UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(MARK ONE)

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE 
    ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

                                       OR

| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934

          For the transition period from______________ to _____________

                        COMMISSION FILE NUMBER 001-15223

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


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

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

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



Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
___ Yes     X  No

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

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
___ Yes     X  No

         The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, at October 31, 2005 was 30,664,991 shares.



                                INDEX TO FORM 10-Q



                                                                                                      Page No.
PART I. FINANCIAL INFORMATION
                                                                                                  
    Item 1.  Financial Statements

               Condensed Consolidated Balance Sheets at September 30, 2005 and
                  December 31, 2004, (unaudited)                                                         3

               Condensed Consolidated Statements of Operations for the three and
                  nine months ended September 30, 2005 and 2004, (unaudited)                             4

               Condensed Consolidated Statements of Cash Flows for the nine
                  months ended September 30, 2005 and 2004, (unaudited)                                  5

               Notes to Condensed Consolidated Financial Statements, (unaudited)                         6

    Item 2.  Management's Discussion and Analysis of Financial Condition and
                  Results of Operations                                                                 13

    Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                 24

    Item 4.  Controls and Procedures                                                                    25


PART II.     OTHER INFORMATION

    Item 1.  Legal Proceedings                                                                          25

    Item 5.  Other Information                                                                          25

    Item 6.  Exhibits                                                                                   25


SIGNATURE                                                                                               27



















                                       2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


                 OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (AMOUNTS IN THOUSANDS)
                                   (UNAUDITED)



                                                               SEPTEMBER 30,         DECEMBER 31,
                                                                   2005                  2004
                                                              ----------------     -----------------
                                                                                        
    ASSETS
    CURRENT ASSETS:
       Cash and cash equivalents                                      $ 2,142               $ 2,228
       Accounts receivable, net                                         2,122                 2,164
       Inventory                                                        1,808                 1,851
       Assets held for sale                                                 -                 7,894
       Other current assets                                               750                   681
                                                              ----------------     -----------------
           TOTAL CURRENT ASSETS                                         6,822                14,818
                                                              ----------------     -----------------
    Property and equipment, net                                         2,084                 2,628
    Goodwill                                                           16,888                16,663
    Intangible assets, net                                                985                 1,068
    Assets held for sale, non-current                                       -                 1,150
    Other assets                                                        3,385                 3,487
                                                              ----------------     -----------------
    TOTAL ASSETS                                                     $ 30,164              $ 39,814
                                                              ================     =================

    LIABILITIES AND STOCKHOLDERS' EQUITY
    CURRENT LIABILITIES:
       Accounts payable                                               $ 1,028               $ 2,727
       Accrued expenses                                                 6,030                 6,514
       Current portion of long-term debt                                1,519                   332
       Current portion of long-term debt - related party                1,000                     -
       Current portion of capital lease obligations                        54                    11
       Liabilities of held for sale business                                -                 5,683
       Other current liabilities                                          897                 1,119
                                                              ----------------     -----------------
            TOTAL CURRENT LIABILITIES                                  10,528                16,386
                                                              ----------------     -----------------

    Long-term debt, less current portion                                  898                10,024
    Capital lease obligations, less current portion                       115                    19
    Other liabilities                                                     352                 1,476
                                                              ----------------     -----------------
           TOTAL NON-CURRENT LIABILITIES                                1,365                11,519
                                                              ----------------     -----------------


    Series B 12.5% mandatorily redeemable, convertible
       preferred stock--related party                                   6,929                 6,344

    STOCKHOLDERS' EQUITY:
    Series C & D preferred stock--related party                             1                     1
    Common stock                                                           31                    31
    Additional paid-in-capital                                         83,051                79,192
    Accumulated deficit                                               (71,741)              (73,659)
                                                              ----------------     -----------------
             TOTAL STOCKHOLDERS' EQUITY                                11,342                 5,565
                                                              ----------------     -----------------
    TOTAL LIABILITIES AND                                     
        STOCKHOLDERS' EQUITY                                          $30,164               $39,814
                                                              ================     =================

See notes to condensed consolidated financial statements.

                                       3



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



                                                                          THREE MONTHS                     NINE MONTHS
                                                                      ENDED SEPTEMBER 30,              ENDED SEPTEMBER 30,
                                                                   ---------------------------     ----------------------------
                                                                      2005            2004            2005            2004
                                                                   ------------    -----------     ------------    ------------
                                                                                                       
  NET REVENUES:
    Managed vision                                                     $ 6,653        $ 6,547          $19,439        $ 18,864
    Product sales                                                        2,871          2,860            8,837           8,931
    Other services                                                       5,317          4,771           15,088          15,271
    Other income                                                            75              -              848           1,458
                                                                   ------------    -----------     ------------    ------------
     Total net revenues                                                 14,916         14,178           44,212          44,524
                                                                   ------------    -----------     ------------    ------------

  OPERATING EXPENSES:
     Medical claims expense                                              4,779          4,913           14,216          14,274
     Cost of product sales                                               1,022          1,092            3,108           3,200
     Cost of services                                                    2,088          1,865            5,730           6,374
     Selling, general and administrative                                 6,300          6,617           18,724          19,275
     Depreciation                                                          254            232              750             645
     Amortization                                                           28             31               83              86
     Interest                                                              175            298              553             886
                                                                   ------------    -----------     ------------    ------------
          Total operating expenses                                      14,646         15,048           43,164          44,740
                                                                   ------------    -----------     ------------    ------------

  Income (loss) from continuing operations before income tax               270          (870)            1,048           (216)
  Income tax expense (benefit)                                               -           (20)               50              32
                                                                   ------------    -----------     ------------    ------------
  Income (loss) from continuing operations                                 270          (850)              998           (248)

  Discontinued operations:
      Income (loss) from discontinued operations                           920        (1,324)              920         (3,846)
      Income tax expense (benefit)                                           -              -                -               -
                                                                   ------------    -----------     ------------    ------------
      Income (loss) from discontinued operations                           920        (1,324)              920         (3,846)

  Net income (loss)                                                      1,190        (2,174)            1,918         (4,094)
  Preferred stock dividends                                              (199)          (177)            (585)           (528)
                                                                   ------------    -----------     ------------    ------------
  Net income (loss) available to common stockholders                      $991      $ (2,351)           $1,333       $ (4,622)
                                                                   ============    ===========     ============    ============


  EARNINGS (LOSS) PER SHARE:
  Earnings Per Share - Basic:
      Income (loss) from continuing operations applicable to
       common stockholders                                               $0.00        $(0.01)            $0.00         $(0.01)
      Income (loss) from continuing operations applicable to
       participating securities                                          $0.00       $ (0.02)            $0.01         $(0.02)
      Discontinued operations                                            $0.03       $ (0.05)            $0.03         $(0.12)
                                                                   ------------    -----------     ------------    ------------
      Net income (loss) per common share                                 $0.03       $ (0.08)            $0.04         $(0.15)
                                                                   ============    ===========     ============    ============

  Earnings Per Share - Diluted:
      Income (loss) from continuing operations                           $0.00       $ (0.03)            $0.00        $ (0.03)
      Discontinued operations                                            $0.01       $ (0.05)            $0.01        $ (0.12)
                                                                   ------------    -----------     ------------    ------------
      Net income (loss) per common share                                 $0.01       $ (0.08)            $0.01        $ (0.15)
                                                                   ============    ===========     ============    ============

See notes to condensed consolidated financial statements.

                                       4





                 OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)
                                   (UNAUDITED)
                                                                                  FOR THE NINE MONTHS ENDED
                                                                                        SEPTEMBER 30,
                                                                              ----------------------------------
                                                                                   2005               2004
                                                                              ---------------     --------------
  OPERATING ACTIVITIES:
     Net income (loss)                                                               $ 1,918          $ (4,094)
     (Income) loss on discontinued operations                                          (920)              3,846
                                                                              ---------------     --------------
     Income (loss) from continuing operations                                            998              (248)
     Adjustments to reconcile net income (loss) to net cash provided
        by (used in) operating activities:
     Depreciation                                                                        750                645
      Amortization                                                                        83                 86
      Non-cash interest expense                                                          105                115
      Non-cash gain on contract settlements                                            (153)                  -
      Changes in operating assets and liabilities:
         Accounts receivable                                                              42              (107)
         Inventory                                                                        43               (76)
         Other assets                                                                     95              (426)
         Accounts payable and accrued expenses                                       (2,203)              3,101
        Other liabilities                                                              (184)                271
         Cash (used in) provided by discontinued operations                            (157)                 68
                                                                              ---------------     --------------
  Net cash (used in) provided by operating activities                                  (581)              3,429
                                                                              ---------------     --------------

  INVESTING ACTIVITIES:
      Cash received on notes receivable                                                  110                111
      Purchase of fixed assets, net of disposals                                       (206)              (292)
      Investment in acquisition                                                        (225)               (25)
      Net proceeds from the sale of discontinued operations                            3,361                700
      Purchase of restricted certificates of deposit                                   (204)              (260)
                                                                              ---------------     --------------
  Net cash provided by investing activities                                            2,836                234
                                                                              ---------------     --------------

  FINANCING ACTIVITIES:
      Net decrease in revolving credit facility                                      (7,528)            (2,184)
      Principal payments on long-term debt                                             (275)              (278)
      Proceeds from subordinated debt                                                  1,000                  -
      Principal payments on capital lease obligations                                   (39)               (13)
      Payment of financing costs                                                        (14)                (5)
      Proceeds from issuance of Series D preferred stock                               4,445                  -
      Equipment financing                                                                 55                117
      Payment of bank financing fees                                                    (13)               (65)
      Proceeds from issuance of common stock                                              28                 20
                                                                              ---------------     --------------

  Net cash used in financing activities                                              (2,341)            (2,408)
                                                                              ---------------     --------------

  Increase (decrease) in cash and cash equivalents                                      (86)              1,255
  Cash and cash equivalents at beginning of period                                     2,228              1,695
                                                                              ---------------     --------------
  Cash and cash equivalents at end of period                                         $ 2,142            $ 2,950
                                                                              ===============     ==============

  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest                                                                $474              $ 765
  Cash paid for income taxes, net of refunds                                             $57               $ 59

 See notes to condensed consolidated financial statements.


                                       5


                 OPTICARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                    (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
                                   (UNAUDITED)


1.  BASIS OF PRESENTATION

    The accompanying condensed consolidated financial statements of OptiCare
Health Systems, Inc., a Delaware corporation, and its subsidiaries (collectively
the "Company") for the three and nine months ended September 30, 2005 and 2004
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities
Exchange Act of 1934, as amended, and are unaudited. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation of the condensed
consolidated financial statements have been included. The results of operations
for the three and nine months ended September 30, 2005 are not necessarily
indicative of the results to be expected for the full year. The condensed
consolidated balance sheet as of December 31, 2004 was derived from the
Company's audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America.

    In September 2004, the Company sold its Technology business, CC Systems,
Inc., and in January 2005, sold its Distribution business, which was comprised
of Wise Optical and the Buying Group. The effective date of the Distribution
transaction was December 31, 2004. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets," both sales were accounted for as discontinued operations.
Amounts in the financial statements and related notes for the 2004 period have
been reclassified to reflect treatment of these businesses as held for sale.


2.  MANAGEMENT'S  PLAN

    The Company incurred operating losses in 2004 due primarily to significant
operating losses at Wise Optical. In January 2005, the Company sold its
Distribution business, which included the Wise Optical operation. In September
2004, the Company also sold its Technology business, CC Systems, Inc. The sale
of these operations generated cash proceeds and reduced demands on working
capital and corporate personnel. In addition, in January 2005, the Company sold
280,618 shares of newly created Series D preferred stock for an aggregate price
of $4,445.

     In 2003 the Managed Vision segment began shifting away from the lower
margin and long sales cycle of our third party administrator ("TPA") style
business to the higher margin and shortened sales cycle of a direct-to-employer
business. This new direct-to-employer business also removes some of the
volatility that is often experienced in the Company's TPA-based revenues. The
Company continues to grow its direct-to-employer business, however; the
direct-to-employer business continues to be relatively small in comparison to
the overall Managed Vision business. The Company experienced significant
improvements in revenue and profitability in the Consumer Vision segment from
2003 to 2004, largely from growth in existing store sales and enhanced margins
as a result of sales incentives. In the nine month period ended September 30,
2005, revenue and profitability in the Consumer Vision segment have remained
relatively constant with the comparable period of 2004.

    The Company believes the combination of these initiatives executed in the
operating segments will continue to improve the Company's liquidity and should
ensure compliance with covenants in the loan agreement with CapitalSource
Finance LLC ("CapitalSource") in the future.

    On August 22, 2005, the Company announced that it had entered into an
agreement and plan of merger with Refac, the details of which are included in
Note 10 - Merger Proposal.

3.  NEW ACCOUNTING PRONOUNCEMENTS

    In March 2004, the Financial Accounting Standards Board ("FASB") approved
Emerging Issues Task Force ("EITF") Issue 03-6 "Participating Securities and the
Two-Class Method under SFAS 128." EITF 03-6 supersedes 


                                       6


the guidance in Topic No. D-95, "Effect of Participating Convertible Securities
on the Computation of Basic Earnings per Share," and requires the use of the
two-class method of participating securities. The two-class method is an
earnings allocation formula that determines earnings per share for each class of
common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. In addition,
EITF 03-6 addresses other forms of participating securities, including options,
warrants, forwards and other contracts to issue an entity's common stock, with
the exception of stock-based compensation (unvested options and restricted
stock) subject to the provisions of Accounting Principles Board ("APB") Opinion
No. 25 "Accounting for Stock Issued to Employees" ("Opinion 25") and FASB's
Statement 123R "Share-Based Payments" ("Statement 123R"), EITF 03-6 is effective
for the reporting periods beginning after March 31, 2004 and should be applied
by restating previously reported earnings per share. The adoption of EITF 03-6
did not have a material impact on the Company's condensed consolidated financial
statements.

    In December 2004, the FASB issued Statement 123R. Statement 123R eliminates
the option to apply the intrinsic value measurement provisions of Opinion 25.
Rather Statement 123R requires companies to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant date fair value of the award. That cost will be recognized over the period
during which an employee is required to provide services in exchange for the
award, (usually the vesting period). Statement 123R will also require companies
to measure the cost of employee services received in exchange for Employee Stock
Purchase Plan ("ESPP") awards and the Company will be required to expense the
grant date fair value of the Company's ESPP awards. Statement 123R became
effective for the Company's fiscal quarter beginning July 1, 2005. Based on the
number of stock options outstanding as of December 31, 2004, the effect of the
adoption of Statement 123R would be to increase annual compensation expense by
approximately $0.2 million commencing in the Company's fiscal quarter beginning
July 1, 2005. However, based on Securities and Exchange Commission Release
2005-57, we have elected to defer the adoption of Statement 123R until January
1, 2006. As a result, the Company will not incur any compensation expense in
2005 related to stock options.

    In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" which supersedes APB Opinion No. 20, "Accounting Changes" and FAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It established, unless impracticable, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to the
newly adopted accounting principle. The reporting of an error correction
involves adjustments to previously issued financial statements similar to those
generally applicable to reporting an accounting change retroactively. Therefore,
the reporting of a correction of an error by restating previously issued
financial statements is also addressed by SFAS 154, which is effective for
accounting changes and correction of errors made in fiscal years beginning after
December 15, 2005. The Company does not expect the adoption of SFAS 154 to have
a material impact on its consolidated financial statements.

4.   STOCK BASED COMPENSATION

    The Company accounts for its stock-based compensation plans under Opinion
25, and related interpretations in accounting for the stock options granted to
its employees and directors. Accordingly, employee and director compensation
expense is recognized only for those options whose price is less than fair
market value at the measurement date.

    SFAS No. 123 "Accounting for Stock-Based Compensation," as amended by SFAS
No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure an
amendment of Statement of Financial Accounting Standards No. 123" requires that
companies which do not elect to account for stock-based compensation as
prescribed by this statement, disclose the pro forma effects on earnings and
earnings per share as if SFAS No. 123 had been adopted. If the Company applied
the recognition provisions of SFAS No. 123, the Company's reported net income
(loss) and earnings (loss) per share available to common stockholders, using the
Black-Scholes option pricing model, would have been adjusted to the pro forma
amounts indicated below.

                                       7



                                                            THREE MONTHS ENDED             NINE MONTHS ENDED
                                                              SEPTEMBER 30,                  SEPTEMBER 30,
                                                        ---------------------------    --------------------------
                                                           2005           2004            2005           2004
                                                        -----------    ------------    -----------    -----------
                                                                                              
    Net income (loss) available to common                     
    stockholders, as reported                                $ 991       $ (2,351)        $ 1,333     $ (4,622)
    Less: Total stock-based employee compensation
    expense, net of related tax effects, determined
    under the fair value method for all awards                 (47)           (45)           (127)        (104)
                                                        -----------    ------------    -----------    -----------
    Pro forma net income (loss)                              $ 944       $ (2,396)        $ 1,206     $ (4,726)
                                                        ===========    ============    ===========    ===========

    Earnings (loss) per share - basic:
        As reported                                         $ 0.03        $ (0.08)         $ 0.04       $ (0.15)
        Pro forma                                           $ 0.03        $ (0.08)         $ 0.04       $ (0.15)

    Earnings (loss) per share - diluted:
        As reported                                         $ 0.01        $ (0.08)         $ 0.01       $ (0.15)
        Pro forma                                           $ 0.01        $ (0.08)         $ 0.01       $ (0.15)


5.  DISCONTINUED OPERATIONS

    In May 2004, the Company's Board of Directors approved management's plan to
exit the technology business, which was comprised of CC Systems, Inc. (formerly
reported in the Company's Distribution and Technology segment). The Company
completed the sale of the net assets of CC Systems, Inc. on September 10, 2004.
In accordance with SFAS No. 144 the disposal of CC Systems, Inc. is accounted
for as a discontinued operation. In connection with the sale, the Company
received $700 in cash. Additional consideration provided by the buyer included
the surrender of 82,500 shares of the Company's common stock which had a fair
market value of approximately $21 and the forgiveness of an unsecured promissory
note payable by the Company which had an outstanding balance of $71 at the time
of the sale. In the third quarter of 2004, the Company recorded a $1,005 loss on
the disposal of discontinued operations based on the fair value of the net
assets held for sale. The results of operations of CC Systems, Inc. are included
in the condensed consolidated financial statements as part of discontinued
operations for the period ended September 30, 2004.

    In December 2004, the Company's Board of Directors approved management's
plan to exit the Distribution business which experienced substantial operating
losses in 2003 and 2004, which was comprised of the distribution business the
Company purchased from Wise Optical Vision Group, Inc. ("Wise Optical"), a New
York corporation, in February, 2003 and the Buying Group, (formerly reported in
the Company's Distribution segment) and to dispose of the Company's Distribution
business. The Company completed the sale of the net assets of the Distribution
business on January 12, 2005 to entities formed by the Company's Chairman and
former Chief Executive Officer. The effective date of the transaction was
December 31, 2004. In accordance with SFAS No. 144 the disposal of the
Distribution business is accounted for as a discontinued operation. The
aggregate gross consideration from the sale was $4,150, less a working capital
adjustment of $575 and estimated closing costs and other direct costs of $349.
The Company recorded a $3,400 loss on the disposal of discontinued operations
based on the fair value of the net assets held for sale. The results of
operations of Wise Optical are included in the condensed consolidated financial
statements as part of discontinued operations for the period ended September 30,
2004.

    In connection with the sale of the Distribution business, the Company
entered into a supply agreement with the buyers of the Distribution business.
The supply agreement is a four year commitment to purchase, on a non-exclusive
basis, $4,200 of optical products per year from certain designated manufacturers
and suppliers. This annual commitment includes the purchase of $1,275 of contact
lenses a year. In addition, the Company is also obligated to pay an annual fee
based on the total of all purchases it makes under the supply agreement. The
supply agreement also contains certain buyout provisions depending on when the
supply agreement is terminated. During the nine months ended September 30, 2005,
the Company had approximately $2,966 in product purchases related to this supply
agreement which included the purchase of approximately $973 in contact lenses.

    Also in connection with the sale of the Distribution business, the lease
obligation on the facility occupied by Wise Optical located in Yonkers, New York
remained with the Company. The lease term on the facility was scheduled to
expire in June 2011. At December 31, 2004, the Company estimated its potential
exposure on the lease 


                                       8


to be $1,300 and recorded a provision for this amount which was included in the
loss on disposal of discontinued operations for the year ended December 31,
2004. During the nine months ended September 30, 2005, the Company paid $157 in
rent payments related to this lease. On October 21, 2005, the Company entered
into a surrender agreement with the landlord of the Yonkers facility. The
Company paid $125 to the landlord and also agreed to forego $85 in a rent
deposit that it had paid at the inception of the lease in January 2003. In
return, the landlord released the Company from any and all financial obligations
regarding the lease of the Yonkers facility, effective September 30, 2005, and
the landlord will release the Company from all other obligations under the lease
agreement, effective December 31, 2005. As a result of this transaction, the
Company adjusted its estimated provision to cover any potential exposure on the
Yonkers lease obligation down to $125 at September 30, 2005. The offset to this
adjustment was treated as income from discontinued operations in 2005 since the
original provision was included in the loss on disposal of discontinued
operations for the year ended December 31, 2004.

    Operating results of the discontinued operations for the three and nine
months ended September 30, 2004 are as follows:


                                                                                   THREE MONTHS              NINE
                                                                                      ENDED              MONTHS ENDED
                                                                                  SEPT. 30, 2004         SEPT. 30, 2004
                                                                                 ----------------      -----------------
                                                                                                 
     External revenue                                                                   $ 14,182                $45,285
                                                                                 ================      =================

     Intercompany revenue                                                                $ 1,616                $ 4,704
                                                                                 ================      =================

     Loss from discontinued operations before tax                                       $(1,324)              $ (3,846)
     Income tax expense                                                                        -                      -
                                                                                 ----------------      -----------------
     Loss from discontinued operations                                                  $(1,324)              $ (3,846)
                                                                                 ================      =================

     Loss per share from discontinued operations                                         $(0.05)               $ (0.12)
                                                                                 ================      =================


6.    INTANGIBLE ASSETS

    Intangible assets subject to amortization are comprised of a service
agreement and non-compete agreements. The fifteen year service agreement has a
gross carrying amount of $1,658 and accumulated amortization of $673 and $590 at
September 30, 2005 and December 31, 2004, respectively. The non-compete
agreements, which had a gross carrying amount of $265, were fully amortized at
September 30, 2005 and December 31, 2004. Amortization expense for the three
months ended September 30, 2005 and 2004 was $28 and $31, respectively, and for
the nine months ended September 30, 2005 and 2004 was $83 and $86, respectively.
Estimated annual amortization expense is expected to be approximately $111 in
each of the years 2005 through 2008.


7.  DEBT

    The loan agreement with CapitalSource requires the Company to maintain a
lock-box arrangement with its banks whereby amounts received into the lock-boxes
are applied to reduce the revolving credit note outstanding. The agreement also
contained certain subjective acceleration clauses in the event of a material
adverse event. EITF Issue 95-22 "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements That Include both a Subjective
Acceleration Clause and a Lock-Box Arrangement" required the Company to classify
outstanding borrowings under the revolving credit note as current liabilities.

                                       9


        On August 27, 2004, the Company amended its loan agreement with
CapitalSource to eliminate the lender's ability to declare a default based upon
subjective criteria as described in EITF Issue 95-22. Palisade Concentrated
Equity Partnership, L.P. ("Palisade"), provided a $1,000 guarantee against the
loan balance due to CapitalSource related to this amendment. As a result of this
amendment, the Company has classified the loan balance related to the revolving
credit facility as long-term at September 30, 2005 and December 31, 2004.

    On January 12, 2005, we amended the term loan and revolving credit facility
with CapitalSource to reduce the tangible net worth covenant for December 2004
and January 2005 from ($3,000) to ($6,500). Without this Amendment, we would
have been in violation of the tangible net worth covenant at December 31, 2004.
Under the term loan and revolving credit facility, as amended, we must maintain
a tangible net worth of at least ($3,000) after February 1, 2005. We paid
CapitalSource approximately $13 in financing fees in connection with this
amendment.

    The Company's temporary over advance facility with CapitalSource expired on
August 31, 2005. On September 1, 2005, in connection with the proposed merger
between the Company and Refac (see Note 10), Refac made a subordinated loan to
the Company of $1,000. This loan is evidenced by a subordinated secured note and
is subordinate to the Company's senior indebtedness with CapitalSource. Pursuant
to the terms and conditions of the loan agreement with Refac, the principal
balance together with any accrued but unpaid interest shall be due and payable
by the Company on January 25, 2007. However, if the merger provided for in the
agreement and plan of merger, dated August 22, 2005, between Refac, OptiCare
Merger Sub, Inc. and the Company is not completed on or before January 31, 2006,
the maturity date shall be March 31, 2006. The Company did not incur any loan
origination fees associated with the subordinated loan from Refac. The note
bears interest at a rate equivalent to prime plus 5.5%. The entire amount of
loan proceeds was used by the Company to repay a portion of our outstanding
indebtedness under the revolving credit facility with CapitalSource.

    The Company had standby letters of credit outstanding at September 30, 2005
and December 31, 2004 of $1,100, respectively. There were no draw downs against
these standby letters of credit in 2005 or 2004. The letters of credit
outstanding at September 30, 2005 and December 31, 2004 were secured by
restricted certificates of deposit and security deposits.


8.  SEGMENT INFORMATION

    During the third quarter of 2004, the Company sold its Technology business,
CC Systems, Inc., and on January 12, 2005 sold its Distribution business, which
was comprised of Wise Optical and the Buying Group, with an effective date of
December 31, 2004. As a result of selling these businesses, the Company has the
following two reportable operating segments: (1) Managed Vision and (2) Consumer
Vision. These operating segments are managed separately, offer separate and
distinct products and services and serve different customers and markets,
although there is some cross-marketing and selling between the segments.
Discrete financial information is available for each of these segments and the
Company's Chief Executive Officer and President assesses performance and
allocates resources among these two operating segments.

    The Managed Vision segment contracts with insurers, insurance fronting
companies, employer groups, managed care plans and other third party payers 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.

    In addition to its reportable operating segments, the Company's "Other"
category includes other non-core operations and transactions, which do not meet
the quantitative thresholds for a reportable segment. Included in the "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.

    Management assesses the performance of the Company's segments based on
income before income taxes, interest expense, depreciation and amortization, and
other corporate overhead. Summarized financial information, by segment, for the
three and nine months ended September 30, 2005 and 2004 is as follows:



                                       10



                                                           THREE MONTHS ENDED               NINE MONTHS ENDED
                                                              SEPTEMBER 30,                   SEPTEMBER 30,
                                                      -----------------------------    -----------------------------
                                                         2005             2004            2005            2004
                                                      ------------     ------------    ------------    -------------
                                                                                               
      REVENUES:
           Managed vision                               $  6,653         $  6,547        $ 19,439         $ 18,864
           Consumer vision                                 8,426            7,861          24,684           24,797
                                                      ------------     ------------    ------------    -------------
              Reportable segment totals                   15,079           14,408          44,123           43,661
           Other                                              81               15             866            1,539
           Elimination of inter-segment revenues            (244)            (245)           (777)            (676)
                                                      ------------     ------------    ------------    -------------
             Total net revenue                          $ 14,916         $ 14,178        $ 44,212         $ 44,524
                                                      ============     ============    ============    =============

      SEGMENT INCOME:
           Managed vision                               $    534         $    251        $  1,259         $    657
           Consumer vision                                   942              678           2,760            2,739
                                                      ------------     ------------    ------------    -------------
              Total reportable segment totals              1,476              929           4,019            3,396
           Other                                              83             (171)            795            1,009
           Depreciation                                     (254)            (232)           (750)            (645)
           Amortization expense                              (28)             (31)            (83)             (86)
           Interest expense                                 (175)            (298)           (553)            (886)
           Corporate                                        (832)          (1,067)         (2,380)          (3,004)
                                                      ------------     ------------    ------------    -------------
               Income from continuing operations
                  before tax                            $    270         $   (870)        $ 1,048         $  (216)
                                                      ============     ============    ============    =============



9.  EARNINGS (LOSS) PER COMMON SHARE

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



                                                                   THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                                      SEPTEMBER 30,                       SEPTEMBER 30,
                                                             --------------------------------    ---------------------------------
                                                                 2005              2004              2005               2004
                                                             --------------    --------------    --------------     --------------
                                                                                                             
EARNINGS (LOSS) PER SHARE:

  Income (loss) from continuing operations                          $  270          $  (850)            $  998           $  (248)
  Preferred stock dividend                                            (199)            (177)              (585)             (528)
                                                             --------------    --------------    --------------     --------------
  Income (loss) from continuing operations applicable                              
    to common stockholders and participating securities             $   71         $(1 ,027)            $  413           $  (776) 
                                                             ==============    ==============    ==============     ==============

  Income (loss) from continuing operations applicable to
    common stockholders                                             $   20           $ (332)            $  117           $  (250)
  Income (loss) from continuing operations applicable to
    participating securities                                            51             (695)               296              (526)
  Discontinued operations                                              920           (1,324)               920            (3,846)
                                                             --------------    --------------    --------------     --------------
  Net income (loss) applicable to common stockholders               $  991         $ (2,351)           $ 1,333          $ (4,622)
                                                             ==============    ==============    ==============     ==============

  Weighted average common shares--basic                         30,664,991       30,685,060         30,649,686        30,579,558
  Effect of dilutive securities:
      Options                                                      708,727                *            938,264                 *

                                       11



      Warrants                                                      86,045                *            106,045                 *
      Preferred Stock                                           76,846,234                *         76,846,234                 *
                                                             --------------    --------------    --------------     --------------
  Weighted average common shares-- diluted                     108,305,997       30,685,060        108,540,229        30,579,558
                                                             ==============    ==============    ==============     ==============

Earnings Per Share - Basic:
  Income (loss) from continuing operations applicable to
    common stockholders                                             $ 0.00          $ (0.01)            $ 0.00           $ (0.01)
  Income (loss) from continuing operations applicable to
    participating securities                                        $ 0.00          $ (0.02)            $ 0.01           $ (0.02)
  Discontinued operations                                           $ 0.03          $ (0.05)            $ 0.03           $ (0.12)
                                                             --------------    --------------    --------------     --------------
  Net income (loss) per common share                                $ 0.03          $ (0.08)            $ 0.04           $ (0.15)
                                                             ==============    ==============    ==============     ==============

Earnings Per Share - Diluted:
  Income (loss) from continuing operations                          $ 0.00          $ (0.03)            $ 0.00           $ (0.03)
  Discontinued operations                                           $ 0.01          $ (0.05)            $ 0.01           $ (0.12)
                                                             --------------    --------------    --------------     --------------
  Net income (loss) per common share                                $ 0.01          $ (0.08)            $ 0.01           $ (0.15)
                                                             ==============    ==============    ==============     ==============

     * Anti-dilutive


    The following table reflects the potential common shares of the Company for
the nine months ended September 30, 2005 and 2004 that are not included in the
dilutive securities for purposes of computing weighted average common shares -
diluted. The amounts reflected for the three and nine months ended September 30,
2004 have been excluded from the calculation of diluted earnings per share due
to anti-dilution.



                                               2005               2004
                                        ----------------    --------------
   Options                                    4,806,179         6,195,943
   Warrants                                   3,168,955         3,275,000
   Convertible Preferred Stock                        -        64,343,513
                                        ----------------    --------------
                                              7,975,134        73,814,456
                                        ================    ==============



10.  MERGER PROPOSAL

     On April 8, 2005, the Company announced that Refac, an affiliated company,
expressed interest in exploring an acquisition of the Company in a stock
transaction and that the Company and Refac had entered into discussions
regarding the same. On August 22, 2005, the Company announced that it had
entered into an agreement and plan of merger with Refac. The Company originally
expected the merger to close before the end of 2005. The Company now expects
that the merger will be consummated on or before April 30, 2006. Under the terms
of the merger agreement, as amended on November 11, 2005, (i) each of the
Company's preferred stockholders will receive 0.04029244 shares of Refac common
stock for each share of the Company's common stock underlying the Company's
preferred stock they hold, (ii) Palisade will receive 0.04029244 shares of Refac
common stock for each share of the Company's common stock it holds and (iii)
each other of the Company's stockholders will receive 0.0472 shares of Refac
common stock for each share of the Company's common stock they hold and the
Company will become a wholly-owned subsidiary of Refac. As a condition to the
merger, the Company's preferred stockholders have agreed to convert all of their
preferred stock into the Company's common stock prior to the merger. The merger
requires the approval of the holders of at least 55% of the outstanding shares
of Refac common stock. Palisade, as the Company's majority stockholder, has
executed a written consent approving the merger, which consent shall be
effective within 20 days after the Company mails an information statement to its
stockholders.

    Refac also announced that it has entered into a definitive agreement with
U.S. Vision, Inc., another affiliated company, which is privately-held and
operates the 6th largest retail optical chain in the United States, under which
Refac will acquire U.S. Vision, Inc.

                                       12


    The Company, Refac and U.S. Vision are all controlled by Palisade which
beneficially owns approximately 89% of the Company's outstanding common stock
(on a fully diluted basis), 90% of Refac's outstanding common stock and 88% of
U.S. Vision's outstanding common stock.

    Refac was incorporated in 1952 and for most of its history, was engaged in
intellectual property licensing activities. During the period from 1997 to 2002,
it was also engaged in the business of product development and graphic design
and had invested these creative resources, together with its licensing skills,
in certain product development ventures. In March 2002, Refac announced plans to
reposition itself for sale or liquidation and by the end of 2002, it had
disposed of all of its operating segments with the exception of its licensing
business and it has limited the operations of that segment to managing certain
existing license agreements and related contracts. On February 28, 2003, Refac
completed a merger with a wholly-owned subsidiary of Palisade pursuant to which
Palisade acquired control of Refac and, in May 2003, Palisade increased its
ownership to approximately 90% through an additional cash investment of $17,000.
Palisade had indicated that it intended to use Refac as a vehicle for making
acquisitions and the purpose of the stock purchase transaction was to provide
Refac with additional capital for making these acquisitions. As of December 31,
2004, Refac reported a net worth of $31,197 with approximately $29,000 available
for acquisitions.

     U.S. Vision, a privately held company, is a leading store-within-a-store
retailer of optical products and services with net revenues of approximately
$128,000 during its most recent fiscal year. It operates 518 locations in 47
states and Canada, consisting of 506 licensed departments and 12 freestanding
stores.

11. CONTINGENCIES

    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 September 30, 2005 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 impact on the Company's consolidated financial position or results of
operations.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
        OF OPERATIONS

    The following discussion may be understood more fully by reference to our
consolidated financial statements, notes to the consolidated financial
statements, and management's discussion and analysis contained in our Annual
Report on Form 10-K, as amended, for the year ended December 31, 2004, as filed
with the Securities and Exchange Commission.

OVERVIEW

     We are an integrated eye care service company focused on vision benefits
management (managed vision) and retail optical sales and eye care services to
consumers and patients (consumer vision).

    Throughout 2004, we implemented cost cutting measures and programs designed
to increase sales and product margins at our contact lens distributor, Wise
Optical. However, we were unable to increase sales or improve product margins
and operating income at Wise Optical, which negatively impacted our results of
operations in 2004. As a result of the continued troubles at Wise Optical, on
January 12, 2005, our wholly-owned subsidiary, OptiCare Acquisition Corp.,
entered into an Asset Purchase Agreement with Wise Optical, LLC and
AECC/Pearlman Buying Group, LLC, both entities formed by Dean J. Yimoyines,
M.D., our former Chief Executive Officer, current President and Chief Executive
Officer of our medical affiliate, OptiCare P.C., and our current Chairman,
pursuant to which we sold, effective as of December 31, 2004, substantially all
of the assets and certain liabilities of our Distribution division, which
consisted of Wise Optical, and our Optical Buying Group, for an aggregate
purchase price of approximately $4.2 million less a working capital adjustment
of approximately $0.6 million and estimated closing costs and other direct costs
of approximately $0.3 million.

    In addition, in May 2004, our Board of Directors approved management's plan
to exit and dispose of our Technology business, CC Systems, Inc. We completed
the sale of the net assets of CC Systems on September 10, 2004.

                                       13


     As a result of selling these businesses, we now have the following two
reportable operating segments: (1) Managed Vision and (2) Consumer Vision. Our
Managed Vision segment contracts with insurers, managed care plans and other
third party payers and employer groups to manage claims payment administration
of eye health benefits for those contracting parties and to provide insurance.
Our Consumer Vision segment 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.

    We have financed our operations and certain acquisitions through a term loan
and revolving credit facility with Capital Source Finance, LLC (CapitalSource),
portions of which our majority stockholder, Palisade Concentrated Partnership,
L.L.C. (Palisade), has guaranteed. In connection with the sale of certain assets
of our Distribution division on January 12, 2005, we amended the terms of our
term loan and revolving credit facility with CapitalSource to reduce the
tangible net worth covenant for December 2004 and January 2005 from ($3.0)
million to ($6.5) million. Without this Amendment, we would have been in
violation of the tangible net worth covenant at December 31, 2004. Pursuant to
the terms of the revolving credit facility, as amended, we must maintain a
tangible net worth of at least ($3.0) million after February 1, 2005. Management
believes it will comply with its future financial covenants, however, if we
incur operating losses in the future and we fail to comply with our financial
covenants in the future or otherwise default on our debt, our creditors could
foreclose on our assets.

     On April 8, 2005, we announced that Refac, an affiliated company, expressed
an interest in exploring an acquisition of us in a stock transaction and that we
and Refac had entered into discussions regarding same. On August 22, 2005, we
announced that we had entered into an agreement and plan of merger with Refac.
Under the terms of the merger agreement, as amended on November 11, 2005, (i)
each of the Company's preferred stockholders will receive 0.04029244 shares of
Refac common stock for each share of the Company's common stock underlying the
Company's preferred stock they hold, (ii) Palisade will receive 0.04029244
shares of Refac common stock for each share of the Company's common stock it
holds and (iii) each other of the Company's stockholders will receive 0.0472
shares of Refac common stock for each share of the Company's common stock they
hold and the Company will become a wholly-owned subsidiary of Refac. As a
condition to the merger, the Company's preferred stockholders have agreed to
convert all of their preferred stock into the Company's common stock prior to
the merger. The merger requires the approval of the holders of at least 55% of
the outstanding shares of Refac common stock. Palisade, as the Company's
majority stockholder, has executed a written consent approving the merger, which
consent shall be effective within 20 days after the Company mails an information
statement to its stockholders. The Company originally expected the merger to
close by the end of 2005. We now, however, expect that the merger will be
consummated on or before April 30, 2006. Refac also announced that it had
entered into a definitive agreement with U.S. Vision, Inc., another affiliated
company, which is privately-held and operates the 6th largest retail optical
chain in the United States, under which Refac will acquire U.S. Vision, Inc.

    We, Refac and U.S. Vision are all controlled by Palisade which beneficially
owns approximately 89% of our outstanding common stock (on a fully diluted
basis), 90% of Refac's outstanding common stock and 88% of U.S. Vision's
outstanding common stock.


RESULTS OF OPERATIONS

Three Months Ended September 30, 2005 Compared to the Three Months Ended 
September 30, 2004

    Managed Vision revenue. Managed Vision revenue represents fees received
under our managed care contracts. Managed Vision revenue increased to
approximately $6.6 million for the three months ended September 30, 2005
compared to approximately $6.5 million for the three months ended September 30,
2004, an increase of approximately $0.1 million or 1.6%. The increase in Managed
Vision revenue relates primarily to approximately $0.8 million in sales from new
contracts entered into and sales growth in existing contracts. These sales
increases were partially offset by approximately $0.7 million in lower revenues
related to membership declines experienced by two of our larger customers.

    Effective September 1, 2005, the Texas state legislature reinstated a vision
benefit in its Children's Health Insurance Program (CHIP). We previously
administered these benefits for a number of health plans in Texas until the
benefit was eliminated in September 2003. We have successfully negotiated a
number of new contracts under this reinstated program. In July 2005, Cigna
informed us of their intention to terminate or renegotiate certain aspects 

                                       14


of the five contracts we currently have with them. For the three months ended
September 30, 2005, total revenues derived from these five contracts
approximated 12% of our consolidated revenues. Three of the five contracts cover
both routine vision care, including exams and/or hardware, and medical/surgical
procedures and the two remaining contracts cover routine vision care only. Cigna
has indicated that it will terminate all of the contracts as they relate to the
routine vision care. To date we have received four contract termination notices
with effective dates of December 1, 2005 and January 1, 2006, respectively. In
subsequent discussions, Cigna expressed an interest in possibly extending two of
the contracts on a renegotiated basis as they relate to medical/surgical
procedures only. At this time, we have executed one contract amendment related
to medical/surgical procedures and are reviewing a draft amendment for another.
However, there can be no assurances that any other of the contracts will be
renegotiated on favorable terms. We believe, however, that the potential impact
from the termination or renegotiated Cigna contracts will be mitigated in part
by the new contracts we have entered into related to the CHIPS program.

    Product sales revenue. Product sales primarily include the sale of optical
products through our Consumer Vision segment. Product sales revenue remained
relatively flat at approximately $2.9 million for the three months ended
September 30, 2005 and September 30, 2004.

    Other services revenue. Other services revenue primarily includes revenue
earned from providing eye care services in our Consumer Vision segment. Other
services revenue increased to approximately $5.3 million for the three months
ended September 30, 2005 compared to approximately $4.8 million for the three
months ended September 30, 2004, an increase of approximately $0.5 million or
11.4%. This increase is primarily due to increased services volume in the
medical, optometry and surgical areas attributable to an increase in the number
of patients seen in the third quarter 2005 as compared to 2004. We expect
services revenue to remain at these levels or to increase slightly in the
future.

    Other income. Other income represents non-recurring settlements on Health
Service Organization ("HSO") contracts. Other income for the three months ended
September 30, 2005 was approximately $0.1 million. There were no non-recurring
settlements on HSO contracts for the three months ended September 30, 2004.
Further we believe income from these settlements will be negligible in the
future.

     Medical claims expense. Medical claims expense decreased to approximately
$4.8 million for the three months ended September 30, 2005 compared to
approximately $4.9 million for the three months ended September 30, 2004. The
medical claims expense loss ratio (MLR) representing medical claims expense as a
percentage of Managed Vision revenue decreased to 71.8% for the three months
ended September 30, 2005 from 75.0% for the three months ended September 30,
2004. The favorable change in MLR is a result of changes to existing contracts
and the performance of new contracts entered into in the latter half of 2004.

    Cost of product sales. Cost of product sales, which are primarily optical
products sold through our Consumer Vision operation, remained relatively
constant at approximately $1.0 million for the three months ended September 30,
2005 compared to approximately $1.1 million for the three months ended September
30, 2004.

    Cost of services. Cost of services increased to approximately $2.1 million
for the three months ended September 30, 2005 compared to approximately $1.9
million for the three months ended September 30, 2004, an increase of
approximately $0.2 million or 12.0%. This increase is primarily due to an
increase in the volume of services provided in the Consumer Vision area in this
period of 2005 compared to 2004.

    Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to approximately $6.3 million for the three
months ended September 30, 2005 compared to approximately $6.6 million for the
three months ended September 30, 2004. The three month period ended September
30, 2005 includes approximately $0.2 million in one-time merger related
expenses. Excluding the one-time merger expenses, selling, general and
administrative expenses decreased approximately $0.5 million or 7.8%. The
decrease in 2005 is primarily due to a decrease in compensation expense
associated with staff reductions at the corporate level.

    Discontinued Operations. Income from discontinued operations of
approximately $0.9 million for the three months ended September 30, 2005 relates
to our settlement of the Yonkers lease obligation. On October 21, 2005, we
entered into a surrender agreement with the landlord of the Yonkers facility. We
paid $125,000 to the landlord and also agreed to forego $85,000 in a rent
deposit that we had paid at the inception of the lease in January 2003. In
return, the landlord released us from any and all financial obligations
regarding the lease of the Yonkers facility, effective September 30, 2005, and
the landlord will release us from all other obligations under the lease
agreement, effective December 31, 2005. As a result of this transaction, we
adjusted our estimated provision to cover any potential 


                                       15


exposure on the Yonkers lease obligation down to $125,000 at September 30, 2005.
The offset to this adjustment of approximately $0.9 million was treated as
income from discontinued operations in the three months ended September 30,
2005, since the original provision was included in the loss on disposal of
discontinued operations for the year ended December 31, 2004. The loss from
discontinued operations of approximately $1.3 million for the three months ended
September 30, 2004 relates to the operating losses of CC Systems, Inc. and the
Distribution business and also includes an adjustment to the loss on the
disposal of CC Systems, Inc. which was sold in September 2004.

    Interest expense. Interest expense decreased to approximately $0.2 million
for the three months ended September 30, 2005 from approximately $0.3 million
for the three months ended September 30, 2004, a decrease of approximately $0.1
million or 41.3%. The decrease in interest expense is primarily due to a
decrease in the average outstanding debt balance resulting from our $6.3 million
debt pay down in January 2005. Cash proceeds received from the sale of the
Distribution business and the issuance of the Series D preferred stock were used
in part for the debt pay down.

    Income tax expense. Income tax expense recorded for the three months ended
September 30, 2004 primarily represents minimum state tax expense. For the three
months ended September 30, 2005, the Company has offset its income tax expense,
with the releasing of valuation allowances that were setup to offset the net
operating loss deferred tax assets.

Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September
30, 2004

    Managed Vision revenue. Managed Vision revenue increased to approximately
$19.4 million for the nine months ended September 30, 2005 compared to
approximately $18.9 million for the nine months ended September 30, 2004, an
increase of approximately $0.5 million or 3.0%. The increase in Managed Vision
revenue relates primarily to approximately $2.1 million in sales from new
contracts entered into in 2004 and sales growth in existing contracts. These
sales increases were partially offset by approximately $1.6 million in lower
revenues related to membership declines experienced by two of our larger
customers.

    Effective September 1, 2005, the Texas state legislature reinstated a vision
benefit in its Children's Health Insurance Program (CHIP). We previously
administered these benefits for a number of health plans in Texas until the
benefit was eliminated in September 2003. We have successfully negotiated a
number of new contracts under this reinstated program. In July 2005, Cigna
informed us of their intention to terminate or renegotiate certain aspects of
the five contracts we currently have with them. For the nine months ended
September 30, 2005, total revenues derived from these five contracts
approximated 12% of our consolidated revenues. Three of the five contracts cover
both routine vision care, including exams and/or hardware, and medical/surgical
procedures and the two remaining contracts cover routine vision care only. Cigna
has indicated that it will terminate all of the contracts as they relate to
routine vision care. To date we have received four contract termination notices
with effective dates of December 1, 2005 and January 1, 2006, respectively. In
subsequent discussions, Cigna expressed an interest in possibly extending two of
the contracts on a renegotiated basis as they relate to medical/surgical
procedures only. At this time, we have executed one contract amendment related
to medical/surgical procedures and are reviewing a draft amendment for another.
However, there can be no assurances that any other of the contracts will be
renegotiated on favorable terms. We believe, however, that the potential impact
from the termination or renegotiated Cigna contracts will be mitigated in part
by the new contracts we have entered into related to the CHIPS program.

    Product sales revenue. Product sales primarily include the sale of optical
products through our Consumer Vision segment. Product sales revenue remained
relatively flat at approximately $8.8 million for the nine months ended
September 30, 2005 compared to approximately $8.9 million for the same period of
2004.

    Other services revenue. Other services revenue primarily includes revenue
earned from providing eye care services in our Consumer Vision segment. Other
services revenue decreased to approximately $15.1 million for the nine months
ended September 30, 2005 compared to approximately $15.3 million for the nine
months ended September 30, 2004, a decrease of approximately $0.2 million or
1.2%. This decrease is primarily due to decreased services volume in the
medical, optometry and surgical areas attributable to decline in the number of
patients seen in the first half of 2005 as compared to 2004, which were slightly
offset by increased volume in the third quarter of 2005 compared to the same
period of 2004.

    Other income. Other income represents non-recurring settlements on HSO
contracts. Other income for the nine months ended September 30, 2005 was
approximately $0.8 million compared to approximately $1.5 million for the nine
months ended September 30, 2004, representing a decrease of approximately $0.7
million or 41.8%, which 


                                       16


resulted from a decrease in the number of settlements in the nine months ended
September 30, 2005. Further we believe income from these settlements will be
negligible in the future.

     Medical claims expense. Medical claims expense remained relatively flat at
approximately $14.2 million for the nine months ended September 30, 2005
compared to approximately $14.3 million for the same period of 2004. The MLR
decreased to 73.1% in 2005 from 75.7% in 2004. The favorable change in MLR is a
result of changes to existing contracts and the performance of new contracts
entered into 2004.

    Cost of product sales. Cost of product sales, which are primarily optical
products sold through our Consumer Vision operation, remained relatively
constant at approximately $3.1 million for the nine months ended September 30,
2005 compared to approximately $3.2 million for the nine months ended September
30, 2004.

    Cost of services. Cost of services decreased to approximately $5.7 million
for the nine months ended September 30, 2005 compared to approximately $6.4
million for the nine months ended September 30, 2004, a decrease of
approximately $0.7 million or 10.1%. This decrease is primarily due to a
decrease in the volume of services provided in the Consumer Vision area in this
period of 2005 compared to 2004.

    Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to approximately $18.7 million for the nine
months ended September 30, 2005 compared to approximately $19.3 million for the
nine months ended September 30, 2004. The nine month period ended September 30,
2005 includes approximately $0.3 million in one-time merger related expenses.
Excluding the one-time merger expenses, selling, general and administrative
expenses decreased approximately $0.9 million or 4.7%. The decrease in 2005 is
primarily due to a decrease in compensation expense associated with staff
reductions at the corporate level.

    Interest expense. Interest expense decreased to approximately $0.6 million
for the nine months ended September 30, 2005 from approximately $0.9 million for
the nine months ended September 30, 2004, a decrease of approximately $0.3
million or 37.6%. The decrease in interest expense is primarily due to a
decrease in the average outstanding debt balance resulting from our $6.3 million
debt pay down in January 2005. Cash proceeds received from the sale of the
Distribution business and the issuance of the Series D preferred stock were used
in part for the debt pay down.

    Discontinued Operations. Income from discontinued operations of
approximately $0.9 million for the nine months ended September 30, 2005 relates
to our settlement of the Yonkers lease obligation. On October 21, 2005, we
entered into a surrender agreement with the landlord of the Yonkers facility. We
paid $125,000 to the landlord and also agreed to forego $85,000 in a rent
deposit that we had paid at the inception of the lease in January 2003. In
return, the landlord released us from any and all financial obligations
regarding the lease of the Yonkers facility, effective September 30, 2005, and
the landlord will release us from all other obligations under the lease
agreement, effective December 31, 2005. As a result of this transaction, we
adjusted our estimated provision to cover any potential exposure on the Yonkers
lease obligation down to $125,000 at September 30, 2005. The offset to this
adjustment of approximately $0.9 million was treated as income from discontinued
operations in the nine months ended September 30, 2005, since the original
provision was included in the loss on disposal of discontinued operations for
the year ended December 31, 2004. The loss from discontinued operations of
approximately $3.8 million for the nine months ended September 30, 2004 relates
to the operating losses of CC Systems, Inc. and the Distribution business and
also includes the loss on the disposal of CC Systems, Inc. which was sold in
September 2004.

    Income tax expense. Income tax expense recorded for the nine months ended
September 30, 2005 and September 30, 2004 primarily represents minimum state tax
expense. For the nine months ended September 30, 2005, the Company has offset
its income tax expense, other than the minimum state tax expense, with the
releasing of valuation allowances that were setup to offset the net operating
loss deferred tax assets.

CRITICAL ACCOUNTING POLICIES

    The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities at the date of our financial statements. Management bases its
estimates and judgments on historical experience, current economic and industry
conditions and on various other facts that are believed to be reasonable under
the circumstances. Actual results may differ significantly from these estimates
under different assumptions, judgments or conditions. The accounting policies
and judgments, estimates and assumptions are described in greater detail in our
Annual Report on Form 10-K, as amended, in the "Critical Accounting Policies and
Estimates" of 


                                       17

Management's Discussion and Analysis of Financial Condition and Results of
Operations and in Note 3 to the Consolidated Financial Statements for the year
ended December 31, 2004.

    Management believes critical accounting estimates are used in determining
the adequacy of the allowance for doubtful accounts, insurance disallowances,
managed care claims accrual, valuation allowance for deferred tax assets and in
evaluating goodwill and intangibles for impairment.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

    Our primary sources of liquidity have been cash flows generated from
operations in our Managed Vision and Consumer Vision segments, other income from
litigation settlements and borrowings under our term loan and revolving credit
facility with CapitalSource and recently, borrowings under our loan from Refac.
We have continued to settle outstanding litigation with positive results through
September 2005, but expect future revenue from these settlements to be
negligible in the future.

    As of September 30, 2005, we had cash and cash equivalents of approximately
$2.1 million and additional availability under our revolving credit facility
with CapitalSource of approximately $1.6 million. The Company's over advance
facility with CapitalSource expired on August 31, 2005 and our term loan with
CapitalSource becomes due on January 26, 2006. On September 1, 2005, Refac made
a subordinated loan to us of $1.0 million.

    As a result of operating losses our condensed consolidated financial
statements for the three months ended March 31, 2004, we were not in compliance
with the minimum fixed charge ratio covenant under our term loan and revolving
credit facility with CapitalSource as of March 31, 2004. In addition, we were
not in compliance with this covenant as of April 30 or May 31, 2004. As
discussed below, we amended our term loan and revolving credit facility with
CapitalSource on August 16, 2004 and received a waiver from CapitalSource for
any non-compliance with this covenant as of March 31, 2004, April 30, 2004, May
31, 2004 and June 30, 2004.

     On January 12, 2005, we amended the term loan and revolving credit facility
with CapitalSource to reduce the tangible net worth covenant for December 2004
and January 2005 from ($3.0) million to ($6.5) million. Without this amendment,
we would have been in violation of the tangible net worth covenant at December
31, 2004. Under the term loan and revolving credit facility, as amended, we must
maintain a tangible net worth of at least ($3.0) million after February 1, 2005.
We paid CapitalSource $12,500 in financing fees in connection with this
amendment. We have been in compliance with all of our covenants at each month
end for the period January 31, 2005 through September 30, 2005.

     The following table sets forth a year-over-year comparison of the
components of our liquidity and capital resources for the nine months ended
September 30, 2005 and 2004:

                                          (In millions)
                                                                     
                                          2005            2004       CHANGE
                                          ----            ----       -------
Cash and cash equivalents                $ 2.1           $ 3.0       $ (0.9)

Cash provided by (used in):
    Operating activities                  (0.6)            3.4         (4.0)
     Investing activities                  2.8             0.3          2.5
     Financing activities                 (2.3)           (2.4)         0.1


    Net cash used in operating activities was approximately $0.6 million for the
nine months ended September 30, 2005 compared to approximately $3.4 million of
net cash provided by operations for the nine months ended September 30, 2004.
The decrease of approximately $4.0 million in net cash from operating activities
in the nine months ended September 30, 2005 compared to nine months ended
September 30, 2004 is primarily attributable to an approximate $5.2 million net
increase in the non-cash components of working capital in 2005 compared to 2004.
This amount was offset in part by an increase of approximately $1.2 million in
net income from continuing operations in the nine months ended September 30,
2005 compared to the nine months ended September 30, 2004. The increase in the
non-cash 


                                       18

components of working capital resulted primarily from a decrease in accounts
payable and accrued expenses of approximately $5.3 million and an approximate
$0.1 million net increase in other assets and liabilities. The decrease of
approximately $5.3 million in accounts payable and accrued expenses resulted
primarily from expenses associated with the sale of the Distribution business,
including professional fees being settled in 2005.

    Net cash provided by investing activities was approximately $2.8 million for
the nine months ended September 30, 2005 compared to approximately $0.3 million
of net cash provided by investing activities for the nine months ended September
30, 2004. Net cash provided by investing activities in 2005 included
approximately $3.4 million in proceeds received related to the sale of the
Distribution business in January 2005 and approximately $0.1 million of payments
received on notes receivable both of which were partially offset by
approximately $0.2 million used to purchase fixed assets, approximately $0.2
million used for earn out payments related to an acquisition and approximately
$0.2 million of managed care deposits. Net cash provided by investing activities
in 2004 included $0.7 million in proceeds received related to the sale of CC
Systems, our technology business, in September 2004 and approximately $0.1
million of payments received on notes receivable both of which were partially
offset by approximately $0.3 million used to purchase fixed assets and
approximately $0.2 million of managed care deposits.

    Net cash used in financing activities was approximately $2.3 million for the
nine months ended September 30, 2005 compared to approximately $2.4 million of
net cash used in financing activities for the nine months ended September 30,
2004. Net cash used in financing activities in 2005 resulted primarily from
approximately $7.8 million in debt repayments under our revolving credit
facility and term loan with Capital Source, offset in part by cash proceeds
received of approximately $4.4 million from the issuance of Series D preferred
stock and $1.0 million from the subordinated loan from Refac. Debt repayments of
approximately $7.8 million were made in part with cash proceeds received from
the sale of the Distribution business, the subordinated loan from Refac and from
the issuance of the Series D preferred stock. Net cash used in financing
activities in 2004 was primarily attributable to approximately $2.4 million in
debt repayments under our revolving credit facility and term loan with Capital
Source.

    We incurred operating losses in 2004 due primarily to substantial operating
losses at Wise Optical. In January 2005, we sold our Distribution business
including the Wise Optical operation. In September 2004, we sold our Technology
business, CC Systems, Inc. The sale of these operations generated cash proceeds
and reduced demands on working capital and corporate personnel. In addition, in
January 2005, we sold 280,618 shares of newly created Series D preferred stock,
which is convertible into our common stock, for an aggregate price of
approximately $4.4 million.

    In addition, in 2003 the Managed Vision segment began shifting away from the
lower margin and long sales cycle of our third party administrator, or TPA style
business to the higher margin and shortened sales cycle of a direct-to-employer
business. This direct-to-employer business also removes some of the volatility
that is often experienced in our TPA-based revenues. We continue to grow our
direct-to-employer business, however, the direct-to-employer business continues
to be relatively small in comparison to the overall Managed Vision business. We
experienced significant improvements in revenue and profitability in the
Consumer Vision segment from 2003 to 2004, largely from growth in existing store
sales and enhanced margins as a result of sales incentives. In the nine month
period ended September 30, 2005, revenue and profitability in the Consumer
Vision segment have remained relatively constant with the comparable period of
2004.

     We believe the combination of the above initiatives executed in the
operating segments will continue to improve our liquidity and should ensure
compliance with CapitalSource covenants in the future. We believe that our
future cash flow from operations, borrowings under our amended term loan and
revolving credit facility with CapitalSource, borrowings under our subordinated
loan agreement with Refac and operating and capital lease financing will provide
us with sufficient funds to finance our operations for the next 12 months,
including the purchase of certain operating equipment.

The CapitalSource Loan and Security Agreement

    As of September 30, 2005, we had borrowings of $1.5 million outstanding
under our term loan with CapitalSource, $0.9 million of advances outstanding
under our revolving credit facility with CapitalSource and $1.6 million of
additional availability under this revolving credit facility. Our temporary
over-advance facility with CapitalSource expired on August 31, 2005. Our term
loan with CapitalSource matures on January 25, 2006 and our revolving credit
facility matures on January 25, 2007.

                                       19


    In January 2002, as part of a debt and equity restructuring, we entered into
a credit facility with CapitalSource consisting of a $3.0 million term loan and
a $10.0 million revolving credit facility. In February 2003, in connection with
our acquisition of Wise Optical, the revolving credit facility was amended to
$15.0 million. Although we may borrow up to $15.0 million under the revolving
credit facility, the maximum amount that may be advanced is limited to the value
derived from applying advance rates to eligible accounts receivable and
inventory.

    We did not meet our minimum fixed charge ratio covenant in the third and
fourth quarter of 2003, primarily due to operating losses incurred at Wise
Optical. However, on November 14, 2003, we entered into an amendment of the
terms of our term loan and credit facility with CapitalSource which, among other
things,

     (i)  increased our term loan by $0.3 million and extend the maturity date
          of the term loan from January 25, 2004 to January 25, 2006,

     (ii) extended the maturity date of our revolving credit facility from
          January 25, 2005 to January 25, 2006,

     (iii) permanently increased the advance rate on eligible receivables of
          Wise Optical from 80% to 85%,

     (iv) temporarily increased the advance rate on eligible inventory of Wise
          Optical from 50% to 55% through March 31, 2004,

     (v)  provided access to a $0.7 million temporary over-advance bearing
          interest at prime plus 5 1/2%, which was repaid by March 1, 2004, and
          was guaranteed by Palisade,

     (vi) through March 31, 2004, waived our non-compliance with the minimum
          fixed charge ratio covenant, and

     (vii) changed our net worth covenant from ($27) million to tangible net
          worth of ($10) million.

    In connection with the foregoing amendment, we paid CapitalSource $80,000 in
financing fees. The amendment also included an additional $150,000 termination
fee if we terminated the revolving credit facility prior to December 31, 2004.
Additionally, if we terminate the revolving credit facility pursuant to a
refinancing with another commercial financial institution, we must pay
CapitalSource, in lieu of the termination fee, a yield maintenance amount equal
to the difference between (i) the all-in effective yield which could be earned
on the revolving balance through January 25, 2006, and (ii) the total interest
and fees actually paid to CapitalSource on the revolving credit facility prior
to the termination date or date of prepayment.

    We did not meet our fixed charge ratio covenant in January and February
2004. Accordingly, on March 29, 2004, we amended and restated the terms of our
term loan and revolving credit facility with Capital Source which incorporated
all of the changes embodied in the above amendments and: (i) confirmed that the
temporary over-advance was repaid as of February 29, 2004, (ii) changed the
expiration date of the waiver of our fixed ratio covenant from March 31, 2004 to
February 29, 2004 and (iii) reduced the tangible net worth covenant from ($10)
million to ($2) million. In connection with this amendment, we agreed to pay
$25,000 to CapitalSource in financing fees.

    We were not in compliance with the minimum fixed charge ratio covenant under
our term loan and revolving credit facility with CapitalSource as of March 31,
2004. In addition, we were not in compliance with this covenant as of April 30,
2004 or May 31, 2004. We were in compliance with the covenant as of June 30,
2004. In connection with a waiver and amendment to the term loan and revolving
credit facility with CapitalSource entered into on August 16, 2004, we received
a waiver from CapitalSource for any non-compliance with this covenant as of
March 31, 2004, April 30, 2004, May 31, 2004 and June 30, 2004.

    The August 16, 2004 waiver and amendment also amended the term loan and
revolving credit facility to, among other things, extend the maturity date of
the revolving credit facility from January 25, 2006 to January 25, 2007, (ii)
provide access to a $2.0 million temporary over-advance bearing interest at
prime plus 5 1/2%, and in no event less than 6%, which is to be repaid in eleven
monthly installments of $100,000 commencing on October 1, 2004 with the
remaining balance to be repaid in full by August 31, 2005, which is guaranteed
by our largest stockholder, Palisade, (iii) change the fixed charge ratio
covenant from between 1.5 to 1 to not less than 1 and to extend the next test
period for this covenant to March 31, 2005, (iv) decrease the minimum tangible
net worth financial covenant from ($2.0) million to ($3.0) million and (v) add a
debt service coverage ratio covenant of between 0.7 to 1.0 for the 


                                       20


period October 31, 2004 to February 28, 2005. In addition, the waiver and
amendment increased the termination fee payable if we terminate the revolving
credit facility by 2.0% and increased the yield maintenance amount payable, in
lieu of the termination fee, if we terminate the revolving credit facility
pursuant to a refinancing with another commercial financial institution, by
2.0%. The yield maintenance amount was also changed to mean an amount equal to
the difference between (i) the all-in effective yield which could be earned on
the revolving balance through January 25, 2007 and (ii) the total interest and
fees actually paid to CapitalSource on the revolving credit facility prior to
the termination or repayment date. On August 17, 2004, we paid CapitalSource
$25,000 in financing fees in connection with this waiver and amendment.

    In addition, on August 27, 2004, we amended our loan agreement with
CapitalSource to eliminate a material adverse change as an event of default or
to prevent further advances under the loan agreement. This amendment eliminates
the lender's ability to declare a default based upon subjective criteria as
described in consensus 95-22 issued by the Financial Accounting Standards Board
Emerging Issues Task Force. Palisade provided a $1.0 million guarantee against
the loan balance due to CapitalSource related to this amendment. We paid
CapitalSource $15,000 in financing fees in connection with this amendment.

    On January 12, 2005, we amended the term loan and revolving credit facility
with CapitalSource to reduce the tangible net worth covenant for December 2004
and January 2005 from ($3.0) million to ($6.5) million. Without this amendment,
we would have been in violation of the tangible net worth covenant at December
31, 2004. Under the term loan and revolving credit facility, as amended, we must
maintain a tangible net worth of at least ($3.0) million after February 1, 2005.
We paid CapitalSource $12,500 in financing fees in connection with this
amendment.

    The term loan and revolving credit facility with CapitalSource are subject
to the second amended and restated revolving credit, term loan and security
agreement dated March 29, 2004, as amended on August 16, 2004, August 27, 2004
and January 12, 2005. The revolving credit, term 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, both as discussed above. Upon the occurrence of certain
events or conditions described in the revolving credit, term loan and security
agreement (subject to grace periods in certain cases), including our failure to
meet the financial covenants, the entire outstanding balance of principal and
interest would become immediately due and payable.

    Pursuant to the revolving credit, term loan and security agreement, as
amended, our term loan with CapitalSource matures on January 25, 2006 and our
revolving credit facility matures on January 25, 2007. We are required to make
monthly principal payments of $25,000 on the term loan with the balance due at
maturity. Although we may borrow up to $15.0 million under the revolving credit
facility, the maximum amount that may be advanced is limited to the value
derived from applying advance rates to eligible accounts receivable and
inventory. The advance rate under our revolving credit facility is 85% of all
eligible accounts receivable and 50 to 55% of all eligible inventory. The $0.9
million reduction in our inventory value as a result of the mathematical and
fundamental errors in accounting and reconciliation for inventory reduced our
borrowing availability under this formula from $2.5 million to $1.9 million at
March 31, 2004. The interest rate applicable to the term loan equals the prime
rate plus 3.5% (but not less than 9.0%) and the interest rate applicable to the
revolving credit facility is prime rate plus 1.5% (but not less than 6.0%).

    If we terminate the revolving credit facility prior to December 31, 2005, we
must pay CapitalSource a termination fee of $600,000. If we terminate the
revolving credit facility after December 31, 2005 but prior to the expiration of
the revolving credit facility the termination fee is $450,000. Additionally, if
we terminate the revolving credit facility pursuant to a refinancing with
another commercial financial institution, we must pay CapitalSource, in lieu of
the termination fee, a yield maintenance amount equal to the difference between
(i) the all-in effective yield which could be earned on the revolving balance
through January 25, 2007 and (ii) the total interest and fees actually paid to
CapitalSource on the revolving credit facility prior to the termination date or
date of prepayment.

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

                                       21


    We believe that we will be able to comply with our financial covenants under
our amended credit facility with CapitalSource. However, if we incur operating
losses and we fail to comply with our financial covenants or otherwise default
on our debt, our creditors could foreclose on our assets, in which case we would
be obligated to seek alternate sources of financing. There can be no assurance
that alternate sources of financing will be available to us on terms acceptable
to us, if at all. If 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 and may have a material
adverse impact on the business and operations.

The Refac Loan Agreement

     On September 1, 2005, Refac loaned us $1.0 million. This loan is evidenced
by a subordinated secured note and is subordinate to our senior indebtedness
with CapitalSource. Pursuant to the terms and conditions of the loan agreement
with Refac, the principal balance together with any accrued but unpaid interest
shall be due and payable by us on January 25, 2007. However, if the merger
provided for in our merger agreement with Refac is not completed on or before
January 31, 2006, the maturity date shall be March 31, 2006. We did not incur
any loan origination fees associated with the subordinated loan from Refac. The
note bears interest at a rate equivalent to prime plus 5.5%. The entire amount
of loan proceeds was used to repay a portion of our outstanding indebtedness
under the revolving credit facility with CapitalSource.

The Series B Preferred Stock

    As of September 30, 2005, we had 3,204,959 shares of Series B Preferred
Stock issued and outstanding. Subject to the senior liquidation preference of
the Series C and Series D Preferred Stock described below, 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.
Each share of Series B Preferred Stock is convertible into a number of shares of
common stock equal to such share's current liquidation value, divided by a
conversion price of $0.14, subject to adjustment for dilutive issuances. The
number of shares of common stock into which each share of Series B Preferred
Stock is convertible will increase over time because the liquidation value of
the Series B Preferred Stock, which was $2.16 per share as of September 30,
2005, increases at a rate of 12.5% per year, compounded annually.

The Series C Preferred Stock

    As of September 30, 2005, we had 406,158 shares of Series C Preferred Stock
issued and outstanding. The Series C Preferred Stock has an aggregate
liquidation preference of approximately $16.2 million and ranks senior to all
other currently issued and outstanding classes or series of our stock with
respect to liquidation rights with exception of the Series D Preferred Stock.
Each share of Series C Preferred Stock is convertible into 50 shares of common
stock and has the same dividend rights, on an as converted basis, as our common
stock.

The Series D Preferred Stock

    In January 2005, we issued and sold an aggregate of 280,618 shares of our
newly created Series D Preferred Stock, which are initially convertible into an
aggregate of 11,224,720 shares of our common stock, to Palisade and Ms.
Yimoyines, the spouse of our Chairman and former Chief Executive Officer, for an
aggregate purchase price of approximately $4.4 million. Each share of Series D
Preferred Stock has a senior liquidation preference over all other series and
classes of our currently outstanding capital stock equal to (a) $15.84 and (b)
an amount in cash equal to all accrued but unpaid dividends thereon. Each share
of Series D Preferred Stock is initially convertible, at the option of the
holder, into 40 shares of our common stock based on an initial conversion price
of $0.396. The conversion price is subject to adjustment for dividends on our
common stock and subdivisions and/or reclassifications of our common stock. Each
holder of Series D Preferred Stock is entitled to vote, on an as converted
basis, on all matters with the holders of our common stock and receive dividends
equally and ratably with the holders of our common stock in an amount equal to
the dividends such holder would receive if it had converted its Series D
Preferred Stock into common stock on the date the dividends are declared.


                                       22


Impact of Reimbursement Rates

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


FORWARD-LOOKING INFORMATION AND RISK FACTORS

    The statements in this Form 10-Q and elsewhere (such as in other filings by
us 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, as amended. When used in this
document and elsewhere, words such as "anticipate," "believe," "expect," "plan,"
"intend," "estimate," "project," "could," "may," "predict" and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements include those relating to:

     o  Our expectation that the merger with Refac will be consummated on or
        before April 30, 2006 and the expected consideration to be received by
        our stockholders in the merger;

     o  Our opinion that with respect to lawsuits incidental to our current and
        former operations, after taking into account the merits of defenses and
        established reserves, the ultimate resolution of these matters may not
        have a material adverse impact on our financial position or results of
        operations;

     o  Our belief that our direct-to-employer product will lead to increased
        revenue, gross margins and profitability in our Managed Vision segment;

     o  Our expectation of future revenue, profitability, income and expense
        levels for our company as a whole and for each of its segments;

     o  Our belief that the termination or renegotiation of Cigna contracts will
        be mitigated in part by new contracts; 

     o  Our expectation that interest rates may not have a material adverse
        effect on income or cash flows in 2005; 

     o  Our belief that our initiatives may continue to improve liquidity and
        should ensure compliance with covenants in our amended term loan and
        revolving credit facility with CapitalSource; and

     o  Our belief that cash from operations, borrowings under our amended term
        loan and revolving credit facility with CapitalSource and loan with
        Refac and operating and capital lease financings will provide sufficient
        funds to finance operations for the next 12 months, including the
        purchase of certain operating equipment.


    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  The fact that we have failed financial covenants and may fail them in
        the future;

     o  If we default on our debt to CapitalSource, it could foreclose on our
        assets;

     o  If we default on our debt to Refac, it could foreclose on our assets;

     o  The fact that the proposed merger with Refac may not be consummated in a
        timely manner, if at all, which could negatively impact our continued
        operations and prospects as a stand-alone business.

                                       23

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

     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
        could have a material adverse effect on our business, financial
        condition and results of operations;

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

     o  Loss of the services of key management personnel could adversely affect
        our business;

     o  If we fail to execute our growth strategy, we may not continue to be 
        profitable;

     o  If we are unable to obtain additional capital, our growth could be
        limited;

     o  We have a history of losses and may incur further losses in the future;

     o  We may not be able to maintain the listing of our common stock on the
        American Stock Exchange, which may make it more difficult for
        stockholders to dispose of our common stock;

     o  We may not be able to compete effectively with other eye care services
        companies which have more resources and experience than us, and with
        other eye care distributors;

     o  Failure to negotiate profitable capitated fee arrangements could have a
        material adverse effect on our results of operations and financial
        condition;

     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 our stockholders and us;

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

     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 our largest stockholder, Palisade, owns sufficient shares
        of our common stock and voting equivalents to significantly affect the
        results of any stockholder vote and controls our board of directors;

     o  The fact that conflicts of interest may arise between Palisade and us; 

     o  The fact that conflicts of interest may arise between Dean J. Yimoyines
        and us; and

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


    Except as required by law, we undertake no obligation to publicly update or
revise forward-looking statements to reflect events or circumstances after the
date of this Form 10-Q or to reflect the occurrence of unanticipated events.

ITEM 3. 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
and the loan from Refac, due to their variable interest rates. 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 2005, 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
nine-month interest expense by approximately $41,000 assuming that our borrowing
level is unchanged. We did not use derivative instruments to adjust our interest
rate risk profile during the nine months ended September 30, 2005.


                                       24

ITEM 4.  CONTROLS AND PROCEDURES

    (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

    As required by Rule 13a-15 under the Exchange Act, our management, under the
supervision and with the participation of the our Chief Executive Officer and
Corporate Controller and Chief Accounting Officer, performed an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based upon that
evaluation, these officers have concluded that, as of September 30, 2005, our
disclosure controls and procedures were adequate and designed to provide
reasonable assurance that the information required to be disclosed is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.

    (B) CHANGES IN INTERNAL CONTROLS

    There have been no changes in our internal controls over financial
reporting, identified in connection with our evaluation of such internal
controls, which have occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to material affect, our internal
controls over financial reporting.


PART II.      OTHER INFORMATION


ITEM 1.     LEGAL PROCEEDINGS

    HEALTH SERVICE ORGANIZATION LAWSUITS

    In July 2005, we reached settlement with John C. Hagan, III, M.D., an HSO
practice that we were in litigation in the matter of In re Prime Vision Health,
Inc., Contract Litigation, MDL 1466, which was previously reported in our Annual
Report on Form 10-K, as amended, for the year ended December 31, 2004. This
settlement resulted in a cash payment to us and mutual termination of the HSO
service agreement. The HSO lawsuits are coming to conclusion and we do not
expect substantial income from additional settlements in the future.

ITEM 5.     OTHER INFORMATION

    On October 21, 2005, we entered into a surrender agreement with the landlord
of the Yonkers facility. We paid $125,000 to the landlord and also agreed to
forego $85,000 in a rent deposit that we had paid at the inception of the lease
in January 2003. In return, the landlord released us from any and all financial
obligations regarding the lease of the Yonkers facility, effective September 30,
2005, and the landlord will release us from all other obligations under the
lease agreement, effective December 31, 2005.

    On November 11, 2005, we received the resignation of Gordon A. Bishop,
President, Consumer Vision Division effective February, 28, 2006. We have
selected David Gaio to succeed Mr. Bishop as the President of the Consumer
Vision Division. Mr. Gaio currently serves as an Executive Vice President for
the Consumer Vision Division.

    On November 11, 2005, we executed an amendment to Section 8.01 of the
agreement and plan of merger dated August 22, 2005 among us, Refac and OptiCare
Merger Sub, Inc. amending the merger termination date to April 30, 2006 from
December 31, 2005.

ITEM 6. EXHIBITS

 The following Exhibits are filed as part of this Quarterly Report on Form 10-Q:

         EXHIBIT      DESCRIPTION
         -------      -----------
         2.1          Agreement and Plan of Merger by and among Refac, OptiCare 
                      Merger Sub, Inc. and the 


                                       25

                      Registrant dated as of August 22, 2005, incorporated
                      herein by reference from the Registrant's Current Report
                      on Form 8-K filed August 23, 2005, Exhibit 2.1.

         2.2          Amendment No.1 dated as of November 11, 2005 to the 
                      Agreement and Plan of Merger by and among Refac, OptiCare
                      Merger Sub, Inc. and the Registrant dated as of August 22,
                      2005.*

         10.1         Loan Agreement by and among Refac, the Registrant and
                      OptiCare Eye Health Centers, Inc. dated as of September 1,
                      2005, incorporated herein by reference from the
                      Registrant's Current Report on Form 8-K filed September 8,
                      2005, Exhibit 10.1.

         10.2         The Registrant's Promissory Note dated September 1, 2005,
                      incorporated herein by reference from the Registrant's
                      Current Report on Form 8-K filed September 8, 2005,
                      Exhibit 10.2.

         10.3         Subordination Agreement by and among Refac, the
                      Registrant, OptiCare Eye Health Centers, Inc., Primevision
                      Health, Inc. and CapitalSource Finance LLC dated as of
                      September 1, 2005, incorporated herein by reference from
                      the Registrant's Current Report on Form 8-K filed
                      September 8, 2005, Exhibit 10.3.

         10.4         Employment Agreement dated July 19, 2005 by and between
                      the Registrant and Vincent S. Miceli, incorporated herein
                      by reference from the Registrant's Current Report on Form
                      8-K filed July 25, 2005, Exhibit 10.1.

         10.5         Amendment No. 1 to Amended and Restated Employment
                      Agreement dated July 19, 2005 by and between the
                      Registrant and Christopher Walls, incorporated herein by
                      reference from the Registrant's Current Report on Form 8-K
                      filed July 25, 2005, Exhibit 10.2.

         10.6         Surrender of Lease Agreement dated October 21, 2005 by and
                      between the Registrant and MACK-CALI SO. WEST REALTY
                      ASSOCIATES L.L.C.*

         31.1         Certification of Chief Executive Officer pursuant to 
                      Section 302 of the Sarbanes-Oxley Act of 2002.*

         31.2         Certification of Corporate Controller and Chief Accounting
                      Officer pursuant to Section 302 of the Sarbanes-Oxley Act
                      of 2002.*

         32           Certification of Chief Executive Officer and Corporate
                      Controller and Chief Accounting Officer pursuant to
                      Section 906 of the Sarbanes-Oxley Act of 2002.*


                  *  Filed herewith.





















                                       26


                                    SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be filed on its behalf by the
undersigned, hereunto duly authorized.


Date:   November 14, 2005                 OPTICARE HEALTH SYSTEMS, INC.



                                     By:  /s/ Vincent S. Miceli
                                          --------------------------------------
                                          Vincent S. Miceli
                                          Corporate Controller
                                          (Principal Financial and Accounting
                                           Officer and duly authorized officer)
































                                       27

                                  EXHIBIT INDEX

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

         2.1          Agreement and Plan of Merger by and among Refac, OptiCare 
                      Merger Sub, Inc. and the Registrant dated as of August 22,
                      2005, incorporated herein by reference from the
                      Registrant's Current Report on Form 8-K filed August 23,
                      2005, Exhibit 2.1.

         2.2          Amendment No.1 dated as of November 11, 2005 to the 
                      Agreement and Plan of Merger by and among Refac, OptiCare
                      Merger Sub, Inc. and the Registrant dated as of August 22,
                      2005.*

         10.1         Loan Agreement by and among Refac, the Registrant and
                      OptiCare Eye Health Centers, Inc. dated as of September 1,
                      2005, incorporated herein by reference from the
                      Registrant's Current Report on Form 8-K filed September 8,
                      2005, Exhibit 10.1.

         10.2         The Registrant's Promissory Note dated September 1, 2005,
                      incorporated herein by reference from the Registrant's
                      Current Report on Form 8-K filed September 8, 2005,
                      Exhibit 10.2.

         10.3         Subordination Agreement by and among Refac, the
                      Registrant, OptiCare Eye Health Centers, Inc., Primevision
                      Health, Inc. and CapitalSource Finance LLC dated as of
                      September 1, 2005, incorporated herein by reference from
                      the Registrant's Current Report on Form 8-K filed
                      September 8, 2005, Exhibit 10.3.

         10.4         Employment Agreement dated July 19, 2005 by and between
                      the Registrant and Vincent S. Miceli, incorporated herein
                      by reference from the Registrant's Current Report on Form
                      8-K filed July 25, 2005, Exhibit 10.1.

         10.5         Amendment No. 1 to Amended and Restated Employment
                      Agreement dated July 19, 2005 by and between the
                      Registrant and Christopher Walls, incorporated herein by
                      reference from the Registrant's Current Report on Form 8-K
                      filed July 25, 2005, Exhibit 10.2.

         10.6         Surrender of Lease Agreement dated October 21, 2005 by and
                      between the Registrant and MACK-CALI SO. WEST REALTY
                      ASSOCIATES L.L.C.*

         31.1         Certification of Chief Executive Officer pursuant to 
                      Section 302 of the Sarbanes-Oxley Act of 2002.*

         31.2         Certification of Corporate Controller and Chief Accounting
                      Officer pursuant to Section 302 of the Sarbanes-Oxley Act
                      of 2002.*

         32           Certification of Chief Executive Officer and Corporate
                      Controller and Chief Accounting Officer pursuant to
                      Section 906 of the Sarbanes-Oxley Act of 2002.*



                  *  Filed herewith.



                                       28