Edgar Filing: EYE DYNAMICS INC

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

AMENDMENT NO. 1 TO
FORM 10-KSB

(X) Annual Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended DECEMBER 31, 2000.

EYE DYNAMICS, INC.
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(Name of small business issuer in its charter)

Nevada 88-0249812
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(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation)

2301 W. 205th Street, #106, Torrance, CA 90501
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(Address of principal executive offices) (City, state and ZIP)

Issuer's telephone number 310-328-0477
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Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock Par Value $.001 per share

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB (X)

State issuer's revenues for its most recent fiscal year: $ 779,996
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State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as a
specified date within the past 60 days:

Non-affiliate Equity: 6,507,812 shares @ $. 37 per share = $2,407,890
---------------------------------------------------------------------

The number of shares outstanding of the issuer's common stock as of April 1,
2001 was 11,900,313.

Transitional Small Business Disclosure Format (check one). ( ) Yes (X) No

PART 1

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

Eye Dynamics, Inc. (the "Company") designs, develops, produces and
markets diagnostic equipment that measures, tracks and records human eye
movements, utilizing the Company's proprietary technology and computer software.
The products perform separate, but related, functions and target two separate
markets. First, the Company markets a neurological diagnostic product that
tracks and measures eye movements during a series of standardized tests, as an
aid in diagnosing problems of the vestibular (balance) system and other balance
disorders. Second, the Company's impairment detection devices target the
corporate and criminal justice markets and are designed to test individuals for
impaired performance resulting from the influences of alcohol, drugs, illness,
stress and other factors that affect eye and pupil performance. The Company is a
Nevada corporation formed in 1989.

INTRODUCTION

The human eye is a very sensitive organ. Eye movements or pupil
reactions are excellent indicators of the presence of disease, drugs or other
conditions which may impair the human ocular motor system. In particular, the
Company's technology deals with the central nervous system condition of
nystagmus, a rapid, involuntary oscillation of the eyeball. Nystagmus occurs in
different forms and has a number of causes, ranging from the serious (e.g., a
tumor in the brain or ear) to the benign (such as positional dizziness). The
consumption of certain drugs and alcohol also causes nystagmus, and there is a
direct and quantifiable correlation between blood alcohol concentration in the
body and the angle of onset of nystagmus. Medical research conducted over the
past fifty years has furnished evidence demonstrating a relationship between
irregular eye movement and abnormal central nervous system physiology. The
causes of these conditions are numerous, and include the influences of alcohol,
drugs, illness, stress, extreme fatigue and other neurological conditions

The basic technology used in all of the Company's products is similar,
yet differs in its application and use. The Company's products utilize infrared
sensitive video cameras to monitor, videotape and analyze eye performance and
movement. All the products share in a modular concept for efficiency in
manufacturing. The products are PC computer based with specialized and
proprietary hardware and embedded firmware. A common element of the products is
the Ocular Motor Module, where the subject being tested peers into a dark
environment. The products include an infrared sensitive Charge Coupled Device
video camera that provide a bright video image, even though the person being
tested sees nothing but a small stimulus or tracking light amid complete
darkness.

PRODUCTS

MEDICAL PRODUCTS. Eletronystagmographic (ENG) testing is a standard
medical procedure used in assessing problems of the balance system of patients.
This method provides enhanced diagnostic information for the medical
practitioner to use for the final diagnosis of the patient's problem. Testing of
patients for irregular eye movements has been a standard medical procedure for
several decades. For this market, the Company markets the House InfraRed/Video
ENG System. The ENG System is the first major technological improvement in this
standard medical testing method in the past forty years. The Company's products
have gained a significant share of this highly specialized market. The FDA
granted approval in 1994 to market this product.

Irregular eye movements and conditions are analyzed by medical
specialists as an aid in diagnosing problems with the human balance system and
other neurological conditions. In the past, diagnostic products have used
"electrodes" that are taped to the skin around the periphery of the patient's
eyes and a very small electrical signal from the corneoretinal potential of the
eyes drives a pen recorder. The pen recorder provides a graphical depiction of
the eye movements under different test conditions. These graphs then are
interpreted by the medical diagnostician.

The Company brought the use of infrared illumination of the eyes into
clinical use in 1994 when the U.S. Food and Drug Administration ("FDA") approved
marketing of its House InfraRed/Video ENG System. This device was the first to
replace the electrodes with infrared sensitive video cameras and with computer
digital processing that follow the movement of the eyes and graphically portrays
the movements much like the pen recorder. The test subject wears a lightweight
goggle assembly which uses microminiature video cameras. The goggle is an
essential instrument because certain of the ENG tests require the patient to
move his head and often to recline on an examining table. The Company believes
the accuracy and display of the Infrared/Video ENG System is much improved over
other existing testing methods. In addition, the use of video by the
Infrared/Video ENG System allows the test administrator or medical practitioner
to observe the eye movements directly and provides a videotape record of the
test for later playback and additional analysis. The Company believes that this
is a significant improvement over prior technology. This product was first
marketed in 1994, after gaining FDA approval to market. Since then most every
competitor has changed from electrodes and is embracing video data acquisition
as a superior technology. Results from the tests are used by physicians and
clinicians.

The computer-based system, with proprietary Eye Position Interface
Controller (EPIC) boards, "locks" onto the pupils and independently tracks the
horizontal and vertical movements of each eye. The nystagmus is displayed in
real time, saved, analyzed and printed. The four channel system comes with a 12"
Quad/Video Monitor that displays both eyes on a single video screen.

The system was developed by the Company in conjunction with the House
Ear Clinic and House Ear Institute, Los Angeles, California. The "House" name is
used with the permission of the House Ear Institute.

IMPAIRMENT DETECTION PRODUCTS. The Company's impairment detection
product, SafetyScope (previously known as the "EPS-100"), allows employers and
others to screen individuals for physiological signs of impairment. The system
evaluates involuntary changes in eye movements and/or pupil reactions, which may
result from drug or alcohol abuse, reactions to medication, medical conditions,
stress or fatigue. Occupations in the medical, aviation, emergency response,
manufacturing and transportation businesses are key markets for this technology.
Unlike most drug and alcohol test methods, the SafetyScope functions without the
need for body fluids. Also, due to its less invasive nature, SafetyScope only
reveals if a person is impaired at the time of the test and does not test for
past use. Also, unlike blood and urine tests which only measure the presence of
a substance in the body, the SafetyScope only takes into account the
physiological effects of the substance.

While substance abuse receives the most attention, worker impairment
caused by other factors, such as prescription and over-the-counter medications,
stress, extreme fatigue and illness, is a significant expense to employers.
Workers suffering from such impairments are characterized by low productivity,
more accidents, higher workers' compensation and insurance costs, and equipment
and merchandise damage. Different types of performance tests have evolved based
on extensive scientific studies validating the relationship between test results
and the impaired performance of an individual. They assess an individual's motor
and cognitive skills at the time of the test.

The SafetyScope is based on methods developed by the federal government
and used by law enforcement over the past 25 years. The SafetyScope is a simple
computer system that evaluates the ability of an individual's eyes to follow a
moving light and react to a dim and bright light stimulus. The SafetyScope is
non-diagnostic and non-judgmental; it evaluates performance of the individual
for solely for safety and productivity purposes. The initial price for the
product was $15,000, but with redesign and improved components and modest sales
volume the product will be repriced to $8,000, which the Company believes is
competitive with the price of professional desktop breath testing analyzers
commonly used by law enforcement for assessment of blood alcohol content levels
in individuals. However, the preferred pricing model is to place the units with
the user at no initial cost, except for a modest deposit, and to charge the user
a fee for each test administered. It is anticipated that the fees for such tests
will range from $1 to $5 per test, depending on the monthly quantity of tests,
with an average of approximately $3 per test.

An employee looks into SafetyScope and focuses on a moving beam of
light. A video camera records the action, and software analyzes eye movement
(smooth or jerky) and pupil reaction (small or large) and renders a
determination on whether there is impairment. In just ninety seconds, the
SafetyScope tests the human eye for the purpose of evaluating an individual for
impairment, by measuring twenty parameters of eye movement and pupil change,
relating to the position and reaction time of the eye and the size of pupil. The
SafetyScope reports the result of the test instantly with a "Pass" or "Fail"
result. The system does not require bodily fluids such as blood or urine.
SafetyScope offers users major advantages over traditional drug tests, in that
the system can detect on-the-spot impairment and results are immediate. Designed
for workplace testing, whether in a random testing or regular scheduled testing
environment. Traditional drug tests can take days to complete, too late for
detecting a problem the day it occurs.

SafetyScope can be an important component for evaluating an employee
for job safety, particularly those jobs in life-dependent occupations, such as
airline pilots, bus drivers, train engineers, firefighters, medical personnel,
construction workers and law enforcement personnel, among others. Companies and
government agencies around the world are evaluating this cost- effective
technology to replace traditional drug tests, that require body fluids and are
much more expensive to conduct.

Even in healthy subjects the eyeball exhibits rapid, involuntary,
oscillatory movements, a phenomenon called nystagmus. But as the subject's brain
function becomes increasingly impaired these movements become more and more
erratic. The SafetyScope uses an algorithm developed through thousands of trials
with hundreds of people under the influence of alcohol, heroin, marijuana, and
cocaine. The trials compared their current reading with a baseline reading taken
prior to being dosed with the substance.

The Company believes that the SafetyScope will be especially useful for
applications where fatigue in the workplace has an impairing effect on workers.
The Company has contracted with a major human alertness technology consulting
and research organization to optimize the SafetyScope for fatigueness testing.
The Company believes the SafetyScope will appeal to employers with
round-the-clock workforces who desire to reduce industrial accidents caused by
employee fatigue and to improve worker alertness and safety. It is estimated
that in our society more than 20 million Americans, or over 10% of the
workforce, work outside of normal daylight working hours.

The Company also offers a second model, the EM/1, which is designed for
use by law enforcement agencies for forensic purposes and for the evaluation of
individuals suspected of driving or being under the influence of intoxicants.
The EM/1 functions in a manner similar to the SafetyScope, but without the
"Pass/Fail" result. Instead, the EM/1 delivers the videotaped data for
interpretation by the law enforcement agency.

In most states, law enforcement agencies use a six point evaluation of
people thought to be intoxicated. This is referred to as the Standardized Field
Sobriety Test ("SFST"). The SFST includes three tests for balance and three
tests involving eye performance. Thus, the Company believes there is a need for
a product that can be utilized, not only in the jail or precinct house, but in
the field by traffic patrol cars. This product must ultimately be in a 'hand
held' configuration.

Hardware for the EM/1 is similar to the SafetyScope, but different
operating software requires that a person trained and certified in SFST and drug
recognition and evaluation operate the equipment and evaluate eye performance.
>From the EM/1 test results and other test information, the evaluator draws an
opinion as to whether the individual is impaired and under the influence of
intoxicants or not, or whether medical treatment is indicated. The video tape

made of the test is then available as evidence to support the conclusion of the
law enforcement officer and, depending on the jurisdiction, may be admissible as
evidence in court proceedings. The EM/1 is currently priced at $14,000 per unit;
however, the Company plans to introduce a handheld unit within the next two
years, which should sell for less than $5,000.

MARKETING

MEDICAL PRODUCTS. Marketing of the Infrared/Video ENG System is
conducted through a network of independently owned special instrument dealers
("SID's").These independently owned businesses are distributors of not only the
IR/Video ENG System, but of a variety of allied and related products for the
audiometric and otolaryngology ("ENT") markets. These distributors are across
the United States and operate in territories that are assigned exclusively to
them by the Company. In addition, there are several foreign distributors that
are merchandising the product in countries such as Egypt, Hungary, Turkey,
Thailand, Taiwan and Korea. The Company is not yet selling in the European
Community countries due to lack of the "CE" mark of approval that must be
obtained prior to marketing in those countries. The Company is negotiating with
potential distributors in the European Community, who would add locally
available computers, monitors and other peripheral devices to the Company's
proprietary equipment, and then apply for the "CE" mark.

The Company has also supplied a modified version of the Infrared/Video
ENG System to a distributor on a private label basis. These private label sales
have represented a significant portion of sales of the product. That distributor
has recently terminated its relationship with the Company; however, an affiliate
of the distributor has recently entered into a contract for the purchase of a
slightly improved version of the product

The market for the ENG products is relatively mature and represents
only annual growth estimated at 5%, but because of the advancement of technology
spurred by the Company's introduction of video data acquisition methods in 1994,
the market for replacement products has been strong and will continue to be so
for the foreseeable future.

IMPAIRMENT DETECTION PRODUCTS. The Company has been test marketing the
SafetyScope and has sold a number of units in various locales. Currently,
independent sales representatives are being recruited to achieve geographic
distribution coverage over the United States. However, implementation of a full
marketing plan is contingent on receipt of additional working capital.

In general, government drug testing regulations are based on urine
testing; so testing of employees by governmental agencies, quasi-governmental
agencies and certain regulated industries must comply with these regulations.
Accordingly, some modification of these regulations must be achieved in order
for the SafetyScope to gain broad acceptance in this sector. Also, companies
that do substantial business with government agencies often must have a drug
testing program that complies with government regulations. Also, industries that
are regulated by the Department of Transportation must comply with these
regulations, as well as certain other industries regulated by the federal
government, such as the nuclear power industry.

These factors limit the overall size of the market currently available
to the Company to private companies that are not regulated by the federal
government with respect to testing employees for substance abuse. If a private
employer falls within government regulated drug testing requirements, but
desires to also use impairment testing methodologies, it must do so in addition
to the government regulation requirements. This creates an additional cost to
such testing and therefore greatly limits our the Company's access to that
market.

The Company is actively involved with various government agencies to
modify applicable regulations and procedures so that they will encompass testing
based on eye movement and performance. While certain governmental agencies have
expressed an interest in the Company's products, management believes that
changing governmental testing regulations will be a lengthy process and success
is not assured.

COMPETITION

MEDICAL PRODUCTS. The principal competitors in the medical market
making ENG testing equipment are Micromedical Technologies, Inc., ICS Medical
Corporation and SensoMotorific Inc. Since the Company's ENG product was
introduced in 1994, competitors have developed similar video-based ENG goggle
products; as a result, the market has become very competitive and subject to
pricing pressures. As a consequence, the Company has reduced prices, with an
adverse effect on overall gross margins. To combat this competitive pressure the
Company has reduced manufacturing costs in an effort to offset the gross margin
loss.

IMPAIRMENT DETECTION PRODUCTS. Competition for the SafetyScope is from
companies that have developed tests and devices that evaluate motor and
cognitive skills. These take the form of hand-eye coordination tests, divided
attention tests and other behavioral tests or series of tests administered
either in series or selectively. The Company has identified three such
competitors that have marketed these products in the past, including Performance
Factors, Inc., Essex Corporation, and Pulse Medical Instruments.

The Company believes only Pulse Medical Instruments is developing a
product to be directly competitive with the Company's products. The Pulse
Medical product does not use video sensors and its results are displayed in
graphic form on a computer monitor for the qualified expert to interpret. The
Company believes that such product will be more expensive than the SafetyScope
and is still being developed and validated as a useful device.

The SafetyScope differs from its competitors' tests because the
SafetyScope test evaluates changes in eye performance which are involuntary
responses and not under the control of the individual. For this reason, these
responses cannot be changed, improved upon or learned. All the other competitive
forms of performance tests known to the Company can be learned and over time the
individual being tested can improve his skills. The Company feels that this
difference is an important competitive advantage over other forms of performance
tests.

The SafetyScope also competes with drug and alcohol abuse test kits and
devices, which principally rely on collection and testing of urine samples. In
addition, certain drug and alcohol abuse tests now being developed will test
saliva and/or hair for evidence of drug or alcohol abuse. The main advantage the
product has over many others tests is the immediacy of results and
non-invasiveness of the procedure. The Company believes that the potential for
safety that it will provide for life-dependent professions such as airline
pilots, bus drivers and train engineers will make the system a very important
breakthrough.

MANUFACTURING

The Company has performed all its own design and engineering of
products and has developed all software and validation of software algorithms
that are used in the analysis portion of the proprietary software.

Manufacturing of both the ENG products and the SafetyScope is primarily
done through subcontracting with various suppliers. The Company does not rely on
a single supplier for the major manufacturing of items. Various companies build
and test product modules on an OEM contract basis. Final system integration and
testing is completed by the Company prior to shipment of devices to customers.
All the products share in a modular concept for efficiency in manufacturing. The
products are PC Computer based with specialized and proprietary hardware and
embedded firmware. The common element of the three is the viewport, where the
individual being tested peers into a dark environment.

Manufactured or fabricated modules include the molded eye piece, the
goggle assembly, the viewport assembly and proprietary printed circuit boards.
As a majority of the components in the Company's products are readily available,
the Company does not anticipate undertaking internal manufacturing of any
components. Manufacturing operations consist of only assembly, testing and
packaging functions.

GOVERNMENT REGULATION

The Company's ENG products have been approved for marketing by the U.S.
Food and Drug Administration. The Company is also licensed by the State of
California as a Medical Device Manufacturer. The SafetyScope and EM/1 are not
subject to regulation, as they are not considered medical devices. However, as
discussed above under the caption "Marketing," governmental regulations on
substance abuse testing for government employees and certain private companies
impact the Company's ability to market the SafetyScope in these areas.

PATENTS & PROPRIETARY PROTECTION

The Company licenses the technology used in its performance evaluation
products from Ronald A. Waldorf, Chairman of the Board of Directors, who holds a
patent covering claims relating to tracking eye movements in the dark, utilizing
infrared illumination and infrared sensitive video cameras, as well as the
related analysis methodology. The patent was issued in 1989 and expires in 2006.
The license is for the term of the underlying patent, and calls for nominal
annual royalties of $100.

The Company is the owner of a patent issued in August 1992, covering
certain technology underlying the SafetyScope, principally relating to the
apparatus for testing for impairment by tracking eye movements and pupil
reactions to presented stimuli.

The existence of patents may be important to the Company's future
operations but there is no assurance that additional patents will be issued. For
both of the above named patents, eleven foreign patents have been issued and/or
are pending in several foreign countries.

The Company also relies on unpatented technology, know-how and trade
secrets covering a number of items, particularly the methods of obtaining data
regarding eye performance. The Company relies on confidentiality agreements and
internal procedures to protect such information.

EMPLOYEES

The Company employs three employees full time, including its President,
a development engineer and a marketing manager. Other part time consulting and
commissioned personnel are also utilized. The Company's employees are not
parties to any collective bargaining agreement, and the Company believes that
its employee relations are satisfactory.

ITEM 2. DESCRIPTION OF PROPERTY

The Company's offices are in leased space in an industrial complex
Torrance, California. The offices are 960 square feet in size and the lease
expires on April 30, 2002.

ITEM 3. LEGAL PROCEEDINGS

Inapplicable

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

Inapplicable

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The following table sets forth the quarterly high and low closing
prices for the Common Stock, as reported on the OTC Bulletin Board, during the
2000 fiscal year.

LOW HIGH
--- ----
2000
First Quarter $.41 $.90
Second Quarter .09 .53
Third Quarter .09 .70
Fourth Quarter .25 .53

1999 (closing bid)
-----------------------
First Quarter .14 .46
Second Quarter .13 1.30
Third Quarter .37 .87
Fourth Quarter .02 .37

The Company's common stock is traded on the OTC Bulletin Board under
the symbol"EYDY". As of April 10, 2001, the Company's Common Stock was held of
record by approximately 110 holders. Registered ownership includes nominees who
may hold securities on behalf of multiple beneficial owners.

The Company has paid no cash dividends on its Common Stock and has no
present intention of paying cash dividends in the foreseeable future.

During 2000, the Company sold 1,000,000 units in a private offering to
four individuals, at a price of $ .20 per Unit. Each Unit consisted of one share
of Common Stock and two Warrants. Each Warrant is exercisable for one year and
entitles the holder to purchase one share of Common Stock; the first warrant
carries an exercise price of $.35 per share and the second carries an exercise
price of $.75 per share.

The Company believes that the issuances were exempt under Regulation D
of the Securities Act of 1933, as amended.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-KSB. Except for the historical
information contained herein, the following discussion contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Annual Report on Form 10-KSB should be read
as being applicable to all related forward-looking statements wherever they
appear in this Annual Report on Form 10-KSB. The Company's actual results may
differ materially from the results discussed in the forward-looking statements
as a result of certain factors including, but not limited to, those discussed
elsewhere in this Annual Report on Form 10-KSB.

The Company has invested substantial funds in the last several years
developing and validating its products. The Company is successfully producing
and marketing the Infrared/Video ENG System; however, since this is a niche
product in a relatively mature market, potential revenue growth from this
product line is limited. To date, sales of this product have constituted a
substantial portion of the Company's revenues.

The SafetyScope product or its predecessor, the EPS-100 Performance
System, has been sold in a few locales and beta marketing has been successful.
For large scale sale of this product the Company needs to have federal drug
testing regulations modified. This is a significant project requiring a
coordinated effort with potential users, government officials and the help of
legislative bodies. Therefore, additional investment capital is required to
launch the marketing of the SafetyScope. A large scale marketing and lobbying
effort will be necessary for this product to succeed.

RESULTS OF OPERATIONS

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999.

Revenues from sale of products decreased by 8% from $847,416 in 1999 to $779,996
in 2000. This decrease is due to reduced unit sales of the Infrared/Video ENG
System, which resulted from increased competition, particularly from foreign
manufacturers, and a generally flat market. Also, our private label customer
discontinued purchases in November of 2000. Unit prices remained stable. Cost of
sales decreased by 7%, due to a decrease in units sold. Operating expenses
increased by 30%, due principally to a change in the marketing of the ENG
products, as described below, as well as costs associated with the introduction
of the "SafetyScope" product line. Net loss increased by $256,863, or 562%, due
to the increase in operating expenses and $88,000 in consulting expense (which
was paid in stock).

The increase in operating expense is due in part to a change in the
method of distributing medical products, which started midway through 1998 and
into 1999; before that time the Company had sold principally to a single
distributor, which in turn sold through a dealer network and some direct
salesmen. In July of 1999 the Company terminated the contract with the
distributor and started selling products directly to the dealer network or to
the end customer, and paying a commission to the dealer. One result of this
change is an increase in the gross profit, because of the simplified selling
structure, and an increase in selling and commission expense, since these items
had previously been borne by the distributor. Under the previous system the
discount from retail price was generally 50%, whereas in the current system
discount is generally 25%, or when invoiced directly to the end user, a
commission of 25% is paid. The change also requires the Company to assume the
responsibilities and the expenses associated with performing marketing
functions, such as attendance at trade shows, travel expenses for marketing
activities, production and printing of collateral materials, seminars and
workshops, and internal technical support services. We believe that the savings
resulting from the changed structure exceed the costs, since the increased gross
profit more than offsets the additional expenses.

Inventory turnover ratio in 1999 was approximately 7:1 and in 2000 was
5.7:1. This reduced turnover was caused by the reduction in purchasing during
November and December by the private label customer. The reduction in purchasing
lowered revenues and left us with about $8000 of inventory that was acquired to
supply the customer in November and December, but was not sold.

The increase in accounts receivable at year end came from sales in
October that were almost double the average month for the year, principally due
to a medical convention and related promotions during the month. Average days
outstanding is approximately 60 days throughout the year. October was unusual by
its volume of revenues which caused the accounts receivable to spike at year
end. Also, inventories increased because of component purchases in anticipation
of product purchases by the original private label customer; however, we believe
these excess inventory items will be utilized in the assembly of products for
the new private label customer.

Prepaid expense at December 31, 2000 included $68,833 of unamortized
expenses relating to the six month strategic planning and marketing program
commenced in September. The balance of prepaid expenses was $1,635 of prepaid
liability insurance premiums.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2000, the Company had an accumulated deficit of
approximately $3,282,332. As of that date, the Company had $85,688 in cash, and
approximately $158,474 in net accounts receivable. Also, the Company had
$735,707 of current liabilities, consisting principally of a single promissory
note and accrued interest on that note. The note payable became due on December
31, 1999. The Company has held discussions with the payee of the note, but has
been unable to achieve a settlement or extension of the note. To date, the payee
of the note has not demanded payment.

The Company has no plans for significant capital equipment expenditures
for the foreseeable future.

The Company believes that current and future available capital
resources, cash flow from operations and other existing sources of liquidity
will be adequate to fund its operations for the remainder of the current fiscal
year. However, there can be no assurance that sufficient funds will be available
or that future events will not cause the Company to seek additional capital
sooner, including, but not limited to, the failure by the Company to timely
collect outstanding accounts receivable. To the extent the Company is in need of
any additional financing, there can be no assurance that any additional
financing will be available to the Company on acceptable terms, or at all. The
inability to obtain such financing could have a material adverse effect on the
Company's business, financial condition and results of operations. If additional
funds are raised by issuing equity or convertible debt securities, options or
warrants, further dilution to the existing shareholders may result.

If adequate funds are not available, the Company may also be required
to delay, scale back or eliminate its product development efforts or to obtain
funds through arrangements with strategic partners or others that may require
the Company to relinquish rights to certain of its technologies or potential
products or other assets. Accordingly, the inability to obtain such financing
could result in a significant loss of ownership and/or control of its
proprietary technology and other important Company assets and could also
adversely affect the Company's ability to continue its product development
efforts, which the Company believes contributes significantly to its competitive
advantage. If any of such circumstances were to arise, the Company's business,
financial condition and results of operations could be materially and adversely
affected.

EFFECT OF INFLATION

The Company believes that inflation has not had a material effect on
its net sales or profitability in recent years.

ITEM 7. FINANCIAL STATEMENTS

The financial statements of the Company are submitted as a separate
section of this Annual Report on Form 10-KSB, commencing with page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The directors and executive officers of the Company are as follows:

DIRECTOR
NAME AGE POSITION SINCE
---- --- -------- -----------

Charles E. Phillips 65 President, Treasurer & Director 1991

Ronald A. Waldorf 52 Vice President, Secretary & Director 1991

Arnold D. Kay 65 Director 1999

Barbara J. Mauch 55 Chief Product Development Engineer ----

The directors are elected annually at the Annual Shareholders Meeting
and the term of office is one year.

CHARLES E. PHILLIPS has been President and a Director of the Company
and its predecessor, OculoKinetics, Inc. since its inception in 1988. Prior to
forming OculoKinetics, Inc., Mr. Phillips operated Charles E. Phillips, Inc., a
management and marketing consulting firm. His work has included assignments in
marketing, operations and the initiation of start-up ventures. From 1974 to
1985,Mr. Phillips was Executive Vice President and Director of Akai America,
Ltd., a consumer electronics company. His management background has encompassed
marketing, new product planning, sales, advertising, finance, accounting,
manufacturing, quality assurance and distribution.

Mr. Phillips received a B.A. from Pepperdine College, Los Angeles,
California with emphasis on Business and Speech Education, in 1956.

RONALD A. WALDORF has been Chairman of the Board of Directors of the
Company since 1991 and is active in overall policy formation and strategic
planning for the Company. He is the inventor of the IR/Video ENG System,
SafetyScope and EM/1 products. He also owns a patent covering closely related
technology that has been licensed exclusively to the Company. Since 1969 Waldorf
has been active in the field of otolaryngology, primarily in an academic
research environment at the University of Florida, College of Medicine and at
the University of California (Irvine), Department of Surgery. He has published
numerous articles on vestibular and optokinetic research in international
scientific and medical journals and was the principal investigator in a research
grant funded by the National Institute of Health/National Institute on Alcohol
Abuse and Alcoholism(NIH/NIAAA). Since 1981 he has acted as a consultant to
clinics and hospitals in the Los Angeles area, including the House Ear Clinic.
He has also consulted to a Japanese company developing new technologies for eye
movement detection.

Waldorf earned an M.S. in from the Department of Physiology of the
College of Medicine, University of Florida, in 1972.

ARNOLD D. KAY was elected a Director in September 1999. He has more
than thirty years experience in finance, sales and administration. Mr. Kay was
an employee of the Company from 1991 to 1994. He currently is co-owner and
General Manager of Lomita Blueprint/CADWEST of Lomita, California, a software
and computer imaging business focusing in design, graphics and distribution of
CAD software and systems.

Mr. Kay received a B.S. in Business Administration/Finance from
California State University, Northridge, in 1961.

BARBARA J. MAUCH is the primary product development engineer for the
Company. She has been with the Company since 1989 and is responsible for product
engineering and software development. Her background encompasses computer
systems design and software development for access control of buildings and
other properties. She served as a Director of the Company from 1991 to 1996.

Ms. Mauch earned a B.S. in Mathematics from Northern Colorado
University, in 1971 and completed the Master's program in computer science at
UCLA.

DIRECTORS' COMPENSATION

The members of the Board of Directors do not receive any compensation
for their service as directors, but are eligible for reimbursement of their
expenses incurred in connection with attendance at Board meetings in accordance
with Company policy.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities (the "10% Stockholders"), to file reports of
ownership and changes of ownership with the Securities and Exchange Commission.
Officers, directors and 10% Stockholders of the Company are required by
Commission regulation to furnish the Company with copies of all Section 16(a)
forms so filed.

Based upon a review of filings made and other information available to
it, the Company believes that each of the Company's present Section 16 reporting
persons filed all forms required of them during the year 2000 by Section 16(a).

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain compensation awarded or paid by
the Company to its President and Chief Executive Officer during the fiscal years
ended December 31, 2000 and December 31, 1999. No other executive officer's
total annual salary and bonus for services to the Company exceeded $100,000.

SUMMARY COMPENSATION TABLE

LONG-TERM COMPENSATION
-----------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ------------------------------------
RESTRICTED LTIP
NAME AND SALARY BONUS OTHER STOCK AWARDS OPTIONS PAYOUTS ALL OTHER
PRINCIPAL POSITION YEAR $ $ $ $ # $ COMPENSATION
------------------ ---- ------ ----- ----- ------ ------- ------- ------------

Charles E. Phillips 2000 64,500 0 0 0 100,000 0 0
1999 60,000 0 0 0 20,000 0 0
1998 48,000 0 0 280(1) 0 0 0

--------------------------
(1) Consists of 280,000 shares issued during 1998. The shares were not
subject to any vesting requirements. The value of the shares At
December 31, 2000 was $86,800

The following table sets forth information as to options granted during
2000:

NO. OF
SHARES
SUBJECT TO
OPTIONS %
GRANTED TO OF TOTAL EXERCISE EXPIRATION
OPTIONEE OPTIONEE OPTIONS PRICE DATE
-------- -------- ------- ----- ----

Charles E. Phillips 100,000 67% .15 February 2003

No options were exercised during 2000. The following table sets forth
certain information concerning options outstanding at December 31, 2000:

Number of Value of Unexercised
Shares Unexercised In-the-money
Acquired on Value Options at Options at
Exercise Realized December 31, 2000* December 31, 2000*
---------- -------- ------------------ ------------------
Name
----

Charles E. Phillips 0 0 120,000 $15,000

Ronald Waldorf 0 0 120,000 $29,900

Arnold Kay 0 0 10,000 0

---------------------------
*All currently exercisable

Mr. Phillips is employed by the Company pursuant to an Employment
Agreement entered into in 1989. The initial five-year term of the Employment
Agreement has expired, but it is has been automatically renewed on an annual
basis since that date. The Employment Agreement calls for an annual salary of
$90,000, as well as discretionary bonuses. However, as noted in the foregoing
table, the Company has not paid the full amounts due, as a result of cash flow
considerations. Mr. Phillips has agreed to forgive the shortfall for these
years. The Employment Agreement also provides for a termination benefit; if Mr.
Phillips is terminated due to disability, we are to pay his full salary for six
months thereafter and 50% of his salary for the following six months. Also, if
we terminate his employment without cause, or refuse to extend the agreement for
any reason, we must pay him al least one year's salary.

Barbara Mauch is employed by the Company as Chief Product Development
Engineer pursuant to an Agreement entered into in 1990. The Agreement currently
calls for annual compensation of $70,000 per year. However, as noted in the
foregoing table, the Company has not paid the full amounts due, as a result of
cash flow considerations. Ms. Mauch has agreed to forgive the shortfall for
these years.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT

The following table sets forth information regarding the beneficial
ownership of the Common Stock of the Company as of March 15, 2001, by (i) each
person known by the Company to beneficially own 5% or more of the outstanding
Common Stock of the Company; (ii) each of the Company's directors; (iii) the
Named Executive Officers identified in the Summary Compensation Table; and (iv)
all directors and Named Executive Officers of the Company as a group.

Name & Address Number of Shares Percentage Owned
-------------- ---------------- ----------------
Charles E. Phillips 2,242,489 (1) 18.8 (1)
2301 W. 205th St., #106
Torrance, CA 90501

Ronald A. Waldorf 1,815,315 (2) 15.3 (2)
2301 W. 205th St., #106
Torrance, CA 90501

Barbara J. Mauch 1,432,544 (3) 12.0 (3)
2301 W. 205th St., #106
Torrance, CA 90501

Arnold D. Kay 316,316 (4) 2.7 (4)
2301 W. 205th St., #106
Torrance, CA 90501

All directors and executive 4,374,120 36.8
officers as a group
(3 persons)

-----------------------
(1) Includes 120,000 shares covered by options exercisable within 60 days

(2) Includes 120,000 shares covered by options exercisable within 60 days

(3) Includes 50,000 shares covered by options exercisable within 60 days.

(4) Includes 10,000 shares covered by options exercisable within 60 days

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them. Shares of Common Stock subject to
securities currently convertible, or convertible within 60 days after March 15,
2001, are deemed to be outstanding in calculating the percentage ownership of a
person or group but are not deemed to be outstanding as to any other person or
group.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Since its inception the Company has borrowed funds for working capital
purposes from Charles E. Phillips, its President and Chief Executive Officer,
and Ms. Barbara Mauch, an employee and shareholder, under various promissory
notes. The notes are unsecured and bear interest at 10% per annum. As of
December 31, 1999, the principal balance of loans from Charles E. Phillips was
$14,491, all of which was repaid in January 2000, and the principal balance of
loans from Barbara Mauch was $8,701, all of which was repaid in January 2000. No
interest has been paid on either loan, and accrued interest as of March 31, 2001
was $40,266 owed to Mr. Phillips and $22,069 to Ms. Mauch. The accrued but
unpaid interest bears interest at the same rate as the underlying loan.
Subsequent to December 31, 2000 Mr. Phillips has loaned an additional $25,000 to
the Company, on the same terms.

The Company maintains a line of credit with a commercial bank,
guaranteed by Mr. Phillips. The maximum amount of the line of credit is $65,000;
at December 31, 2001 there were no borrowings outstanding on the line of credit.
The line of credit bears interest at 2.75% over the bank's prime lending rate
and is secured by all of the Company's assets.

ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K

(A) The following exhibits are included herein or incorporated by reference:

3(i)* Articles of Incorporation, as amended.

3(ii)* Bylaws

10.1* Employment Agreement, dated April 1, 1989 with Charles E. Phillips

10.2* Employment Agreement, dated December 1, 1989 with Barbara J. Mauch

10.3* Exclusive Licensing Agreement, dated November 1, 1989 with Ronald A.
Waldorf

10.4 Standard Multi-Tenant Commercial Industrial Lease-Gross, dated January
25, 1996, between the Company and AmberJack, Ltd. , and Amendments No.
1, No. 2 and No. 3. (included in original filing)

10.5 Agreement, dated March 19, 2001 between the Company and Medtrak, Inc.
(included in original filing)

* Incorporated by reference from Amendment No. 1 to the Registration Statement
on Form 10-SB, filed on December 13, 1999.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this amendment to be signed on its behalf by the undersigned,
thereunto duly authorized.

Eye Dynamics, Inc.

By: /s/ Charles E. Phillips
-----------------------------------
Date: November 21, 2001 Charles E. Phillips, President
and Chief Financial Officer

In accordance with the Exchange Act, this report has been signed below
by the following persons On behalf of the Registrant and in the capacities and
on the dates indicated:

Signature Title Date
--------- ----- ----

/s/ Charles E. Phillips President, Chief Financial November 21, 2001
Charles E. Phillips Officer and a Director

/s/ Ronald A. Waldorf Chairman and a Director November 21, 2001
Ronald A. Waldorf

/s/ Arnold Kay Director November 21, 2001
Arnold Kay

INDEPENDENT AUDITOR'S REPORT
----------------------------

To the Board of Directors and Stockholders
of Eye Dynamics, Inc.

I have audited the accompanying consolidated balance sheet of Eye Dynamics, Inc.
(a Nevada corporation) and its subsidiary, Oculokinetics, Inc. (a California
corporation), as of December 31, 2000 and 1999, and the related consolidated
statements of operations, changes in stockholders' deficit, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these consolidated financial statements based on my audits.

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

In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Eye
Dynamics, Inc. and its subsidiary as of December 31, 2000, and the results of
their consolidated operations and their consolidated cash flows for the years
ended December 31, 2000 and 1999, in conformity with generally accepted
accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 16 to
the consolidated financial statements, the Company's deficit in stockholders'
equity and working capital raise substantial doubt about its ability to continue
as a going concern. Management's plans regarding those matters are also
described in Note 16. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ Harold Y Spector, CPA
-------------------------
Pasadena, California
February 16, 2001
(Except for Note 8, the date is
June 19, 2001 and for Note 2,
the date is November 1, 2001)

EYE DYNAMICS, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999

ASSETS

2000 1999
---------- ----------
Current Assets
Cash and Cash Equivalents $ 85,688 $ 50,580
Accounts Receivable 158,474 119,228
Employee Advances 2,524 0
Inventories 59,732 50,083
Prepaid and Unamortized Expenses 70,469 4,952
---------- ----------

Total Current Assets 376,887 224,843
---------- ----------

Property and Equipment
Furniture and Fixtures 1,432 1,432
Equipment 13,331 13,331
---------- ----------
14,763 14,763
Less: Accumulated Depreciation (10,279) (7,612)
---------- ----------

Total Property and Equipment 4,484 7,151
---------- ----------

Other Assets
Deposits 11,964 15,992
---------- ----------

Total Other Assets 11,964 15,992
---------- ----------

TOTAL ASSETS $ 393,335 $ 247,986
========== ==========

The accompanying notes are an integral part of these
consolidated financial statements

EYE DYNAMICS, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999

LIABILITIES AND STOCKHOLDERS' DEFICIT

2000 1999
------------ ------------
Current Liabilities
Accounts Payable $ 27,271 $ 46,491
Accrued Interest 270,729 235,100
Other Accrued Expenses 20,458 40,046
Deposit from Shareholders 0 7,758
Notes Payable, current Portion 417,249 430,191
------------ ------------

Total Current Liabilities 735,707 759,586
------------ ------------

Stockholders' Deficit
Common Stock, $.001 par value,
50,000,000 shares authorized;
11,416,313 shares issued and
outstanding at December 31, 2000;
9,139,460 shares at December 31, 1999 11,416 9,139
Paid-in Capital 2,928,544 2,459,063
Accumulated Deficit (3,282,332) (2,979,802)
------------ ------------

Total Stockholders' Deficit (342,372) (511,600)
------------ ------------

TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ 393,335 $ 247,986
============ ============

The accompanying notes are an integral part of these
consolidated financial statements

EYE DYNAMICS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2000 and 1999

2000 1999
------------- -------------

SALES $ 779,996 $ 847,416

COST OF SALES 342,958 370,143
------------- -------------

GROSS PROFIT 437,038 477,273

OPERATING EXPENSES 630,366 483,137
------------- -------------

LOSS FROM OPERATIONS (193,328) (5,864)
------------- -------------

NONOPERATING INCOME (EXPENSES)
Other and Interest Income 16,121 190
Consulting Expense - Nonoperating (88,000) 0
Interest Expenses (35,723) (38,393)
------------- -------------

Total Other Income (Expenses) (107,602) (38,203)
------------- -------------

LOSS BEFORE TAXES (300,930) (44,067)

PROVISION FOR INCOME TAXES 1,600 1,600
------------- -------------

NET LOSS $ (302,530) $ (45,667)
============= =============

Net Loss per share - Basic and Diluted $ (0.03) $ (0.01)
============= =============

Weighted Average shares outstanding 10,180,433 8,948,383
============= =============

The accompanying notes are an integral part of these
consolidated financial statements

EYE DYNAMICS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Years ended December 31, 2000 and 1999

Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
-------------------------------------------------------------------------------------

Balance at December 31, 1998 8,300,627 $ 8,300 $ 2,333,027 $(2,934,135) $ (592,808)

Issuance of stock for consulting 88,833 89 33,036 33,125

Exercise of stock options 750,000 750 93,000 93,750

Net Loss (45,667) (45,667)
-------------------------------------------------------------------------------------

Balance at December 31, 1999 9,139,460 $ 9,139 $ 2,459,063 $(2,979,802) $ (511,600)

Issuance of stock to financial
advisor 400,000 400 87,600 88,000

Issuance of stock for consulting
fees payable 76,853 77 19,423 19,500

Issuance stock for strategic
planning and marketing 1,000,000 1,000 199,000 200,000

Private placement sales 750,000 750 149,250 150,000

Issuance of stock for public
relations 50,000 50 6,450 6,500

Shareholder's contribution 7,758 7,758

Net Loss (302,530) (302,530)
-------------------------------------------------------------------------------------

Balance at December 31, 2000 11,416,313 $ 11,416 $ 2,928,544 $(3,282,332) $ (342,372)
=====================================================================================

The accompanying notes are an integral part of these
consolidated financial statements

EYE DYNAMICS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000 and 1999

2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(302,530) $ (45,667)
Adjustments to reconcile net loss to net
cash used by operating activities
Depreciation 2,667 2,597
Issuance of stock for Consulting Fees 88,000 33,125
Issuance of stock for Public Relations 6,500 0
Issuance of stock for Strategic Planning 200,000 0
(Increase) Decrease in:
Accounts Receivable (39,246) (608)
Employee Advances (2,524) 0
Inventories (9,649) 10,180
Prepaid Expenses 3,316 (4,952)
Unamortized Expenses (68,833) 0
Deposits 4,028 (9,851)
Increase (Decrease) in:
Accounts Payable (19,220) (46,037)
Accrued Interest 35,629 36,834
Accrued Expenses (88) (17,289)
---------- ----------

NET CASH (USED) BY OPERATING ACTIVITIES (101,950) (41,668)
---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment 0 (699)
---------- ----------

NET CASH (USED) BY INVESTING ACTIVITIES 0 (699)
---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES
Deposit from shareholders 0 7,758
Proceeds from exercise of options 0 93,750
Proceeds from sales of stock 150,000 0
Proceeds from notes payable 10,250 0
Payments to line of credit 0 (45,013)
Payments to officers' loans (23,192) 0
---------- ----------

NET CASH PROVIDED BY FINANCING ACTIVITIES 137,058 56,495
---------- ----------

NET INCREASE IN CASH AND CASH EQUIVALENTS 35,108 14,128

BEGINNING OF YEAR 50,580 36,452
---------- ----------

END OF YEAR $ 85,688 $ 50,580
========== ==========

SUPPLEMENTAL DISCLOSURES:
Cash Paid During the Year for:
Interest $ 94 $ 1,559
========== ==========

Income Tax $ 1,600 $ 1,600
========== ==========

The accompanying notes are an integral part of these
consolidated financial statements

EYE DYNAMICS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2000 and 1999

NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for:
Consulting Fee Payable $ 19,500
Public Relation Expense 6,500
Consulting Expense 88,000
Strategic Planning and Marketing 200,000
---------
$314,000
=========

Conversion of Deposit from Shareholder of $7,758 into Paid-in Capital.

The accompanying notes are an integral part of these
consolidated financial statements

EYE DYNAMICS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000 and 1999

NOTE 1 - NATURE OF BUSINESS

Eye Dynamics, Inc. ("the Company") was formed under the laws of Nevada on August
7, 1989 under the name Petro Plex, Inc. and adopted later as Drug Detection
Systems, Inc. The Company changed its name to Eye Dynamics, Inc. and became
qualified as a foreign corporation in California on November 2, 1992.

The Company markets and distributes diagnostic equipment that utilizes the
Company's proprietary technology and computer software to test individuals for
impaired eye and pupil performance. The Company also markets a medical
diagnostic product that tracks and measures eye movements during a series of
standardized tests.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Oculokinetics, Inc. (a California
corporation), after elimination of all material intercompany accounts and
transactions.

The subsidiary had no operations in both years of 2000 and 1999. All revenue is
derived from the Company.

Use of estimates

The preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make certain estimates and assumptions that directly affect the results of
reported assets, liabilities, revenue, and expenses. Actual results may differ
from these estimates.

Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with an original maturity of three months or less to be
cash equivalents.

Fair Value of Financial Instruments

The carrying amounts of the financial instruments have been estimated by
management to approximate fair value.

EYE DYNAMICS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000 and 1999

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition

The Company is subcontracting the manufacturing of the medical diagnostic
equipment and products. Manufacturing operations consist of assembly, test, and
packaging functions. Sales of product and equipment are recognized at the time
of delivery of the product to the customer or at the time of sale or
installation. No provisions were established for estimated product returns and
allowances based on the Company's historical experience.

Sales of repair and maintenance service is recognized when completion of the
service which basically is the setup of the equipment with twelve months
warranty.

The Company evaluated Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), but does not expect that SOP 97-2 will have a
material impact on the Company's financial position, results of operations, or
cash flows since the Company did not sell, license, lease or market any computer
software.

The Company adopted Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101") in the fourth quarter of 2000. The adoption of
SAB 101 did not have a material impact on the Company's operating results or
financial positions.

Accounts Receivable

Management of the Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made. Bad debt expense for years ended December 31, 2000 and 1999 was $708 and
$1,487, respectively.

Inventories

Costs incurred for materials, technology and shipping are capitalized as
inventories and charged to cost of sales when revenue is recognized.

Inventories consist of finished goods and are stated at the lower of cost or
market, using the first-in, first-out method.

EYE DYNAMICS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000 and 1999

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property and Equipment

Property and equipment are valued at cost. Maintenance and repair costs are
charged to expenses as incurred. Depreciation is computed on the straight-line
method based on the estimated useful lives of the assets. Depreciation expense
was $2,667 and $2,597 for 2000 and 1999, respectively.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting For Income Taxes". SFAS No. 109 requires a company to recognize
deferred tax liabilities and assets for the expected future income tax
consequences of events that have been recognized in the Company's financial
statements. Under this method, deferred tax assets and liabilities are
determined based on temporary differences between the financial carrying amounts
and the tax bases of assets and liabilities using the enacted tax rates in
effect in the years in which the temporary differences are expected to reverse.

Advertising Costs

All advertising costs are expensed as incurred. Advertising expenses were $3,998
and $1,004 for 2000 and 1999, respectively.

Reclassification

Certain reclassifications have been made to the 1999 consolidated financial
statements to conform with the 2000 consolidated financial statement
presentation. Such reclassification had no effect on net loss as previously
reported.

Stock-Based Compensation

The Company accounts for stock issued to non-employees in accordance with the
provisions of Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation" and the Emerging Issues Task
Force (EITF) Consensus on Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."

F10

EYE DYNAMICS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000 and 1999

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncement

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 138, which was
issued in June 2000. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments. The Company currently does not use derivative
financial products for hedging or speculative purposes and as a result, does not
anticipate any impact on the Company's consolidated financial statements.

In September 2000, the Emerging Issues Task Force (EITF) reached a final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." This consensus requires that all amounts billed to a customer in a sale
transaction related to shipping and handling, if any, represent revenue and
should be classified as revenue. The Company historically has classified
shipping charges to customers as revenue. With respect to the classification of
costs related to the shipping and handling incurred by the seller, the EITF
determined that the classification of such costs is an accounting policy
decision that should be disclosed. It also determined that if shipping costs or
handling costs are significant and are not included in cost of sales, a company
should disclose both the amount(s) of such costs and the line item(s) on the
income statement that include them. The Company historically has included
inbound shipping charges in cost of sales and classified outbound shipping
charges as operating expenses. For the years ended December 31, 2000 and 1999,
the outbound shipping charges included as operating expenses were $25,033 and
$23,112, respectively.

NOTE 3 - LINE OF CREDIT

The Company has an operating line of credit with Wells Fargo Bank of $65,000,
with interest payable at the bank's prime rate plus 2.75%. This line of credit
is payable on demand and is personally guaranteed by the Company's President.
There were no outstanding loan balances at December 31, 2000 or 1999.

NOTE 4 - NOTES PAYABLE
2000 1999
---------- ----------
a)Notes to Officers, compound interest
accrued at 10%; due 60 days after
dates of notes; unsecured $ 278 $ 23,470

F11

EYE DYNAMICS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000 and 1999

NOTE 4 - NOTES PAYABLE (Continued)
2000 1999
---------- ----------
b)Notes to Others, interest at 12% per
annum; due on demand, unsecured 10,000 10,000

c)Note to TESA Corporation, interest at
7% payable on maturity date, December
31, 1999; maturing 11% of gross revenues,
collateralized by accounts receivable,
inventories, patents and a licensing agreement 406,971 396,721
---------- ----------
417,249 430,191
Less current maturities (417,249) (430,191)
---------- ----------

Long-term debt, net $ 0 $ 0
========== ==========

NOTE 5 - SETTLEMENT AGREEMENT AND MUTUAL RELEASE

On December 29, 1993, the Company entered into a settlement agreement and mutual
release with TESA Corporation, a former distributor. The agreement provided a
payment of $400,000 with simple interest at 7% per annum, payable on or before
December 31, 1999. The note principal is payable in monthly installments of 11%
of gross revenue on the sales (See Note 4c). As of December 31, 2000 and 1999,
interest of $195,987 and $167,987 was accrued and no principal payments were
made, respectively. The Company is currently negotiating the note.

In addition, the Company will repurchase from TESA up to nine product units,
which were previously sold by the Company to TESA for the sum of $10,250 each.
As of December 31, 2000 and 1999, the balance owed to TESA related to these
consigned inventories was $10,250 and $0, respectively. The amount was included
in Note Payable - TESA (See Note 4c).

NOTE 6 - INCOME TAXES

The Company files separate federal and state income tax returns with its
subsidiary.

Provision for income taxes in the consolidated statements of operations for
years ended December 31, 2000 and 1999 consist of $1,600 minimum state income
taxes in each year, $800 for each corporation.

F12

EYE DYNAMICS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000 and 1999

NOTE 6 - INCOME TAXES (Continued)

As of December 31, 2000, the Company has net operating loss carryforwards,
approximately, of $840,105 to reduce future taxable income. The subsidiary has
NOL carryforwards of $1,481,264. To the extent not utilized, both carryforwards
will begin to expire through 2019. The Company's ability to utilize its net
operating loss carryforwards is uncertain and thus a valuation reserve has been
provided against the Company's net deferred tax assets.

The deferred net tax assets consist of the following at December 31:

2000 1999
---------- ----------
Net Operating Loss Carryforwards $ 285,636 $ 182,936
Valuation Allowance (285,636) (182,936)
---------- ----------

Net deferred tax assets $ 0 $ 0
========== ==========

NOTE 7 - PRIVATE PLACEMENT OFFERING

In August 2000, the Company conducted a self-underwritten offering of 1,000,000
units, consisting of one share of common stock and two stock warrants at $0.20
per unit. One warrant to be for purchase of one share of common stock at $.35
per share and the second warrant to be for purchase of one share of common stock
at $.75 per share. The warrants expire in one year after purchase of the above
described unit. As of December 31, 2000, the Company sold 750,000 units and
received $150,000 in proceeds.

NOTE 8 - COMMON STOCK TRANSACTION

In September 2000, the Company issued 1,000,000 shares of common stock to a
consultant for strategic planning and marketing services for the period from
September 1, 2000 and extending for a minimum of six months and a maximum of 12
months. The fair value of the stock at the time of issue was $0.20 per share.
The total cost of $200,000 was capitalized and amortized over a six-month
period. For year ended December 31, 2000, $133,333 was charged to operations,
and as of that date, the balance of unamortized marketing expense was $66,667.

The Company also issued 50,000 shares of common stock at a fair value of $0.13
per share to a consultant as an incentive for development and execution of a
public relations program. The total cost of $6,500 was capitalized and amortized
over a six-month period. For year ended December 31, 2000, $4,333 was charged to
operations, and as of that date, the balance of unamortized public relation
expense was $2,167.

F13

EYE DYNAMICS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000 and 1999

NOTE 8 - COMMON STOCK TRANSACTION (Continued)

In April 2000, the Company issued 400,000 shares of common stock to a financial
advisor at a fair value of $0.22 per share, or total of $88,000. The Company
also converted a consulting fee payable of $19,500 into 76,853 shares of common
stock.

In 1999, the Company agreed to pay a consultant $5,250 per month; $2,000 in cash
and the balance of $3,250 will be converted into the Company's common stock at
85% of the average market price during the compensation period. Accordingly, the
Company had issued 88,833 shares of common stock at an average market price of
$0.44 per share, or an aggregate of $33,125, for his service rendered.

NOTE 9 - STOCK OPTIONS

In February 2000, the Company granted 150,000 non-qualified stock options to
officers at an exercise price of fifteen cents ($.15) per share through February
2003. The fair value of the stock when granted was $0.20 per share.

In September 1999, the Company granted 60,000 non-qualified stock options to
employees at an exercise price of fifty-four cents ($.54) per share through
September 2001.

There were 750,000 shares of options exercised at $.125 per share in 1999. None
were exercised in 2000.

A summary of the status of the Company's stock option as of December 31, 2000
and 1999, and changes during the years then ended is presented below:

2000 1999
--------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Number of Price Number of Price
Shares Per Share Shares Per Share
--------------------------------------------------------------

Outstanding at beginning of Year 2,560,000 $0.27 3,550,000 $0.23
Granted 150,000 0.15 60,000 0.54
Exercised 0 - (750,000) 0.125
Expired and Cancelled (400,000) 0.10 (300,000) 0.20
---------- ----- ---------- ------
Outstanding at end of Year 2,310,000 $0.29 2,560,000 $0.27
========= ===== ========= ======

Exercisable at end of Year 2,310,000 $0.29 2,515,000 $0.26
========= ===== ========= =====

The following table sets forth additional information about stock options
outstanding at December 31, 2000:

F14

EYE DYNAMICS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000 and 1999

NOTE 9 - STOCKS OPTIONS (Continued)

Weighted
Number Average Weighted Number
Range of Outstanding Remaining Average Exercisable
Exercise as of Contractual Exercise as of
Prices Dec. 31, 2000 Life Price Dec. 31, 2000
------ ------------- ---- ----- -------------

$0.54 60,000 0.75 years $0.54 60,000
$0.25 1,000,000 0.92 years $0.25 1,000,000
$0.375 1,000,000 0.92 years $0.375 1,000,000
$0.001 100,000 0.92 years $0.001 100,000
$0.15 150,000 2.17 years $0.15 150,000
--------- ---- ----- ---------
2,310,000 0.99 years $0.29 2,310,000
========= ==== ===== =========

The Company accounts for equity-based instruments issued or granted to employees
using the intrinsic method as prescribed under APB No. 25 Accounting for Stock
Issued to Employees. During 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), which defines a fair value based method
of accounting for stock options or similar equity instruments. The Company has
elected to adopt the disclosure-only provisions of SFAS 123 in accounting for
employee stock options. Accordingly, the Company has elected to account for its
stock-based compensation plan under APB Opinion No. 25 an accounting standard
under which no related compensation was recognized in 2000 or 1999, the year of
the grant; however the Company has computed for pro forma disclosure purposes,
the value of all options granted during the year ended December 31, 2000 and
1999 using the Black-Scholes option pricing model as prescribed by SFAS No. 123
and the weighted average assumptions as follows:

December 31,
2000 1999
-----------------------
Weighted average fair value per option granted $0.185 $0.19
Risk-free interest rate 5.00% 6.00%
Expected dividend yield 0.00% 0.00%
Expected Lives 3.00 3.00
Expected volatility 0.30 0.30

For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the options' vesting period. The Company's pro forma
information follows:
December 31,
2000 1999
---------- ----------
Net Loss as reported $(302,530) $ (45,667)
========== ==========
Net Loss (pro forma) $(315,580) $ (49,467)
========== ==========
Basic net loss per share as reported $ (0.03) $ (0.01)
========== ==========
Basic net loss per share (pro forma) $ (0.03) $ (0.01)
========== ==========

F15

EYE DYNAMICS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000 and 1999

NOTE 10 - WARRANTS

As discussed in Note 7, the Company sold warrants in a private placement
offering to purchase up to 1,500,000 shares of common stock at exercise prices
of $.35 or $.75 per share. These warrants will expire in August 2001.

A summary of the status of the Company's warrants as of December 31, 2000, and
changes during the year then ended is presented below:

Weighted Average
Exercise
Number of Price
Shares Per Share
------ ---------
Outstanding at beginning of Year 0 $ -
Granted 1,500,000 0.55
Exercised 0 -
Expired and Cancelled 0 -
--------- ------
Outstanding at end of Year 1,500,000 $ 0.55
========= ======

Exercisable at end of Year 1,500,000
=========

There were no outstanding warrants as of December 31, 1999.

NOTE 11 - NET LOSS PER SHARE

Net loss per share is computed based on the weighted average number of shares of
common stock outstanding during the period. Basic net loss per share for years
ended December 31, 2000 and 1999 was $0.02 and $0.01, respectively. Net loss per
share does not include options and warrants as they would be anti-dilutive in
2000 and 1999 due to the net loss in those years.

NOTE 12 - SEGMENT INFORMATION

SFAS No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION" requires that a publicly traded company must disclose information
about its operating segments when it presents a complete set of financial
statements. Since the subsidiary did not have any operations in 2000 or 1999,
and the Company has only one segment; accordingly, detailed information of the
reportable segment is not presented.

F16

EYE DYNAMICS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000 and 1999

NOTE 13 - RELATED PARTY TRANSACTION

As disclosed in Note 4a, the Company had notes payable to the officers in the
amounts of $278 and $23,470 as of December 31, 2000 and 1999, respectively. As
of these dates, balance of accrued interest was $63,542 and $57,113,
respectively. Interest expense charged on these notes totaled $6,429 and $7,638
in those years, respectively.

The Company converted a deposit from shareholder in the amount of $7,758 into
equity.

NOTE 14 - MAJOR CUSTOMERS

During 2000 and 1999, the Company had one major customer, sales to which
exceeded 10% of the Company's total sales. Sales to this customer totaled
$234,958 and $403,247 for the years ended December 31, 2000 and 1999,
respectively.

NOTE 15 - CONTINGENCIES AND COMMITMENTS

Contingency

The Company agreed to pay a financial advisor in the sum of $15,000 on condition
that the Company obtains outside capital financing or sells to a third party an
equity interest in the Company.

Public Relation Agreement

In September 2000, the Company entered into an agreement providing that the
Company will pay $6,000 per month for a public relation through February 2001.

Lease Commitments

The Company leases its office facilities for $787 per month. The lease expires
April 2001. Rent expense totaled $9,368 and $9,216 for 2000 and 1999,
respectively.

The Company also leases office equipment at $197 per month on a month-to-month
basis.

As of December 31, 2000, the minimum commitment under these leases is $3,148.

F17

EYE DYNAMICS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2000 and 1999

NOTE 16 - GOING CONCERN

The accompanying consolidated financial statements are presented on the basis
that the Companies are going concerns. Going concern contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business over a reasonable length of time. As shown in the accompanying
consolidated financial statements, as of December 31, 2000, the Company has
accumulated deficit of $3,282,332, a stockholders' deficit of $342,372 and its
current liabilities exceed current assets by $358,820.

As discussed in Note 7, the Company conducted a private placement offering in
2000, and had raised $150,000. The offering was completed in January 2001. With
funds from the private placement and upon the completion of the research, the
Company began to market and publicize its second product line, Impairment
Detection device. Management is also actively increasing marketing efforts to
increase revenues. The Company continued existence depends on its ability to
meet its financing requirements and the success of its future operations. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

NOTE 17 - SUBSEQUENT EVENT

The private placement offering was completed in January 2001. The Company sold
250,000 units and received $50,000.

F18