COLE NATIONAL GROUP INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(MARK ONE)

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2003, 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 33-66342

COLE NATIONAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 34-1744334
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

5915 LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (440) 449-4100

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM IN THE
REDUCED DISCLOSURE FORMAT.

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER
PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS YES |X| NO
| |.

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT
TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE TO IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. |X|

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED
FILER (AS DEFINED IN RULE 12b-2 OF THE ACT). YES |X| NO | |.

ALL OF THE OUTSTANDING CAPITAL STOCK OF THE REGISTRANT IS HELD BY
COLE NATIONAL CORPORATION.

AS OF MAY 12, 2003, 1,100 SHARES OF THE REGISTRANT'S COMMON STOCK,
$.01 PAR VALUE, WERE OUTSTANDING.

DOCUMENTS INCORPORATED BY REFERENCE: NONE

TABLE OF CONTENTS

Page
----

Part I

Item 1. Business .................................................................................. 1
2. Properties ................................................................................ 4
3. Legal Proceedings ......................................................................... 4
4. Submission of Matters to a Vote of Security Holders ....................................... 5

Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..................... 5
6. Selected Financial Data ................................................................... 5
7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 6
7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 19
8. Financial Statements and Supplementary Data ............................................... 20
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 20

Part III

Item 10. Directors and Executive Officers of the Registrant ........................................ 20
11. Executive Compensation .................................................................... 20
12. Security Ownership of Certain Beneficial Owners and Management ............................ 20
13. Certain Relationships and Related Transactions ............................................ 20
14. Controls and Procedures ................................................................... 20

Part IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 22

Signatures ................................................................................ 23
Certifications ............................................................................ 24
Exhibit Index.............................................................................. X-1

FORWARD LOOKING STATEMENTS

The Company's expectations and beliefs concerning the future contained in
this document are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those forecasted due to a variety of factors that can adversely affect the
Company's operating results, liquidity and financial condition such as risks
associated with potential adverse consequences of the restatement of the
Company's financial statements, including those resulting from litigation or
government investigations, restrictions or curtailment of the Company's credit
facility and other credit situations, costs and other effects associated with
the California litigation, the timing and achievement of improvements in the
operations of the optical business, the results of Things Remembered, which is
highly dependent on the fourth quarter holiday season, the nature and extent of
disruptions of the economy from terrorist activities or major health concerns
and from governmental and consumer responses to such situations, the actual
utilization of Cole Managed Vision funded eyewear programs, the success of new
store openings and the rate at which new stores achieve profitability, the
Company's ability to select, stock and price merchandise attractive to
customers, success of systems development and integration, competition in the
optical industry, integration of acquired businesses, economic and weather
factors affecting consumer spending, operating factors affecting customer
satisfaction, including manufacturing quality of optical and engraved goods, the
Company's relationships with host stores and franchisees, the mix of goods sold,
pricing and other competitive factors, and the seasonality of the Company's
business.

PART I

ITEM 1. BUSINESS

GENERAL

Cole National Group, Inc., a wholly owned subsidiary of Cole National
Corporation, was incorporated as a Delaware corporation in July 1993 as a
successor to companies that began operations approximately 60 years ago. Cole
National Group is a leading provider of vision care products and services,
including managed vision care programs and personalized gifts with 2,944 retail
locations in 50 states, Canada and the Caribbean. References herein to the
"Company" include Cole National Group, its direct and indirect subsidiaries, and
its predecessor companies. The Company's retail vision locations do business
primarily under the names "Pearle Vision", "Sears Optical", "Target Optical" and
"BJ's Optical" and its managed vision care programs are offered primarily
through Cole Managed Vision. Collectively these businesses are referred to
herein as "Cole Vision." Personalized gifts are offered through retail
locations, e-commerce and catalogs by Things Remembered. The Company believes
that, based on industry data, it is the third largest retail optical company in
the United States and operates the only nationwide chain of personalized gift
stores. The Company differentiates itself from other specialty retailers by
providing value-added services at the point of sale at all of its retail
locations.

COLE VISION

Cole Vision contributed 76% of the Company's net revenue in fiscal 2002
with 2,174 company-owned and franchised retail locations throughout the United
States, Canada, and the Caribbean as of February 1, 2003. Cole Managed Vision
programs provide vision care benefits to participants through access to a
network of company-owned, franchised and third-party optical locations.

COLE LICENSED BRANDS

Cole Licensed Brands operates principally under the "Sears Optical",
"Target Optical" and "BJ's Optical" names. As of February 1, 2003, Cole Licensed
Brands operated 1,310 retail locations in 47 states and Canada, including 826
departments on the premises of Sears department stores, 117 freestanding Sears
Optical stores, 126 departments in BJ's Wholesale Club stores, and 241
departments in Target stores. Retail locations are generally operated under a
lease or license arrangement through which the host store collects the sales
receipts, retains an agreed upon percentage of sales and remits the remainder on
a weekly or monthly basis.

Locations are, in most cases, retail eyecare stores offering brand name
and private label prescription eyeglasses, contact lenses and accessories, which
make available services of a doctor of optometry who performs complete eye
examination and prescribes eyeglasses and contact lenses. Most optical
departments, which are typically 1,000 square feet in size, operate with a
department manager and support staff of one to seven associates depending on
store sales volume. In a majority of the stores, eye examinations services are
available from independent doctors of optometry, as is often required by state
law, and from doctors of optometry employed by Cole Licensed Brands.

1

Each of the United States retail locations is computer-linked to six
centralized laboratory facilities, which grind, cut and fit lenses to order and
ship them to the stores. The Canadian retail locations are served by a
centralized laboratory located near Toronto. Next-day delivery is provided on
most eyewear when requested by customers. All of the frames and most lenses used
in eyeglasses are purchased from outside suppliers, both in the United States
and several foreign countries.

A variety of marketing and promotional efforts, primarily host
advertising, newspaper, direct mail, magazine, television and yellow pages are
used to build and maintain the customer base for each of the Cole Licensed
Brands stores. Host advertising includes the placement of promotional material
within sales circulars or credit card billings sent out by the host store to its
customers.

The Company believes it has developed excellent relationships with the
host stores in which Cole Licensed Brands operates. The Company has maintained
its relationships in the optical business with Sears for over 40 years. Although
leases and licenses with major hosts are terminable upon relatively short
notice, Cole Licensed Brands has never had a lease terminated other than in
connection with a store closing, relocation or major remodeling.

PEARLE

Pearle Vision (Pearle) operates 400 company-owned and 464 franchised
stores located in 45 states, Canada, and the Caribbean. Most Pearle stores
operate in either an "Express" or "Mainline" store format. Express stores
contain a full surfacing lab that can produce most glasses in approximately one
hour. Mainline stores can produce over 50% of prescriptions on-site in
approximately one hour. Other prescriptions are sent to Pearle's central
laboratory in Dallas, Texas. At February 1, 2003, 274 of the company-owned
stores and 135 of the franchised stores were Express, with most of the balance
being Mainline.

The Express stores typically are located in high-traffic freestanding
strip centers or mall locations with most stores averaging 3,000 square feet.
The Express stores are usually staffed with a manager and a support staff of
four to eight associates. Mainline stores have an average size of 1,700 square
feet and are also located in freestanding buildings, or in smaller strip or
regional centers. Mainline stores are usually staffed with a manager and two or
three associates. Most Pearle stores make exams available by on-site doctors of
optometry with approximately 80% leasing space from Pearle on an independent
basis. Most of the remaining doctors are direct employees of Pearle. In
California, eye exams are provided by doctors of optometry, employed by Pearle
Vision Care, Inc., a licensed health care service plan.

Pearle's marketing strategy employs a wide range of media at both the
national and local levels. The franchised and company-owned stores each
contribute a percentage of revenues to Pearle's marketing budget with a
significant amount of Pearle's marketing expenditures devoted to television.
Pearle's brand positioning of high quality eyecare products and services has
been reinforced by an advertising and promotions program, which includes
Pearle's long-standing advertising slogan: "Nobody Cares for Eyes More Than
Pearle".

Pearle operates a central lab and distribution center in Dallas, Texas
that inventories and distributes a comprehensive product line, including frames,
eyeglass lenses, contact lenses, optical supplies and eyewear accessories, to
company-owned and franchised locations.

Pearle has maintained a franchise program since 1980. Most of the
franchised stores are single store franchise operations, with no franchisee
operating more than ten stores. Each franchisee must enter into a franchise
agreement requiring payment of an initial franchise fee. The term of the typical
franchise agreement is equal to the lesser of ten years or the term of the
underlying base lease. Royalty and advertising contributions typically have been
based on a percentage of the franchisee's gross revenues from the retail
operation, excluding nonsurgical professional fees. The total monthly
advertising contribution is distributed to Pearle's system-wide advertising fund
and the local co-op market advertising fund. Franchisees are generally eligible
to participate in Cole Vision's managed vision care programs. In fiscal 2002, 17
new franchise locations were opened, 13 company-operated locations were sold to
franchisees, 2 franchise locations were converted to corporate stores and 4
franchise locations closed.

COLE MANAGED VISION

Recognizing the role that managed health care would play in the coming
years, Cole Vision Corporation created Cole Managed Vision (CMV) to bring its
own unique capabilities to the vision benefit marketplace, and to provide an
additional source of customers for the Company's owned and franchised retail
locations. Since then, CMV has been developing, marketing, and administering
group vision benefit programs for employers, health plans and associations
nationwide. Today, CMV manages funded benefits for more than 13 million
participants, and discount benefits for more than 80 million participants.
Managed vision care participants comprise approximately one third of Cole
Vision's retail customers.

2

THINGS REMEMBERED

Things Remembered contributed 24% of the Company's net revenue in fiscal
2002. As of February 1, 2003, Things Remembered operated 770 stores and kiosks
located in large, enclosed shopping malls located in 48 states. Each location
carries a wide assortment of engraveable items and provides "while you shop"
personalization services for any occasion including holiday, wedding, business
recognition and other special occasion gift events. Engraving is offered for
items purchased at the store as well as for items purchased elsewhere. Customers
can purchase Things Remembered's broad gift assortment through its catalogs
(1-800-274-7367) and its e-commerce site, http://www.thingsremembered.com.

Merchandise sold at Things Remembered stores and through the catalog and
internet consists of a broad selection of moderately priced gift categories and
items at prices generally ranging from $15 to $150. The gift offerings include
writing instruments, desk accessories such as desk sets, recognition plaques and
awards; women's gifts which include sterling jewelry, jewelry boxes, and
keepsake boxes; men's gifts which include barware, valet boxes, and leather
goods; gifts for newborns and children including baby cups, rattles and jewelry
as well as apparel and quilts. Gifts for the home include glassware, clocks,
frames, albums, doorknockers and a special assortment of holiday gifts such as
ornaments and other collectible items. Things Remembered features brand name
merchandise as well as higher margin, private label merchandise. At some
locations computer-controlled embroidery equipment is utilized for the
personalization of merchandise, such as throws, pillows, polo shirts, bathrobes,
jackets, canvas totes and baby blankets. These soft goods are also available in
most of Things Remembered's other locations with personalization services
provided from a central fulfillment facility.

At February 1, 2003, Things Remembered locations consisted of 472 stores
and 298 kiosks. The typical store consists of about 1,300 square feet, while
kiosks, which are units generally located in the center of the common mall area,
are typically 200 square feet.

Things Remembered locations are usually operated by one or two employees
during nonpeak periods and up to 15 employees during the peak fourth quarter
holiday season. Locations typically employ a store manager on a full-time basis,
an assistant store manager on a full-time or part-time basis, and the balance of
employees as part-time sales associates.

Nearly all locations are equipped with computerized engravers and key
duplicating machines. Most stores also have equipment for etching glassware
items. All locations are equipped with point-of-sale terminals.

Most of the Things Remembered's store merchandise is shipped through its
centralized warehouse and distribution facility located near Youngstown, Ohio.
The warehouse utilizes a computerized carousel system to automate the process of
locating merchandise needed to fulfill store orders. The warehouse also has
systems and support capabilities to fulfill e-commerce and catalog orders within
72 hours.

PURCHASING

The merchandise, supplies and component parts required for the various
products sold by the Company are purchased from a large number of suppliers and
manufacturers and are generally readily available. In most cases, such purchases
are not made under long-term contracts. The Company believes that the loss of
any one supplier or manufacturer would not have a material adverse effect on its
operations.

COMPETITION

The Company operates in highly competitive businesses. Cole Vision
competes with other optical companies, private ophthalmologists, optometrists
and opticians and HMOs and other managed vision care companies in a highly
fragmented marketplace on the basis of the services it provides, as well as
price and product quality. In addition, Pearle competes on the basis of its
highly recognized brand name, superior customer service and large merchandise
assortment. The Company believes that, based on industry data, Cole Vision is
the third largest optical retail company in the United States. Although Things
Remembered operates the only nationwide chain of gift stores offering "while you
shop" gift engraving, key duplicating, glass etching and monogramming, as well
as related merchandise, it competes with many other retailers that sell gift
items. Things Remembered competes with such other retailers primarily on the
basis of the value-added point of sale services, as well as price and product
quality. Some competitors have greater financial resources than the Company.

EMPLOYEES

As of February 1, 2003, the Company and its subsidiaries had approximately
9,418 full-time employees. This full-time work force is supplemented by 6,098
part-time and seasonal employees. Approximately 134 Pearle employees are
represented by labor unions. The Company considers its present labor relations
to be satisfactory.

3

SEGMENT INFORMATION

Information for the Company's two reportable segments and geographical
information are contained in Note 7 of the Notes to Consolidated Financial
Statements.

ITEM 2. PROPERTIES

All Cole Licensed Brands retail locations are leased or operated under a
license with the host store, and none of the individual retail locations are
material to operations. Leases for departments operated in Sears and Target
stores are terminable upon relatively short notice. Freestanding stores operated
under the name "Sears Optical" are leased for terms which average five years.
The leases for departments operated in BJ's Wholesale Club stores expire in
April 2006.

Cole Licensed Brands leases six optical laboratory facilities, located in
Columbus, Ohio; Knoxville, Tennessee (two); Memphis, Tennessee; Salt Lake City,
Utah; and Richmond, Virginia, pursuant to leases expiring (including renewal
options) between 2005 and 2017.

Pearle leases most of its retail stores under noncancelable operating
leases with terms generally ranging from five to ten years and which generally
contain renewal options for additional periods. Pearle is the principal lessee
on a majority of stores operated by franchisees who sublease the facilities from
Pearle.

In January 2002, Pearle completed a sale and leaseback of its Dallas,
Texas Support Center, which comprises approximately 129,000 square feet of
laboratory and distribution facilities. The lease expires in 2017 and includes
four options to renew for five-year terms. An adjoining office facility, no
longer used for operations, was sold in April 2001. Pearle also owns a small
headquarters and a laboratory facility in Puerto Rico.

Cole Vision also leases a home office, an optical laboratory and a
distribution facility for its Canadian operations pursuant to leases expiring in
2004. The Company expects to close its Canadian optical laboratory and
distribution facility in June 2003, and move those operations to the United
States.

Leases for Things Remembered stores and kiosks are generally for terms of
ten and five years, respectively. Things Remembered's home office functions are
located in a 50,000 square foot leased facility in Highland Heights, Ohio. The
lease expires (including renewal options) in 2007. Things Remembered leases its
210,000 square foot warehouse and distribution facility located near Youngstown,
Ohio. The lease expires in 2013 and includes three options to renew for
five-year terms.

ITEM 3. LEGAL PROCEEDINGS

From time to time during the ordinary course of business, the Company may
be threatened with, or may become a party to, a variety of legal actions and
other proceedings incidental to its business.

A complaint was filed in the Superior Court of California, county of San
Diego against Cole National Corporation, its affiliates and certain of its
officers by the Attorney General of the State of California on February 14, 2002
and amended on February 22, 2002. The case, State of California v. Cole National
Corporation, et al., alleges claims for various statutory violations related to
the operation of 24 Pearle Vision Centers in California. The claims include
untrue or misleading advertising, illegal dilation fees, unlawful advertising of
eye exams, maintaining an optometrist on or near the premises of a registered
dispensing optician, unlawful advertising of an optometrist, unlicensed practice
of optometry, and illegal relationships between dispensing opticians, optical
retailers and optometrists. The action seeks unspecified damages, restitution
and injunctive relief. Although the State of California obtained a preliminary
injunction to enjoin certain advertising practices and the charging of dilation
fees in July 2002, the terms of the injunction have not had and are not expected
to have a material effect on the Company's operations. In addition, both the
State and the Company have appealed the preliminary injunction. Although we
believe we are in compliance with California law and intend to continue to
defend the issues raised in the case vigorously, the case is in its early stages
and we cannot predict with certainty its outcome or costs.

A class action complaint was filed on August 14, 2002 in the Superior
Court of San Francisco, California, against Things Remembered by a purported
class of approximately 200 employees of Things Remembered alleging that the
members of the putative class were improperly denied overtime compensation in
violation of California law. The action sought unspecified damages, interest,
restitution, as well as declaratory and injunctive relief and attorneys' fees.
On February 3, 2003, Things Remembered and the plaintiffs reached an agreement
to resolve the lawsuit for $562,500. The settlement is subject to court
approval.

4

A class action complaint was filed on December 6, 2002 in the United
States District Court for the Northern District of Ohio against Cole National
Corporation and certain present and former officers and directors by a purported
class of shareholders of the Company alleging claims for various violations of
federal securities laws related to Cole National Corporation's publicly reported
revenues and earnings. The action, which proposes a class period of March 23,
1999 through November 26, 2002 and names Cole National Corporation and certain
present and former officers and directors, seeks unspecified compensatory
damages, punitive damages "where appropriate", costs, expenses and attorneys
fees. Following the announcement in November 2002 of the restatement of the
Company's financial statements, the Securities and Exchange Commission began an
inquiry into Cole National Corporation's previous accounting.

The Company has been named as a defendant, along with numerous other
retail companies, in patent infringement litigation in the United States
District Court for the District of Arizona, known as Lemelson Medical, Education
& Research Foundation, Limited Partnerships v. CompUSA, Inc. et al., No. Civ.
00-0663, which challenges the defendants' use of bar code technology in their
retail operations. The Company is participating in a common defense with a
number of other defendants. A stay of the proceedings has been sought and was
granted, in deference to prior pending declaratory judgment suits brought by the
manufacturers and suppliers of the implicated technology seeking to declare the
patents in suit not infringed, invalid and unenforceable. The Company likewise
intends to oppose the allegations and claims against it.

See Note 9 of Notes to Consolidated Financial Statements for further
discussion of these legal proceedings.

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

Information required by this item has been omitted pursuant to General
Instruction I of Form 10-K.

PART II

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

The Registrant is a wholly owned subsidiary of Cole National Corporation
and has no equity securities that are traded in an established public trading
market or otherwise.

The indentures pursuant to which the 8-5/8% notes and the 8-7/8% notes
were issued contain certain optional and mandatory redemption features and other
financial covenants, including restrictions on the ability of the Company to
incur additional indebtedness, pay dividends or make other restricted payments
to Cole National Corporation. The indentures also permit payments to Cole
National Corporation for certain tax obligations and for administrative expenses
not to exceed 0.25% of the Company's net sales.

The Company has no equity compensation plans under which securities of the
Company are authorized for issuance.

ITEM 6. SELECTED FINANCIAL DATA

Information required by this item has been omitted pursuant to General
Instruction I of Form 10-K.

5

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

Certain information required by this item has been omitted pursuant to
General Instruction I of Form 10-K.

As discussed in Note 11 to the Notes to Consolidated Financial Statements,
the Company's fiscal year 2001 and fiscal 2000 financial statements have been
restated. See Note 11 for a summary of the significant effects of the
restatement. The following discussion of the Company's financial condition and
results of operations gives effect to the restatement and should be read in
conjunction with the Consolidated Financial Statements and related notes.

OVERVIEW

Cole National Group Inc., a wholly owned subsidiary of Cole National
Corporation, is a leading provider of optical products and services and
personalized gifts. The Company sells its products and services through 2,480
company-owned retail locations and 464 franchised locations in 50 states, Canada
and the Caribbean.

Fiscal years end on the Saturday closest to January 31 and are identified
according to the calendar year in which they begin. For example, the fiscal year
ended February 1, 2003 is referred to as "fiscal 2002". Fiscal 2002 and fiscal
2001 each consisted of a 52-week period, and fiscal 2000 consisted of a 53-week
period.

The Company has two reportable segments, Cole Vision and Things
Remembered. Most of Cole Vision's revenue represents sales of prescription
eyewear, accessories and services through its Cole Licensed Brands and Pearle
Vision retail locations. Cole Vision revenue also includes sales of merchandise
to franchisees, royalties based on franchise sales, initial franchise fees for
Pearle Vision and capitation revenue, administrative service fee revenue and
discount program service fees from its Cole Managed Vision business.

Things Remembered's revenue represents sales of engraveable gift
merchandise, personalization and other services primarily through retail in-line
stores and kiosks. Things Remembered revenue also includes direct sales through
its e-commerce site, http://www.ThingsRemembered.com, sales through Things
Remembered catalogs and through affiliate programs direct to businesses.

6

RESULTS OF OPERATIONS

The following schedule sets forth the results from continuing operations
for the fiscal years ended February 1, 2003, February 2, 2002 and February 3,
2001. This schedule and subsequent discussions should be read in conjunction
with the consolidated financial statements and notes thereto included in Item 8
of this Form 10-K.

Change
Fiscal Year ---------------------
---------------------------------- 2002 vs. 2001 vs.
2002 2001 2000 2001 2000
-------- -------- -------- -------- --------
(Dollars in millions)

Net revenue:
Cole Vision $ 877.5 $ 836.8 $ 801.8 4.9% 4.4%
Things Remembered 270.6 272.3 276.1 (0.6) (1.4)
-------- -------- --------
Total net revenue $1,148.1 $1,109.1 $1,077.9 3.5% 2.9%

Gross margin:
Cole Vision $ 576.8 $ 550.9 $ 524.5 4.7% 5.0%
Things Remembered 192.6 193.8 193.8 (0.6) (0.0)
-------- -------- --------
$ 769.4 $ 744.7 $ 718.3 3.3% 3.7%
Operating expenses:
Cole Vision $ 546.2 $ 531.7 $ 512.3 2.7% 3.8%
Things Remembered 177.5 168.8 170.3 5.2 (0.9)
Unallocated corporate expense 17.4 9.5 12.9 83.2 (26.4)
-------- -------- --------
$ 741.1 $ 710.0 $ 695.5 4.4% 2.1%
Goodwill and tradename amortization:
Cole Vision $ -- $ 4.1 $ 4.2 (100.0)% (2.4)%
Things Remembered -- 0.9 1.0 (100.0) (10.0)
-------- -------- --------
$ -- $ 5.0 $ 5.2 (100.0)% (3.8)%
Operating income:
Cole Vision $ 30.6 $ 15.1 $ 8.0 102.6% 88.7%
Things Remembered 15.1 24.1 22.5 (37.3) 7.1
Unallocated corporate expense (17.4) (9.5) (12.9) 83.2 (26.4)
-------- -------- --------
$ 28.3 $ 29.7 $ 17.6 (4.7)% 68.7%
======== ======== ========

Percentage of net revenue:
Gross margin 67.0% 67.1% 66.6% (0.1) 0.5
Operating expenses 64.6 64.0 64.5 0.5 (0.5)
Goodwill and tradename amortization -- 0.5 0.5 (0.5) (0.0)
-------- -------- --------
Operating income 2.5% 2.7% 1.6% (0.2) 1.1
======== ======== ========

Number of retail locations at the end
of the period:
Cole Licensed Brands 1,310 1,282 1,164
Pearle company-owned 400 423 439
Pearle franchised 464 440 426
-------- -------- --------
Total Cole Vision 2,174 2,145 2,029
Things Remembered 770 774 784
-------- -------- --------
Total Cole National 2,944 2,919 2,813
======== ======== ========
Same-Store Sales Growth:
Cole Licensed Brands (U.S.) 3.7% 3.8% 3.7%
Pearle company-owned (U.S.) 4.0 2.6 2.0
Total Cole Vision 3.3 2.6 3.1
Things Remembered (2.5) (1.8) 5.4
Total Cole National 1.8% 1.4% 3.7%

Pearle U.S. franchise stores 1.1% - % 3.3%

7

As used in Item 7 of this Form 10-K, same-store sales growth is a non-GAAP
financial measure, which includes deferred warranty sales on a cash basis and
does not reflect provisions for returns and remakes and certain other items. The
Company's current systems do not gather data on these items on an individual
store basis. Adjustments to the cash basis sales information accumulated at the
store level are made for these items on an aggregate basis. As a retailer, the
Company believes that a measure of same-store sales performance is important for
understanding its operations. The Company calculates same-store sales for stores
opened for at least twelve months. A reconciliation of same-store sales growth
to net revenue is presented below in the section "Reconciliation of Same-Store
Sales Growth".

Same-store sales for Pearle U.S. franchise stores is a non-GAAP financial
measure that is provided for comparative purposes only. The Company believes
that its franchisees' method of reporting sales is consistent on a year-to-year
basis.

FISCAL 2002 COMPARED TO FISCAL 2001

CONSOLIDATED OPERATIONS

Total revenues were $1,148.1 million in fiscal 2002, compared with
$1,109.1 million in fiscal 2001. Total revenues increased 3.5% in fiscal 2002,
primarily attributable to a 1.8% increase in same-store sales, an increase in
the number of stores open at year-end from 2,919 to 2,944 and an increase in
revenues from managed vision care programs.

Gross margin was $769.4 million in fiscal 2002, compared with $744.7
million in fiscal 2001, an increase of 3.3%. Gross margin dollars increased
primarily due to higher revenues at Cole Vision. Gross margin percent declined
to 67.0% in fiscal 2002, compared with 67.1% in fiscal 2001. The decline was
attributable to lower gross margin percent at Cole Vision. A shift in sales mix
to products with lower gross margin rates occurred at both Pearle Vision and
Cole Licensed Brands (further discussion is included in the Cole Vision
Segment). The gross margin rate at Things Remembered was the same as the prior
year.

Operating expenses were $741.1 million in fiscal 2002, compared with
$710.0 million in fiscal 2001, an increase of 4.4%. Increased costs of store
payroll, benefits, store occupancy and other store costs to support the increase
in revenues at Cole Vision comprised most of the increase. Operating expenses at
Cole Vision as a percent of sales declined from the prior year by 1.3%. At
Things Remembered, operating expenses increased 5.2% on declining sales,
primarily in occupancy, nonstore overhead and store wages. Store rent and
occupancy expenses increased in fiscal 2002 primarily due to increases in
insurance, taxes and other common area charges. These charges are generally
variable and can increase as mall ownership or tenant occupancy rates change.
Things Remembered nonstore expense increased in fiscal 2002 due primarily to
costs associated with the anticipated settlement of a class action complaint in
California involving overtime compensation (See Note 9 of the Notes to
Consolidated Financial Statements). Legal and settlement costs for this matter
totaled $1.1 million. Nonstore overhead also included costs of $0.5 million for
a new store point of sales system, the implementation of which has subsequently
been indefinitely delayed. Severance costs related to a senior Things Remembered
executive totaled $0.3 million. Store wage costs at Things Remembered increased
due to higher average hourly wage rates and increases in benefits and workers
compensation.

Also included in operating expenses, the Company incurred charges of
approximately $3.4 million in fiscal 2002 for outside audit fees related to the
reaudit of its restated financial statements for the previous two years. The
Company and its optical subsidiaries have been sued by the State of California,
which alleges claims for various statutory violations related to the operation
of 24 Pearle Vision Centers in California (see Note 9 of the Notes to
Consolidated Financial Statements). Legal costs associated with the defense of
this matter totaled $3.5 million in fiscal 2002 and were charged to the Cole
Vision segment. During the fourth quarter of 2002, the Company recorded a
restructuring charge against operating expense of $1.1 million. Of this amount,
$0.6 million was paid and $0.5 million was accrued to accrued liabilities for
ongoing benefits, salary continuation and out placement costs. Charges to the
liability are expected to total $0.4 million through the end of the first
quarter of fiscal 2003, with the remaining costs continuing through the fourth
quarter of fiscal 2003. The restructuring charge was related to a reduction in
workforce of 60 individuals in the corporate office and field management. The
Company expects the functions performed by these individuals to be absorbed by
others. The Company recorded a charge of $0.3 million related to the closing of
the corporate office and relocating it to the Cole National Corporation's
facility in Twinsburg, Ohio. The Company recorded incremental costs of $1.2
million for continuing group medical and basic life insurance coverage for a
group of employees covered under a postemployment benefits plan. Coverage of
these benefits continue until death. In January 2002, the Company approved a
plan freeze of its noncontributory defined benefit pension plan. As a result,
the Company recorded no pension expense in fiscal 2002, compared to a $1.2
million charge in fiscal 2001, primarily in the Cole Vision segment. See Note 6
of the Notes to Consolidated Financial Statements for more information. In
conjunction with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets," (SFAS 144), which
addresses financial accounting and reporting for impairment or disposal of
long-lived assets, the Company evaluated

8

the operating performance of each of its locations. The Company recorded
impairment charges of $0.9 million in fiscal 2002, compared with impairment
charges of $3.7 million in fiscal 2001. The reduction of the impairment charge
was primarily attributable to improvements at Pearle Vision. In November 2002,
the Company changed its paid-time-off (PTO) policy for its employees, and
discontinued the practice of permitting most of its employees to carryover three
leave days from one year to the next. As a result of this change in policy, the
Company reversed $0.5 million of accrued leave into income, as an offset to
operating expense.

The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142) in the first quarter of fiscal 2002. SFAS 142 requires that goodwill
and certain intangible assets deemed to have indefinite useful lives no longer
be amortized, but instead, be subject to at least an annual review for
impairment. With the adoption of this statement, the Company ceased amortization
of goodwill and tradenames as of February 3, 2002. The Company recorded a $5.0
million goodwill and tradename amortization charge in fiscal 2001.

Operating income in fiscal 2002 was $28.3 million compared with $29.7
million in fiscal 2001, a decrease of 4.7%. A decline in operating income at
Things Remembered and the costs associated with the reaudit, restructuring and
legal costs associated with the California Attorney General's action, as well as
the increased costs of postemployment benefits offset improvements at Cole
Vision.

Interest and other (income) expense, consists of interest expense on the
Company's indebtedness, interest income on franchise notes at Pearle Vision,
interest income from temporary investments, and gains and losses from the sale
of assets. Interest and other (income) expense, net, increased to $25.3 million
in fiscal 2002, compared to $24.9 million in fiscal 2001. The Company recorded
$1.3 million lower interest expense in fiscal 2002 primarily due to replacement
of the $150.0 million 9-7/8% Senior Subordinated Notes with the issuance of
8-7/8% Senior Subordinated Notes in May 2002. See Note 3 of the Notes to
Consolidated Financial Statements for further information regarding this
transaction. The Company recognized a gain of $0.7 million from the sale of a
Dallas, Texas facility in the first quarter of fiscal 2001 and lower interest
income from franchise notes and temporary investments.

The effective income tax rate was 103.1 % in fiscal 2002 compared with
110.6 % in fiscal 2001. The difference between the statutory tax rate and the
higher effective tax rates in each fiscal year is primarily due to the provision
for state income taxes, the provision for valuation allowances related to
deferred tax assets for charitable contribution carry-forwards, foreign income,
other non-deductible items, and goodwill amortization (2001 only). A more
complete discussion of income taxes is included in Note 5 of the Notes to
Consolidated Financial Statements.

The results for fiscal 2002 include an extraordinary loss on early
extinguishment of debt of $7.2 million, which is net of an income tax benefit of
$3.9 million. The extraordinary charge represents payment of premiums and other
costs of retiring the Company 9-7/8% Senior Subordinated Notes due 2006 and the
write-offs of unamortized discount and deferred financing fees. See the section
below entitled "Liquidity and Capital Resources" and Note 3 of the Notes to
Consolidated Financial Statements for more information regarding this
transaction.

COLE VISION SEGMENT

Cole Vision revenues were $877.5 million in fiscal 2002, compared with
$836.8 million in fiscal 2001, an increase of 4.9%. Same store sales increased
4.0% at Pearle Vision company-owned stores, primarily reflecting an increase in
average spectacle selling price. Improved merchandise assortment and selling
skills at the store level have resulted in a higher rate of multi-pair purchases
and increased sales of additional features. At Cole Licensed Brands, same-store
sales increased 3.7%, driven by both average spectacle selling price and
increased sales of accessories. New premium product introductions at both Sears
Optical and Target Optical, offset slightly by increased sales of contact
lenses, was a key factor in the average selling price increase. Cole Managed
Vision sales also increased from the prior year, due to increases in claims
revenue and administrative service only (ASO) fees and the addition of laser
procedure revenue.

Gross margin percent declined 0.1% at Cole Vision in fiscal 2002 compared
to fiscal 2001. The decline in gross margin rate was attributable to a change in
sales mix at both Pearle Vision and Cole Licensed Brands. At Pearle, the decline
in margin rate was attributable to increased sales of product to franchisees,
which are sold at lower gross margin rates than retail sales at company-owned
locations. Sales to franchisees offer benefits for the Company, including
producing a more uniform merchandise assortment and consistent brand look across
all stores. Additionally, Pearle's mix of contact lens sales increased, which
also contributed to a decline of the gross margin rate.

At Cole Licensed Brands, the decline in gross margin rate was attributable
to the increased sales of premium product and saleable accessories. Accessories,
which include lens cleaner, lens cloth, clips and other products designed to
care for optical purchases, and premium products, generally are sold at lower
gross margin rates. In addition, Cole Licensed Brands

9

made a strategic decision to lower retail prices of contact lenses in fiscal
2002 to become more competitive. The price decrease was a key factor in the
gross margin rate decline.

Operating expenses as a percent of sales declined at Cole Vision by 1.3%
in fiscal 2002, compared to fiscal 2001. In conjunction with SFAS 144, the
Company evaluated the operating performance of each of its locations. Cole
Vision recorded impairment charges of $0.4 million in fiscal 2002, compared with
impairment charges of $2.8 million in fiscal 2001. The reduction of the
impairment charge was primarily attributable to improvements at Pearle Vision.
At Pearle Vision, store payroll declined as a percent of sales compared to the
prior year due to higher same-store sales combined with reduced hours. The
average hours worked per store per week was reduced 3.3 hours. In addition,
overtime pay declined as a percent to sales compared to last year. Operating
expenses at Cole Licensed Brands declined as a percent to sales compared to last
year due primarily to improvements at Target Optical. Results at Target Optical
improved as the focus changed from aggressive growth to measured growth and
improved operations. Operating expenses at Cole Managed Vision declined as a
percent to sales compared to last year primarily due to the reduction of
processing fees paid to MetLife as claims processing was converted to the
Company's internal systems at a lower cost per claim. Pension expense was $1.0
million lower than the prior year at Cole Vision due to the Company's decision
to freeze the defined benefit pension plan. Operating expenses in fiscal 2002
included legal costs of $3.5 million associated with the California Attorney
General's action mentioned previously.

Operating income at Cole Vision improved to $30.6 million in fiscal 2002,
compared to $15.1 million in fiscal 2001. The revenue increase of $40.7 million
and improved expense leverage were the primary drivers of the increase in
operating income. Results at Target Optical improved as the focus changed from
aggressive growth to measured growth and improved operations. The cessation of
goodwill and tradename amortization resulted in $4.1 million lower expense in
fiscal 2002, compared to fiscal 2001. In addition, the growth in revenue and
improved claims management efficiencies resulted in higher operating income at
Cole Managed Vision. These improvements were offset by the $3.5 million in legal
costs associated with the California Attorney General's action.

THINGS REMEMBERED SEGMENT

Things Remembered sales were $270.6 million in fiscal 2002, compared with
$272.3 million in fiscal 2001, a decrease of 0.6%. The decrease in sales was
primarily due to a same-store sales decrease of 2.5% and a lower number of
stores operating than the prior year. Store count at fiscal year end dropped
from 774 to 770. The same-store sales decline was primarily attributable to a
slowdown in mall traffic during fiscal 2002. Demand for business award and
recognition gifts also declined during the year due to changes in general
economic conditions. Declines in customer count were partially offset by
increases in average transaction value and a 40% growth in the small relatively
still direct channel business.

The gross margin rate at Things Remembered was the same as the prior year.

At Things Remembered, operating expenses grew 5.2% on declining sales,
primarily in occupancy, nonstore overhead and store wages. Store rent and
occupancy charges increased in fiscal 2002 primarily due to increases in
insurance, taxes and other common area charges. These charges are generally
variable and can increase as mall ownership or tenant occupancy rates change.
Things Remembered nonstore expense increased in fiscal 2002 due primarily to
costs associated with the pending settlement of a class action complaint in
California involving overtime compensation (See Note 9 of the Notes to
Consolidated Financial Statements). Legal and settlement cost for this matter
totaled $1.1 million. Nonstore overhead also included costs of $0.5 million for
a new store point of sales system, the implementation of which has subsequently
been indefinitely delayed. Severance costs related to a senior Things Remembered
executive totaled $0.3 million. Store wage costs at Things Remembered increased
due to higher average hourly wage rates and increases in benefits and workers
compensation. Things Remembered recorded impairment charges of $0.5 million in
fiscal 2002, compared with impairment charges of $0.9 million in fiscal 2001.

Operating income decreased to $15.1 million in fiscal 2002 from $24.1
million in fiscal 2001. Reductions in revenue, higher mall occupancy costs,
higher payroll and overhead costs were the primary causes of the reduction in
operating income.

FISCAL 2001 COMPARED TO FISCAL 2000

CONSOLIDATED OPERATIONS

Total revenue was $1,109.1 million in fiscal 2001, compared with $1,077.9
million in fiscal 2000. Total revenue increased 2.9% in fiscal 2001, primarily
attributable to a 1.4% increase in same-store sales, an increase in the number
of

10

stores opened at year-end from 2,813 to 2,919 and an increase in claims revenue
from managed vision care programs. These increases were partially offset by one
less week of revenue in fiscal 2001. Fiscal 2000 included 53 weeks of
operations, compared to 52 weeks in fiscal 2001. The 53rd week in fiscal 2000
provided approximately $17.6 million in revenue.

Gross margin was $744.7 million in fiscal 2001, compared with $718.3
million in fiscal 2000, an increase of 3.7%. Gross margin dollars increased
primarily due to higher revenues at Cole Vision and improvements in gross margin
rate at Things Remembered. Gross margin percent increased to 67.1% in fiscal
2001, compared to 66.6% in fiscal 2000. The increase was attributable to gross
margin rate improvements at both Cole Vision and Things Remembered. The gross
margin rate at Cole Vision was higher than the prior year, although it declined
in the second half of fiscal 2001, as more customers selected merchandise from
Cole Licensed Brands' new, higher cost frame assortment at Sears. Higher revenue
from managed care programs partially offset the impact of a decline in frame
margins in fiscal 2001. At Things Remembered, the gross margin rate improved
1.0% compared to the prior year, reflecting the improvement in average selling
price, lower merchandise acquisition costs, and less inventory shrinkage.

Operating expenses were $710.0 million in fiscal 2001, compared with
$695.5 million in fiscal 2000, an increase of 2.1%. Increased costs of store
payroll, store occupancy and other store costs to support the increase in
revenue at Cole Vision and the Target Optical expansion comprised most of the
increase. Operating expenses at Cole Vision declined as a percent of sales
compared to last year by 0.4%. Productivity gains at Pearle and reduced managed
care claims processing costs contributed to the improvement. Further discussion
is included in the Cole Vision segment. In conjunction with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS 121), which establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets, the Company evaluated the operating performance of each
of its locations. In fiscal 2000, Pearle Vision recorded $3.5 million of
impairment charges related to the performance of 39 store locations. This
compared to impairment charges of $2.6 million for 28 locations in fiscal 2001,
a reduction of $0.9 million. At Things Remembered, operating expenses decreased
by $1.5 million. Lower costs of store payroll together with reduced bonus
expenses were partially offset by higher costs of store rent and occupancy.
Things Remembered recorded impairment charges in accordance with SFAS 121 of
$0.9 million in fiscal 2001 compared to $0.3 million the prior year.

Goodwill and tradename amortization was $5.0 million in fiscal 2001
compared to $5.2 million in fiscal 2000.

In fiscal 2001, the Company's operating income improved 68.7% from $17.6
million in fiscal 2000 to $29.7 million in fiscal 2001. Improvements were made
at both segments. At Cole Vision, operating income improved 88.7% from the prior
year due primarily to the reduced impairment charge and to productivity
improvements. Things Remembered operating income improved 7.1% despite a decline
in sales. Lower costs of store payroll and an increase in gross margin rate
mitigated the reduction in revenues. During fiscal 2000, the Company recorded a
restructuring charge against operating expense of $1.8 million. Of this amount,
$1.6 million was paid and $0.2 million was recorded to accrued liabilities for
salary continuation. Charges to the liability were $0.2 million in fiscal 2001.
The restructuring charge was related to a reduction in workforce of 44
individuals in the corporate office. In addition, a reduction in corporate bonus
expense of $0.8 million contributed to the improvement in operating income. The
improvement in operating income occurred despite one less week of sales, and the
absorption of increased losses from the continued expansion of Target Optical.

Interest and other (income) expense, net, decreased $1.2 million in fiscal
2001, due to one less week of interest expense, no seasonal borrowing during
fiscal 2001, and a $0.7 million gain from the sale of a Dallas, Texas office
facility in the first quarter of fiscal 2001.

The effective tax rate was 110.6% in fiscal 2001 compared with 8.7% in
fiscal 2000. The higher effective tax rate in 2001 was primarily due to
increased provision for state income taxes and an increase in the valuation
allowances related to deferred tax assets for contribution carryforwards. See
Note 9 of Notes to Consolidated Financial Statements for further discussion.

COLE VISION SEGMENT

Cole Vision revenues were $836.8 million in fiscal 2001, compared with
$801.8 million in fiscal 2000, an increase of 4.4%. Same-store sales increased
2.6% at Pearle Vision company-owned stores, reflecting an increase in average
selling price for the first nine months and an increase in the number of
transactions for the fourth quarter. The increase in average selling price was
due, in part, to not repeating a "50% off frames" promotion that ran during the
entire first quarter of fiscal 2000. At Cole Licensed Brands, same-store sales
increased 3.8%, primarily reflecting an increase in the average spectacle
selling price. The 53rd week in fiscal 2000 provided approximately $14.4 million
in revenue.

The gross margin rate at Cole Vision was higher compared to the prior
year, although it declined in the second half of 2001, as more customers
selected merchandise from Cole Licensed Brands' new, higher cost frame
assortment at Sears. Higher revenue from Cole Managed Vision partially offset
the impact of decline in frame margins in fiscal 2001.

11

Operating expenses increased 3.8%, but declined 0.4% as a percent of sales
compared to last year at Cole Vision. Increased store payroll, occupancy and
other store costs to support the increase in revenues at Cole Vision comprised
most of the increase. Operating expenses at Pearle decreased from the prior
year. Pearle Vision recorded $2.6 million of impairment charges in accordance
with SFAS 121 in fiscal 2001 compared to an impairment charge of $3.5 million in
fiscal 2000. In addition, payroll costs were favorable due to productivity
improvements. A reduction of the average weekly hours worked per store relative
to fiscal 2000 was achieved. Other store costs at Pearle were lower than fiscal
2000, primarily due to write-offs of $0.8 million in third party receivables in
fiscal 2000. Expenses declined as a percent of sales compared to last year at
Cole Managed Vision due to a reduction in the processing cost per claim and
increased volume and leverage gains in capitated business.

Operating income at Cole Vision improved to $15.1 million in fiscal 2001,
compared to $8.0 million in fiscal 2000. The reduction of the impairment charge
at Pearle Vision and other operating improvements at both Pearle and Cole
Managed Vision were the primary reasons for the increase. Gains in retail
operations were tempered by the loss of revenues associated with the 53rd week
in fiscal 2000 as well as the expansion of Target Optical. The Company opened
107 Target Optical stores during fiscal 2001. The losses associated with the
Target Optical expansion are expected to decline as older stores ramp up to
profitability, as a result of the new focus on opening only in Super Target
stores and with a switch from fixed to percentage rent. The average time to
store level profitability is also expected to become shorter.

THINGS REMEMBERED SEGMENT

Things Remembered revenues were $272.3 million in fiscal 2001, compared
with $276.1 million in fiscal 2000, a decrease of 1.4%. The largest contributor
to this year over year decrease was the 53rd week in fiscal 2000, which provided
approximately $3.2 million in revenue. The decrease in revenues was due to a
same-store sales decrease of 1.8%, attributable to the general slowdown in mall
traffic which worsened following the events of September 11 and from not
repeating a merchandise clearance promotion that was held in fiscal 2000.
However, the average transaction selling price increased as a result of sales of
new merchandise at higher average unit retails, more personalization and fewer
promotions.

At Things Remembered, the gross margin rate improved 1.0 percentage points
compared to the prior year, reflecting the improvement in average selling price,
lower merchandise acquisition costs and less inventory shrinkage.

Operating expenses decreased $1.5 million in fiscal 2001 compared to the
prior year due to lower costs of store payroll and bonus expense. These
improvements were partially offset by higher costs of rent and occupancy. Things
Remembered recorded impairment charges in accordance with SFAS 121 of $0.9
million in fiscal 2001 compared to $0.3 million in the prior year.

Operating income increased to $24.1 million in fiscal 2001 from $22.5
million in fiscal 2000, primarily due to lower operating expenses and
improvements in gross margin rate.

RECONCILIATION OF SAME-STORE SALES GROWTH

Same-store sales growth is a non-GAAP financial measure, which includes
deferred warranty sales on a cash basis and does not reflect provisions for
returns and remakes and certain other items. The Company's current systems do
not gather data on these items on an individual store basis. Adjustments to the
cash basis sales information accumulated at the store level are made for these
items on an aggregate basis. As a retailer, the Company believes that a measure
of same-store performance is important for understanding its operations. The
Company calculates same-store sales for stores opened for at least twelve
months. A reconciliation of same-store sales to revenue reported on a GAAP basis
follows:

12

2002 2001 2000
----------- ----------- -----------
(Dollars in thousands)

Current year same-store sales $ 993,776 $ 961,240 $ 949,023
Prior year same-store sales(1) 976,291 948,060 915,286
Percent change 1.8% 1.4% 3.7%

Current year same-store sales $ 993,776 $ 961,240 $ 949,023

Adjustment for:
Sales at new and closed stores 30,185 25,510 26,504
Extended warranties (2,701) (1,846) (102)
Order vs. customer receipt (478) 4,341 (3,148)
Returns, remakes and refunds (1,183) (751) (707)
Other (37) 188 (968)
----------- ----------- -----------
Store sales 1,019,562 988,682 970,602

Nonstore revenues 157,042 146,631 128,344

Intercompany eliminations (28,485) (26,190) (21,040)
----------- ----------- -----------

GAAP Basis Net Revenue $ 1,148,119 $ 1,109,123 $ 1,077,906
=========== =========== ===========

(1) Prior year same-store sales differ from current year same-store sales in
the prior year due to store openings and closings.

LIQUIDITY AND CAPITAL RESOURCES

The Company and its operating subsidiaries have a working capital line of
credit. As of fiscal year end 2002, the total commitment was $75.0 million and
availability under the credit facility totaled $62.7 million after reduction for
commitments under outstanding letters of credit. There are no working capital
borrowings outstanding as of February 1, 2003. The maximum amount outstanding
during fiscal 2002 was $2.3 million and the daily average borrowing during
fiscal 2002 was approximately $31,000.

The credit facility, which is guaranteed by Cole National Corporation and
the Company, requires the Company and its principal operating subsidiaries to
comply with various operating covenants that restrict corporate activities,
including covenants restricting the ability of the subsidiaries to incur
additional indebtedness, pay dividends, prepay subordinated indebtedness,
dispose of certain investments or make acquisitions. The credit facility also
requires the Company to comply with certain financial covenants, including
covenants regarding minimum interest coverage and maximum leverage. On November
25, 2002, the Company received a waiver from the lenders under the credit
facility, which expired on December 31, 2002, of certain covenants to
accommodate anticipated changes in the accounting treatment for the sale of
certain optical warranties and the costs associated with auditing the Company's
restated consolidated financial statements. On December 19, 2002, the credit
agreement was amended to accommodate the anticipated changes due to the
restatement. The Company received a waiver dated May 9, 2003, of the maximum
leverage coverage test for the fiscal year end 2002 and the first quarter of
fiscal 2003. During that waiver period the maximum leverage test was adjusted to
accommodate the effect of the restatement on the Company's financial statements.
This waiver will expire on the earlier of May 17, 2003, if the Lenders do not
receive the Form 10-K and 10-Q's for the first through third fiscal quarters of
2002; on May 23, 2003, if certain additional financial information is not
received by the Lenders; or June 30, 2003. The Company is currently in
compliance with the covenants in the credit agreement and currently expects to
meet the waiver conditions. The Company currently expects to complete a
permanent amendment to the credit agreement on or before June 30, 2003. However,
there is no assurance that the Company will be successful in its effort to
complete such an amendment by that time, if at all. The Company believes that,
even if it is unsuccessful in its effort to complete such an amendment, it will
have sufficient liquidity from internal and other external sources.

On May 22, 2002, the Company issued $150.0 million of 8-7/8% Senior
Subordinated Notes due 2012. The notes are unsecured and mature on May 15, 2012.
Net proceeds from the notes offering, together with cash on hand, were used to
retire $150.0 million of 9-7/8% senior subordinated notes due 2006 and pay
premium and other costs associated with retiring those notes. An extraordinary
loss on early extinguishment of debt of $7.2 million, which is net of an income
tax benefit of $3.9 million, representing the payment of premiums and other
costs of retiring the notes and write-offs of unamortized discount and deferred
financing fees, was recorded in the second quarter of fiscal 2002.

13

The indentures pursuant to which the 8-5/8% notes and the 8-7/8% notes
were issued contain certain optional and mandatory redemption features and other
financial covenants, including restrictions on the ability of the Company to
incur additional indebtedness, pay dividends or make other restricted payments
to Cole National Corporation. The indentures also permit payments to Cole
National Corporation for certain tax obligations and for administrative expenses
not to exceed 0.25% of the Company's net sales. See Note 3 of the Notes to
Consolidated Financial Statements. The Company may from time to time purchase
its outstanding notes in the open market or refinance them depending on capital
market conditions.

No significant principal payment obligations are due under the Company's
outstanding indebtedness until 2007, when the $125.0 million Senior Subordinated
debt is due. The ability of Cole National Corporation and its subsidiaries to
satisfy their obligations will be primarily dependent upon the future financial
and operating performance of the subsidiaries and upon Cole National
Corporation's ability to renew or refinance borrowings or raise additional
capital through equity financing or sales of assets.

The Company maintains a noncontributory defined benefit pension plan that
covers employees who have met eligibility service requirements and are not
members of certain collective bargaining units. The pension plan calls for
benefits to be paid to eligible employees at retirement, based primarily upon
years of service and their compensation levels near retirement. In January 2002,
the Company approved a plan freeze for all participants except for participants
who are at least age 50 or older with 10 years of benefit service as of March
31, 2002. These participants had their average pay frozen as of March 31, 2002,
and covered compensation frozen as of December 31, 2001, but their benefit
service will continue to grow. The Company's policy is to fund amounts necessary
to keep the pension plan in full force and effect, in accordance with the
Internal Revenue Code and the Employee Retirement Income Security Act of 1974.

During fiscal 2002, the Company changed the discount rate used to
calculate its projected benefit obligation from 7.5% to 6.5%. The change in the
discount rate reflects the overall decline in market interest rates and has led
to an increase in the projected benefit obligation at February 1, 2003. In
addition, the stock market declines have reduced the fair value of the pension
plan's assets. As a result of these factors, the pension plan was underfunded by
$16.0 million as of February 1, 2003. The Company has written off a prepaid
pension asset of $4.6 million and recorded the minimum pension liability by
charging $20.6 million to accumulated other comprehensive income (loss) in
stockholder's equity. This charge will not impact the actual funding
requirements of the plan or the Company's compliance with debt covenants.

Cash and cash equivalents at year-end were $42.0 million at February 1,
2003, compared to $63.4 million at February 2, 2002. Operations generated net
cash of $39.6 million in fiscal 2002, compared with $52.6 million in fiscal 2001
and $31.8 million in fiscal 2000. The primary reason for the $13.0 million
decrease in cash provided from operations in fiscal 2002 compared to fiscal 2001
was changes in working capital. Changes in working capital resulted in a source
of funds totaling $1.0 million in fiscal 2002 compared to a source of funds
totaling $6.8 million in fiscal 2001. During fiscal 2001, the Company undertook
an extensive re-merchandising program at Pearle Vision, which contributed to an
inventory reduction of $9.8 million. Changes in receivables and other assets
resulted in a use of $11.4 million in cash in fiscal 2002, compared to a source
of $0.5 million in fiscal 2001. The increase in receivables was primarily due to
increased sales and corresponding receivables at Cole Vision. Changes in
accounts payable and other liabilities resulted in a source of cash of $9.0
million in fiscal 2002 compared to a use of cash of $2.9 million in fiscal 2001.
The increase in other liabilities was due to accrued audit fees, deferred
revenues, accrued retirement plans, benefit obligations and bonus accruals.
Changes in accrued taxes resulted in a use of cash of $0.8 million in fiscal
2002 primarily due to a decrease in current year accruals for federal and state
income taxes.

Net cash from investing activities resulted in a use of funds of $47.0
million in fiscal 2002, compared to $30.4 million in fiscal 2001. Capital
expenditures, which accounted for most of the cash used for investing, were
$39.4 million, $33.8 million and $26.5 million in fiscal 2002, 2001 and 2000,
respectively. The majority of capital expenditures were for store fixtures,
equipment and leasehold improvements for new stores, including the Target
Optical expansion, and remodeling of existing stores. A payment was made to
Target Corporation in fiscal 2002 in consideration of prior years' capital
expenditures, which had been accrued. The Company paid approximately $5.6
million, $6.9 million and $8.4 million for systems development costs in fiscal
2002, 2001 and 2000, respectively. Such costs have been capitalized and are
being amortized over the systems' estimated useful lives. The Company used $1.6
million and $0.8 million in fiscal 2002 and fiscal 2001, respectively, for
contingent payments in connection with the prior acquisition of MetLife's
managed vision business. In fiscal 2001, net proceeds of $12.5 million were
received from the sale of two facilities no longer required for operations and
from the sale and leaseback of Pearle Vision's former headquarters office
building in Dallas, Texas and a portion of the land.

For fiscal 2003, the Company plans to expand the number of stores,
including opening approximately 23 Target Optical stores, and to remodel and
relocate other stores. The Company expects to open in new Super Target stores
that will offer Target Optical excellent, highly visible and high traffic
locations. As a result, the Company's emphasis on Target Optical has moved from
opening stores to improving their operations. The Company currently estimates
that capital

14

expenditures in fiscal 2003 will be approximately $35.5 million, excluding
acquisition and systems development costs. Approximately $3.9 million is
estimated to be incurred for systems development costs in 2003, which will be
capitalized and subsequently amortized.

Net cash used for financing activities totaled $14.1 million in fiscal
2002. Net cash provided by financing totaled $4.0 million and $9.7 million in
fiscal 2001 and 2000, respectively. In May 2002, the Company issued $150.0
million of 8-7/8% Senior Subordinated Notes due May 2012. The net proceeds of
the issuance and cash on hand were used to retire all of the Company's $150.0
million 9-7/8% Senior Subordinated Notes due 2006. Finance fees and early
repayment of the 9-7/8% notes resulted in a net cash usage of $14.2 million.
Advances to affiliates totaled $6.5 million and $3.5 million in fiscal 2002 and
fiscal 2001, respectively. Advances from affiliates totaled $13.6 million in
fiscal 2000.

The Company believes that funds provided from operations, including cash
on hand, along with funds available under the credit facility, will provide
adequate sources of liquidity to allow its operating subsidiaries to continue to
expand the number of stores and to fund capital expenditures and systems
development costs.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

The Company leases a substantial portion of its equipment and facilities
including laboratories, office and warehouse space, and retail locations. In
addition, Cole Vision operates departments in various host stores and pays
occupancy costs solely as a percentage of sales. A more complete discussion of
the Company's lease and license commitments is included in Note 8 of the Notes
to Consolidated Financial Statements.

The Company guarantees future minimum lease payments for certain store
locations leased directly by Pearle franchisees. The term of these guarantees
range from one to ten years of which many are limited to periods that are less
than the full term of the leases involved. A more complete discussion of the
Company's guarantees is included in Note 8 of the Notes to Consolidated
Financial Statements.

The following table summarizes certain payments due by period for
contractual obligations including operating leases:

Payments Due by Period ()
--------------------------------------------------------------------------------
Less Than After
Contractual Obligations Total 1 Year 1-3 Years 4-5 Years 5 Years
- ---------------------------- --------- -------- --------- --------- ---------

Long-term debt $ 275,000 $ -- $ -- $ 125,000 $ 150,000
Capital lease obligations 1,210 328 576 306 --
Operating leases 381,983 78,973 127,824 84,342 90,844
Sublease agreements (43,223) (10,765) (15,825) (9,793) (6,840)
--------- -------- --------- --------- ---------
Total contractual obligations $ 614,970 $ 68,536 $ 112,575 $ 199,855 $ 234,004
========= ======== ========= ========= =========

RECENTLY ISSUED ACCOUNTING STANDARDS

The Company adopted SFAS 142, "Goodwill and Other Intangible Assets" (SFAS
142) in the first quarter of fiscal 2002. This statement requires that goodwill
and certain intangible assets deemed to have indefinite useful lives no longer
be amortized, but instead be subject to at least an annual review for
impairment. Other intangible assets with finite lives are amortized over their
useful lives. With the adoption of this statement, the Company ceased
amortization of goodwill and tradenames as of February 3, 2002. Amortization of
goodwill and tradenames totaled $5.0 million in fiscal 2001 and $5.2 million in
fiscal 2000.

During the second quarter of fiscal 2002, the Company completed the
transitional impairment testing of goodwill as required by SFAS 142. Based on
the findings of its outside valuation advisor, the Company has concluded that
there was no impairment of either its goodwill or tradenames at the adoption
date of the new accounting standard, effective February 3, 2002. The Company has
elected to perform its annual tests for potential impairment as of the first day
of the Company's fourth quarter. Based on its annual tests performed in the
fourth quarter of fiscal 2002, the Company has concluded that there was no
impairment of its goodwill or tradenames. As part of the restatement, the
Company and its outside valuation advisor

15

reviewed the previously completed impairment testing and confirmed that there
was no impairment of either goodwill or tradenames.

The Financial Accounting Standards Board (FASB) has issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of SFAS Statement
No. 13, and Technical Corrections" (SFAS 145). SFAS 145 states that the
rescission of SFAS No. 4 shall be applied in fiscal years beginning after May
15, 2002. Any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does not meet the criteria in
Accounting Principles Board (APB) Opinion 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for
classification as an extraordinary item shall be reclassified as operating
expenses. The Company will adopt SFAS 145 as of the beginning of fiscal 2003. As
a result, the loss on early extinguishment of debt reported as an extraordinary
item for the year ended February 1, 2003, will be reclassified at that time. The
pretax loss from the early extinguishment of debt will be presented as a
separate line within interest and other (income) expenses and the related income
tax benefit will reduce the reported income tax provision. Other portions of the
statement are not applicable to the Company.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). This statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company adopted SFAS 146 on January 1, 2003. The adoption had no
effect on the Company's financial position or operations.

The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosures" (SFAS 148) which amends SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). SFAS 148 provides alternate methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require more prominent and more frequent disclosures
in the financial statements about the effects of stock-based compensation. The
Company has adopted the disclosure provisions of SFAS 148 as of fiscal 2002.

The FASB has also issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143), and SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 143 provides guidance for legal
obligations arising from the retirement of long-lived assets. SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 was adopted during fiscal 2002 and had no effect on the
Company's financial position or operations. SFAS 143 will be adopted during
fiscal 2003 and is not expected to have a material effect on the Company's
financial position or operations.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The Company adopted the fair value recognition provision
of this interpretation for guarantees issued or modified after December 31,
2002, which did not have a material effect on the Company's financial position
or operations. The disclosure provisions of the interpretation have been adopted
for the year ended February 1, 2003.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which requires the Company to disclose and
under certain conditions consolidate variable interest entities, as defined. The
Company does not have any variable interest entities which would require
disclosure or consolidation.

In November 2002, the Emerging Issues Task Force of the FASB ("EITF")
reached a consensus on Issue 02-16, "Accounting by a Reseller for Cash
Consideration Received from a Vendor" (Issue 02-16). Certain aspects of the
issue were effective immediately, which were adopted did not have a significant
impact on operations. The remaining portion of Issue 02-16 will be adopted
during fiscal 2003 and is not expected to have a material effect on the
Company's financial position or operations.

CONTINGENCIES

The Company and its optical subsidiaries have been sued by the State of
California, which alleges claims for various statutory violations related to the
operation of 24 Pearle Vision Centers in California. The claims include untrue
or misleading advertising, illegal dilation fees, unlawful advertising of eye
exams, maintaining an optometrist on or near the premises of a registered
dispensing optician, unlawful advertising of an optometrist, unlicensed
practice of optometry, and

16

illegal relationships between dispensing opticians, optical retailers and
optometrists. The action seeks unspecified damages, restitution and injunctive
relief. Although the State of California obtained a preliminary injunction to
enjoin certain advertising practices and from charging dilation fees in July
2002, the terms of the injunction have not had and are not expected to have any
material effect on the Company's operations. In addition, both the State and the
Company have appealed the preliminary injunction. The injunction is not expected
to have a material effect on the Company's operations. Although the Company
believes it is in compliance with California law and intends to continue to
defend the issues raised in the case vigorously, it may be required to further
modify its activities or might be required to pay damages and or restitution in
currently undeterminable amount if it is not successful, the cost of which, as
well as continuing defense costs, might have a material adverse effect on the
Company's operating results and cash flow in one or more periods.

Things Remembered, Inc. is in the process of settling a class action
complaint in California alleging that the putative class (alleged to include 200
members) were improperly denied overtime compensation in violation of California
law. The action sought unspecified damages, interest, restitution, as well as
declaratory and injunctive relief and attorneys' fees. On February 3, 2003,
Things Remembered and the plaintiffs reached an agreement to resolve the lawsuit
for $562,500. The settlement is subject to court approval. A liability of
$562,500 was recorded in the fourth quarter of 2002.

Cole National Corporation is defending a purported class action lawsuit
alleging claims for various violations of federal securities laws related to the
Company's publicly reported revenues and earnings. The action, which proposes a
class period of March 23, 1999 through November 26, 2002 and names Cole
National Corporation and certain present and former officers and directors as
defendants, seeks unspecified compensatory damages, punitive damages "where
appropriate", costs, expenses and attorneys' fees. Following the Company's
announcement in November 2002 of the restatement of the Company's financial
statements (see Note 11 of the Notes to Consolidated Financial Statements), the
Securities and Exchange Commission began an inquiry into Cole National
Corporation's previous accounting. The course of this or further litigation or
investigations arising out of the restatement of the Company's financial
statements cannot be predicted. In addition, under certain circumstances the
Company would be obliged to indemnify the individual current and former
directors and officers who are named as defendants in litigation or who are or
become involved in an investigation. The Company believes it has insurance that
should be available with respect to litigation and any indemnification
obligations. However, if the Company is unsuccessful in defending against any
such litigation, and if its insurance coverage is not available or is
insufficient to cover its expenses, indemnity obligations and liability, if any,
the litigation and/or investigation may have a material adverse effect on the
Company's financial condition, cash flow and results of operations.

As described in Part I, Item 3, "Legal Proceedings", Cole National Group,
Inc. has been named as a defendant along with numerous other retailers, in
patent infringement litigation challenging the defendants' use of bar code
technology. The Company believes it has available defenses and does not expect
any liability. However, if Cole National Group, Inc. were to be found liable for
an infringement, it might have a material adverse effect on our operating
results and cash flow in the period incurred.

In the ordinary course of business, the Company is involved in various
other legal proceedings. The Company is of the opinion that the ultimate
resolution of these matters will not have a material adverse effect on the
results of operations, liquidity or financial position of the Company.

SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements requires the Company to estimate
the effect of various matters that are inherently uncertain as of the date of
the financial statements. Each of these required estimates varies in regard to
the level of judgment involved and its potential impact on the Company's
reported financial results. Estimates are deemed significant when a different
estimate could have reasonably been used or where changes in the estimate are
reasonably likely to occur from period to period, and would materially impact
the Company's financial condition, changes in financial condition or results of
operations. The Company's significant accounting policies are discussed in Note
1 of the Notes to Consolidated Financial Statements. Critical estimates inherent
in these accounting policies are discussed in the following paragraphs.

Allowance for Uncollectible Accounts

The Company records an allowance for uncollectible accounts to reflect
management's best estimate of losses inherent in its portfolio of receivables
from Cole Licensed Brands' host stores, Pearle Vision franchisees and managed
vision care accounts. The allowance is established through a charge to the
provision and represents amounts of current and past due receivable balances
which management estimates will not be collectible. The Company calculates the
allowance for uncollectible accounts using historical experience, current
trends, credit policy and aging reports. An analysis, including historical
performance, break-even analysis and payment arrangements is performed on
delinquent accounts. The Company's calculation is reviewed by management to
assess whether additional consideration is required to appropriately estimate
losses in the receivable portfolio. Management believes its receivables are
adequately reserved under current conditions. Any significant deterioration in
the economic environment could materially affect these expectations.

17

Valuation of Inventories

Inventories are recorded at the lower of cost or market based on the
first-in, first-out (FIFO) method for the optical inventories and based on the
weighted average cost method for the gift inventories. The Company records a
reserve for future inventory cost markdowns to be taken for inventory not
expected to be part of its ongoing merchandise offering. The reserve is
estimated based on historical information regarding sell through for similar
products. The Company records a reserve for estimated shrinkage based on various
factors including sales volume, historical shrink results and current trends.
Management believes its inventories are appropriately valued.

Valuation of Long-Lived Assets

Property and equipment, systems development, and other finite intangibles
are amortized over their estimated useful lives. Useful lives are based on
management's estimates of the period that the assets will generate revenue.
These assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
initial screening is performed on all long-lived assets. Store locations less
than three years old and stores relocated within three years of fiscal year-end
are excluded from testing. If the undiscounted future cash flows from the
long-lived asset are less than the carrying value, the Company recognizes a loss
equal to the difference between the discounted future cash flow and the carrying
value. Management's estimate of future cash flow is based on our experience,
knowledge and market data. However, these estimates can be affected by factors
such as future store profitability, real estate demand and economic conditions
that can be difficult to predict.

Goodwill, noncompete agreements and tradename assets were amortized over
their estimated useful economic life using the straight-line method and are
carried at cost less accumulated amortization. Beginning with fiscal year 2002,
all goodwill and tradename amortization ceased in accordance with Statement of
Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142); and both goodwill and tradenames are tested at least
annually for impairment. The Company adopted the first day of the fourth fiscal
quarter for the annual impairment review.

Valuation of Deferred Income Taxes

Deferred tax assets and liabilities are recognized based on the
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. Management regularly reviews its deferred tax assets
for recoverability and establishes a valuation allowance for tax assets based on
historical taxable income, projected future taxable income and the expected
timing of the reversals of existing temporary differences. In determining the
valuation allowance related to deferred tax assets, management estimates taxable
income into the future. The assessment of whether or not a valuation allowance
is required often requires significant judgment including the forecast of future
taxable income and the evaluation of tax planning initiatives. Adjustments to
the deferred tax valuation allowance are made to earnings in the period when
such assessment is made.

Allowance for Remakes and Returns

Sales are recorded in accordance with the Company's policy for revenue
recognition and deferred revenue discussed in the summary of Significant
Accounting Policies. Revenues have been reduced by allowances for remakes of
product and returns. The estimated allowances are calculated as a percentage of
sales and based upon historical return percentages.

Managed Vision Underwriting Results

The Company sells capitated managed vision care plans which generally have
a duration of one year. Based upon its experience, the Company believes that it
can predict utilization and claims experience under these plans with a high
level of confidence. Underwriting results are recognized using an estimated
percentage of claims revenue. Each quarter, a portion of the resulting gain is
reserved for potential variances between predicted and actual results. The
reserves are reconciled following the end of each plan year.

Self-Insurance Reserves

Due to the significant deductible under its insurance policies, the
Company is primarily self-insured for property loss, workers' compensation,
automobile and general liability costs. The liabilities are determined
actuarially based on claims filed and estimates for claims incurred but not
reported. These liabilities are not discounted. In estimating the obligation
associated with incurred losses, the Company utilizes loss development factors
prepared by independent third party actuaries. These development factors utilize
historical data to project the future development of incurred losses. Loss
estimates are adjusted based upon actual claims settlements and reported claims.

18

Defined Benefit Retirement Plans

The plan obligations and related assets of defined benefit retirement
plans are presented in Note 6 of the Notes to Consolidated Financial
Statements. Plan assets, which consist primarily of marketable equity and debt
instruments, are valued using market quotations. Plan obligations and annual
pension expense are determined by independent actuaries and through the use of a
number of assumptions. Key assumptions in measuring the plan obligations include
the discount rate and the estimated future return on plan assets. In determining
the discount rate, the Company utilizes the yield on high-quality, fixed income
investments currently available with maturities corresponding to the anticipated
timing of the benefit payments. Asset returns are based upon the anticipated
average rate of earnings expected on the invested funds of the plans. At
February 1, 2003, the weighted average actuarial assumptions of the Company's
plans were: discount rate 6.5%, and long-term rate of return on plan assets
9.0%.

FORWARD LOOKING STATEMENTS

The Company's management expects its continued emphasis on becoming better
retailers to have a positive impact on the Company's operations in fiscal 2003.
However, the difficult economy and weak mall traffic negatively impacted store
performance early in the 2003 fiscal year, and it is difficult to predict when
the current conditions in the retail industry are likely to improve. For the
first quarter of fiscal 2003, the Company expects low single digit negative
same-store sales in the Cole Vision segment continuing similar trends seen in
the fourth quarter of fiscal 2002. The Company expects positive same-store sales
at Things Remembered for the first quarter of fiscal 2003, compared to a
negative fourth quarter in fiscal 2002. Legal and accounting fees associated
with the restatement, the resulting litigation and the SEC inquiry and the
litigation in California are likely to have a negative impact on results in
fiscal 2003.

The Company's expectations and beliefs concerning the future contained in
this document are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those forecasted due to a variety of factors that can adversely affect the
Company's operating results, liquidity and financial condition such as risks
associated with potential adverse consequences of the restatement of the
Company's financial statements, including those resulting from litigation or
government investigations, restrictions or curtailment of the Company's credit
facility and other credit situations, costs and other effects associated with
the California litigation, the timing and achievement of improvements in the
operations of the optical business, the results of Things Remembered, which is
highly dependent on the fourth quarter holiday season, the nature and extent of
disruptions of the economy from terrorist activities or major health concerns
and from governmental and consumer responses to such situations, the actual
utilization of Cole Managed Vision funded eyewear programs, the success of new
store openings and the rate at which new stores achieve profitability, the
Company's ability to select, stock and price merchandise attractive to
customers, success of systems development and integration, competition in the
optical industry, integration of acquired businesses, economic and weather
factors affecting consumer spending, operating factors affecting customer
satisfaction, including manufacturing quality of optical and engraved goods, the
Company's relationships with host stores and franchisees, the mix of goods sold,
pricing and other competitive factors, and the seasonality of the Company's
business.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's major market risk exposure is to changes in foreign currency
exchange rates, which could impact its results of operations and financial
condition. Foreign exchange risk arises from the Company's exposure to
fluctuations in foreign currency exchange rates because the Company's reporting
currency is the United States dollar. Management seeks to minimize the exposure
to foreign currency fluctuations through natural internal offsets to the fullest
extent possible. A 10% adverse movement in quoted foreign currency exchange
rates could result in a loss in fair value of investments of $0.4 million.

During the third quarter of 2002, the Company entered into interest swap
agreements to take advantage of favorable market interest rates. These
agreements require the Company to pay an average floating interest rate based on
six month LIBOR plus 4.5375% to a counter party while receiving a fixed rate on
$50.0 million of the Company's $125.0 million 8-5/8% Senior Subordinated Notes
due 2007. The agreements mature August 15, 2007 and qualify as fair value
hedges. The LIBOR rate is reset in arrears. The reset effective on February 15,
2003 for six month LIBOR was 1.34% and resulted in a rate of 5.87750% applied
from the inception date of the swaps through February 1, 2003. At February 1,
2003 the fair value of the swap agreement was an unrealized gain of
approximately $0.8 million.

A change in six month LIBOR would effect the interest cost associated with
the $50.0 million notional value of the swap. A 50% change (approximately 67
basis points) in the market rates of interest for six month LIBOR as compared to
the 5.87750% rate in effect for fiscal 2002 would increase the Company's annual
interest cost by $0.3 million.

19

In addition, the Company is exposed to changes in the fair value of our
debt portfolio, primarily resulting from the effects of changes in interest
rates. The Company utilizes interest rate swaps to manage its exposure.
Management believes that its use of these financial instruments is in the
Company's best interests. The Company does not enter into financial instruments
for trading purposes.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information required by this item appears on pages F-1 through F-35 of
this Form 10-K and is incorporated herein by this reference. Other financial
statements and schedules are filed herewith as "Financial Statement Schedules"
pursuant to Item 15.

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

On June 13, 2002, upon the recommendation of the Company's Audit
Committee, the Board of Directors determined to replace Arthur Andersen LLP
("Arthur Andersen") as the Company's independent public accountants and to
appoint Deloitte & Touche LLP ("Deloitte & Touche") to serve as its independent
public accountants for the fiscal year 2002. The change in auditors was
effective June 13, 2002.

Arthur Andersen's reports on the Company's consolidated financial
statements for each of the fiscal years ended February 2, 2002 and February 3,
2001 did not contain an adverse opinion or disclaimer of opinion, nor were such
reports qualified or modified as to uncertainty, audit scope or accounting
principles.

During the Company's two fiscal years ended February 2, 2002 and February
3, 2001 and the subsequent interim period preceding the decision to change
independent public accountants, there were no disagreements with Arthur Andersen
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to Arthur
Andersen's satisfaction, would have caused them to make reference to the subject
matter of the disagreement in connection with their audit reports on the
Company's consolidated financial statements for such years, and there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

In the years ended February 2, 2002 and February 3, 2001 and through the
date of their appointment, the Company did not (i) receive a written report or
oral advice from Deloitte & Touche with respect to either the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements, or (ii) consult with Deloitte & Touche on any
other matter that was either the subject of a disagreement, within the meaning
of Item 304(a)(1)(iv) of Regulation S-K, or any "reportable event," as that term
is defined in Item 304(a)(1)(v) of Regulation S-K.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item has been omitted pursuant to General
Instruction I of Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item has been omitted pursuant to General
Instruction I of Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item has been omitted pursuant to General
Instruction I of Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item has been omitted pursuant to General
Instruction I of Form 10-K.

ITEM 14. CONTROLS AND PROCEDURES

(a) Immediately following the Signature section of this Annual Report are
certifications of the Company's Chief Executive Officer and Chief Financial
Officer required in accordance with Section 302 of the Sarbanes-Oxley Act of
2002 (the "Section 302 Certification"). This portion of our Annual Report on
Form 10-K is our disclosure of the results of our control

20

evaluation referred to in paragraphs (4), (5) and (6) of the Section 302
Certification and should be read in conjunction with the Section 302
Certification for a more complete understanding of the topics presented.

In November 2002, the Company determined it needed to restate its
previously issued financial statements for the timing of the recognition of
revenues earned on the sale of extended warranty contracts. The Company issued a
press release on November 26, 2002 announcing the restatement of its historical
consolidated financial statements beginning with its 1998 fiscal year. The
Company subsequently determined that it needed to make other changes to
previously issued financial statements in addition to the timing of the
recognition of warranty revenues. The adjustments have a significant negative
impact on the Company's previously reported revenue, net income, and earnings
per share. See Note 11 of the Notes to Consolidated Financial Statements for
further discussion of the restatement.

In March 2003, the Audit Committee engaged outside counsel to conduct an
inquiry into the issues surrounding the restatement. The results and conclusions
of that inquiry have been considered in the preparation of the accompanying
financial statements.

Within 90 days prior to the filing date of this Form 10-K, the Company
carried out an evaluation, under the supervision and with the participation of
its Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a-15
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), as
amended, of the effectiveness of the design and operation of its disclosure
controls and procedures. In making this evaluation, the Company has considered
matters relating to its restatement of previously issued financial statements,
including the substantial process that was undertaken to ensure that all
material adjustments necessary to restate the previously issued financial
statements were recorded. The Company believes that certain of the restatement
adjustments occurred because certain of the Company's control processes and
procedures related to the matters underlying such adjustments were not
effective.

In connection with the audit of the Company's financial statements for the
2002 fiscal year and the restated financial statements for the 2001 and 2000
fiscal years, Deloitte & Touche reported to management and the Board of
Directors on April 30, 2003 that certain deficiencies existed during the audit
period in the design or operation of the Company's internal accounting controls
which, constituted material weaknesses pursuant to standards established by the
American Institute of Certified Public Accountants. Such deficiencies related to
the application or selection of accounting principles, the use of management
judgment and estimates, and the adequacy of account details and reconciliations.

In order to improve the effectiveness of its control processes and
procedures, the Company has taken a number of actions within the past year. The
Company searched for and hired a new Chief Financial Officer from outside the
Company, and filled the position of Corporate Controller. The Audit Committee
approved a charter for the Internal Audit function; the Internal Audit staff was
strengthened and Internal Audit's role was expanded. The Company established an
internal representation requirement, whereby the operating executive and
financial officer of each business unit and major staff area are required to
certify on a quarterly basis the accuracy of the financial statements and the
adequacy of the control processes and procedures within that business unit or
staff area. With the approval of the Board of Directors, the Company amended its
Business Code of Conduct, and required that all management employees certify in
writing that they comply with it. The Business Code of Conduct includes
procedures for the receipt, retention and treatment of complaints received from
employees regarding among, other things, accounting and internal accounting
control matters. The Company is currently revising its Finance and Accounting
Policies and Procedures Manual.

Based in part upon these changes, the Company's Chief Executive Officer
and Chief Financial Officer concluded that as of the evaluation date, the
Company's disclosure controls and procedures were reasonably designed to ensure
that information required to be disclosed by the Company in the reports it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.

(b) Other than as described above, since the evaluation date by the
Company's management of its internal controls, there have not been any
significant changes in the internal controls or in other factors that could
significantly affect the internal controls.

21

PART IV

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

(a)(1) and (2) Financial Statements and Financial Statement Schedules

The consolidated financial statements and the related
financial statement schedules filed as part of this Form 10-K for
Cole National Group, Inc. and its consolidated subsidiaries are
located as set forth in the index on page F-1 of this report.

(a)(3) Exhibits

See Exhibit Index on pages X-1 through X-3.

(b) Reports on Form 8-K

The Company filed a Form 8-K (Item 5) on November 26, 2002,
which attached a press release announcing that it would restate
certain of its historical financial statements as a result of a
change in the Company's accounting treatment for the timing of the
recognition of revenues earned on the sale of optical warranties.

The Company filed a Form 8-K (Item 5) on December 19, 2002,
announcing that it had amended covenants in its agreement with the
bank lenders for its $75.0 million credit facility to accommodate
anticipated changes in the accounting treatment for the sale of
certain optical warranties and the auditing costs associated with
restating the Company's consolidated financial statements.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

No annual report or proxy statement covering Cole National Group's last
fiscal year has been or will be circulated to security holders.

22

SIGNATURES

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

COLE NATIONAL GROUP, INC.

May 16, 2003 By: /s/ Ann M. Holt
----------------------------------------------
Ann M. Holt
Senior Vice President and Corporate Controller

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.

/s/ Jeffrey A. Cole Chairman and Chief Executive Officer May 16, 2003
- -------------------------- and Director (Principal Executive Officer)
Jeffrey A. Cole

/s/ Larry Pollock President and Chief Operating Officer May 16, 2003
- -------------------------- and Director
Larry Pollock

/s/ Lawrence E. Hyatt Executive Vice President and May 16, 2003
- -------------------------- Chief Financial Officer
Lawrence E. Hyatt (Principal Financial Officer)

/s/ Ann M. Holt Senior Vice President and Corporate Controller May 16, 2003
- -------------------------- (Principal Accounting Officer)
Ann M. Holt

* Director May 16, 2003
- --------------------------
Ronald E. Eilers

* Director May 16, 2003
- --------------------------
Timothy F. Finley

* Director May 16, 2003
- --------------------------
Irwin N. Gold

* Director May 16, 2003
- --------------------------
Melchert Frans Groot

* Director May 16, 2003
- --------------------------
Peter V. Handal

* Director May 16, 2003
- --------------------------
Charles A. Ratner

* Director May 16, 2003
- --------------------------
Walter J. Salmon

* The undersigned, by signing her name hereto, does sign and execute this
report on Form 10-K pursuant to the Powers of Attorney executed by the
above-named officers and directors of Cole National Group and which
are being filed herewith with the Securities and Exchange Commission on
behalf of such officers and directors.

/s/ Ann M. Holt
- ------------------------------
Ann M. Holt, Attorney-in-Fact

23

CERTIFICATION

I, Jeffrey A. Cole, certify that:

1. I have reviewed this annual report on Form 10-K of Cole National Group, Inc.;

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

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

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

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

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

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

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

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

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

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: May 16, 2003
/s/ Jeffrey A. Cole
-------------------------------------
Jeffrey A. Cole
Chairman and Chief Executive Officer

24

CERTIFICATION

I, Lawrence E. Hyatt, certify that:

1. I have reviewed this annual report on Form 10-K of Cole National Group, Inc.;

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

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

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

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

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

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

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

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

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

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: May 16, 2003
/s/ Lawrence E. Hyatt
---------------------------------
Lawrence E. Hyatt
Executive Vice President and
Chief Financial Officer

25

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Page
----

Independent Auditors' Report F - 2

Consolidated Balance Sheets as of February 1, 2003 and February 2, 2002 (as restated) F - 3

Consolidated Statements of Operations for the 52 weeks ended February 1, 2003,
the 52 weeks ended February 2, 2002 (as restated) and the 53 weeks ended February 3, 2001(as restated) F - 4

Consolidated Statements of Cash Flows for the 52 weeks ended February 1, 2003, the
52 weeks ended February 2, 2002 (as restated) and the 53 weeks ended February 3, 2001(as restated) F - 5

Consolidated Statements of Stockholder's Equity and Comprehensive Income (Loss)
for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 (as restated)
and the 53 weeks ended February 3, 2001(as restated) F - 6

Notes to Consolidated Financial Statements F - 7

FINANCIAL STATEMENT SCHEDULES:

Schedule I - Condensed Financial Information of Registrant F - 32

Schedule II - Valuation and Qualifying Accounts F - 35

All financial statement schedules not included have been omitted because
they are not applicable or because the required information is otherwise
furnished.

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of Cole National Group, Inc.:

We have audited the accompanying consolidated balance sheets of Cole
National Group, Inc. and subsidiaries (the "Company") as of February 1, 2003 and
February 2, 2002, and the related consolidated statements of operations,
stockholder's equity and comprehensive income (loss), and cash flows for each of
the three fiscal years in the period ended February 1, 2003. Our audits also
included the financial statement schedules listed in the Index at Item 15(a)(2).
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Cole National Group, Inc. and
subsidiaries as of February 1, 2003 and February 2, 2002, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 1, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.

As discussed in Notes 1 and 2 to the consolidated financial statements,
the Company changed its method of accounting for goodwill and other intangible
assets effective February 3, 2002.

As discussed in Note 11, the accompanying fiscal 2001 and 2000
consolidated financial statements have been restated.

/s/Deloitte & Touche LLP

Cleveland, Ohio
May 15, 2003

F-2

COLE NATIONAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

February 1, February 2,
2003 2002
--------- ---------
(As restated,
see Note 11)

Assets
Current assets:
Cash and cash equivalents $ 41,962 $ 63,418
Accounts receivable, less allowances of
$3,063 in 2002 and $3,228 in 2001 50,462 41,299
Current portion of notes receivable 4,517 2,723
Inventories 118,119 119,203
Prepaid expenses and other 26,523 29,013
Deferred income taxes 32,116 27,161
--------- ---------
Total current assets 273,699 282,817

Property and equipment, at cost 312,413 298,918
Less - accumulated depreciation and amortization (192,805) (180,536)
--------- ---------
Total property and equipment, net 119,608 118,382

Notes receivable, excluding current portion, less allowances
of $3,010 in 2002 and $5,209 in 2001 2,971 4,709
Deferred income taxes 26,026 22,156
Other assets 44,658 43,690
Other intangibles, net 50,903 45,996
Goodwill, net 85,557 85,543
--------- ---------
Total assets $ 603,422 $ 603,293
========= =========

Liabilities and Stockholder's Equity
Current liabilities:
Current portion of long-term debt $ 232 $ 229
Accounts payable 67,579 64,863
Payable to affiliates, net 78,561 85,477
Accrued interest 7,805 6,340
Accrued liabilities 91,968 92,324
Accrued income taxes 516 373
Deferred revenue 37,592 35,401
--------- ---------
Total current liabilities 284,253 285,007

Long-term debt, net of discount and current portion 276,553 274,574
Other long-term liabilities 36,498 17,919
Deferred revenue, long-term 11,559 11,049

Stockholder's equity:
Common stock -- --
Paid-in capital 195,326 194,886
Accumulated other comprehensive loss (14,393) (1,105)
Accumulated deficit (186,374) (179,037)
--------- ---------
Total stockholder's equity (5,441) 14,744
--------- ---------
Total liabilities and stockholder's equity $ 603,422 $ 603,293
========= =========

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

F-3

COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)

Fifty-Two Fifty-Two Fifty-Three
Weeks Ended Weeks Ended Weeks Ended
February 1, February 2, February 3,
2003 2002 2001
----------- ----------- -----------

(As restated, see Note 11)
Net revenue $ 1,148,119 $ 1,109,123 $ 1,077,906

Cost and expenses:
Cost of goods sold 378,704 364,392 359,608
Operating expenses 741,145 710,055 695,551
Goodwill and tradename amortization -- 5,010 5,168
----------- ----------- -----------
Total costs and expenses 1,119,849 1,079,457 1,060,327
----------- ----------- -----------

Operating income 28,270 29,666 17,579

Interest and other (income) expense:
Interest expense 26,659 28,020 28,587
Interest and other (income) (1,398) (3,153) (2,539)
----------- ----------- -----------
Total interest and other (income) expense, net 25,261 24,867 26,048
----------- ----------- -----------

Income (loss) before income taxes 3,009 4,799 (8,469)

Income tax provision (benefit) 3,104 5,309 (736)
----------- ----------- -----------

Income (loss) before extraordinary loss (95) (510) (7,733)

Extraordinary loss on early extinguishment of debt,
net of $3.9 million tax benefit (7,242) -- --
----------- ----------- -----------

Net income (loss) $ (7,337) $ (510) $ (7,733)
=========== =========== ===========

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

F-4

COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

Fifty-Two Fifty-Two Fifty-Three
Weeks Ended Weeks Ended Weeks Ended
February 1, February 2, February 3,
2003 2002 2001
----------- ----------- -----------

(As restated, see Note 11)
Cash flows from operating activities:
Net income (loss) $ (7,337) $ (510) $ (7,733)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 35,630 38,905 39,113
Impairment losses 899 3,738 3,954
Deferred income tax provision (benefit) 1,411 2,929 (2,835)
Extraordinary loss on early extinguishment of debt, net of tax 7,242 -- --
Noncash interest and other, net 766 1,471 1,264
Gain on sale of fixed assets -- (683) --
Increases (decreases) in cash resulting from changes
in assets and liabilities:
Accounts and notes receivable, prepaid expenses and other assets (11,408) 484 (5,722)
Inventories 1,205 9,811 (6,258)
Accounts payable, accrued liabilities and other liabilities 8,951 (2,855) 6,533
Accrued interest 1,465 (70) 285
Accrued and refundable income taxes 804 (571) 3,246
----------- ----------- -----------
Net cash provided by operating activities 39,628 52,649 31,847
----------- ----------- -----------

Cash flows from investing activities:
Purchases of property and equipment (39,360) (33,785) (26,544)
Net proceeds from sales and sale/leasebacks of fixed assets -- 12,481 --
Systems development costs (5,626) (6,918) (8,444)
Contingent payments for acquisition of business (1,645) (847) --
Other, net (329) (1,360) (640)
----------- ----------- -----------
Net cash used for investing activities (46,960) (30,429) (35,628)
----------- ----------- -----------

Cash flows from financing activities:
Repayment of long-term debt (158,288) (135) (681)
Proceeds from issuance of long-term debt 150,000 -- --
Payment of deferred financing fees (6,058) -- (422)
Advances from (to) affiliates, net (6,510) (3,482) 13,572
Increase (decrease) overdraft balances 6,210 7,872 (2,704)
Other, net 522 (275) (108)
----------- ----------- -----------
Net cash (used for) provided by financing activities (14,124) 3,980 9,657
----------- ----------- -----------

Cash and cash equivalents:
Net decrease during the period (21,456) 26,200 5,876
Balance, beginning of period 63,418 37,218 31,342
----------- ----------- -----------

Balance, end of period $ 41,962 $ 63,418 $ 37,218
=========== =========== ===========

Supplemental disclosures:
Interest paid $ 24,068 $ 26,810 $ 27,067
=========== =========== ===========
Income taxes paid $ 1,268 $ 1,049 $ 844
=========== =========== ===========

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

F-5

COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S
EQUITY AND COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)

February 1, February 2, February 3,
2003 2002 2001
--------- --------- ---------
(As restated, see Note 11)

Common Stock:
Balance at beginning of period $ -- $ -- $ --
Issuance of stock -- -- --
--------- --------- ---------
Balance at end of period -- -- --
--------- --------- ---------

Paid-in Capital:
Balance at beginning of period 194,886 195,066 195,017
Shares held in deferred compensation (58) (34) (54)
Exercise of stock options 498 (146) 103
--------- --------- ---------
Balance at end of period 195,326 194,886 195,066
--------- --------- ---------

Accumulated Other Comprehensive Income (Loss), net of tax:
Balance at beginning of period (1,105) (664) (192)
Minimum pension liability, net of tax $6,987 (13,665) -- --
Foreign currency translation adjustment 377 (441) (472)
--------- --------- ---------
Other comprehensive loss (13,288) (441) (472)
--------- --------- ---------
Balance at end of period (14,393) (1,105) (664)
--------- --------- ---------

Accumulated Deficit:
Balance at beginning of period (179,037) (178,527) (170,794)
Net income (loss) (7,337) (510) (7,733)
--------- --------- ---------
Balance at end of period (186,374) (179,037) (178,527)
--------- --------- ---------

Total Stockholder's Equity $ (5,441) $ 14,744 $ 15,875
========= ========= =========

Total Comprehensive Income (Loss):
Net income (loss) $ (7,337) $ (510) $ (7,733)
Other comprehensive income (loss) per above (13,288) (441) (472)
--------- --------- ---------
Total comprehensive income (loss) $ (20,625) $ (951) $ (8,205)
========= ========= =========

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

F-6

COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
---------------------

Cole National Group, Inc. is a wholly owned subsidiary of Cole
National Corporation. The consolidated financial statements include the
accounts of Cole National Group and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany transactions
have been eliminated in consolidation.

Fiscal years end on the Saturday closest to January 31 and are
identified according to the calendar year in which they begin. For
example, the fiscal year ended February 1, 2003 is referred to as "fiscal
2002." Fiscal 2002 and fiscal 2001 each consisted of 52-week periods;
fiscal 2000 consisted of a 53-week period.

Nature of Operations
--------------------

The Company is a specialty service retailer operating in both host
and nonhost environments, whose primary lines of business are optical
products and services and personalized gifts. The Company sells its
products through 2,480 company-owned retail locations and 464 franchised
locations in 50 states, Canada, and the Caribbean. In connection with its
optical business, the Company is a managed vision care benefit provider
and claims payment administrator whose programs provide comprehensive
eyecare benefits primarily marketed directly to large employers, health
maintenance organizations (HMO) and other organizations. The Company has
two reportable segments: Cole Vision and Things Remembered (see Note 7).

Use of Estimates
----------------

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

Significant estimates are required in determining the allowance for
uncollectible accounts, inventory valuation, depreciation, amortization
and recoverability of long-lived assets, deferred income taxes, remakes
and returns allowances, managed vision underwriting results,
self-insurance reserves, and retirement and post-employment benefits.

Reclassifications
-----------------

Certain reclassifications have been made to prior year financial
statements and the notes to conform to the current year presentation.

Revenue Recognition and Deferred Revenue
----------------------------------------

Revenues include sales of goods and services, including delivery
fees to retail customers at company-operated stores, sales of merchandise
inventory to franchisees and other outside customers, other revenues from
franchisees such as royalties based on sales and initial franchise fees,
and capitation and other fees associated with Cole Vision's managed vision
care business.

Revenues from merchandise sales and services, net of estimated
returns and allowances, are recognized at the time of customer receipt or
when the related goods are shipped direct to the customer and all
significant obligations of the Company have been satisfied. The reserve
for returns and allowances is calculated as a percentage of sales based on
historical return percentages. Capitation revenues are accrued when due
under related contracts at the agreed upon per member, per month rates.
Administrative service revenue is recognized when services are provided
over the contract period and the Company's customers are obligated to pay.
Additionally, the Company sells discount programs which have 12-month
terms. Revenues from discount programs are deferred and amortized over the
12-month term.

F-7

Additionally, the Company sells separately priced extended warranty
contracts with terms of coverage of 12 and 24 months. Revenues from the
sale of these contracts are deferred and amortized over the lives of the
contracts while the costs to service the warranty claims are expensed as
incurred. Incremental costs directly related to the sale of such
contracts, such as sales commissions and percentage rent, are deferred in
prepaid expenses and other, and charged to expense in proportion to the
revenue recognized.

A reconciliation of the changes in deferred revenue from the sale of
warranty contracts follows (dollars in thousands):

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

Deferred revenues:
Beginning balance $ 46,450 $ 44,604
Warranty contracts sold 53,023 50,074
Amortization of deferred revenue (50,322) (48,228)
-------- --------

Ending balance $ 49,151 $ 46,450
======== ========

Franchise revenues based on sales by franchisees are accrued as
earned. Initial franchise fees are recorded as revenue when all material
services or conditions relating to the sale of the franchises have been
substantially performed or satisfied by the Company and when the related
store begins operations.

Things Remembered sells memberships in its Rewards Club(TM) program,
which allows members to earn rebates based on their accumulated purchases.
The Company defers and amortizes the membership fee revenue over the life
of the membership. The rebates which can only be used to offset the price
of future customer purchases are recognized as a reduction of revenue
based on the rebates earned and the estimated future redemptions. The
cumulative liability for unredeemed rebates is adjusted over time based on
actual experience and trends with respect to redemption.

Consideration Received from Vendors
-----------------------------------

The Company receives consideration from vendors as either rebates on
the purchase of the inventory or as reimbursement of costs incurred to
sell the vendors' products. Rebates received for purchases are deferred
and recorded as a reduction of cost of sales when the product is sold or
based upon estimated inventory turns.

Reimbursement for specific, incremental and identifiable advertising
costs incurred by the Company to sell the vendors' products are recorded
as a reduction of those costs at the time the expense is recognized in the
income statement. Co-op funds calculated as a percentage of inventory
purchases are offset against the related expense at the time the inventory
is sold.

Managed Vision Underwriting Results
-----------------------------------

The Company sells capitated managed vision care plans which
generally have a duration of one year. Based upon its experience, the
Company believes that it can predict utilization and claims experience
under these plans with a high level of confidence. Underwriting results
are recognized using an estimated percentage of claims revenue. Each
quarter, a portion of the resulting gain is reserved for potential
variances between predicted and actual results. The reserves are
reconciled following the end of each plan year.

Other Managed Vision Expenses
-----------------------------

Cost of printing member cards, program descriptions and related
distribution costs for capitation and administrative service contracts are
expensed when incurred. Expenses for discount programs are recognized over
the 12-month contract period.

Advertising and Direct Response Marketing
-----------------------------------------

Cost for newspaper, television, radio and other media advertising
are expensed when incurred and production costs are expensed the first
time the advertising occurs or when the service is performed, if later.
Costs for certain

F-8

direct response advertising are capitalized if such direct response
advertising costs result in future economic benefit. Such costs related to
direct response advertising are amortized in proportion to when the
revenues are recognized, not to exceed 90 days. Generally, other direct
response program costs that do not meet the capitalization criteria are
expensed the first time advertising occurs.

The total cost of advertising charged to operating expense is net of
amounts reimbursed by franchisees based on a percentage of their sales.
Advertising expense is summarized as follows (dollars in thousands):

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

Gross advertising expense $ 85,215 $ 84,191 $ 86,133
Less: Franchisee contribution (21,303) (20,486) (20,458)
-------- -------- --------
Net advertising expense $ 63,912 $ 63,705 $ 65,675
======== ======== ========

Gains (Losses) from the Sale and Franchising Company Operated Stores
--------------------------------------------------------------------

Gains (losses) from the sale and franchising company operated stores
include the gains or losses from the sale of existing Pearle operated
stores to new and existing franchisees, reduced by transaction costs and
direct administrative costs of franchising. The Company recognizes these
gains (losses) when the sale transaction closes, the franchisee has a
minimum amount of the purchase price at risk and the Company is satisfied
that the franchisee can meet its financial obligations. If the criteria
for gain recognition are not met, the gain is deferred to the extent a
remaining financial obligation in connection with the sales transaction
exists. Deferred gains are recognized when these criteria are met or as
the Company's financial obligation is reduced. Gains (losses) are recorded
as decreases (increases) to operating expenses and were $711,000 and
$44,000 in fiscal 2002 and fiscal 2001, respectively. No gains (losses)
were recorded in fiscal 2000.

Store Opening Expenses
----------------------

Store opening expenses are charged to operations in the period the
expenses are incurred.

Cash and Cash Equivalents
-------------------------

Cash and cash equivalents consist of cash in banks, investments in
money market accounts, treasury bills, commercial paper, and marketable
securities with maturities of three months or less and credit card
receivables recorded at the time of sale. Credit card receivables were
$4.2 million and $3.8 million as of February 1, 2003 and February 2, 2002,
respectively.

In addition, overdrafts resulting from outstanding checks at the end
of each reporting period are reclassified as current liabilities in either
accounts payable or accrued expenses. This reclassification to accounts
payable amounted to $28.4 million and $22.2 million at February 1, 2003
and February 2, 2002, respectively and to accrued expenses amounted to
$3.2 million at February 1, 2003 and February 2, 2002.

Valuation of Inventories
------------------------

Inventories are recorded at the lower of cost or market based on the
first-in, first-out (FIFO) method for the optical inventories and based on
the weighted average cost method for the gift inventories. The Company
records a valuation reserve for future inventory cost markdowns to be
taken for inventory not expected to be part of its ongoing merchandise
offering. The reserve is estimated based on historical information
regarding sell through for similar products. The Company records a reserve
for estimated shrinkage based on various factors including sales volume,
historical shrink results and current trends.

Notes Receivable
----------------

Notes from Pearle's franchisees are included in notes receivable.
The franchise notes are collateralized by inventory, equipment, and
leasehold improvements at each location, generally bear interest at the
prime rate plus 3.0%, and require monthly payments of principal and
interest over periods of up to ten years.

F-9

Property and Equipment
----------------------

Property and equipment are stated at cost. Repairs and maintenance
costs that extend the life of the asset are capitalized. Depreciation is
provided principally by using the straight-line method over the estimated
useful life of the related assets, generally 2 to 10 years for furniture,
fixtures and equipment, 2 to 25 years for leasehold improvements and 5 to
40 years for buildings and improvements.

Property and equipment at cost, consist of the following at February
1, 2003 and February 2, 2002 (dollars in thousands):

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

Land and building $ 2,414 $ 2,423
Furniture, fixtures and equipment 197,680 187,255
Leasehold improvements 112,319 109,240
-------- --------
Total property and equipment $312,413 $298,918
======== ========

Capitalized Lease Property
--------------------------

Capitalized lease assets are amortized using the straight-line
method over the term of the lease, or in accordance with practices
established for similar owned assets if ownership transfers to the Company
at the end of the lease term. Capital lease assets are included in
property and equipment and are $1.3 million and $0.9 million, net of
accumulated amortization, in fiscal 2002 and 2001, respectively.
Amortization is included with depreciation expense and was $308,000,
$215,000 and $333,000 in fiscal 2002, 2001 and 2000.

Software and Development Costs
------------------------------

Software development and implementation costs are expensed until the
Company has determined that the software will result in probable future
economic benefits and management has committed to funding the project.
Thereafter, all direct costs to develop or obtain internal use software,
including internal costs, are capitalized in other assets and amortized
over the estimated useful life of the software using the straight-line
method. Amortization periods range from two to seven years and begin when
the software is placed in service. At February 1, 2003 and February 2,
2002, these costs, net of accumulated amortization, were $31,665,000 and
$34,314,000, respectively. Amortization of software development costs in
fiscal 2002, 2001 and 2000 was $7,865,000, $7,659,000 and $7,695,000,
respectively.

Goodwill and Other Intangible Assets
------------------------------------

Goodwill, noncompete agreements and tradename assets were amortized
over their estimated useful economic life using the straight-line method
and are carried at cost less accumulated amortization. Beginning with
fiscal year 2002, all goodwill and tradename amortization ceased in
accordance with Statement of Financial Accounting Standard (SFAS) No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), and both goodwill and
tradenames are tested at least annually for impairment. The Company
adopted the first day of the fourth fiscal quarter for the annual
impairment review. Other intangible assets with finite lives are amortized
over their estimated useful lives based on management's estimates of the
period that the assets will generate revenue.

Long-Lived Asset Recoverability
-------------------------------

Long-lived assets, including intangible assets, are reviewed for
impairment when facts and circumstances indicate that the carrying value
of the asset may not be recoverable. When necessary, impaired assets are
written down to estimated fair value based on the best information
available. Estimated fair value is generally based on either appraised
value or measured by discounting estimated future cash flows. Considerable
management judgment is necessary to estimate discounted future cash flows.
Accordingly, actual results could vary significantly from such estimates.
Impairment charges include the write-down of long-lived assets at stores
that were assessed for impairment because changes in circumstances
indicate the carrying value of an asset may not be recoverable. Impairment
charges recorded to operating expenses by segment follows (dollars in
thousands):

F-10

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

Cole Vision $444 $2,848 $3,672
Things Remembered 455 890 282
---- ------ ------

Total impairment charges $899 $3,738 $3,954
==== ====== ======

Unamortized Debt Issuance Cost
------------------------------

Financing costs incurred in connection with obtaining long-term debt
are capitalized in other assets and amortized over the life of the related
debt using the effective interest method. At February 1, 2003 and February
2, 2002, deferred financing costs net of accumulated amortization were
$6,976,000 and $4,483,000, respectively. Amortization of financing costs
included in interest expense in fiscal 2002, 2001 and 2000 was $1,128,000,
$1,150,000 and $1,102,000, respectively.

Income Taxes
------------

The Company is included in the consolidated federal income tax
returns of Cole National Corporation and has been charged (credited) an
amount equal to the taxes that would have been payable by it if it were a
corporation filing a separate return. Income taxes are accounted for under
the asset and liability method. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. This method also requires the recognition of future
tax benefits such as net operating loss carryforwards, to the extent that
realization of such benefits is more likely than not. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities from a change in tax rates is recognized in income in the
period that includes the enactment date. The Company includes interest on
prior year taxes in income tax expense.

Derivatives and Hedging Activity
--------------------------------

The interest rate swap agreements utilized by the Company are
designated as fair value hedges of the underlying fixed rate debt
obligations and are recorded at fair value as an increase in noncurrent
assets or liabilities and an increase or decrease in long-term debt. These
interest rate swaps qualify for the short-cut method for assessing hedge
effectiveness under the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). Changes in fair
value of the interest rate swaps are offset by the changes in fair value
of the underlying debt.

Self Insurance
--------------

Due to the significant deductible under its insurance policies, the
Company is primarily self-insured for property loss, workers'
compensation, automobile and general liability costs. The liabilities are
determined actuarially based on claims filed and estimates for claims
incurred but not reported. These liabilities are not discounted.

Accrued Liabilities
-------------------

Accrued liabilities consist of the following (dollars in thousands):

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

Accrued payroll and related liabilities $31,617 $27,859
Customer deposits 15,882 14,961
Other 44,469 49,504
------- -------
Accrued liabilities $91,968 $92,324
======= =======

Other Long-Term Liabilities
---------------------------

Other long-term liabilities consist primarily of certain employee
benefit obligations, deferred lease credits and other lease-related
obligations, and other obligations not expected to be paid within 12
months. Deferred lease credits are amortized on a straight-line basis over
the life of the applicable lease.

F-11

Foreign Currency Translation
----------------------------

The assets and liabilities of the Company's foreign subsidiary are
translated to United States dollars at the rates of exchange on the
balance sheet date. Income and expense items are translated at average
rates of exchange for the foreign subsidiary. Translation adjustments are
presented as a component of accumulated other comprehensive income within
stockholder's equity.

Fair Value of Financial Instruments
-----------------------------------

Due to their short-term nature, the carrying value of the Company's
cash and cash equivalents, credit card and other receivables, and
short-term borrowings approximate fair value. The fair value of the notes
receivables has not been determined due to nonmarketability and the nature
of relationship between the Company and franchisees. Fair value estimates
for the Company's derivative and debt instruments are based on market
prices when available or are derived from financial valuation
methodologies such as discounted cash flow analyses.

Capital Stock
-------------

At February 2, 2002 and February 3, 2001, there were 1,100 shares of
common stock, par value $.01 per share, authorized, issued and
outstanding.

Earnings Per Common Share
-------------------------

Earnings per common share and weighted average number of common
shares outstanding data for 2002, 2001 and 2000 have been omitted as the
presentation of such information, considering the Company is a wholly
owned subsidiary of Cole National Corporation, is not meaningful.

Related Party Transaction
-------------------------

Cole National Corporation allocates certain expenses to the Company
for Director fees, certain public company expenses and professional fees.
Amounts allocated to the Company were $0.5 million, $0.6 million and $0.6
million in fiscal 2002, 2001 and 2000, respectively. The balance of
payable to affiliates is due on demand.

Stock-Based Compensation
------------------------

Cole National Corporation has various stock-based compensation plans
in which key employees of the Company are eligible to participate. The
Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees", for Cole National Corporation's stock-based compensation
plans. The Company measures compensation expense for employee stock
options as the aggregate difference between the market value of Cole
National Corporation's common stock and the exercise price of the options
on the date that both the number of shares the grantee is entitled to
receive and the exercise price are known. Compensation expense associated
with Cole National Corporation's restricted stock grants are not allocated
to the Company. For Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" (SFAS 123) purposes, the
fair value of each option granted was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
risk-free interest rates of 4.6%, 4.8% and 6.2% for grants in fiscal 2002,
2001 and 2000, respectively, volatility of 49-50%, 47-49% and 45-47% in
fiscal 2002, 2001 and 2000, respectively, and expected lives of six years
for options granted in all fiscal years. The weighted average fair value
of options granted during fiscal 2002, 2001 and 2000 at the date of grant
was $9.50, $6.31 and $3.59, respectively. Tax benefits from stock-based
compensation activity are allocated to the Company. Pro forma information
relating to the fair value of stock-based compensation is summarized as
follows:

2002 2001 2000
------- ------- -------
(Dollars in thousands)

Net income (loss)
Reported income (loss) $(7,337) $ (510) $(7,733)
Compensation cost included in determination
of net income as reported, net of tax -- -- --
Compensation cost as if fair value based method
had been applied to all awards, net of tax (2,199) (1,208) (1,394)
------- ------- -------

Pro forma net income (loss) $(9,536) $(1,718) $(9,127)
======= ======= =======

Retirement Plans
----------------

The Company accounts for its defined benefit pension plans and its
nonpension postretirement benefit plans using actuarial models required by
SFAS No. 87, "Employers' Accounting for Pensions" (SFAS 87) and SFAS No.

F-12

106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (SFAS 106), respectively. These models use an attribution
approach that generally spreads individual events over the service lives
of the employees in the plan. The Company accounts for other
post-employment benefits under SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" (SFAS 112), which requires the recognition of the
obligation to provide benefits awarded to certain individuals.

Recently Issued Accounting Standards
------------------------------------

The Company adopted SFAS 142, "Goodwill and Other Intangible Assets"
(SFAS 142) in the first quarter of fiscal 2002. This statement requires
that goodwill and certain intangible assets deemed to have indefinite
useful lives no longer be amortized, but instead be subject to at least an
annual review for impairment. Other intangible assets with finite lives
are amortized over their useful lives. With the adoption of this
statement, the Company ceased amortization of goodwill and tradenames as
of February 3, 2002. Amortization of goodwill and tradenames totaled $5.0
million in fiscal 2001 and $5.2 million in fiscal 2000.

During the second quarter of fiscal 2002, the Company completed the
transitional impairment testing of goodwill as required by SFAS 142. Based
on the findings of its outside valuation advisor, the Company has
concluded that there was no impairment of either its goodwill or
tradenames at the adoption date of the new accounting standard, effective
February 3, 2002. The Company has elected to perform its annual tests for
potential impairment as of the first day of the Company's fourth quarter.
Based on its annual tests performed in the fourth quarter of fiscal 2002,
the Company has concluded that there was no impairment of its goodwill or
tradenames. As part of the restatement, the Company and its outside
valuation advisor reviewed the previously completed impairment testing and
confirmed that there was no impairment of either goodwill or tradenames.

The Financial Accounting Standards Board (FASB) has issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of SFAS
Statement No. 13, and Technical Corrections" (SFAS 145). SFAS 145 states
that the rescission of SFAS No. 4 shall be applied in fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in APB Opinion 30 for classification as an
extraordinary item shall be reclassified as operating expenses. The
Company will adopt SFAS 145 as of the beginning of fiscal 2003. As a
result, the loss on early extinguishment of debt reported as an
extraordinary item for the year ended February 1, 2003 will be
reclassified at that time. The pretax loss from the early extinguishment
of debt will be presented as a separate line within interest and other
(income) expenses and the related income tax benefit will reduce the
reported income tax provision. Other portions of the statement are not
applicable to the Company.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The provisions of
this statement were effective for exit or disposal activities initiated
after December 31, 2002. The Company adopted SFAS 146 on January 1, 2003.
The adoption had no effect on the Company's financial position or
operations.

The FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosures" (SFAS 148) which amends SFAS
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 148
provides alternate methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require more prominent and more frequent disclosures in the financial
statements about the effects of stock-based compensation. The Company has
adopted the disclosure provisions of SFAS 148 for fiscal 2002.

The FASB has also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143) and SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 143 provides
guidance for legal obligations arising from the retirement of long-lived
assets. SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 was adopted during
fiscal 2002 and had no effect on the Company's financial position or
operations. SFAS 143 will be adopted during fiscal 2003 and is not
expected to have a material effect on the Company's financial position or
operations.

In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" (FIN 45). This
interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee. The
Company adopted the fair value recognition provision of this
interpretation for guarantees issued or

F-13

modified after December 31, 2002, which did not have a material effect on
the Company's financial position or operations. The disclosure provisions
of the interpretation have been adopted for the year ended February 1,
2003.

In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46), which requires the
Company to disclose and under certain conditions consolidate variable
interest entities, as defined. The Company does not have any variable
interest entities which would require disclosure or consolidation.

In November 2002, the Emerging Issues Task Force of the FASB
("EITF") reached a consensus on Issue 02-16, "Accounting by a Reseller for
Cash Consideration Received from a Vendor" (Issue 02-16), which addresses
the accounting by a vendor for consideration given to a customer,
including both a reseller of the vendor's products and an entity that
purchases the vendor's products from a reseller. Certain aspects of the
issue were effective immediately, which were adopted and did not have a
significant impact on operations. The remaining portion of Issue 02-16
will be adopted during fiscal 2003 and is not expected to have a material
effect on the Company's financial position or operations.

(2) GOODWILL AND OTHER INTANGIBLE ASSETS

The Company adopted SFAS 142 in the first quarter of fiscal 2002.
This statement requires that goodwill and certain intangible assets deemed
to have indefinite lives will no longer be amortized, but instead, will be
subject to review for impairment annually, or more frequently if certain
indicators arise. With the adoption of this statement, the Company ceased
amortization of goodwill and tradenames as of February 3, 2002.

The Company completed the transitional impairment testing of
goodwill and tradenames during the second quarter of fiscal 2002 as
required by SFAS 142. Based on the findings of its outside valuation
advisor, the Company has concluded that there was no impairment at the
adoption date of the new accounting standard, effective February 3, 2002.
The Company has elected to perform its annual tests for potential
impairment as of the first day of the Company's fourth fiscal quarter.
Based on its annual tests, performed at the end of fourth quarter of
fiscal 2002, the Company has concluded that there was no impairment of its
goodwill or tradenames.

The following table provides the comparable effects of adopting SFAS
142 for the three years ended February 1, 2003, February 2, 2002 and
February 3, 2001.

2002 2001 2000
------- ------- -------
(Dollars in thousands)

Income (loss) before extraordinary loss:
Reported income (loss) before extraordinary loss $ (95) $ (510) $(7,733)
Goodwill amortization - Cole Vision -- 2,825 2,956
Goodwill amortization - Things Remembered -- 948 952
Tradename amortization - Cole Vision -- 1,237 1,260
Related tax adjustment -- (680) (700)
------- ------- -------
Adjusted income (loss) before extraordinary loss $ (95) $ 3,820 $(3,265)
======= ======= =======

2002 2001 2000
------- ------- -------
(Dollars in thousands)

Net income (loss)
Reported net income (loss) $(7,337) $ (510) $(7,733)
Goodwill amortization - Cole Vision -- 2,825 2,956
Goodwill amortization - Things Remembered -- 948 952
Tradename amortization - Cole Vision -- 1,237 1,260
Related tax adjustment -- (680) (700)
------- ------- -------
Adjusted net income (loss) $(7,337) $ 3,820 $(3,265)
======= ======= =======

F-14

Other intangible assets consist of (dollars in thousands):

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

Tradename $ 49,460 $ 49,460
Noncompete agreements 240 240
Contracts 8,847 3,460
-------- --------
58,547 53,160
Accumulated amortization (7,644) (7,164)
-------- --------
Other intangibles, net $ 50,903 $ 45,996
======== ========

The net carrying amount of goodwill at February 1, 2003, by business
segment, was $64.2 million at Cole Vision and $21.4 million at Things
Remembered. The increases in the net carrying amount of $14,000 for
goodwill was due to foreign currency translation of goodwill at Cole
Vision. Accumulated amortization of goodwill is $52.6 million for fiscal
2002 and 2001. The net carrying amount of $50.9 million for other
intangibles at February 1, 2003 was attributable to the Cole Vision
segment. Additional contingent payments related to the 1999 acquisition of
MetLife's managed vision care benefits business increased the net carrying
amount of contracts by $5.4 million, net of related amortization of $0.4
million. Amortization of other intangibles was $0.1 million for fiscal
2003. Amortization expense is expected to be $1.3 million for each of the
next five fiscal years.

(3) LONG-TERM DEBT

Long-term debt at February 1, 2003 and February 2, 2002 is
summarized as follows (dollars in thousands):

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

8-7/8% Senior Subordinated Notes $ 150,000 $ --

8-5/8% Senior Subordinated Notes 125,807 125,000
net of fair market value of interest rate swap

9-7/8% Senior Subordinated Notes,
net of unamortized discount -- 149,318

Capital lease obligations 978 485
--------- ---------
276,785 274,803
Less current portion (232) (229)
--------- ---------
Net long-term debt $ 276,553 $ 274,574
========= =========

On May 22, 2002, the Company issued $150.0 million of 8-7/8% Senior
Subordinated Notes that mature on May 15, 2012. Interest on the notes is
payable semi-annually on each May 15 and November 15, commencing November
15, 2002.

Net proceeds from the 8-7/8% note offering, together with cash on
hand, were used to retire $150.0 million of 9-7/8% Senior Subordinated
Notes due December 31, 2006 and pay premiums and other costs associated
with retiring those notes. The Company's results for fiscal 2002 included
an extraordinary loss on early extinguishment of debt of approximately
$7.2 million, net of an income tax benefit of approximately $3.9 million,
representing the payment of premiums and other costs of retiring the notes
and the write-offs of unamortized discount and deferred financing fees.

On August 22, 1997, the Company issued $125.0 million of 8-5/8%
Senior Subordinated Notes that mature on August 15, 2007 with no earlier
scheduled redemption or sinking fund payments. Interest on the 8-5/8%
notes is payable semi-annually on February 15 and August 15.

The 8-5/8% notes and the 8-7/8% notes are general unsecured
obligations of the Company, subordinated in right of payment to senior
indebtedness of the Company and senior in right of payment to any current
or future subordinated indebtedness of the Company.

The indentures pursuant to which the 8-5/8% notes and the 8-7/8%
notes were issued restrict dividend payments to the Company. The
indentures also contain certain optional and mandatory redemption features
and other financial covenants. The Company was in compliance with these
covenants at February 1, 2003.

F-15

At February 1, 2003, the fair value of long-term debt was
approximately $260.0 million compared to a carrying value of $276.8
million. The fair value was estimated primarily by using quoted market
prices.

During the third quarter of fiscal 2002, the Company entered into
interest rate swap agreements to take advantage of favorable market
interest rates. These agreements require the Company to pay an average
floating interest rate based on six-month LIBOR plus 4.5375% to a counter
party while receiving a fixed interest rate on a portion of the Company's
$125.0 million 8-5/8% Senior Subordinated Notes due 2007. The counter
party is a major commercial bank. The agreements mature August 15, 2007
and qualify as fair value hedges. The aggregate notional amount of the
interest rate swap agreements is $50.0 million. At February 1, 2003, the
floating rate of swaps was approximately 5.9% and the fair value of the
swap agreements was an unrealized gain of approximately $807,000. There
was no impact to earnings for fiscal 2002 due to hedge ineffectiveness.

(4) CREDIT FACILITY

The operating subsidiaries of the Company, have a working
capital commitment of $75.0 million that extends until May 31, 2006.
Borrowings under the credit facility presently bear interest based on
leverage ratios of the Company at a rate equal to either (a) the
Eurodollar Rate plus 2.25% or (b) 1.25% plus the highest of (i) the CIBC
prime rate, (ii) the three-week moving average of the secondary market
rates for three-month certificates of deposit plus 1.0% or (iii) the
federal funds rate plus 0.5%. The Company pays a commitment fee of between
0.50% and 0.75% per annum on the total unused portion of the facility
based on the percentage of revolving credit commitments used. Cole
National Corporation and the Company guarantee this credit facility. The
credit facility is secured by the assets of the operating subsidiaries of
Cole National Group, Inc.

The credit facility requires the principal operating subsidiaries of
Cole National Group to comply with various operating covenants that
restrict corporate activities, including covenants restricting the ability
of the subsidiaries to incur additional indebtedness, pay dividends,
prepay subordinated indebtedness, dispose of certain investments or make
acquisitions. The credit facility also requires the subsidiaries of Cole
National Group to comply with certain financial covenants, including
covenants regarding interest coverage and maximum leverage. On November
25, 2002 the Company received a waiver, which expired on December 31, 2002
associated with the restatement of the financial statements. On December
19, 2002 the credit agreement was amended to accommodate the anticipated
changes due to the restatement. The Company received a waiver dated May 9,
2003 of the maximum leverage coverage test for the fiscal year end 2002
and the first quarter of fiscal 2003. During the waiver period the maximum
leverage test was adjusted to accommodate the effect of the restatement on
the Company's financial statements. This waiver will expire on the earlier
of May 17, 2003 if the Lenders do not receive the Form 10-K and 10-Q's for
the first through third fiscal quarters of 2002; on May 23, 2003 if
certain additional financial information is not received by the Lenders;
or June 30, 2003. The Company is in compliance with the covenants in the
credit agreement and expects to meet the waiver conditions. The Company
expects to complete a permanent amendment to the credit agreement on or
before June 30, 2003. However, there is no assurance that the Company will
be successful in its effort to complete such an amendment. The Company
believes that, even if it is unsuccessful in its effort to complete such
an amendment, it will have sufficient liquidity from internal and other
external sources.

The credit facility restricts dividend payments to the Company from
its subsidiaries to amounts needed to pay interest on the 8-7/8% notes and
the 8-5/8% notes, and certain amounts related to taxes, along with up to
0.25% of the Company's consolidated net revenue annually for other direct
expenses of Cole National Corporation or the Company. The credit facility
restricts dividend payments to Cole National Group in an aggregate amount
not to exceed $50.0 million to allow for the repurchase of Senior
Subordinated Notes.

As of fiscal year end 2002, the total commitment under the credit
facility was $75.0 million and availability under the credit facility
totaled $61.0 million after reduction for commitments under outstanding
letters of credit. There were no working capital borrowings outstanding as
of February 1, 2003 and February 2, 2002. The maximum amount of borrowings
outstanding during fiscal 2002 was $2.3 million. There were no borrowings
during fiscal 2001.

F-16

(5) INCOME TAXES

The income tax provision reflected in the accompanying consolidated
statements of operations for fiscal 2002, 2001 and 2000 are detailed below
(dollars in thousands):

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

Current payable -
Federal $ 522 $ 750 $ 1,336
State and local 538 1,335 449
Foreign 633 295 314
------- ------- -------
1,693 2,380 2,099
------- ------- -------

Deferred -
Federal 1,229 2,854 (2,588)
State and local 183 32 (525)
Foreign (1) 43 278
------- ------- -------
1,411 2,929 (2,835)
------- ------- -------

Income tax provision (benefit) $ 3,104 $ 5,309 $ (736)
======= ======= =======

The income tax provision differs from the federal statutory rate as
follows (dollars in thousands):

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

Income tax provision at statutory rate $ 1,053 $ 1,680 $(2,964)
Tax effect of-
Goodwill -- 1,451 1,972
State income taxes, net of federal
tax benefit 533 900 (233)
Foreign income tax 199 59 94
Valuation allowance 484 988 --
Nondeductible expenses 296 331 303
Adjustments to prior years taxes 522 354 246
Research and development credit -- (265) --
Other, net 17 (189) (154)
------- ------- -------
Income tax provision (benefit) $ 3,104 $ 5,309 $ (736)
======= ======= =======

The exercise of nonqualified stock options during fiscal 2002
resulted in $498,000 of income tax benefits to the Company derived from
the difference between the market price at the date of exercise and the
option price. These tax benefits were recorded in additional paid-in
capital. Tax benefits from option exercises in fiscal 2001 and 2000 were
not significant.

F-17

The tax effects of temporary differences that give rise to
significant portions of the Company's deferred tax assets and deferred tax
liabilities at February 1, 2003 and February 2, 2002 are as follows
(dollars in thousands):

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

Deferred tax assets:
Employee benefit accruals $ 11,420 $ 4,047
Deferred revenue 22,659 21,510
Other non-deductible accruals 8,432 9,163
Net operating loss carryforwards 8,961 6,801
Intangibles 4,373 6,008
Contribution carryforward 1,223 1,820
Inventory basis differences 2,047 1,789
Leases 5,106 4,828
Other 2,005 1,378
-------- --------
Total deferred tax assets 66,226 57,344
Valuation allowance (4,371) (4,809)
-------- --------
Net deferred tax assets 61,855 52,535

Deferred tax liabilities:
Depreciation and amortization (3,713) (3,218)

-------- --------
Net deferred tax assets $ 58,142 $ 49,317
======== ========

At February 1, 2003, the Company had approximately $17.8 million of
federal tax net operating loss carryforwards in the United States that
expire in years 2004 through 2022. Of that amount, $8.4 million resulted
from the Company's acquisition of American Vision Centers ("AVC"). Due to
the change in ownership requirements of the Internal Revenue Code,
utilization of the AVC net operating loss is limited to approximately $0.3
million per year. Valuation allowances of $3.8 million and $0.6 million at
February 1, 2003 have been established against net operating losses and
charitable contribution carryforwards to reduce the corresponding deferred
tax assets to the amount that will likely be realized. The decrease in the
valuation allowance in 2002 is due to the expiration of certain tax
carryforwards net of the current year provision of $484,000.

No provision of United States federal and state income taxes has
been provided for the undistributed earnings of the Company's foreign
subsidiaries because those earnings are considered to be indefinitely
reinvested. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to both United States income
taxes (subject to an adjustment of foreign tax credits) and withholding
taxes payable. Determination of the net amount of unrecognized United
States income tax with respect to these earnings is not practicable.

(6) RETIREMENT PLANS

The Company maintains a noncontributory defined benefit pension plan
that covers employees who have met eligibility service requirements and
are not members of certain collective bargaining units. The pension plan
calls for benefits to be paid to eligible employees at retirement based
primarily upon years of service and their compensation levels near
retirement. In January 2002, the Company approved a plan freeze for all
participants except for participants who are age 50 with 10 years of
benefit service as of March 31, 2002. These participants had their average
pay frozen as of March 31, 2002, and covered compensation frozen as of
December 31, 2001, but their benefit service will continue to grow. The
Company's policy is to fund amounts necessary to keep the pension plan in
full force and effect, in accordance with the Internal Revenue Code and
the Employee Retirement Income Security Act of 1974.

The Company also maintains a postretirement benefit plan in
connection with the acquisition of Pearle in 1996. This plan was closed to
new participants at the time of acquisition. Under this plan, the eligible
former employees are provided life insurance and certain health care
benefits through insurance premiums based on expected benefits to be paid
during the year. Substantial portions of the health care benefits are not
insured and are

F-18

paid by the Company. For measurement purposes, a 13% annual rate of
increase for health care benefits was assumed for fiscal 2002. The rate
was assumed to decrease gradually to 8% over ten years and level
thereafter. A one percentage point change in the assumed health care cost
trend rate would have the following effects:

1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------

Effect on total of service and interest cost $ 35,800 $ (29,600)

Effect on the postretirement benefit obligation $551,400 $(455,700)

F-19

The following provides a reconciliation of benefit obligations, plan
assets and the funded status of the pension plan and postretirement
benefits.

Pension Benefits Postretirement Benefits
(SFAS 87) (SFAS 106)
2002 2001 2002 2001
-------- -------- ------- -------
(Dollars in thousands)

Change in benefit obligation:
Benefit obligation at beginning of period $ 28,825 $ 27,720 $ 2,879 $ 2,650
Service cost 238 1,868 -- --
Interest cost 2,423 2,156 203 174
Actuarial loss 10,203 2,260 1,149 195
Effect of curtailment -- (3,751) -- --
Benefits paid (1,147) (1,056) (159) (184)
Participants contributions -- -- 37 44
Expenses paid (420) (372) -- --
-------- -------- ------- -------
Benefit obligation at end of period $ 40,122 $ 28,825 $ 4,109 $ 2,879
======== ======== ======= =======

Change in plan assets:
Fair value of plan assets at beginning of year $ 28,861 $ 26,076 $ -- $ --
Actual return of plan assets (3,709) (483) -- --
Employer contributions 522 4,696 122 140
Participants contributions -- -- 37 44
Benefits paid (1,147) (1,056) (159) (184)
Expenses paid (420) (372) -- --
-------- -------- ------- -------
Fair value of plan assets at end of year $ 24,107 $ 28,861 $ -- $ --
======== ======== ======= =======

Reconciliation of funded status:
Benefit obligation at end of period $ 40,122 $ 28,825 $ 4,109 $ 2,879
Fair value of plan assets, primarily money market
and equity mutual funds 24,107 28,861 -- --
-------- -------- ------- -------
(Unfunded) funded status (16,015) 36 (4,109) (2,879)

Employer contributions after measurement date -- -- 10 11
Unrecognized prior service cost -- -- 103 112
Net unrecognized loss 20,992 4,554 2,614 1,548
Unamortized transition asset (340) (519) -- --
Charge to comprehensive loss (20,652) -- -- --
-------- -------- ------- -------
Plan (obligation) asset $(16,015) $ 4,071 $(1,382) $(1,208)
======== ======== ======= =======

F-20

Net pension expense and postretirement expense for fiscal 2002, 2001
and 2000 includes the following components (dollars in thousands):

Pension Benefits Postretirement Benefits
----------------------------------- ------------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- ---- ---- ----

Service cost - benefits earned during the period $ 238 $ 1,868 $ 1,442 $ -- $ -- $ --

Interest cost on the projected benefit obligation 2,423 2,156 1,889 203 174 132

Less:
Return on plan assets -
Actual 3,709 483 (359) -- -- --
Deferred (6,234) (3,203) (2,086) -- -- --
------- ------- ------- ---- ---- ----
(2,525) (2,720) (2,445) -- -- --

Amortization of actuarial loss -- -- -- 83 76 30
Amortization of transition asset (179) (179) (179) -- -- --
Prior service cost -- 25 28 9 9 9
------- ------- ------- ---- ---- ----
Net expense (income) $ (43) $ 1,150 $ 735 $295 $259 $171
======= ======= ======= ==== ==== ====

Actuarial assumptions:
Discount rate 6.5% 7.5% 7.8% 6.5% 7.5% 7.8%
Expected return on plan assets 9.0% 9.5% 9.5% -- -- --
Rate of compensation increase N/A 3 to 7% 3 to 7% -- -- --

The change in the discount rate reflects the overall decline in
market interest rates and has led to an increase in the projected benefit
obligation from February 2, 2002. In addition, stock market declines have
reduced the fair value of the pension plan's assets. As a result of these
factors, the pension plan was underfunded by $16.0 million as of February
1, 2003. The Company has written off the prepaid pension expense of $4.6
million and recorded the minimum pension liability by charging $20.6
million to accumulated other comprehensive income (loss) in stockholder's
equity. The amortization of this charge will result in higher pension
costs in future periods.

The Company has a defined contribution plan, including features
under Section 401(k) of the Internal Revenue Code, which provides
retirement benefits to its employees. Eligible employees may contribute up
to 17% of their compensation to the plan. In the United States, the
Company changed the plan beginning with the 2003 fiscal year to provide
for a mandatory company match of 25% of the first 4% of employee
contributions. During prior fiscal years, the plan provided a mandatory
company match of 10% of employee contributions. The Company may also make
a discretionary matching contribution for each plan year equal to such
dollar amount or percentage of employee contributions as determined by the
Company's Board of Directors. In Puerto Rico, the Company provides for a
mandatory match of 50% of the first 6% of employee contributions. The plan
provides for the investment of employer and employee contributions in the
Company's common stock and other investment alternatives. The Company's
matching contributions, net of forfeitures, of $1.0 million, $0.6 million
and $0.6 million were recorded as expense for fiscal years 2002, 2001 and
2000, respectively.

The Company has a Supplemental Executive Retirement Plan (SERP),
which provides for the payment of retirement benefits for certain
management and highly compensated employees supplementing amounts payable
under the Company's non-contributory defined contribution plan. The
benefits are unfunded and each participant's SERP account is credited with
a percentage of their base salary for the year. Expenses for this plan for
fiscal 2002, 2001 and 2000 were $0.4 million, $0.6 million and $0.6
million, respectively. The plan liability recorded in long-term
liabilities was $2.3 million and $2.1 million at February 1, 2003 and
February 2, 2002, respectively.

The Company has a deferred compensation plan for executives and
other senior management which allows deferral of income without regard to
limitations imposed by the Company's 401(k) plan. The Company generally
makes a contribution of its common stock equal to 10% of the participant's
deferrals, however, in fiscal 2002 the Company made a cash contribution.
The deferred compensation together with the Company's contributions is
funded through various marketable securities based on the election of the
participant. As of fiscal year end 2002 and 2001, the Company had accrued
$2.1 million and $1.3 million, respectively for its obligations under
these plans in other long-term liabilities. The Company's expense, which
includes the participant's deferral and Company contributions, was $0.8
million, $0.7 million and $0.5 million for fiscal 2002, 2001 and 2000,
respectively. The investments made on behalf of the participants are
included in other noncurrent assets and were $2.1 million, and $1.3
million for fiscal 2002 and 2001, respectively.

F-21

The Company provides under certain conditions postemployment
benefits for continuation of health care benefits and life insurance
coverage to former employees after employment but before retirement.
Pursuant to SFAS 112, the accrued cost for postemployment benefits was
$2.6 million and $1.7 million at February 1, 2003 and February 2, 2002,
respectively. The net postemployment benefits expense (income) was $0.9
million, $(0.2) million and $0.1 million in 2002, 2001 and 2000,
respectively.

The Company has certain individual deferred compensation agreements,
which provide guaranteed retirement benefits per year for life. The
benefits are accrued over the estimated period in which the employee is
to render service and becomes eligible for the benefit. The benefits are
unfunded. Expenses for these agreements for fiscal 2002, 2001 and 2000
were $0.5 million, $0.4 million and $0.3 million, respectively. At
February 1, 2003 and February 2, 2002, the liability, which was recorded
in other long-term liabilities, was $3.4 million and $2.8 million,
respectively.

(7) SEGMENT INFORMATION

The Company has two reportable segments: Cole Vision and Things
Remembered. Most of Cole Vision's revenue is provided primarily by sales
of prescription eyewear, accessories and services through its Cole
Licensed Brands and Pearle retail locations. Cole Vision's revenue is also
provided by sales of merchandise to franchisees and other outside
customers, by royalties based on sales and initial franchise fees from
franchisees and by fees from managed vision care programs. Cole Vision is
subject to various state regulations related to the dispensing of
prescription eyewear, its relationship with the doctors of optometry and
other matters. The Cole Licensed Brands and Pearle Vision business units
have been aggregated in accordance with SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS 131), based on
the similarity of their economic characteristics, nature of products,
services and production processes, types of customers, distribution
methods and regulatory environment. Things Remembered's revenue is
provided by sales of engraveable gift merchandise, personalization and
other services primarily through retail stores and kiosks. The accounting
policies of the segments are the same as those described in the Summary of
Significant Accounting Policies (see Note 1).

The reportable segments are strategic business units that offer
different products and services. They are managed separately as each
business requires different technology and marketing strategies.
Performance is evaluated based on operating income. Reported segment
revenue, depreciation and amortization, and income or loss, with
reconciliations to consolidated amounts are as follows (dollars in
thousands):

F-22

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

Net revenue:
Cole Vision $ 877,550 $ 836,869 $ 801,790
Things Remembered 270,569 272,254 276,116
----------- ----------- -----------
Consolidated net revenue $ 1,148,119 $ 1,109,123 $ 1,077,906
=========== =========== ===========

Depreciation and amortization:
Cole Vision $ 22,554 $ 25,508 $ 26,816
Things Remembered 10,297 10,520 9,857
----------- ----------- -----------
Total segment depreciation and amortization 32,851 36,028 36,673
Corporate 2,779 2,877 2,440
----------- ----------- -----------
Consolidated depreciation and amortization $ 35,630 $ 38,905 $ 39,113
=========== =========== ===========

Income:
Cole Vision $ 30,583 $ 15,113 $ 7,958
Things Remembered 15,060 24,149 22,507
----------- ----------- -----------
Total segment operating income 45,643 39,262 30,465
Unallocated corporate expenses 17,373 9,596 12,886
----------- ----------- -----------
Consolidated operating income 28,270 29,666 17,579
Interest and other expense, net 25,261 24,867 26,048
----------- ----------- -----------

Income (loss) before income taxes $ 3,009 $ 4,799 $ (8,469)
=========== =========== ===========

Reported segment assets, expenditures for capital additions and
systems development costs and acquisitions of businesses, with
reconciliations to consolidated amounts, are as follows (dollars in
thousands):

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

Segment assets:
Cole Vision $ 420,911 $ 408,909 $ 433,868
Things Remembered 119,105 118,069 119,101
----------- ----------- -----------
Total segment assets 540,016 526,978 552,969
Corporate cash and temporary cash investments 28,435 50,333 26,306
Other corporate assets 34,971 25,982 19,091
----------- ----------- -----------
Consolidated assets $ 603,422 $ 603,293 $ 598,366
=========== =========== ===========

Expenditures for capital additions
and systems development costs:
Cole Vision $ 31,502 $ 26,445 $ 18,817
Things Remembered 10,342 12,582 11,192
----------- ----------- -----------
Total segment expenditures 41,844 39,027 30,009
Corporate 3,142 1,676 4,979
----------- ----------- -----------
Consolidated expenditures $ 44,986 $ 40,703 $ 34,988
=========== =========== ===========

Contingent payments for acquisition of business
Cole Vision $ 1,645 $ 847 $ --
=========== =========== ===========

F-23

Revenue from external customers of each group of similar products
and services is as follows (dollars in thousands):

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

Sales of optical products and services $ 783,765 $ 751,680 $ 729,870
Royalties and initial fees from royalties 19,450 18,744 19,655
Fees from managed vision care programs 74,335 66,445 52,265
----------- ----------- -----------
Total Cole Vision net revenue 877,550 836,869 801,790
Retail sales or gift merchandise and services 270,569 272,254 276,116
----------- ----------- -----------
Consolidated net revenue $ 1,148,119 $ 1,109,123 $ 1,077,906
=========== =========== ===========

The Company operates primarily in the United States. Net revenue
attributable to Cole Vision's Canadian operations was $28.6 million, $30.0
million and $31.1 million in fiscal 2002, 2001 and 2000, respectively.
Long-lived assets located in Canada at February 1, 2003 and February 2,
2002 totaled $2.7 million and $3.0 million, respectively.

(8) COMMITMENTS AND CONTINGENCIES

The Company leases a substantial portion of its computers, equipment
and facilities including laboratories, office and warehouse space, and
retail store locations. These leases generally have initial terms of up to
10 years and often contain renewal or purchase options. Operating and
capital lease obligations are based upon contractual minimum rates and, in
most leases covering retail store locations, additional rents are payable
based on store sales. In addition, Cole Vision operates departments in
various host stores paying occupancy costs solely as a percentage of sales
under agreements containing short-term cancellation clauses. Generally,
the Company is required to pay taxes and normal expenses of operating the
premises for laboratory, office, warehouse and retail store leases; the
host stores pay these expenses for departments operated on a
percentage-of-sales basis. The following amounts represent rental expense
for fiscal 2002, 2001 and 2000 (dollars in thousands):

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

Occupancy costs based on sales $ 59,143 $ 57,379 $ 54,748
All other rental expense 91,329 89,881 86,147
Sublease rental income (18,422) (19,719) (21,354)
----------- ----------- -----------
Total rental expense, net $ 132,050 $ 127,541 $ 119,541
=========== =========== ===========

At February 1, 2003, future minimum lease payments and sublease
income receipts under noncancelable leases and the present value of the
future minimum lease payments for capital leases are as follows (dollars
in thousands):

Operating Leases
Capital ------------------------
Leases Payments Receipts
------- -------- --------

2003 $ 328 $ 78,973 $ (10,765)
2004 310 70,046 (8,759)
2005 266 57,778 (7,066)
2006 223 46,749 (5,625)
2007 83 37,593 (4,168)
2008 and thereafter - 90,844 (6,840)
----- -------- ---------
Total future minimum lease payments 1,210 $ 381,983 $ (43,223)
======== =========
Amount representing interest (232)
-----
Present value of future minimum lease payments $ 978
=====

F-24

In fiscal 2001, under a sale and leaseback agreement, the Company
received approximately $5.7 million, net of related costs, from the sale
of its Pearle Vision lab and distribution facility in Dallas, Texas and
leased it back under a fifteen-year operating lease agreement with four
five-year renewal options. The transaction produced a gain of
approximately $0.6 million that was deferred and is being amortized over
the fifteen year lease period.

The Company also leases an office and general operating facility in
Highland Heights, Ohio under a four-year operating lease with annual
renewal options up to six years. The lease provides for regular payments
based on LIBOR plus 1.50%. In accordance with this agreement, Cole
National Corporation must maintain compliance with a minimum net worth
covenant. At the end of this lease in 2007, Cole National Corporation has
the option to renew the lease, purchase the property or arrange for the
sale of the property. If Cole National Corporation does not exercise its
purchase option at the end of the lease, it is contingently liable for up
to $1.7 million. Cole National Corporation does not believe it will have
any payment obligation at the end of the lease because either Cole
National Corporation will exercise the purchase option, or the net
proceeds from the sale of the property will exceed the amount payable to
the lessor.

The Company guarantees future minimum lease payments for certain
store locations leased directly by franchisees. These guarantees totaled
approximately $13.8 and $13.7 million as of February 1, 2003 and February
2, 2002. Performance under a guarantee by the Company is triggered by
default of a franchisee in their lease commitment. Generally, these
guarantees also extend to payments of taxes and other normal expenses
payable under these leases, the amounts of which are not readily
quantifiable. The term of the guarantees range from one to ten years of
which many are limited to periods that are less than the full term of the
leases involved. Under the terms of the guarantees, the Company has the
right to assume the primary obligation and begin operating as a
company-owned store. In addition, as part of many franchise agreements,
the Company may recover any amounts paid under a guarantee from the
defaulting franchisee. The Company has recorded a liability of $5,700,
which represents the fair value of the Company's obligations from
guarantees entered into or modified after December 31, 2002 using an
expected present value calculation.

(9) LEGAL PROCEEDINGS

The Company and its optical subsidiaries have been sued by the State
of California, which alleges claims for various statutory violations
related to the operation of 24 Pearle Vision Centers in California. The
claims include untrue or misleading advertising, illegal dilation fees,
unlawful advertising of eye exams, maintaining an optometrist on or near
the premises of a registered dispensing optician, unlawful advertising
of an optometrist, unlicensed practice of optometry, and illegal
relationships between dispensing opticians, optical retailers and
optometrists. The action seeks unspecified damages, restitution and
injunctive relief. Although the State of California obtained a preliminary
injunction to enjoin certain advertising practices and from charging
dilation fees in July 2002, the terms of the injunction have not had and
are not expected to have any material effect on the Company's operations.
In addition, both the State and the Company have appealed the preliminary
injunction. The injunction is not expected to have a material effect on
the Company's operations. Although the Company believes it is in
compliance with California law and intends to continue to defend the
issues raised in the case vigorously, it may be required to further modify
its activities or might be required to pay damages and or restitution in
currently undeterminable amount if it is not successful, the cost of
which, as well as continuing defense costs, might have a material adverse
effect on the Company's operating results and cash flow in one or more
periods.

Things Remembered, Inc. is in the process of settling a class action
complaint in California alleging that the putative class (alleged to
include 200 members) were improperly denied overtime compensation in
violation of California law. The action sought unspecified damages,
interest, restitution, as well as declaratory and injunctive relief and
attorneys' fees. On February 3, 2003, Things Remembered and the plaintiffs
reached an agreement to

F-25

resolve the lawsuit for $562,500. The settlement is subject to court
approval. A liability of $562,500 was recorded in the fourth quarter of
2002.

Cole National Corporation is defending a purported class action
lawsuit alleging claims for various violations of federal securities laws
related to the Company's publicly reported revenues and earnings. The
action which proposes a class period of March 23, 1999 through November
26, 2002 and names the Company and certain present and former officers and
directors, seeks unspecified compensatory damages, punitive damages "where
appropriate", costs, expenses and attorneys' fees. Following the Company's
announcement in November 2002 of the restatement of the Company's
financial statements (see Note 11 of the Notes to Consolidated Financial
Statements), the Securities and Exchange Commission began an inquiry into
the Company's previous accounting. The course of this or further
litigation or investigations arising out of the restatement of the
Company's financial statements cannot be predicted. In addition, under
certain circumstances the Company would be obliged to indemnify the
individual current and former directors and officers of the Company who
are named as defendants in litigation or who are or become involved in an
investigation. The Company believes it has insurance that should be
available with respect to litigation and any indemnification obligations.
However, if the Company is unsuccessful in defending against any such
litigation, and if its insurance coverage is not available or is
insufficient to cover its expenses, indemnity obligations and liability,
if any, the litigation and/or investigation may have a material adverse
effect on the Company's financial condition, cash flow and results of
operations.

The Company has been named as a defendant along with numerous other
retailers, in patent infringement litigation challenging the defendants'
use of bar code technology. The Company believes it has available defenses
and does not expect any liability. However, if the Company were to be
found liable for an infringement, it might have a material adverse effect
on our operating results and cash flow in the period incurred.

In the ordinary course of business, the Company is involved in
various other legal proceedings. The Company is of the opinion that the
ultimate resolution of these matters will not have a material adverse
effect on the results of operations, liquidity or financial position of
the Company.

(10) SUBSEQUENT EVENT

As discussed in Note 4, the Company received a waiver dated May 9,
2003 of the maximum leverage coverage test for the fiscal year end 2002
and the first quarter of fiscal 2003. During the waiver period the maximum
leverage test was adjusted to accommodate the effect of the restatement on
the Company's financial statements. This waiver will expire on the earlier
of May 17, 2003 if the Lenders do not receive the Form 10-K and 10-Q's for
the first through third fiscal quarters of 2002; on May 23, 2003 if
certain additional financial information is not received by the Lenders;
or June 30, 2003. The Company is in compliance with the covenants in the
credit agreement and expects to meet the waiver conditions. The Company
expects to complete a permanent amendment to the credit agreement on or
before June 30, 2003. However, there is no assurance that the Company will
be successful in its effort to complete such an amendment. The Company
believes that, even if it is unsuccessful in its effort to complete such
an amendment, it will have sufficient liquidity from internal and other
external sources.

(11) RESTATEMENT

Subsequent to the issuance of the Company's consolidated financial
statements for the second quarter of fiscal 2002, the Company determined
it needed to restate its previously issued financial statements for
numerous items, each of which was an "error" within the meaning of
Accounting Principles Board Opinion No. 20, "Accounting Changes". In
addition to the restatement of its annual financial statements, the
Company has also restated its previously issued quarterly financial
statements for fiscal years 2002 and 2001. The principal reasons and
significant effects of the restatement adjustments on the accompanying
financial statements from amounts previously reported are summarized as
follows:

F-26

As of and for As of and for As of
the Fiscal Year Ended the Fiscal Year Ended January 29,
February 2, 2002 February 3, 2001 2000
----------------------------- ------------------------------- ------------
Increase Increase
Accumulated (decrease) Accumulated (decrease) Accumulated
Dollars in thousands Deficit in net income Deficit in net income Deficit
----------- ------------- ----------- ------------- -----------

As reported $(135,302) $ 4,911 $(140,213) $ 1,883 $ (142,096)

Significant restatement items:
Sale of extended warranty contracts (40,483) (1,580) (38,903) (104) (38,799)
Other revenue recognition adjustments (12,416) 3,229 (15,645) (2,531) (13,114)
Valuation of long-lived assets (5,601) (2,455) (3,146) (4,352) 1,206
Inventories and cost of goods sold (1,845) (451) (1,394) (154) (1,240)
Accruals for operating expenses (8,716) (4,560) (4,156) (7,343) 3,187
1998 settlement from former owner of Pearle (5,806) 175 (5,981) (218) (5,763)
Deferred income taxes and income tax liabilities 31,132 221 30,911 5,086 25,825
--------- ------ --------- -------- ----------
Total restatement items (43,735) (5,421) (38,314) (9,616) (28,698)

As restated $(179,037) $ (510) $(178,527) $ (7,733) $ (170,794)
========= ====== ========= ======== ==========

Recognition of Revenues Earned on the Sale of Extended Warranty Contracts.
Customers purchasing eyeglasses from the Company's retail stores are offered the
option of buying a warranty for up to two years, paying in full for the warranty
at the time of sale. The Company historically recognized the revenue at the time
of the sale. The Company has made restatement adjustments to record the warranty
payment received at the time of the sale as deferred revenue and recognizes the
revenue on a straight-line basis over the warranty period.

Other Revenue Recognition Adjustments. Previously, the Company recognized
certain sales transactions as revenue when the customer placed the order and a
deposit was taken. Restatement adjustments were made to defer such revenue until
i) customer receipt or when the related goods were shipped direct to the
customer and ii) all significant obligations of the Company were satisfied. In
addition, revenue adjustments have been made to establish adequate allowances
for returns and remakes. Historically, the Company had recorded returns and
remakes based on actual product returned during the period.

Valuation of Long-lived Assets. Historically, the Company did not consider
certain mature stores with negative cash flows in its asset impairment tests. In
addition, in testing for SFAS 121 impairment, the Company did not allocate
goodwill to the respective stores. As part of the restatement, the Company
applied a methodology which includes all mature stores in its asset impairment
tests and includes an allocation of goodwill for years prior to fiscal 2002. The
restated financial statements also reflect the recognition of losses on the
disposal of fixed assets in the appropriate periods. Additional adjustments were
made to record depreciation expense for certain depreciable fixed assets which
were not previously being depreciated. Also included is an adjustment to record
capital lease assets and the corresponding lease obligation for leases that had
previously been accounted for as operating leases.

Inventories and Cost of Goods Sold. The Company's restated financial statements
reflect adjustments relating to inventories and cost of goods sold primarily to
i) recognize obsolescence reserves in appropriate periods and amounts, correct
calculation errors and recognize certain inventory costs in appropriate periods
and ii) reflect certain vendor allowances previously recorded in operations but
not yet earned as a reduction in the inventory balances.

Accruals for Operating Expenses. Historically, the Company did not always record
changes in estimates in the period of change, and established accruals for
certain expenses that had not yet been incurred. The restated financial
statements reflect adjustments to recognize certain operating expenses in the
period in which they were incurred and to record the corresponding liability for
those items not paid at the end of the period. Such operating expenses primarily
consist of advertising, self-insurance, IBNR claims, retirement and post
employment benefits, vacation, allowance for uncollectible accounts and
miscellaneous operating expenses.

1998 Settlement from Former Owner of Pearle. The Company's 1998 financial
statements included the recognition of $6.0 million of income from a $13.0
million cash settlement with the former owner of Pearle. The terms of the
related agreement included the settlement of certain claims and indemnifications
associated with the purchase agreement. In addition, as part of the settlement,
the Company agreed to assume certain contingent liabilities from the former
owner. The restated financial statements reflect the treatment of this $6.0
million from the settlement as an adjustment to the purchase price of Pearle,

F-27

thereby reducing the goodwill that was established in connection with the Pearle
acquisition and associated amortization expense.

Deferred Income Taxes and Income Tax Liabilities. The Company reviewed all of
its temporary differences and loss and tax credit carryforwards, and made
adjustments to its deferred tax assets and liabilities. Adjustments were made to
provide for state and local income tax deferred tax assets and liabilities,
which were previously not recorded. The Company evaluated the adequacy of the
tax liabilities established for the current and open tax years and adjusted the
amounts maintained in the tax liability accounts. Also included is the tax
effect of the restatement items.

Summary. The consolidated financial statements for the years ended February 2,
2002 and February 3, 2001 contained herein have been restated to reflect all of
the above discussed adjustments. In addition, the Company has restated
accumulated deficit as of January 29, 2000 by $28.7 million to reflect the
cumulative impact of the restatement adjustments on prior years. The
following is a summary of the effects of the restatement.

F-28

AS OF FEBRUARY 2, 2002

As Cumulative
Previously Effect of Prior
Reported Years Changes(1) Adjustments As Restated
-------- ---------------- ----------- -----------
(Dollars in thousands)

Assets
Current assets:
Cash and cash equivalents $ 63,656 $ 493 $ (731) $ 63,418
Accounts receivable, net of allowances 39,544 718 1,037 41,299
Current portion of notes receivable 2,825 -- (102) 2,723
Inventories 111,098 6,987 1,118 119,203
Refundable income taxes 502 (571) 69 --
Prepaid expenses and other 22,613 10,441 (4,041) 29,013
Deferred income taxes 430 25,465 1,266 27,161
--------- -------- ------- ---------
Total current assets 240,668 43,533 (1,384) 282,817

Property and equipment, at cost 291,148 2,208 5,562 298,918
Less - accumulated depreciation and amortization (169,851) (6,096) (4,589) (180,536)
--------- -------- ------- ---------
Total property and equipment, net 121,297 (3,888) 973 118,382

Notes receivable, excluding current portion 3,899 1 809 4,709
Deferred income taxes 7,612 11,301 3,243 22,156
Other assets 41,759 1,099 832 43,690
Other intangibles, net 42,992 2,593 411 45,996
Goodwill, net 103,552 (17,273) (736) 85,543
--------- -------- ------- ---------
Total assets $ 561,779 $ 37,366 $ 4,148 $ 603,293
========= ======== ======= =========

Liabilities and Stockholder's Equity
Current liabilities:
Current portion of long-term debt $ 54 $ 94 $ 81 $ 229
Accounts payable 57,242 8,825 (1,204) 64,863
Payable to affiliates, net 73,548 7,597 4,332 85,477
Accrued interest 6,130 73 137 6,340
Accrued liabilities(2) 77,257 15,541 (474) 92,324
Accrued income taxes 546 187 (360) 373
Deferred revenue(2) 1,468 29,740 4,193 35,401
--------- -------- ------- ---------
Total current liabilities 216,245 62,057 6,705 285,007

Long-term debt, net of discount and current portion 274,318 249 7 274,574
Other long-term liabilities 12,040 3,039 2,840 17,919
Deferred revenue, long-term -- 10,437 612 11,049

Stockholder's equity:
Common stock -- -- -- --
Paid-in capital 195,676 (96) (694) 194,886
Accumulated other comprehensive loss (1,198) (6) 99 (1,105)
Accumulated deficit (135,302) (38,314) (5,421) (179,037)
--------- -------- ------- ---------
Total stockholder's equity 59,176 (38,416) (6,016) 14,744
--------- -------- ------- ---------
Total liabilities and stockholder's equity $ 561,779 $ 37,366 $ 4,148 $ 603,293
========= ======== ======= =========

(1) The cumulative amount reflects the effect of fiscal year 2000 and prior on
the previously reported fiscal 2001 balance sheet.

(2) Deferred revenue as of February 2, 2002 has been reclassified from accrued
liabilities to deferred revenue.

F-29

FOR THE YEAR ENDED FEBRUARY 2, 2002

As Previously
Reported Adjustments As Restated
----------- ----------- -----------
(Dollars in thousands)

Net revenue $ 1,101,333 $ 7,790 $ 1,109,123

Cost and expenses:
Cost of goods sold 364,752 (360) 364,392
Operating expenses 694,450 15,605 710,055
Goodwill and tradename amortization 5,769 (759) 5,010
----------- -------- -----------
Total costs and expenses 1,064,971 14,486 1,079,457
----------- -------- -----------

Operating income (loss) 36,362 (6,696) 29,666

Interest and other (income) expense:
Interest expense 27,553 467 28,020
Interest and other (income) (1,632) (1,521) (3,153)
----------- -------- -----------
Total interest and other (income) expense, net 25,921 (1,054) 24,867
----------- -------- -----------

Income (loss) before income taxes 10,441 (5,642) 4,799

Income tax provision (benefit) 5,530 (221) 5,309
----------- -------- -----------

Net income (loss) $ 4,911 $ (5,421) $ (510)
=========== ======== ===========

F-30

FOR THE YEAR ENDED FEBRUARY 3, 2001

As Previously
Reported Adjustments As Restated
----------- ----------- -----------
(Dollars in thousands)

Net revenue $ 1,076,420 $ 1,486 $ 1,077,906

Cost and expenses:
Cost of goods sold 358,030 1,578 359,608
Operating expenses 678,456 17,095 695,551
Goodwill and tradename amortization 5,840 (672) 5,168
----------- -------- -----------
Total costs and expenses 1,042,326 18,001 1,060,327
----------- -------- -----------

Operating income (loss) 34,094 (16,515) 17,579

Interest and other (income) expense:
Interest expense 28,402 185 28,587
Interest and other (income) (541) (1,998) (2,539)
----------- -------- -----------
Total interest and other (income) expense, net 27,861 (1,813) 26,048
----------- -------- -----------

Income (loss) before income taxes 6,233 (14,702) (8,469)

Income tax provision (benefit) 4,350 (5,086) (736)
----------- -------- -----------

Net income (loss) $ 1,883 $ (9,616) $ (7,733)
=========== ======== ===========

F-31

SCHEDULE I

COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT

COLE NATIONAL GROUP, INC.
CONDENSED BALANCE SHEETS
FEBRUARY 1, 2003 AND FEBRUARY 2, 2002
(Dollars in millions)

2002 2001
------- -------
(As Restated)

Assets:
Cash $ 28.4 $ 50.3
Investment in subsidiaries 337.9 342.5
Property and equipment, net 4.4 4.8
Deferred income tax and other 23.6 15.7
------- -------

Total assets $ 394.3 $ 413.3
======= =======

Liabilities and stockholder's equity:
Accounts payable and accrued expenses $ 21.4 $ 12.9
Payable to affiliates 76.4 102.8
Long-term debt 275.8 274.4
Other long-term liabilities 26.1 8.5
Stockholder's equity (deficit) (5.4) 14.7
------- ------

Total liabilities and stockholder's equity $ 394.3 $ 413.3
======= =======

F-32

SCHEDULE I
(CONTINUED)

COLE NATIONAL GROUP, INC.
CONDENSED STATEMENTS OF OPERATIONS AND CASH FLOWS
52 WEEKS ENDED FEBRUARY 1, 2003,
52 WEEKS ENDED FEBRUARY 2, 2002 AND
53 WEEKS ENDED FEBRUARY 3, 2001
(Dollars in millions)

February 1, February 2, February 3,
2003 2002 2001
----- ----- ----

Condensed Statements of Operations
- ----------------------------------

Revenue - services to affiliates $32.9 $29.7 $16.4

Operating expenses 35.7 29.2 14.7
Interest and other (income) expenses, net 0.2 (3.9) (7.7)
----- ----- -----
Income (loss) before taxes (3.0) 4.4 9.4
Income tax provision (benefit) 0.1 (2.2) 0.1
----- ----- -----

Income (loss) before equity in undistributed earnings
of subsidiaries (3.1) 6.6 9.3
Equity in undistributed earnings of subsidiaries 3.0 (7.1) (17.0)
----- ----- -----
Income (loss) before extraordinary loss (0.1) (0.5) (7.7)
----- ----- -----
Extraordinary loss on early extinguishment of debt,
net of $3.9 million tax benefit 7.2 -- --
----- ----- -----
Net income (loss) $(7.3) $(0.5) $(7.7)
===== ===== =====

Condensed Statements of Cash Flows
- ----------------------------------

Net cash provided by operating activities $11.0 $12.6 $ 7.5
----- ----- -----

Investing activities:
Purchase of property and equipment, net (0.5) (3.2) --
Systems developments costs (1.0) (1.0) (1.8)
Other, net 0.8 0.1 (0.6)
----- ----- -----

Net cash used for investing activities (0.7) (4.1) (2.4)
----- ----- -----

Financing activities:
Repayment of long-term debt (150.1) (0.1) (0.5)
Advances from (to) affiliates (26.4) 15.8 0.4
Proceeds from issuance of long-term debt 150.0 -- --
Payment of financing fees (6.1) -- (0.4)
Other, net 0.4 (0.2) 0.7
----- ----- -----

Net cash (used for) provided by financing activities (32.2) 15.5 0.2
----- ----- -----

Net change in cash (21.9) 24.0 5.3
Cash, beginning of period 50.3 26.3 21.0
----- ----- -----
Cash, end of period $28.4 $50.3 $26.3
===== ===== =====

F-33

SCHEDULE I
(CONTINUED)

NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT

The accompanying financial information of Cole National Group, Inc. is as
of February 1, 2003 and February 2, 2002, and for the 52 weeks ended February 1,
2003 and February 2, 2002, and for the 53 weeks ended February 3, 2001. Cole
National Group, Inc. is a holding company for its wholly owned subsidiaries,
Things Remembered, Inc., Cole Vision Corporation and Pearle, Inc., except for
expenses associated with Cole National Group's corporate offices, consisted of
no other operations.

This financial information should be read in connection with the
Consolidated Financial Statements and notes thereto of Cole National Group, Inc.
and Subsidiaries, contained elsewhere in this Form 10-K.

F-34

COLE NATIONAL GROUP, INC. AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
52 WEEKS ENDED FEBRUARY 1, 2003,
52 WEEKS ENDED FEBRUARY 2, 2002 AND
53 WEEKS ENDED FEBRUARY 3, 2001
(Dollars in millions)

Charges
Balance at (Reversals) Balance
Beginning to Cost and End of
Description of Period Expenses Transfers(C) Deductions(A) Period
----------- --------- -------- --------- ------------- ------

FEBRUARY 1, 2003

Allowance for uncollectible accounts $3.2 $2.0 $ -- $(2.1) $3.1

Franchise note allowance for uncollectible accounts 5.2 (0.7) -- (1.5) 3.0

FEBRUARY 2, 2002

Allowance for uncollectible accounts (B) $6.3 $1.1 $(1.2) $(3.0) $3.2

Franchise note allowance for uncollectible accounts (B) 4.7 0.3 1.2 (1.0) 5.2

FEBRUARY 3, 2001

Allowance for uncollectible accounts (B) $7.7 $2.6 $ -- $(4.0) $6.3

Franchise note allowance for uncollectible accounts (B) 2.2 2.8 -- (0.3) 4.7

(A) Receivable balances written off, net of recoveries

(B) As restated see Note 11 to the Notes to Consolidated Financial Statements.

(C) Transfers resulted from conversions of accounts receivables to notes
receivables.

Allowance balances presented in the Notes to Consolidated Financial
Statements are represented on this schedule.

F-35

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------ -----------

3.1(i) Certificate of Incorporation of Cole National Group,
incorporated by reference to Exhibit 3.1(i) to Cole National
Group's Registration Statement on Form S-1 (Registration No.
33-66342).

3.2(ii) By-Laws of Cole National Group, incorporated by reference to
Exhibit 3.2(ii) to Cole National Group's Registration
Statement on Form S-1 (Registration No. 33-66342).

4.1 Indenture dated May 22, 2002, by and among Cole National
Group, Inc. and Wells Fargo Bank Minnesota, National
Association, as trustee, relating to the 8-7/8% Senior
Subordinated Notes due 2012 (the form of which Senior
Subordinated Note is included in such Indenture), incorporated
by reference to Exhibit 10.2 of Cole National Group's
Quarterly Report on Form 10-Q, filed on June 13, 2002 (File
No. 33-66342).

4.2 Indenture dated August 22, 1997, between Cole National Group,
Inc. and Norwest Bank Minnesota, National Association, as
Trustee, relating to the 8-5/8% Senior Subordinated Notes Due
2007, incorporated by reference to Exhibit 4.4 of Cole
National Group, Inc.'s Registration Statement on Form S-1
(Registration No. 333-34963).

4.3 Cole National Group, Inc. by this filing agrees, upon request,
to file with the Commission the instruments defining the
rights of holders of long-term debt of Cole National Group and
its subsidiaries where the total amount of securities
authorized thereunder does not exceed 10% of the total assets
of Cole National Group and its subsidiaries on a consolidated
basis.

10.1 Form of Indemnification Agreement for Directors of Cole
National Group, incorporated by Reference to Exhibit 10.19 to
Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342).

10.2 Form of Indemnification Agreement for Officers of Cole
National Group, incorporated by reference to Exhibit 10.20 to
Cole National Group's Registration Statement on Form S-1
(Registration No. 33-66342).

10.3 Agreement for the Allocation of Federal Income Tax Liability
and Benefits among Members of the Parent Group dated August
23, 1985, as amended, incorporated by reference to Exhibit
10.26 to Cole National Group, Inc.'s Registration Statement on
Form S-1 (Registration No. 33-66342).

10.4 Assignment and Assumption Agreement dated as of September 30,
1993 between Cole National Corporation and Cole National
Group, incorporated by reference to Exhibit 10.24 to Cole
National Corporation's Annual Report on Form 10-K for the
year ended February 3, 1996 (File No. 1-12814).

10.5 Credit Agreement, dated as of November 15, 1996, among Cole
Vision Corporation, Things Remembered, Inc., Cole Gift
Centers, Inc., Pearle, Inc. and Pearle Service Corporation and
Canadian Imperial Bank of Commerce, incorporated by reference
to Exhibit 99.1 of Cole National Corporation's Report on Form
8-K, filed on December 2, 1996 (File No. 1-12814).

10.6 Cole National Group Guarantee and Cash Collateral Agreement,
dated as of November 15, 1996, by Cole National Group and Cole
National Corporation, incorporated by reference to Exhibit
99.3 of Cole National Corporation's Report on Form 8-K, filed
on December 2, 1996 (File No. 1-12814).

10.7 Guarantee and Collateral Agreement, dated as of November 15,
1996, by Cole Vision Corporation, Things Remembered, Inc.,
Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service
Corporation and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 99.4 of Cole National
Corporation's Report on Form 8-K, filed December 2, 1996
(File No. 1-12814).

10.8 First Amendment to the Credit Agreement, dated as of January
13, 1997, among Cole Vision Corporation, Things Remembered,
Inc., Cole Gift Centers, Inc., Pearle, Inc., and Pearle
Service Corporation and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.33 of Cole National
Group, Inc.'s Registration Statement on Form S-1 (Registration
No. 333-34963).

X-1

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------ -----------

10.9 Second Amendment to Credit Agreement, dated as of August 8,
1997, among Cole Vision Corporation, Things Remembered, Inc.,
Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service
Corporation and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.34 of the Cole
National Group, Inc.'s Registration Statement on Form S-1
(Registration No. 333-34963).

10.10 Third Amendment to the Credit Agreement, dated as of May 15,
1998, among Cole Vision Corporation and Canadian Imperial Bank
of Commerce, incorporated by reference to Exhibit 10.1 of Cole
National Corporation's Quarterly Report on Form 10-Q for the
period ended May 2, 1998 (File No. 1-12814).

10.11 Fourth Amendment to the Credit Agreement, dated as of March 5,
1999, among Cole Vision Corporation, Things Remembered, Inc.,
Pearle, Inc., and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.45 to Cole National
Corporation's Annual Report on Form 10-K for the period ended
January 30, 1999 (File No. 1-12814).

10.12* Cole National Group, Inc. 1999 Supplemental Retirement Benefit
Plan dated as of December 17, 1998, incorporated by reference
to Exhibit 10.51 to Cole National Corporation's Annual Report
on Form 10-K for the period ended January 30, 1999 (File No.
1-12814).

10.13* Cole National Group, Inc. Deferred Compensation Plan effective
as of February 1, 1999, incorporated by reference to Exhibit
10.53 to Cole National Corporation's Annual Report on Form
10-K for the period ended January 30, 1999 (File No. 1-12814).

10.14* Amendment No. 1, dated as of December 17, 1998, to the Cole
National Group, Inc. Supplemental Pension Plan, incorporated
by reference to Exhibit 10.54 to Cole National Corporation's
Annual Report on Form 10-K for the period ended January 30,
1999 (File No. 1-12814).

10.15* Employment Agreement entered into as of December 17, 1998 by
and among Cole National Corporation, Cole National Group,
Inc., Cole Vision Corporation, Pearle Inc., Things Remembered,
Inc. and Jeffrey A. Cole, incorporated by reference to Cole
National Corporation's Annual Report on Form 10-K in the
period ended January 30, 1999 (File No. 1-12814).

10.16 Fifth Amendment to the Credit Agreement, dated as of August
20, 1999, among Cole Vision Corporation, Things Remembered,
Inc., Pearle, Inc., and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.1 to Cole National
Corporation's Quarterly Report on Form 10-Q for the period
ended July 31, 1999 (File No. 1-12814).

10.17 Sixth Amendment and Waiver to the Credit Agreement, dated as
of March 7, 2000, among Cole Vision Corporation, Things
Remembered, Inc., Pearle, Inc., and Canadian Imperial Bank
of Commerce, incorporated by reference to Exhibit 10.50 to
Cole National Corporation's Annual Report on Form 10-K for the
period ended January 29, 2000 (File No. 1-12814).

10.18* Addendum to Employment Agreement dated June 4, 1999 among
Jeffrey A. Cole, Cole National Corporation and certain of its
subsidiaries, incorporated by reference to Exhibit 10.67 to
Cole National Corporation's Annual Report on Form 10-K for the
period ended January 29, 2000 (File No. 1-12814).

10.19 Seventh Amendment to the Credit Agreement, dated as of April
21, 2000 among Cole Vision Corporation, Things Remembered,
Inc., Pearle, Inc., and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.69 to Cole National
Corporation's Annual Report on Form 10-K for the period ended
January 29, 2000 (File No. 1-12814).

10.20 Eighth Amendment to the Credit Agreement, dated as of June 9,
2000 among Cole Vision Corporation, Things Remembered, Inc.,
Pearle, Inc., and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.1 of Cole National
Corporation's Quarterly Report on Form 10-Q for the period
ended July 29, 2000 (File No. 1-12814).

X-2

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------ -----------

10.21* Amendment No. 1 to the Cole National Group, Inc. Deferred
Compensation Plan for Senior Executives and other Senior
Management, dated January 25, 2002 incorporated by reference
to Exhibit 10.32 to Cole National Group Inc.'s Annual Report
on Form 10-K for the period ended February 2, 2002 (File No.
33-66342).

10.22* Amendment No. 2 to the Cole National Group, Inc. Supplemental
Pension Plan, dated January 25, 2002 incorporated by reference
to Exhibit 10.33 to Cole National Group Inc.'s Annual Report
on Form 10-K for the period ended February 2, 2002 (File No.
33-66342).

10.23* Amendment No. 2 to the Cole National Group, Inc. Supplemental
Retirement Benefit Plan, dated January 25, 2002 incorporated
by reference to Exhibit 10.34 to Cole National Group Inc.'s
Annual Report on Form 10-K for the period ended February 2,
2002 (File No. 33-66342).

10.24* Amendment No. 1 to the Cole National Group, Inc. 1999
Supplemental Retirement Benefit Plan, dated January 5, 2002
incorporated by reference to Exhibit 10.35 to Cole National
Group Inc.'s Annual Report on Form 10-K for the period ended
February 2, 2002 (File No. 33-66342).

10.25 Amended and Restated Credit Agreement, dated as of May 23,
2002, among Cole Vision Corporation, Things Remembered, Inc.,
Cole Gift Centers, Inc., Pearle, Inc., and Canadian Imperial
Bank of Commerce, incorporated by reference to Exhibit 10.1 of
Cole National Group Inc.'s Quarterly Report on Form 10-Q for
the period ended May 4, 2002 (File No. 33-66342).

10.26+ Third Amendment to Credit Agreement, dated December 16, 2002,
among Cole Vision Corporation, Things Remembered, Inc.,
Pearle, Inc., and Canadian Imperial Bank of Commerce.

10.27*+ Amended and Restated Instrument Designating Participants of
the Cole National Group, Inc. 1999 Supplemental Retirement
Benefit Plan dated January 25, 2002.

10.28+ Form of License/Lease Agreement for Sears Optical.

10.29+ Bank waiver to the Credit Agreement dated May 9, 2003, among
Cole Vision Corporation, Things Remembered, Inc., Pearle,
Inc., and Canadian Imperial Bank of Commerce.

24+ Power of Attorney.

99.1 Letter to Securities and Exchange Commission regarding Arthur
Andersen LLP, incorporated by reference to Exhibit 99 to Cole
National Group Inc.'s Annual Report on Form 10-K for the
period ended February 2, 2002 (File No. 33-66342).

99.2+ Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act 2002.

*Reflects management contract or other compensatory arrangement required to be
filed as an exhibit pursuant to Item 14(c) of this Form 10-K.

+ Filed herewith.

X-3