Shareholders’ Deficit

1998 Executive Stock Option Plan

On April 25, 1998, the Company authorized a nonqualified stock option plan whereby key executives and senior officers may be offered options to purchase the Company’s Common Stock. Under the plan, the exercise price set by the Board of Directors of the Company must at least equal the fair market value of the Company’s Common Stock at the date of grant. The options begin vesting one year after the date of grant in four installments of 10%, 15%, 25% and 50% provided the optionee is an employee of the Company on the anniversary date and shall expire 10 years after the date of grant. Under certain specified conditions the vesting schedule may be altered. During Fiscal 2001, the Company entered into Option Cancellation Agreements (the Cancellation Agreements) with certain employees and directors (the Optionees) to cancel all outstanding options which were granted through the cancellation date under the Company’s 1998 Stock Option Plan (the Plan) due to changes in the fair market value of the Company’s common stock. The Company provided all of the Optionees with an option cancellation notice detailing the Company’s offer for the Optionees to cancel and terminate their respective options in exchange for the commitment of the Company to grant new options under the Plan (the New Options), such new grant to be made no earlier than six months and a day after the effective date of the cancellation of the options and at an exercise price equal to the fair market value of the common stock as of the effective date of the grant of the New Options. The Cancellation Agreements provided that, in January 2002 (the Grant Date), the Company granted to each of the Optionees a New Option to purchase the number of shares of common stock subject to the options being terminated and cancelled and that such New Option will have an exercise price equal to the fair market value of the common stock as of the Grant Date. The vesting period for the New Options granted to employees was 40% on the Grant Date with an additional 20% to vest on each of the first, second and third anniversaries of the Grant Date. The exercise price at the Grant Date was $5.00 per share.

Subsequent grants of 131,000 options were made throughout the remainder of Fiscal 2002. Such grants begin vesting one year after the date of the grant in four installments of 10%, 15%, 25% and 50% and have an exercise price of $5.00 to $15.13 per share, based on the fair market value at the Grant Date. The weighted-average fair value per share for option grants was $0.63, $1.72, and $1.82 for Fiscal 2002, 2003, and 2004, respectively. The following table presents information related to options outstanding and options exercisable at January 1, 2005 based on various exercise prices.

EYE CARE CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands unless indicated otherwise)

Options Outstanding

Exercise Price Per Share ($) Number of Options

Weighted Average Following is a summary of activity in the plan for Fiscal 2002, 2003, and 2004:

Weighted

The Company grants certain directors options to purchase the Company’s Common Stock from time to time.

Options granted during Fiscal 2001 begin vesting on the date of grant in three installments of 50%, 25% and 25%, with such options expiring 10 years from the date of grant. All subsequent options granted begin vesting one year after the date of the grant in four installments of 25% each installment, with such options expiring 10 years from the date of grant. The weighted-average fair value per share for option grants was $0.63, $1.72, and

$2.24 for Fiscal 2002, 2003, and 2004, respectively. The following table presents information related to options outstanding and options exercisable at January 1, 2005 based on various exercise prices.

Options Outstanding

Exercise Price Per Share ($) Number of Options

Weighted Average

EYE CARE CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands unless indicated otherwise)

Following is a summary of activity in the plan for Fiscal 2002, 2003, and 2004:

Weighted Average

Option Exercise Price Per Share ($)

Options Outstanding

Weighted Average

Option Exercise Price

Per Share ($)

Options Exercisable

December 29, 2001 . . . $ — — $ — — Granted . . . 5.39 131,412 — — Became exercisable . . . — — 5.00 63,206 Canceled or expired . . . — — — — December 28, 2002 . . . 5.39 131,412 5.00 63,206 Granted . . . 15.13 5,000 — — Became exercisable . . . — — 5.39 32,853 Canceled or expired . . . — — — — December 27, 2003 . . . 5.74 136,412 5.13 96,059 Granted . . . 15.13 10,000 — — Became exercisable . . . — — 5.74 34,103 Canceled or expired . . . — — — — January 1, 2005 . . . $ 6.38 146,412 $5.29 130,162

The Company has elected to follow Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123 Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options of privately held companies. Under APB 25, because the exercise price of the Company’s employee stock options equals the estimated fair value of the underlying stock on the date of grant, no compensation expense is recognized.

The fair value for these options was estimated at the date of the grant using the minimum value method with the following assumptions for Fiscal 2002, Fiscal 2003, and Fiscal 2004: risk-free interest rate of 3%, no

dividend yield and a weighted-average expected life of the options of 4 years.

Option valuation models require the input of highly subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

EYE CARE CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands unless indicated otherwise)