expiring in
various years through 2012, including leases with related parties (see Note 16).
Several facility leases have annual rental terms comprised of base rent at the
inception of the lease adjusted by an amount based, in part, upon the increase
in the consumer price index. Lease expense charged to continuing operations
during the years ended December 31, 2002, 2001 and 2000 was $3,990, $5,087 and
$5,271.

Property and equipment includes the following amounts for capital leases at
December 31:

2002 2001
------ ------
Furniture, machinery and equipment $ 248 $ 660
Less accumulated amortization (181) (342)
------ ------
$ 67 $ 318
====== ======

Capital lease obligations of $55 were incurred for acquisition of new
equipment in 2001. Amortization of capital leases is included in depreciation
expense.

F-20

Future minimum lease payments, by year and in the aggregate, under capital
leases and operating leases with remaining terms of one year or more consisted
of the following at December 31, 2002:

CAPITAL OPERATING
LEASES LEASES
--------------- ---------------
2003 $ 61 $ 1,839
2004 7 1,667
2005 1,534
2006 - 1,389
2007 - 1,209
Thereafter - 2,762

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

Total minimum lease payments $ 68 $10,400
=============== ===============

13. 401(K) SAVINGS PLAN

The Company provides a defined contribution 401(k) savings plan to
substantially all employees who meet certain age and employment criteria.
Eligible employees are allowed to contribute a portion of their income in
accordance with specified guidelines. The Company matches a percentage of
employee contributions up to certain limits. Employer contributions are made on
a discretionary basis as authorized by the Board of Directors. Employer
contributions for the years ended December 31, 2002, 2001, and 2000 were $288,
$333 and $417, respectively.

14. REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company has 5,000,000 shares of Series B Preferred Stock authorized. On
January 25, 2002 the Company designated and issued 3,204,959 of such shares
having a liquidation preference of $1.40 per share. Each share of Series B
Preferred Stock is, at the holder's option, immediately convertible into ten
shares of common stock and has the voting power equivalent to ten shares of
common stock; accrues cumulative dividends at an annual rate of 12.5%; and with
respect to dividends, redemption rights, and rights on liquidation, winding up,
corporate reorganization and dissolution, ranks senior to the Company's common
stock. Each share of Series B Preferred Stock must be redeemed in full by the
Company on December 31, 2008, at a price equal to the greater of (i) the
aggregate adjusted redemption value of the Series B Preferred Stock ($1.40 per
share) plus accrued but unpaid dividends or (ii) the amount the preferred
stockholders would be entitled to receive if the Series B Preferred Stock plus
accrued dividends were converted at that time into common stock and the Company
were to liquidate and distribute all of its assets to its common stockholders.
As of December 31, 2002, cumulative accrued and unpaid dividends totaled $531 or
$0.17 per preferred share.

15. STOCKHOLDERS' EQUITY

SALE OF REGISTERED COMMON STOCK

In January 2000, the Company completed the sale of 3,571,429 registered
shares of common stock. Gross proceeds from the offering, based on the offering
price of $3.50 per share, totaled $12,500, including the cancellation of a
$2,000 subordinated note payable previously issued by the Company. The shares
were issued under a registration statement filed with the Securities and
Exchange Commission on January 18, 2000. The Company used $7,000 of the net
proceeds to pay down long-term debt and used the remaining proceeds for, among
other things, business expansion, working capital and general corporate
purposes.

F-21

WARRANTS

In December 2002 warrants to purchase 17,500,000 common shares of the
Company were exercised at a price of $0.14 per share. These warrants were
scheduled to expire in 2012.

As of December 31, 2002, the following warrants to purchase common stock of
the Company were outstanding and exercisable with expiration dates ranging from
2005 to 2012:

OUTSTANDING EXERCISE
WARRANTS PRICE
----------------- -----------
275,000 $0.14
20,000 $0.16
750,000 $0.40
2,000,000 $1.00
50,000 $3.50
30,000 $4.50
-----------------
3,125,000
=================

EMPLOYEE STOCK PURCHASE PLAN

The Company provides an Employee Stock Purchase Plan (the "ESPP") to
substantially all eligible employees who meet certain employment criteria. Under
the terms of the ESPP, eligible employees may have up to 20% of eligible
compensation deducted from their pay to purchase common stock. The per share
purchase price is 85% of the average high and low per share trading price of
common stock on the American Stock Exchange on the last trading date prior to
the investment date, as defined in the ESPP. The amount that may be offered
pursuant to this plan is 450,000 shares. Effective July 2001, the Company
suspended the purchase of shares by employees under the ESPP. As of December 31,
2002, the purchase of shares under the ESSP remained suspended and, therefore,
no shares were purchased by employees during 2002. For the year ended December
31, 2001, 33,458 shares were purchased by employees under the ESPP at a weighted
average price of $0.24.

STOCK PLANS

The Company's stock plans provide for the grant of incentive stock options
and non-qualified stock options as well as restricted stock. Stock options
generally are granted with an exercise price equal to 100% of the market value
of a share of common stock on the date of grant, have a 10-year term and vest
within four years from the date of grant. The weighted average fair value of
stock options, calculated using the Black-Scholes option pricing model, granted
during 2002 and 2000 was $0.11 and $0.89 per share, respectively. There were no
stock options granted during the year ended December 31, 2001. As of December
31, 2002, 9,600,000 shares were reserved for issuance under the stock plans,
including 1,321,146 shares available for future grant.

Presented below is a summary of the status of the Company's stock options
and the related transactions for the years ended December 31, 2002, 2001 and
2000.

WEIGHTED
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
----------------- -------------
December 31, 1999 1,314,738 $ 5.66
Canceled (162,383) 6.15
Exercised (35,209) 2.56
Granted 125,000 2.19
-----------------
December 31, 2000 1,242,146 5.33
Canceled (321,688) 4.51
-----------------

December 31, 2001 920,458 5.62
Granted 4,732,500 0.33
Canceled (68,892) 5.71
-----------------
December 31, 2002 5,584,066 $1.14
=================

F-22

The following table summarizes in more detail information regarding the
Company's stock options outstanding at December 31, 2002.

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE
------------------- --------------- -------------- ------------- -------------- ------------

$ 0.15 - $ 0.16 1,400,000 9.0 $0.15 668,750 $ 0.15
$ 0.20 1,210,000 9.4 0.20 750,000 0.20
$ 0.25 - $ 0.26 862,500 9.5 0.26 150,000 0.25
$ 0.31 - $ 0.36 830,000 9.9 0.35 370,000 0.34
$ 1.00 - $ 1.78 245,000 9.2 1.14 22,500 1.78
$ 2.00 - $ 2.56 545,131 6.7 2.35 345,131 2.56
$ 5.85 451,250 6.6 5.85 338,435 5.85
$ 6.37 - $ 63.73 40,185 4.6 29.40 40,185 29.40
--------------- -------------- ------------- -------------- ------------
Total 5,584,066 8.8 $1.14 2,685,001 $ 1.68
=============== ============== ============= ============== ============

16. RELATED PARTY TRANSACTIONS

The Company incurred rent expense and other fees of $106, $146 and $131 in
2002, 2001 and 2000, respectively, which was paid to certain doctors for the use
of equipment.

The Company incurred rent expense of $1,780, $2,098 and $2,123 in 2002,
2001 and 2000, respectively, which was paid to entities in which certain
officers of the Company had an interest, for the lease of facilities.

In the normal course of business the Company contracts with OptiCare P.C.
to provide medical, surgical and optometric services to patients. The Company's
Chief Executive Officer is the sole stockholder of OptiCare P.C.

The Company is a guarantor on a mortgage loan of an entity in which the
Chief Executive Officer of the Company has an interest and the Company has a 1%
interest. The mortgage loan, which matures in 2003, had a balance of $57 and
$103 at December 31, 2002 and 2001, respectively. As a guarantor, performance by
the Company would be required if the borrowing entity defaulted, however, the
Company has deemed that its performance as a guarantor is not likely to occur.

In January 2002, the Company issued senior subordinated secured notes
payable to Palisade, a significant stockholder, for $13,900 and to Ms.
Yimoyines, wife of the Company's Chief Executive Officer, for $100, which mature
in January 2012 (see Note 3). For the year ended December 31, 2002, interest
expense on these notes to Palisade and Ms. Yimoyines was $1,577 and $11
respectively, which was paid in kind.

In January 2002, 2,880,599.5 and 324,360.3 shares of Series B Preferred
Stock were issued by the Company to Palisade and Ms. Yimoyines (see Note 3),
respectively. As of December 31, 2002, accrued and unpaid dividends on these
shares payable to Palisade and Ms. Yimoyines totaled $477 and $54, respectively.

In January 2002, the Company issued warrants to Palisade and Ms. Yimoyines
to purchase 17,375,000 and 125,000 shares, respectively, of the Company's common
stock at an exercise price of $0.14 (see Note 3). These warrants were exercised
in December 2002.

As of December 31, 2002 the Company had an unsecured promissory note payable
to an officer of the Company related to an amount owed in connection with the
Company's purchase of Cohen Systems in 1999. The note, which accrues interest at
7.50% and matures on December 1, 2004, had an outstanding balance of $204 at
December 31, 2002, of which $98 has been reflected as a current liability. For
the year ended December 31, 2002, interest expense on this note was $9.

F-23

17. EARNINGS (LOSS) PER COMMON SHARE

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

YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
------------- ------------- --------------

Income (loss) from continuing operations $ (448) $ 2,687 $(14,686)
Preferred stock dividends (531) - -
------------- ------------- --------------
Income (loss) from continuing operations applicable to
common stockholders (979) 2,687 (14,686)
Discontinued operations (4,121) 293 515
Extraordinary gain 5,314 - -
------------- ------------- --------------
Net income (loss) applicable to common shareholders $ 214 $ 2,980 $(14,171)
============= ============= ==============

Weighted average common shares - basic 12,552,185 12,795,433 12,354,494
Effect of dilutive securities - convertible preferred stock * 418,803 *
------------- ------------- --------------
Weighted average common shares - dilutive 12,552,185 13,214,236 12,354,494
============= ============= ==============

Earnings Per Share - Basic and Diluted:
Income (loss) from continuing operations $(0.07) $ 0.21 $(1.19)
Discontinued operations (0.33) 0.02 0.04
Extraordinary item 0.42 - -
------------- ------------- --------------
Net income (loss) per common share $ 0.02 $ 0.23 $(1.15)
============= ============= ==============

* Anti-dilutive

The following table reflects the potential common shares of the Company at
December 31, 2002, 2001 and 2000 that have been excluded from the calculation of
diluted earnings per share due to anti-dilution. The potential shares in 2002
and 2000, reflected below, have been excluded from the calculation of diluted
earnings per share because the Company incurred a loss from continuing
operations available to common stockholders in those periods and their effect
would be anti-dilutive.

2002 2001 2000
-------------- ------------- -------------

Options 5,584,066 920,458 1,242,146
Warrants 3,125,000 3,501,198 3,001,198
Convertible preferred stock 32,049,598 - 418,803
-------------- ------------- -------------
Total 40,758,664 4,421,656 4,662,147
============== ============= =============

On February 7, 2003 the Company issued 750,000 shares of common stock (see
Footnote 21) and on February 28, 2003, granted 225,000 shares of restricted
stock and options to purchase an aggregate of 773,000 shares of common stock.
Additionally on February 28, 2003, the Company authorized the issuance of up to
502,769 shares of immediately vested restricted stock to management in lieu of a
cash bonus payment. Management in its discretion may elect to receive its bonus
in any combination of cash or stock.

F-24

18. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities consisted of the following at
December 31, 2002 and 2001:

2002 2001
------------ ------------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 1,389 $ 4,372
Accruals 1,451 2,218
Allowance for bad debts 202 354
Depreciation and amortization 1,480 1,476
Other 278 (620)
------------ ------------
Total deferred tax assets $ 4,800 7,800
============ ============

The current portion of the deferred tax asset, which is included in other
current assets, was $1,660 at December 31, 2002 and $6,000 at December 31, 2001.

As of December 31, 2002, the Company has net operating loss carryforwards
available of approximately $5.6 million for federal tax purposes. These NOL
carryforwards expire in the years 2019 through 2021.

The components of income tax expense (benefit) for the years ended December
31, 2002, 2001 and 2000 are as follows:

2002 2001 2000
------------ ------------ -------------

Current:
Federal $ - $ - $ -
State 80 (30) (34)
------------ ------------ -------------
Total current 80 (30) (34)
------------ ------------ -------------

Deferred:

Federal (970) (6,634) 2,188
State (57) (1,362) 484
------------ ------------ -------------

Total deferred (1,027) (7,996) 2,672
------------ ------------ -------------
Total income tax expense (benefit) $ (947) $(8,026) $2,638
============ ============ =============

A reconciliation of the tax provision (benefit) at the U.S. Statutory Rate
to the effective income tax rate as reported is as follows:

2002 2001 2000
------------ ------------ -------------

Tax provision (benefit) at U.S. Statutory Rate (34)% (34)% (34)%
State income taxes, net of federal benefit (3)% (6)% (6)%
Non-deductible expenses and other (31)% 33 % 7 %

Change in valuation allowance - (143)% 55 %
------------ ------------ -------------
Effective income tax rate (68)% (150)% 22 %
============ ============ =============

F-25

19. COMMITMENTS AND CONTINGENCIES

HEALTH SERVICES ORGANIZATION LAWSUITS

The Company and/or its subsidiaries are parties to 11 lawsuits, described
below, involving the following medical practices and their shareholders: Charles
Retina Institute, P.C. and Steven T. Charles, M.D., Memphis, TN; Huntington &
Distler, Louisville, KY; Eye Associates of Southern Indiana & Bradley C. Black,
New Albany, IN; Downing-McPeak Vision Centers, P.S.C., Bowling Green, KY;
Surgical Care Center, Inc., Indianapolis, IN; Eye Surgeons of Indiana, P.C.,
Indianapolis, IN; Jeffrey P. Wasserstrom, M.D., a Medical Corporation, La Mesa,
CA; Midwest Eye Institute, Kansas City, MO; The Milne Eye Medical Center, Inc.,
Silver Spring, MD; Robert M. Thomas, Jr., M.D., a Medical Corporation, San
Diego, CA; The Brinkenhoff Eye Medical Center, Inc., Ventura, CA; Tri-County Eye
Institute, a Medical Corporation, Corona, CA; and Delaware Eye Care Center,
Dover, DE.

Each suit involves a medical practice which was unwound from the former
PrimeVision Health network and which remained affiliated with the Company
through a Health Service Organization ("HSO") agreement. Generally, the HSO
agreements require the practice to pay monthly HSO services fees to PrimeVision
and obligate PrimeVision to provide only certain "Core Services." Other
"Supplemental Services" are optional. The Company maintains that it has fully
complied with the HSO agreements by providing these Core Services. The HSO
agreements generally are for a fifteen-year term, subject to early termination.
A practice is allowed to terminate only on very limited conditions. However,
even on early termination, the practice is contractually obligated to pay a
"Buy-Out Price." The Buy-Out Price is a stated fixed sum, reduced by certain
percentages on the fifth and tenth anniversaries of the HSO Agreement.

The Company filed 11 of these suits in response to the medical practices'
failure to pay the agreed upon HSO services fees. With one exception involving a
state court filing, each of the suits was filed in the Federal District Court
for the district in which a defendant practice is located. The Company seeks
payment of past due HSO services fees, payment of the Buy-Out Fee as stated in
the HSO agreement, attorneys' fees and interest as permissible in the HSO
agreement.

The remaining three of the 14 lawsuits to which the Company is a party were
filed against the Company by practices alleging that the Company had failed to
provide the services for which, the practices allege, the fees are payable.

The Company continues to discuss settlement of the HSO matters with some of
the defendant practices. The suits are in the early stages of litigation, and
there can be no assurance of a favorable outcome.

OTHER LITIGATION

OptiVest, LLC v. OptiCare Health Systems, Inc., OptiCare Eye Health
Centers, Inc. and Dean Yimoyines, filed in the Superior Court, Judicial District
of Waterbury, Connecticut on January 14, 2002. Plaintiff is a Connecticut
limited liability corporation that entered into an Asset Purchase Agreement for
certain assets of the Company. The Company believes it properly cancelled the
Asset Purchase Agreement pursuant to its terms. Plaintiff maintains that it
incurred expenses in investigating a potential purchase of certain assets, that
the Company misled the plaintiff with respect to the Company's financial
condition, and, as a result, plaintiff has suffered damages. Plaintiff seeks
specific performance of the Asset Purchase Agreement and an injunction
prohibiting the Company from interfering with concluding the transactions
contemplated by the Asset Purchase Agreement. Further, plaintiff alleges a
breach of contract with regard to the Asset Purchase Agreement. Plaintiff
further alleges the Company engaged in innocent misrepresentation, negligent
misrepresentation, intentional and fraudulent misrepresentation, and unfair
trade practices with respect to the Asset Purchase Agreement.

The Company filed an answer to the complaint denying plaintiff's
allegations and indicating that the Company believes they are baseless and
without merit. The Company also met with plaintiff in an unsuccessful settlement
effort. The Company is preparing for discovery. The Company intends to
vigorously defend its position, but the case is in its early stages and,
therefore, no assurance can be given of a favorable outcome.

F-26

THREATENED LITIGATION

In the fourth quarter of 2002 the Company received notice from an attorney
representing a physician employed by an affiliated entity regarding a possible
employment claim and expressing disagreement with the computation of physicians'
salaries in the affiliated entity, alleged mismanagement of the Company and/or
the affiliated entity, possible conflicts of interests and unlawful practice
and/or compensation issues. The Company has reviewed these allegations and
believes they are unmeritorious, however, should such a claim proceed there can
be no assurance of a favorable outcome. In an attempt to amicably resolve these
issues the parties have agreed to non-binding mediation which is currently
scheduled in the second quarter of 2003.

REGULATORY PROCEEDINGS

North Carolina Board of Optometry Proceedings

On August 2, 2002, the North Carolina Board of Optometry approved the sale
of the Company's North Carolina retail optometry operations to Optometric Eye
Care Centers, P.A. ("OECC"). Although regulatory proceedings convened by the
North Carolina Board of Optometry in exercise of its continuing authority to
oversee implementation of a consent order entered in December 1999 remain
pending, the Company believes its involvement in this matter is at a conclusion.

Optometric Eye Care Center, P.A. Claim

On August 12, 2002, the Company and OECC consummated a transaction for the
sale of the assets and certain liabilities of the Company's North Carolina
retail optometry operations that resolved a dispute between the Company and
OECC, which had centered on the Company's performance under a Services Agreement
the Company entered into with OECC in 1999.

Billing Communication Error in Connecticut

OptiCare Eye Health Centers, Inc., the Company's Connecticut subsidiary,
and the Attorney General of Connecticut have agreed to terms of a consensual
administrative order relating to confusing statements sent to certain of the
Company's customers in the 1995-99 period showing balances due to the Company.
Although the Company denies liability and believes that any amounts mistakenly
paid to the Company were refunded in full as soon as the error was discovered,
the Company has agreed to pay a fine equivalent to $133 ($100 in cash and $33 in
eyeglasses for the visually impaired). The Company maintains that this was
misunderstanding and did not admit any liability under the terms of the
settlement.

In the normal course of business, the Company is both a plaintiff and
defendant in lawsuits incidental to its current and former operations. Such
matters are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, the ultimate aggregate amount of monetary liability or
financial impact with respect to these matters at December 31, 2002 cannot be
ascertained. Management is of the opinion that, after taking into account the
merits of defenses and established reserves, the ultimate resolution of these
matters will not have a material adverse effect in relation to the Company's
consolidated financial position or results of operations.

F-27

20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Historical quarterly results have been restated, as presented below, to
reflect the reclassifications required for discontinued operations
presentation.

First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------ ------------ -------------

2002
----
Net revenue $ 23,290 $24,046 $23,010 $ 21,185
Gross profit 6,612 7,478 8,193 7,700
Income (loss) from continuing operations (448) (125) 104 21
Discontinued operations 189 (3,945) (23) -
Extraordinary item, net of tax 5,314 - - (342)
Net income (loss) 5,055 (4,070) 81 (321)
Basic and diluted earnings (loss) per share :
Income (loss) from continuing operations (a) $(0.04) $(0.02) $(0.01) $(0.01)
Net income (loss) (a) $ 0.39 $(0.33) $(0.01) $(0.04)

2001
----
Net revenue $ 24,505 $24,588 $ 23,134 $ 21,855
Gross profit 6,598 7,066 6,844 6,223
Income (loss) from continuing operations (1,096) (445) (799) 5,027
Discontinued operations 287 98 4 (96)
Net income (loss) (b) (809) (347) (795) 4,931
Basic earnings (loss) per share:
Income (loss) from continuing operations (0.09) (0.03) (0.06) 0.39
Net income (loss) (0.06) (0.03) (0.06) 0.38
Diluted earnings (loss) per share:
Income (loss) from continuing operations (0.09) (0.03) (0.06) 0.38
Net income (loss) (0.06) (0.03) (0.06) 0.37

Quarterly and year-to-date computations of earnings per share amounts are
made independently. Therefore, the sum of earnings per share amounts for the
quarters may not agree with the per share amounts for the year.

(a) Includes the effect of a preferred stock dividend of $103 in the first
quarter, $142 in the second quarter and $143 in each of the third and
fourth quarters of 2002.

(b) In the fourth quarter of 2001, the Company recorded approximately $1,017 of
professional fees associated with the restructuring of the Company's debt
and recorded a tax benefit of $7,830 primarily due to the reversal of a
valuation allowance against deferred tax assets.

F-28

21. SUBSEQUENT EVENTS

ACQUISITION OF WISE OPTICAL VISION GROUP, INC.

On February 7, 2003, the Company acquired substantially all of the assets
and certain liabilities of the contact lens distribution business of Wise
Optical Vision Group, Inc., a New York corporation, (the "Wise Acquisition"). As
a result of the Wise Acquisition, the Company will be a leading optical product
distributor. The aggregate purchase price consisted of approximately $7,290 of
cash and 750,000 shares of the Company's common stock with an estimated fair
market value of $330, based on the average closing market price of the Company's
common stock over the two-day period before and after the sale was announced.
Funds for the acquisition were obtained via the Company's Amended Credit
Facility with CapitalSource, which was increased from $10 million to $15 million
in connection with the Wise Acquisition.

The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. The estimated fair
values of assets purchased and liabilities assumed, used herein, were estimated
based on available information and is subject to refinement based upon the
outcome of valuations and other fair value studies, which have not yet been
completed. Therefore, the allocation of the purchase price and resulting
goodwill is subject to change. The goodwill from this acquisition, of $1,074,
was assigned to the Company's Distribution and Technology operating segment,
which is expected to be deductible for tax purposes.

(Unaudited)
Assets:
Cash and cash equivalents $ 1,427
Accounts receivable 6,986
Inventory 5,845
Property and equipment, net 935
Goodwill 1,074
Other assets 275
---------------
Total assets $ 16,542
===============

Liabilities:
Accounts Payable and accrued expenses $ 8,859
Other liabilities 63
---------------
Total liabilities $ 8,922
===============

The following is a summary of the unaudited pro forma results of operations
of the Company as if the Wise Acquisition had closed effective January 1, of the
respective periods below:

YEAR ENDED DECEMBER 31,
----------------------------------
2002 2001
-------------- --------------
(unaudited)

Net Revenues $ 156,567 $ 154,215
Income (loss) from continuing operations (776) 2,135
Net income (loss) 417 2,428

Income (loss) per common share from continuing operations (1):
Basic $(0.10) $0.16
Diluted $(0.10) $0.15

Net income (loss) per common share (1):
Basic $(0.01) $0.18
Diluted $(0.01) $0.17

(1) Includes effect of a $531 preferred stock dividend in 2002.

The unaudited pro forma information presented above is for informational
purposes only and is not necessarily indicative of the results that would have
been obtained had these events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.

F-29

SOUTH CAROLINA CAPTIVE INSURANCE COMPANY

In February 2003, the Company received approval from the South Carolina
Department of Insurance to operate a captive insurance company domiciled in
South Carolina. The Company obtained $600 in letters of credit to capitalize a
new wholly owned subsidiary, OptiCare Vision Insurance Company, Inc. ("OVIC"),
to operate as the captive insurance company, as part of the Company's entrance
into the "direct-to-employer" market in its Managed Vision segment. Fidelity
Security Life Insurance Company will underwrite the Company's insured product.

F-30