<PAGE>

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

                                    FORM 10-Q

(MARK ONE)

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

     For the quarterly period ended September 29, 2001.

[ ]  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 333-61119

                              AAI.FOSTERGRANT, INC.
             (Exact name of registrant as specified in its charter)

              RHODE ISLAND                            05-0419304
     (State or other jurisdiction of               (I.R.S. Employer
     Incorporation or organization)             Identification Number)

                          500 GEORGE WASHINGTON HIGHWAY
                              SMITHFIELD, RI 02917
               (Address of principal executive offices) (Zip code)

                                 (401) 231-3800
              (Registrant's telephone number, including area code)

Indicate by checkmark 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:
                                        ---      ---
     As of November 13, 2001, the aggregate market value of the voting equity
held by non-affiliates of the Registrant was none.

     As of November 13, 2001, 608,000 shares of Common Stock, 43,700 shares of
Series A Preferred Stock and 70,870 shares of Series B Preferred Stock of the
Registrant were issued and outstanding.
<PAGE>

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                                QUARTERLY REPORT
                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

PART I. -- FINANCIAL INFORMATION

  ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

     Consolidated Condensed Balance Sheets as of December 30, 2000 and
     September 29, 2001                                                        3

     Consolidated Condensed Statements of Operations for the three and
     nine months ended September 30, 2000 and September 29, 2001               4

     Consolidated Condensed Statements of Cash Flows for the nine
     months ended September 30, 2000 and September 29, 2001                    5

     Notes to Consolidated Condensed Financial Statements                   6-16

  ITEM 2. Management's Discussion and Analysis of Financial
          Condition and Results of Operations                              17-23

  ITEM 3. Quantitative and Qualitative Disclosures About Market Risk          23

PART II - OTHER INFORMATION                                                   24

  ITEM 1. Legal Proceedings                                                   24
  ITEM 2. Changes in Securities and Use of Proceeds                           24
  ITEM 3. Defaults Upon Senior Securities                                     24
  ITEM 4. Submission of Matters to a Vote of Security Holders                 24
  ITEM 5. Other Information                                                   24
  ITEM 6. Exhibits and reports on Form 8-K                                    24

SIGNATURES                                                                    25


                                  2
<PAGE>

                AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                 CONSOLIDATED CONDENSED BALANCE SHEETS
                            (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        DECEMBER 30,    SEPTEMBER 29,
                                                                            2000            2001
                                                                        ------------    -------------
<S>                                                                      <C>             <C>
                                        ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                              $     578       $     359
  Accounts receivable less reserves of approximately
    $9,370 and $11,898                                                      32,839          17,759
  Inventories                                                               33,083          24,257
  Prepaid expenses and other current assets                                  1,280           1,018
  Deferred tax assets                                                          980             980
                                                                         ---------       ---------
    Total current assets                                                    68,760          44,373
                                                                         ---------       ---------
Property, plant and equipment, net                                          18,658          16,601
Intangible assets                                                           12,830          12,343
Other assets                                                                 5,914           5,211
Deferred tax assets                                                          2,009           2,009
                                                                         ---------       ---------
    Total assets                                                         $ 108,171       $  80,537
                                                                         =========       =========

                       LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Borrowings under revolving note payable                                $  25,263       $  18,229
  Current maturities of long-term obligations                                1,427           1,768
  Deferred compensation - current portion                                       10              12
  Accounts payable                                                          21,380          15,299
  Accrued expenses                                                          17,678          13,737
  Accrued income taxes                                                       2,403           2,415
                                                                         ---------       ---------
    Total current liabilities                                               68,161          51,460
                                                                         ---------       ---------
10 3/4% series B senior notes due 2006                                      51,850          51,850
Long-term obligations - less current maturities                              6,561           5,206
Deferred compensation - less current portion                                 1,287           1,346
Series A redeemable convertible preferred stock, $.01 par value --
   Designated, issued and outstanding -- 43,700 shares stated at
   redemption value                                                         35,147          37,824
Series B redeemable preferred stock, $.01 par value --
  Designated -- 75,000 shares
  Issued and outstanding -- 70,870 shares stated at redemption value           945           1,418

SHAREHOLDERS' DEFICIT:
  Common stock, $.01 par value -- Authorized -- 4,800,000 shares
    Issued and outstanding -- 608,000 shares                                     6               6
  Additional paid-in capital                                                   270             270
  Accumulated other comprehensive loss                                        (575)           (940)
  Accumulated deficit                                                      (55,481)        (67,902)
                                                                         ---------       ---------
    Total shareholders' deficit                                            (55,780)        (68,567)
                                                                         ---------       ---------
Total liabilities and shareholders' deficit                              $ 108,171       $  80,537
                                                                         =========       =========
</TABLE>

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


                                       3
<PAGE>

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED               NINE MONTHS ENDED
                                                                -----------------------------   -----------------------------
                                                                SEPTEMBER 30,   SEPTEMBER 29,   SEPTEMBER 30,   SEPTEMBER 29,
                                                                    2000            2001            2000            2001
                                                                -------------   -------------   -------------   -------------
<S>                                                              <C>             <C>             <C>             <C>
NET SALES                                                        $  35,750       $  23,407       $ 123,985       $  91,779
COST OF GOODS SOLD                                                  21,600          15,495          70,711          54,799
                                                                 ---------       ---------       ---------       ---------
  Gross profit                                                      14,150           7,912          53,274          36,980

OPERATING EXPENSES:
  Selling                                                            9,702           7,155          33,208          25,443
  General and administrative                                         4,346           4,233          13,474          12,484
  Restructuring charge                                                  --             394           2,500             732
                                                                 ---------       ---------       ---------       ---------
  Income (loss) from operations                                        102          (3,870)          4,092          (1,679)
Interest expense                                                    (3,041)         (2,405)         (8,422)         (7,461)
Other income (expense), net                                             53            (106)            198            (217)
                                                                 ---------       ---------       ---------       ---------
Loss before income tax (expense) benefit                            (2,886)         (6,381)         (4,132)         (9,357)
Income tax (expense) benefit                                           (35)             76             (78)           (386)
                                                                 ---------       ---------       ---------       ---------
Net loss before extraordinary items                                 (2,921)         (6,305)         (4,210)         (9,743)
Extraordinary gain, net of $3.2 million and $6.3 million in
  taxes, respectively                                                4,409              --           8,838              --
                                                                 ---------       ---------       ---------       ---------
Net income (loss) before dividends and accretion on
  preferred stock                                                    1,488          (6,305)          4,628          (9,743)
Dividends and accretion on preferred stock                             847             929           2,435           2,678
                                                                 ---------       ---------       ---------       ---------
Net income (loss) applicable to common shareholders              $     641       $  (7,234)      $   2,193       $ (12,421)
                                                                 =========       =========       =========       =========

</TABLE>


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


                                       4
<PAGE>

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                NINE MONTHS ENDED
                                                                          ----------------------------
                                                                          SEPTEMBER 30,  SEPTEMBER 29,
                                                                              2000           2001
                                                                          -------------  -------------
<S>                                                                        <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss) before dividends and accretion on preferred stock      $  4,628       $ (9,743)
  Adjustments to reconcile net loss to net (cash used) provided
    by in operating activities --
  Depreciation and amortization                                               9,106          7,765
  Extraordinary gain on early extinguishment of debt                         (8,838)            --
  Amortization of interest costs related to debt                                593            935
  Equity in losses of investments in affiliates                                  --            147
  Changes in assets and liabilities --
    Accounts receivable                                                      (5,715)        14,687
    Inventories                                                              (4,073)         8,596
    Prepaid expenses and other current assets                                   158            255
    Deferred costs                                                             (450)           (88)
    Accounts payable                                                            784         (5,922)
    Accrued expenses                                                         (4,611)        (3,838)
    Accrued income taxes                                                         27             12
                                                                           --------       --------
      Net cash (used in) provided by operating activities                    (8,392)        12,806
                                                                           --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property, plant and equipment                                 (6,568)        (4,949)
  Increase in other assets                                                     (191)           (20)
                                                                           --------       --------
      Net cash used in investing activities                                  (6,759)        (4,969)
                                                                           --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings under revolving note payable                                16,953         (7,034)
  Proceeds from issuance of long-term debt                                    7,087             --
  Repurchase of 10 3/4% Series B Senior Notes due 2006                       (7,087)            --
  Payments on long term obligations and deferred compensation                (1,067)        (1,022)
  Redemption of Preferred Stock of a subsidiary                              (1,000)            --
                                                                           --------       --------
      Net cash provided by (used in) financing activities                    14,886         (8,056)
                                                                           --------       --------

  Effect of exchange rate changes on cash and cash equivalents                 (144)            --

NET DECREASE IN CASH AND CASH EQUIVALENTS                                      (409)          (219)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                2,289            578
                                                                           --------       --------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                   $  1,880       $    359
                                                                           ========       ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the period for --
    Interest                                                               $  8,257       $  7,537
                                                                           ========       ========
    Income taxes                                                           $     40       $    373
                                                                           ========       ========

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
    Acquisition of equipment under capital lease obligations               $    557       $     --
                                                                           ========       ========
    Issuance of Series B Preferred  Stock in connection with debt
      repurchase                                                           $    945       $    473
                                                                           ========       ========
</TABLE>


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


                                       5
<PAGE>

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 - Significant Accounting Policies

     (a) Interim Consolidated Condensed Financial Statements

     The accompanying unaudited interim consolidated condensed financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) for reporting on
Form 10-Q. Accordingly, certain information and footnote disclosure required for
complete financial statements are not included herein. It is recommended that
these financial statements be read in conjunction with the consolidated
financial statements and related notes of AAi.FosterGrant, Inc. (the "Company"
or "AAi") for the year ended December 30, 2000 as reported in the Company's 10-K
filed with the SEC on March 29, 2001. In the opinion of management, all
adjustments (consisting of normal, recurring adjustments) considered necessary
for a fair presentation of financial position, results of operations and cash
flows at the dates and for the periods presented have been included. The
consolidated condensed balance sheet presented as of December 30, 2000 has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The results of operations for the
period ended September 29, 2001 may not be indicative of the results that may be
expected for the year ending December 29, 2001, or for any other future period.

     (b) Revenue Recognition

     The Company recognizes revenue from product sales, net of estimated agreed
upon future allowances and anticipated returns and discounts, taking into
account historical experience, upon shipment to the customer.

     (c) Inventories

     Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following at December 30, 2000 and September 29, 2001 (in
thousands):

                                          DECEMBER 30,   SEPTEMBER 29,
                                              2000           2001
                                          ------------   -------------
     Finished goods                         $26,881        $21,599
     Work-in-process and raw materials        6,202          2,658
                                            -------        -------
                                            $33,083        $24,257
                                            =======        =======

     (d) Customer Acquisition Costs

     The Company incurs direct and incremental costs in connection with the
acquisition of certain new customers and new store locations from existing
customers under multi-year agreements. The Company may also receive the previous
vendor's merchandise from the customer in connection with these agreements. In
these situations, the Company values this inventory at its fair market value,
representing the lower of cost or net realizable value, and records that value
as inventory. The Company sells this inventory through various liquidation
channels. Except as provided below, the excess costs over the fair market value
of the inventory received is charged to selling expense when incurred. The
Company expensed customer acquisition costs of approximately $48,000 and
$269,000 for the three and nine months ended September 30, 2000 and $44,000 for
the nine months ended September 29, 2001. There were no customer acquisition
costs expensed for the three months ended September 29, 2001.

     The excess costs over the fair market value of the inventory received is
capitalized as deferred costs and amortized over the agreement period if the
Company enters into a minimum purchase agreement with the customer from which
the estimated gross profits from future minimum sales during the term of the
agreement are sufficient to recover the amount of the deferred costs. During the
three and nine months ended September 30, 2000 the Company capitalized
approximately $220,000 and $449,000, respectively, of these costs. The Company
capitalized costs of approximately $3,000 and $90,000 during the three and nine
months ended September 29, 2001, respectively. Amortization expense related to
these costs as well as previously capitalized costs was approximately $382,000
and $1.0 million for the three and nine months ended September 30, 2000 and
$91,000 and $268,000 for the three and nine months ended September 29, 2001.


                                       6
<PAGE>

Note 2 - Long-Term Obligations

     On July 21, 1998, the Company sold $75.0 million of 10 3/4% Senior Series A
Notes due 2006 (the Notes) through a Rule 144A offering. The net proceeds of
approximately $71.3 million received by the Company from the issuance and sale
of the Notes were used to repay outstanding indebtedness under a credit facility
with a bank and certain subordinated promissory notes to shareholders, net of
amounts due the Company from certain of these shareholders. The Company incurred
issuance costs of approximately $3.7 million in relation to the Notes. These
costs are being amortized over the life of the Notes and are included in other
assets in the accompanying consolidated balance sheets. In December 1998 the
Notes were exchanged for 10 3/4% Series B Notes due 2006 registered with the
SEC. Interest on the Series B Notes is payable semiannually on January 15 and
July 15.

     The Notes are general unsecured obligations of the Company, rank senior in
right of payment to all future subordinated indebtedness of the Company and rank
pari passu in right of payment to all existing and future unsubordinated
indebtedness of the Company including the bank credit facility. Accounts
receivable and inventory of the Company and its domestic subsidiaries secure the
bank credit facility. Accordingly, the Company's obligations under the bank
credit facility will effectively rank senior in right of payment to the Notes to
the extent of the assets subject to such security interest. The Notes are fully
and unconditionally guaranteed, on a joint and several basis, by each of the
Company's current and future Domestic Subsidiaries (as defined) (the
Guarantors). The Indenture under which the Notes were issued (the Indenture)
imposes certain limitations on the ability of the Company, and its subsidiaries
to, among other things, incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, make investments, create liens, engage
in transactions with shareholders and affiliates, sell assets and engage in
mergers and consolidations. At September 29, 2001 management believes the
Company was in compliance with these covenants.

     The Notes are redeemable at the option of the Company, in whole or in part,
on or after July 15, 2002 at various redemption prices, declining from 105.375%
of the principal amount to par on and after July 15, 2004. In addition, on or
prior to July 15, 2001, the Company may use the net cash proceeds of one or more
equity offerings to redeem up to 35% of the aggregate principal amount of the
Notes originally issued at a redemption price of 110.750% of the principal
amount thereof plus accrued interest to the date of redemption. Upon a change of
control, each Note holder has the right to require the Company to repurchase
such holder's Notes at a purchase price of 101% of the principal amount plus
accrued interest.

     During 2000, the Company repurchased $23.15 million face value of the Notes
for a purchase price of $7.09 million. The purchase price was financed utilizing
a term loan under its existing Senior Credit Facility. The term loan is secured
by a mortgage on its Smithfield, RI facility and the agreements of certain
preferred shareholders to purchase participations in the term loan. (In
September 2001, certain preferred shareholders agreed to subordinate their first
mortgage interest to the Company's senior lenders in connection with an
amendment to the Senior Credit Facility that increased the Company's borrowing
base. See Note 3- Senior Credit Facility.) The term loan is being amortized over
60 months commencing April 1, 2001, with the principal balance due at the
expiration of the Senior Credit Facility on July 31, 2003. As a result of this
transaction, the Company recognized a $8.8 million extraordinary gain, net of
$6.3 million in taxes, and wrote off $0.9 million of unamortized issuance costs
related to the Notes that were repurchased. These purchases resulted from
inquiries from holders of the Notes. The Company does not solicit offers to
tender Notes for repurchase, but may, from time to time, consider requests to
repurchase Notes, subject to the availability of appropriate financing.

     In conjunction with the commitment to purchase participations in the term
loan, the Company issued 70,870 shares of Series B Preferred Stock. The holders
of Series B Preferred Stock are entitled to receive, prior and in preference to
any other capital stock of the Company, an amount per share equal to $6.67
multiplied by the number of six month periods and fractions thereof during which
the participation commitment is outstanding. The Company is amortizing the value
related to each six-month participation commitment to interest expense. As the
participation commitment is extended for additional six-month periods, the
Company is recording additional value to the Series B Preferred Stock and
amortizing the related costs over the additional period of the participation
commitment as required. During the nine months ended September 29, 2001, the
Company recorded additional value to the Series B Preferred Stock of $473,000.

Note 3 - Senior Credit Facility

     In September 2001, the Company amended its Senior Credit Facility.
Borrowings under the Senior Credit Facility are limited to the lesser of $40.0
million or the borrowing base, which is defined as a percentage of eligible
accounts receivable and the lesser of (i) inventories or (ii) $30.0 million less
the interest rate protection reserve and the foreign exchange exposure, reduced
by outstanding letters of credit. Revolving credit borrowings bear interest at
the bank's prime rate (7.875% at September 29, 2001) plus 0.5% or LIBOR (3.55%
at September 29, 2001) plus 3.625%. The Company has the option of electing the
rate; however, the use of LIBOR is


                                       7
<PAGE>

limited. The Senior Credit Facility expires July 2003. As of September 29, 2001,
the Company had approximately $0.2 million borrowing availability under the
Senior Credit Facility.

     The Senior Credit Facility is subject to certain restrictive covenants,
including a fixed charge coverage ratio, leverage ratio and minimum EBITDA. As
of September 29, 2001, the Company was not in compliance with certain financial
covenants. As of November 13, 2001, the Company received a written waiver for
such noncompliance from the Bank. The Company is currently negotiating its
financial covenants going forward so that they reflect performance levels that
the Company believes it can attain.

Note 4 - Comprehensive Income (Loss)

     Comprehensive loss for the three and nine months ended September 29, 2001
was $6.4 million and $9.4 million, respectively, as compared to comprehensive
income for the three and nine months ended September 30, 2000 of $1.4 million
and $5.1 million, respectively. Differences between comprehensive income (loss)
and income (loss) before dividends and accretion on preferred stock for each
period represents the foreign currency translation adjustment for each period.

Note 5 - Restructuring Charge

     In March 2000, the Company recorded a restructuring charge of $2.5 million
related to the termination of three executives. The charge consists of an
accrual of severance payments due to three executives for a two-year period. The
severance will be paid through fiscal 2002.

     In May 2001, the Company recorded a restructuring charge of $0.3 million
related to one senior executive, which will be paid over a twelve-month period.
In addition, in July 2001, the Company adopted a plan to realign its
organization and reduce operating costs that resulted in a workforce reduction.
As a result, the Company recognized a third quarter restructuring charge of $0.4
million related to severance payments due to 27 employees. As of September 29,
2001 all of these employees were terminated and severance payments of $0.1
million were paid. The remaining severance will be paid through July 2002.

<TABLE>
<CAPTION>
                        March 2000                      May 2001        July 2001
                      Restructuring    Fiscal 2000    Restructuring   Restructuring    Fiscal 2001    Reserve Balance
Description              Charge         Payments         Charge          Charge         Payments     September 29, 2001
-----------           -------------    -----------    -------------   -------------    -----------   ------------------
<S>                   <C>              <C>            <C>             <C>              <C>           <C>
Severance benefits        $2,500          $(896)          $338             $394         $(1,483)            $853
                          ======          =====           ====             ====         =======             ====
</TABLE>

Note 6 - New Accounting Standards

     In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations". SFAS 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. The Company does not
expect the adoption of this statement to have a material impact on its
operations.

     In June 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets". With the adoption of
SFAS No. 142, goodwill is no longer subject to amortization over its estimated
useful life, but instead goodwill is subject to at least an annual assessment
for impairment by applying a fair-value-based test. The Company will adopt this
statement at the beginning of fiscal year 2002. The Company is currently
assessing the impact of this pronouncement.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 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." Under this
statement it is required that one accounting model be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired,
and it broadens the presentation of discontinued operations to include more
disposal transactions. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early adoption permitted.
The Company is currently evaluating the ultimate impact of this statement on its
results of operations or financial position until such time as its provisions
are applied.


                                       8
<PAGE>

Note 7 - Segment Reporting

     The Company has determined it has three reportable segments: mass
merchandisers, chain drug stores/combo stores/supermarkets, and variety stores.
The Company distributes accessories such as, costume jewelry, optical products,
watches, clocks and other accessories.

     The Company's reportable segments are strategic business units that sell
the Company's products to distinct distribution channels. They are managed
separately because each business requires different marketing strategies. The
Company's approach is based on the way that management organizes the segments
within the enterprise for making operating decisions and assessing performance.

     The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes not
including nonrecurring gains and losses.

<TABLE>
<CAPTION>
                                           CHAIN DRUG
   THREE MONTHS                           STORES/COMBO
      ENDED                   MASS          STORES/
SEPTEMBER 30, 2000        MERCHANDISERS   SUPERMARKETS     VARIETY    OTHER       TOTAL
------------------        -------------   ------------     -------    ------     -------
<S>                          <C>            <C>            <C>        <C>        <C>
Net sales                    $21,994        $7,056         $ 4,226    $2,474     $35,750
                             =======        ======         =======    ======     =======
Segment loss                 $  (619)       $ (720)        $  (927)   $ (674)    $(2,940)
                             =======        ======         =======    ======     =======

                                           CHAIN DRUG
   THREE MONTHS                           STORES/COMBO
      ENDED                   MASS          STORES/
SEPTEMBER 29, 2001        MERCHANDISERS   SUPERMARKETS     VARIETY    OTHER       TOTAL
------------------        -------------   ------------     -------    ------     -------
Net sales                    $17,013        $ 2,368        $ 2,883    $1,143     $23,407
                             =======        =======        =======    ======     =======
Segment loss                 $(3,666)       $(1,382)       $(1,029)   $ (198)    $(6,275)
                             =======        =======        =======    ======     =======

                                           CHAIN DRUG
    NINE MONTHS                           STORES/COMBO
      ENDED                   MASS          STORES/
SEPTEMBER 30, 2000        MERCHANDISERS   SUPERMARKETS      VARIETY    OTHER      TOTAL
------------------        -------------   ------------     -------    -------    --------
Net sales                    $73,141        $ 27,122       $ 16,976   $ 6,746    $123,985
                             =======        ========       ========   =======    ========
Segment profit (loss)        $ 1,389        $   (378)      $ (1,606)  $(1,231)   $ (1,826)
                             =======        ========       ========   =======    ========

                                           CHAIN DRUG
    NINE MONTHS                           STORES/COMBO
      ENDED                   MASS          STORES/
SEPTEMBER 29, 2001        MERCHANDISERS   SUPERMARKETS     VARIETY     OTHER      TOTAL
------------------        -------------   ------------     -------    -------    --------
Net sales                    $57,504        $ 19,272       $ 11,478   $ 3,525    $ 91,779
                             =======        ========       ========   ========   ========
Segment loss                 $(2,978)       $   (499)      $ (2,227)  $  (867)   $ (6,571)
                             =======        ========       ========   =======    ========
</TABLE>

     Revenues from segments below the quantitative thresholds are attributable
to five operating segments of the Company. Those segments include department
stores, armed forces' PX stores, boutique stores, gift shops, bookstores and
catalogues. None of these segments have ever met any of the quantitative
thresholds for determining reportable segments and their combined results are
presented as Other.

     Segment profit (loss) differs from the profit (loss) before income tax
expense and dividends and accretion on preferred stock by the amount of other
income, restructuring charge and extraordinary items which are not allocated by
segment. The chief operating decision-maker does not review segment assets.

     Total assets specifically identifiable with each reportable segment are as
follows:

                                                  DECEMBER 30,   SEPTEMBER 29,
                                                     2000            2001
                                                  ------------   -------------
Mass merchandisers                                 $ 22,497        $ 16,851
Chain drug stores/combo stores/supermarkets           7,795           5,093
Variety                                               4,631           1,888
Other                                                 2,701           2,120
Unassigned assets                                    70,547          54,585
                                                   --------        --------
                                                   $108,171        $ 80,537
                                                   ========        ========


                                       9
<PAGE>

Note 8 - Supplemental Consolidating Financial Information

     The following is summarized consolidating financial information for the
Company, segregating the Company, wholly owned guarantor subsidiaries and
non-guarantor subsidiaries as they relate to the Notes. The wholly owned
guarantor subsidiaries are domestic subsidiaries of the Company and they
guarantee the Notes on a full, unconditional and joint and several basis.
Separate financial statements of the guarantor subsidiaries have not been
included because management believes that they are not material to investors.

     The Company and guarantor subsidiaries account for investments in
subsidiaries on the equity method for the purposes of the consolidating
financial data. Earnings of subsidiaries are therefore reflected in the
Company's and subsidiary's investment accounts and earnings. The principal
elimination entries eliminate investments in subsidiaries and intercompany
balances and transactions.


                                       10
<PAGE>

SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                             DECEMBER 30, 2000
                                                   ----------------------------------------------------------------------
                                                                 GUARANTOR     NON-GUARANTOR
                                                    COMPANY     SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                   ---------    ------------   -------------  ------------   ------------
                                                                              (IN THOUSANDS)
<S>                                                <C>            <C>            <C>           <C>            <C>
                                                         ASSETS
CONSOLIDATING BALANCE SHEETS
CURRENT ASSETS:
  Cash and cash equivalents                        $      --      $      --      $     578     $      --      $     578
  Accounts receivable, net                            27,084          2,143          3,612            --         32,839
  Inventories                                         28,948             --          4,135            --         33,083
  Prepaid expenses and other current assets              837             42            401            --          1,280
  Deferred tax assets                                    980             --             --            --            980
                                                   ---------      ---------      ---------     ---------      ---------
    Total current assets                              57,849          2,185          8,726            --         68,760

PROPERTY, PLANT AND EQUIPMENT, NET                    16,887              6          1,765            --         18,658
OTHER ASSETS                                          38,356             --          2,729       (20,332)        20,753
                                                   ---------      ---------      ---------     ---------      ---------
    Total assets                                   $ 113,092      $   2,191      $  13,220     $ (20,332)     $ 108,171
                                                   =========      =========      =========     =========      =========


                                    LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
  Borrowings under revolving note payable          $  25,263      $      --      $      --     $      --      $  25,263
  Current maturities of long-term obligations          1,390             --             47            --          1,437
  Accounts payable                                    19,813             67          1,500            --         21,380
  Accrued expenses                                    18,251            722          1,108            --         20,081
  Due (from) to affiliate                               (631)         8,141          8,823       (16,333)
                                                   ---------      ---------      ---------     ---------      ---------
    Total current liabilities                         64,086          8,930         11,478       (16,333)        68,161

10 3/4% SENIOR NOTES                                  51,850             --             --            --         51,850

LONG-TERM OBLIGATIONS, LESS CURRENT
MATURITIES                                             7,652             --            196            --          7,848

  Preferred stock                                     36,092             --             --            --         36,092
  Shareholders' (deficit) equity                     (46,588)        (6,739)         1,546        (3,999)       (55,780)
                                                   ---------      ---------      ---------     ---------      ---------
    Total liabilities and shareholders'
      equity (deficit)                             $ 113,092      $   2,191      $  13,220     $ (20,332)     $ 108,171
                                                   =========      =========      =========     =========      =========
</TABLE>


                                       11
<PAGE>

                SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                          SEPTEMBER 29, 2001
                                                  ------------------------------------------------------------------
                                                               GUARANTOR     NON-GUARANTOR
                                                  COMPANY     SUBSIDIARIES   SUBSIDIARIES  ELIMINATIONS  CONSOLIDATED
                                                  --------    ------------   ------------- ------------  ------------
                                                                            (IN THOUSANDS)
<S>                                                <C>           <C>           <C>          <C>           <C>
                                               ASSETS
CONSOLIDATING BALANCE SHEETS
  CURRENT ASSETS:
  Cash and cash equivalents                        $     64      $     --      $    295     $     --      $    359
  Accounts receivable, net                           15,001           616         2,142           --        17,759
  Inventories                                        20,724            --         3,533           --        24,257
  Prepaid expenses and other current assets             434            --           584           --         1,018
  Deferred tax assets                                   980            --            --           --           980
                                                   --------      --------      --------     --------      --------

    Total current assets                             37,203           616         6,554           --        44,373

PROPERTY, PLANT AND EQUIPMENT, NET                   15,071            --         1,530           --        16,601
OTHER ASSETS                                         32,786            --           333      (13,556)       19,563
                                                   --------      --------      --------     --------      --------
    Total Assets                                   $ 85,060      $    616      $  8,417     $(13,556)     $ 80,537
                                                   ========      ========      ========     ========      ========

                              LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
  Borrowings under revolving note payable          $ 17,837      $     --      $    392     $     --      $ 18,229
  Current maturities of long-term obligations         1,733            --            47           --         1,780
  Accounts payable                                   13,944            --         1,355           --        15,299
  Accrued expenses                                   13,798           211         2,143           --        16,152
  Due (from) to affiliate                              (702)        7,446         2,492       (9,236)           --
                                                   --------      --------      --------     --------      --------
    Total current liabilities                        46,610         7,657         6,429       (9,236)       51,460

10 3/4% SENIOR NOTES                                 51,850            --            --           --        51,850

LONG-TERM OBLIGATIONS, LESS
CURRENT MATURITIES                                    6,397            --           155           --         6,552

    Preferred stock                                  39,242            --            --           --        39,242
    Shareholders' (deficit) equity                  (59,039)       (7,041)        1,833       (4,320)      (68,567)
                                                   --------      --------      --------     --------      --------

      Total liabilities and shareholders'
       equity (deficit)                            $ 85,060      $    616      $  8,417     $(13,556)     $ 80,537
                                                   ========      ========      ========     ========      ========
</TABLE>


                                       12
<PAGE>

                SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED SEPTEMBER 30, 2000
                                            ----------------------------------------------------------------------
                                                           GUARANTOR     NON-GUARANTOR
                                             COMPANY      SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                            ---------     ------------   -------------  ------------  ------------
                                                                        (IN THOUSANDS)
<S>                                         <C>            <C>            <C>            <C>           <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
Net sales                                   $ 102,134      $   4,217      $  17,634      $      --     $ 123,985
Cost of goods sold                             59,199          3,325          8,187             --        70,711
                                            ---------      ---------      ---------      ---------     ---------

Gross profit                                   42,935            892          9,447             --        53,274

Operating expenses                             37,200          1,900          7,582             --        46,682

Restructuring charge                            2,500             --             --             --         2,500
                                            ---------      ---------      ---------      ---------     ---------

Income (loss) from operations                   3,235         (1,008)         1,865             --         4,092
Interest expense                               (7,976)           (30)          (416)            --        (8,422)
Other income (expense), net                     1,112             44           (958)            --           198
Equity in (losses) earnings of
  consolidated subsidiaries                      (504)            --             --            504            --
                                            ---------      ---------      ---------      ---------     ---------

(Loss) income before income tax expense
  and dividends and accretion on
  preferred stock                              (4,133)          (994)           491            504        (4,132)

Income tax expense                                (77)            (1)            --             --           (78)
                                            ---------      ---------      ---------      ---------     ---------

Net (loss) income before extraordinary         (4,210)          (995)           491            504        (4,210)
  gain

Extraordinary gain, net of tax                  8,838             --             --             --         8,838
                                            ---------      ---------      ---------      ---------     ---------
Net income (loss) before dividends and
  accretion on preferred stock                  4,628           (995)           491            504         4,628
Dividends and accretion on
preferred  stock                                2,435             --             --             --         2,435
                                            ---------      ---------      ---------      ---------     ---------

Net income (loss) applicable to common
  shareholders                              $   2,193      $    (995)     $     491      $     504     $   2,193
                                            =========      =========      =========      =========     =========
</TABLE>


                                       13
<PAGE>

                SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                             NINE MONTHS ENDED SEPTEMBER 29, 2001
                                              --------------------------------------------------------------------
                                                            GUARANTOR    NON-GUARANTOR
                                              COMPANY     SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                              --------    ------------   -------------  ------------  ------------
                                                                       (IN THOUSANDS)
<S>                                           <C>           <C>           <C>           <C>           <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
Net sales                                     $ 74,208      $    (17)     $ 17,588      $     --        $ 91,779
Cost of goods sold                              46,735           253         7,811            --          54,799
                                              --------      --------      --------      --------        --------

  Gross profit                                  27,473          (270)        9,777            --          36,980

Operating expenses                              30,563            30         7,334            --          37,927

Restructuring charge                               732            --            --            --             732
                                              --------      --------      --------      --------        --------

  (Loss) income from operations                 (3,822)         (300)        2,443            --          (1,679)
Interest expense                                (7,143)           --          (318)           --          (7,461)
Other income (expense), net                      1,071            --        (1,141)           --             (70)
Equity in income (losses) earnings of
  consolidated subsidiaries                        174            --            --          (321)           (147)
                                              --------      --------      --------      --------        --------

  (Loss) income before income tax expense
    and dividends and accretion and
    preferred stock                             (9,720)         (300)          984          (321)       (9,357)

Income tax expense                                 (23)           (2)         (361)           --          (386)
                                              --------      --------      --------      --------      --------

Net (loss) income before dividends and
  accretion on preferred stock                  (9,743)         (302)          623          (321)       (9,743)
Dividends and accretion on preferred
  Stock                                          2,678            --            --            --         2,678
                                              --------      --------      --------      --------      --------

  Net (loss) income applicable to
    common shareholders                       $(12,421)     $   (302)     $    623      $   (321)     $(12,421)
                                              ========      ========      ========      ========      ========
</TABLE>


                                       14
<PAGE>

                SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED SEPTEMBER 30, 2000
                                                   -----------------------------------------------------------------
                                                                GUARANTOR    NON-GUARANTOR
                                                    COMPANY    SUBSIDIARIES  SUBSIDIARIES  ELIMINATIONS  CONSOLIDATED
                                                   --------    ------------  ------------  ------------  ------------
                                                                            (IN THOUSANDS)
<S>                                                <C>           <C>           <C>           <C>           <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash flows from operating activities               $ (8,354)     $ (1,839)     $  1,801      $     --      $ (8,392)
Cash flows from Investing activities:
  Purchase of property, plant and equipment          (5,133)           --        (1,435)           --        (6,568)
  Advance to affiliates                              (1,286)           --            --         1,286            --
  Other investing activities                           (191)           --            --            --          (191)
                                                   --------      --------      --------      --------      --------
  Net cash (used in) provided by
    investing activities                             (6,610)           --        (1,435)        1,286        (6,759)
                                                   --------      --------      --------      --------      --------
Cash flows from financing activities:
  Net borrowings under revolving note
    payable                                          16,953            --            --            --        16,953
  Proceeds from issuance of long-term debt            7,087            --            --            --         7,087
  Repurchase of 10 3/4% Series B
    Senior Notes due 2006                            (7,087)           --            --            --        (7,087)
  Payments on long-term obligations and
    deferred compensation                            (1,067)           --            --            --        (1,067)
  Redemption of Series A Preferred Stock             (1,000)           --            --            --        (1,000)
  Due to (from) affiliates                               --         1,860          (574)       (1,286)           --
                                                   --------      --------      --------      --------      --------
  Net cash provided by (used in) financing
    activities                                       14,886         1,860          (574)           --        14,886
                                                   --------      --------      --------      --------      --------
  Net (decrease) increase in cash                       (78)           21          (208)           --          (265)
  Exchange rate effect on cash                           --            --          (144)           --          (144)
Cash and cash equivalents, beginning of period           97             8         2,184            --         2,289
                                                   --------      --------      --------      --------      --------
Cash and cash equivalents, end of period           $     19      $     29      $  1,832      $     --      $  1,880
                                                   ========      ========      ========      ========      ========
</TABLE>


                                       15
<PAGE>

                SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                 NINE MONTHS ENDED SEPTEMBER 29, 2001
                                                  ------------------------------------------------------------------
                                                                              NON-
                                                               GUARANTOR    GUARANTOR
                                                  COMPANY    SUBSIDIARIES  SUBSIDIARIES  ELIMINATIONS   CONSOLIDATED
                                                  --------   ------------  ------------  ------------   ------------
                                                                          (IN THOUSANDS)
<S>                                               <C>           <C>           <C>           <C>           <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS
Cash flows from operating activities              $  7,733      $    694      $  4,379      $     --      $ 12,806
Cash flows from Investing activities:
  Purchase of property, plant and equipment         (3,719)           --        (1,230)           --        (4,949)
  Advance to affiliates                                 69            --          (349)          280            --
  Other investing activities                           (20)           --            --            --           (20)
                                                  --------      --------      --------      --------      --------
  Net cash (used in) provided by investing
    activities                                      (3,670)           --        (1,579)          280        (4,969)
                                                  --------      --------      --------      --------      --------
Cash flows from financing activities:
  Net borrowings under revolving note payable       (7,426)           --           392            --        (7,034)
  Payments on long-term obligations and
    Deferred compensation                             (982)           --           (40)           --        (1,022)
  Due to (from) affiliates                           4,409          (694)       (3,435)         (280)           --
                                                  --------      --------      --------      --------      --------
    Net cash provided by (used in)
      financing activities                          (3,999)         (694)       (3,083)         (280)       (8,056)
                                                  --------      --------      --------      --------      --------
    Net (decrease) increase in cash                     64            --          (283)           --          (219)
Cash and cash equivalents, beginning
  of period                                             --            --           578            --           578
                                                  --------      --------      --------      --------      --------
Cash and cash equivalents, end of period          $     64      $     --      $    295      $     --      $    359
                                                  ========      ========      ========      ========      ========
</TABLE>


                                       16
<PAGE>

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

     The following discussion may contain "forward-looking" statements and are
subject to risks and uncertainties that could cause actual results to differ
significantly from expectations. In particular, statements contained in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section which are not historical facts, including, but not limited
to, statements regarding the anticipated adequacy of cash resources to meet the
Company's working capital and capital expenditure requirements and statements
regarding the anticipated proportion of revenues to be derived from a limited
number of customers, may constitute forward-looking statements. Although the
Company believes the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
have been correct. These risks and uncertainties include the substantial
leverage of the Company, customer concentration and consolidation, dependence on
licensed brands, a single site distribution facility, operating in international
economies, unpredictability of discretionary consumer spending, competition,
susceptibility to changing consumer preferences and obtaining full benefits from
the new information system. The following discussion and analysis of financial
condition and results from operations should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere.

OVERVIEW

     The Company is a value-added distributor of optical products, costume
jewelry, watches, clocks and other accessories primarily to mass merchandisers,
chain drug stores/combo stores/supermarkets and variety stores in North America
and the United Kingdom. As a value-added distributor, the Company provides
customized store displays, merchandising management and a store-level field
service force to replenish and restock displays, reorder product and attend to
markdowns and allowances. Upon shipment to the customer, the Company estimates
agreed-upon future allowances, returns and discounts, taking into account
historical experience, and reflects revenue net of these estimates.

     When establishing or expanding a customer relationship, the Company
generally enters into multi-year agreements for the supply of specified product
lines to specific customer stores. The agreements typically do not contain
required minimum sales volumes but may provide for termination penalties equal
to the Company's unamortized cost of product displays provided to the customer.
The Company believes its relationships with retailers are dependent upon its
ability to efficiently utilize allocated floor space to generate satisfactory
returns for its customers. To meet this end, the Company strives to consistently
deliver competitively priced products and service programs, which provide
retailers with attractive gross margins and inventory turnover rates. The
Company has historically retained customers from year to year, although
retailers may drop or add product lines supplied by the Company. Generally,
customer loss has been attributable to such customer going out of business or
being acquired by a company that does not carry the Company's product line or
has prior relationships with a competitor of the Company.

     Certain segments of the retail industry, particulary mass merchandisers,
variety stores, drugstores and supermarkets, are experiencing significant
consolidation and in recent years many major retailers have experienced
financial difficulties. These industry wide developments have had and may
continue to have an impact on the Company's results of operations. In addition,
many major retailers have sought to reduce inventory levels in order to reduce
their operating costs which has had a negative effect on the Company's results
of operations.

     Net Sales. The Company offers optical products, costume jewelry, small
synthetic leather goods and other accessories, generally at retail price points
of $30 or less. Until the sale of its Fantasma division in April 2001, the
Company also sold watches and clocks. Net sales of the Company's optical
products accounted for approximately 69.6% and 62.2% of the Company's net sales
for the nine months ended September 29, 2001 and September 30, 2000
respectively. Net sales of the Company's costume jewelry accounted for
approximately 30.3% and 32.7% of the Company's net sales for the nine months
ended September 29, 2001 and September 30, 2000, respectively, and the balance
represented sales of synthetic leather goods, watches, clocks and other
accessories.

     Cost of Goods Sold. The Company outsources manufacturing for all of its
products, approximately 83.5% of which is sourced to manufacturers in Asia
through its joint venture in Hong Kong, with the remainder outsourced to
independent domestic manufacturers. Accordingly, the principal element
comprising the Company's cost of goods sold is the price of manufactured goods
purchased through the Company's joint venture or from independent manufacturers.
The Company believes outsourcing manufacturing allows it to reliably deliver
competitively priced products to the retail market while retaining considerable
flexibility in its cost structure.

    Operating Expenses. Operating expenses are comprised primarily of payroll
and occupancy costs related to the Company's selling, general and administrative
activities as well as depreciation and amortization. The Company incurs various
costs in connection with the acquisition of new customers and new stores for
existing customers, principally the cost of new product display fixtures and
costs


                                       17
<PAGE>

related to the purchase of the customer's existing inventory. The Company makes
substantial investments in the design, production and installation of display
fixtures in connection with establishing and maintaining customer relationships.
The Company capitalizes the production cost of these display fixtures as long as
it retains ownership of them. These costs are amortized to selling expense on a
straight-line basis over the estimated useful life of these fixtures, which are
one to three years. If the Company does not retain title to the displays, the
display costs are expensed as shipped.

     The Company incurs direct and incremental costs in connection with the
acquisition of certain new customers and new store locations from existing
customers under multi-year agreements. The Company may also receive the previous
vendor's merchandise from the customer in connection with these agreements. In
these situations, the Company values this inventory at its fair market value,
representing the lower of cost or net realizable value, and records that value
as inventory. The Company sells this inventory through various liquidation
channels. Except as provided below, the excess costs over the fair market value
of the inventory received is charged to selling expense when incurred. The
Company expensed customer acquisition costs of approximately $48,000 and
$269,000, respectively for the three and nine months ended September 30, 2000
and $44,000 for the nine months ended September 29, 2001. There were no customer
acquisition costs expensed for the three months ended September 29, 2001.

     The excess costs over the fair market value of the inventory received is
capitalized as deferred costs and amortized over the agreement period if the
Company enters into a minimum purchase agreement with the customer from which
the estimated gross profits from future minimum sales during the term of the
agreement are sufficient to recover the amount of the deferred costs. During the
three and nine months ended September 30, 2000, the Company capitalized
approximately $220,000 and $449,000 of these costs, respectively. The Company
capitalized costs of approximately $3,000 and $90,000 during the three and nine
months ended September 29, 2001, respectively. Amortization expense related to
the costs as well as previously capitalized costs was approximately $91,000 and
$268,000, for the three and nine months ended September 29, 2001, respectively
and $382,000 and $1.0 million, for the three and nine months ended September 30,
2000, respectively.

     During the six months ended July 1, 2000, the Company recognized a $2.5
million restructuring charge related to the accrual of severance payments due to
three executives, which is being paid over a two-year period. In May 2001, the
Company recorded an additional restructuring charge of $0.3 million related to
the accrual of severance payments to one senior executive, which will be paid
over a twelve-month period. In addition, the Company adopted a plan in July 2001
to realign its organization and reduce operating costs that resulted in a work
force reduction. As a result, the Company recognized a third quarter
restructuring charge of approximately $0.4 million related to severance payments
due to 27 employees. As of September 29, 2001 all of these employees were
terminated and severance payments of $0.1 million were paid. The remaining
severance will be paid through July 2002.

     Dividends and Accretion on Preferred Stock. The Company has 43,700 shares
of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock")
outstanding, of which 34,200 were issued in May 1996 for gross proceeds of $18.0
million, and an additional 9,500 shares were issued for gross proceeds of $5.0
million in connection with the December 1996 acquisition of Foster Grant Group
US and related companies. Beginning on June 30, 2002, shares of the Series A
Preferred Stock are redeemable at the option of the holder for an amount equal
to the original issue price plus accrued and unpaid dividends yielding a 10%
compounded annual rate of return, provided, however, that the right to require
redemption is suspended as long as any Restrictive Indebtedness (as defined in
the Articles of Incorporation) is outstanding. Net income (loss) applicable to
common shareholders represents net income (loss) less accretion of original
issuance costs and cumulative dividends due on the Series A Preferred Stock.

     Extraordinary Gain. During 2000, the Company repurchased $23.15 million
face value of the Notes for a purchase price of $7.09 million. As a result of
this transaction, the Company recognized a $8.8 million extraordinary gain, net
of $6.3 million in taxes. See further discussion in "Liquidity and Capital
Resources".

     Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).
Although EBITDA is not a measure of performance calculated in accordance with
Generally Accepted Accounting Principles (GAAP), the Company believes that
EBITDA is accepted as a generally recognized measure of performance in the
distribution industry and provides an indicator of the earnings available to
meet the Company's debt service obligations. EBITDA should not be considered in
isolation or as a substitute for operating income, net income, net cash provided
by operating activities or any other measure for determining the Company's
operating performance or liquidity which is calculated in accordance with GAAP.
EBITDA, before the restructuring charge of $0.4 million and $0.7 million, was
($1.4) million and $6.7 million for the three and nine months ended September
29, 2001, respectively, as compared to EBITDA, before the restructuring charge
of $2.5 million and the extraordinary gain of $8.8 million, of approximately
$3.2 million and $15.9 million for the three and nine months ended September 30,
2000, respectively. The year-to-date decrease, before the restructuring charge
and extraordinary gain, of $9.2 million or 58% is principally due to the
decrease in operating income. EBITDA, after the restructuring charge was ($1.7)
million and $6.0 million for the three and nine months ended September 29, 2001,
respectively.


                                       18
<PAGE>

EBITDA, after the restructuring charge and extraordinary gain, was $7.6 million
and $22.2 million for the three and nine months ended September 30, 2000,
respectively.

     Net loss before dividends and accretion on preferred stock, before the
restructuring charge was $5.9 million and $9.0 million for the three and nine
months ended September 29, 2001, respectively, as compared to the net loss
before dividends and accretion on preferred stock before the restructuring
charge and extraordinary gain, of $2.9 million and $1.7 million for the three
and nine months ended September 30, 2000, respectively. Net loss before
dividends and accretion on preferred stock, after the restructuring charge, was
$6.3 million and $9.7 million for the three and nine months ended September 29,
2001, respectively, as compared to net income before dividends and accretion on
preferred stock, after the restructuring charge and extraordinary gain, of $1.5
million and $4.6 million for the three and nine months ended September 30, 2000,
respectively.

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items included in the Company's
Consolidated Condensed Statements of Operations:

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                             -------------------------------     -------------------------------
                                                             SEPTEMBER 30,     SEPTEMBER 29,     SEPTEMBER 30,     SEPTEMBER 29,
                                                                2000              2001              2000              2001
                                                             -------------     -------------     -------------     -------------
<S>                                                             <C>               <C>               <C>               <C>
Net sales                                                       100.0%            100.0%            100.0%            100.0%
Cost of goods sold                                               60.4              66.2              57.0              59.7
                                                                -----             -----             -----             -----
Gross profit                                                     39.6              33.8              43.0              40.3
Operating expenses, excluding restructuring charge               39.3              48.6              37.7              41.3
Restructuring charge                                             --                 1.7               2.0               0.8
                                                                -----             -----             -----             -----
Income (loss) from operations                                     0.3             (16.5)              3.3              (1.8)
Interest expense                                                 (8.5)            (10.3)             (6.8)             (8.1)
Other income (expense), net                                       0.1              (0.5)              0.2              (0.3)
                                                                -----             -----             -----             -----
Loss before taxes and dividends and accretion
  on preferred stock                                             (8.1)            (27.3)             (3.3)            (10.2)
Income tax (expense) benefit                                     (0.1)              0.3              (0.1)             (0.4)
                                                                -----             -----             -----             -----
Net loss before extraordinary items,
  dividends and accretion on preferred stock                     (8.2)            (27.0)             (3.4)            (10.6)
Extraordinary gain, net                                          12.3              --                 7.1              --
                                                                -----             -----             -----             -----
Net income (loss) before dividends and accretion on
  preferred stock                                                 4.1             (27.0)              3.7             (10.6)
Dividend and accretion on preferred stock                         2.3               4.0               2.0               2.9
                                                                -----             -----             -----             -----
Net income (loss) applicable to common shareholders               1.8%            (31.0)%             1.7%            (13.5)%
                                                                =====             =====             =====             =====
</TABLE>


                                       19
<PAGE>
THREE MONTHS ENDED SEPTEMBER 29, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000

     Net Sales. Consolidated net sales were $23.4 million for the three months
ended September 29, 2001 as compared to $35.8 million for the three months ended
September 30, 2000, a decrease of $12.4 million. Sales decreased across all
segments and is primarily due to the absence of sales from watches, clocks and
certain other accessory lines which the Company discontinued during the first
half of 2001 and the Company's efforts to restructure its customer base to
eliminate less profitable relationships. The decline is also attributable to
several customer bankruptcies and a general softness in sunglasses and jewelry
retail sales in all segments as a result of current economic conditions, as well
as planned reductions in jewelry principally related to a change in the terms of
service with a significant customer in the Mass Merchandiser channel.

     Gross Profit. Gross profit was $7.9 million for the three months ended
September 29, 2001 as compared to $14.2 million for the three months ended
September 30, 2000. Gross profit as a percentage of net sales decreased to 33.8%
for the three months ended September 29, 2001 from 39.6% for the three months
ended September 30, 2000. The percentage decrease is primarily due to a shift in
mix of sales to lower margin distribution channels.

     Operating Expenses. Operating expenses were $11.4 million, before the
restructuring of $0.4 million, for the three months ended September 29, 2001 as
compared to $14.0 million for the three months ended September 30, 2000, a
decrease of 18.9% or $2.6 million. Decreases occurred throughout the Company
driven primarily by the restructuring of the field service organization and
staffing reductions which reflects management's continued attention to expense
control. Operating expenses, after the restructuring charge of $0.4 million,
were $11.8 million for the three months ended September 29, 2001. The
restructuring charge is a result of the steps the Company took in July 2001 to
realign its organization and reduce operating costs.

     Interest Expense. Interest expense was $2.4 million for the three months
ended September 29, 2001 as compared to $3.0 million for the three months ended
September 30, 2000, a decrease of 20.9% or $0.6 million. The decrease is
primarily attributable to interest savings generated by the bond repurchase
during fiscal 2000 and a lower average outstanding balance and interest rate on
the revolving note payable versus the prior year.

     Income Tax. Income tax benefit was $76,000 for the three months ended
September 29, 2001 as compared to income tax expense of $35,000 for the three
months ended September 30, 2000, and relates to net taxes due on our foreign
operations.

     Net Loss. As a result of the factors discussed above, net loss before
dividends and accretion on preferred stock, before the restructuring charge of
$0.4 million was $5.9 million, for the three months ended September 29, 2001 as
compared to a net loss before dividends and accretion on preferred stock, before
the extraordinary gain, of $2.9 million for the three months ended September 30,
2000, a decrease of $3.0 million in earnings. Net loss before dividends and
accretion on preferred stock, after the restructuring charge was $6.3 million
for the three months ended September 29, 2001 as compared to net income before
dividends and accretion on preferred stock, after the extraordinary gain of $1.5
million for the three months ended September 30, 2000. The extraordinary gain of
$4.4 million was recognized as a result of the early extinguishment of debt.

     Net Loss Applicable to Common Shareholders. Net loss applicable to common
shareholders, before the restructuring charge of $0.4 million was $6.8 million
for the three months ended September 29, 2001, as compared to a net loss
applicable to common shareholders, before the extraordinary gain of $3.8 million
for the three months ended September 30, 2000, a decrease of $3.0 million in
earnings.

NINE MONTHS ENDED SEPTEMBER 29, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000

     Net Sales. Consolidated net sales were $91.8 million for the nine months
ended September 29, 2001 as compared to $124.0 million for the nine months ended
September 30, 2000, a decrease of $32.2 million or 26.0%. Sales decreased across
all segments and is primarily due to the absence of sales from watches, clocks
and certain other accessory lines which the Company discontinued during the
first half of 2001 and the Company's efforts to restructure its customer base to
eliminate less profitable relationships. The decline is also attributable to
several customer bankruptcies and a decline in all segments in optical sales
related to weather and in both sunglasses and jewelry retail sales as a result
of current economic conditions. The decrease in the fiscal 2001 period as
compared to the fiscal 2000 period also reflects the timing of initial customer
shipments for the 2000 sunglass roll-out, which occurred during the first
quarter of 2000 as compared to the orders being shipped in the fourth quarter of
fiscal 2000 for the 2001 sunglass season.

     Gross Profit. Gross profit was $37.0 million for the nine months ended
September 29, 2001 as compared to $53.3 million for the nine months ended
September 30, 2000. Gross profit as a percentage of net sales decreased to 40.3%
for the nine months ended September 29, 2001 from 43.0% for the nine months
ended September 30, 2000. The $16.3 million or 30.6% decrease is primarily due
to the sales decline and the shift in the sales mix from higher margin segments
to lower margin segments.


                                       20
<PAGE>
     Operating Expenses. Operating expenses were $37.9 million, before the
restructuring charge of $0.7 million for the nine months ended September 29,
2001 as compared to operating expenses of $46.7 million, before the
restructuring charge of $2.5 million for the nine months ended September 30,
2000, a decrease of $8.8 million or 18.8%. The decrease is primarily
attributable to the restructuring of the field service organization and staffing
reductions. These decreases reflect management's continued attention to expense
control. Operating expenses, after the restructuring charge were $38.7 million
for the nine months ended September 29, 2001, as compared to operating expenses,
after the restructuring charge of $49.2 million for the nine months ended
September 30, 2000.

     Interest Expense. Interest expense was $7.5 million for the nine months
ended September 29, 2001 as compared to $8.4 million for the nine months ended
September 30, 2000, a decrease of $0.9 million or 11.4%. The decrease is
primarily attributable to interest savings generated by the bond repurchase
during fiscal 2000 and a lower average outstanding balance and interest rate on
the revolving note payable versus the prior year.

     Income Tax. Income tax expense was $0.4 million for the nine months ended
September 29, 2001 as compared to $78,000 for the nine months ended September
30, 2000, and relates to taxes due on our foreign operations.

     Net Loss. As a result of the factors discussed above, net loss before
dividends and accretion on preferred stock, before the restructuring charge of
$0.7 million, was $9.0 million, for the nine months ended September 29, 2001, as
compared to net loss before dividends and accretion on preferred stock,
excluding the extraordinary gain of $8.8 million and the restructuring charge of
$2.5 million of $1.7 million for the nine months ended September 30, 2000, an
increase of $7.3 million. This increase is attributable to a $7.3 million
decrease in earnings. Net loss before dividends and accretion on preferred
stock, after the restructuring charge, was $9.7 million for the nine months
ended September 29, 2001, as compared to net income before dividends and
accretion on preferred stock, after the extraordinary gain and the restructuring
charge, of $4.6 million for the nine months ended September 30, 2000.

     Net Loss Applicable to Common Shareholders. Net loss applicable to common
shareholders, before the restructuring charge of $0.7 million, was $11.7 million
for the nine months ended September 29, 2001, as compared to a net loss
applicable to common shareholders before the extraordinary gain and the
restructuring charge, of $4.1 million for the nine months ended September 30,
2000, an increase of $7.6 million. The increase is attributable to the $7.6
million decrease in earnings. Net loss applicable to common shareholders, after
the restructuring charge was $12.4 million for the nine months ended September
29, 2001, as compared to net income applicable to common shareholders, after the
extraordinary gain and the restructuring charge, of $2.2 million for the nine
months ended September 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

     At September 29, 2001, the Company had cash and cash equivalents of $0.4
million and negative working capital of $7.1 million as compared to $0.6 million
of cash and cash equivalents and working capital of $0.6 million, respectively,
at December 30, 2000. The decrease in cash and cash equivalents is due to the
timing of cash receipts at month end. The decline in working capital was driven
by a continued focus on reduction in receivables and inventory offset by the pay
down of trade payables, accrued expenses and the revolving note payable.

     The Company generated $12.8 million of cash in operations during the nine
months ended September 29, 2001 compared to a use of $8.4 million during the
nine months ended September 30, 2000. The increase in cash generated is
principally due to continued collection efforts of accounts receivable and
inventory management during the nine months ended September 29, 2001, partially
offset by the pay down of trade payables and accrued expenses.

     The Company used $5.0 million in investing activities during the nine
months ended September 29, 2001 compared to a use of $6.8 million during the
nine months ended September 30, 2000. These investments were primarily related
to the purchase of display fixtures used in the merchandising of both optical
and jewelry products and represent normal purchases. The decrease in the current
year is due to the decline in the sales volume.

     The Company used $8.1 million from financing activities during the nine
months ended September 29, 2001 compared to generating $14.9 million during the
nine months ended September 30, 2000. The decrease in cash from financing
activities is primarily due to an increase in cash provided by operating
activities, which was utilized to pay down the revolving note payable.

     The Company has 43,700 shares of Series A Preferred Stock that has a
redemption value at September 29, 2001 of $37.8 million. Shares of Series A
Preferred Stock are convertible into Common Stock at a rate of 10 for 1,
adjustable for certain dilutive events.


                                       21
<PAGE>

Conversion is at the option of the shareholder, but is automatic upon the
consummation of a qualified public offering. The holders of Series A Preferred
Stock have the right to require redemption for cash for any unconverted shares,
beginning June 30, 2002, provided, however, that the right to require redemption
is suspended as long as any Restrictive Indebtedness (as defined in the
Company's Articles of Incorporation) is outstanding. The $75.0 million 10 3/4%
Senior Notes due 2006 (the "Notes") constitute Restrictive Indebtedness. The
redemption price of the Series A Preferred Stock is an amount equal to the
original issue price, $526.32 per share, plus any accrued and unpaid dividends
yielding a 10% compounded annual rate of return.

     In connection with the purchase of Foster Grant US, the Company's wholly
owned subsidiary, Foster Grant Holdings, Inc. (FG Holdings) issued 100 shares of
FG Preferred Stock, which were redeemable for $1.0 million on February 28, 2000.
The $1.0 million was paid on April 3, 2000. The former holder of the FG
Preferred Stock is entitled to receive an additional payment of up to $3.0
million, depending upon transaction value, in the event of an initial public
offering, merger or similar transaction, or private placement of securities
representing more than 50% of the Company's capital stock, at a specified
valuation.

     During 2000, the Company has repurchased $23.15 million face value of the
Notes for a purchase price of $7.09 million. The purchase price was financed
utilizing a term loan under its existing Senior Credit Facility. The term loan
is secured by a mortgage on its Smithfield, RI facility and the agreements of
certain preferred shareholders to purchase participations in the term loans. (In
September 2001, certain preferred shareholders agreed to subordinate their first
mortgage interest to the Company's senior lenders in connection with an
amendment to the Senior Credit Facility that increased the Company's borrowing
base. See Note 3- Senior Credit Facility.) The term loan is being amortized over
60 months commencing April 1, 2001, with the principal balance due at the
expiration of the Senior Credit Facility on July 31, 2003. As a result of this
transaction, the Company recognized an $8.8 million extraordinary gain, net of
$6.3 million in taxes, and wrote off $0.9 million of unamortized issuance costs
related to the Notes that were repurchased. These purchases resulted from
inquiries from holders of the Notes. The Company does not solicit offers to
tender Notes for repurchase, but may, from time to time, consider requests to
repurchase Notes, subject to the availability of appropriate financing.

     In conjunction with the commitment to purchase participations in the term
loan, the Company issued 70,870 shares of Series B Preferred Stock. The holders
of Series B Preferred Stock are entitled to receive, prior and in preference to
any distribution with respect to any other capital stock of the Company, an
amount per share equal to $6.67 multiplied by the number of six month periods
and fractions thereof in the period during which the participation commitment is
outstanding. The Company is amortizing the value related to each six-month
participation commitment to interest expense. As the participation commitment is
extended for additional six-month periods, the Company is recording additional
value to the Series B Preferred Stock and amortizing the related costs over the
additional period of the participation commitment as required. During the nine
month ended September 29, 2001, the Company recorded additional value to the
Series B Preferred Stock of $473,000.

     The Company has substantial indebtedness and significant debt service
obligations. As of September 29, 2001, the Company had total indebtedness,
including borrowings under the Senior Credit Facility, in the aggregate
principal amount of $78.4 million. The Company had current liabilities of
approximately $51.5 million. In addition, the Company has significant annual
obligations that include interest on the Notes of approximately $5.6 million,
minimum royalty obligations over the next two years of approximately $1.8
million and minimum payments under its operating leases of approximately $0.2
million. The Indenture permits the Company to incur additional indebtedness,
including secured indebtedness, subject to certain limitations.

     Effective September 21, 2001, by execution of an amendment to its Senior
Credit Facility, the borrowing base for the revolving credit facility was
increased through December 31, 2001, by $3.8 million, additional security was
pledged to the lenders, and two holders the Company's Series B Preferred Stock
agreed to subordinate to the lenders such holders' first mortgage interest in
the Company's headquarters building in North Smithfield, Rhode Island. The
Company has agreed to pay to each Series B Preferred Stockholder who
subordinates its interest in the first mortgage the sum of $25 for each $100 of
value subordinated for each six month period that the increase in the borrowing
base is outstanding, pro rated for such lesser period. The Company expects that
the payment due the holders will be approximately $500,000 which the Company
will amortize on a monthly basis to interest expense.

     The Company has up to $0.2 million available for borrowings under the
Senior Credit Facility as of September 29, 2001. Interest rates on the revolving
loans under the Senior Credit Facility are based, at the Company's option, on
the Base Rate (as defined) or LIBOR plus an applicable margin. The Senior Credit
Facility contains certain restrictions and limitations, including financial
covenants that require the Company to maintain and achieve certain levels of
financial performance and limit the payment of cash dividends and similar
restricted payments. As of September 29, 2001, the Company is not in compliance
with the financial covenants. As of November 13, 2001, the Company received a
written waiver for such noncompliance from the Bank. The Company is currently
negotiating its financial covenants going forward so that they reflect
performance levels that the Company believes it can attain.


                                       22
<PAGE>

     The Company's ability to make scheduled payments of principal, or to pay
the interest on, or to refinance, its indebtedness (including the Notes), or to
fund planned capital expenditures will depend on its future performance, which,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond its control. Based
upon the current level of operations and anticipated cost savings and revenue
growth, the Company believes that cash flow from operations and available cash,
together with available borrowings under the Senior Credit Facility, will be
adequate to meet the Company's future liquidity needs for the next twelve
months. The Company may, however, need to refinance all or a portion of the
principal of the Notes on or prior to maturity. There can be no assurance that
the Company's business will generate sufficient cash flow from operations, that
anticipated cost savings and revenue growth will be realized or that future
borrowings will be available under the Senior Credit Facility in an amount
sufficient to enable the Company to service its indebtedness, including the
Notes, or to fund its other liquidity needs. In addition, there can be no
assurance that the Company will be able to effect any such refinancing on
commercially reasonable terms or at all.

SEASONALITY AND QUARTERLY INFORMATION

     Significant portions of the Company's business are seasonal. Sunglasses are
shipped primarily during the fourth quarter of the fiscal year as retailers
build inventory for the spring and summer selling seasons, while costume jewelry
and other accessories are shipped primarily during the second half of the fiscal
year as retailers build inventory for the holiday season. Reading glasses sales
are generally uniform throughout the year. As a result of these shipping trends,
the Company's working capital requirements grow throughout the first half of the
year to fund purchases and accounts receivable. In the second half of the year,
the Company's working capital requirements decrease as accounts receivable are
collected and inventory purchases decline relative to first half needs.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     The following discussion about the Company's market risk disclosures
includes forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.

     Interest Rate Risk. The Company is exposed to market risk from changes in
interest rates primarily through its borrowing activities. In addition, the
Company's ability to finance future acquisition transactions may be impacted if
the Company is unable to obtain appropriate financing at acceptable interest
rates.

     Foreign Currency Risk. The Company's results of operations are affected by
fluctuations in the value of the U.S. dollar as compared to the value of
currencies in foreign markets primarily related to changes in the British Pound,
the Canadian Dollar, the Mexican Peso, the Euro Dollar and the Hong Kong Dollar.
During the nine months ended September 29, 2001, the net impact of foreign
currency changes was not material to the Company's financial condition or
results of operations. The Company manages its exposure to foreign currency
exchange risk by trying to minimize the Company's net investment in its foreign
subsidiaries. The Company generally does not enter into derivative financial
instruments to manage foreign currency exposure.

     The Company's operations in Europe are not significant and, therefore, the
Company has not been materially impacted by the fluctuations in the Euro dollar.


                                       23
<PAGE>

                     AAI. FOSTERGRANT, INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None

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

     None

ITEM 5. OTHER INFORMATION

     None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

          10.1.8    Eighth Amendment to the Second Amendment and Restated
                    Financing and Security Agreement dated September 21, 2001.

     (b)  Report on Form 8-K

     The registrant filed no reports on form 8-K during the quarter ended
September 29, 2001.


                                       24
<PAGE>

                     AAI. FOSTERGRANT, INC. AND SUBSIDIARIES

                                   SIGNATURES

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

                                        AAI.FOSTERGRANT, INC. (Registrant)

Dated: November 13, 2001                /s/ Michael F. Cronin
                                        ----------------------------------------
                                        Michael F. Cronin
                                        Chairman of the Board


Dated: November 13, 2001                /s/ John R. Ranelli
                                        ----------------------------------------
                                        John R. Ranelli
                                        Director, President, and Chief
                                        Executive Officer
                                        (Principal Executive Officer)


Dated: November 13, 2001                /s/ Brian J. Lagarto
                                        ----------------------------------------
                                        Brian J. Lagarto
                                        Chief Financial Officer
                                        (Principal Financial Officer)

                                       25