<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549


                                    FORM 10-K


         (MARK ONE)

[x]  Annual Report Under Section 13 of the Securities Exchange Act of 1934 For
     the fiscal year ended December 30, 2000; or

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 From the transition period from ________ to ________.


                              AAI.FOSTERGRANT, INC.
             (Exact Name of Registrant as Specified in Its Charter)


               RHODE ISLAND                                   05-0419304
     (State or Other Jurisdiction of                        (IRS Employer
      Incorporation or Organization)                      Identification No.)

500 GEORGE WASHINGTON HIGHWAY, SMITHFIELD RI                    02917
 (Address of Principal Executive Offices)                    (Zip Code)

                                 (401) 231-3800
                (Issuer's Telephone Number, Including Area Code)


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

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

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

     Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]

     As of March 29, 2001, the aggregate market value of the voting equity held
by non-affiliates of the Registrant was none.

     As of March 29, 2001, 608,000 shares of Common Stock and 43,700 shares of
Series A Preferred Stock and 70,870 shares of Series B Preferred Stock of the
Registrant were issued and outstanding.

<PAGE>   2
                                TABLE OF CONTENTS

                                                                           PAGE
DESCRIPTION                                                               NUMBER
-----------                                                               ------
Part I.   Item 1 --  Business.............................................    3

          Item 2 --  Properties...........................................    8

          Item 3 --  Legal Proceedings....................................    8

          Item 4 --  Submission of Matters to a Vote of Security Holders..    8

Part II.  Item 5 --  Market for the Company's Common Equity and Related
                     Stockholder Matters..................................    9

          Item 6 --  Selected Financial Data..............................    9

          Item 7 --  Management's Discussion and Analysis of Financial
                     Condition and Results of Operations..................   11

          Item 7A -- Quantitative and Qualitative Disclosures About
                     Market Risk..........................................   20

          Item 8 --  Financial Statements and Supplementary Data..........   20

          Item 9 --  Changes in and Disagreements with Accountants on
                     Accounting and Financial Disclosure..................   20

Part III. Item 10 -- Directors and Executive Officers of the Company......   21

          Item 11 -- Executive Compensation...............................   25

          Item 12 -- Security Ownership of Certain Beneficial Owners
                     and Management.......................................   30

          Item 13 -- Certain Relationships and Related Transactions.......   31

Part IV.  Item 14 -- Exhibits, Financial Statement Schedules and
                     Reports on Form 8-K..................................   33

          Signatures......................................................   37



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<PAGE>   3

                                     PART I

ITEM 1. BUSINESS

GENERAL

     AAi.FosterGrant, Inc. ("AAi" or the "Company") is a value-added distributor
of optical products, costume jewelry, watches, clocks and other accessories to
mass merchandisers, variety stores, chain drug stores and supermarkets in North
America and the United Kingdom. The Company sells its products in over 48,000
retail locations. The Company markets its products under its own brand names
such as Foster Grant(R) as well as customers' private labels and numerous
licensed brand names including Ironman Triathalon(R), Disney(R), Warner Bros.(R)
and Revlon(R). The Company outsources all of its manufacturing.

     The Company's product lines contain a large number of stock keeping units
("SKUs") with low retail price points and typically represent a small percentage
of retailers' total sales. As a result, many of AAi's customers have chosen to
outsource the merchandising of these products to the Company. AAi's service
program provides retailers with customized displays and product packaging and
store-level merchandising designed to maximize sales and inventory turnover. In
2000, the Company employed approximately 950 field service representatives who
regularly visit program customers' stores to arrange, replenish and restock
displays, reorder product and attend to markdowns and allowances. By providing
retailers with in-store product management, the Company retains control of its
product marketing and pricing, allowing AAi to maximize product sales and
increase the floor space allocated to its product lines. In fiscal 2000, sales
to customers utilizing the Company's service program accounted for 52.9% of
AAi's net sales.

     AAi was incorporated in Rhode Island in December 1985 and is the successor
by merger to a Rhode Island corporation incorporated in 1962. The Company's
principal executive offices are located at 500 George Washington Highway,
Smithfield, Rhode Island, 02917, and its telephone number is (401) 231-3800.

CAUTIONARY STATEMENT

     This annual report contains statements relating to future results of the
Company (including certain projections and business trends) that are considered
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of certain risks and uncertainties, including but not limited to,
changes in economic conditions and competitive product and pricing pressures
within the Company's markets, as well as other risks and uncertainties detailed
from time to time in the filings of the Company with the Securities and Exchange
Commission.

DISTRIBUTION CHANNELS AND CUSTOMERS

     AAi sells its products to over 200 customers, primarily in three
distribution channels: (1) mass merchandisers, (2) chain drug stores, combo
stores (stores combining general merchandise, food and drug items) and
supermarkets and (3) variety stores. To a lesser extent, AAi also distributes
its products through armed forces' PX stores, boutique stores, gift shops and
book stores.

     The Company customizes its product and service program offerings to meet
the distinctive characteristics and requirements of each of these retail
distribution channels.

     Mass Merchandisers. AAi's sales to mass merchandisers accounted for
approximately $96.5 million, or 58.3%, of net sales in fiscal 2000. These
customers demand a high level of merchandise support as well as national and
international distribution capability.

     Chain Drug Stores, Combo Stores, Supermarkets. AAi's sales to this channel
accounted for approximately $37.6 million, or 22.7%, of net sales in fiscal
2000. These stores tend to be smaller than mass merchandisers and attract a
broader class of trade, which is often less price sensitive and more
convenience-oriented than the mass merchandiser or variety store customer.

     Variety Stores. AAi's sales to variety stores accounted for approximately
$23.6 million, or 14.3%, of net sales in fiscal 2000. The Company's extensive
product lines enable it to provide targeted service programs on a cost-effective
basis, which affords the Company a significant competitive advantage in this
market.


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     Department Stores and Others. The Company's sales to armed forces' PX
stores, boutique stores, gift shops and book stores accounted for $7.8 million,
or 4.7%, of its fiscal 2000 net sales. Each of these channels has different
characteristics and product and service requirements and caters to different
types of consumers. For example, department stores generally offer higher-end
products with higher price points and sales of accessories at such outlets
represent a larger percentage of total store sales.

     Most of the Company's business is based upon annual contracts or open
purchase orders which are terminable at will. When establishing or expanding a
customer relationship, the Company generally enters into multi-year agreements
for the supply of specified product lines to specific customer stores. Such
agreements, in addition to identifying the stores and product lines to be
supplied, prescribe inventory and service levels and anticipated turnover rates
and sales volumes, as well as the amount of any fixed obligation due to the
customer in connection with establishing the relationship. The agreements
typically do not contain required minimum sales volumes, but may provide for
early termination penalties equal to the Company's unamortized cost of product
displays provided to the customer.

     With regard to new customers, many retailers require a new supplier to buy
back the retailer's existing inventory as a condition of changing vendors. These
inventory costs can be substantial and can serve as a significant barrier to
entry for competitors and the Company in obtaining new customers.

     In fiscal 2000, Wal-Mart accounted for approximately 27.8% of the Company's
net sales. The loss of any significant customer, whether through competition or
otherwise, could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, further industry
consolidation could result in the Company's loss of customers that are acquired
by retailers serviced by other suppliers as well as further concentration of the
Company's credit risks. Such events could have a material adverse effect on the
Company's results of operations.

PRODUCTS

     The Company offers sunglasses, reading glasses, costume jewelry, small
synthetic leather goods, watches, clocks, and other accessories generally at
retail price points below $20.

     Optical Products. The Company's optical product line includes sunglasses
and non-prescription reading glasses which are sold with and without the
Company's service program. As a result of its 1996 acquisition of Foster Grant
Group L.P. and related entities ("Foster Grant US"), AAi has become a leading
seller of popularly priced sunglasses (retail price points of $4 to $20). The
Company pursues co-branding opportunities for its Foster Grant name and also
sells sunglasses under other licensed brand names. The Company offers a variety
of styles as well as color options for both frames and lenses. Sunglasses have a
significant fashion component and positive or negative consumer response in any
year can impact not only that year's profitability but also sales for the
following year, since retailers' orders tend to mirror the prior year's sales.
Such sales are also highly seasonal, with initial orders placed in the fourth
quarter and, depending on consumer response, restocking orders in the second
quarter.

     The Company also offers a variety of styles of non-prescription reading
glasses marketed under Foster Grant, licensed brand names or private labels at
price points of $4 to $20. The reading glasses business has a limited fashion
component and is typically non-cyclical and non-seasonal. Since magnification
strength is the primary purchasing consideration for this product line, proper
stocking and restocking is essential to maximizing sales.

     Costume Jewelry. AAi offers a wide variety of ladies' and children's
costume jewelry with low retail price points (between $3 and $20), including
earrings, necklaces and bracelets. The Company's jewelry line includes private
labeled products and branded products distributed pursuant to arrangements with
licensors such as Disney Enterprises, Inc., Warner Bros. and Revlon Consumer
Products Corporation. Most of the Company's jewelry line is basic (non-seasonal)
and approximately one-third has a fashion or holiday component.

    Small Synthetic Leather Goods and Other. Through a 1986 acquisition, AAi
expanded its product lines to include small synthetic leather goods with retail
price points of $6 to $10, such as small backpacks, handbags, wallets and
purses. Many of the lines of small accessories are designed to complement AAi's
costume jewelry and are likewise often sold under licensed brands. The bulk of
these products are sold on a non-program basis and are shipped direct from the
Company's suppliers to the customer. In June 1998, through the acquisition of
Fantasma, LLC ("Fantasma") the Company added watches and clocks (with average
retail price points between $10 and $20) to its product lines.


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<PAGE>   5

DISTRIBUTION

     During the fourth quarter of 1998, AAi closed its Texas distribution
facility and consolidated its distribution operations into its Smithfield, Rhode
Island facility. The Company consolidated its distribution facilities in order
to optimize supply chain operations, improve customer service, increase
inventory turns and lower operating costs. A disruption of the Company's
distribution operations for any reason could cause the Company to limit or cease
its operations, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

     AAi has purchased and is continuing to implement an Enterprise Resources
Planning ("ERP") system that integrates planning, inventory management and
financials. Improvement and enhancements to this system will continue through
the year 2001.

     The Company's distribution systems are capable of handling any small
package. AAi typically delivers its products to its high volume customers on a
weekly basis. A VNA (very narrow aisle) facility configuration serviced by wire
guided stock pickers resupplies a rapid response order picking line. After
receiving a customer order, the Company's computer system automatically
generates a list of the ordered items, also known as a "picking" order, which
the distribution staff utilizes in packing the customer's shipment. With the
planned improvements to the Company's inventory management computer system,
"picking" orders will be arranged according to the location of the ordered items
within the Company's distribution center, which AAi anticipates will improve the
efficiency of employees in filling orders.

     The Company continues to invest in electronic data interchange ("EDI")
technology that enables customers to order and confirm shipments and allows AAi
to invoice electronically. This technology will continue to permit AAi and its
partners to reduce the cycle time to go to market, improving replenishment of
products to customers and reducing inventory and costs.

SERVICE PROGRAM

     The Company believes that an attractive, well-positioned display is
critical to maximizing sales to the ultimate consumer. The SKU-intensive nature
of the Company's product line and the low retail price points (ranging from $4
to $20 on costume jewelry and sunglasses) relative to the required display space
has led many retailers to outsource the merchandising function to the Company
for these product lines. To better serve these customers, the Company provides
innovative sales programs through which AAi provides its program customers with
store-level management of its products. In fiscal 2000, the sales to customers
who utilize the Company's service program accounted for approximately 52.9% of
net sales.

     Program customers select the products to be sold in their stores and, in
consultation with AAi's sales and merchant organizations determine the initial
order and display requirements. Thereafter, based on point of sale ("POS")
information and field service reports, the Company's management adjusts product
mix, generates display planograms and determines discounts and markdowns. This
information is transmitted to AAi's field service representatives who regularly
visit the retailers' stores to replenish and restock displays, reorder product
and attend to markdowns and allowances, thereby providing customers with a
real-time response to the market. The frequency of service visits is dictated by
the size of the store and the number of the Company's products carried by the
retailer. In 2000, the Company employed approximately 950 field service
representatives.

SALES AND MARKETING

     The sales force is primarily organized by both distribution channel and
product line. The product-based sales approach is dictated by customers since
most retailers divide their buyers' responsibilities by product. Sales
representatives service existing customers and are responsible for increasing
product penetration and solving customer problems.

     The Company markets its products to the retailers by attending trade shows
and advertising in industry trade magazines. The Company also maintains
showrooms and sales offices domestically in Bentonville, Arkansas as well as
internationally in Toronto, Canada, Mexico City, Mexico, Stoke-On-Trent, United
Kingdom and Hong Kong. Marketing focuses on designing a customized product and
service package for each customer after determining the retailer's specific
needs. Often, branded products provide AAi with initial access to a new
customer. The Company then leverages the strength of the Company's field service
and breadth of its product lines to increase product penetration.



                                       5
<PAGE>   6

    In addition, since acquiring the Foster Grant brand, the Company has begun
to advertise directly to the end-consumer. This includes relaunching the "Who's
That Behind Those Foster Grants" campaign, featuring Cindy Crawford, global
promotions and public relations efforts aimed at increasing awareness of the
Foster Grant brand. Also, in the spring of 1999, the Company launched a
co-branded line of Ironman Triathlon(R) sports sunglasses.

INTELLECTUAL PROPERTY AND LICENSES

     Proprietary Trademarks. The Company owns trademarks in the words and
designs used on or in connection with many of its products. The Company has
registered a variety of trademarks under which it sells a number of its
products, including Foster Grant. The level of copyright and trademark
protection available to the Company for proprietary words, phrases and designs
varies depending on several factors including the degree of originality and the
distinctiveness of the associated trademarks and design.

    Licenses. In 1992, AAi began distributing licensed products pursuant to an
agreement with Disney Enterprises, Inc. The Company currently holds numerous
non-exclusive licenses from various licensors to market products with classic
cartoon characters and other images or under other brand names and trademarks.
Many of the Company's license agreements limit sales of products to certain
market categories. The Company pays each of these licensors a royalty on sales
of licensed products. The Company's licenses generally are for terms ranging
from one to ten years. The license agreements generally require minimum annual
payments and certain quality control procedures and give the licensor the right
to approve products licensed by the Company. Typically, the licensor may
terminate the license if specified minimum levels of annual net sales for
licensed products are not met or for failure by the Company to comply with the
material terms of the license. Certain licenses require minimum advertising
expenditures by the Company and also require the Company to make lump-sum
payments in the event of a change of ownership. Accordingly, the Company's
licensing arrangements are dependent primarily upon maintaining a good
relationship between the Company and its licensors. The Company believes it has
good relationships with its licensors and has generally been able to obtain
renewals of expired licenses and to obtain the required approval for licensed
products.

     Most of the Company's license agreements are non-exclusive, many of them
are of short duration and all may be terminated if the Company fails to comply
with any material terms thereof. There can be no assurance that any of these
relationships with licensors will continue, that such agreements will be renewed
or that the Company will be able to obtain licenses for additional brands. If
the Company were unable in the future to obtain such licenses on terms it deems
reasonable, it would be required to modify its marketing plans and could be
forced to rely more heavily on its proprietary brands or generic product sales,
which could materially adversely affect its business, financial condition and
results of operations.

PRODUCT DESIGN, SOURCING AND ASSEMBLY

     Product Design. AAi's in-house design staff develops new products in line
with the current and anticipated trends for each season. For licensed brands,
the Company works extensively with the licensor in approving each detail of the
new products. The Company believes that its future success will depend, in part,
on its ability to enhance its existing product lines and develop new styles and
products to meet an expanding range of customer and consumer requirements.

     Sourcing and Assembly. The Company outsources manufacturing for all of its
products, 79.2% of which is sourced to manufacturers in Asia through a joint
venture in Hong Kong, with the remainder outsourced to independent domestic
manufacturers. The joint venture is co-owned with a Hong Kong investor who
provides on-site management. The joint venture monitors production and ensures
that products meet the Company's quality standards. The Company also utilizes
domestic manufacturers to accommodate short delivery lead times or when
otherwise necessary. The Company believes that the quality and cost of the
products manufactured by its suppliers provide it with a significant competitive
advantage. In addition, sourcing the majority of its products through the joint
venture enables the Company to better control costs, monitor product quality,
manage inventory and provide efficient order fulfillment.

COMPETITION

     The optical products and accessories industries are highly competitive.
There are numerous competitors for each of its product lines both in the retail
channels serviced by the Company and in its other channels of distribution.
Competitors include numerous accessory vendors, including those with their own
retail stores, smaller independent specialty manufacturers, and in the case of
costume jewelry and reading glasses, divisions or subsidiaries of large
companies with greater financial or other resources than those


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<PAGE>   7

of the Company. Certain of these competitors control licenses for widely
recognized images, such as cartoon or movie characters which could provide them
with a competitive advantage. The Company may also experience increased
competition from suppliers of upscale fashion accessories seeking to enter the
mass merchandise market.

     There are significant costs associated with the design, production and
installation of display fixtures for new customers. Furthermore, many retailers
require a new supplier to buy back the retailer's existing inventory as a
condition to changing vendors. These inventory costs can be substantial and
serve as a barrier to entry for both competitors attempting to reach the
Company's existing customers as well as for the Company in obtaining new
customers.

     AAi competes on the basis of diversity and quality of its product designs,
the breadth of its product lines, product availability, price and reputation as
well as customer service and support programs. The Company has many competitors
with respect to one or more of its products but believes that there are few
competitors that distribute products with the same product diversity and service
quality as the Company.

EMPLOYEES

     As of March 14, 2001, the Company had approximately 400 full-time employees
and 760 part-time employees, none of whom were represented by a labor union. The
Company considers its relationship with its employees to be good.


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<PAGE>   8
ITEM 2. PROPERTIES

     The Company's principal executive office is located at 500 George
Washington Highway, Smithfield, Rhode Island. AAi's primary distribution
facilities are adjacent to its headquarters, which together are 180,000 square
feet.

     The following table describes the material properties owned and leased by
AAi:

<TABLE>
<CAPTION>

     OWNED PROPERTY:                                       USE

<S>                                         <C>
       Smithfield, Rhode Island             Warehousing & Distribution, Product Showroom, Sales
                                            Office and Office Administration

     LEASED PROPERTIES:

       Bentonville, Arkansas                Product Showroom and Sales Office

       Warren Avenue, Providence,
           Rhode Island (a)                 Warehousing

       Carpenter St., Providence,
          Rhode Island (a)                  Warehousing

       Toronto, Canada                      Product Showroom and Sales Office

       Stoke-On-Trent, United Kingdom       Warehousing & Distribution and Office Administration
</TABLE>


(a)  Leased to AAi from related parties. See Item 13, "Certain Relationships and
     Related Transactions."

ITEM 3. LEGAL PROCEEDINGS

     The Company is subject to legal proceedings in the ordinary course of
business. While the outcome of law suits or other proceedings cannot be
predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial condition, results of the operation or
cash flow of the Company.


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

     There were no matters submitted to a vote of security holders in the fourth
quarter of 2000.


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<PAGE>   9

                                     PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     All of the Common Stock of the Company is held by affiliates and certain
directors and officers of the Company; thus, no trading market exists for such
stock.

ITEM 6. SELECTED FINANCIAL DATA

     The following table contains selected consolidated financial data for the
Company and is qualified in its entirety by the more detailed consolidated
financial statements of the Company included herein. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere herein.


<TABLE>
<CAPTION>
                                                                                         YEAR ENDED    YEAR ENDED   YEAR ENDED
                                                              YEAR ENDED DECEMBER 31     JANUARY 2,    JANUARY 1,  DECEMBER 30,
                                                              ----------------------     ----------    ----------  ------------
                                                               1996(a)      1997(a)       1999(a)        2000          2000
                                                              --------     ---------     ---------     ---------    ----------
                                                                                  (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>           <C>           <C>           <C>
Statement of Operations Data:
    Net sales ............................................    $ 86,336     $ 149,411     $ 160,325     $ 150,680     $ 165,542
    Cost of goods sold ...................................      47,871        77,928        88,823        96,973        96,589
                                                              --------     ---------     ---------     ---------     ---------
    Gross profit .........................................      38,465        71,483        71,502        53,707        68,953
    Operating expenses ...................................      37,524        65,323        78,135        72,735        63,210
                                                              --------     ---------     ---------     ---------     ---------
    Income (loss) from operations ........................         941         6,160        (6,633)      (19,028)        5,743
    Interest expense(b) ..................................      (1,469)       (4,214)       (7,010)      (10,250)      (10,929)
    Other (expense) income, net ..........................        (331)           31           490          (111)          192
                                                              --------     ---------     ---------     ---------     ---------
    (Loss) income before taxes ...........................        (859)        1,977       (13,153)      (29,389)       (4,994)
    Income tax benefit (expense) .........................         948        (1,162)           --           (36)         (126)
                                                              --------     ---------     ---------     ---------     ---------
    Net income (loss) before extraordinary items .........          89           815       (13,153)      (29,425)       (5,120)
    Extraordinary gain, net of $6.3 million in taxes .....          --            --            --            --         8,838
                                                              --------     ---------     ---------     ---------     ---------
    Net income (loss) before dividends and accretion
    on preferred stock ...................................          89           815       (13,153)      (29,425)        3,718
    Dividends and accretion on preferred stock(c) ........       1,123         2,496         2,779         3,002         3,283
                                                              --------     ---------     ---------     ---------     ---------
    Net (loss) income applicable to common shareholders ..      (1,034)       (1,681)      (15,932)      (32,427)          435
    Pro forma income tax adjustment(d) ...................        (604)           --            --            --            --
                                                              --------     ---------     ---------     ---------     ---------
    Pro forma net (loss) income applicable to common
    shareholders .........................................    $ (1,638)    $  (1,681)    $ (15,932)    $ (32,427)    $     435
                                                              ========     =========     =========     =========     =========

Other Data:
    Depreciation and amortization ........................    $  1,868     $   8,248     $  12,792     $  11,489     $  11,937
    Cash flow from operating activities ..................      (2,219)        1,600        (3,903)        2,612        (4,669)
    Cash flow from investing activities ..................     (12,473)       (9,053)      (29,753)      (10,603)       (9,046)
    Cash flow from financing activities ..................      16,134         8,755        33,084         8,073        12,048
    EBITDA(e) ............................................       2,478        14,439         6,649        (7,650)       17,872
    Capital expenditures(f) ..............................       1,572         7,583        16,882        10,475         8,742

</TABLE>



<TABLE>
<CAPTION>

                                                                YEAR ENDED DECEMBER 31    YEAR ENDED   YEAR ENDED    YEAR ENDED
                                                                ----------------------    JANUARY 2,   JANUARY 1,   DECEMBER 30,
                                                                  1996          1997          1999         2000          2000
                                                                --------      -------     ----------   ----------   ------------
                                                                                   (DOLLARS IN THOUSANDS)
<S>                                                             <C>           <C>           <C>         <C>           <C>
Balance Sheet Data:
    Working capital.........................................    $   687       $ 5,936      $ 31,346     $   7,399     $     599
    Total assets............................................     82,010        93,746       126,498       107,867       108,171
    Total debt(g)...........................................     35,588        44,960        78,982        87,322        85,101
    Preferred securities(h).................................     24,338        26,918        29,771        32,864        36,092
    Total shareholders' deficit ............................     (5,281)       (7,359)      (23,502)      (55,762)      (55,780)

</TABLE>



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<PAGE>   10

(a)  Includes the results of operations of the acquired businesses from the
     respective dates of acquisition: Tempo Division of Allison Reed Group, Inc.
     ("Tempo") in June 1996, Foster Grant US in December 1996, Superior Jewelry
     Company ("Superior") in July 1997, Eyecare Products UK Ltd. ("Foster Grant
     UK") in March 1998 and Fantasma, LLC ("Fantasma") in June 1998.

(b)  Includes amortization of shareholder participation related to the issuance
     of the term loan and Series B preferred stock.

(c)  Reflects a reduction from net income for the accretion and noncash
     dividends on Series A Preferred Stock. See Note 9 of the Notes to the
     Company's Consolidated Financial Statements.

(d)  The Company was an S corporation under Section 1362 of the Internal Revenue
     Code until May 31, 1996. Pro forma income taxes, assuming the Company was
     subject to C corporation income taxes, have been provided, in the
     accompanying statement of operations for 1995 and 1996, at an estimated
     statutory rate of 40%.

(e)  "EBITDA" is defined as earnings before interest, taxes, depreciation and
     amortization. Although EBITDA is not a measure of performance calculated in
     accordance with GAAP, AAi believes that EBITDA is accepted as a generally
     recognized measure of performance in the distribution industry because it
     is an indicator of the earnings available to meet the Company's debt
     service obligations. Nevertheless, this measure should not be considered in
     isolation or as a substitute for operating income, net income, net cash
     provided by operating activities or any other measure for determining AAi's
     operating performance or liquidity which is calculated in accordance with
     GAAP. The Company recorded an extraordinary gain of $8.8 million, which is
     excluded from EBITDA in fiscal 2000.

(f)  Does not include capital assets acquired in connection with the
     acquisitions of the Tempo, Foster Grant US, Superior, Foster Grant UK and
     Fantasma.

(g)  Includes amounts outstanding under a revolving credit facility, various
     long-term obligations and subordinated promissory notes payable to
     shareholders at each applicable period.

(h)  Includes preferred stock of Foster Grant Holdings, Inc. ("FG Holdings") for
     1998 and 1999, and Series B Preferred Stock in 2000.



                                       10
<PAGE>   11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

OVERVIEW

     The Company is a value-added distributor of optical products, costume
jewelry, watches, clocks and other accessories primarily to mass merchandisers,
chain drug stores/combo stores/supermarkets and variety stores in North America
and the United Kingdom. As a value-added distributor, the Company provides
customized store displays, merchandising management and a store-level field
service force to replenish and restock displays, reorder product and attend to
markdowns and allowances. Upon shipment to the customer, the


                                       11
<PAGE>   12

Company estimates agreed upon future allowances, returns and discounts, taking
into account historical experience, and reflects revenue net of these estimates.

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

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

     During the first quarter of 1998, the Company elected to change its fiscal
year end from December 31 to the Saturday closest to December 31.

     On July 21, 1998, the Company sold $75 million of 10-3/4% Senior Notes due
2006 (the "Notes"). The net proceeds of approximately $71 million were used to
repay outstanding indebtedness, as described below under "Liquidity and Capital
Resources."

     During 2000, the Company repurchased $23.15 million face amount of the
Notes for a purchase price of $7.09 million. The purchase price was financed
utilizing a term loan under the Company's Senior Credit Facility. The term loan
is subject to the obligation of certain preferred shareholders to purchase
participations in the term loan upon the happening of certain events. In
conjunction with these commitments to purchase the loan participations, the
Company issued 70,870 shares of Series B Preferred Stock, as described below
under "Liquidity and Capital Resources".

     Net Sales. The Company offers optical products, costume jewelry, small
synthetic leather goods, watches, clocks and other accessories, generally at
retail price points of $20 or less. Net sales of the Company's optical products
accounted for approximately 60.8%, 41.0% and 47.3% of the Company's net sales in
fiscal 2000, 1999 and 1998, respectively; net sales of the Company's costume
jewelry accounted for approximately 34.3%, 38.7% and 40.3% of the Company's net
sales in fiscal 2000, 1999 and 1998, respectively. The balance represented sales
of synthetic leather goods, watches, clocks and other accessories which the
Company has begun to de-emphasize.

     Cost of Goods Sold. The Company outsources manufacturing for all of its
products, 79.2% of which is sourced to manufacturers in Asia through its joint
venture in Hong Kong, with the remainder outsourced to independent domestic
manufacturers. Accordingly, the principal element comprising the Company's cost
of goods sold is the price of manufactured goods purchased through the Company's
joint venture or from independent manufacturers. The Company believes
outsourcing manufacturing allows it to reliably deliver competitively priced
products to the retail market while retaining considerable flexibility in its
cost structure.

     Operating Expenses. Operating expenses are comprised primarily of payroll
and occupancy costs related to the Company's selling, general and administrative
activities as well as depreciation and amortization. The Company incurs various
costs in connection with the acquisition of new customers and new stores for
existing customers, principally the cost of new product display fixtures and
costs related to the purchase of the customer's existing inventory. The Company
makes substantial investments in the design, production and installation of
display fixtures in connection with establishing and maintaining customer
relationships. The Company capitalizes the production cost of these display
fixtures as long as it retains ownership of them. These costs are amortized to
selling expenses on a straight-line basis over their estimated useful life,
which is one to three years. If the Company does not retain title to the
displays, the display costs are expensed as shipped. During fiscal 2000, the
Company recognized a $2.5 million restructuring charge related to the accrual of
severance payments due to three executives, which will be paid over a two-year
period.


                                       12
<PAGE>   13

     The Company incurs direct and incremental costs in connection with the
acquisition of certain new customers and new store locations from existing
customers under multi-year agreements. The Company may also receive the previous
vendor's merchandise from the customer in connection with most of these
agreements. In these situations, the Company values this inventory at its fair
market value, representing the lower of cost or net realizable value, and
records that value as inventory. The Company sells this inventory through
various liquidation channels. Except as provided below, the excess costs over
the fair market value of the inventory received is charged to selling expenses
when incurred. The Company expensed customer acquisition costs of $0.3 million,
$0.6 million and $0.9 million in fiscal 2000, 1999 and 1998, respectively.

     The excess costs over the fair market value of the inventory received is
capitalized as deferred costs and amortized over the agreement period if the
Company enters into a minimum purchase agreement with the customer and the
estimated gross profits from future minimum sales during the term of the
agreement are sufficient to recover the amount of the deferred costs. During
fiscal 2000, 1999 and 1998, the Company capitalized approximately $0.5 million,
$0.3 million and $2.3 million of these costs, respectively. Amortization expense
related to these costs was approximately $1.2 million, $1.2 million and $0.2
million for the years ended December 30, 2000, January 1, 2000 and January 2,
1999, respectively.

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

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

     Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).
Although EBITDA is not a measure of performance calculated in accordance with
Generally Accepted Accounting Principles (GAAP), the Company believes that
EBITDA is accepted as a generally recognized measure of performance in the
distribution industry and provides an indicator of the earnings available to
meet the Company's debt service obligations. EBITDA should not be considered in
isolation or as a substitute for operating income, net income, net cash provided
by operating activities or any other measure for determining the Company's
operating performance or liquidity which is calculated in accordance with GAAP.
Actual EBITDA before extraordinary gain was $17.9 million, ($7.7) million and
$6.6 million in fiscal 2000, 1999 and 1998, respectively. EBITDA, excluding the
restructuring charge of $2.5 million (fiscal 2000), the extraordinary gain of
$8.8 million (fiscal 2000), the goodwill impairment loss of $6.0 million (fiscal
1999) and the $2.6 million in restructuring charges (fiscal 1998) was
approximately $20.4 million, ($1.6) million and $9.2 million in fiscal 2000,
1999 and 1998 respectively. EBITDA, including the restructuring charge and
extraordinary gain was $26.7 million for the year ended December 30, 2000.

ACQUISITIONS

     During the 1990's, the Company grew rapidly through strategic acquisitions.
In June 1998, the Company acquired 80% of the membership interests of Fantasma
for $4.1 million in cash. The remaining 20% membership interest of Fantasma was
held by a previous member of Fantasma. As a result of the termination of the
employment of this member, in April 1999, the Company acquired this 20% interest
effective September 1, 1999. Accordingly, the Company currently holds 100% of
the Fantasma member interests. Fantasma is a marketer and distributor of watches
and clocks.

     The acquisition was accounted for using the purchase method; accordingly,
the results of operations of Fantasma from the date of acquisition are included
in the Company's consolidated statements of operations. The purchase price was
allocated based on estimated fair market value of the assets and liabilities at
the date of acquisition. In connection with the purchase price allocation, the
Company recorded goodwill of approximately $4.6 million, which was being
amortized over 10 years. During 1999, the Company determined that the remaining
goodwill related to this acquisition was impaired based on the Company's
projections of future cash flows related to this asset. Accordingly, the Company
recorded an impairment loss of approximately $3.9 million.



                                       13
<PAGE>   14

     In March 1998, the Company acquired certain assets of Foster Grant UK for
the aggregate book value of certain acquired assets, including inventory items
of $3.3 million and accounts receivable of $1.7 million, less the aggregate
amount of trade payables assumed of $1.1 million and bank debt assumed of $1.7
million. In addition, the Company acquired the Foster Grant trademark in the
United Kingdom and Europe for $0.7 million, which amount was subject to upward
adjustment at the end of 1998 and 1999 based on annual sales, up to a maximum
additional payment of $0.7 million. No adjustment to the purchase price was
required as result of 1999 and 1998 sales. As a result of this acquisition, the
Company recorded approximately $1.1 million of intangible assets which are being
amortized over 20 years.

EFFECTS OF ACQUISITIONS

     Historically, the Company has selected acquisition candidates based, in
part, on the opportunity to improve their operating results. The Company seeks
to leverage its purchasing power, distribution capabilities and lower operating
costs to improve the financial performance of its acquired businesses. Results
of operations reported herein for each period only include the results of
operations for acquired businesses from their respective dates of acquisition.
Full year operating results, therefore, could differ materially from those
presented.

     The Company has accounted for its acquisitions using the purchase method of
accounting. As a result, these acquisitions have affected, and will
prospectively affect, the Company's results of operations in certain significant
respects. The aggregate acquisition costs are allocated to the tangible and
intangible assets acquired and liabilities assumed by the Company based upon
their respective fair values as of the acquisition date. The cost of such assets
are then amortized according to the classes of assets and the estimated useful
lives thereof. The acquisitions necessitating payment of purchase price in
excess of the fair value of the net assets acquired results in intangible assets
consisting of goodwill and trademarks which are being amortized on a
straight-line basis over a period of 10 to 40 years. Similar future acquisitions
or additional consideration paid for existing acquisitions may result in
additional amortization expense. In addition, due to the effects of the
increased borrowing to finance any future acquisitions, the Company's interest
expense may increase in future periods.

     In December 1999, the Company determined that the potential future cash
flows related to the intangible assets of the watches and clocks and certain
jewelry product lines were less than carrying value. As a result, the Company
recorded an impairment loss of approximately $6.0 million relating to these
intangibles.

     As of December 30, 2000, net intangible assets as a result of acquisitions
were $12.8 million.

CONSOLIDATION OF DISTRIBUTION OPERATIONS

     In the fourth quarter of 1998, the Company closed its Texas distribution
center and consolidated distribution operations at its Rhode Island facility.
This restructuring contributed to operating expense savings of approximately
$8.0 million in fiscal 1999. In 1998, the Company incurred approximately $5.0
million of expenses related to the closing of the Texas distribution center,
including a restructuring charge of $2.6 million for the write-down of disposed
assets, the payment of severance benefits and expenses relating to operating
inefficiencies.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                         YEAR ENDED         YEAR ENDED      YEAR ENDED
                                                                     DECEMBER 30, 2000   JANUARY 1, 2000  JANUARY 2, 1999
                                                                     -----------------  ----------------  ---------------

<S>                                                                        <C>               <C>              <C>
Net sales ..........................................................       100.0%            100.0%           100.0%
Cost of goods sold .................................................        58.3              64.4             55.4
                                                                           -----             -----            -----
Gross profit .......................................................        41.7              35.6             44.6
Operating expenses .................................................        36.7              44.2             47.1
Restructuring charge/Goodwill impairment loss ......................         1.5               4.0              1.6
                                                                           -----             -----            -----
Income (loss) from operations ......................................         3.5             (12.6)            (4.1)
Interest expense ...................................................         6.6               6.8              4.4
Other income (expense), net ........................................         0.1              (0.1)             0.3
                                                                           -----             -----            -----
</TABLE>


                                       14
<PAGE>   15

<TABLE>
<S>                                                                         <C>              <C>               <C>
Net loss before taxes and dividends and accretion on preferred stock ..     (3.0)            (19.5)            (8.2)
Income tax expense ....................................................     (0.1)             --               --
                                                                           -----             -----            -----
Net loss before extraordinary items, dividends and accretion on
  preferred stock .....................................................     (3.1)            (19.5)            (8.2)
Extraordinary gain, net ...............................................      5.3              --               --
Net income (loss) before dividends and accretion on preferred stock....      2.2             (19.5)            (8.2)
Dividends and accretion on preferred stock ............................      2.0               2.0              1.7
                                                                           -----             -----            -----
Net income (loss) applicable to common shareholders ...................      0.3%            (21.5)%           (9.9)%
                                                                           =====             =====            =====
</TABLE>

YEAR ENDED DECEMBER 30, 2000 COMPARED TO YEAR ENDED JANUARY 1, 2000

     Net Sales. Consolidated net sales were $165.5 million for the year ended
December 30, 2000 as compared to $150.7 million for the year ended January 1,
2000, an increase of 9.8% or $14.8 million. The increase in net sales is
primarily attributable to increased volume in the Mass Merchandisers and Chain
Drug Stores, Combo, Supermarkets segments. The Company continually evaluates its
sales-allowance and return reserves. As a result of this, during the third and
fourth quarter of 2000, the Company decreased its reserves related to specific
customers by $1.7 million and $2.9 million, respectively, which resulted in an
increase in net sales. Fourth quarter 2000 sales also benefited from improved
inventory management which resulted in higher order fulfillment than in the
fourth quarter of fiscal 1999. These increased sales were partially offset by
the planned restructuring in the relationship of a major customer which reduced
selling space, and increased competition in the jewelry product line.

     Gross Profit. Gross profit was $69.0 million for the year ended December
30, 2000 as compared to $53.7 million for the year ended January 1, 2000. Gross
profit as a percentage of net sales increased to 41.7% from 35.6% primarily due
to the shift in mix to higher margin optical products and lower royalty
expense related to the planned de-emphasis of branded watches, clocks and other
accessories. Also, in 1999, a significant promotion was conducted with a major
customer, which resulted in lower than expected margin.

     Operating Expenses. Operating expenses before the restructuring charge of
$2.5 million were $60.7 million for the year ended December 30, 2000 as compared
to $72.7 million for the year ended January 1, 2000, a decrease of 16.5% or
$12.0 million. The decrease is primarily attributable to the goodwill impairment
loss of $6.0 million that was recognized during 1999 and the realignment of
territories within the field service organization. In addition, selling and
design expenses were significantly reduced due to the planned de-emphasis of
branded watches, clocks, and other accessories.

     Interest Expense. Interest expense was $10.9 million for the year ended
December 30, 2000 as compared to $10.3 million for the year ended January 1,
2000, an increase of 5.8% or $0.6 million. This resulted from additional
borrowing under the Company's credit facilities to fund operations during 1999
as well as to fund increased purchases of optical products related to increased
shipments as compared to the prior year. This increase was partially offset by
the interest savings incurred as a result of the repurchase of $23.15 million in
face amount of the Notes which occurred during the second and third quarters of
2000, net of additional interest accrued associated with the term loan and
Series B Preferred Stock.

     Income Tax Expense. Income tax expense of $126,000 for fiscal 2000
represents a provision for income taxes related to foreign operations that do
not have net operating losses. In addition, the Company has provided a $6.3
million provision for income taxes related to the extraordinary gain from debt
extinguishment. During 2000 and 1999, the Company did not record an additional
tax benefit related to its losses. This decision was based on historical and
anticipated results. The effect of this decision was to increase its valuation
reserve for its deferred tax assets. The Company's valuation allowance as of
December 30, 2000 is approximately $16.3 million.

     Net Income (Loss). As a result of the factors discussed above, net income
(loss) before dividends and accretion on preferred stock was $3.7 million and
($29.4) million for the years ended December 30, 2000 and January 1, 2000,
respectively. Net loss before dividends and accretion on preferred stock,
excluding the extraordinary gain of $8.8 million and the restructure charge of
$2.5 million, was $2.6 million for the year ended December 30, 2000 as compared
to a net loss before dividends and accretion on preferred stock, excluding the
goodwill impairment charge of $6.0 million was $23.4 million for the year
ended January 1, 2000, a decrease of $20.8 million.

     Net Income (Loss) Applicable to Common Shareholders. Net income (loss)
applicable to common shareholders was $0.4 million and ($32.4) million for the
years ended December 30, 2000 and January 1, 2000, respectively. Net income
(loss) applicable to common shareholders, excluding extraordinary gain and the
restructuring charge was $5.9 million for the year ended December 30, 2000, as
compared to a loss, excluding the goodwill impairment charge of $6.0 million was
$26.4 million for the year ended January 1, 2000, a decrease of $20.5 million.
This decrease is attributable to the $27.3 million increase in earnings offset
by the increase in interest expense.


                                       15
<PAGE>   16

YEAR ENDED JANUARY 1, 2000 COMPARED TO YEAR ENDED JANUARY 2, 1999

     Net Sales. Consolidated net sales were $150.7 million for the year ended
January 1, 2000 as compared to $160.3 million for the year ended January 2,
1999, a decrease of 6.0% or $9.6 million. The decrease in net sales relates
primarily to a $9.2 million decline within the Mass Merchandiser channel. This
decrease in net sales is primarily attributable to a combination of retail
pricing pressure and softness in demand during fiscal 1999.

     Gross Profit. Gross profit was $53.7 million for the year ended January 1,
2000 as compared to $71.5 million for the year ended January 2, 1999. Gross
profit as a percentage of net sales decreased to 35.6% from 44.6% due to: (i) a
decline in net sales related to higher returns and markdowns as mentioned above,
(ii) increased shipments of lower margin items in an effort to reduce inventory,
and (iii) higher cost of goods sold due to an increase in labor and freight
charges after the consolidation of the distribution operations due to past
consolidation inefficiencies.

     Operating Expenses. Operating expenses were $72.7 million for the year
ended January 1, 2000 as compared to $78.1 million for the year ended January 2,
1999, a decrease of 6.9% or $5.4 million. The decrease of $5.4 million is
primarily attributable to approximately $6.4 million in savings from the
consolidation and closing of the Texas distribution center into the Company's
newly expanded Rhode Island facility. During 1999, the Company also recognized a
goodwill impairment loss of approximately $6.0 million, the comparative effect
of which is largely offset by a $2.6 million restructuring charge and a one time
charge of approximately $2.4 million related to the closing of the Texas
distribution center which were incurred in 1998.

     Interest Expense. Interest expense was $10.3 million for the year ended
January 1, 2000 as compared to $7.0 million for the year ended January 2, 1999,
an increase of 46.2% or $3.2 million. This was caused by both a higher average
balance outstanding on our line of credit throughout fiscal 1999 as well as a
higher interest rate on the Notes which were outstanding for the full year.

     Income Tax Expense. Income tax expense of $36,000 for fiscal 1999
represents a provision for foreign income taxes related to our foreign
operations. During 1999 and 1998, the Company did not record a tax benefit
related to its losses. This decision was based on historical and anticipated
results. The effect of this decision was to increase its valuation reserve for
its deferred tax assets. The Company's valuation allowance as of January 1, 2000
was approximately $15.0 million.

     Net Loss. As a result of the factors discussed above, net loss before
dividends and accretion on preferred stock was $29.4 million for the year ended
January 1, 2000 as compared to net loss before dividends and accretion on
preferred stock of $13.2 million for the year ended January 2, 1999, an
increased loss of $16.3 million.

     Net Loss Applicable to Common Shareholders. Net loss applicable to common
shareholders was $32.4 million for the year ended January 1, 2000 as compared to
a loss of $15.9 million for the period ending January 2, 1999, an increased loss
of $16.5 million. The increase was attributable to the $16.3 million decrease in
earnings and an increase of $223,000 in dividends and accretion on Series A
Preferred Stock due to the compounding of accrued dividends.

LIQUIDITY AND CAPITAL RESOURCES

     At December 30, 2000, the Company had cash and cash equivalents of $0.6
million and working capital of $0.6 million as compared to $2.3 million and $7.4
million, respectively at January 1, 2000. The decline in cash and cash
equivalents is due to the Company's enhanced focus on utilizing worldwide cash
reserves to fund payments on its Senior Credit Facility. The decline in working
capital was driven by increased borrowings under the revolving note payable
partially offset by an increase in trade receivables that resulted from the
timing of the rollout of the 2001 optical line in the fourth quarter of 2000, as
compared to the 2000 optical rollout in the first quarter of 2000.

     The Company used $4.7 million of cash in operations during 2000 as compared
to generating cash of $2.6 million in 1999 and a use of cash of $3.9 million in
1998. The decrease is primarily due to the increased trade receivables in 2000
partially offset by the timing of payments in accrued expenses in 1999.

     The Company used $9.0 million of cash in investing activities during fiscal
2000, compared to $10.6 million in 1999 and $29.8 million in 1998. Cash used in
investing activities decreased in fiscal 2000 as compared to fiscal 1999 as a
result of a $1.8 million decrease in property, plant and equipment expenditures.



                                       16
<PAGE>   17
     The Company generated $12.0 million from financing activities during fiscal
2000, compared to $8.1 million in 1999 and $33.1 million in 1998. Cash generated
from financing activities is primarily attributable to increased borrowings
under the revolving note payable partially offset by the redemption payment on
the FG Holdings preferred stock and higher payments on capital lease
obligations.

     In connection with the purchase of Foster Grant US, the Company's
wholly-owned subsidiary, FG Holdings issued 100 shares of preferred stock ("FG
Preferred Stock"), which were redeemable on February 28, 2000. The redemption
price which was determined with reference to the combined net sales of
sunglasses, reading glasses and accessories by FG Holdings and the Company
totaled $1.0 million. The Company funded the redemption in April 2000 from its
Senior Credit Facility (the "Senior Credit Facility"). In addition, upon the
occurrence of certain specified capital transactions, the holders of FG
Preferred Stock are entitled to receive a supplemental payment of up to $3.0
million depending upon the transaction value. See Item 13, "Certain
Relationships and Related Transactions."

     On July 21, 1998, the Company sold $75 million of 10-3/4% Senior Series A
Notes due 2006 (the Notes) through a Rule 144A offering. The net proceeds of
approximately $71.0 million received by the Company from the issuance and sale
of the Notes were used to repay outstanding indebtedness under the credit
facility with a bank and the Subordinated Promissory Notes to shareholders, net
of amounts due the Company from certain of these shareholders. The Company
incurred issuance costs of approximately $3.7 million in relation to these
Notes. These costs are being amortized over the life of the Notes and are
included in other assets in the accompanying consolidated balance sheets. In
December 1998, the Notes were exchanged for 10-3/4% Series B Notes due 2006
registered with the SEC. Interest on the Notes is payable semiannually on
January 15 and July 15, commencing January 15, 1999.

     During 2000, the Company repurchased $23.15 million face amount of the
Notes for a purchase price of $7.09 million. The purchase price was financed
utilizing a term loan under its existing Senior Credit Facility. The term loan
is secured by a mortgage on its Smithfield, RI facility and subject to the
obligation of certain preferred shareholders to purchase participations in the
term loan, upon the happening of certain events. The term loan is being
amortized over 60 months commencing April 1, 2001, with the remaining principal
balance due at the expiration of the Senior Credit Facility on July 31, 2003. As
a result of this transaction, the Company recognized an $8.8 million
extraordinary gain, net of $6.3 million of income taxes, and wrote off $90,000
of unamortized issuance costs related to the Notes that were repurchased. These
purchases resulted from inquiries from holders of the Notes. The Company does
not solicit offers to tender Notes for repurchase, but may, from time to time,
consider requests to repurchase Notes, subject to the availability of
appropriate financing.

     In conjunction with the commitment to purchase participations in the term
loan, the Company issued 70,870 shares of Series B Preferred Stock. The holders
of Series B Preferred Stock are entitled to receive, prior and in preference to
any distribution with respect to any other capital stock of the Company, an
amount per share equal to $6.67 multiplied by the number of six month periods
and fractions thereof in the period during which the participation commitment
was outstanding. The Company is amortizing the value related to the two six
month periods (approximately $945,000) in the year ended December 30, 2000. This
amount is being amortized over the one-year period as interest expense. If the
participation commitment is outstanding for a period beyond twelve months, the
Company will record additional value to the Series B Preferred Stock and
amortize the related costs over the additional period of the participation
commitment as required.

     The Company has 43,700 shares of Series A Preferred Stock outstanding which
have an aggregate redemption value of $35.1 million at December 30, 2000. Each
share of Series A Preferred Stock is convertible into 10 shares of Common Stock
at a rate of 10 to 1, adjustable for certain dilutive events. Conversion is at
the option of the shareholder, but is automatic upon consummation of a qualified
public offering of equity securities. The holders of the Series A Preferred
Stock have the right to require redemption for cash for any unconverted shares,
beginning June 30, 2002, provided, however, that the right to require redemption
is suspended as long as any Restrictive Indebtedness is outstanding. The Notes
constitute Restrictive Indebtedness. The redemption price of the Series A
Preferred Stock is an amount equal to the original issue price, $526.32 per
share, plus any accrued and unpaid dividends yielding a 10% compounded annual
rate of return.

     The Company had up to $5.5 million available for additional borrowings
under the Senior Credit Facility as of December 30, 2000. Interest rates on the
revolving loans under the Senior Credit Facility are based, at the Company's
option, on the Base Rate (as defined) or LIBOR plus an applicable margin. The
Senior Credit Facility contains certain restrictions and limitations, including
financial covenants that require the Company to maintain and achieve certain
levels of financial performance and limit the payment of cash dividends and
similar restricted payments. As of December 30, 2000, the Company was not in
compliance with certain financial covenants under the Senior Credit Facility. As
of March 27, 2001, the Company received a waiver of such non-compliance from its
lenders and amended its Senior Credit Facility. The Company expects to be in
compliance with the modified financial covenants in


                                       17
<PAGE>   18

the Senior Credit Facility throughout 2001. The Company incurred a fee of
$75,000 payable to the lenders in connection with the amendment which was
expensed in 2000.

     In November 1999, Foster Grant UK entered into a credit facility with a
different bank. The facility provides for a pound sterling 1.5 million
(approximately $2.2 million at December 30, 2000) overdraft line to finance
working capital. Repayments under this facility fluctuate with interest at the
bank's base rate (6.0% at December 30, 2000) plus 1.25% if below the facility
limit of pound sterling 1.5 million and 2.25% if in excess of the agreed limit.
The facility expires in December 2001. The Company had no borrowings outstanding
under this facility at December 30, 2000 and, therefore, the related covenants
were not in effect, as they only become effective when the Company has
borrowings outstanding.

     The Company has substantial indebtedness and significant debt service
obligations. As of December 30, 2000, the Company had total indebtedness,
including borrowings under the Senior Credit Facility, in the aggregate
principal amount of $85.1 million. The Company had current liabilities of
approximately $68.2 million. In addition, the Company has significant annual
obligations that include interest on the Notes of approximately $5.6 million,
minimum royalty obligations over the next two years of approximately $2.7
million and minimum payments under its operating leases of approximately
$391,000. The Indenture governing the Notes permits the Company to incur
additional indebtedness, including secured indebtedness, subject to certain
limitations.

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

IMPACT OF INFLATION

     The Company believes that inflation has not had a material effect on its
results of operations or financial condition during the past three years.

SEASONALITY AND QUARTERLY INFORMATION

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

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1999, FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133, which defers the effective date of SFAS No. 133 to all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, issued in June
1998, establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company does not expect adoption of this
statement to have a significant impact on its consolidated financial position or
results of operations.

     The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition", in December 1999. The Company was required
to adopt this new accounting guidance through a cumulative charge to operations,
in accordance with Accounting Principles Board (APB) Opinion No. 20, Accounting
Changes, no later than the fourth quarter of fiscal 2000. Adoption of the
guidance provided in SAB No. 101 did not have a material impact on operating
results.

     In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB
Opinion No. 25." The interpretation clarifies the application of APB Opinion No.
25 in certain situations, as


                                       18
<PAGE>   19

defined. The Interpretation was effective July 1, 2000, but covers certain
events occurring during the period after December 15, 1998. The adoption of this
interpretation did not have an impact on the accompanying financial statements.



                                       19
<PAGE>   20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

     Foreign Currency Risk. The Company's results of operations are affected by
fluctuations in the value of the U.S. dollar as compared to the value of
currencies in foreign markets primarily related to changes in the British Pound,
the Canadian Dollar, the Mexican Peso, the Euro Dollar and the Hong Kong Dollar.
In fiscal 1999 and 2000, the net impact of foreign currency changes was not
material to the Company's financial condition or results of operations. The
Company manages its exposure to foreign currency exchange risk by trying to
minimize the Company's net investment in its foreign subsidiaries. At December
30, 2000, the Company's net investment in foreign assets was approximately $7.3
million. The Company generally does not enter into derivative financial
instruments to manage foreign currency exposure.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The index to financial statements is included on page F-1 of this Annual
Report and is incorporated by reference herein.

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

     There are no changes in or disagreements with accountants on accounting and
financial disclosure as defined by Item 304 of Regulation S-K.




                                       20
<PAGE>   21
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

DIRECTORS AND EXECUTIVE OFFICERS

     Each director of the Company is elected for a period of one year at the
Company's annual meeting of shareholders and serves until his successor is duly
elected by the shareholders. Vacancies and newly created directorships resulting
from any increase in the number of authorized directors may be filled by a
majority vote of directors then remaining in office. The holders of the Series A
Preferred Stock (the "Preferred Holders," or individually, a "Preferred Holder")
have the right, at their option, to designate up to two directors to the Board
of Directors, as well as the right to vote on the election of directors at the
annual meeting of shareholders. In addition, AAi's Articles of Incorporation
provide that, in addition to other events, if the Company is in default of any
of its covenants thereunder, the Preferred Holders shall have the right to elect
a majority of the members of the Board of Directors. The Company is currently in
default of certain such covenants. However, the Preferred Holders have not
exercised their right to elect a majority of the members of the Board of
Directors, but have elected one additional director.



                                       21
<PAGE>   22

     The Company's shareholders have entered into an agreement that requires
them, subject to the rights of Preferred Holders to elect additional directors
in the event of default, to vote to fix the number of directors of the Company
at seven and elect as directors two persons designated by the Preferred Holders
and five persons designated by certain management shareholders. In addition,
Weston Presidio Capital II, L.P., the record holder of 17,100 shares (39.1%) of
the Series A Preferred Stock, has agreed to vote in favor of Martin E. Franklin
(or in the event of his death or disability, the designee of Marlin Capital,
L.P.) as a director. See Item 13, "Certain Relationships and Related
Transactions -- Shareholders Agreement." Officers are elected by and serve at
the discretion of the Board of Directors.

     The following table sets forth information with respect to each person who
is currently a director or executive officer of the Company.

<TABLE>
<CAPTION>

NAME                                AGE     POSITION WITH THE COMPANY

<S>                                 <C>    <C>
Michael F. Cronin *............     47      Chairman of the Board (a), (b)
John R. Ranelli................     54      Director, President and Chief Executive Officer
John H. Flynn, Jr..............     50      Director and Executive Vice President - Sales
Stephen J. Carlotti............     58      Director and Secretary (a)
Gerald F. Cerce................     53      Director
Martin E. Franklin *...........     36      Director (b)
George Graboys.................     68      Director (a), (b)
David B. Jenkins *.............     70      Director (b)
Mark D. Kost...................     39      Chief Financial Officer and Treasurer
John R. Agre...................     37      Executive Director - International
Joseph T. Barrell..............     49      Executive Director - Operations
Howard Collins.................     54      Executive Director - Product Development
Babette Lienhard...............     50      Executive Director - Merchandising
</TABLE>

*    Designated by the Preferred Holders. All other directors were designated by
     certain management shareholders pursuant to the Shareholders Agreement. See
     Item 13, "Certain Relationships and Related Transactions -- Shareholders
     Agreement."

(a)  Member of the Compensation Committee.

(b)  Member of the Audit Committee.

     The following is a brief summary of the background of each director and
executive officer. Unless otherwise indicated, each individual has served in his
current position for at least the past five years.

     Gerald F. Cerce co-founded the Company in 1985 with Mr. Porcaro and has
served as the Company's Chairman of the Board from its founding until February
2001. Mr. Cerce served as Chief Executive Officer from the Company's founding
until February 2000. Mr. Cerce also served as Chairman of the Board of AAi's
predecessor company, Femic, Inc., a Rhode Island jewelry manufacturer which Mr.
Cerce and Mr. Porcaro acquired in 1972. Mr. Cerce serves on the Board of
Trustees of Bryant College and is a former member of the Advisory Board of
Citizens Savings Bank.

     John R. Ranelli has been a Director of the Company since July 1999 when he
joined AAi as President and Chief Operating Officer. In February 2000, Mr.
Ranelli became President and Chief Executive Officer. Prior to joining AAi, Mr.
Ranelli served as Executive Vice President of Stride Rite Corporation (a
multi-brand footwear company) from 1996 through 1998. Mr. Ranelli served as
Chief Operating Officer for Deckers Outdoor Corporation (a footwear and apparel
manufacturer) from 1995 to 1996. Mr. Ranelli is a graduate of the College of the
Holy Cross and received his M.B.A. from the Amos Tuck School, Dartmouth College.

     John H. Flynn, Jr. joined AAi's predecessor company in 1981 as Vice
President. He served as President and Chief Executive Officer of the Company
from 1985 to 1998 and has been a Director since 1985. As Executive Vice
President of Sales, Mr. Flynn directly manages all sales and service operations
for the Company in the U.S. Prior to joining the Company, Mr. Flynn was a
service director for K&M Associates, a costume jewelry distributor, and also
served as Vice President of Puccini Accessories where he supervised all sales
and service operations.



                                       22
<PAGE>   23

     Stephen J. Carlotti has been a Director of the Company since June 1996. He
is an attorney and has been a partner of the firm Hinckley, Allen & Snyder LLP,
since 1992 and from 1972 to 1989. He is a graduate of Dartmouth College and Yale
University Law School.

     Michael F. Cronin has been a Director of the Company since June 1996. Mr.
Cronin also serves on the boards of directors of Casella Waste System, Inc. (an
integrated waste management company), Tekni Plex, Inc. (a manufacturer of
packaging materials), Tweeter Home Entertainment Group, Inc. (a retailer of
audio and video consumer electronics products) and several other private growth
companies. Since 1991, Mr. Cronin has been the Managing General Partner of
Weston Presidio Capital, a venture capital investment firm. He is a graduate of
Harvard College and Harvard Business School.

     Martin E. Franklin has been a Director of the Company since 1996. Mr.
Franklin has been Chairman and Chief Executive Officer of Marlin Holdings, Inc.,
the general partner of Marlin Capital, L.P., a private investment partnership,
since October 1996. He also serves as Chairman of the Board of Directors of
Bolle Inc., a NASDAQ listed company, and as a Director of Specialty Catalog
Corp. From May 1996 until March 1998, Mr. Franklin served as Chairman and Chief
Executive Officer of Lumen Technologies, Inc., a NYSE company, and served as
Executive Chairman from March 1998 until December 1998. Mr. Franklin was
Chairman of the Board and Chief Executive Officer of Lumen's predecessor, Benson
Eyecare Corporation from October 1992 to May 1996 and President from November
1993 until May 1996. Mr. Franklin was non-executive Chairman and a Director of
Eyecare Products plc, a London Stock Exchange company, from December 1993 until
February 1999. Mr. Franklin also serves on the boards of a number of privately
held companies and charitable organizations. Mr. Franklin received a B.A. in
political science from the University of Pennsylvania in 1986.

     George Graboys has served as a Director of the Company since 1996. Mr.
Graboys served as Chief Executive Officer of Citizens Bank and Citizens
Financial Group, Inc. until he retired in October 1992. From January 1993 to
June 1995, Mr. Graboys was Adjunct Professor and Executive-in-Residence at the
University of Rhode Island School of Business. From March 1995 to June 1998, Mr.
Graboys served as Chairman of the Board of Governors for Higher Education. The
Board oversees the state's three institutions of higher education with
operations conducted on eight campuses throughout the state.

     David B. Jenkins became a Director of the Company in May 1999. Mr. Jenkins
serves on the board of directors of the Nabisco Holding Corp., Citizens
Financial Group, and The Foreside Company, Inc. Mr. Jenkins is a trustee of
Bridgewater State College and Milton Academy, a director of Relationship
Marketing and chairman of Kabloom. Mr. Jenkins received his B.A. from Wesleyan
University and his M.B.A. from the Harvard Business School.

     Mark Kost joined AAi as Chief Financial Officer in January 2000. Mr. Kost
was Senior Director of Finance, Global Sales, Marketing and Product Development
for the Polaroid Corporation from 1997 through 1999. Mr. Kost also served in
numerous capacities for Pepsico from 1991 to 1997. Mr. Kost received his B.A. in
accounting from Michigan State University and his M.B.A. from the University of
Chicago.

     John R. Agre joined AAi as Executive Director - International in November
1999. Prior to joining AAi, Mr. Agre served as General Manager of Stride Rite
International Corporation responsible for managing Stride Rite's brands in all
international markets from 1992 through 1999. Mr. Agre received his B.A. in
economics from Northwestern University and his M.B.A. from Cornell University's
Johnson Graduate School of Management.

     Joseph T. Barrell joined AAi as Executive Director - Operations in October
1999. Prior to joining AAi, Mr. Barrell was Senior Vice President of Operations
at Stride Rite Corporation responsible for three distribution centers, customer
service, logistics and information technology. Mr. Barrell served as the Vice
President of Distribution for The Timberland Company from 1991 through 1995 and
Director of Physical Distribution of Melville Corporation from 1976 through
1991. Mr. Barrell received his B.S. degree from Worcester State College and his
M.B.A from Anna Maria College.

     Howard B. Collins, Jr. joined AAi as Executive Director - Product
Development in April 2000. Mr. Collins was a Division President of The Stride
Rite Corporation, responsible for product design, engineering and production
from 1997 to 2000. Mr. Collins also held senior level positions at The
Timberland Company from 1991 through 1997, first running the apparel business,
then the manufacturing and sourcing Divisions. Mr. Collins received his B.S.
degree from the University of Utah.



                                       23
<PAGE>   24
     Babette A. Lienhard joined AAi as Executive Director - Merchandising in
December 2000. Most recently Ms. Lienhard was the Senior Vice President for
Juniors, Accessories and Shoes for Cherry & Webb, Inc. Prior to that, Ms.
Lienhard was President for New World Consulting where she developed programs for
Universal Studios, Warner Brothers and Disney as well as other companies. She
was Vice President of Merchandising for Accessories and Dresses at Ann Taylor.
Ms. Lienhard served in numerous capacities from 1972-1992 at the Macy
Corporation moving from Assistant Buyer to Group Vice President of Fashion
Accessories. Ms. Lienhard received her B.S. in Business Administration and
Retail Management from Simmons College in Boston.

DIRECTOR COMPENSATION

     Directors who are not employees of AAi receive an annual fee of $10,000 and
$500 for each committee meeting attended, as well as reimbursement for their
reasonable expenses. Messrs. Ranelli and Flynn do not receive any directors'
fees.



                                       24
<PAGE>   25
ITEM 11. EXECUTIVE COMPENSATION

     The following table summarizes the compensation paid or accrued by the
Company to those individuals who served as its Chief Executive Officer at any
time during fiscal 2000, each of its four most highly compensated executive
officers who earned more than $100,000 in salary and bonus in fiscal 2000 and
were employed by the Company on December 30, 2000 and each of two individuals
who would have been one of the four most highly compensated executive officers
but for the fact that they retired prior to December 30, 2000 (together, the
"NAMED EXECUTIVE OFFICERS") for the three fiscal years ended December 30, 2000,
in each case, for services rendered in all capacities to the Company during
fiscal 2000:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                  LONG TERM
                                                                      ANNUAL COMPENSATION(a)     COMPENSATION
                                                           FISCAL     ----------------------     ------------      ALL OTHER
         NAME AND PRINCIPAL POSITION                        YEAR      SALARY          BONUS       OPTIONS(#)    COMPENSATION(b)
         ---------------------------                       ------    --------       --------     ------------   ---------------

<S>                                                         <C>      <C>            <C>           <C>              <C>
Gerald F. Cerce(c).....................................     2000     $346,380       $162,500            --         $616,616
  Chief Executive Officer and Chairman of the Board         1999      651,738             --            --           18,291
                                                            1998      651,342        145,000            --          245,576

John R. Ranelli (d)....................................     2000      379,519        185,225            --            8,325
  President and Chief Executive Officer                     1999      148,077             --        31,350            3,600
                                                            1998           --             --            --               --

John H. Flynn, Jr......................................     2000      335,408        187,937            --           15,545
  Executive Vice President-Sales                            1999      309,563             --            --           13,129
                                                            1998      309,236         75,000            --           12,905

Felix A. Porcaro, Jr.(e)...............................     2000      119,170         52,367            --          136,454
  Executive Vice President-Product Development              1999      211,928             --            --           16,907
  and Marketing                                             1998      211,673         50,000            --           13,138

Robert V. Lallo(e).....................................     2000      146,797         71,194            --           63,650
  Executive Vice President-Distribution                     1999      174,488             --            --            5,482
                                                            1998      165,229         45,000            --            6,069

John R. Agre(f)........................................     2000      202,000         60,438         6,000              650
  Executive Director - International Operations             1999       21,539             --            --               --
                                                            1998           --             --            --               --

Joseph T. Barrell(g)...................................     2000      249,124         73,422        13,500            1,263
  Executive Director - Operations                           1999       50,769             --            --               --
                                                            1998           --             --            --               --

Mark D. Kost(h)........................................     2000      232,405         86,678        11,224              730
  Chief Financial Officer                                   1999           --             --            --               --
                                                            1998           --             --            --               --

</TABLE>

(a)  The aggregate amount of perquisites and other personal benefits received
     from the Company by each of the Named Executive Officers was less than the
     lesser of $50,000 or 10% of the total of annual salary and bonus reported.



                                       25
<PAGE>   26

(b)  Amounts paid in fiscal 2000 represent the following: (1) severance payments
     made by the Company to Mr. Cerce ($324,631), Mr. Porcaro ($120,838) and Mr.
     Lallo ($58,812); (2) medical payments reimbursed by the Company to Mr.
     Cerce ($7,437), Mr. Flynn ($3,908), and Mr. Porcaro ($5,680); (3) the
     Company's matching contributions under its Qualified 401(k) Plan and
     Non-Qualified 401(k) Excess Plan for Named Executive Officers as follows:
     Mr. Cerce ($13,494), Mr. Ranelli ($13,500), Mr. Flynn ($10,696), Mr.
     Porcaro ($6,049), Mr. Lallo ($4,764), Mr. Agre ($600), Mr. Barrell ($1,200)
     and Mr. Kost ($705); (4) premiums paid by the Company for term life
     insurance purchased for Named Executive Officers and not made available
     generally to salaried employees are as follows: Mr. Cerce ($21,054), Mr.
     Ranelli ($75), Mr. Flynn ($941), Mr. Porcaro ($3,887), Mr. Lallo ($75), Mr.
     Agre ($50), Mr. Barrell ($63) and Mr. Kost ($25); and (5) premium of
     $250,000 paid with respect to life insurance purchased by Company in
     connection with Mr. Cerce's Supplemental Executive Retirement Plan.

(c)  Mr. Cerce served as Chief Executive Officer until February 2000 and
     terminated his employment with the Company effective June 30, 2000.

(d)  Mr. Ranelli's employment with the Company commenced on July 26, 1999; he
     assumed the position as Chief Executive Officer in February 2000.

(e)  Messrs. Porcaro and Lallo terminated their employment with the Company
     effective June 30, 2000 and August 31, 2000, respectively.

(f)  Mr. Agre's employment with the Company commenced in November 1999.

(g)  Mr. Barrell's employment with the Company commenced in October 1999.

(h)  Mr. Kost's employment with the Company commenced in January 2000.

STOCK PLAN

     The Company has established the 1996 Incentive Stock Plan (the "1996 Plan")
which provides for the grant of awards covering a maximum of 88,000 shares of
Common Stock, to officers and other key employees of the Company and
non-employees who provide services to the Company or its subsidiaries. Awards
under the 1996 Plan may be granted in the form of incentive stock options,
non-qualified stock options, shares of common stock that are restricted, units
to acquire shares of Common Stock that are restricted, or in the form of stock
appreciation rights or limited stock appreciation rights.

     The following table sets forth certain information concerning the grant of
stock options under the 1996 Plan to the Named Executive Officers during fiscal
2000. No options were granted to any other Named Executives in fiscal 2000.

                      OPTION GRANTS IN THE LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                NUMBER OF
                                SECURITIES
                                UNDERLYING   % OF TOTAL OPTIONS
                                 OPTIONS    GRANTED TO EMPLOYEES  EXERCISE OR BASE PRICE                    GRANT DATE
NAME                            GRANTED(a)     IN FISCAL YEAR           ($/SH)             EXPIRATION DATE    VALUE
----                            ----------  --------------------  ----------------------   ---------------  ----------

<S>                              <C>              <C>                 <C>                  <C>                <C>
John R. Agre                      6,000              12.73%             $ 32.00              3/14/2010        $ 81,660
Joseph T. Barrell                13,500              28.65%             $ 32.00              3/14/2010        $183,735
Mark D. Kost                     11,224              23.82%             $ 32.00              3/14/2010        $152,759

</TABLE>

(a)  Options vest in three equal annual installments commencing on the first
     anniversary of the grant date; vesting accelerates (i) upon an initial
     public offering, (ii) change of control of the Company or (iii) the Company
     attaining annual EBIT of at least $20 million.

(b)  Represents the fair value of the option granted and was estimated as of the
     date of the grant using the Black-Scholes option pricing model with the
     following weighted average assumptions: expected volatility of 35.53%;
     expected life of five years; and risk-free interest rate of 6.5%. No
     dividends on Common Stock were assumed for purposes of this estimate.



                                       26
<PAGE>   27

     The following table contains information with respect to aggregate stock
options held by the Named Executive Officers as of December 30, 2000. Messrs.
Cerce, Flynn, Porcaro and Lallo do not hold any stock options. No stock options
were exercised by any Named Executive Officers during fiscal 2000.

                      AGGREGATE YEAR-END OPTION VALUES
                                                         VALUE OF UNEXERCISED
                                                          IN-THE-MONEY OPTION/
                      NUMBER OF SECURITIES UNDERLYING   SARs AT FISCAL END($)(a)
                       UNEXERCISED OPTIONS AT FISCAL        YEAR-END($)(a)
                                YEAR-END                    (EXERCISABLE/
NAME                    EXERCISABLE/UNEXERCISABLE           UNEXERCISABLE)
----                  --------------------------------  -----------------------

John R. Ranelli......       15,675/15,675                  $6,740/$6,740
John R. Agre.........          0/6,000                          0
Joseph T. Barrell....          0/13,500                         0
Mark D. Kost.........          0/11,224                         0

(a)  Based on the December 30, 2000, price of the Common Stock being equal to
     $32.00, the exercise price of options granted in fiscal 2000.

EMPLOYMENT AGREEMENTS

     The Company entered into employment agreements, dated as of May 31, 1996,
with certain of its executive officers, including Messrs. Cerce, Flynn, Porcaro
and Lallo and dated as of July 19, 1999 with Mr. Ranelli (collectively, the
"Executives," each an "Executive").

     Each employment agreement provides that during the term of the contract the
Executive's base salary will not be reduced, will be increased on each
anniversary date of the agreement based upon the consumer price index and may be
increased based on the Company's performance and the Executive's particular
contributions. The employment agreements also stipulate that the Executives will
remain eligible for participation in the Company's Executive Bonus Plan and
other benefit programs, and that the Company will provide each Executive with an
automobile consistent with past practice or, in the case of Mr. Ranelli, a car
allowance. The employment agreement of Mr. Cerce further provides for the
reimbursement of certain membership and service fees as well as reasonable
expenses associated with the performance of his duties in New York City and
specifies that the Company will make all annual payments for his Supplemental
Employment Retirement Plan.

     Mr. Cerce's agreement provides for an initial ten year term expiring on May
31, 2006, and the employment agreements of Messrs. Flynn, Porcaro and Lallo each
stipulate an initial three year term expiring on May 31, 1999, with automatic
renewals for successive one year terms thereafter. Mr. Ranelli's agreement
provides for a rolling two year term. Upon prior written notice to the
Executive, the Company may terminate the agreement "with cause" for (a) the
conviction of the Executive for a crime involving fraud or moral turpitude; (b)
deliberate dishonesty of the Executive with respect to the Company or its
subsidiaries; or, (c) except under certain circumstances as specified in the
agreement, the Executive's refusal to follow the reasonable and lawful written
instructions of the Board of Directors with respect to the services to be
rendered and the manner of rendering such services by the Executive. In
addition, an Executive may terminate his agreement at any time by providing
written notice to the Company, and the Company may terminate the agreement at
any time "without cause" by providing written notice to the Executive. Mr.
Cerce's agreement provides that the Company must provide such written notice at
least six months prior to termination. Termination "without cause" means
termination for any reason other than "cause" as defined and specifically
includes the disability of the Executive or the Executive's death and, in the
case of Mr. Ranelli, the Company's material reduction of the Executive's duties
or authority.

     Mr. Ranelli may also terminate his employment for "good reason", which is
defined as (i) an assignment of duties materially inconsistent with his status
with the Company or material alteration in the nature or status of his
responsibilities or titles or offices or his removal from any such positions,
(ii) a reduction in his salary, (iii) the Company's failure to provide current
fringe benefits to him, except if such action applies to all executive officers,
(iv) a relocation of the Company's principal executive offices to a location
more than 50 miles from their current location, (v) any material breach,
incurred after reasonable notice, by the Company of any provisions of the
agreement or (vi) a "change of control", provided that in such event Mr. Ranelli
may exercise his right to terminate his employment only within the 12-month
period following such change in control.



                                       27
<PAGE>   28

     Under the employment agreements, if the Company terminates an agreement
"without cause," and, in the case with Mr. Ranelli, if he terminates his
employment for "good reason", the Company is obligated to provide the Executive
monthly severance benefits consisting of one-twelfth of the sum of Executive's
then current annual base salary and the Executive's most recent bonus and to
continue coverage under the Company's insurance programs and any ERISA benefit
plans. Such payments, insurance coverage and plan participation will continue
for at least two years from the date of the Executive's termination, and, except
in the case of Mr. Ranelli, may be extended for a longer period depending on the
Executive's "Non-compete Period" as described below. For Messrs. Cerce and
Flynn, the maximum period for severance benefits is five years, for Mr. Lallo
the comparable maximum period is four years, and for Mr. Porcaro, the comparable
maximum period is three years.

     The employment agreements contain confidentiality provisions and provide
that during the employment period and after termination of the agreement, the
Company may restrict the Executive's subsequent involvement in Restricted
Business Activities for two years following the date of the termination (the
"Non-compete Period"). As used in the agreements, "Restricted Business
Activities" means the marketing and sale of ladies' and men's consumer soft
lines to retail stores, which the Company sold and marketed during the
Executive's employment with the Company. Other than with the written approval of
the Company, the Executive may not enter into or engage in or have a proprietary
interest in the Restricted Business Activities other than the ownership of (a)
the stock of the Company held by the Executive, and (b) no more than five
percent of the securities of any other company which is publicly held. The
Non-compete Period may be extended, at the Company's option, by three years for
Messrs. Cerce and Flynn, by two years for Mr. Lallo and by one year for Mr.
Porcaro, provided that the Company continues to make the payments and provide
the benefits described in the preceding paragraph.

     In accordance with the terms of their respective employment agreements,
each of Messrs. Cerce, Porcaro and Lallo will receive monthly severance payments
for the 24 month period following the effective date of his termination of
employment, which payments for fiscal 2000 are reflected under "All Other
Compensation" in the Summary Compensation Table. In addition, Messrs. Cerce,
Porcaro and Lallo were entitled to participate on a pro-rata basis in the
Company's fiscal 2000 Executive Bonus Plan, based upon the effective date of the
Executive's respective termination of employment. To date, the Company has not
elected to extend the Non-compete Period as permitted under the employment
agreements.

     The Company has entered into letter agreements with Messrs. Agre, Barrell
and Kost. The letter agreements establish the executive's base salary and
stipulate that the executive will be eligible for participation in the Company's
Executive Bonus Plan and other benefit programs. Mr. Agre's letter agreement
further provides for a $30,000 payment as reimbursement for relocation expenses.

     Under the letter agreements, if the Company terminates the executive's
employment other than for cause, the Company is obligated to provide the
executive monthly severance payments equal to one-twelfth of the executive's
base salary for a twelve month period. For this purpose, "cause" constitutes (a)
permanent disability under Company's long-term disability insurance coverage;
(b) failure to devote full time and reasonable best efforts to the performance
of the executive's duties; (c) commission of an act of gross negligence,
dishonesty, fraud, gross insubordination, malfeasance, disloyalty, bad faith or
breach of trust in the performance of the executive's duties; (d) failure to
observe the confidentiality and non-competition provisions of the agreement; (e)
commission of a felony or act which, in the judgment of the Board of Directors
of Company, subjects the executive or the Company to public disrespect, scandal
or ridicule so as to materially and adversely affect the utility of executive's
services to the Company; or (f) refusal to perform duties assigned to executive
in good faith or violation of or failure to observe any lawful business
instruction or lawful business policy established by the Company with respect to
the operation of its business and affairs or the failure or refusal to
substantially perform the executive's duties. Mr. Barrell's agreement also
obligates the Company to pay him twelve months of severance if he resigns
following a change of control and his duties or authority's have been materially
reduced.

     The letter agreements contain confidentiality provisions and provide that
during his employment and the twelve month period following termination of
employment, the executive will not engage in or carry on, directly or
indirectly, any business similar to or competing with any business carried on by
the Company or directly or indirectly related to the business of providing
jewelry, small leather goods, sunglasses, reading glasses and other accessories
sales and services.

EXECUTIVE BONUS PLAN

     The Company maintains an Executive Bonus Plan for the purpose of providing
incentives in the form of an annual cash bonus to officers and other key
employees. Awards are equal to a percentage of base salaries specified in an
annual plan by reference to the Company's target for EBITDA, as well as
specified personal goals. Bonuses awarded to senior executives range from 30% to
50% of



                                       28
<PAGE>   29
compensation if the targets are met. If the targets are not met, the amount of
the bonuses, if any, is subject to the discretion of the Board of Directors.

QUALIFIED 401(k) PLAN

     The Company has a qualified 401(k) plan (the "Qualified Plan") that permits
all employees to defer, on an elective basis, up to 15% of their salary or
wages. Presently, the Company matches 25% of the first 6% of compensation that
an employee defers under the Qualified Plan. The amount of elective deferrals
for any one employee under the Qualified Plan is limited by the Internal Revenue
Code of 1986, as amended (the "Code"). In addition, the amount that an executive
employee may defer is subject to nondiscrimination rules which may prevent the
executive from deferring the maximum amount. Further, the Qualified Plan may not
take into account compensation in excess of specified amounts for any employee
in computing contributions under the Qualified Plan. If an employee's elective
contributions are reduced or capped under the Qualified Plan, the amount of
matching employer contribution also is restricted.

NON-QUALIFIED EXCESS 401(k) PLAN

     In May 1997, the Company established the Non-Qualified Excess 401(k) Plan
(the "Non-Qualified Plan") effective as of June 1, 1997. The purpose of the
Non-Qualified Plan is to provide deferred compensation to a select group of
management or highly compensated employees of the Company as designated by the
Board of Directors. Presently, all the Named Executive Officers participate in
the Non-Qualified Plan. Under the Non-Qualified Plan, a participant may elect to
defer up to 15% of his or her compensation on an annual basis. This amount is
credited to the employee's deferred compensation account (the "Deferred
Amount"). Under the Non-Qualified Plan, the Company also credits the
participant's deferred compensation account for the amount of the matching
contribution the Company would have made under the Qualified Plan with respect
to the Deferred Amount. All amounts contributed by the employee and by the
Company under the Non-Qualified Plan are immediately vested.

     A participant under the Non-Qualified Plan is entitled to receive a
distribution of his or her account upon retirement, death, disability or
termination of employment. An executive also is eligible to withdraw funds
credited to the executive's deferred compensation account in the event of
unforeseeable financial hardship. This policy is consistent with the ability of
an employee to obtain hardship withdrawals under the Qualified Plan.

     The amount deferred under the Non-Qualified Plan is not included in the
income of the executive until paid and, accordingly, the Company is not entitled
to a deduction for any liabilities established under the Non-Qualified Plan
until the amount credited to the participant's deferred compensation account is
paid to him or her.

     The Company has established a grantor trust effective June 1, 1997 to hold
assets to be used for payment of benefits under the Non-Qualified Plan. In the
event of the Company's insolvency, any assets held by the trust are subject to
claims of general creditors of the Company under federal and state law.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

     The Company has entered into a Supplemental Executive Retirement Plan (the
"Supplemental Plan") with Mr. Cerce the purpose of which is to provide
supplemental retirement, death, disability and severance benefits to Mr. Cerce
in consideration for his performance of services as a key executive of the
Company. In order to fund the Company's obligations under the Supplemental Plan,
the Company has purchased an insurance policy insuring the life of Mr. Cerce
(the "Policy"). With the consent of Mr. Cerce, the Company made no contribution
to the Supplemental Plan in fiscal 1999. The Company made a $250,000
contribution to the Supplemental Plan in fiscal 2000.

     Under the terms and subject to the conditions contained in the Supplemental
Plan, upon Mr. Cerce's voluntary termination of employment for any reason on or
after age 60 ("Retirement") or by reason of disability, the Company will pay to
Mr. Cerce the existing cash surrender value of the Policy. At the discretion of
the Board of Directors of the Company, payment may be made either in a single
lump sum or in monthly installments over a ten year period; provided, however,
in the event that Retirement occurs within one year after a change of control,
the retirement benefit will be paid in a single lump sum.



                                       29
<PAGE>   30

     In the event that Mr. Cerce dies while employed by the Company, the Company
will pay a death benefit to Mr. Cerce's surviving spouse or designated
beneficiary equal to the death benefit payable under the Policy. The death
benefit will be paid in monthly installments over a fifteen year period unless
Mr. Cerce's death occurs within one year after a change of control, in which
event, the death benefit will be paid in a single lump sum no later than ninety
days after his death.

     In the event that Mr. Cerce's employment with the Company is terminated for
any reason other than Retirement, death or disability, Mr. Cerce will be
entitled to receive the existing cash surrender value of the Policy, payable at
the discretion of the Board of Directors of the Company in a single lump sum or
in monthly installments over a ten year period. However, if Mr. Cerce's
termination occurs within one year after a change of control, the severance
benefit will be paid in a single lump sum. By agreement, the Company will
continue to make contributions to the Supplemental Plan during the 24 month
severance period. Mr. Cerce's employment shall be deemed terminated for purposes
of triggering the Company's payment obligations under the Supplemental Plan as
of the end of the 24 month severance period.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

SECURITY OWNERSHIP OF 5% BENEFICIAL OWNERS AND DIRECTORS AND OFFICERS

     The following table sets forth certain information regarding beneficial
ownership of the Company's capital stock as of March 28, 2000, by (i) each
person who is known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, Series A Preferred Stock or Series B
Preferred Stock; (ii) each of the Company's directors and Named Executive
Officers; and (iii) all directors and current executive officers of the Company
as a group:

<TABLE>
<CAPTION>
                                           SERIES A                   SERIES B                                    COMMON STOCK
                                        PREFERRED STOCK           PREFERRED STOCK          COMMON STOCK             DILUTED (b)
                                   -------------------------------------------------------------------------------------------------
                                    NUMBER OF                 NUMBER OF                NUMBER OF              NUMBER OF
                                     SHARES                    SHARES                   SHARES                  SHARES
                                   BENEFICIALLY  PERCENT OF  BENEFICIALLY  PERCENT OF BENEFICIALLY PERCENT   BENEFICIALLY   PERCENT
NAME AND ADDRESS (a)                  OWNED        CLASS        OWNED        CLASS       OWNED     OF CLASS      OWNED      OF CLASS
--------------------               ------------ ------------ ------------ ----------- ------------ --------  ------------   --------
<S>                                <C>           <C>         <C>           <C>         <C>         <C>         <C>           <C>
Gerald F. Cerce ...................      --          --            --          --      305,906       50.3%      305,906        29.3%
John R. Ranelli (c)................      --          --            --          --       15,675        2.5        15,675         1.5
Felix A. Porcaro, Jr. .............      --          --            --          --      171,000       28.1       171,000        16.4
John H. Flynn, Jr..................      --          --            --          --       28,500        4.7        28,500         2.7
Stephen J. Carlotti (d)(e).........      --          --            --          --       36,094        5.9        36,094         3.5
Michael F. Cronin (f)..............  17,100        39.1%       39,939        56.4%      19,000        3.1       190,000        18.2
Martin E. Franklin (g).............   4,750        10.9         7,488        10.6           --         --        47,500         4.5
George Graboys.....................      --          --            --          --           --         --            --          --
David B. Jenkins...................      --          --            --          --           --         --            --          --
David J. Syner (e)(h)..............      --          --            --          --       36,094        5.9        36,094         3.5
Robert V. Lallo....................      --          --            --          --       28,500        4.7        28,500         2.7
John R. Agre (c)...................      --          --            --          --        2,000          *         2,000           *
Joseph T. Barrell (c)..............      --          --            --          --        4,500          *         4,500           *
Mark D. Kost (c)...................      --          --            --          --        2,000          *         2,000           *
Weston Presidio Capital II,
   L.P. (i)........................  17,100        39.1        39,939        56.4       19,000        3.1       190,000        18.2
St. Paul Fire and Marine
  Insurance Company, St.
   Paul Venture Capital
   V, LLC(j).......................   6,840        15.7        11,719        16.5        7,600        1.3        76,000         7.3
BancBoston Ventures, Inc. (k)......   6,840        15.7         5,860         8.3        7,600        1.3        76,000         7.3
Marlin Capital, L.P. (l)...........   4,750        10.9         7,488        10.6           --         --        47,500         4.5
National City Capital
   Corporation (m).................   3,420         7.8         5,864         8.3        3,800          *        38,000         3.6
Brahman Group (n)..................   3,117         7.1            --          --           --         --        31,170         3.0
All executive officers and
   directors as a group (13
   persons) (o)....................  21,850        50.0        47,427        66.9      419,583      65.76       638,083       59.35

</TABLE>

*    Less than one percent

(a)  If applicable, beneficially owned shares include shares owned by the
     spouse, children and certain other relatives of the director or officer, as
     well as shares held by trusts of which the person is a trustee or in which
     he has a beneficial interest. All information with respect to beneficial
     ownership has been furnished by the respective directors and officers.
(b)  Includes full conversion of all outstanding shares of Series A Preferred
     Stock into Common Stock at the current ratio of 1 for 10.
(c)  Represents shares that may be acquired pursuant to presently exercisable
     options.


                                       30
<PAGE>   31
(d)  Mr. Carlotti's business address is 1500 Fleet Center, Providence, Rhode
     Island 02903.

(e)  Represents shares of Common Stock held by Mr. Carlotti and David J. Syner,
     as trustees of the benefit of Mr. Cerce's children.

(f)  Mr. Cronin's business address is 1 Federal Street, 21st Floor, Boston,
     Massachusetts 02110. Includes 19,000 shares of Common Stock, 39,939 shares
     of Series B Preferred Stock and 17,100 shares of Series A Preferred Stock
     held in the name of Weston Presidio Capital II, L.P. of which Mr. Cronin is
     a general partner.

(g)  Mr. Franklin's business address is 555 Theodore Fremd Avenue, Suite B-302,
     Rye, New York 10580. Includes 7,488 shares of Preferred Series B Preferred
     Stock and 4,750 shares of Series A Preferred Stock held in the name of
     Marlin Capital, L.P., of which Mr. Franklin's majority-owned company is the
     sole general partner.

(h)  Mr. Syner's business address is 35 Sockanesset Crossroads, Cranston, Rhode
     Island 02920.

(i)  The address of Weston Presidio Capital II, L.P. is 1 Federal Street, 21st
     Floor, Boston, Massachusetts 02110.

(j)  The address of St. Paul Fire and Marine Insurance Company is c/o St. Paul
     Venture Capital, Inc., 8500 Normandale Lake Boulevard, Suite 1940,
     Bloomington, Minnesota 55437.

(k)  The address of BancBoston Ventures, Inc. is 175 Federal Street, 10th Floor,
     Boston, Massachusetts 02110.

(l)  The address of Marlin Capital, L.P. is 555 Theodore Fremd Avenue, Suite
     B-302, Rye, New York 10580.

(m)  The address of National City Capital Corporation is 1965 E. 6th Street,
     Suite 1010, Cleveland, Ohio 44114.

(n)  The Brahman Group includes Brahman Partners II, L.P., Brahman Institutional
     Partners, L.P., B.Y. Partners, L.P. and Brahman Partners II Offshore Ltd.,
     which are a "group" as that term is used in Section 13(d)(3) of the
     Exchange Act of 1934, as amended (the "Exchange Act"). The address for
     these shareholders is c/o Brahman Capital Corp., 277 Park Avenue, New York,
     New York 10172.

(o)  Includes 30,083 shares that may be acquired pursuant to options which are
     or will become exercisable within 60 days.

     All of the Company's shareholders are party to an agreement that requires
the parties thereto, subject to the right of the Preferred Holders to elect
additional directors in the event of the Company's default on certain covenants,
to vote to fix the number of directors of the Company at seven and elect as
directors two persons designated by the Preferred Holders and five persons
designated by certain management shareholders. See Item 13, "Certain
Relationships and Related Transactions -- Shareholders Agreement."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

LEASES OF RHODE ISLAND WAREHOUSE SITES

     The Company has an operating lease agreement for warehouse facilities with
Sunrise Properties, LLC ("Sunrise Properties"), a Rhode Island limited liability
company, of which Mr. Porcaro and Linda Cerce, wife of Mr. Cerce and sister of
Mr. Porcaro, are members. The Company also has an operating lease agreement for
warehouse facilities with 299 Carpenter Street Associates, LLC, a Rhode Island
limited liability company of which Sunrise Properties and Messrs. Lallo and
Flynn are members. The leased properties are located at 4 Warren Avenue, North
Providence, Rhode Island and at 299 Carpenter Street, Providence, Rhode Island.
The present annual rental rates for the Warren Avenue and Carpenter Street
properties are $161,412 and $40,920, respectively. The Company is responsible
for real estate taxes and utilities. Each lease has a three year term ending on
December 31, 2001, and grants the Company an option to extend the lease for an
additional three year term at the greater of the then fair market rent or the
current rent adjusted for the cumulative increase in the consumer price index.



                                       31
<PAGE>   32

GUARANTY OF MORTGAGE NOTE

     The Company has guaranteed a mortgage note payable by Sunrise Properties in
the aggregate amount of $200,000, the outstanding balance of which was paid in
full during 2000.

SHAREHOLDERS AGREEMENT

     The Company and the current shareholders are parties to a Tag-along,
Transfer Restriction and Voting Agreement (the "Shareholders Agreement") which
requires the parties thereto, subject to the right of the Preferred Holders to
elect additional directors in the event of the Company's default on certain
covenants, to vote to fix the number of directors at seven and to elect as
directors two persons nominated by the Preferred Holders and five persons
nominated by the other parties to the Shareholders Agreement (the "Management
Shareholders"). In a related Letter Agreement, Weston Presidio Capital II, L.P.,
a Preferred Holder, has agreed to use its best efforts to cause the nomination
of and to vote all of its shares of Series A Preferred Stock for the election of
Martin E. Franklin (or, in the event of his death or incapacity, the designee of
Marlin Capital, L.P.) as a director of the Company, for so long as the Preferred
Holders, in the aggregate, own at least 10% or 4,750 shares of Series A
Preferred Stock.

     The Shareholders Agreement also provides that upon the death of a
Management Shareholder, the Company will purchase, at an appraised value
determined by an independent investment banker, all or a portion of the shares
owned by the Management Shareholder at his death. The Company has funded its
obligations under the Shareholders Agreement with life insurance policies on the
lives of the Management Shareholders in the aggregate amount of $27 million. The
Company's obligation to purchase shares upon the death of a Management
Shareholder is limited to the life insurance proceeds received upon the death of
such Management Shareholder. The Company may not decrease the amount of life
insurance coverage without the prior written consent of the affected Management
Shareholder.

     The Shareholders Agreement terminates on the earlier of the following: (i)
the time immediately prior to the consummation of a Qualified Public Offering as
defined in the Articles of Incorporation or (ii) when no shares of the Series A
Preferred Stock and no warrants issuable to the Preferred Holders are
outstanding, except as a result of the conversion, exchange or exercise of the
Series A Preferred Stock or warrants.

OWNERSHIP OF PREFERRED SHARES OF FOSTER GRANT US BY LUMEN

     In connection with the purchase of Foster Grant US, the Company's
wholly-owned subsidiary, issued Lumen 100 shares of Preferred Stock of Foster
Grant US (the "FG Preferred Stock") which represents all of the issued and
outstanding shares of FG Preferred Stock. By its terms, the FG Preferred Stock
was redeemable on February 28, 2000 (the "FG Redemption Date") by payment of an
amount ranging from $10,000 to $40,000 per share (the "FG Redemption Amount"),
determined with reference to the combined net sales of sunglasses, reading
glasses and accessories by Foster Grant US and the Company for the year ended
January 1, 2000, excluding an amount equal to the net sales by the Company for
such items for the year ended December 31, 1996. The Company redeemed these
securities during the second quarter of fiscal 2000 for $1.0 million.

     The Certificate of Incorporation of Foster Grant US also provides for
supplemental payment to the holders of the FG Preferred Stock if the Company
completes either (i) an initial public offering where the pre-money equity
valuation of the Company equals or exceeds $75.0 million, (ii) a merger or
similar transaction where the transaction value equals or exceeds $75.0 million
or (iii) a private placement of equity securities representing more than 50% of
the outstanding capital stock for consideration of not less than $37.5 million
(each a "Redemption Event") subsequent to the FG Redemption Date. Upon
completion of a Redemption Event, holders of FG Preferred Stock are entitled
receive a payment ranging from $25,000 to $30,000 per share (the "Redemption
Event Amount"), to be determined with reference to, as the case may be, either
the pre-money valuation of the Company immediately prior to the initial public
offering or the proceeds of the merger or similar transaction or private equity
placement. If the transaction value does not equal or exceed the threshold
amounts, no supplemental payment is due.

LEGAL SERVICES

     Stephen J. Carlotti, a partner of Hinckley, Allen & Snyder LLP, is a
director and the secretary of the Company and, as trustee, is the holder of 5.9%
of the Common Stock. Hinckley, Allen & Snyder LLP, provides legal services to
the Company.



                                       32

<PAGE>   33

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) Financial Statements

     Financial Statements are listed in the index of this Annual Report.




                                       33
<PAGE>   34

(2)  Exhibits

     EXHIBIT NO.    DESCRIPTION
     -----------    -----------

      3.1.1(1)      Restated Articles of Incorporation of AAi.FOSTERGRANT, Inc.

      3.1.2(5)      Articles of Amendment to Articles of Incorporation of
                    AAi.FOSTERGRANT, Inc. filed on June 9, 2000.

      3.1.3(6)      Articles of Amendment to Articles of Incorporation of
                    AAi.FOSTERGRANT, Inc. filed on August 11, 2000.

      3.2(1)        Amended and Restated By-laws of AAi.FOSTERGRANT, Inc.

      4.1(1)        Indenture dated as of July 21, 1998, by and among
                    AAi.FOSTERGRANT, Inc. ("AAi"), its domestic subsidiaries
                    named therein (the "Guarantors") and IBJ Schroder Bank &
                    Trust Company, as Trustee, with respect to the Series A and
                    Series B 10 3/4% Senior Notes due 2006.

      4.2(1)        Purchase Agreement dated as of July 16, 1998, by and among
                    AAi, the Guarantors and NationsBanc Montgomery Securities
                    LLC, Prudential Securities Incorporated and BancBoston
                    Securities Inc.

      9.1(1)        Letter Agreement of Weston Presidio Capital II, L.P.
                    regarding voting of the Preferred Stock of AAi dated
                    December 9, 1996.

      9.2(1)        Tag-Along Transfer Restriction and Voting Agreement among
                    AAi, Weston Presidio Capital, II, L.P. and certain other
                    investors and certain shareholders of the Company dated May
                    31, 1996, as amended on December 11, 1996.

     10.1(1)        Second Amended and Restated Financing and Security Agreement
                    by and among AAi, certain of its Subsidiaries, NationsBank,
                    N.A., as agent, and other lenders party thereto, dated July
                    21, 1998.

     10.1.1(2)      First Amendment to Second Amended and Restated Financing and
                    Security Agreement dated as of May 7, 1999.

     10.1.2(3)      Second Amendment to Second Amended and Restated Financing
                    and Security Agreement dated as of March 24, 2000.

     10.1.3(5)      Third Amendment to Second Amended and Restated Financing and
                    Security Agreement dated as of June 12, 2000.

     10.1.4(6)      Fourth Amendment to Second Amended and Restated Financing
                    and Security Agreement dated as of August 14, 2000.

     10.1.5         Fifth Amendment to Second Amended and Restated Financing and
                    Security Agreement dated as of March 27, 2001.

     10.2(1)        Agreement of Amendment, Termination & Modification between
                    AAi, Bolle, Inc., Foster Grant Group, LP and Foster Grant
                    Holdings, Inc. dated June 1998.

     10.3(1)        Stock Purchase Agreement by and among AAi, BEC Group, Inc.,
                    Foster Grant Group, L.P. and Foster Grant Holdings, Inc.,
                    dated May 31, 1996, as amended by a side letter dated
                    December 11, 1996.



                                       34

<PAGE>   35

     10.4.1(1)      Securities Purchase Agreement among AAi, Weston Presidio
                    Capital II, L.P. and certain other investors, dated May 31,
                    1996.

     10.4.2(1)      First Amendment to Securities Purchase Agreement among AAi,
                    Weston Presidio Capital II, L.P. and certain other
                    investors, dated October 1, 1998.

     10.5(1)        Registration Rights Agreement among AAi, Weston Presidio
                    Capital II, L.P. and certain other investors and certain
                    shareholders of the Company dated May 31, 1996, as amended
                    on December 11, 1996.

     10.6(1)        Incentive Stock Plan of AAi.+

     10.6.1(3)      Amendment to Incentive Stock Plan.+

     10.7(1)        Employment Agreement between AAi and Gerald F. Cerce dated
                    May 31, 1996.+

     10.8(2)        Employment Agreement between AAi and John R. Ranelli dated
                    July 19, 1999.+

     10.9(1)        Employment Agreement between AAi and John H. Flynn, Jr.
                    dated May 31, 1996.+

     10.10(1)       Employment Agreement between AAi and Robert V. Lallo dated
                    May 31, 1996.+

     10.11(1)       Employment Agreement between AAi and Felix A. Porcaro, Jr.
                    dated May 31, 1996.+

     10.12(1)       Supplemental Executive Retirement Plan between AAi and
                    Gerald F. Cerce dated September 29, 1994, as amended on
                    December 29, 1995 and May 31, 1996.+

     10.13(1)       Executive Bonus Plan.+

     10.14(1)       Non-Qualified Excess 401(k) Plan.+

     10.15(3)       Employment Agreement between AAi and Mark D. Kost dated
                    December 15, 1999.+

     10.16(3)       Employment Agreement between AAi and John R. Agre dated
                    November 3, 1999.+

     10.17(3)       Employment Agreement between AAi and Joseph T. Barrell dated
                    September 15, 1999.+

     10.18(5)       Employment Agreement between AAi and Howard Collins dated
                    March 24, 2000.+

     10.19          Employment Agreement between AAi and Babette Lienhard dated
                    December 22, 2000.+

     21.1           Subsidiaries of AAi.

(1)  Previously filed as an exhibit to the Company's Registration Statement No.
     333-61119 on Form S-4 and by this reference is incorporated herein.

(2)  Previously filed as an exhibit to the Company's Form 10-Q for the fiscal
     quarter ended July 3, 1999 and by this reference incorporated herein.

(3)  Previously filed as an exhibit to the Company's Form 10-Q for the fiscal
     quarter ended October 1, 1999 and by this reference incorporated herein.



                                       35
<PAGE>   36

(4)  Previously filed as an exhibit to the Company's Form 10-K for the fiscal
     year ended January 1, 2000 and by this reference incorporated herein.

(5)  Previously filed as an exhibit to the Company's Form 10-Q for the fiscal
     quarter ended July 1, 2000 and by this reference incorporated herein.

(6)  Previously filed as an exhibit to the Company's Form 10-Q for the fiscal
     quarter ended September 30, 2000 and by this reference incorporated herein.

+    Management or compensatory plan or arrangement.

(b)  Reports On Form 8-K

None.


                                       36
<PAGE>   37

                              AAI.FOSTERGRANT, INC.

                                   SIGNATURES

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

                                        AAI.FOSTERGRANT, INC.


Date: March 29, 2001                    By: /s/ John R. Ranelli
                                           -------------------------------------
                                           John R. Ranelli
                                           President and Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<S>                                       <C>
/s/ John R. Ranelli                       /s/ Mark D. Kost..
----------------------------------------  --------------------------------------------
John R. Ranelli                           Mark D. Kost
Director, President, and                  Chief Financial Officer
Chief Executive Officer                   (Principal Financial and Accounting Officer)
(Principal Executive Officer)             Date: March 29, 2001
Date: March 29, 2001

/s/ Gerald F. Cerce                       /s/ Stephen J. Carlotti
----------------------------------------  --------------------------------------------
Gerald F. Cerce, Director                 Stephen J. Carlotti, Director
Date: March 29, 2001                      Date: March 29, 2001

/s/ Michael F. Cronin                     /s/ John H. Flynn, Jr.
----------------------------------------  --------------------------------------------
Michael F. Cronin, Chairman of the Board  John H. Flynn, Jr., Director
Date: March 29, 2001                      Date: March 29, 2001

/s/ Martin E. Franklin                    /s/ George Graboys
----------------------------------------  --------------------------------------------
Martin E. Franklin, Director              George Graboys, Director
Date: March 29, 2001                      Date: March 29, 2001

</TABLE>



                                       37
<PAGE>   38

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                              FINANCIAL STATEMENTS
                   AS OF JANUARY 1, 2000 AND DECEMBER 30, 2000
                         TOGETHER WITH AUDITORS' REPORT

                                      INDEX

<TABLE>
<CAPTION>
                                                                                   PAGE

<S>                                                                                <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                            F-1

CONSOLIDATED BALANCE SHEETS AS OF JANUARY 1, 2000 AND DECEMBER 30, 2000             F-2

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED JANUARY 2,
1999, JANUARY 1, 2000 AND DECEMBER 30, 2000                                         F-3

CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK, SHAREHOLDERS' DEFICIT
AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED JANUARY 2, 1999, JANUARY 1,
2000 AND DECEMBER 30, 2000                                                          F-4

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JANUARY 2, 1999,
JANUARY 1, 2000 AND DECEMBER 30, 2000                                               F-5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                          F-6

</TABLE>

<PAGE>   39


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of AAi.FosterGrant, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of AAi.FosterGrant,
Inc. (a Rhode Island corporation) and subsidiaries as of January 1, 2000 and
December 30, 2000 and the related consolidated statements of operations,
redeemable preferred stock, shareholders' deficit and comprehensive income
(loss) and cash flows for each of the three years in the period ended December
30, 2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AAi.FosterGrant, Inc. and
subsidiaries as of January 1, 2000 and December 30, 2000 and the results of
their operations and their cash flows for each of the three years in the period
ended December 30, 2000 in conformity with accounting principles generally
accepted in the United States.


                                       /s/ ARTHUR ANDERSEN LLP

Boston, Massachusetts
March 27, 2001




                                      F-1
<PAGE>   40

                     AAI. FOSTERGRANT, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                     ASSETS
                                                                         JANUARY 1, DECEMBER 30,
                                                                           2000        2000
                                                                         ---------- ------------

<S>                                                                       <C>        <C>
CURRENT ASSETS:
   Cash and cash equivalents........................................      $  2,289   $    578
   Accounts receivable, less reserves of approximately $12,804 and
   $9,370...........................................................        22,231     32,839
   Inventories......................................................        33,025     33,083
   Prepaid expenses and other current assets........................           794      1,280
   Deferred tax assets..............................................         3,743        980
                                                                          --------   --------
     Total current assets...........................................        62,082     68,760
                                                                          --------   --------

PROPERTY, PLANT AND EQUIPMENT, AT COST:
   Land.............................................................         1,233      1,233
   Building and improvements........................................         5,386      5,760
   Display fixtures.................................................        14,857     14,056
   Furniture, fixtures and equipment................................        11,166     13,183
   Leasehold improvements...........................................         2,834      2,815
   Equipment under capital leases...................................         1,604      1,903
                                                                          --------   --------
                                                                            37,080     38,950

LESS -- ACCUMULATED DEPRECIATION AND AMORTIZATION...................        17,688     20,292
                                                                          --------   --------
                                                                            19,392     18,658
                                                                          --------   --------
OTHER ASSETS:
   Advances to officers/shareholders................................            74         68
   Deferred costs...................................................         1,143        411
   Deferred tax assets..............................................         5,319      2,009
   Investments in affiliates........................................         1,291      1,220
   Intangible assets, net of accumulated amortization of $4,095
   and $2,497.......................................................        13,486     12,830
   Other assets, net of accumulated amortization of $878 and $1,758.         5,080      4,215
                                                                          --------   --------
                                                                            26,393     20,753
                                                                          --------   --------
     Total assets...................................................      $107,867   $108,171
                                                                          ========   ========

                     LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES:
   Borrowings under revolving note payable..........................      $ 11,000   $ 25,263
   Redeemable preferred stock of a subsidiary.......................         1,000         --
   Current maturities of long-term obligations......................           902      1,427
   Deferred compensation-- current portion..........................            10         10
   Accounts payable.................................................        16,414     21,380
   Accrued expenses.................................................        23,253     17,678
   Accrued income taxes.............................................         2,104      2,403
                                                                          --------   --------
     Total current liabilities......................................        54,683     68,161
                                                                          --------   --------

10 3/4% Series B Senior Notes Due 2006..............................        75,000     51,850
Long-term obligations, less current maturities......................           420      6,561
Deferred compensation, less current portion.........................         1,662      1,287
Commitments and contingencies (Note 14)
Redeemable Preferred Stock of a Subsidiary..........................            --         --
   Authorized -- 200,000 shares
Series A redeemable convertible Preferred stock, $.01 par
   value -- Designated, issued and outstanding -- 43,700
   shares stated at redemption value................................        31,864     35,147
Series B redeemable Preferred stock, $.01 par value --
   Designated - 75,000 shares Issued and outstanding --
   70,870 shares stated at redemption value.........................            --        945
SHAREHOLDERS' DEFICIT:
   Common stock, $0.01 par value
     Authorized -- 4,800,000 shares
     Issued and outstanding-- 608,000 shares........................             6          6
   Additional paid-in capital.......................................           270        270
   Accumulated other comprehensive items............................          (122)      (575)
   Accumulated deficit..............................................       (55,916)   (55,481)
                                                                          --------   --------
     Total shareholders' deficit....................................       (55,762)   (55,780)
                                                                          --------   --------
     Total liabilities and shareholders' deficit....................      $107,867   $108,171
                                                                          ========   ========
</TABLE>

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


                                      F-2
<PAGE>   41

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                       YEARS ENDED
                                                                            ------------------------------------
                                                                            JANUARY 2,  JANUARY 1,  DECEMBER 30,
                                                                               1999       2000         2000
                                                                            ----------  ----------  ------------
<S>                                                                         <C>          <C>         <C>
NET SALES.............................................................      $ 160,325    $150,680    $165,542

COST OF GOODS SOLD....................................................         88,823      96,973      96,589
                                                                            ---------    --------    --------

     Gross profit.....................................................         71,502      53,707      68,953

SELLING EXPENSES......................................................         49,315      41,645      42,928

GENERAL AND ADMINISTRATIVE EXPENSES...................................         26,220      25,072      17,726

RESTRUCTURING CHARGES AND GOODWILL IMPAIRMENT LOSS....................          2,600       6,018       2,500
                                                                            ---------    --------    --------

     (Loss) income from operations....................................         (6,633)    (19,028)      5,799

EQUITY IN LOSSES OF INVESTMENTS IN AFFILIATES.........................            (76)         --          --

MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY................           (187)        (91)        (56)

INTEREST EXPENSE......................................................         (7,010)    (10,250)    (10,929)

OTHER INCOME (EXPENSE), NET...........................................            753         (20)        192
                                                                            ---------    --------    --------

     Loss before income tax...........................................        (13,153)    (29,389)     (4,994)

INCOME TAX EXPENSE....................................................             --         (36)       (126)
                                                                            ---------    --------    --------

     Net loss before extraordinary items..............................        (13,153)    (29,425)     (5,120)

Extraordinary gain, net of $6.3 million in taxes......................             --          --       8,838
                                                                            ---------    --------    --------

     Net (loss) income before dividends and accretion on
       preferred stock................................................        (13,153)    (29,425)      3,718

DIVIDENDS AND ACCRETION ON PREFERRED STOCK............................          2,779       3,002       3,283
                                                                            ---------    --------    --------

     Net (loss) income applicable to common shareholders..............      $ (15,932)   $(32,427)   $    435
                                                                            =========    ========    ========
</TABLE>


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


                                      F-3
<PAGE>   42
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK,
              SHAREHOLDERS' DEFICIT AND COMPREHENSIVE INCOME (LOSS)
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                    SERIES A REDEEMABLE
                                                         CONVERTIBLE         SERIES B REDEEMABLE
                                                       PREFERRED STOCK         PREFERRED STOCK        COMMON STOCK     ADDITIONAL
                                                    --------------------     -------------------     ----------------  ----------
                                                              REDEMPTION              REDEMPTION                 PAR    PAID-IN
                                                     SHARES      VALUE       SHARES     VALUE        SHARES     VALUE   CAPITAL
                                                    -------   ----------     ------   ----------     -------    -----   ---------
<S>                                                 <C>         <C>          <C>       <C>           <C>        <C>      <C>
       BALANCE, DECEMBER 31, 1997 .............     43,700      26,083         --       --           608,000      6      270

Dividends and accretion on Series A Preferred
  Stock .......................................         --       2,779         --       --                --      -       --

Foreign currency translation adjustment (not
  tax effected) ...............................         --          --         --       --                --      -       --
Net loss ......................................         --          --         --       --                --      -       --

Comprehensive loss for the year ended                   --          --         --       --                --      -       --
  January 2, 1999
                                                    ------     -------     ------     ----           -------     --     ----
       BALANCE, JANUARY 2, 1999 ...............     43,700      28,862         --       --           608,000      6      270

Dividends and accretion on Series A
  Preferred Stock .............................         --       3,002         --       --                --      -       --

Foreign currency translation adjustment
  (not tax effected) ..........................         --          --         --       --                --      -       --
Net loss ......................................         --          --         --       --                --      -       --

Comprehensive loss for the year ended
  January 1, 2000 .............................         --          --         --       --                --      -       --
                                                    ------     -------     ------     ----           -------     --     ----
       BALANCE, JANUARY 1, 2000 ...............     43,700      31,864         --       --           608,000      6      270

Issuance of Series B Redeemable Preferred
  Stock in connection with term loans .........         --          --     70,870      945                --     --

Dividends and accretion on Series A
  Preferred Stock .............................         --       3,283         --       --                --      -       --

Foreign currency translation adjustment
  (not tax effected) ..........................         --          --         --       --                --      -       --
Net income ....................................         --          --         --       --                --      -       --

Comprehensive income for the year ended
  December 30, 2000 ...........................         --          --         --       --                --      -       --
                                                    ------     -------     ------     ----           -------     --     ----

       BALANCE, DECEMBER 30, 2000 .............     43,700     $35,147     70,870     $945           608,000     $6     $270
                                                    ======     =======     ======     ====           =======     ==     ====

</TABLE>


<TABLE>
<CAPTION>
                                                                                     TOTAL
                                              ACCUMULATED OTHER    ACCUMULATED    SHAREHOLDERS'   COMPREHENSIVE NET
                                             COMPREHENSIVE ITEMS    DEFICIT         DEFICIT         INCOME (LOSS)
                                             -------------------   -----------    -------------   -----------------
<S>                                               <C>               <C>            <C>              <C>
       BALANCE, DECEMBER 31, 1997 ........           (78)           (7,557)         (7,359)               --

Dividends and accretion on Series A
  Preferred Stock ........................            --            (2,779)         (2,779)               --

Foreign currency translation adjustment
  (not tax effected) .....................          (211)               --            (211)             (211)
Net loss .................................            --           (13,153)        (13,153)          (13,153)

Comprehensive loss for the year ended
  January 2, 1999 ........................            --                --                           (13,364)
                                                   -----          --------        --------          --------
       BALANCE, JANUARY 2, 1999 ..........          (289)          (23,489)        (23,502)               --

Dividends and accretion on Series A
  Preferred Stock ........................            --            (3,002)         (3,002)               --

Foreign currency translation adjustment
  (not tax effected) .....................           167                --             167               167
Net loss .................................            --           (29,425)        (29,425)          (29,425)

Comprehensive loss for the year ended
  January 1, 2000 ........................            --                --              --           (29,258)
                                                   -----          --------        --------          --------

       BALANCE, JANUARY 1, 2000 ..........          (122)          (55,916)        (55,762)               --

Issuance of Series B Redeemable Preferred
  Stock in connection with term loans.....            --                --              --                --

Dividends and accretion on Series A
  Preferred Stock ........................            --            (3,283)         (3,283)               --

Foreign currency translation adjustment
  (not tax effected) .....................          (453)               --            (453)             (453)
Net income ...............................            --             3,718           3,718             3,718
                                                   -----          --------        --------          --------
Comprehensive income for the year ended
  December 30, 2000 ......................            --                --              --          $  3,265
                                                   -----          --------        --------          ========
       BALANCE, DECEMBER 30, 2000 ........         $(575)         $(55,481)       $(55,780)
                                                   =====          ========        ========

</TABLE>

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


                                       F-4
<PAGE>   43
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                   YEARS ENDED
                                                                                     -----------------------------------------
                                                                                     JANUARY 2,     JANUARY 1,    DECEMBER 30,
                                                                                        1999           2000           2000
                                                                                     ----------     ----------    ------------
<S>                                                                                   <C>           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income .............................................................     $(13,153)     $(29,425)      $  3,718
  Adjustments to reconcile net (loss) income to net cash (used in)
    provided by operating by operating activities, net of acquisitions--
    Depreciation and amortization ...............................................       12,792        11,489         11,937
  Extraordinary gain on early extinguishments of debt ...........................           --            --         (8,838)
  Goodwill impairment loss ......................................................           --         6,018             --
  Equity in losses of investments in affiliates .................................           76            --             --
  Minority interest in income of consolidated subsidiary ........................          187            91             --
  Loss on barter transaction ....................................................          187            --             --
  Cumulative foreign currency translation adjustment ............................         (211)          167             --
  Amortization of deferred costs related to issuance of 10 3/4% senior
     notes due 2006 .............................................................          212           551            880
  Deferred interest on subordinated promissory notes payable ....................          140            --             --

  Changes in assets and liabilities, net of acquisitions--
    Accounts receivable .........................................................       (7,706)        7,086        (10,814)
    Inventories .................................................................         (199)        4,137            (64)
    Prepaid expenses and other current assets ...................................           73           747           (248)
    Deferred costs ..............................................................       (2,309)         (251)          (459)
    Accounts payable ............................................................       (3,844)       (1,523)         4,877
    Accrued expenses ............................................................       10,006         3,551         (5,684)
    Accrued income taxes .........................................................        (154)          (26)            26
                                                                                      --------      --------       --------
     Net cash (used in) provided by operating activities ........................       (3,903)        2,612         (4,669)
                                                                                      --------      --------       --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisitions, net of cash received ............................................       (9,464)           --             --

  Purchase of property, plant and equipment .....................................      (16,882)      (10,475)        (8,742)

  Advances to officers/shareholders .............................................       (3,511)           (5)
  Decrease in investments in affiliates .........................................           13            --             --
  Decrease (increase) in other assets ...........................................           91          (123)          (298)
                                                                                      --------      --------       --------
     Net cash used in investing activities ......................................      (29,753)      (10,603)        (9,046)
                                                                                      --------      --------       --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net (repayments) borrowings under revolving note payable ......................      (25,022)        8,424         14,263
  Proceeds from term note payable ...............................................       13,222            --             --
  Payments on term note payable .................................................      (13,222)           --             --

  Proceeds from issuance of long-term debt ......................................           --            --          7,087

  Repurchase of 10-3/4% Series B Senior Notes due 2006 ..........................           --            --         (7,087)
  Payments on subordinated notes ................................................       (2,132)           --             --
  Proceeds from 10 3/4% senior notes due 2006 ...................................       75,000            --             --
  Costs related to issuance of 10 3/4% senior notes due 2006 ....................       (3,713)           --             --

  Payments on long-term obligations .............................................      (11,026)         (333)          (979)

  Payments on deferred compensation .............................................          (23)          (18)          (236)

  Redemption of Preferred Stock of a subsidiary .................................           --            --         (1,000)
                                                                                      --------      --------       --------
     Net cash provided by financing activities ..................................       33,084         8,073         12,048
                                                                                      --------      --------       --------

  Effect of exchange rate changes on cash and cash equivalents ..................           --            --            (44)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................         (572)           82         (1,711)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................        2,779         2,207          2,289
                                                                                      --------      --------       --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................     $  2,207      $  2,289       $    578
                                                                                      ========      ========       ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for-
     Interest ...................................................................     $  3,936      $  8,513       $ 10,719
                                                                                      ========      ========       ========
     Income taxes ...............................................................     $    597      $     17       $     77
                                                                                      ========      ========       ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
  Conversion of leasehold improvements to building improvements .................     $  1,393      $     --       $     --
                                                                                      ========      ========       ========
  Acquisition of equipment under capital lease obligations ......................     $    557      $    249       $    557
                                                                                      ========      ========       ========
  Offset of advances to officers/shareholders against
    subordinated promissory notes payable to officers/shareholders ..............     $  3,495      $     --       $     --
                                                                                      ========      ========       ========
  Increase in cash surrender value of officers life insurance policy ............     $    361      $    213       $    188
                                                                                      ========      ========       ========
  Exchange of inventory for barter credits ......................................     $    947      $     --       $     --
                                                                                      ========      ========       ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS RELATED TO ACQUISITIONS:
  During fiscal 1997 and 1998, the Company acquired Superior, Foster Grant UK
    and Fantasma, as described in Note 2. These acquisitions are summarized as
    follows - Fair value of assets acquired, excluding cash .....................     $ 15,672      $     --       $     --
  Payments in connection with the acquisitions, net of cash acquired ............       (9,464)           --             --
                                                                                      --------      --------       --------
  Liabilities assumed and notes issued ..........................................     $  6,208      $     --       $     --
                                                                                      ========      ========       ========
</TABLE>


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


                                      F-5
<PAGE>   44

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 30, 2000

(1)  OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

     AAi.FosterGrant, Inc. and Subsidiaries (the Company) is a value-added
     distributor of accessories, such as optical products, costume jewelry,
     watches, clocks and other accessories, to mass merchandisers, variety
     stores, chain drug stores and supermarkets in North America and the United
     Kingdom.

     For the year ended December 30, 2000, the Company reported income from
     operations of approximately $5.8 million and used $4.7 million in cash from
     operations. As of December 30, 2000, the Company had accumulated deficit of
     approximately $55.5 million. The Company has not met the financial
     covenants related to its Senior Credit Facility for the last three fiscal
     years. The covenants under the Senior Credit Facility have been
     renegotiated each of the last three years (see Note 5). Management has
     initiated plans to reduce its operating expenses and increase its cash flow
     from operations to meet the modified financial covenants under the Senior
     Credit Facility. Failure to achieve these plans or comply with the revised
     covenants under its Senior Credit Facility could have a material adverse
     effect on the Company's results of operations and financial condition.

     The accompanying consolidated financial statements reflect the application
     of certain significant accounting policies, as discussed below and
     elsewhere in the notes to consolidated financial statements.

     (a)  Principles of Consolidation

          The accompanying consolidated financial statements include the results
          of operations of the Company and its wholly owned subsidiaries. All
          material intercompany balances and transactions have been eliminated
          in consolidation.

     (b)  Change in Fiscal Year-End

          During 1998, the Company elected to change its fiscal year-end from
          December 31, to the Saturday closest to December 31.

     (c)  Cash and Cash Equivalents

          The Company considers all highly liquid investments with original
          maturities of three months or less at the time of purchase to be cash
          equivalents.

     (d)  Inventories

          Inventories are stated at the lower of cost (first-in, first-out) or
          market and consist of the following (in thousands):

                                                JANUARY 1,  DECEMBER 30,
                                                   2000        2000
                                                ----------  ------------
          Finished goods                         $ 29,695    $ 26,881
          Work-in-process and raw materials         3,330       6,202
                                                 --------    --------
                                                 $ 33,025    $ 33,083
                                                 ========    ========

          Finished goods inventory consists of material, labor and manufacturing
          overhead.



                                      F-6
<PAGE>   45

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

     (e)  Advertising Costs

          Advertising costs, which are included in selling expense, are expensed
          when the advertisement first takes place. Advertising expense was
          approximately $1.1 million, $2.0 million and $1.4 million for the
          years ended January 2, 1999, January 1, 2000 and December 30, 2000,
          respectively. Prepaid advertising production costs were $132,000 at
          January 2, 1999 and $49,500 at December 30, 2000 and are included in
          prepaid expenses and other current assets in the accompanying
          consolidated balance sheets. The Company had no prepaid advertising
          production costs at January 1, 2000.

     (f)  Depreciation and Amortization

          The Company provides for depreciation and amortization by charges to
          operations in amounts that allocate the cost of these assets on the
          straight-line basis over their estimated useful lives, as follows:

                                                      ESTIMATED USEFUL
          ASSET CLASSIFICATION                               LIFE
          Building and improvements                        20 years
          Display fixtures                                1-3 years
          Furniture, fixtures and equipment               3-10 years
          Leasehold improvements                        Term of lease
          Equipment under capital leases                Term of lease

          The Company has adopted the provisions of Statement of Position (SOP)
          No. 98-1, Accounting for the Costs of Computer Software Developed or
          Obtained for Internal Use.

     (g)  Intangible and Other Long-Lived Assets

          Intangible assets consist of goodwill and trademarks, which are being
          amortized on the straight-line basis over estimated useful lives of 10
          to 40 years. Intangible assets primarily relate to the Company's
          acquisitions of various businesses, as discussed in Note 2 to these
          consolidated financial statements. In determining the estimated lives
          of these intangible assets, the Company evaluates various factors
          including but not limited to: nature of business, existing
          distribution channels, brand recognition of acquired products,
          customer base and length of time in which an acquired business has
          been in existence. Amortization expense was approximately $1.4
          million, $1.4 million and $0.7 million for the years ended January 2,
          1999, January 1, 2000 and December 30, 2000, respectively.

          In accordance with Statement of Financial Accounting Standards (SFAS)
          No. 121, Accounting for Impairment of Long-Lived Assets and For
          Long-Lived Assets to Be Disposed Of, the Company reviews its
          long-lived assets (which include intangible assets, deferred costs,
          and property and equipment) for impairment as events and circumstances
          indicate that the carrying amount of an asset may not be recoverable.
          The Company evaluates the realizability of its long-lived assets based
          on profitability and cash flow expectations for the related asset or
          subsidiary. In December 1999, the Company determined that the future
          cash flows related to the intangible assets of the watches and clocks
          and certain jewelry product lines were less than their carrying value.
          As a result, the Company recorded an impairment loss of approximately
          $6.0 million relating to these intangibles.

     (h)  Revenue Recognition

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



                                      F-7
<PAGE>   46

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

     (i)  Restructuring Charge

          In April 1998, the Company adopted a formal plan to close its Texas
          distribution center. The Company recorded a restructuring charge of
          $2.6 million during the year ended January 2, 1999 in connection with
          this plant closing.

          In March 2000, the Company recorded a restructuring charge of $2.5
          million related to the termination of three executives. The charge
          consists of an accrual of severance payments due to three executives
          for a two-year period. The severance will be paid through fiscal 2002.
          Through December 30, 2000, severance benefits of approximately
          $896,000 were paid to the three executives. Details of the 1998
          and 2000 restructuring charge are as follows:

<TABLE>
<CAPTION>
                                                             ACCRUED                 ACCRUED                               RESERVE
                           1998                             EXPENSES,               EXPENSES,       2000                   BALANCE
                     RESTRUCTURING  WRITE-DOWN  FISCAL 1998 JANUARY 2,  FISCAL 1999 JANUARY 1,  RESTRUCTURING    2000      DECEMBER
                        CHARGE      OF ASSETS    PAYMENTS     1999       PAYMENTS      2000        CHARGE      PAYMENTS    30, 2000
                     -------------  ----------  ----------- ----------  ----------- ----------  -------------  --------    --------

<S>                    <C>          <C>           <C>         <C>         <C>            <C>      <C>            <C>        <C>
Severance accrual      $ 1,084      $    --       $ 430       $ 654       $ 649          $5       $2,500         $901       $1,604
Write-down of
  assets to be
  disposed               1,516        1,516          --          --          --          --           --           --           --
                       -------      -------       -----       -----       -----          --       ------         ----       ------
                       $ 2,600      $ 1,516       $ 430       $ 654       $ 649          $5       $2,500         $901       $1,604
                       =======      =======       =====       =====       =====          ==       ======         ====       ======
</TABLE>

          The 1998 severance accrual represents severance payments due to 40
          office and distribution employees. Through December 30, 2000, all of
          these 40 employees were terminated and severance benefits of
          $1,084,000 were paid.

     (j)  Customer Acquisition Costs

          The Company incurs direct and incremental costs in connection with the
          acquisition of certain new customers and new store locations from
          existing customers under multiyear agreements. The Company may also
          receive the previous vendor's merchandise from the customer in
          connection with most of these agreements. In these situations, the
          Company values this inventory at its fair market value, representing
          the lower of cost or net realizable value, and records that value as
          inventory. The Company sells this inventory through various
          liquidation channels. Except as provided below, the excess costs over
          the fair market value of the inventory received is charged to selling
          expenses when incurred. The Company expensed customer acquisition
          costs of approximately $0.9 million, $0.6 million and $0.3 million for
          the years ended January 2, 1999, January 1, 2000 and December 30,
          2000, respectively.

          The excess costs over the fair market value of the inventory received
          is capitalized as deferred costs and amortized over the agreement
          period if the Company enters into a minimum purchase agreement with
          the customer and the estimated gross profits from future minimum sales
          during the term of the agreement are sufficient to recover the amount
          of the deferred costs. During fiscal 1998, 1999 and 2000 the Company
          capitalized approximately $2.3 million, $0.3 million and $0.5 million
          of these costs in the accompanying consolidated balance sheets.
          Amortization expense related to these costs was approximately $0.2
          million, $1.2 million and $1.2 million for the years ended January 2,
          1999, January 1, 2000 and December 30, 2000, respectively, and is
          included in selling expenses in the accompanying statements of
          operations.

     (k)  Comprehensive Income (Loss)

          The Company applies SFAS No. 130, Reporting Comprehensive Income.
          Comprehensive income (loss) is defined as the change in equity of a
          business enterprise during the period from transactions and other
          events and circumstances from nonowner sources. Differences between
          comprehensive income (loss) and net income (loss) before dividends and
          accretion on preferred stock represents the foreign currency
          translation for all periods presented.

     (l)  Concentration of Credit Risk

          Financial instruments that potentially subject the Company to
          concentrations of credit risk are principally accounts receivable. A
          significant portion of its business activity is with domestic mass
          merchandisers whose ability to meet their financial



                                      F-8
<PAGE>   47
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

          obligations is dependent on economic conditions germane to the retail
          industry. During recent years, many major retailers have experienced
          significant financial difficulties and some have filed for bankruptcy
          protection; other retailers have begun to consolidate within the
          industry. The Company sells to certain customers in bankruptcy, as
          well as those consolidating within the industry. To reduce credit
          risk, the Company routinely assesses the financial strength of its
          customers and purchases credit insurance, as it deems appropriate.

     (m)  Disclosure of Fair Value of Financial Instruments

          The Company's financial instruments consist mainly of cash and cash
          equivalents, accounts receivable, accounts payable and debt. The
          carrying amounts of the Company's financial instruments, excluding the
          10 3/4% Series B Senior Notes due 2006 (the Notes), approximate fair
          value. The Company's Notes had a carrying value of approximately $75.0
          million at January 2, 1999 and $51.9 million (after the repurchase of
          $23.15 million) at December 30, 2000. The Company has determined the
          fair value of the Notes based on the current trading prices to be
          $18.2 million at December 30, 2000.

     (n)  Net Loss per Share

          During the year ended December 30, 2000, the Company eliminated its
          earning per share disclosure. This decision was based on the fact that
          the Company does not have common stock or potential common stock that
          is traded in a public market, as required by SFAS No. 128, "Earnings
          Per Share", and the Company's common stock does not have a readily
          ascertainable fair market value.

     (o)  Use of Estimates

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

          Significant estimates in the Company's financial statements include
          sales returns and allowances. The Company continually evaluates its
          sales return and allowance reserves based upon contractual agreements
          and historical experience. During the third and fourth quarter of
          2000, the Company decreased its reserves related to specific customers
          by $1.7 million and $2.9 million, respectively.

     (p)  New Accounting Pronouncements

          In June 1999, FASB issued SFAS No. 137, Accounting for Derivative
          Instruments and Hedging Activities -- Deferral of the Effective Date
          of FASB Statement No. 133, which defers the effective date of SFAS No.
          133 to all fiscal quarters of all fiscal years beginning after June
          15, 2000. SFAS No. 133, Accounting for Derivative Instruments and
          Hedging Activities, issued in June 1998, establishes accounting and
          reporting standards for derivative instruments, including certain
          derivative instruments embedded in other contracts, and hedging
          activities. It requires an entity to recognize all derivatives as
          either assets or liabilities in the statement of financial position
          and measure those instruments at fair value. The Company does not
          expect adoption of this statement to have a significant impact on its
          consolidated financial position or results of operations.

          The Securities and Exchange Commission issued Staff Accounting
          Bulletin (SAB) No. 101, "Revenue Recognition", in December 1999. The
          Company was required to adopt this new accounting guidance through a
          cumulative charge to operations, in accordance with Accounting
          Principles Board (APB) Opinion No. 20, Accounting Changes, no later
          than the fourth quarter of fiscal 2000. Adoption of the guidance
          provided in SAB No. 101 did not have a material impact on operating
          results.

          In March 2000, the FASB issued Interpretation No. 44, "Accounting for
          Certain Transactions Involving Stock Compensation - an Interpretation
          of APB Opinion No. 25." The interpretation clarifies the application
          of APB Opinion No. 25 in certain situations, as defined. The
          Interpretation was effective July 1, 2000, but covers certain events
          occurring during the period after December 15, 1998. The adoption of
          this interpretation did not have an impact on the accompanying
          financial statements.


                                      F-9
<PAGE>   48
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)
(2)  ACQUISITIONS

     In June 1998, the Company acquired an 80% interest in Fantasma, LLC
     (Fantasma) for approximately $4.1 million in cash. The remaining 20%
     interest in Fantasma was held by a previous member of Fantasma. As a result
     of the termination of the employment of this member, in April 1999, the
     Company acquired this 20% interest effective September 1, 1999.
     Accordingly, the Company currently holds 100% of the Fantasma member
     interests. The acquisition was accounted for using the purchase method;
     accordingly, the results of operations of Fantasma from the date of
     acquisition are included in the Company's consolidated statements of
     operations. The purchase price was allocated based on the estimated fair
     market value of assets and liabilities at the date of acquisition. In
     connection with the purchase price allocation, the Company recorded
     approximately $4.6 million of goodwill, which was being amortized ratably
     over 10 years. During 1999, the Company determined that the remaining
     goodwill related to this acquisition was impaired based on the Company's
     projections of future cash flows related to this product line. Accordingly,
     the Company recorded an impairment of approximately $3.9 million (see Note
     1g).

     On March 5, 1998, the Company acquired certain assets and liabilities of
     Eyecare Products UK Ltd. (Foster Grant UK), including the Foster Grant
     trademark in territories not previously owned, for approximately $5.5
     million in cash. Foster Grant UK is a marketer and distributor of
     sunglasses and reading glasses in Europe. The purchase price may be
     increased by approximately $0.7 million in fiscal 1998 and 1999 based on
     Foster Grant UK performance. Based on fiscal 1998 and 1999 activity, there
     was no increase in the purchase price.

     The acquisition has been accounted for using the purchase method of
     accounting; accordingly, the results of operations of Foster Grant UK from
     the date of the acquisition are included in the accompanying consolidated
     statements of operations. The purchase price was allocated based on
     estimated fair values of assets and liabilities at the date of acquisition.
     In connection with the purchase price allocation, the Company recorded
     goodwill of approximately $1.1 million, which is being amortized on the
     straight-line basis over 20 years.

(3)  INCOME TAXES

     Income taxes are provided using the liability method of accounting in
     accordance with SFAS No. 109. A deferred tax asset or liability is recorded
     for all temporary differences between financial and tax reporting. Deferred
     tax expense (benefit) results from the net change during the year of the
     deferred tax asset and liability.

     The components of the income tax (benefit) expense are as follows (in
     thousands):

                                             FOR THE YEARS ENDED
                                   ----------------------------------------
                                   JANUARY 2,    JANUARY 1,    DECEMBER 30,
                                   ----------   -----------    ------------
                                      1999          2000           2000
Current -
   Federal..................        $    --      $      --       $    --
   State....................            (33)             6            --
   Foreign..................             --             36           126
                                    -------      ---------       -------
                                        (33)            42           126
Deferred -
   Federal..................         (3,054)        (9,042)        3,925
   State....................           (625)        (1,281)        1,064
                                    -------      ---------       -------
                                     (3,679)       (10,323)        4,989
                                    -------      ---------       -------

Increase in valuation allowance       3,712         10,317         1,357
                                    -------      ---------       -------
                                    $    --      $      36       $ 6,472
Less amount attributable to
   extraordinary gain                    --             --        (6,346)
                                    -------      ---------       -------
                                    $    --      $      36       $   126
                                    =======      =========       =======

     A reconciliation of the federal statutory rate to the Company's effective
     tax rate is as follows:

<TABLE>
<CAPTION>
                                                          FOR THE YEARS ENDED
                                                ---------------------------------------
                                                JANUARY 2,    JANUARY 1,   DECEMBER 30,
                                                ----------    ----------   ------------
                                                   1999          2000          2000

<S>                                                <C>           <C>           <C>
Income tax provision at federal statutory rate     (34.0)%       (34.0)%       (34.0)%
Decrease in tax resulting from State tax
   provision, net of federal
</TABLE>



                                      F-10

<PAGE>   49
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)
<TABLE>
<S>                                                <C>           <C>           <C>
     benefit..................................      (4.1)         (2.9)           --
   Foreign....................................      (1.5)          0.1           1.5
   Nondeductible expenses.....................       1.5           1.8           4.8
   Increase in valuation allowance and
     other, net...............................      38.1          35.0          30.2
                                                   -----         -----         -----
Actual effective tax rate expense.............        --%           --%          2.5%
                                                   -----         -----         -----
</TABLE>

     Deferred income taxes relate to the following temporary differences (in
     thousands):

                                             JANUARY 1,  DECEMBER 30,
                                                2000          2000
                                             ----------  ------------
Nondeductible reserves....................    $  7,318    $  3,489
Nondeductible accruals....................       2,199       1,683
Customer acquisition costs................      (1,716)     (1,904)
Other.....................................          21          47
                                              --------    --------
     Gross deferred tax assets............       7,822       3,315
Less-- Valuation allowance................      (4,079)     (2,335)
                                              --------    --------
     Net current deferred tax assets......    $  3,743    $    980
                                              ========    ========
Net operating loss carryforwards..........    $ 13,454    $ 13,572
Tax basis of property and equipment.......         414        (236)
Goodwill amortization.....................       2,353       2,496
Other.....................................          --         180
                                              --------    --------
     Gross long term deferred tax assets        16,221      16,012
Less-- Valuation allowance................     (10,902)    (14,003)
                                              --------    --------
     Net long term deferred tax assets .      $  5,319    $  2,009
                                              ========    ========

     A valuation allowance is provided when it is more likely than not that some
     portion or all of the deferred tax assets will not be recognized. The
     Company has approximately $39.8 million of net operating loss
     carryforwards, which expire through 2020.

     The Company was a Subchapter S corporation under Section 1362 of the
     Internal Revenue Code until May 31, 1996 when it issued Series A Preferred
     Stock. As a Subchapter S corporation, the taxable income or loss of the
     Company was passed through to the shareholders and reported on their
     individual federal and certain state tax returns. Dividend distributions of
     approximately $2.9 million in 1996 were made to the shareholders primarily
     to fund payment of the taxes related to the Company's income. In addition,
     $10.3 million of cash and $3.0 million of subordinated notes payable were
     distributed to the shareholders in 1996 to distribute the previously
     undistributed after-tax earnings. During 1997, a cash distribution of $0.3
     million was made to the Subchapter S corporation shareholders to distribute
     a portion of the remaining undistributed after-tax earnings.

     The Company has entered into an indemnification agreement with the
     shareholders of the Company prior to its conversion to a Subchapter C
     corporation relating to potential income tax liabilities resulting from
     adjustments to reported Subchapter S corporation taxable income. The
     shareholders will continue to be liable for personal income taxes on the
     Company's income for all periods prior to the time the Company ceased to be
     a Subchapter S corporation, while the Company will be liable for all income
     taxes subsequent to the time it ceased to be a Subchapter S corporation.
     The indemnification agreement provides that the Company shall distribute to
     the individual shareholders 40% of the amount of additional deductions
     permitted to be taken by the Company after its conversion to a Subchapter C
     corporation for expenditures made prior to becoming a Subchapter C
     corporation, which result from adjustments in the form of a final
     determination by tax authorities.

     During fiscal 1998, the Company made advances to the Subchapter S
     corporation shareholders to pay a portion of the income tax owed by them
     with respect to the Company's Subchapter S corporation earnings resulting
     from an income tax audit. The Company agreed to make advances to these
     shareholders to pay their tax liabilities, the aggregate amount of which
     was approximately $3.4 million. These advances are evidenced by promissory
     notes and bear interest at an annual rate equal to the Applicable Federal
     Rate (6.1% at December 30, 2000). Principal and accrued interest are
     payable on demand. These advances and their related interest were offset
     against the subordinated notes payable to shareholders that were due to
     these shareholders of approximately $3.5 million. The remaining amounts
     have been included in long-term other assets in the accompanying
     consolidated balance sheets.

(4)  REDEEMABLE NONVOTING PREFERRED STOCK OF A SUBSIDIARY

     In connection with the purchase of Foster Grant US in December 1996, the
     Company's wholly owned subsidiary, FG Holdings, issued 100 shares of FG
     Preferred Stock, which represents all of the issued and outstanding shares
     of FG Preferred Stock. The FG Preferred Stock was to be redeemed on
     February 28, 2000 (the FG Redemption Date) by payment of an amount ranging
     from $1.0


                                      F-11
<PAGE>   50
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

     million to $4.0 million (the FG Redemption Amount), determined based on the
     combined net sales of sunglasses, reading glasses and accessories by Foster
     Grant US and the Company for the year ended January 1, 2000, excluding an
     amount equal to the net sales by the Company for such items for the year
     ended December 31, 1996. Any increase in the redemption amount would be
     recorded as goodwill. Based on the actual net sales for fiscal 1999, the FG
     Redemption Amount was determined to be $1.0 million. This amount was paid
     to the FG Preferred Stockholders on April 3, 2000. In addition to the FG
     Redemption Amount, upon the occurrence of (i) an initial public offering
     where the pre-money equity valuation of the Company equals or exceeds $75.0
     million, (ii) a merger or similar transaction where the transaction value
     equals or exceeds $75.0 million or (iii) a private placement of equity
     securities representing more than 50% of the outstanding capital stock for
     consideration of not less than $37.5 million, the FG Preferred Stockholders
     are entitled to receive a supplemental payment of up to $3.0 million
     depending on the transaction value. If the transaction value does not equal
     or exceed the threshold amounts, no supplemental payment is due. This
     supplemental payment amount will be recorded as additional goodwill when,
     and if, the amount is estimatable.

     The value of FG Preferred Stock was recorded as part of the initial
     purchase of Foster Grant US and was based on the present value of
     management's best estimate of the expected payment of $1.0 million upon
     redemption. The accretion of the original value to the $1.0 million
     redemption value was recorded as a charge to minority interest in income of
     subsidiaries in the accompanying consolidated statements of operations.
     Accretion of this discount for the years ended January 2, 1999 and January
     1, 2000 was approximately $74,000 and $91,000, respectively.

(5)  SENIOR CREDIT FACILITIES WITH A BANK

     In July 1998, the Company amended its Senior Credit Facility with a bank
     (the Bank Agreement). The amended Senior Credit Facility provides for a
     $60.0 million revolving credit facility, including a $3.0 million letter of
     credit facility. Use of the proceeds from the Senior Credit Facility are
     limited to refinancing existing term debt, support letters of credit, fund
     working capital and finance permitted acquisitions and tax distributions,
     as defined.

     In August 2000, the Company amended its Senior Credit Facility with the
     bank. The amended Senior Credit Facility provides for a term loan not to
     exceed $7,097,875 and reduces the overall $60.0 million maximum level of
     borrowing under the credit facility. The loan is secured by a mortgage on
     its Smithfield, RI facility and the agreements of certain preferred
     shareholders to purchase participations in the term loan upon the happening
     of certain events. The term loan is being amortized over 60 months
     commencing April 1, 2001 with the remaining principal balance due at the
     expiration of the Senior Credit Facility on July 31, 2003. The interest
     rate on the term loan is the rate on the Senior Credit Facility plus 0.50%.
     The proceeds from this term loan were used to repurchase $23.15 million
     face amount of the Company's 10-3/4% Senior Series A Notes. (See Note 7)

     Borrowings under the Senior Credit Facility are limited to the lesser of
     $60.0 million or the borrowing base, which is defined as a percentage of
     eligible accounts receivable and the lesser of (i) inventories or (ii)
     $30.0 million less the interest rate protection reserve and the foreign
     exchange exposure, reduced by outstanding letters of credit. Revolving
     credit borrowings bear interest at the bank's prime rate (9.5% at December
     30, 2000) plus 0.5% or LIBOR (6.52% at December 30, 2000) plus 2.25%. The
     Company has the option of electing the rate; however, the use of LIBOR is
     limited. The Senior Credit Facility expires in July 2003. As of December
     30, 2000, the Company had approximately $5.5 million available under this
     Senior Credit Facility.

     If the Bank Agreement is terminated by the Company earlier than the
     expiration date, the Company will be required to pay a termination fee of
     $0.1 million. The termination fee will be waived if the debt is refinanced
     with the bank or if repayment is from proceeds of the Company's initial
     public offering.

     The Senior Credit Facility is subject to certain restrictive covenants,
     including a fixed charge coverage ratio, leverage ratio and minimum EBITDA.
     As of December 30, 2000, the Company was not in compliance with the above
     financial covenants. As of March 27, 2001, the Company received a waiver
     for such noncompliance from the Bank and entered into an amendment with the
     bank which modifies the covenants going forward so that they reflect
     performance levels that the Company believes it can attain. Amounts due
     under the Senior Credit Facility are secured by a mortgage on its
     Smithfield, RI property, the accounts receivable and inventory of the
     Company and its domestic subsidiaries.

     In November 1999, Foster Grant UK entered into a credit facility with a
     different bank. The facility provides for a pound sterling 1.5 million
     (approximately $2.2 million at December 30, 2000) overdraft line to finance
     working capital. Repayments under this facility fluctuate with interest at
     the bank's base rate (6.0% at December 30, 2000) plus 1.25% if below the
     facility limit of pound



                                      F-12
<PAGE>   51
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

     sterling 1.5 million and 2.25% if in excess of the agreed limit. The
     facility expires in December 2001. The Company had no borrowings
     outstanding under this facility at December 30, 2000 and, therefore, the
     related covenants were not in effect, as they only become effective when
     the Company has borrowings outstanding.

(6)  LONG-TERM OBLIGATIONS

     Long-term obligations consist of the following at January 1, 2000 and
     December 30, 2000 (in thousands):

<TABLE>
<CAPTION>
                                                                         JANUARY 1, DECEMBER 30,
                                                                            2000      2000
                                                                         ---------- ------------

<S>                                                                        <C>       <C>
Term loan under existing Senior Credit Facility due July 31, 2003,
monthly payments of interest through April 1, 2001, principal payments
of $118,117 commencing April 2001, interest at Senior Credit Facility
rate plus 0.50%, secured by mortgage on Smithfield, RI property ......     $   --     $7,087

Financing lease obligation, payable in monthly installments of
principal and interest of $6,500 through September 2000, interest
at 8.75% per annum, secured by certain office equipment ..............         50         --

Capital lease obligation, payable in monthly installments of
principal and interest of $10,903 through November 2000,
interest at 9.0% per annum ...........................................        115         --

Promissory notes, payable in monthly installments of
principal and interest through February 2000, interest
at 7.07% to 9.9% per annum, secured by certain factory equipment .....          5         --

Capital lease obligation, payable in monthly installments
of principal and interest through November 2001, interest
at 8.0% per annum (refinanced during 2000) ...........................        367         --

Capital lease obligation, payable in monthly installments of
principal and interest through December 2002, interest
at 13.5% per annum ...................................................         --        641

Financing lease obligations, payable in monthly installments of
principal and interest through January 2001, interest
at 8.76% to 8.82% per annum, secured by certain factory
and office equipment .................................................        235         10

Capital lease obligation, payable in monthly installments of
principal and interest through July 2005, interest
at 7.07% per annum, secured by certain equipment .....................        249        243

Other ................................................................        301          7
                                                                           ------     ------
                                                                            1,322      7,988
Less -- Current maturities ...........................................        902      1,427
                                                                           ------     ------
                                                                           $  420     $6,561
                                                                           ======     ======
</TABLE>


Future maturities of the Company's long-term obligations as of December 30,
2000 are as follows (in thousands):

                         YEARS             AMOUNT
                         -----            -------
                         2001              $1,427
                         2002               1,806
                         2003               1,468
                         2004               1,472
                         Thereafter         1,815
                                           ------
                                           $7,988
                                           ======

(7)  10 3/4% SENIOR NOTES DUE 2006

     On July 21, 1998, the Company sold $75.0 million of 10 3/4% Senior Series A
     Notes due 2006 (the Notes) through a Rule 144A offering. The net proceeds
     of approximately $71.0 million received by the Company from the issuance
     and sale of the Notes were used to repay outstanding indebtedness under the
     Senior Credit Facility with a bank and the Subordinated Promissory Notes to
     shareholders, net of amounts due the Company from certain of these
     shareholders. The Company incurred issuance costs of approximately $3.7
     million in relation to the Notes. These costs are being amortized over the
     life of the Notes and are included in other assets in the accompanying
     consolidated balance sheets. In December 1998, the Notes were exchanged for
     10 3/4% Series B Notes due 2006 registered with the SEC. Interest on the
     Notes is payable semiannually on January 15 and July 15, commencing January
     15, 1999.


                                      F-13
<PAGE>   52
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

     The Notes are general unsecured obligations of the Company, rank senior in
     right of payment to all future subordinated indebtedness of the Company and
     rank pari passu in right of payment to all existing and future
     unsubordinated indebtedness of the Company, including the Senior Credit
     Facility described in Note 5. The Senior Credit Facility is secured by a
     mortgage on its Smithfield, RI property, accounts receivable and inventory
     of the Company and its domestic subsidiaries. Accordingly, the Company's
     obligations under the Senior Credit Facility will effectively rank senior
     in right of payment to the Notes to the extent of the assets subject to
     such security interest. The Notes are fully and unconditionally guaranteed,
     on a senior and joint and several basis, by each of the Company's current
     and future Domestic Subsidiaries (as defined) (the Guarantors). The
     Indenture under which the Notes were issued (the Indenture) imposes certain
     limitations on the ability of the Company and its subsidiaries to, among
     other things, incur indebtedness, pay dividends, prepay subordinated
     indebtedness, repurchase capital stock, make investments, create liens,
     engage in transactions with shareholders and affiliates, sell assets and
     engage in mergers and consolidations.

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

     During 2000, the Company repurchased $23.15 million face amount of the
     Notes for a purchase price of $7.09 million. The purchase price was
     financed utilizing a term loan under its existing Senior Credit Facility.
     The term loan is secured by a mortgage on its Smithfield, RI property and
     subject to the obligation of certain preferred shareholders to purchase
     participations in the term loan upon the happening of certain events. The
     term loan is being amortized over 60 months commencing April 1, 2001, with
     the remaining principal balance due at the expiration of the Senior Credit
     Facility on July 31, 2003. As a result of this transaction, the Company
     recognized a $8.8 million extraordinary gain, net of $6.3 million of income
     taxes, and wrote off $90,000 of unamortized issuance costs related to the
     Notes that were repurchased. These purchases resulted from inquiries from
     holders of the Notes. The Company does not solicit offers to tender Notes
     for repurchase, but may, from time to time, consider requests to repurchase
     Notes, subject to the availability of appropriate financing.

     In conjunction with the commitment to purchase participations in the term
     loan, the Company issued 70,870 shares of Series B Preferred Stock. The
     holders of Series B Preferred Stock are entitled to receive, prior and in
     preference to any distribution with respect to any other capital stock of
     the Company, an amount per share equal to $6.67 multiplied by the number of
     six month periods and fractions thereof in the period during which the
     participation commitment is outstanding. The Company is amortizing the
     value related to two six month periods (approximately $945,000) in the year
     ended December 30, 2000, as interest expense. If the participation
     commitment is outstanding for a period beyond twelve months, the Company
     will record additional value to the Series B Preferred Stock and amortize
     the related costs over the additional period of the participation
     commitment as required.

(8)  DEFERRED COMPENSATION

     The Company has deferred compensation agreements with several key
     employees. The agreements provide for deferred compensation based on
     increases in net book value, as defined, and for one executive, the cash
     surrender value of a life insurance policy owned by the Company. The
     amounts due under these agreements are payable in a lump sum or in annual
     installments upon certain defined events. The Company incurred $200,000 and
     $250,000 of expense related to the insurance policy during the years ended
     January 2, 1999 and December 30, 2000, respectively. No expense was
     incurred during the year ended January 1, 2000. At December 30, 2000, the
     cash surrender value of the life insurance policy was approximately $1.2
     million and is included in other assets in the accompanying consolidated
     balance sheet.

     The Company also has an obligation to four former employees under a
     nonqualified deferred compensation plan. Payments of principal and interest
     are to be made monthly through August 2007. The obligation at December 30,
     2000 was $73,000, of which $11,000 is due prior to December 29, 2001. These
     amounts are included as deferred compensation in the accompanying
     consolidated balance sheets.



                                      F-14
<PAGE>   53
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

(9)  PREFERRED STOCK

     The Company has 200,000 shares of preferred stock, $0.01 par value,
     authorized and issuable in one or more series with such voting powers,
     designations, preferences and other special rights and such qualifications,
     limitations or restrictions as may be stated in the resolution or
     resolutions adopted by the Company's Board of Directors providing for the
     issue of such series and as permitted by the Rhode Island Business
     Corporation Act. The Company has created two series of preferred stock
     designated Series A Redeemable Convertible Preferred Stock (Series A
     Preferred Stock) and Senior Series B Preferred Stock (Series B Preferred
     Stock). A total of 43,700 shares of Series A Preferred Stock are designated
     for issuance, all of which are issued and outstanding. A total of 75,000
     shares of Series B Preferred Stock are designated for issuance of which
     70,870 shares are issued and outstanding.

     (a)  Series A Redeemable Convertible Preferred Stock

          In May 1996, the Company sold 34,200 shares of Series A Preferred
          Stock for gross proceeds of $18.0 million. In connection with the
          acquisition of Foster Grant US in December 1996, the Company issued an
          additional 9,500 shares of the Series A Preferred Stock for gross
          proceeds of $5.0 million. The rights and preferences of Series A
          Redeemable Preferred Stock, as amended in June 1998, are as follows:

          Conversion. Shares of the Series A Preferred Stock are convertible
          into common stock at a rate of 10 shares of common stock for each
          share of Series A Preferred Stock, adjustable for certain dilutive
          events. As amended by the Company's shareholders in June 1998,
          conversion is at the option of the shareholder but is automatic upon
          the consummation of an initial public offering resulting in gross
          proceeds to the Company of at least $20.0 million and at an offering
          price of at least 175% of the original conversion price.

          Redemption. Subject to the restriction described below, the holders of
          the Series A Preferred Stock have the right to require redemption for
          cash of any unconverted shares, beginning June 30, 2002. The Company
          will redeem the Series A Preferred Stock equal to 5% of the total
          number of shares issued and outstanding as of March 31, 2002 on the
          last day of each March, June, September and December, as follows:


                                YEARS ENDING
                                DECEMBER 31,     PERCENTAGE
                                ------------     ----------
                                    2002             15%
                                    2003             35
                                    2004             55
                                    2005             75
                                    2006             95
                                    2007            100

          Upon redemption, holders of Series A Preferred Stock will be entitled
          to receive an amount equal to the original stock price, $526.32 per
          share, plus accrued and unpaid dividends yielding a 10% compounded
          annual rate of return (the Redemption Amount). Accordingly, the Series
          A Preferred Stock has been recorded at its redemption value in the
          accompanying consolidated balance sheets.

          The holders of the Series A Preferred Stock may require the Company to
          redeem all or any portion of the Series A Preferred Stock upon certain
          events such as the sale, merger or dissolution of the Company. In
          addition, the Company may voluntarily redeem the Series A Preferred
          Stock at the Redemption Amount, as defined above. If the Company
          voluntarily redeems the Series A Preferred Stock, it must issue the
          holders of Series A Preferred Stock a warrant to purchase common stock
          equal to the number of shares the shareholder would have received upon
          conversion, at a strike price equal to the redemption price at the
          time of redemption.

          In connection with the proposed issuance of the Notes the preferred
          shareholders agreed, in June 1998, to suspend their redemption rights
          until 91 days after the date that any Restrictive Indebtedness, as
          defined, is no longer outstanding. Restrictive Indebtedness is defined
          as indebtedness whose terms restrict the Company's ability to redeem,
          in whole or part, the Series A Preferred Stock. Restrictive
          Indebtedness can not exceed $150.0 million or such greater amount as
          may be approved by the directors designated by the preferred
          shareholders. The Notes constitute Restrictive Indebtedness.



                                      F-15
<PAGE>   54
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

          Liquidation Preference. After payment of any preference due the
          holders of the Series B Preferred Stock, holders of the Series A
          Preferred Stock are entitled to receive a preference in the event of a
          liquidation, dissolution or winding up of the Company equal to the
          Redemption Amount prior to any distribution of any assets of the
          Company to the holders of any other class of capital stock other than
          the Series B Preferred Stock. If the assets of the Company are
          insufficient to pay the full preferential amounts to the holders of
          Series A Preferred Stock, the assets shall be distributed ratably
          among such shareholders in proportion to their aggregate liquidation
          preference amounts.

          Voting Rights and Dividends. The holders of the Series A Preferred
          Stock are entitled to vote on all matters based on the number of votes
          equal to the number of shares of common stock into which the shares of
          Series A Preferred Stock are convertible after December 1, 1996. In
          addition, without the vote or consent of the holders of at least
          two-thirds of outstanding shares of Series A Preferred Stock, voting
          separately as a class, the Company may not take certain specified
          actions that could adversely affect the holders of such shares. The
          holders of a majority of the Series A Preferred Stock shares are
          entitled to elect two directors. In certain events, defined as Remedy
          Events, the number of directors of the Company automatically increases
          to the minimum number sufficient to allow the holders of Series A
          Preferred Stock to elect a majority of the directors. In June 1998,
          the holders of the Series A Preferred Stock agreed to change the
          definition of Remedy Events to reduce the minimum amount of
          consolidated shareholders' equity that the Company is required to
          maintain dollar for dollar by any payments of certain subordinated
          notes payable to shareholders.

          Dividends will not be paid on the common stock unless the Series A
          Preferred Stock receives the same dividends that such shares would
          have received had they been converted into common stock immediately
          prior to the record date for such dividend.

     (b)  Senior Series B Preferred Stock

          During 2000, in conjunction with the commitment by certain holders of
          Series A Preferred Stock to purchase participations in the term loan
          the Company issued 70,870 shares of Series B Preferred Stock (see Note
          5). The rights and preferences of the Series B Preferred Stock are as
          follows:

          Liquidation Preference. The holders of Series B Preferred Stock are
          entitled to receive, prior and in preference to any distribution with
          respect to any other capital stock of the Company, an amount per share
          equal to $6.67 multiplied by the number of six month periods and
          fractions thereof in the period during which the participation
          commitment was outstanding, provided that if a holder of Series B
          Preferred Stock purchases a participation or the commitment to
          purchase the participation remains in effect with respect to any
          holder for more than two years after the date of the issuance of such
          shares of Series B Preferred Stock, such preference shall be increased
          to $13.34 retroactive to date of issuance.

          Redemption. Pursuant to consent of a majority of the Company's
          disinterested directors, the Company may redeem the Series B Preferred
          Stock in whole for the amount of the liquidation preference at any
          time after the participation commitment is no longer in effect.

          Voting Rights and Dividends. Without the vote or consent of the
          holders of two-thirds of the outstanding shares of Series B Preferred
          Stock, separately as a class, the Company may not take certain actions
          that could adversely affect the holders of such shares. Except for
          these express rights and as otherwise required by law, the holders of
          Series B Preferred Stock are not entitled to vote on any matter.

          The holders of Series B Preferred Stock are not entitled to any
          dividends.

(10) 1996 INCENTIVE STOCK PLAN

     In May 1996, the Company adopted the 1996 Incentive Stock Plan (the Plan)
     under which it may grant incentive stock options (ISOs), nonqualified stock
     options (NSOs), restricted stock and other stock rights to purchase up to
     50,000 shares of common stock. In May 1999, the Company increased the
     number of shares of common stock authorized for issuance under the Plan to
     88,000. Under the Plan, ISOs may not be granted at less than fair market
     value on the date of grant and vest in a method determined by the Board of
     Directors, over a term not to exceed 10 years. All options have been
     granted with exercise prices equal



                                      F-16
<PAGE>   55
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

     to the fair market value of the Company's common shares, as determined by
     the Board of Directors. Stock option activity for each of the three years
     in the period ended December 30, 2000 is as follows:

<TABLE>
<CAPTION>
                                                                      WEIGHTED
                                                      WEIGHTED        AVERAGE
                                                      AVERAGE        REMAINING
                                 NUMBER OF SHARES  EXERCISE PRICE CONTRACTUAL LIFE
                                 ----------------  -------------- ----------------
<S>                                <C>              <C>               <C>
Outstanding, December 31, 1997       14,000           $ 50.00           9.5
  Canceled                           (2,000)            50.00            --
                                     ------           -------          ----

Outstanding, January 2, 1999         12,000             50.00           8.5
  Granted                            31,350             31.57           9.5
  Canceled                           (4,000)            50.00            --
                                     ------           -------          ----

Outstanding, January 1, 2000         39,350           $ 35.32           9.1
  Granted                            47,124             32.00           9.2
  Canceled                           (4,000)            50.00            --
                                     ------           -------          ----
Outstanding, December 30, 2000       82,474             32.71           8.7
                                     ======           =======          ====

Exercisable, January 2, 1999         12,000           $ 50.00           8.5
                                     ======           =======          ====

Exercisable, January 1, 2000         18,450           $ 39.56           8.7
                                     ======           =======          ====

Exercisable, December 30, 2000       19,675           $ 35.32           8.1
                                     ======           =======          ====
</TABLE>

     During fiscal year 2000, the Board of Directors approved the grant of
     additional options to purchase 47,124 shares of common stock at an exercise
     price of $32.00 to certain employees. These options vest in three equal
     annual installments subject to acceleration if the Company attains annual
     EBIT of at least $20.0 million. 10,450 of the above options are to vest
     upon the Company achieving an equity value of $90.0 million in a liquidity
     event, as defined. These options will be accounted for under variable plan
     accounting. As of December 30, 2000, there was no charge related to these
     options.

     In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
     Compensation. SFAS No. 123 requires the measurement of the fair value of
     stock options granted to employees be included in the statement of
     operations or disclosed in the notes to financial statements. The Company
     has determined that it will continue to account for stock-based
     compensation for employees under Accounting Principles Board Opinion No.
     25, Accounting for Stock Issued to Employees, and elect the disclosure-only
     alternative under SFAS No. 123.

     In connection with the acquisition of Fantasma, the Company issued options
     to two employees of Fantasma. The options provide that the employees may
     purchase up to 13% of Fantasma at the fair market value based upon the
     purchase price. Certain of these options contain performance criteria and,
     therefore, will be accounted for as variable options. Based on fiscal 1998,
     1999 and 2000, activity and the termination of one of the employees,
     options to purchase 3%, 9% and 1%, respectively, of Fantasma had expired.
     No option to purchase remains outstanding at December 30, 2000.

     Had compensation cost for the Company's and Fantasma's stock plans been
     determined based on the fair value at the grant dates, as prescribed in
     SFAS No. 123, the Company's net loss and net loss per share applicable to
     common shareholders for the years ended January 2, 1999, January 1, 2000
     and December 30, 2000 would have been as follows:

                                  JANUARY 2,    JANUARY 1,  DECEMBER 30,
                                    1999          2000         2000
                                  ----------    ----------  ------------
Net loss applicable to common
Shareholders (in thousands)-
   As reported                    $(15,932)     $(32,427)      $  435
   Pro forma                       (15,999)      (32,563)         367


     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes option pricing model with the following assumptions used
     for grants during the applicable period: dividend yield of 0.0% for all
     periods; volatility of 35.53% for all periods; risk-free interest rates of
     6.00% for all options granted during fiscal 1998, 5.68% for all options
     granted during fiscal 1999, 6.5% for all options granted during 2000 and a
     weighted average expected option term of five years for all periods. The
     weighted average fair value per share of options granted during the years
     ended January 1, 2000 and December 30, 2000 was $12.95 and $13.61,



                                      F-17
<PAGE>   56
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

     respectively. The weighted average grant date fair value for an option to
     purchase a 1% membership interest in Fantasma granted during the year ended
     January 2, 1999 was approximately $14,400.

(11) INVESTMENTS

     (a) Hong Kong

         The Company has an ownership interest in four entities in Hong Kong.
         These entities provide various services to the Company and each other
         in connection with purchasing and distributing products. The Company
         accounts for these investments using the equity method. The net
         investment in these entities is recorded as investment in affiliates in
         the accompanying consolidated balance sheets. The following table
         summarizes certain financial information for these entities (in
         thousands):

                                                  FISCAL YEAR
                                      -----------------------------------
                                        1998           1999        2000
                                      ---------      -------     --------
     Ownership Interest-
        AAi Hong Kong Limited               49%          49%          49%
        Milagros (Far East)
        Limited                             49           49           49
        Honest Lion Limited                 50           50           50
        Milagros AAi Asia Limited           49           49           49

     Sales to AAi                     $ 10,215       $9,982      $11,774
     Equity in losses                      (76)          --           56
     Investment balance                  1,337        1,291        1,235

     The following table summarizes certain consolidated financial information
     of the four Hong Kong entities (in thousands):

                                             FISCAL YEAR
                                    -----------------------------
                                       1998      1999       2000
                                    ---------  --------    ------
     Current assets                 $  5,453   $  5,911    $ 4,632
     Noncurrent assets                 6,814      7,235      9,350
     Current liabilities               8,165      7,419      9,492
     Noncurrent liabilities            3,087     11,105      1,619
     Net sales                        22,193     30,532     36,529
     Gross profit                      5,273      4,735      5,327
     (Loss) income from operations      (156)       204        656
     Net loss                           (156)        --         --

     (b) Mexico

         In 1996, the Company acquired a 50% ownership in AAi Joske's S.A. de
         R.L. De CV (Joske's), an entity engaged in the purchasing and
         distribution of accessories in Mexico for $0.5 million of inventory. In
         January 1997, the Company acquired an additional 5% ownership interest
         in Joske's and accordingly has consolidated its financial results in
         the Company's consolidated financial statements subsequent to December
         31, 1996. In 1999, the Company acquired an additional 20% ownership
         interest in Joske's for a nominal amount. Based on the value of these
         transactions and the related net book value of Joske's as of the dates
         of acquisition, no goodwill was recorded.

(12) EMPLOYEE BENEFIT PLANS

     (a) Qualified 401(k) Plan

         The Company has a defined contribution profit sharing plan covering
         substantially all employees. Under the terms of the profit sharing
         plan, contributions are made at the discretion of the Company. No
         contributions were made for the years ended January 2, 1999, January 1,
         2000 and December 30, 2000. The profit sharing plan also allows
         eligible participants to make contributions in accordance with Internal
         Revenue Code Section 401(k). The Company matches employee contributions
         equal to 25% of the first 6% of compensation that an employee defers.
         These matching contributions totaled approximately $117,000, $120,000
         and $110,000 for the years ended, January 2, 1999 , January 1, 2000 and
         December 30, 2000, respectively.



                                      F-18
<PAGE>   57
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

     (b) Non-Qualified Excess 401(k) Plan

         In May 1997, the Company established the Non-Qualified Excess 401(k)
         Plan (the Non-Qualified Plan) effective as of June 1, 1997. The purpose
         of the Non-Qualified Plan is to provide deferred compensation to a
         select group of management or highly compensated employees of the
         Company as designated by the Board of Directors. Under the
         Non-Qualified Plan, a participant may elect to defer up to 15% of his
         or her compensation on an annual basis. This amount is credited to the
         employee's deferred compensation account (the Deferred Amount). Under
         the Non-Qualified Plan, the Company also credits the participant's
         deferred compensation account for the amount of the matching
         contribution the Company would have made under the qualified 401(k)
         plan with respect to the Deferred Amount. The matching contributions
         totaled approximately $13,000, $28,000 and $20,500 for the years ended
         January 2, 1999, January 1, 2000 and December 30, 2000, respectively.
         All amounts contributed by the employee and by the Company under the
         Non-Qualified Plan are immediately vested. A participant under the
         Non-Qualified Plan is entitled to receive a distribution of his or her
         account upon retirement, death, disability or termination of
         employment.

(13) RELATED PARTY TRANSACTIONS

     The Company has operating lease agreements with Sunrise Properties, LLC and
     299 Carpenter Street Associates, LLC, of which certain officers and
     shareholders of the Company are partners. The related rental expense
     charged to operations was approximately $471,000, $329,000 and $229,000 in
     the years ended January 2, 1999, January 1, 2000 and December 30, 2000,
     respectively.

     The Company has guaranteed a mortgage note payable by Sunrise Properties,
     LLC aggregating $200,000. During the year ended December 30, 2000, the
     balance of this note has been paid in full.

     On May 31, 1996, the Company and its shareholders, including the management
     shareholders (Management Shareholders), entered into a tag-along, transfer
     restriction and voting agreement (the Shareholders Agreement). The
     Shareholders Agreement requires that any Management Shareholder wishing to
     transfer or sell common stock of the Company to provide right of first
     refusal and tag-along rights, on a pro rata basis, as defined, to all other
     shareholders' party to the Shareholders Agreement upon receipt of a
     third-party offer to purchase the applicable restricted shares.

     Upon the death of a Management Shareholder, the personal representative of
     such Management Shareholder shall sell to the Company such Management
     Shareholder's shares based on an appraisal value, as defined, provided that
     the Company's obligation to purchase shares is limited to the amount of any
     proceeds paid to the Company under insurance policies insuring the life of
     the Management Shareholder.

     The Shareholders Agreement shall terminate upon the earlier of a qualified
     public offering, as defined, or when no shares of Series A Preferred Stock
     and warrants are outstanding, except as a result of the conversion,
     exchange or exercise of the Series A Preferred Stock or warrants.

(14) COMMITMENTS AND CONTINGENCIES

     (a) Letters of Credit

         At December 30, 2000, the Company had irrevocable letters of credit
         outstanding of approximately $170,000.

     (b) Operating Leases

         In addition to the operating leases described in Note 13, the Company
         also has operating leases for its other locations. Future minimum
         rental payments are as follows (in thousands):

                 2001          $  214
                 2002             177
                 2003             147
                 2004             145
              Thereafter          858
                               ------
                               $1,541
                               ======



                                      F-19
<PAGE>   58
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

         The Company incurred rent expense of $707,000, $250,000 and $280,000
         for the years ended January 2, 1999, January 1, 2000 and December 30,
         2000, respectively.

     (c) Royalties

         The Company has several agreements that require royalty payments based
         on a percentage of certain net product sales, subject to specified
         minimum payments. Minimum royalty obligations relating to these
         agreements as of December 30, 2000 totaled $1.9 million and $0.8
         million for fiscal 2001 and fiscal 2002, respectively. In addition,
         certain of these agreements require the Company pay additional fees
         based on a percentage of net product sales. These fees are not subject
         to minimum payment obligations. In the event the Company transfers its
         rights under certain of these agreements, a transfer fee would be
         payable. At December 30, 2000, the minimum aggregate transfer fee due
         would be no less than $750,000.

     (d) Supply Agreement

         The Company has a supply agreement with a display manufacturer. The
         agreement requires that the Company purchase 70% of Foster Grant US's
         annual display purchases, as defined, from this supplier through
         December 2005. If the Company does not purchase 70% of Foster Grant
         US's displays from this manufacturer, it is required to make a payment
         equal to 30% of the annual shortfall. In addition, the Company and BEC
         are required to cumulatively purchase $32.3 million of displays over
         the term of this agreement. To the extent that total purchases do not
         meet this dollar level, the Company is required to make a payment equal
         to 30% of $32.3 million, less the Company's purchases, BEC's purchases
         and any amounts paid as a result of the annual shortfall discussed
         above. As of December 30, 2000, no amounts were due under this
         agreement as a result of a shortfall.

     (e) Litigation

         In the ordinary course of business, the Company is party to various
         types of litigation, The Company maintains insurance to mitigate
         certain of these risks. The Company believes it has meritorious
         defenses to all claims, and, in its opinion, all litigation currently
         pending or threatened will not have a material effect on the Company's
         financial position or results of operations.

         In November 1998, the Company reached a favorable settlement with a
         customer related to the customer not honoring its purchase commitments
         under a 1997 agreement. As a result of this settlement, the Company
         received $950,000 for lost revenues. This settlement is included in
         other income, net in the accompanying fiscal 1998 consolidated
         statement of operations.

(15) SIGNIFICANT CUSTOMERS AND SUPPLIERS

     During the years ended January 2, 1999, January 1, 2000 and December 30,
     2000, one customer accounted for approximately 27.3%, 35.6% and 27.8% of
     net sales, respectively. This customer's accounts receivable balance
     represented approximately 44.2% and 26.6% of gross accounts receivable as
     of January 1, 2000 and December 30, 2000, respectively. For the year ended
     January 2, 1999 one additional customer accounted for approximately 10.6%
     of the Company's net sales and approximately 10.6% of gross accounts
     receivable. In addition, two customers accounted for 13.3% and 10.9%
     individually of gross accounts receivable at December 30, 2000. No other
     customer accounted for 10% or more of the Company's net sales or gross
     accounts receivable for the above stated years

     The Company currently purchases a significant portion of its inventory from
     certain suppliers in Asia. Although there are other suppliers of the
     inventory items purchased and management believes that these suppliers
     could provide similar inventory at fairly comparable terms, a change in
     suppliers could cause a delay in the Company's distribution process and a
     possible loss of sales, which would adversely affect operating results.



                                      F-20
<PAGE>   59
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

(16) ACCRUED EXPENSES

     Accrued expenses consist of the following (in thousands):

                                     JANUARY 1,  DECEMBER 30,
                                        2000        2000
                                     ----------  ------------

     Accrued payroll and payroll
       related items                  $ 1,388      $ 2,237
     Accrued Severance                      5        1,604
     Accrued interest                   3,764        2,750
     Accrued royalties                  2,242        1,787
     Other accrued expenses            15,854        9,300
                                      -------      -------
                                      $23,253      $17,678
                                      =======      =======

(17) SEGMENT REPORTING

     In July 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
     an Enterprise and Related Information. SFAS No. 131 requires certain
     financial and supplementary information to be disclosed on an annual and
     interim basis for each reportable segment of an enterprise. SFAS No. 131 is
     effective for fiscal years beginning after December 15, 1997.

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

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

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

<TABLE>
<CAPTION>
                                                                CHAIN DRUG
                                                               STORES/COMBO
                                                   MASS          STORES/
               FISCAL 1998                     MERCHANDISERS   SUPERMARKETS   VARIETY     OTHER       TOTAL
               -----------                     -------------   ------------   --------   --------   ---------
<S>                                             <C>             <C>            <C>        <C>        <C>
     Net sales                                  $ 103,559       $ 29,801      $ 13,835   $ 13,130   $ 160,325
                                                =========       ========      ========   ========   =========

     Interest expense                           $   4,528       $  1,303      $    605   $    574   $   7,010
                                                =========       ========      ========   ========   =========

     Depreciation and amortization expense      $   8,260       $  1,777      $  1,457   $  1,298   $  12,792
                                                =========       ========      ========   =========  =========

     Customer acquisition costs                 $     822       $     --      $     50   $     --   $     872
                                                =========       ========      ========   ========   =========

     Segment (loss) profit                      $  (9,013)      $    736      $ (5,603)  $    237     (13,643)
                                                =========       ========      ========   ========   =========

</TABLE>

<TABLE>
<CAPTION>
                                                                CHAIN DRUG
                                                               STORES/COMBO
                                                   MASS          STORES/
               FISCAL 1999                     MERCHANDISERS   SUPERMARKETS   VARIETY     OTHER       TOTAL
               -----------                     -------------   ------------   --------   --------   ---------
<S>                                             <C>             <C>            <C>        <C>        <C>
     Net sales                                  $ 94,385        $28,762       $ 17,125   $ 10,408   $ 150,680
                                                ========        =======       ========   ========   =========

     Interest expense                           $  6,386        $ 1,979       $  1,152   $    733   $  10,250
                                                ========        =======       ========   ========   =========

     Depreciation and amortization expense      $  6,902        $ 1,955       $  1,583   $  1,049   $  11,489
                                                ========        =======       ========   ========   =========

     Customer acquisition costs                 $     --        $   251       $     --   $     --   $     251
                                                ========        =======       ========   ========   =========

     Segment (loss) profit                      $(14,662)       $(3,634)      $ (6,879)  $ (4,103)  $ (29,278)
                                                ========        =======       ========   ========   =========
</TABLE>

                                      F-21
<PAGE>   60
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

<TABLE>
<CAPTION>
                                                          CHAIN DRUG
                                                         STORES/COMBO
                                              MASS          STORES/
          FISCAL 2000                     MERCHANDISERS  SUPERMARKETS    VARIETY     OTHER       TOTAL
          -----------                    --------------  ------------  ---------   --------    --------
<S>                                         <C>            <C>         <C>         <C>         <C>
     Net sales                              $ 96,469       $37,577     $ 23,649    $  7,847    $ 165,542
                                            ========       =======     ========    ========    =========

     Interest expense                       $  6,369       $ 2,481     $  1,561    $    518    $  10,929
                                            ========       =======     ========    ========    =========

     Depreciation and amortization expense  $  5,343       $ 4,274     $  1,510    $    810    $  11,937
                                            ========       =======     ========    ========    =========

     Customer acquisition costs             $     18       $   180     $     65    $     30    $     293
                                            ========       =======     ========    ========    =========

     Segment profit (loss)                  $  2,284       $   (58)    $ (3,015)   $ (1,870)   $  (2,659)
                                            ========       ========    =========   ========    =========
</TABLE>


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

     Segment profit (loss) differs from the income (loss) before income tax
     (expense) benefit and dividends and accretion on preferred stock by the
     amount of equity in losses of investments in affiliates, minority interest
     in income of consolidated subsidiary and other income, which are not
     allocated by segment. Segment assets are not reviewed by the chief
     operating decision maker.

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

                                   JANUARY 2,     JANUARY 1,  DECEMBER 30,
                                     1999           2000        2000
                                   ----------     ----------  ------------
     Mass merchandisers            $  25,248      $ 19,730     $  22,497
     Chain drug stores/combo
     stores/supermarkets               6,368         3,495         7,795
     Variety                           1,246         2,708         4,631
     Other                             5,068         2,454         2,701
     Unassigned assets                88,568        79,480        70,547
                                   ---------      --------     ---------
                                   $ 126,498      $107,867     $ 108,171
                                   =========      ========     =========


    The following table identifies sales and long-lived assets by geographic
    region. Sales are attributed to countries based on location of customer.
    Assets are attributed based on location.

                              1998         1999          2000
                           NET SALES    NET SALES     NET SALES
                           ---------    ---------     ----------
         United States     $144,540     $ 129,310     $ 143,697
         Canada               6,162         8,095         7,043
         Europe               7,757        10,379        11,748
         Mexico               1,866         2,896         3,054
                           --------     ---------     ---------

            Total          $160,325     $ 150,680     $ 165,542
                           ========     =========     =========


                                 LONG-LIVED ASSETS

                             JANUARY 1,   DECEMBER 30,
                               2000          2000
                             ----------   ------------
         United States       $ 41,132      $ 32,788
         Canada                 1,608         2,447
         Europe                 1,726         2,681
         Asia                   1,291         1,220
         Mexico                    28           275
                             --------      --------
            Total            $ 45,785      $ 39,411
                             ========      ========

(18) SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

     The following is summarized consolidating financial information for the
     Company, segregating the Company, wholly owned guarantor subsidiaries,
     mostly owned subsidiaries and nonguarantor subsidiaries as they relate to
     the Notes. The guarantor subsidiaries, both mostly and wholly owned, are
     domestic subsidiaries of the Company and they guarantee the Notes on a
     full, unconditional and joint and several basis. Separate financial
     statements of the wholly owned guarantor subsidiaries have not been
     included because management believes that they are not material to
     investors. Prior to September 1, 1999, the Company held an


                                      F-22
<PAGE>   61
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 30, 2000

                                  (CONTINUED)

     80% interest in Fantasma LLC ("Fantasma") and, accordingly, Fantasma was
     included as a mostly owned subsidiary in the supplemental consolidating
     financial information for such periods.

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

     Effective January 3, 1999, the assets of the Company's wholly owned
     guarantor subsidiaries (other than Fantasma) were transferred to the
     Company. Accordingly, the Company now performs all operations previously
     performed by these wholly owned guarantor subsidiaries, the results of
     which are included in the consolidating financial information for periods
     ending after such date. Effective September 1, 1999, the Company acquired
     100% of the interest of Fantasma, which is included as a wholly owned
     subsidiary in the consolidating financial information for periods ending
     after such date.



                                      F-23
<PAGE>   62

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 30, 2000

                                   (CONTINUED)


<TABLE>
<CAPTION>
                                                                                  JANUARY 1, 2000
                                                    ------------------------------------------------------------------------
                                                                    WHOLLY
                                                                     OWNED       NONGUARANTOR
                                                     COMPANY      SUBSIDIARIES   SUBSIDIARIES    ELIMINATIONS   CONSOLIDATED
                                                    ---------     ------------   -------------   ------------   ------------
                                                                                  (IN THOUSANDS)
<S>                                                 <C>             <C>            <C>            <C>             <C>
ASSETS

CONSOLIDATING BALANCE SHEETS
CURRENT ASSETS:
  Cash and cash equivalents ..................      $      97       $      8       $  2,184       $      --       $   2,289
  Accounts receivable, net ...................         16,303          2,427          3,501              --          22,231
  Inventories ................................         28,743             --          4,282              --          33,025
  Prepaid expenses and other
  current assets .............................            400             41            353              --             794
  Deferred tax assets ........................          3,743             --             --              --           3,743
                                                    ---------       --------       --------       ---------       ---------
    Total current assets .....................         49,286          2,476         10,320              --          62,082

PROPERTY, PLANT AND EQUIPMENT, NET ...........         17,727             14          1,651              --          19,392
OTHER ASSETS .................................         43,334             --          1,712         (18,653)         26,393
                                                    ---------       --------       --------       ---------       ---------
                                                    $ 110,347       $  2,490       $ 13,683       $ (18,653)      $ 107,867
                                                    =========       ========       ========       =========       =========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
  Borrowings under revolving note
    payable ..................................      $  11,000       $     --       $     --       $      --       $  11,000
  Redeemable preferred stock of a
    subsidiary ...............................          1,000             --             --              --           1,000
  Current maturities of long-term
    obligations ..............................            569             --            343              --             912
  Accounts payable ...........................         15,364            209            841              --          16,414
  Accrued expenses ...........................         22,545          1,075          1,798             (61)         25,357
  Due (from) to affiliate ....................           (590)         5,569          4,940          (9,919)             --
                                                    ---------       --------       --------       ---------       ---------
    Total current liabilities ................         49,888          6,853          7,922          (9,980)         54,683

10 3/4% SENIOR NOTES .........................         75,000             --             --              --          75,000

LONG-TERM OBLIGATIONS, LESS
CURRENT MATURITIES ...........................          1,878             --            204              --           2,082

PREFERRED STOCK ..............................         31,864             --             --              --          31,864

SHAREHOLDERS' (DEFICIT) EQUITY ...............        (48,283)        (4,363)         5,557          (8,673)        (55,762)
                                                    ---------       --------       --------       ---------       ---------
                                                    $ 110,347       $  2,490       $ 13,683       $ (18,653)      $ 107,867
                                                    =========       ========       ========       =========       =========
</TABLE>



                                      F-24
<PAGE>   63

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 30, 2000

                                   (CONTINUED)


<TABLE>
<CAPTION>
                                                                           DECEMBER  30, 2000
                                               ------------------------------------------------------------------
                                                              WHOLLY
                                                              OWNED      NONGUARANTOR
                                                COMPANY    SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS CONSOLIDATED
                                               ---------   ------------  ------------   ------------ ------------
                                                                        (IN THOUSANDS)
<S>                                            <C>          <C>            <C>            <C>          <C>
ASSETS

CONSOLIDATING BALANCE SHEETS
CURRENT ASSETS:
   Cash and cash equivalents...............    $      --    $    --        $    578       $     --     $    578
   Accounts receivable, net................       27,084      2,143           3,612             --       32,839
   Inventories.............................       28,948         --           4,135             --       33,083
   Prepaid expenses and other
   current assets..........................          837         42             401             --        1,280
   Deferred tax assets.....................          980         --              --             --          980
                                               ---------    -------        --------       --------     --------
     Total current assets..................       57,849      2,185           8,726             --       68,760

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

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

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

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

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

PREFERRED STOCK............................       36,092         --              --             --       36,092

SHAREHOLDERS' (DEFICIT) EQUITY.............      (46,588)    (6,739)          1,546         (3,999)     (55,780)
                                               ---------    -------        --------       --------     --------
                                               $ 113,092    $ 2,191        $ 13,220       $(20,332)    $108,171
                                               =========    =======        ========       ========     ========
</TABLE>


                                      F-25
<PAGE>   64

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 30, 2000

                                   (CONTINUED)

<TABLE>
<CAPTION>
                                                                                    JANUARY 2, 1999
                                               ----------------------------------------------------------------------------------
                                                              WHOLLY
                                                              OWNED      MOSTLY OWNED   NONGUARANTOR
                                                COMPANY    SUBSIDIARIES  SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                               ---------   ------------  ------------   ------------   ------------  ------------
                                                                              (IN THOUSANDS)
<S>                                            <C>          <C>           <C>            <C>             <C>         <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
NET SALES..................................    $  89,832    $ 44,140      $ 10,306       $ 16,047        $    --     $ 160,325
COST OF GOODS SOLD.........................       54,566      19,887         6,712          7,658             --        88,823
                                               ---------    --------      --------       --------        -------     ---------

     Gross profit..........................       35,266      24,253         3,594          8,389             --        71,502

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE....................................       40,362      28,235         2,747          6,791             --        78,135
                                               ---------    --------      --------       --------        -------     ---------

     (Loss) income from operations.........       (5,096)     (3,982)         (847)         1,598             --        (6,633)

INTEREST EXPENSE...........................       (5,970)       (586)         (292)          (162)            --        (7,010)
OTHER INCOME (EXPENSE), NET................          688          16             2           (140)            --           566
EQUITY IN (LOSS) INCOME OF SUBSIDIARIES....       (2,659)         --            --             --          2,583           (76)
                                               ---------    --------      --------       --------        -------     ----------

     (Loss) income before income tax
     (expense) benefit and dividends
     and accretion on preferred stock......      (13,037)     (4,552)          557          1,296          2,583       (13,153)

INCOME TAX EXPENSE.........................           --          --            --             --             --            --
                                               ---------    --------      --------       --------        -------     ---------

     (Loss) income before
     dividends and accretion on
     preferred stock.......................      (13,037)     (4,552)          557          1,296          2,583       (13,153)

DIVIDENDS AND ACCRETION ON PREFERRED
STOCK......................................        2,779          --            --             --             --         2,779
                                               ---------    --------      --------       --------        -------     ---------

     Net (loss) income applicable to
     common shareholders...................    $ (15,816)   $ (4,552)     $    557       $  1,296        $ 2,583     $ (15,932)
                                               =========    ========      ========       ========        =======     =========

</TABLE>

                                      F-26
<PAGE>   65


                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 30, 2000

                                   (CONTINUED)

<TABLE>
<CAPTION>
                                                                                   JANUARY 1, 2000
                                                 ---------------------------------------------------------------------------------
                                                                WHOLLY
                                                                 OWNED    MOSTLY OWNED   NONGUARANTOR
                                                  COMPANY   SUBSIDIARIES  SUBSIDIARY     SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                                 ---------  ------------  ------------   ------------   ------------  ------------
                                                                                  (IN THOUSANDS)
<S>                                              <C>           <C>           <C>            <C>            <C>          <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
NET SALES....................................    $ 119,672     $ 4,665       $ 5,723        $ 20,620       $    --      $ 150,680
COST OF GOODS SOLD...........................       76,809       4,163         5,528          10,473            --         96,973
                                                 ---------     -------       -------        --------       -------      ---------

     Gross profit............................       42,863         502           195          10,147            --         53,707

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE..       53,829       5,907         3,475           9,524            --         72,735
                                                 ---------     -------       -------        --------       -------      ---------

     (Loss) income from operations...........      (10,966)     (5,405)       (3,280)            623            --        (19,028)

INTEREST EXPENSE.............................       (9,718)        (92)         (209)           (231)           --        (10,250)
OTHER INCOME (EXPENSE), NET..................          974         (25)          (25)         (1,035)           --           (111)
EQUITY IN (LOSS) INCOME OF SUBSIDIARIES......       (9,715)         --            --              --         9,715             --
                                                 ---------     -------       -------        --------       -------      ---------

     (Loss) income before income tax expense
     and dividends and accretion on
     preferred stock.........................      (29,425)     (5,522)       (3,514)           (643)        9,715        (29,389)

INCOME TAX EXPENSE...........................           --          --            --             (36)           --            (36)
                                                 ---------     -------       -------        --------       -------      ---------

     Net (loss) income before
     dividends and accretion on
     preferred stock.........................      (29,425)     (5,522)       (3,514)           (679)        9,715        (29,425)

DIVIDENDS AND ACCRETION ON PREFERRED STOCK...        3,002          --            --              --            --          3,002
                                                 ---------     -------       -------        --------       -------      ---------

     Net (loss) income applicable to
     common shareholders.....................    $ (32,427)    $(5,522)      $(3,514)       $   (679)      $ 9,715      $ (32,427)
                                                 =========     =======       =======        ========       =======      =========

</TABLE>



                                      F-27
<PAGE>   66
                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 30, 2000

                                   (CONTINUED)


<TABLE>
<CAPTION>
                                                                                 DECEMBER 30, 2000
                                                    -----------------------------------------------------------------------------
                                                                      WHOLLY
                                                                      OWNED         NONGUARANTOR
                                                     COMPANY       SUBSIDIARIES     SUBSIDIARIES     ELIMINATIONS    CONSOLIDATED
                                                    ---------      ------------     ------------     ------------    ------------
                                                                                   (IN THOUSANDS)
<S>                                                 <C>            <C>              <C>              <C>             <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
NET SALES ...................................       $ 137,978        $   5,719        $  21,845        $      --       $ 165,542
COST OF GOODS SOLD ..........................          82,166            4,778            9,645               --          96,589
                                                    ---------        ---------        ---------        ---------       ---------

     Gross profit ...........................          55,812              941           12,200               --          68,953

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE .          49,290            2,341            9,023               --          60,654

RESTRUCTURE CHARGE ..........................           2,500               --               --               --           2,500
                                                    ---------        ---------        ---------        ---------       ---------

     Income (loss) from operations ..........           4,022           (1,400)           3,177               --           5,799

INTEREST EXPENSE ............................         (10,353)             (30)            (546)              --         (10,929)
OTHER INCOME (EXPENSE), NET .................           1,324               44           (1,176)              --             192
EQUITY INCOME (LOSS) INCOME OF SUBSIDIARIES .            (123)              --               --               67             (56)
                                                    ---------        ---------        ---------        ---------       ---------

     (Loss) income before income tax
     (expense) benefit and dividends
     and accretion on preferred stock .......          (5,130)          (1,386)           1,455               67          (4,994)

INCOME TAX EXPENSE ..........................            (125)              (1)              --               --            (126)
                                                    ---------        ---------        ---------        ---------       ---------
     Net (loss) income before
     Dividends and accretion on
     Preferred stock ........................          (5,255)          (1,387)           1,455               67          (5,120)

EXTRAORDIANARY GAIN, NET OF $6.3 MILLION IN
TAXES .......................................           8,838               --               --               --           8,838
                                                    ---------        ---------        ---------        ---------       ---------

INCOME (LOSS) BEFORE DIVIDENDS & ACCRETION ON
PREFERRED STOCK .............................           3,583           (1,387)           1,455               67           3,718

DIVIDENDS AND ACCRETION ON PREFERRED STOCK ..           3,283               --               --               --           3,283

     Net income (loss) applicable to
     common shareholders ....................       $     300        $  (1,387)       $   1,455        $      67       $     435
                                                    =========        =========        =========        =========       =========
</TABLE>


                                      F-28
<PAGE>   67


                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 30, 2000

                                   (CONTINUED)

<TABLE>
<CAPTION>
                                                                                JANUARY 2, 1999
                                                   --------------------------------------------------------------------------------
                                                                   WHOLLY       MOSTLY
                                                                   OWNED        OWNED      NONGUARANTOR
                                                    COMPANY       COMPANY    SUBSIDIARIES  SUBSIDIARIES  ELIMINATIONS  CONSOLIDATED
                                                   --------      --------    ------------  ------------  ------------  ------------
                                                                                  (IN THOUSANDS)
<S>                                                <C>           <C>         <C>           <C>           <C>           <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES ............. $(23,955)     $ 19,698      $ (3,527)     $  3,881      $     --      $ (3,903)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property, plant and equipment .....  (12,479)         (792)          (15)       (3,596)           --       (16,882)
   Acquisitions, net of cash acquired ............   (9,464)           --            --            --            --        (9,464)
   Advances to affiliates ........................   (8,117)           --            --           113         8,004            --
   Other investing activities ....................    6,154        (5,752)          (15)       (3,794)           --        (3,407)
                                                   --------      --------      --------      --------      --------      --------

     Net cash (provided by) used in investing
     activities ..................................  (23,906)       (6,544)          (30)       (7,277)        8,004       (29,753)
                                                   --------      --------      --------      --------      --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net borrowings under revolving note payable ...  (10,307)      (14,715)           --            --            --       (25,022)
   Proceeds from term note payable ...............   13,222            --            --            --            --        13,222
   Proceeds on term note payable .................  (13,222)           --            --            --            --       (13,222)
   Proceeds from issuance of 10 3/4% senior notes.   75,000            --            --            --            --        75,000
   Payments on subordinated notes ................   (5,487)           --            --         3,355            --        (2,132)
   Payments on long-term obligations .............  (10,130)           --            --          (896)           --       (11,026)
   Due to affiliates .............................       --         1,444         3,588         2,972        (8,004)           --
   Other financing activities ....................   (3,501)           --            --          (235)           --        (3,736)
                                                   --------      --------      --------      --------      --------      --------

     Net cash provided by (used in) financing
     activities ..................................   45,575       (13,271)        3,588         5,196        (8,004)       33,084
                                                   --------      --------      --------      --------      --------      --------

NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ......................................   (2,286)         (117)           31         1,800            --          (572)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...    2,354           183            73           169            --         2,779
                                                   --------      --------      --------      --------      --------      --------

CASH AND CASH EQUIVALENTS, END OF PERIOD ......... $     68      $     66      $    104      $  1,969      $     --      $  2,207
                                                   ========      ========      ========      ========      ========      ========
</TABLE>


                                      F-29
<PAGE>   68


                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 30, 2000

                                   (CONTINUED)

<TABLE>
<CAPTION>
                                                                                  JANUARY 1, 2000
                                                    --------------------------------------------------------------------------------
                                                                    WHOLLY       MOSTLY
                                                                    OWNED        OWNED      NONGUARANTOR
                                                     COMPANY       COMPANY    SUBSIDIARIES  SUBSIDIARIES  ELIMINATIONS  CONSOLIDATED
                                                    --------      --------    ------------  ------------  ------------  ------------
                                                                                   (IN THOUSANDS)
<S>                                                 <C>           <C>         <C>           <C>           <C>           <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS

CASH FLOWS FROM OPERATING ACTIVITIES ..........     $  2,277      $  2,698      $ (1,275)     $ (1,088)     $     --      $  2,612
                                                    --------      --------      --------      --------      --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property, plant and equipment ..       (9,218)           --            --        (1,257)           --       (10,475)
   Advances to affiliates .....................       (1,046)           --            --            --         1,041            (5)
   Other investing activities .................         (123)           12           (12)           --            --          (123)
                                                    --------      --------      --------      --------      --------      --------

     Net cash (provided by) used in investing
     activities ...............................      (10,387)           12           (12)       (1,257)        1,041       (10,603)
                                                    --------      --------      --------      --------      --------      --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net borrowings under revolving note payable.        8,424            --            --            --            --         8,424
   Payments on long-term obligations ..........         (351)           --            --            --            --          (351)
   Due to affiliates ..........................           --        (2,702)        1,183         2,560        (1,041)           --
                                                    --------      --------      --------      --------      --------      --------

     Net cash provided by (used in) financing
     activities ...............................        8,073        (2,702)        1,183         2,560        (1,041)        8,073
                                                    --------      --------      --------      --------      --------      --------

NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ...................................          (37)            8          (104)          215            --            82

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.          134            --           104         1,969            --         2,207
                                                    --------      --------      --------      --------      --------      --------

CASH AND CASH EQUIVALENTS, END OF PERIOD ......     $     97      $      8      $     --      $  2,184      $     --      $  2,289
                                                    ========      ========      ========      ========      ========      ========
</TABLE>


                                      F-30
<PAGE>   69


                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 30, 2000

                                   (CONTINUED)

<TABLE>
<CAPTION>
                                                                                          DECEMBER 30, 2000
                                                              ----------------------------------------------------------------------
                                                                              WHOLLY
                                                                              OWNED      NONGUARANTOR
                                                               COMPANY     SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS    CONSOLIDATED
                                                              --------     ------------  ------------   ------------    ------------
                                                                                            (IN THOUSANDS)

<S>                                                           <C>          <C>           <C>            <C>             <C>
CONSOLIDATING STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES .....................    $ (5,255)      $ (1,590)      $  2,115       $     61       $ (4,669)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property, plant and equipment .............      (7,022)            --         (1,720)            --         (8,742)
   Acquisitions, net of cash acquired ....................          --             --             --             --             --
   Advances to affiliates ................................         409             --          1,271         (1,680)            --
   Other investing activities ............................        (304)            --             --             --           (304)
                                                              --------       --------       --------       --------       --------
     Net cash used in investing activities ...............      (6,917)            --           (449)        (1,680)        (9,046)
                                                              --------       --------       --------       --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net borrowings under revolving note payable ...........      14,263             --             --             --         14,263
   Proceeds from issuance of long-term obligations .......       7,087             --             --             --          7,087
   Repurchase of 10 3/4% Series B Senior Notes due 2006...      (7,087)            --             --             --         (7,087)
   Redemption of Series A Preferred Stock ................      (1,000)            --             --             --         (1,000)
   Payments on long-term obligations .....................      (1,188)            --            (27)            --         (1,215)
   Due to affiliates .....................................          --          1,582         (3,201)         1,619             --
     Net cash provided by (used in) financing activities..      12,075          1,582         (3,228)         1,619         12,048
                                                              --------       --------       --------       --------       --------
     Effect of exchange rate changes on cash and cash
         equivalents .....................................          --             --            (44)            --            (44)

NET DECREASE IN CASH AND CASH EQUIVALENTS ................         (97)            (8)        (1,606)            --         (1,711)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...........          97              8          2,184             --          2,289
                                                              --------       --------       --------       --------       --------

CASH AND CASH EQUIVALENTS, END OF PERIOD .................    $     --       $     --       $    578       $     --       $    578
                                                              ========       ========       ========       ========       ========
</TABLE>


                                      F-31
<PAGE>   70

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 30, 2000

                                   (CONTINUED)



(19) QUARTERLY FINANCIAL INFORMATION

     The following is quarterly financial information (unaudited) for fiscal
     1999 and 2000.

<TABLE>
<CAPTION>
                                                                                       FISCAL 1999
                                                        ----------------------------------------------------------------------------
                                                        QUARTER ENDED   QUARTER ENDED   QUARTER ENDED   QUARTER ENDED
                                                           4/3/99          7/3/99          10/2/99          1/1/00        FULL YEAR
                                                        -------------   -------------   -------------   -------------     ---------
                                                                                     (IN THOUSANDS)

<S>                                                     <C>             <C>             <C>             <C>               <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
NET SALES ..........................................      $  41,481       $  45,616       $  38,496       $  25,087       $ 150,680
COST OF GOODS SOLD .................................         23,814          26,757          24,155          22,247          96,973
                                                          ---------       ---------       ---------       ---------       ---------

     Gross profit ..................................         17,667          18,859          14,341           2,840          53,707

SELLING EXPENSES ...................................         11,704          13,267          12,155           4,519          41,645

GENERAL AND ADMINSTRATIVE EXPENSES .................          4,466           4,571           4,572          11,463          25,072

RESTRUCTURING CHARGES AND GOODWILL

IMPAIRMENT LOSS ....................................             --              --              --           6,018           6,018
                                                          ---------       ---------       ---------       ---------       ---------

     Income (loss) from operations ...............          1,497           1,021          (2,386)        (19,160)        (19,028)

EQUITY IN LOSSES OF INVESTMENTS IN AFFILIATES ......             --              --              --              --              --

MINORITY INTEREST IN INCOME OF CONSOLIDATED

SUBSIDIARY .........................................             --              --              --             (91)            (91)

INTEREST EXPENSE ...................................         (2,342)         (2,679)         (2,657)         (2,572)        (10,250)

OTHER INCOME (EXPENSE), NET ........................            135            (152)             60             (63)            (20)
                                                          ---------       ---------       ---------       ---------       ---------

     Loss before income tax ........................           (710)         (1,810)         (4,983)        (21,886)        (29,389)

INCOME TAX (BENEFIT) EXPENSE .......................             --              --             (37)              1             (36)
                                                          ---------       ---------       ---------       ---------       ---------

     Net loss before dividends and accretion on
preferred Stock ....................................           (710)         (1,810)         (5,020)        (21,885)        (29,425)

DIVIDENDS AND ACCRETION ON PREFERRED STOCK .........            718             737             773             774           3,002
                                                          ---------       ---------       ---------       ---------       ---------

     Net loss applicable to common
 shareholders ......................................      $  (1,428)      $  (2,547)      $  (5,793)      $ (22,659)      $ (32,427)
                                                          =========       =========       =========       =========       =========
</TABLE>


                                      F-32
<PAGE>   71


                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 30, 2000

                                   (CONTINUED)


<TABLE>
<CAPTION>
                                                                                       FISCAL 2000
                                                        ----------------------------------------------------------------------------
                                                        QUARTER ENDED   QUARTER ENDED   QUARTER ENDED   QUARTER ENDED
                                                           4/1/00          7/1/00          9/30/00         12/30/00       FULL YEAR
                                                        -------------   -------------   -------------   -------------     ---------
                                                                                     (IN THOUSANDS)

<S>                                                     <C>             <C>             <C>             <C>               <C>
CONSOLIDATING STATEMENTS OF OPERATIONS
NET SALES .........................................      $  42,528       $  45,707       $  35,750       $  41,557       $ 165,542

COST OF GOODS SOLD ................................         23,581          25,529          21,600          25,879          96,589
                                                         ---------       ---------       ---------       ---------       ---------

     Gross profit .................................         18,947          20,178          14,150          15,678          68,953

SELLING EXPENSES ..................................         10,163          12,062           9,702          11,001          42,928

GENERAL AND ADMINSTRATIVE EXPENSES ................          5,870           4,539           4,346           2,971          17,726

RESTRUCTURING CHARGES AND GOODWILL
IMPAIRMENT LOSS ...................................          2,500              --              --              --           2,500
                                                         ---------       ---------       ---------       ---------       ---------

       Income from operations .....................            414           3,577             102           1,706           5,799

EQUITY IN LOSSES OF INVESTMENTS IN AFFILIATES .....             --              --              --             (56)            (56)

INTEREST EXPENSE ..................................         (2,597)         (2,851)         (3,041)         (2,440)        (10,929)

OTHER INCOME (EXPENSE), NET .......................             51              94              53              (6)            192
                                                         ---------       ---------       ---------       ---------       ---------

     (Loss) income before income tax ..............         (2,132)            820          (2,886)           (796)         (4,994)

INCOME TAX EXPENSE ................................             --             (43)            (35)            (48)           (126)
                                                         ---------       ---------       ---------       ---------       ---------

     Net (loss) income before extraordinary items .         (2,132)            777          (2,921)           (844)         (5,120)

Extraordinary gain, net of $6.3 million in taxes ..             --           4,429           4,409              --           8,838
                                                         ---------       ---------       ---------       ---------       ---------

     Net (loss) income before dividends and
accretion on preferred Stock ......................         (2,132)          5,206           1,488            (844)          3,718

DIVIDENDS AND ACCRETION ON PREFERRED STOCK ........            787             801             847             848           3,283
                                                         ---------       ---------       ---------       ---------       ---------

     Net (loss) income applicable to common
Shareholders ......................................      $  (2,919)      $   4,405       $     641       $  (1,692)      $     435
                                                         =========       =========       =========       =========       =========
</TABLE>


                                      F-33
<PAGE>   72


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders of AAi.FosterGrant, Inc. and Subsidiaries:

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. This schedule is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects, the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.


Boston, Massachusetts
March 27, 2001


                                      F-34
<PAGE>   73


                                   SCHEDULE II

                     AAI.FOSTERGRANT, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           ADDITIONS
                                          BALANCE AT      CHARGED TO
                                         BEGINNING OF      COSTS AND     DEDUCTIONS FROM                    BALANCE AT END
                                            PERIOD          EXPENSES       RESERVES(1)         OTHER          OF PERIOD
                                         ------------     ----------     ---------------      --------      --------------
<S>                                      <C>              <C>            <C>                  <C>           <C>
Accounts receivable -
  January 2, 1999 ...............          $10,338          $47,048          $48,711          $ 1,300(1)       $ 9,975
  January 1, 2000 ...............            9,975           50,809           47,980               --           12,804
  December 30, 2000 .............           12,804           33,153           41,131            4,545(3)         9,371

Restructuring reserve -
  January 2, 1999 ...............          $    --          $ 2,600          $ 1,947          $    --          $   654
  January 1, 2000 ...............              654               --              649               --                5
  December 30, 2000 .............                5            2,500              901               --            1,604
</TABLE>

(1)  Amounts deemed uncollectible.

(2)  Reserves related to accounts receivable acquired in acquisitions.

(3)  Reduction of reserves related to specific customers.