##### Table of Contents



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

|           |  |                                                                                                                                                      
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(Mark One)
|           |  |                                                                                                                                                      
|          
|          
|          
|          
|þ          |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 3, 2002                
|          
|          
|          
|          
|           |  |                                                                                                                                                      
|          
|          
|          
|          
|           |  | OR                                                                                                                                                   
|          
|          
|          
|          
|           |  |                                                                                                                                                      
|          
|          
|          
|          
|o          |  | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from
             to
            .

Commission file number 33-66342

COLE NATIONAL GROUP, INC.


(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 34-1744334                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. employer identification no.)

|                                                                                       |  |                 
|-------------------------------------------------------------------------------------- |  | ----------------
|5915 Landerbrook Drive
Mayfield Heights, Ohio
(Address of principal executive offices) |  | 44124
(Zip code)

(440) 449-4100
(Registrants telephone number, including area code)

The registrant meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this form in the reduced
disclosure format.

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

All of the outstanding capital stock of the registrant is held by Cole National
Corporation.

As of August 31, 2002, 1,100 shares of the registrants common stock, $.01 par
value were outstanding.



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TABLE OF CONTENTS



|                                                |                                                                                               |                                            |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I.  FINANCIAL INFORMATION                
|                                                | Item 1. Financial Statements                                                                 
|                                                |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                                |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                                                | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION                    
|                                                | Item 1. Legal Proceedings                                                                    
|                                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                     
|EXHIBIT INDEX                                  
|EX-10.1 Amendment Credit Agreement             
|EX-10.2 2nd Amendment Credit Agreement         
|EX-10.3 Amendment #1 to the CNG Retirement Plan
|EX-99.1 Certification                          



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##### Table of Contents



COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED AUGUST 3, 2002
INDEX

|         |  |                       |  |                                                                                              |                                                                                                       |  |          |   | 
|-------- |  | --------------------- |  | -------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- |  | -------- | - | 
|         |  |                       |  |                                                                                              |                                                                                                       |  | Page No.
|         |  |                       |  |                                                                                              |                                                                                                       |  |         
|PART I.  |  | FINANCIAL INFORMATION |  |                                                                                              |                                                                                                       | 
|        
|        
|        
|        
|         |  |                       |  | Item 1. Financial Statements                                                                 |                                                                                                       |  |          |  
|        
|        
|        
|        
|         |  |                       |  |                                                                                              | Consolidated Balance Sheets as of August 3, 2002 and February 2, 2002                                 |  |          | 1 | 
|        
|        
|        
|        
|         |  |                       |  |                                                                                              | Consolidated Statements of Operations for the 13 and 26 weeks ended August 3, 2002
and August 4, 2001 |  |          | 2 | 
|        
|        
|        
|        
|         |  |                       |  |                                                                                              | Consolidated Statements of Cash Flows for the 26 weeks ended August 3, 2002
and August 4, 2001        |  |          | 3 | 
|        
|        
|        
|        
|         |  |                       |  |                                                                                              | Notes to Consolidated Financial Statements                                                            |  |          | 4 | 
|        
|        
|        
|        
|         |  |                       |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operation |                                                                                                       |  | 8        |  
|        
|        
|        
|        
|         |  |                       |  | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           |                                                                                                       |  | 11       |  
|        
|        
|        
|        
|         |  |                       |  | Item 4. Controls and Procedures                                                              |                                                                                                       |  | 12       |  
|        
|        
|        
|        
|PART II. |  | OTHER INFORMATION     |  |                                                                                              |                                                                                                       | 
|        
|        
|        
|        
|         |  |                       |  | Item 1. Legal Proceedings                                                                    |                                                                                                       |  | 12       |  
|        
|        
|        
|        
|         |  |                       |  | Item 6. Exhibits and Reports on Form 8-K                                                     |                                                                                                       |  | 12       |  





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##### Table of Contents






PART I.  FINANCIAL INFORMATION




Item 1.   Financial Statements




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

|                                                                                                |                                                                         |                                            |                                   |                           |         |           |         |             |         |         |         | 
|----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------ | --------------------------------- | ------------------------- | ------- | --------- | ------- | ----------- | ------- | ------- | ------- | 
|                                                                                                |                                                                         |                                            |                                   |                           |         | August 3, |         | February 2,
|                                                                                                |                                                                         |                                            |                                   |                           |         | 2002      |         | 2002       
|                                                                                                |                                                                         |                                            |                                   |                           |         |           |         |            
|Assets                                                                                          |                                                                         |                                            |                                   |                           |         |           |         |            
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Current assets:                                                                                 |                                                                         |                                            |                                   |                           |         |           |         |            
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Cash and cash equivalents                                               |                                            | $                                 | 48,931                    |         |           | $       | 63,656      |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Accounts receivable, less allowances of $5,588
and $4,008, respectively |                                            |                                   | 44,509                    |         |           |         | 39,544      |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Current portion of notes receivable                                     |                                            |                                   | 2,795                     |         |           |         | 2,825       |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Inventories                                                             |                                            |                                   | 118,318                   |         |           |         | 111,098     |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Refundable income taxes                                                 |                                            |                                   | 458                       |         |           |         | 502         |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Prepaid expenses and other                                              |                                            |                                   | 21,798                    |         |           |         | 22,613      |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Deferred income tax benefits                                            |                                            |                                   | 500                       |         |           |         | 430         |        
|                                                                                                |                                                                         |                                            |                                   |                           |         |           |         |            
|                                                                                                |                                                                         |                                            | Total current assets              |                           |         | 237,309   |         |             |         | 240,668 |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Property and equipment, at cost                                                                 |                                                                         |                                            | 297,350                           |                           |         |           | 291,148 |            
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Less  accumulated depreciation and amortization                        |                                            |                                   | (177,773                  | )       |           |         | (169,851    | )      
|                                                                                                |                                                                         |                                            |                                   |                           |         |           |         |            
|                                                                                                |                                                                         |                                            | Total property and equipment, net |                           |         | 119,577   |         |             |         | 121,297 |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Notes receivable, excluding current portion, less allowances
of $4,217 and $5,209, respectively |                                                                         |                                            | 3,532                             |                           |         |           | 3,899   |            
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Deferred income taxes and other assets                                                          |                                                                         |                                            | 50,438                            |                           |         |           | 49,371  |            
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Tradenames, net                                                                                 |                                                                         |                                            | 42,992                            |                           |         |           | 42,992  |            
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Goodwill, net                                                                                   |                                                                         |                                            | 103,551                           |                           |         |           | 103,552 |            
|                                                                                                |                                                                         |                                            |                                   |                           |         |           |         |            
|                                                                                                |                                                                         |                                            | Total assets                      |                           |         | 557,399   |         |             |         | 561,779 |        
|                                                                                                |                                                                         |                                            |                                   |                           |         |           |         |            
|Liabilities and Stockholders Equity                                                            |                                                                         |                                            |                                   |                           |         |           |         |            
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Current liabilities:                                                                            |                                                                         |                                            |                                   |                           |         |           |         |            
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Current portion of long-term debt                                       |                                            | $                                 | 40                        |         |           | $       | 54          |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Accounts payable                                                        |                                            |                                   | 53,413                    |         |           |         | 57,242      |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Payable to affiliates, net                                              |                                            |                                   | 70,240                    |         |           |         | 73,548      |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Accrued interest                                                        |                                            |                                   | 7,813                     |         |           |         | 6,130       |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Accrued liabilities                                                     |                                            |                                   | 81,937                    |         |           |         | 78,725      |        
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Accrued income taxes                                                    |                                            |                                   | 484                       |         |           |         | 546         |        
|                                                                                                |                                                                         |                                            |                                   |                           |         |           |         |            
|                                                                                                |                                                                         |                                            |                                   | Total current liabilities |         |           | 213,927 |             |         |         | 216,245 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Long-term debt, net of discount and current portion                                             |                                                                         |                                            | 275,000                           |                           |         |           | 274,318 |            
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Other long-term liabilities                                                                     |                                                                         |                                            | 12,352                            |                           |         |           | 12,040  |            
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Stockholders equity                                                                            |                                                                         |                                            | 56,120                            |                           |         |           | 59,176  |            
|                                                                                                |                                                                         |                                            |                                   |                           |         |           |         |            
|                                                                                                |                                                                         | Total liabilities and stockholders equity |                                   | $                         | 557,399 |           |         | $           | 561,779 |        
|                                                                                                |                                                                         |                                            |                                   |                           |         |           |         |            

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

1



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##### Table of Contents






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

|                                                                                    |                                     |   |                                                |         |                      |         |                        |         |           |         |           |         |        |         |         |         |        |         | 
|----------------------------------------------------------------------------------- | ----------------------------------- | - | ---------------------------------------------- | ------- | -------------------- | ------- | ---------------------- | ------- | --------- | ------- | --------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | 
|                                                                                    |                                     |   |                                                |         | Thirteen Weeks Ended |         | Twenty-Six Weeks Ended
|                                                                                    |                                     |   |                                                |         |                      |         |                       
|                                                                                    |                                     |   |                                                |         | August 3,            |         | August 4,              |         | August 3, |         | August 4,
|                                                                                    |                                     |   |                                                |         | 2002                 |         | 2001                   |         | 2002      |         | 2001     
|                                                                                    |                                     |   |                                                |         |                      |         |                        |         |           |         |          
|Net revenue                                                                         |                                     | $ | 288,857                                        |         |                      | $       | 273,348                |         |           | $       | 578,966   |         |        | $       | 543,639 |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Costs and expenses:                                                                 |                                     |   |                                                |         |                      |         |                        |         |           |         |           |         |        |         |         |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Cost of goods sold                  |   |                                                | 94,520  |                      |         |                        | 91,307  |           |         |           | 190,168 |        |         |         | 179,029 |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Operating expenses                  |   |                                                | 184,893 |                      |         |                        | 170,818 |           |         |           | 367,842 |        |         |         | 344,094 |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Goodwill and tradename amortization |   |                                                |        |                      |         |                        | 1,436   |           |         |           |        |        |         |         | 2,898   |       
|                                                                                    |                                     |   |                                                |         |                      |         |                        |         |           |         |           |         |        |         |         |        
|                                                                                    |                                     |   | Total costs and expenses                       |         |                      | 279,413 |                        |         |           | 263,561 |           |         |        | 558,010 |         |         |        | 526,021 | 
|                                                                                    |                                     |   |                                                |         |                      |         |                        |         |           |         |           |         |        |         |         |        
|Operating income                                                                    |                                     |   | 9,444                                          |         |                      |         | 9,787                  |         |           |         | 20,956    |         |        |         | 17,618  |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Interest and other (income) expense, net:                                           |                                     |   |                                                |         |                      |         |                        |         |           |         |           |         |        |         |         |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Interest expense                    |   |                                                | 6,814   |                      |         |                        | 6,863   |           |         |           | 13,807  |        |         |         | 13,764  |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Interest and other (income), net    |   |                                                | (208    | )                    |         |                        | (315    | )         |         |           | (506    | )      |         |         | (1,251  | )     
|                                                                                    |                                     |   |                                                |         |                      |         |                        |         |           |         |           |         |        |         |         |        
|                                                                                    |                                     |   | Total interest and other (income) expense, net |         | 6,606                |         |                        |         | 6,548     |         |           |         | 13,301 |         |         |         | 12,513 |        
|                                                                                    |                                     |   |                                                |         |                      |         |                        |         |           |         |           |         |        |         |         |        
|Income before income taxes                                                          |                                     |   | 2,838                                          |         |                      |         | 3,239                  |         |           |         | 7,655     |         |        |         | 5,105   |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Income tax provision                                                                |                                     |   | 1,135                                          |         |                      |         | 2,268                  |         |           |         | 3,062     |         |        |         | 3,574   |        
|                                                                                    |                                     |   |                                                |         |                      |         |                        |         |           |         |           |         |        |         |         |        
|Income before extraordinary loss                                                    |                                     |   | 1,703                                          |         |                      |         | 971                    |         |           |         | 4,593     |         |        |         | 1,531   |        
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Extraordinary loss on early extinguishment of debt,
net of $4.1 million tax benefit |                                     |   | (7,634                                         | )       |                      |         |                       |         |           |         | (7,634    | )       |        |         |        |        
|                                                                                    |                                     |   |                                                |         |                      |         |                        |         |           |         |           |         |        |         |         |        
|Net income (loss)                                                                   |                                     | $ | (5,931                                         | )       |                      | $       | 971                    |         |           | $       | (3,041    | )       |        | $       | 1,531   |        
|                                                                                    |                                     |   |                                                |         |                      |         |                        |         |           |         |           |         |        |         |         |        

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

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##### Table of Contents






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

|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |           |        |        |         |  
|------------------------------------- | ---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------- | ------ | ---------------------- | ------- | --------- | ------ | ------ | ------- | -
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        | Twenty-Six Weeks Ended
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        |                       
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        | August 3,              |         | August 4,
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        | 2002                   |         | 2001     
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          
|Cash flows from operating activities: |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          
|                                     
|                                     
|                                     
|                                     
|                                      | Net income (loss)                                                                        |                                                                                           | $                                                                | (3,041                                    | )      |                        | $       | 1,531     |       
|                                     
|                                     
|                                     
|                                     
|                                      | Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |                                                                                           |                                                                  |                                           |        |                        |         |           |       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                          | Depreciation and amortization                                                             |                                                                  |                                           | 17,442 |                        |         |           | 18,822 |       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                          | Extraordinary loss on early extinguishment of debt                                        |                                                                  |                                           | 7,634  |                        |         |           |       |       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                          | Noncash interest, net                                                                     |                                                                  |                                           | 580    |                        |         |           | 602    |       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                          | Gain on sale of fixed assets                                                              |                                                                  |                                           |       |                        |         |           | (683   | )     
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                          | Increases (decreases) in cash resulting from changes in operating
assets and liabilities: |                                                                  |                                           |        |                        |         |           |        |       
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                          |                                                                                           | Accounts and notes receivable, prepaid expenses and other assets |                                           |        | (4,060                 | )       |           |        | 1,404  |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                          |                                                                                           | Inventories                                                      |                                           |        | (7,227                 | )       |           |        | (8,108 | )      
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                          |                                                                                           | Accounts payable, accrued liabilities and other liabilities      |                                           |        | (294                   | )       |           |        | 7,671  |        
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                          |                                                                                           | Accrued interest                                                 |                                           |        | 1,683                  |         |           |        | (65    | )      
|                                     
|                                     
|                                     
|                                     
|                                      |                                                                                          |                                                                                           | Accrued, refundable and deferred income taxes                    |                                           |        | 3,966                  |         |           |        | 2,838  |        
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          
|                                      |                                                                                          |                                                                                           |                                                                  | Net cash provided by operating activities |        |                        | 16,683  |           |        |        | 24,012  |  
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          
|Cash flows from investing activities: |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          
|                                     
|                                     
|                                     
|                                     
|                                      | Purchases of property and equipment, net                                                 |                                                                                           |                                                                  | (11,969                                   | )      |                        |         | (19,906   | )     
|                                     
|                                     
|                                     
|                                     
|                                      | Net proceeds from sale of fixed assets                                                   |                                                                                           |                                                                  |                                          |        |                        |         | 4,712     |       
|                                     
|                                     
|                                     
|                                     
|                                      | Systems development costs                                                                |                                                                                           |                                                                  | (2,219                                    | )      |                        |         | (4,578    | )     
|                                     
|                                     
|                                     
|                                     
|                                      | Other, net                                                                               |                                                                                           |                                                                  | (138                                      | )      |                        |         | (63       | )     
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          
|                                      |                                                                                          |                                                                                           |                                                                  | Net cash used for investing activities    |        |                        | (14,326 | )         |        |        | (19,835 | )
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          
|Cash flows from financing activities: |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          
|                                     
|                                     
|                                     
|                                     
|                                      | Repayment of long-term debt                                                              |                                                                                           |                                                                  | (158,074                                  | )      |                        |         | (20       | )     
|                                     
|                                     
|                                     
|                                     
|                                      | Proceeds from issuance of long-term debt                                                 |                                                                                           |                                                                  | 150,000                                   |        |                        |         |          |       
|                                     
|                                     
|                                     
|                                     
|                                      | Payment of deferred financing fees                                                       |                                                                                           |                                                                  | (5,920                                    | )      |                        |         |          |       
|                                     
|                                     
|                                     
|                                     
|                                      | Advances to affiliates, net                                                              |                                                                                           |                                                                  | (3,079                                    | )      |                        |         | (6,151    | )     
|                                     
|                                     
|                                     
|                                     
|                                      | Other, net                                                                               |                                                                                           |                                                                  | (9                                        | )      |                        |         | (208      | )     
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          
|                                      |                                                                                          |                                                                                           |                                                                  | Net cash used for financing activities    |        |                        | (17,082 | )         |        |        | (6,379  | )
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          
|Cash and cash equivalents:            |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          
|                                     
|                                     
|                                     
|                                     
|                                      | Net decrease during the period                                                           |                                                                                           |                                                                  | (14,725                                   | )      |                        |         | (2,202    | )     
|                                     
|                                     
|                                     
|                                     
|                                      | Balance, beginning of period                                                             |                                                                                           |                                                                  | 63,656                                    |        |                        |         | 36,725    |       
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          
|                                      | Balance, end of period                                                                   |                                                                                           | $                                                                | 48,931                                    |        |                        | $       | 34,523    |       
|                                      |                                                                                          |                                                                                           |                                                                  |                                           |        |                        |         |          

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

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



|(1) |  | Summary of Significant Accounting Policies
|--- |  | ------------------------------------------

Basis of Presentation

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

The accompanying consolidated financial statements have been prepared
without audit and certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although management
believes that the disclosures herein are adequate to make the information not
misleading. Results for interim periods are not necessarily indicative of the
results to be expected for the full year. These unaudited consolidated
financial statements should be read in conjunction with the Companys
consolidated financial statements and notes thereto included in its annual
report on Form 10-K for the fiscal year ended February 2, 2002.

In the opinion of management, the accompanying financial statements
contain all adjustments (consisting only of normal recurring accruals)
necessary to present fairly Cole National Group, Inc.s financial position as
of August 3, 2002 and the results of operations and cash flows for the
applicable periods ended August 3, 2002 and August 4, 2001.

Inventories

The accompanying interim consolidated financial statements have been
prepared without physical inventories.

Property and Depreciation

The Companys policy is to provide depreciation using the straight-line
method over a period, which is sufficient to amortize the cost of the asset
over its useful life or lease term. Leasehold improvements of optical
departments operated in a host store under licenses, which are terminable under
relatively short notice, are amortized over their estimated useful life.

Cash Flows

Net cash flows from operating activities reflect net cash payments for
income taxes and payments for interest of $459,000 and $11,544,000,
respectively, for the 26 weeks ended August 3, 2002, and $716,000 and
$13,228,000, respectively, for the 26 weeks ended August 4, 2001.

Total Other Comprehensive Income (Loss)

Total
other comprehensive income (loss) for the 13 and 26 weeks ended August 3,
2002 and August 4, 2001 is as follows (000s omitted):

|                                        |  |                |        |                  |  |      |     |      |  |   |        |   |  |   |       |  
|--------------------------------------- |  | -------------- | ------ | ---------------- |  | ---- | --- | ---- |  | - | ------ | - |  | - | ----- | -
|                                        |  | Thirteen Weeks |        | Twenty-Six Weeks
|                                        |  |                |        |                 
|                                        |  | 2002           |        | 2001             |  | 2002 |     | 2001
|                                        |  |                |        |                  |  |      |     |     
|Net income (loss)                       |  | $              | (5,931 | )                |  | $    | 971 |      |  | $ | (3,041 | ) |  | $ | 1,531 |  
|                                       
|                                       
|                                       
|                                       
|Cumulative translation loss             |  |                | (137   | )                |  |      | (9  | )    |  |   | (15    | ) |  |   | (218  | )
|                                        |  |                |        |                  |  |      |     |      |  |   |        |   |  |   |       |  
|Total
other comprehensive income (loss) |  | $              | (6,068 | )                |  | $    | 962 |      |  | $ | (3,056 | ) |  | $ | 1,313 |  
|                                        |  |                |        |                  |  |      |     |      |  |   |        |   |  |   |       |  

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Use of Estimates

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

Reclassifications

Certain prior year amounts have been reclassified to conform with the
current year presentation.



|(2) |  | Goodwill and Other Intangible Assets
|--- |  | ------------------------------------

The
Company adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142) in the first quarter of fiscal 2002. This statement requires that
goodwill and certain intangible assets deemed to have indefinite lives will no
longer be amortized, but instead, will be subject to reviews for impairment
annually, or more frequently if certain indicators arise. With the adoption of
this statement, the Company ceased amortization of goodwill and tradenames as
of February 3, 2002.

The Company completed the transitional impairment testing of goodwill
during the second quarter of fiscal 2002 as required by SFAS 142. Based on the
findings of its outside valuation advisor, the Company has concluded that there
was no impairment of its goodwill at the adoption date of the new accounting
standard, effective February 3, 2002.

The following table presents the results of the Company for the 13 and 26
weeks ended August 3, 2002 and August 4, 2001 on a comparable basis with fiscal
2001 adjusted for the pro forma impacts SFAS 142 and fiscal 2002s estimated
annual effective tax rate of 40% (000s omitted):

|            |                                               |  |                |       |                  |  |           |       |           |  |   |       |  |  |   |       | 
|----------- | --------------------------------------------- |  | -------------- | ----- | ---------------- |  | --------- | ----- | --------- |  | - | ----- |  |  | - | ----- | 
|            |                                               |  | Thirteen Weeks |       | Twenty-Six Weeks
|            |                                               |  |                |       |                 
|            |                                               |  | August 3,      |       | August 4,        |  | August 3, |       | August 4,
|            |                                               |  | 2002           |       | 2001             |  | 2002      |       | 2001     
|            |                                               |  |                |       |                  |  |           |       |          
|Net income: |                                               |  |                |       |                  |  |           |       |           |  |   |       |  |  |   |      
|           
|           
|           
|           
|            | Reported net income before extraordinary loss |  | $              | 1,703 |                  |  | $         | 971   |           |  | $ | 4,593 |  |  | $ | 1,531 | 
|           
|           
|           
|           
|            | Goodwill amortization  Cole Vision           |  |                |      |                  |  |           | 881   |           |  |   |      |  |  |   | 1,788 | 
|           
|           
|           
|           
|            | Goodwill amortization  Things Remembered     |  |                |      |                  |  |           | 246   |           |  |   |      |  |  |   | 492   | 
|           
|           
|           
|           
|            | Tradename amortization  Cole Vision          |  |                |      |                  |  |           | 309   |           |  |   |      |  |  |   | 618   | 
|           
|           
|           
|           
|            | Related tax adjustment                        |  |                |      |                  |  |           | 398   |           |  |   |      |  |  |   | 373   | 
|            |                                               |  |                |       |                  |  |           |       |           |  |   |       |  |  |   |       | 
|            | Adjusted net income before extraordinary loss |  | $              | 1,703 |                  |  | $         | 2,805 |           |  | $ | 4,593 |  |  | $ | 4,802 | 
|            |                                               |  |                |       |                  |  |           |       |           |  |   |       |  |  |   |       | 

The net carrying amount of goodwill at August 3, 2002, by business
segment, was $81,220,000 at Cole Vision and $22,331,000 at Things Remembered.
The change in the net carrying amount of goodwill for the 26 weeks ended August
3, 2002, was due to foreign currency translation of goodwill at Cole Vision.
The net carrying amount of tradenames at August 3, 2002, was attributable to
the Cole Vision segment.



|(3) |  | Long-Term Debt
|--- |  | --------------

On May 22, 2002, Cole National Group issued $150.0 million of 8-7/8%
senior subordinated notes due 2012. These notes are unsecured and mature on May
15, 2012. Interest on the notes is payable semi-annually on each May 15 and
November 15, commencing November 15, 2002.

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The indenture pursuant to which the 8-7/8% notes were issued contains
certain optional and mandatory redemption features and other financial
covenants similar to those in the indentures for Cole National Groups 8-5/8%
and previously outstanding 9-7/8% notes.

Net proceeds from the 8-7/8% note offering, together with cash on hand,
were used to retire $150.0 million of 9-7/8% senior subordinated notes due 2006
and pay premiums and other costs associated with retiring those notes. The
Companys results for the 13 and 26 weeks ended August 3, 2002 included an
extraordinary loss on early extinguishment of debt of approximately
$7.6 million, net of an income tax benefit of approximately
$4.1 million, representing the payment of premiums and other costs of retiring the
notes and the write-offs of unamortized discount and deferred financing fees.

Subsequent to August 3, 2002, the Company entered into interest rate swap
agreements to take advantage of favorable market interest rates. These
agreements require the Company to pay an average floating interest rate based
on six-month LIBOR plus 4.5375% to a counter party while receiving a fixed
interest rate on a portion of the Companys $125.0 million 8-5/8% senior
subordinated notes due 2007. The counter party is a major commercial bank. The
agreements mature August 15, 2007 and qualify as fair value hedges. The
aggregate notional amount of the interest rate swap agreements is $50.0
million.



|(4) |  | Credit Facility
|--- |  | ---------------

In connection with the 8-7/8% note offering, Cole National Group and its
operating subsidiaries amended their existing credit facility to, among other
things, extend its term to May 31, 2006, provide a working capital commitment
of $75.0 million and reduce borrowing rates. Borrowings under the amended
credit facility presently bear interest at a rate equal to, at the option of
the principal operating subsidiaries of Cole National Group, either (a) the
Eurodollar Rate plus 2.25% or (b) 1.25% plus the highest of (i) the prime rate,
(ii) the three-week moving average of the secondary market rates for
three-month certificates of deposit plus 1.0% or (iii) the federal funds rate
plus 0.5%. Cole National Group pays a commitment fee of between 0.50% and 0.75%
per annum on the unused portion of the facility based on the percentage of
revolving credit commitments used.

The amended credit facility, which is secured by liens against various
assets of the operating subsidiaries and guaranteed by Cole National
Corporation and Cole National Group, has customary operating and financial
covenants similar to those in the Companys previous credit agreement, as
described in Cole Nationals annual report on Form 10-K for the fiscal year
ended February 2, 2002.

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##### Table of Contents





|(5) |  | Segment Information
|--- |  | -------------------

Information on the Companys reportable segments is as follows (000s omitted):

|                  |                                |                                |   |                |         |                  |   |           |         |           |   |         |         |   |   |         |         |  
|----------------- | ------------------------------ | ------------------------------ | - | -------------- | ------- | ---------------- | - | --------- | ------- | --------- | - | ------- | ------- | - | - | ------- | ------- | -
|                  |                                |                                |   | Thirteen Weeks |         | Twenty-Six Weeks
|                  |                                |                                |   |                |         |                 
|                  |                                |                                |   | August 3,      |         | August 4,        |   | August 3, |         | August 4,
|                  |                                |                                |   | 2002           |         | 2001             |   | 2002      |         | 2001     
|                  |                                |                                |   |                |         |                  |   |           |         |          
|Net revenue:      |                                |                                |   |                |         |                  |   |           |         |           |   |         |         |   |   |        
|                 
|                 
|                 
|                 
|                  | Cole Vision                    |                                | $ | 215,680        |         |                  | $ | 200,714   |         |           | $ | 452,336 |         |   | $ | 417,095 |        
|                 
|                 
|                 
|                 
|                  | Things Remembered              |                                |   | 73,177         |         |                  |   | 72,634    |         |           |   | 126,630 |         |   |   | 126,544 |        
|                  |                                |                                |   |                |         |                  |   |           |         |           |   |         |         |   |   |        
|                  |                                | Total net revenue              |   | $              | 288,857 |                  |   | $         | 273,348 |           |   | $       | 578,966 |   |   | $       | 543,639 |  
|                  |                                |                                |   |                |         |                  |   |           |         |           |   |         |         |   |   |        
|Operating income: |                                |                                |   |                |         |                  |   |           |         |           |   |         |         |   |   |        
|                 
|                 
|                 
|                 
|                  | Cole Vision                    |                                | $ | 2,693          |         |                  | $ | 1,426     |         |           | $ | 17,829  |         |   | $ | 12,806  |        
|                 
|                 
|                 
|                 
|                  | Things Remembered              |                                |   | 9,324          |         |                  |   | 10,434    |         |           |   | 7,960   |         |   |   | 9,366   |        
|                  |                                |                                |   |                |         |                  |   |           |         |           |   |         |         |   |   |        
|                  |                                | Total segment operating income |   | $              | 12,017  |                  |   | $         | 11,860  |           |   | $       | 25,789  |   |   | $       | 22,172  |  
|                 
|                 
|                 
|                 
|                  | Unallocated amounts:           |                                |   |                |         |                  |   |           |         |           |   |         |         |   |   |         |        
|                 
|                 
|                 
|                 
|                  |                                | Corporate expenses             |   |                | (2,573  | )                |   |           | (2,073  | )         |   |         | (4,833  | ) |   |         | (4,554  | )
|                  |                                |                                |   |                |         |                  |   |           |         |           |   |         |         |   |   |        
|                  | Total operating income         |                                |   | 9,444          |         |                  |   | 9,787     |         |           |   | 20,956  |         |   |   | 17,618  |        
|                 
|                 
|                 
|                 
|                  | Interest and other income, net |                                |   | (6,606         | )       |                  |   | (6,548    | )       |           |   | (13,301 | )       |   |   | (12,513 | )      
|                  |                                |                                |   |                |         |                  |   |           |         |           |   |         |         |   |   |        
|                  | Income before income taxes     |                                | $ | 2,838          |         |                  | $ | 3,239     |         |           | $ | 7,655   |         |   | $ | 5,105   |        
|                  |                                |                                |   |                |         |                  |   |           |         |           |   |         |         |   |   |        



|(6) |  | Commitments and Contingencies
|--- |  | -----------------------------

The Company leases a substantial portion of its equipment and facilities
including laboratories, office and warehouse space, and retail store locations.
These leases generally have initial terms of up to 10 years and often contain
renewal options. Certain of the store locations have been sublet to
franchisees. In most leases covering retail store locations, additional rents
are payable based on store sales. In addition, Cole Vision operates departments
in various host stores paying occupancy costs solely as a percentage of sales
under agreements containing short-term cancellation clauses. Generally, the
Company is required to pay taxes and normal expenses of operating the premises
for laboratory, office, warehouse and retail store leases; the host stores pay
these expenses for departments operated on a percentage-of-sales basis.

The Company guarantees future minimum lease payments for certain store
locations leased directly by franchisees. These guarantees totaled
approximately $13.7 million and $14.0 million as of February 2, 2002 and August
3, 2002, respectively. Generally, these guarantees also extend to payments of
taxes and other normal expenses payable under these leases, the amounts of
which are not readily quantifiable. Many of the guarantees are limited to
periods that are less than the full term of the leases involved.

As described in Part II, Item 1 Legal Proceedings, the State of
California has obtained a preliminary injunction in July 2002 in a
case brought against the Company, Pearle Vision and other subsidiaries regarding
Pearle Vision Centers and Pearle Vision Care, Inc. The terms of the injunction
are not expected to have any material effect on the Companys operations.
Although we believe we are in compliance with California law and intend to
continue to defend the case vigorously, we may be required to further modify
our activities or might be required to pay damages and/or restitution in
currently undeterminable amounts if we are not successful, the cost of which,
as well as continuing defense costs, might have a material adverse effect on
our operating results in one or more periods.

As further described in Part II, Item 1 Legal Proceedings, a class
action complaint was filed in a case brought against the Companys
subsidiary, Things Remembered, Inc., alleging violation of
Californias wage and hour laws. The case is in its early stages and the
Company intends to vigorously defend the suit. We may be required to modify our
activities and pay damages and/or restitution in currently undeterminable
amounts if the plaintiffs prevail, the cost of which, as well as continuing
defense costs, might have a material adverse impact on our operating results in
one or more periods.

7



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##### Table of Contents






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

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

The following is a discussion of certain factors affecting Cole National
Groups results of operations for the 13 and 26 week periods ended August 3,
2002 and August 4, 2001 (the Companys second quarter and first six months).
This discussion should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this filing and the audited
financial statements for the fiscal year ended February 2, 2002 included in the
Companys annual report on Form 10-K.

Fiscal years end on the Saturday closest to January 31 and are identified
according to the calendar year in which they begin. For example, the fiscal
year ended February 2, 2002 is referred to as fiscal 2001. The current fiscal
year, which will end February 1, 2003, is referred to as fiscal 2002.

Results of Operations

The following table sets forth certain operating information for the
second quarter and first six months fiscal 2002 and fiscal 2001 (dollars in
millions):

|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |      |      | 
|--------------------------------------------------- | ----------------------------------- | ------------------- | ----- | -------------- | ----- | ---- | ----- | ------ | ----- | ---------------- | ------ | ---- | ---- | ------ | ----- | ----- | ----- | - | ----- | ----- | ----- | - | ------ | ---- | ---- | 
|                                                    |                                     |                     |       | Second Quarter |       |      |       |        |       | First Six Months |        |      |      |       
|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |       
|                                                    |                                     |                     |       | 2002           |       | 2001 |       | Change |       | 2002             |        | 2001 |      | Change
|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |       
|Net revenue                                         |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Cole Vision                         |                     | $     | 215.7          |       |      | $     | 200.7  |       |                  |        | 7.5  | %    |        | $     | 452.4 |       |   | $     | 417.1 |       |   |        | 8.5  | %   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Things Remembered                   |                     |       | 73.2           |       |      |       | 72.6   |       |                  |        | 0.8  |      |        |       | 126.6 |       |   |       | 126.5 |       |   |        | 0.1  |     
|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|                                                    |                                     | Total net revenue   |       | $              | 288.9 |      |       | $      | 273.3 |                  |        |      | 5.7  |        |       | $     | 579.0 |   |       | $     | 543.6 |   |        |      | 6.5  | 
|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|Gross margin                                        |                                     | $                   | 194.3 |                |       | $    | 182.0 |        |       |                  | 6.8    | %    |      | $      | 388.8 |       |       | $ | 364.6 |       |       |   | 6.6    | %   
|                                                   
|                                                   
|                                                   
|                                                   
|Operating expenses                                  |                                     |                     | 184.9 |                |       |      | 170.8 |        |       |                  | 8.2    |      |      |        | 367.8 |       |       |   | 344.1 |       |       |   | 6.9    |     
|                                                   
|                                                   
|                                                   
|                                                   
|Goodwill and tradename amortization                 |                                     |                     |      |                |       |      | 1.4   |        |       |                  | (100.0 | )    |      |        |      |       |       |   | 2.9   |       |       |   | (100.0 | )   
|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|                                                    |                                     | Operating income    |       | $              | 9.4   |      |       | $      | 9.8   |                  |        |      | (3.5 | )      |       | $     | 21.0  |   |       | $     | 17.6  |   |        |      | 18.9 | 
|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|Percentage of net revenue                           |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Gross margin                        |                     |       | 67.3           | %     |      |       | 66.6   | %     |                  |        | 0.7  |      |        |       | 67.2  | %     |   |       | 67.1  |       |   |        | 0.1  |     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Operating expenses                  |                     |       | 64.0           |       |      |       | 62.5   |       |                  |        | 1.5  |      |        |       | 63.6  |       |   |       | 63.4  |       |   |        | 0.2  |     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Goodwill and tradename amortization |                     |       |               |       |      |       | 0.5    |       |                  |        | (0.5 | )    |        |       |      |       |   |       | 0.5   |       |   |        | (0.5 | )   
|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|                                                    |                                     | Operating income    |       |                | 3.3   | %    |       |        | 3.6   | %                |        |      | (0.3 | )      |       |       | 3.6   | % |       |       | 3.2   | % |        |      | 0.4  | 
|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|                                                   
|                                                   
|                                                   
|                                                   
|Number of retail locations at the end
of the period |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|                                                   
|                                                   
|                                                   
|                                                   
|Cole Licensed Brands                                |                                     |                     | 1,296 |                |       |      | 1,224 |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Pearle company-owned                |                     |       | 420            |       |      |       | 435    |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |      |     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Pearle franchised                   |                     |       | 446            |       |      |       | 416    |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |      |     
|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|                                                    |                                     | Total Cole Vision   |       |                | 2,162 |      |       |        | 2,075 |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |      |      | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Things Remembered                   |                     |       | 776            |       |      |       | 780    |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |      |     
|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     
|                                                    |                                     | Total Cole National |       |                | 2,938 |      |       |        | 2,855 |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |      |      | 
|                                                    |                                     |                     |       |                |       |      |       |        |       |                  |        |      |      |        |       |       |       |   |       |       |       |   |        |     

8



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Consolidated net revenue increased $15.5 million and $35.3 million for the
second quarter and first six months, respectively, compared to the same periods
in fiscal 2001. The revenue increases were primarily attributable to increases
in comparable store sales at Cole Vision, growth in managed vision care revenue
and an increase in the number of Target Optical stores open. Changes in comparable store sales by
business for the second quarter and first six months of fiscal year 2002 were
as follows:

|                             |                     |  |                |     |                  |  |      |     |  
|---------------------------- | ------------------- |  | -------------- | --- | ---------------- |  | ---- | --- | -
|                             |                     |  | Second Quarter |     | First Six Months
|                             |                     |  |                |     |                 
|Cole Licensed Brands (U.S.)  |                     |  | 5.8            | %   |                  |  | 4.6  | %  
|                            
|                            
|                            
|                            
|Pearle U.S. company-owned    |                     |  | 1.5            | %   |                  |  | 6.2  | %  
|                            
|                            
|                            
|                            
|                             | Total Cole Vision   |  |                | 3.6 | %                |  |      | 4.8 | %
|                            
|                            
|                            
|                            
|Things Remembered            |                     |  | (1.6           | %)  |                  |  | (2.2 | %) 
|                            
|                            
|                            
|                            
|                             | Total Cole National |  |                | 2.1 | %                |  |      | 3.0 | %
|                            
|                            
|                            
|                            
|                             |                     |  |                |     |                  |  |      |    
|                            
|                            
|                            
|                            
|Pearle U.S. franchise stores |                     |  | 0.6            | %   |                  |  | 1.0  | %  
|                            
|                            
|                            
|                            
|Pearle U.S. chain-wide       |                     |  | 1.0            | %   |                  |  | 4.6  | %  

At Cole Vision, comparable store sales for the second quarter and first
six months of fiscal 2002 increased in all retail vision brands despite the
difficult retail environment and a slowdown in business in July. Comparable
store sales reflected an increase in the average spectacle selling price and
strong transaction increases at Target Optical. For the first six months of
fiscal year 2002, comparable store sales increases also reflected first quarter
transaction increases at Pearle. The comparable store sales at Target Optical
increased 41.1% for the second quarter and 35.0% for the first six months. At
Things Remembered, comparable store sales declined as fewer transactions offset
the increase in average selling price resulting from sales of new merchandise
at higher average unit prices, higher revenue from merchandise personalization,
and less merchandise sold at clearance prices.

Gross margin increased $12.3 million and $24.2 million in the second
quarter and first six months, respectively, compared to the same periods a year
ago. The gross margin dollar increases were primarily attributable to
improvements in net revenue at Cole Vision. The gross margin rate for the
second quarter was 67.3% compared to 66.6% for the second quarter 2001. Gross
margins as a percentage of net revenue increased by 0.7 at Cole Vision and 1.0
at Things Remembered. The second quarter increase in gross margin rate was due
to a number of factors including an increase in average dollar sale at Things
Remembered and an increase in average spectacle selling price at Cole Vision,
as well as growth in managed vision care claims and fee revenue. More
competitive pricing on contact lenses and an increase in product sold to Pearle
franchisees, which carry a lower margin, partially offset the increase. Product
sales to franchisees offer benefits other than gross margin for the Company,
including helping franchise comparable store sales and producing a more uniform
merchandise assortment and consistent brand look across all stores. For the
first six months, gross margin rate increased slightly to 67.2% in fiscal 2002
from 67.1% in fiscal 2001 due to 0.9 percentage point margin improvement at
Things Remembered.

Operating expenses increased $14.1 million and $23.7 million for the
second quarter and first six months of fiscal 2002, respectively, compared to
those periods in fiscal 2001. The increases in operating expenses were
primarily due to costs incurred to support the increases in net revenue and the
number of Target Optical stores opened in the past twelve months. As a
percentage of net revenue, second quarter operating expenses were 64.0%
compared to 62.5% for second quarter 2001. Increased advertising expenditures
at both Cole Vision and Things Remembered were the primary factor contributing
to the operating leverage loss of 1.5 percentage points. Second quarter
advertising expenditures included a shift of spending from first quarter to
support Pearles second quarter 40th Anniversary promotion. For the first six
months, operating expenses as a percentage of net revenue were up only slightly
to 63.6% from 63.4% in the first six months of fiscal 2001. Amortization of
goodwill and tradenames was discontinued in fiscal 2002 as a result of adopting
SFAS 142.

Second quarter 2002 operating income was essentially flat compared to the
second quarter 2001, primarily because of business slowdown in July and a loss
in operating leverage from increased advertising expenditures, offset by the
elimination of goodwill and tradename amortization from adopting SFAS 142 as
discussed above. The $3.3 million improvement in operating income for the first
six months of fiscal 2002 compared to the same period in fiscal 2001 reflected
the elimination of goodwill and tradename amortization from adopting SFAS 142
and improved

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operating earnings at Pearle. These were partially offset by lower
operating earnings at Licensed Brands and Things Remembered.

Second quarter interest and other (income) expense, net, increased
slightly compared to the same period in fiscal 2001. For the first six months
of fiscal 2002, the increase in interest and other (income) expense, net,
reflects the fact that these expenses were offset by a $0.7 million gain from
the sale of a Dallas office facility in the first quarter of fiscal 2001. In
May 2002, Cole National Group Inc. issued $150.0 million of 8-7/8% senior
subordinated notes due 2012. The net proceeds of the issuance and cash on hand
were used to retire all of Cole National Groups $150.0 million 9-7/8% Senior
Subordinated Notes due 2006. The issuance and retirement will reduce cash
interest expense by $1.5 million on an annual basis.

An income tax provision was recorded in the first six months of fiscal
2002 and fiscal 2001 using the Companys estimated annual effective tax rates
of 40.0% and 70.0%, respectively. The reduction in the estimated effective tax
rate compared to fiscal 2001 was primarily a result of adopting SFAS 142, which
stopped amortization of nondeductible goodwill.

Second quarter 2002 results included an extraordinary loss on early
extinguishment of debt of $7.6 million, net of an income tax benefit of $4.1
million. The extraordinary charge represents payment of premiums and other
costs of retiring Cole National Groups 9-7/8% Senior Subordinated Notes due
2006 and the write-offs of unamortized discount and deferred financing fees.

Contractual Commitments

In the second quarter, Cole National Group issued $150.0 million of Senior
Subordinated Notes due 2012 and retired of all of its $150.0 million Senior
Subordinated Notes due 2006 as discussed above and in Note 3 of the Notes to
Consolidated Financial Statements. As a result, $150.0 million of the Companys
scheduled payments for contractual obligations as reported in its latest annual
report on Form 10-K have been shifted from due in the period 4-5 years to due
in the period after 5 years.

The Companys primary source of liquidity, other than cash on hand, is the
working capital line of credit discussed above and in Note 4 of the Notes to
Consolidated Financial Statements. This facility has been extended until May
31, 2006 and supports $14.7 million of standby letters of credit that are
renewable annually.

Contingencies

As described in Part II, Item 1. Legal Proceedings, the State of
California has obtained a preliminary injunction in July of 2002 in a case
brought against the Company, Pearle Vision and other subsidiaries regarding
Pearle Vision Centers and Pearle Vision Care, Inc. The terms of the injunction
are not expected to have any material effect on the Companys operations.
Although we believe we are in compliance with California law and intend to
continue to defend the case vigorously, we may be required to further modify
our activities or might be required to pay damages and/or restitution in
currently undeterminable amounts if we are not successful, the cost of which, as
well as continuing defense costs, might have a material adverse effect on our
operating results in one or more periods.

As described in Part II, Item 1. Legal Proceedings, a class action
complaint was filed in a case brought against the Companys subsidiary,
Things Remembered, Inc., alleging violation of Californias wage and hour laws.
The case is in its early stages and the Company intends to vigorously defend
the suit. We may be required to modify our activities and pay damages and/or
restitution in currently undeterminable amounts if the plaintiffs prevail, the
cost of which, as well as continuing defense costs, might have a material
adverse impact on our operating results in one or more periods.

New Accounting Pronouncements

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

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Company ceased amortization of
goodwill and tradenames as of February 3, 2002. Amortization of goodwill and
tradenames totaled $5.8 million in fiscal 2001.

During the second quarter of fiscal 2002, the Company completed the
transitional impairment testing of goodwill as required by SFAS 142. Based on
the findings of its outside valuation advisor, the Company has concluded that
there was no impairment of its goodwill at the adoption date of the new
accounting standard, effective February 3, 2002.

The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(SFAS 145). SFAS 145 states that the rescission of FASB Statement No. 4 shall
be applied in fiscal years beginning after May 15, 2002. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in Opinion 30 for
classification as an extraordinary item shall be reclassified.

The Company will adopt SFAS 145 as of the beginning of fiscal 2003. As a
result, the loss on early extinguishment of debt reported as an extraordinary
item in the 13 weeks ended August 3, 2002 will be reclassified at that time.
The pretax loss from the early extinguishment of debt will be presented as a
separate line within total costs and expenses and the related income tax
benefit will reduce the reported income tax provision.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. The provisions of this statement are effective
for exit or disposal activities that are initiated after December 31, 2002.
Management has not determined the impact, if any, that this statement will have
on the Companys consolidated financial statements.

Forward-Looking Information

Certain sections of this Quarterly Report on Form 10-Q, including this
Managements Discussion and Analysis, contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Actual
results may differ materially from those forecast due to a variety of factors
that can adversely affect the operating results, liquidity and financial
condition, such as risks associated with the timing and achievement of
improvements in the operations of the optical business, the nature and extent
of disruptions of the economy from terrorist activities and from governmental
and consumer responses to such acts, the success of new store openings and the
rate at which new stores achieve profitability, the Companys relationships
with host stores and franchisees, the Companys ability to select, stock and
price merchandise attractive to customers, success of systems development and
integration, outcome and costs associated with litigation, competition and
regulation in the optical industry, integration of acquired businesses,
economic, political and weather factors affecting consumer spending, operating
factors affecting customer satisfaction, including manufacturing quality of
optical and engraved goods, the mix of goods sold, pricing and other
competitive factors, the seasonality of the Companys business and the actual
effect of implementation of new accounting standards. Forward-looking
statements are made based upon managements expectations and beliefs concerning
future events impacting the Company. All forward-looking statements involve
risk and uncertainty.




Item 3.   Quantitative and Qualitative Disclosures about Market Risk

The Companys major market risk exposure is to changes in foreign currency
exchange rates, which could impact its results of operations and financial
condition. Foreign exchange risk arises from the Companys exposure to
fluctuations in foreign currency exchange rates because the Companys reporting
currency is the United States dollar. Management seeks to minimize the exposure
to foreign currency fluctuations through natural internal offsets to the
fullest extent possible.

In addition, the Company is exposed to changes in the fair value of our
debt portfolio, primarily resulting from the effects of changes in interest
rates. Subsequent to August 3, 2002, the Company entered into interest rate
swap agreements to manage this exposure. Management believes that its use of
this financial instrument is in the Companys best interests. The Company does
not enter into financial instruments for trading purposes.

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Item 4.   Controls and Procedures



|(a) |  | Not applicable.                                                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | There were no significant changes in the Companys internal controls or
in other factors that could significantly affect these controls subsequent
to managements evaluation.




PART II  OTHER INFORMATION




Item 1.    Legal Proceedings

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

A complaint was filed in the Superior Court of California, County of San
Diego against Cole National Corporation, its affiliates and certain of its
officers by the Attorney General of the State of California on February 14,
2002 and amended on February 22, 2002. The case, State of California v. Cole
National Corporation, et al., Case No. GIC783135, alleges claims for various
statutory violations related to the operation of 24 Pearle Vision Centers in
California. The claims include alleged untrue or misleading advertising,
illegal dilation fees, unlawful advertising of eye exams, maintaining an
optometrist on or near the premises by a registered dispensing optician,
unlawful advertising of an optometrist, unlicensed practice of optometry, and
illegal relationships among dispensing opticians, optical retailers and
optometrists. The action seeks unspecified damages, restitution and injunctive
relief.

The case is in its early stages and we cannot predict with certainty its
outcome or costs. In May 2002, all of the individual officer defendants were
dismissed and their dismissal has been appealed by the State. The State of
California moved for a preliminary injunction to enjoin certain advertising
practices and from charging dilation fees. Though the State obtained a
preliminary injunction in July 2002, the terms of the injunction are not expected
to have any material effect on the Companys operations. In addition, both the
State and the Company have appealed the preliminary injunction. We believe we
are in compliance with California law and intend to continue to defend the
issues raised in the case vigorously.

On August 14, 2002, two former store managers employed in the San
Francisco area by our subsidiary, Things Remembered, Inc., filed a class action
complaint in San Francisco Superior Court. The complaint alleges that the
plaintiffs and the other members of the putative class (alleged to include 250
members) were improperly denied overtime compensation for more than eight hours
of work per day and/or more than 40 hours of work per week in violation of
California law. The action seeks unspecified damages, interest, restitution, as
well as, declaratory and injunctive relief and attorneys fees.




Item 6.   Exhibits and Reports on Form 8-K



|(a) |  | Exhibits. The following Exhibits are filed herewith and made a part thereof:
|--- |  | ----------------------------------------------------------------------------

|     |  |                                                                                                                                                                                  |  |  |  | 
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|10.1 |  | First Amendment to Credit Agreement, dated August 23, 2002, among Cole Vision Corporation, Things
Remembered, Inc., and Pearle, Inc. and Canadian Imperial Bank of Commerce.    
|    
|    
|    
|    
|10.2 |  | Second Amendment to Credit Agreement, dated September 13, 2002, among Cole Vision Corporation, Things
Remembered, Inc., and Pearle, Inc. and Canadian Imperial Bank of Commerce.
|    
|    
|    
|    
|10.3 |  | Amendment No. 1 to the Cole National Group, Inc. Retirement Plan (Amended and Restated as of
January 1, 2001), effective March 31, 2002.                                        
|    
|    
|    
|    
|99.1 |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.  

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|(b) |  | Reports on Form 8-K.
|--- |  | --------------------



| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company filed a report on Form 8-K on June 18, 2002, disclosing
the Company was replacing Arthur Andersen LLP as its independent public
accountants and appointing Deloitte & Touche LLP to serve as its
independent public accountants for the fiscal year 2002.
|
| | The Company filed a report on Form 8-K on August 8, 2002, which
attached a press release announcing that it had extended its offering to
exchange up to $150.0 million aggregate principal amount of its existing
8-7/8% senior subordinated notes due 2012.         

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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 thereunto duly authorized.

| |  |                           |  |                                                                                                 
| |  | ------------------------- |  | ------------------------------------------------------------------------------------------------
| |  | COLE NATIONAL GROUP, INC.
|
|
|
|
| |  |                           |  |                                                                                                 
|
|
|
|
| |  | By:                       |  | /s/ Lawrence E. Hyatt                                                                           
| |  |                           |  |                                                                                                 
| |  |                           |  | Lawrence E. Hyatt
Executive Vice President and Chief
Financial Officer (Duly Authorized Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |  |                           |  |                                                                                                 
|
|
|
|
| |  | By:                       |  | /s/ Tracy L. Burmeister                                                                         
| |  |                           |  |                                                                                                 
| |  |                           |  | Tracy L. Burmeister
Vice President Accounting and 
Reporting (Principal Accounting Officer)     

Date: September 17, 2002

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CERTIFICATIONPURSUANT TO 18
U.S.C. 1350, AS ADOPTEDPURSUANT TO SECTIONS 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Jeffrey A. Cole, certify that:

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

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

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

Date: September 17, 2002

| |  |                                  |  |  |  | 
| |  | -------------------------------- |  |  |  | 
| |  |                                 
|
|
|
|
| |  | /s/ Jeffrey A. Cole             
| |  |                                 
| |  | Jeffrey A. Cole
Chairman and CEO

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CERTIFICATIONPURSUANT TO 18
U.S.C. 1350, AS ADOPTEDPURSUANT TO SECTIONS 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Lawrence E. Hyatt, certify that:

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

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

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

Date: September 17, 2002

| |  |                                                                        |  |  |  | 
| |  | ---------------------------------------------------------------------- |  |  |  | 
| |  | /s/ Lawrence E. Hyatt                                                 
| |  |                                                                       
| |  | Lawrence E. Hyatt
Executive Vice President and Chief Financial Officer

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COLE NATIONAL GROUP, INC.
FORM 10-Q
QUARTER ENDED AUGUST 3, 2002




EXHIBIT INDEX

|                 |  |                                                                                                                                                                                 
|---------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit          |  |                                                                                                                                                                                 
|Number           |  | Description                                                                                                                                                                     
|10.1            |  | First Amendment to Credit Agreement, dated August 23, 2002, among Cole Vision Corporation,
Things Remembered, Inc., and Pearle, Inc. and Canadian Imperial Bank of Commerce.    
|                
|                
|                
|                
|                
|                
|                
|                
|10.2            |  | Second Amendment to Credit Agreement, dated September 13, 2002, among Cole Vision Corporation,
Things Remembered, Inc., and Pearle, Inc. and Canadian Imperial Bank of Commerce.
|                
|                
|                
|                
|                
|                
|                
|                
|10.3            |  | Amendment No. 1 to the Cole National Group, Inc. Retirement Plan (Amended and Restated as of
January 1, 2001), effective March 31, 2002.                                        
|                
|                
|                
|                
|                
|                
|                
|                
|99.1            |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.  
|                
|                
|                
|                
|                
|                
|                
|                
|Filed herewith.

17