##### Table of Contents



---

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

|    |  |                                                                                        
|--- |  | ---------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|    |  | For the quarterly period ended May 3, 2003,                                            

OR

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|     |  | For the transition period from      to      .                                           

Commission file number 1-12814

COLE NATIONAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


|                                                                                       |  |                                     
|-------------------------------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                                               |  | 34-1453189                          
|(State or other jurisdiction of                                                        |  | (I.R.S. Employer Identification No.)
|incorporation or organization)                                                         |  |                                     
|                                                                                       |  |                                     
|5915 LANDERBROOK DRIVE
MAYFIELD HEIGHTS, OHIO
(Address of principal executive offices) |  | 44124
(Zip Code)                    

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [x] No [  ]

As of May 31, 2003, 16,321,481 shares of the registrants common stock
were outstanding.



---

---





---

TABLE OF CONTENTS



|                               |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | Item 1. Financial Statements                                                                 
|                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                               | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                               | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings                                                                    
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                    
|CERTIFICATION                 
|EXHIBIT INDEX                 
|Exhibit 10.1                  
|Exhibit 99.1                  



---



##### Table of Contents



COLE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MAY 3, 2003
INDEX

|                              |                                                                                               |                                                                                                          |  |          |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- |  | -------- | - | 
|                              |                                                                                               |                                                                                                          |  | Page No.
|PART I. FINANCIAL INFORMATION |                                                                                               |                                                                                                          |  |         
|                              | Item 1.
Financial Statements (unaudited)                                                      |                                                                                                          |  |          |  
|                              |                                                                                               | Condensed Consolidated Balance Sheets as of May 3, 2003, May 4, 2002 and
February 1, 2003                |  |          | 1 | 
|                              |                                                                                               | Condensed Consolidated Statements of Operations for the 13 week period ended
May 3, 2003 and May 4, 2002 |  |          | 2 | 
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows for the 13 week period ended
May 3, 2003 and May 4, 2002 |  |          | 3 | 
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                     |  |          | 4 | 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations |                                                                                                          |  | 11       |  
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                          |  | 18       |  
|                              | Item 4. Controls and Procedures                                                               |                                                                                                          |  | 18       |  
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                          |  |         
|                              | Item 1. Legal Proceedings                                                                     |                                                                                                          |  | 19       |  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                          |  | 19       |  
|                              | Signatures                                                                                    |                                                                                                          |  | 21       |  
|                              | Certifications                                                                                |                                                                                                          |  | 22       |  
|                              | Exhibit Index                                                                                 |                                                                                                          |  | 24       |  





---



##### Table of Contents






PART I - FINANCIAL INFORMATION




Item 1. Financial Statements

COLE NATIONAL CORPORATION AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)


|                                                                                                        |                                                                                 |                                   |         |          |         |        |         |             |         |  |         |          |         | 
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | --------------------------------- | ------- | -------- | ------- | ------ | ------- | ----------- | ------- |  | ------- | -------- | ------- | 
|                                                                                                        |                                                                                 |                                   |         | May 3,   |         | May 4, |         | February 1,
|                                                                                                        |                                                                                 |                                   |         | 2003     |         | 2002   |         | 2003       
|                                                                                                        |                                                                                 |                                   |         |          |         |        |         |            
|Assets                                                                                                  |                                                                                 |                                   |         |          |         |        |         |             |         |  |         |         
|Current assets:                                                                                         |                                                                                 |                                   |         |          |         |        |         |             |         |  |         |         
|                                                                                                        | Cash and cash equivalents                                                       |                                   | $       | 29,420   |         |        | $       | 62,438      |         |  | $       | 41,963   |        
|                                                                                                        | Accounts receivable, less allowances of
$3,396, $4,029 and $3,063, respectively |                                   |         | 54,672   |         |        |         | 45,903      |         |  |         | 50,544   |        
|                                                                                                        | Current portion of notes receivable                                             |                                   |         | 6,329    |         |        |         | 2,897       |         |  |         | 8,624    |        
|                                                                                                        | Inventories                                                                     |                                   |         | 134,055  |         |        |         | 127,674     |         |  |         | 120,684  |        
|                                                                                                        | Prepaid expenses and other                                                      |                                   |         | 24,165   |         |        |         | 27,866      |         |  |         | 24,016   |        
|                                                                                                        | Deferred income tax benefits                                                    |                                   |         | 31,383   |         |        |         | 27,326      |         |  |         | 31,333   |        
|                                                                                                        |                                                                                 |                                   |         |          |         |        |         |             |         |  |         |          |        
|                                                                                                        |                                                                                 | Total current assets              |         |          | 280,024 |        |         |             | 294,104 |  |         |          | 277,164 | 
|                                                                                                       
|Property and equipment, at cost                                                                         |                                                                                 |                                   | 329,715 |          |         |        | 309,970 |             |         |  | 318,914 |         
|                                                                                                        | Less - accumulated depreciation and amortization                                |                                   |         | (208,379 | )       |        |         | (189,070    | )       |  |         | (197,906 | )      
|                                                                                                        |                                                                                 |                                   |         |          |         |        |         |             |         |  |         |          |        
|                                                                                                        |                                                                                 | Total property and equipment, net |         |          | 121,336 |        |         |             | 120,900 |  |         |          | 121,008 | 
|                                                                                                       
|Notes receivable, excluding current portion, less allowances
of $3,058, $4,218 and $3,010, respectively |                                                                                 |                                   | 24,958  |          |         |        | 19,456  |             |         |  | 22,137  |         
|Deferred income taxes                                                                                   |                                                                                 |                                   | 34,634  |          |         |        | 27,199  |             |         |  | 31,905  |         
|Other assets                                                                                            |                                                                                 |                                   | 54,952  |          |         |        | 53,152  |             |         |  | 54,933  |         
|Other intangibles, net                                                                                  |                                                                                 |                                   | 50,654  |          |         |        | 45,992  |             |         |  | 50,903  |         
|Goodwill, net                                                                                           |                                                                                 |                                   | 85,708  |          |         |        | 85,549  |             |         |  | 85,557  |         
|                                                                                                        |                                                                                 |                                   |         |          |         |        |         |             |         |  |         |          |        
|                                                                                                        |                                                                                 | Total assets                      |         | $        | 652,266 |        |         | $           | 646,352 |  |         | $        | 643,607 | 
|                                                                                                        |                                                                                 |                                   |         |          |         |        |         |             |         |  |         |          |        
|Liabilities and Stockholders Equity                                                                    |                                                                                 |                                   |         |          |         |        |         |             |         |  |         |         
|Current liabilities:                                                                                    |                                                                                 |                                   |         |          |         |        |         |             |         |  |         |         
|                                                                                                        | Current portion of long-term debt                                               |                                   | $       | 5,235    |         |        | $       | 264         |         |  | $       | 232      |        
|                                                                                                        | Accounts payable                                                                |                                   |         | 70,990   |         |        |         | 66,657      |         |  |         | 67,579   |        
|                                                                                                        | Accrued interest                                                                |                                   |         | 8,496    |         |        |         | 7,376       |         |  |         | 8,199    |        
|                                                                                                        | Accrued liabilities                                                             |                                   |         | 99,958   |         |        |         | 97,246      |         |  |         | 92,096   |        
|                                                                                                        | Accrued income taxes                                                            |                                   |         | 5,265    |         |        |         | 8,443       |         |  |         | 4,957    |        
|                                                                                                        | Deferred revenue                                                                |                                   |         | 38,613   |         |        |         | 36,660      |         |  |         | 37,592   |        
|                                                                                                        |                                                                                 |                                   |         |          |         |        |         |             |         |  |         |          |        
|                                                                                                        |                                                                                 | Total current liabilities         |         |          | 228,557 |        |         |             | 216,646 |  |         |          | 210,655 | 
|                                                                                                       
|Long-term debt, net of discount and current portion                                                     |                                                                                 |                                   | 281,781 |          |         |        | 284,747 |             |         |  | 286,553 |         
|Other long-term liabilities                                                                             |                                                                                 |                                   | 42,053  |          |         |        | 23,420  |             |         |  | 41,587  |         
|Deferred revenue, long-term                                                                             |                                                                                 |                                   | 12,292  |          |         |        | 11,932  |             |         |  | 11,559  |         
|Stockholders equity                                                                                    |                                                                                 |                                   | 87,583  |          |         |        | 109,607 |             |         |  | 93,253  |         
|                                                                                                        |                                                                                 |                                   |         |          |         |        |         |             |         |  |         |          |        
|                                                                                                        | Total liabilities and stockholders equity                                      |                                   | $       | 652,266  |         |        | $       | 646,352     |         |  | $       | 643,607  |        
|                                                                                                        |                                                                                 |                                   |         |          |         |        |         |             |         |  |         |          |        

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

1



---



##### Table of Contents



COLE NATIONAL CORPORATION AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)


|                                          |                                  |                                                |         |                            |         |        |         |         |         | 
|----------------------------------------- | -------------------------------- | ---------------------------------------------- | ------- | -------------------------- | ------- | ------ | ------- | ------- | ------- | 
|                                          |                                  |                                                |         | Thirteen Week Period Ended
|                                          |                                  |                                                |         |                           
|                                          |                                  |                                                |         | May 3,                     |         | May 4,
|                                          |                                  |                                                |         | 2003                       |         | 2002  
|                                          |                                  |                                                |         |                            |         |       
|Net revenue                               |                                  | $                                              | 288,249 |                            |         | $      | 285,441 |        
|Costs and expenses:                       |                                  |                                                |         |                            |         |        |         |        
|                                          | Cost of goods sold               |                                                |         | 95,334                     |         |        |         | 93,129  |        
|                                          | Operating expenses               |                                                |         | 195,446                    |         |        |         | 183,934 |        
|                                          |                                  |                                                |         |                            |         |        |         |        
|                                          |                                  | Total costs and expenses                       |         |                            | 290,780 |        |         |         | 277,063 | 
|                                          |                                  |                                                |         |                            |         |        |         |        
|Operating income (loss)                   |                                  |                                                | (2,531  | )                          |         |        | 8,378   |        
|Interest and other (income) expense, net: |                                  |                                                |         |                            |         |        |         |        
|                                          | Interest expense                 |                                                |         | 6,388                      |         |        |         | 7,042   |        
|                                          | Interest and other (income), net |                                                |         | (907                       | )       |        |         | (1,553  | )      
|                                          |                                  |                                                |         |                            |         |        |         |        
|                                          |                                  | Total interest and other (income) expense, net |         |                            | 5,481   |        |         |         | 5,489   | 
|                                          |                                  |                                                |         |                            |         |        |         |        
|Income (loss) before income taxes         |                                  |                                                | (8,012  | )                          |         |        | 2,889   |        
|                                         
|Income tax provision (benefit)            |                                  |                                                | (1,601  | )                          |         |        | 2,023   |        
|                                          |                                  |                                                |         |                            |         |        |         |        
|Net income (loss)                         |                                  | $                                              | (6,411  | )                          |         | $      | 866     |        
|                                          |                                  |                                                |         |                            |         |        |         |        
|Earnings (loss) per share:                |                                  |                                                |         |                            |         |        |         |        
|                                          | Basic                            |                                                | $       | (0.39                      | )       |        | $       | 0.05    |        
|                                          | Diluted                          |                                                | $       | (0.39                      | )       |        | $       | 0.05    |        
|                                         
|Weighted average shares:                  |                                  |                                                |         |                            |         |        |         |        
|                                          | Basic                            |                                                |         | 16,304                     |         |        |         | 16,128  |        
|                                          | Diluted                          |                                                |         | 16,304                     |         |        |         | 16,588  |        

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

2



---



##### Table of Contents



COLE NATIONAL CORPORATION AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)


|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |        |        |        |        |  
|------------------------------------- | ---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------------- | ------ | -------------------------- | ------- | ------ | ------ | ------ | ------ | -
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        | Thirteen Week Period Ended
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                           
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        | May 3,                     |         | May 4,
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        | 2003                       |         | 2002  
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |       
|Cash flows from operating activities: |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |       
|                                      | Net income (loss)                                                                        |                                                                                           | $                                                                | (6,411                                               | )      |                            | $       | 866    |       
|                                      | Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |                                                                                           |                                                                  |                                                      |        |                            |         |        |       
|                                      |                                                                                          | Depreciation and amortization                                                             |                                                                  |                                                      | 9,275  |                            |         |        | 9,149  |       
|                                      |                                                                                          | Deferred income tax provision (benefit)                                                   |                                                                  |                                                      | (2,723 | )                          |         |        | 613    |       
|                                      |                                                                                          | Noncash compensation                                                                      |                                                                  |                                                      | 399    |                            |         |        | 608    |       
|                                      |                                                                                          | Noncash interest, foreign currency exchange (gains) losses and other, net                 |                                                                  |                                                      | (322   | )                          |         |        | (1,015 | )     
|                                      |                                                                                          | Increases (decreases) in cash resulting from changes in operating
assets and liabilities: |                                                                  |                                                      |        |                            |         |        |        |       
|                                      |                                                                                          |                                                                                           | Accounts and notes receivable, prepaid expenses and other assets |                                                      |        | (4,085                     | )       |        |        | (5,436 | )     
|                                      |                                                                                          |                                                                                           | Inventories                                                      |                                                      |        | (13,103                    | )       |        |        | (6,113 | )     
|                                      |                                                                                          |                                                                                           | Accounts payable, accrued liabilities and other liabilities      |                                                      |        | 24,032                     |         |        |        | 5,735  |       
|                                      |                                                                                          |                                                                                           | Accrued interest                                                 |                                                      |        | 297                        |         |        |        | 628    |       
|                                      |                                                                                          |                                                                                           | Accrued and refundable income taxes                              |                                                      |        | 194                        |         |        |        | (250   | )     
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |        |       
|                                      |                                                                                          |                                                                                           |                                                                  | Net cash provided by operating activities            |        |                            | 7,553   |        |        |        | 4,785  |  
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |        |       
|Cash flows from investing activities: |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |       
|                                      | Purchases of property and equipment                                                      |                                                                                           |                                                                  | (7,467                                               | )      |                            |         | (6,736 | )     
|                                      | Systems development costs                                                                |                                                                                           |                                                                  | (2,170                                               | )      |                            |         | (1,283 | )     
|                                      | Contingent
payments for and acquisition of businesses                                    |                                                                                           |                                                                  | (3,938                                               | )      |                            |         |       |       
|                                      | Other, net                                                                               |                                                                                           |                                                                  |                                                     |        |                            |         | 7      |       
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |        |       
|                                      |                                                                                          |                                                                                           |                                                                  | Net cash used for investing activities               |        |                            | (13,575 | )      |        |        | (8,012 | )
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |        |       
|Cash flows from financing activities: |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |       
|                                      | Repayment of long-term debt                                                              |                                                                                           |                                                                  | (57                                                  | )      |                            |         | (52    | )     
|                                      | Increase (decrease) overdraft balances                                                   |                                                                                           |                                                                  | (6,543                                               | )      |                            |         | 1,916  |       
|                                      | Net proceeds from exercise of stock options and issuance of stock                        |                                                                                           |                                                                  |                                                     |        |                            |         | 389    |       
|                                      | Other, net                                                                               |                                                                                           |                                                                  | 79                                                   |        |                            |         | (6     | )     
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |        |       
|                                      |                                                                                          |                                                                                           |                                                                  | Net cash (used for) provided by financing activities |        |                            | (6,521  | )      |        |        | 2,247  |  
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |        |       
|Cash and cash equivalents:            |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |       
|                                      | Net decrease during the period                                                           |                                                                                           |                                                                  | (12,543                                              | )      |                            |         | (980   | )     
|                                      | Balance, beginning of period                                                             |                                                                                           |                                                                  | 41,963                                               |        |                            |         | 63,418 |       
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |        |       
|                                      | Balance, end of period                                                                   |                                                                                           | $                                                                | 29,420                                               |        |                            | $       | 62,438 |       
|                                      |                                                                                          |                                                                                           |                                                                  |                                                      |        |                            |         |        |       

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

3



---



##### Table of Contents



COLE NATIONAL CORPORATION AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(1) Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include the accounts of
Cole National Corporation (the Parent), its wholly owned subsidiary, Cole
National Group, Inc. and its wholly owned subsidiaries (collectively referred
to as the Company). The Companys 21% investment in Pearle Europe B.V. is
accounted for using the cost method. All significant intercompany transactions
have been eliminated in consolidation.

Fiscal years end on the Saturday closest to January 31 and are identified
according to the calendar year in which they begin. For example, the fiscal
year ended February 1, 2003 is referred to as fiscal 2002. The current fiscal
year, which ends January 31, 2004, is referred to as fiscal 2003. Fiscal 2003
and fiscal 2002 each consists of 52 weeks.

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

Nature of Operations

The Company is a specialty service retailer operating in both host and
nonhost environments, whose primary lines of business are optical products and
services and personalized gifts. The Company sells its products through 2,476
company-owned retail locations and 465 franchised locations in 50 states,
Canada, and the Caribbean. In connection with its optical business, the Company
is a managed vision care benefits provider and claims payment administrator
whose programs provide comprehensive eyecare benefits primarily marketed
directly to large employers, health maintenance organizations (HMO) and other
organizations. The Company has two reportable segments: Cole Vision and Things
Remembered (see Note 5).

Use of Estimates

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

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

Reclassifications

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

Deferred Revenue

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

4



---



##### Table of Contents



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

|                   |                                  |  |        |         |        |  |             |         |   |  |   |         |  
|------------------ | -------------------------------- |  | ------ | ------- | ------ |  | ----------- | ------- | - |  | - | ------- | -
|                   |                                  |  | May 3, |         | May 4, |  | February 1,
|                   |                                  |  | 2003   |         | 2002   |  | 2003       
|                   |                                  |  |        |         |        |  |            
|Deferred revenues: |                                  |  |        |         |        |  |             |         |   |  |   |        
|                   | Beginning balance                |  | $      | 49,151  |        |  | $           | 46,450  |   |  | $ | 46,450  |  
|                   | Warranty contracts sold          |  |        | 14,782  |        |  |             | 14,434  |   |  |   | 53,023  |  
|                   | Amortization of deferred revenue |  |        | (13,028 | )      |  |             | (12,292 | ) |  |   | (50,322 | )
|                   |                                  |  |        |         |        |  |             |         |   |  |   |         |  
|                   | Ending balance                   |  | $      | 50,905  |        |  | $           | 48,592  |   |  | $ | 49,151  |  
|                   |                                  |  |        |         |        |  |             |         |   |  |   |         |  

Cash Flows

Net cash flows from operating activities reflect cash payments for income
taxes and interest of $800,000 and $5,806,000, respectively, for the 13 week
period ended May 3, 2003 and $1,542,000 and $6,217,000, respectively, for the
13 week period ended May 4, 2002.

Overdrafts resulting from outstanding checks at the end of each reporting
period are reclassified as current liabilities in either accounts payable or
accrued expenses from cash and cash equivalents. This reclassification to
accounts payable amounted to $18.1 million, $20.2 million and $28.4 million at
May 3, 2003, May 4, 2002 and February 1, 2003, respectively and to accrued
expenses amounted to $6.9 million, $7.0 million and $3.2 million at May 3,
2003, May 4, 2002 and February 1, 2003, respectively.

Earnings Per Common Share

Basic earnings per common share is computed by dividing net income
available to common shareholders by the weighted average number of common
shares outstanding for the periods presented. Diluted earnings per common share
also includes the dilutive effect of potential common shares (primarily
dilutive stock options) outstanding for the periods presented. The following
represents a reconciliation from basic earnings per share to diluted earnings
per share:

|                                                |                                                         |      |                            |        |        |   |        |        | 
|----------------------------------------------- | ------------------------------------------------------- | ---- | -------------------------- | ------ | ------ | - | ------ | ------ | 
|                                                |                                                         |      | Thirteen Week Period Ended
|                                                |                                                         |      |                           
|                                                |                                                         |      | May 3,                     |        | May 4,
|(In thousands, except per share amounts)        |                                                         | 2003 |                            | 2002  
|                                                |                                                         |      |                            |       
|Determination of shares:                        |                                                         |      |                            |        |        |   |        |       
|                                                | Average common shares outstanding                       |      |                            | 16,304 |        |   |        | 16,128 | 
|                                                | Assumed conversion of dilutive stock options and awards |      |                            |       |        |   |        | 460    | 
|                                                |                                                         |      |                            |        |        |   |        |        | 
|Diluted average common shares outstanding       |                                                         |      | 16,304                     |        |        |   | 16,588 |       
|                                                |                                                         |      |                            |        |        |   |        |        | 
|Basic earnings (loss) per common share          |                                                         | $    | (0.39                      | )      |        | $ | 0.05   |       
|Diluted earnings (loss) shares per common share |                                                         | $    | (0.39                      | )      |        | $ | 0.05   |       

Total Other Comprehensive Income (Loss)

Total other comprehensive income (loss) for the 13 week periods ended May
3, 2003 and May 4, 2002 is as follows (dollars in thousands):

|                                        |  |                            |        |        |  |   |     | 
|--------------------------------------- |  | -------------------------- | ------ | ------ |  | - | --- | 
|                                        |  | Thirteen Week Period Ended
|                                        |  |                           
|                                        |  | May 3,                     |        | May 4,
|                                        |  | 2003                       |        | 2002  
|                                        |  |                            |        |       
|Net income (loss)                       |  | $                          | (6,411 | )      |  | $ | 866 | 
|Cumulative translation income (loss)    |  |                            | 489    |        |  |   | 122 | 
|                                        |  |                            |        |        |  |   |     | 
|Total other comprehensive income (loss) |  | $                          | (5,922 | )      |  | $ | 988 | 
|                                        |  |                            |        |        |  |   |     | 

5



---



##### Table of Contents



Stock- Based Compensation

At May 3, 2003, the Company has various stock-based employee compensation
plans which are described more fully in Note 7 of the Notes to Consolidated
Financial Statements in the Companys 2002 Annual Report on Form 10-K. The
Company accounts for those plans in accordance with Accounting Principles Board
Opinion No. 25, Accounting For Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost for the Companys
various stock option plans is reflected in net income, as no options granted
under those plans had an exercise price less than the market value of the
underlying common stock on the date of grant.

The
following table illustrates the pro-forma effect on net income and earnings per
share of the Company had the Company applied the fair value recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation.

|                                                                                                                                             |             |      |                            |       |        |   |      |      | 
|-------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ---- | -------------------------- | ----- | ------ | - | ---- | ---- | 
|                                                                                                                                             |             |      | Thirteen Week Period Ended
|                                                                                                                                             |             |      |                           
|                                                                                                                                             |             |      | May 3,                     |       | May 4,
|(In thousands, except per share amounts)                                                                                                     |             | 2003 |                            | 2002 
|                                                                                                                                             |             |      |                            |      
|Net income (loss), as reported                                                                                                               |             | $    | (6,411                     | )     |        | $ | 866  |     
|Deductions
for total stock-based employee compensation expense determined
under fair value based method for all awards, net of related taxes |             |      | (446                       | )     |        |   | (501 | )   
|                                                                                                                                             |             |      |                            |       |        |   |      |     
|Net income (loss), pro forma                                                                                                                 |             | $    | (6,857                     | )     |        | $ | 365  |     
|                                                                                                                                             |             |      |                            |       |        |   |      |     
|Basic earnings (loss) per common share                                                                                                       |             |      |                            |       |        |   |      |     
|                                                                                                                                             | As reported |      | $                          | (0.39 | )      |   | $    | 0.05 | 
|                                                                                                                                             | Pro forma   |      | $                          | (0.42 | )      |   | $    | 0.02 | 
|Diluted earnings (loss) per common share                                                                                                     |             |      |                            |       |        |   |      |     
|                                                                                                                                             | As reported |      | $                          | (0.39 | )      |   | $    | 0.05 | 
|                                                                                                                                             | Pro forma   |      | $                          | (0.42 | )      |   | $    | 0.02 | 

Recently Issued Accounting Standards

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

The FASB has also issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). SFAS 143 provides guidance for legal obligations
arising from the retirement of long-lived assets. SFAS 143 was adopted in
fiscal 2003 and did not have a material effect on the Companys financial
position or operations.

In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires certain
variable interest entities, including certain special purpose entities, to be
consolidated by the primary beneficiary if the equity investors in the entity
do not have all the essential characteristics of a controlling financial
interest or do not have sufficient equity at risk. FIN 46 immediately applies
to entities created after January 31, 2003, and at the beginning of the
Companys 2003 third quarter for existing variable interest entities.
Management is still assessing the impacts of FIN 46 on its condensed
consolidated financial statements. However, it is reasonably possible that the
synthetic operating lease for the Highland Heights, Ohio facility will require
consolidation under FIN 46. The consolidation will require an additional $2.4
million in assets and liabilities on the consolidated balance sheet.

6



---



##### Table of Contents



In November 2002, the Emerging Issues Task Force of the FASB (EITF)
reached a consensus on Issue 02-16, Accounting by a Reseller for Cash
Consideration Received from a Vendor (Issue 02-16). Certain aspects of Issue
02-16 were effective in fiscal 2002, which were adopted and did not have a
significant impact on operations. The remaining portion of Issue 02-16 has been
adopted in fiscal 2003 and does not have a material effect on the Companys
financial position or operations.

(2) Goodwill and Other Intangible Assets

Goodwill and tradenames are tested at least annually for impairment and
are not amortized. All other intangible assets with finite lives are amortized
over their estimated useful economic lives based on managements estimates of
the period that the assets will generate revenue. Other intangible assets
consist of (dollars in thousands):

|                         |  |        |        |        |  |             |        |   |  |   |        |  
|------------------------ |  | ------ | ------ | ------ |  | ----------- | ------ | - |  | - | ------ | -
|                         |  | May 3, |        | May 4, |  | February 1,
|                         |  | 2003   |        | 2002   |  | 2003       
|                         |  |        |        |        |  |            
|Tradename                |  | $      | 49,460 |        |  | $           | 49,460 |   |  | $ | 49,460 |  
|Noncompete agreements    |  |        | 320    |        |  |             | 840    |   |  |   | 840    |  
|Contracts                |  |        | 8,847  |        |  |             | 3,460  |   |  |   | 8,847  |  
|Customer records         |  |        | 9      |        |  |             |       |   |  |   |       |  
|                         |  |        |        |        |  |             |        |   |  |   |        |  
|                         |  |        | 58,636 |        |  |             | 53,760 |   |  |   | 59,147 |  
|Accumulated amortization |  |        | (7,982 | )      |  |             | (7,768 | ) |  |   | (8,244 | )
|                         |  |        |        |        |  |             |        |   |  |   |        |  
|Other intangibles, net   |  | $      | 50,654 |        |  | $           | 45,992 |   |  | $ | 50,903 |  
|                         |  |        |        |        |  |             |        |   |  |   |        |  

During the first quarter of fiscal 2003, the Company purchased the
operations of three Sears Optical departments in California for a total
purchase price of $242,500. The amount allocated to the tangible fixed assets
acquired including exam equipment and inventory was $29,500. The remainder of
the purchase price was allocated to intangible assets under the provisions of
Statement of Financial Accounting Standards No. 141, Business Combinations.
Goodwill related to this transaction was $124,000 and noncompete agreements and
customer records totaled $89,000. The decreases in the carrying
amounts of noncompete agreements and accumulated amortization for the
quarter ended May 3, 2003, reflect the write-off of a $600,000
agreement that had expired and was fully amortized. The additional change in the carrying amount
of goodwill was due to foreign currency translation at Cole Vision. The net
carrying amount of goodwill at May 3, 2003, by business segment was $64.3
million at Cole Vision and $21.4 million at Things Remembered.

(3) Long-Term Debt

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

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

The 8-5/8% notes and the 8-7/8% notes are general unsecured obligations of
Cole National Group, subordinated in right of payment to senior indebtedness of
Cole National Group and senior in right of payment to any current or future
subordinated indebtedness of Cole National Group. The indentures pursuant to
which the 8-5/8% notes and the 8-7/8% notes were issued restrict dividend
payments to the Company. The indentures also contain certain optional and
mandatory redemption features and other financial covenants.

On April 23, 1999, the Company issued a $10.0 million promissory note
bearing interest at 5.0% per annum in recognition of a commitment to contribute
$10.0 million to a leading medical institution, supporting the development of a
premier eye care research and surgical facility. The note requires a $5.0
million principal payment to be made on April 23, 2004, and principal payments
in the amount of $1.0 million to be made on the anniversary date of the note
each successive year through 2009. Interest only is payable annually for the
first 5 years, and thereafter with each payment of principal.

The Company has no significant principal payment obligations under its
outstanding indebtedness until the $5.0 million principal payment due in 2004
under the 5.0% promissory note and until 2007, when the $125.0 million Senior
Subordinated debt is due.

7



---



##### Table of Contents



During the third quarter of fiscal 2002, the Company entered into interest
rate swap agreements to take advantage of favorable market interest rates.
These agreements require the Company to pay an average floating interest rate
based on six-month LIBOR plus 4.5375% to a counter party while receiving a
fixed interest rate on a portion of the Companys $125.0 million 8-5/8% Senior
Subordinated Notes due 2007. The counter party is a major commercial bank. The
agreements mature August 15, 2007 and qualify as fair value hedges. The
aggregate notional amount of the interest rate swap agreements is $50.0
million. At May 3, 2003, the floating rate of swaps was approximately 5.8% and
the fair value of the swap agreements was an unrealized gain of approximately
$1.1 million. There was no impact to earnings in the first three months of
fiscal 2003 due to hedge ineffectiveness.

(4) Credit Facility

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

The credit facility requires the principal operating subsidiaries of Cole
National Group to comply with various operating covenants that restrict
corporate activities, including covenants restricting the ability of the
subsidiaries to incur additional indebtedness, pay dividends, prepay
subordinated indebtedness, dispose of certain investments or make acquisitions.
The credit facility also requires the subsidiaries of Cole National Group to
comply with certain financial covenants, including covenants regarding interest
coverage and maximum leverage. On November 25, 2002 the Company received a
waiver from the lenders under the credit facility, which expired on December
31, 2002 associated with the restatement of the financial statements. On
December 19, 2002 the credit agreement was amended to accommodate the
anticipated changes due to the restatement. The Company received a waiver dated
May 9, 2003 of the maximum leverage coverage test for the fiscal year end 2002
and the first quarter of fiscal 2003. During the waiver period the maximum
leverage test was adjusted to accommodate the effect of the restatement on the
Companys financial statements. This waiver will expire on June 30, 2003. The
Company is in compliance with the covenants in the credit agreement and has met
the waiver conditions. The Company expects to complete a permanent amendment to
the credit agreement on or before June 30, 2003. However, there is no assurance
that the Company will be successful in its effort to complete such an
amendment. The Company believes that even if it is unsuccessful in its effort
to complete such an amendment, it will have sufficient liquidity from internal
and other external sources.

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

As of May 3, 2003, the total availability under the credit facility
totaled $63.5 million after reduction for commitments outstanding under letters
of credit. There were no working capital borrowings under the credit facility
outstanding as of May 3, 2003 and May 4, 2002 and there were no borrowings
during the first quarter of fiscal 2003 and fiscal 2002.

(5) Segment Information

Information on the Companys reportable segments is as follows (dollars in
thousands):

8



---



##### Table of Contents



|                         |                                          |                                |   |                            |         |        |   |         |         | 
|------------------------ | ---------------------------------------- | ------------------------------ | - | -------------------------- | ------- | ------ | - | ------- | ------- | 
|                         |                                          |                                |   | Thirteen Week Period Ended
|                         |                                          |                                |   |                           
|                         |                                          |                                |   | May 3,                     |         | May 4,
|                         |                                          |                                |   | 2003                       |         | 2002  
|                         |                                          |                                |   |                            |         |       
|Net revenue:             |                                          |                                |   |                            |         |        |   |        
|                         | Cole Vision                              |                                | $ | 233,541                    |         |        | $ | 232,970 |        
|                         | Things Remembered                        |                                |   | 54,708                     |         |        |   | 52,471  |        
|                         |                                          |                                |   |                            |         |        |   |         |        
|                         |                                          | Total net revenue              |   | $                          | 288,249 |        |   | $       | 285,441 | 
|                         |                                          |                                |   |                            |         |        |   |         |        
|Operating income (loss): |                                          |                                |   |                            |         |        |   |        
|                         | Cole Vision                              |                                | $ | 9,276                      |         |        | $ | 13,291  |        
|                         | Things Remembered                        |                                |   | (2,580                     | )       |        |   | (1,839  | )      
|                         |                                          |                                |   |                            |         |        |   |         |        
|                         |                                          | Total segment operating income |   |                            | 6,696   |        |   |         | 11,452  | 
|                         | Unallocated amounts:                     |                                |   |                            |         |        |   |         |        
|                         |                                          | Corporate expenses             |   |                            | 9,227   |        |   |         | 3,074   | 
|                         |                                          |                                |   |                            |         |        |   |         |        
|                         | Total operating income (loss)            |                                |   | (2,531                     | )       |        |   | 8,378   |        
|                         | Interest and other (income) expense, net |                                |   | 5,481                      |         |        |   | 5,489   |        
|                         |                                          |                                |   |                            |         |        |   |         |        
|                         | Income (loss) before income taxes        |                                | $ | (8,012                     | )       |        | $ | 2,889   |        
|                         |                                          |                                |   |                            |         |        |   |         |        

(6) Commitments and Contingencies

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

The Company guarantees future minimum lease payments for certain store
locations leased directly by franchisees. These guarantees totaled
approximately $13.6 million, $14.2 million and $13.8 million as of May 3, 2003,
May 4, 2002 and February 1, 2003. Performance under a guarantee by the Company
is triggered by default of a franchisee in their lease commitment. Generally,
these guarantees also extend to payments of taxes and other normal expenses
payable under these leases, the amounts of which are not readily quantifiable.

Agreements between HAL Holding N.V. (HAL), the Company and members of
Pearle Europe management require HAL and the Company to periodically offer to
purchase Pearle Europe shares held by the members of Pearle Europe Management.
These offers are required to be made (1) not later than September 3, 2003, (2)
in May 2005, and (3) biannually in May commencing in 2007. The obligations to
fund the purchase of any shares as to which the offer to purchase is accepted
are pro rata to HAL and to the Company based on their respective ownership
interests on the date of the offer. HAL and the Company have not yet agreed on
the price to offer this year or on the process to agree to the price or on the
source of funding for any purchases. Funds could be derived from payments by
Pearle Europe, from the separate resources of HAL and the Company, or from
financings. In the event that all of Pearle Europes managers who are entitled
to receive an offer to purchase their shares were to accept that offer, the
resulting obligation to the Company could be material. The Company
believes that it will have sufficient liquidity to meet the obligation, if any,
that may result from its commitment in fiscal 2003.

(7) Subsequent Events

The Company is in the process of settling a class action lawsuit alleging
claims for various violations of federal securities laws related to the
Companys publicly reported revenues and earnings. The action, which pleaded
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1993
named the Company and certain present and former officers and directors as
defendants, sought unspecified compensatory damages, punitive damages where
appropriate, costs, expenses and attorneys fees. On May 30, 2003, the Company
and attorneys for the plaintiffs have executed a memorandum of understanding
for a settlement to resolve the lawsuit. The settlement is subject to court
approval. A charge of $2,687,500 was recorded in the first quarter of fiscal
2003.

9



---



##### Table of Contents



The Company announced on June 4, 2003 that the Companys President and
Chief Operating Officer will become President and Chief Executive Officer at
the annual meeting of shareholders on June 25, 2003. The Companys President
and Chief Operating Officer succeeds the Companys Chairman and Chief Executive
Officer, who will retire. The Company anticipates fulfilling its obligations
to the Chairman and Chief Executive Officer under his employment agreement and
for retirement and life insurance benefits. The Company estimates that these
obligations will require a one-time lump sum cash payment in the range of $11.5
million to $15.0 million, with an impact on net income in the second quarter of
fiscal 2003 in the range of $5.0 million to $7.5 million. The actual amount of
the obligations and their impact may differ materially at the conclusion of
pending negotiations with the Companys Chairman and Chief Executive Officer.

(8) Legal Proceedings

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

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

Cole National Corporation is defending a purported class action lawsuit
alleging claims for various violations of federal securities laws related to
the Companys publicly reported revenues and earnings. The action, which
pleaded claims under Section 10(b) and 20(a) of the Securities Exchange Act of
1934, and named the Company and certain present and former officers and
directors as defendants, seeks unspecified compensatory damages, punitive
damages where appropriate, costs, expenses and attorneys fee. Subsequent to
the first quarter of fiscal 2003, the Company and attorneys for the plaintiffs
have executed a memorandum of understanding for a settlement to resolve the
lawsuit. The settlement is subject to Court approval. A charge of $2,687,500
was recorded in the first quarter of 2003 with respect to the Companys portion
of the settlement.

Following the Companys announcement in November 2002 of the
restatement of the Companys financial statements, the Securities and Exchange
Commission began an inquiry into the Companys previous accounting. The course
of this investigation or further litigation or investigations arising out of
the restatement of the Companys financial statements cannot be predicted. In
addition, under certain circumstances the Company would be obliged to indemnify
the individual current and former directors and officers who are named as
defendants in litigation or who are or become involved in an investigation. The
Company believes it has insurance that should be available with respect to
litigation and any indemnification obligations. However, if the Company is
unsuccessful in defending against any such litigation, and if its
insurance coverage is not available or is insufficient to cover its expenses,
indemnity obligations and liability, if any, the litigation and/or
investigation may have a material adverse effect on the Companys financial
condition, cash flow and results of operations.

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

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

10



---



##### Table of Contents






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

Overview

Cole National Corporation, primarily through the subsidiaries owned by its
direct subsidiary, Cole National Group, Inc., is a leading provider of optical
products and services and personalized gifts. The Company sells its products
and services through 2,476 company-owned retail locations and 465 franchised
locations in 50 states, Canada and the Caribbean.

Fiscal years end on the Saturday closest to January 31 and are identified
according to the calendar year in which they begin. For example, the fiscal
year ended February 1, 2003 is referred to as fiscal 2002. The current fiscal
year, which ends January 31, 2004, is referred to as fiscal 2003. Fiscal 2003
and fiscal 2002 each consists of 52 weeks.

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

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

11



---



##### Table of Contents



Results of Operations

The following schedule sets forth certain operating information for the
first quarters of fiscal 2003 and fiscal 2002. This schedule and subsequent
discussions should be read in conjunction with the condensed consolidated
financial statements included in this Form 10-Q.

|                                                    |                               |                               |   |                       |       |        |   |       |       |  |  |       |        |   
|--------------------------------------------------- | ----------------------------- | ----------------------------- | - | --------------------- | ----- | ------ | - | ----- | ----- |  |  | ----- | ------ | --
|                                                    |                               |                               |   | First Quarter         |       | Change
|                                                    |                               |                               |   |                       |       |       
|                                                    |                               |                               |   | 2003                  |       | 2002   |   |       |       | 
|                                                    |                               |                               |   |                       |       |        |   |       |       | 
|                                                    |                               |                               |   | (Dollars in millions) |       |        |   |      
|Net revenue:                                        |                               |                               |   |                       |       |        |   |       |       |  |  |      
|                                                    | Cole Vision                   |                               | $ | 233.5                 |       |        | $ | 232.9 |       |  |  | 0.2   | %     
|                                                    | Things Remembered             |                               |   | 54.7                  |       |        |   | 52.5  |       |  |  | 4.3   |       
|                                                    |                               |                               |   |                       |       |        |   |       |       |  |  |      
|                                                    |                               | Total net revenue             |   | $                     | 288.2 |        |   | $     | 285.4 |  |  |       | 1.0    | % 
|Gross margin:                                       |                               |                               |   |                       |       |        |   |       |       |  |  |      
|                                                    | Cole Vision                   |                               | $ | 153.2                 |       |        | $ | 153.7 |       |  |  | (0.3  | )%    
|                                                    | Things Remembered             |                               |   | 39.7                  |       |        |   | 38.6  |       |  |  | 2.7   |       
|                                                    |                               |                               |   |                       |       |        |   |       |       |  |  |      
|                                                    |                               | Total gross margin            |   | $                     | 192.9 |        |   | $     | 192.3 |  |  |       | 0.3    | % 
|                                                   
|Operating expenses:                                 |                               |                               |   |                       |       |        |   |       |       |  |  |      
|                                                    | Cole Vision                   |                               | $ | 143.9                 |       |        | $ | 140.4 |       |  |  | 2.5   | %     
|                                                    | Things Remembered             |                               |   | 42.3                  |       |        |   | 40.4  |       |  |  | 4.4   |       
|                                                    | Unallocated
corporate expense |                               |   | 9.2                   |       |        |   | 3.1   |       |  |  | 200.2 |       
|                                                    |                               | Total operating expenses      |   | $                     | 195.4 |        |   | $     | 183.9 |  |  |       | 6.3    | % 
|                                                   
|Operating income (loss):                            |                               |                               |   |                       |       |        |   |       |       |  |  |      
|                                                    | Cole Vision                   |                               | $ | 9.3                   |       |        | $ | 13.3  |       |  |  | (30.2 | )%    
|                                                    | Things Remembered             |                               |   | (2.6                  | )     |        |   | (1.8  | )     |  |  | 40.3  |       
|                                                    | Unallocated
corporate expense |                               |   | (9.2                  | )     |        |   | (3.1  | )     |  |  | 200.2 |       
|                                                    |                               |                               |   |                       |       |        |   |       |       |  |  |      
|                                                    |                               | Total operating income (loss) |   | $                     | (2.5  | )      |   | $     | 8.4   |  |  |       | (130.2 | )%
|                                                    |                               |                               |   |                       |       |        |   |       |       |  |  |      
|Percentage of net revenue:                          |                               |                               |   |                       |       |        |   |       |       |  |  |      
|                                                    | Gross margin                  |                               |   | 66.9                  | %     |        |   | 67.4  | %     |  |  | (0.5  | )     
|                                                    | Operating expenses            |                               |   | 67.8                  |       |        |   | 64.4  |       |  |  | 3.4   |       
|                                                    | Operating income (loss)       |                               |   | (0.9                  | )%    |        |   | 2.9   | %     |  |  | (3.8  | )     
|                                                   
|Number of retail locations at the end of the period |                               |                               |   |                       |       |        |   |       |       |  |  |      
|                                                    | Cole Licensed Brands          |                               |   | 1,321                 |       |        |   | 1,286 |       |  |  |       |       
|                                                    | Pearle company-owned          |                               |   | 394                   |       |        |   | 422   |       |  |  |       |       
|                                                    | Pearle franchised             |                               |   | 465                   |       |        |   | 442   |       |  |  |       |       
|                                                    |                               |                               |   |                       |       |        |   |       |       |  |  |      
|                                                    |                               | Total Cole Vision             |   |                       | 2,180 |        |   |       | 2,150 |  |  |       |        |   
|                                                    | Things Remembered             |                               |   | 761                   |       |        |   | 776   |       |  |  |       |       
|                                                    |                               |                               |   |                       |       |        |   |       |       |  |  |      
|                                                    |                               | Total Cole National           |   |                       | 2,941 |        |   |       | 2,926 |  |  |       |        |   
|                                                    |                               |                               |   |                       |       |        |   |       |       |  |  |      

As used in Item 2 of this Form 10-Q, same-store sales growth is a non-GAAP
financial measure, which includes deferred warranty sales on a cash basis and does not reflect provisions for returns
and remakes and certain other items. The Companys current systems do not
gather data on these items on an individual store basis. Adjustments to the
cash basis sales information accumulated at the store level are made for these
items on an aggregate basis. As a retailer, the Company believes that a measure
of same-store sales performance is important for understanding its operations.
The Company calculates same store sales for stores opened for at least twelve
months. A reconciliation of same-store sales to revenue is presented in the
section Reconciliation of Same-Store Sales Growth. Same-store sale growth
follows:

12



---



##### Table of Contents



|                               |                     |  |               |      |   
|------------------------------ | ------------------- |  | ------------- | ---- | --
|                               |                     |  | First Quarter
|                               |                     |  |              
|Cole Licensed Brands (U.S.)    |                     |  | 0.0           | %   
|Pearle company-owned (U.S.)    |                     |  | (2.9          | )%  
|                               | Total Cole Vision   |  |               | (1.2 | )%
|Things Remembered              |                     |  | 1.9           | %   
|                               | Total Cole National |  |               | (0.6 | )%
|Pearle franchise stores (U.S.) |                     |  | (3.2          | )%  

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

First Quarter Fiscal 2003 Compared to First Quarter Fiscal 2002

Consolidated Operations

Total revenues were $288.2 million in the first quarter of fiscal 2003,
compared with $285.4 million in the same period of fiscal 2002. Total revenues
increased 1.0% in the first quarter of fiscal 2003, primarily attributable to a
slight increase in revenues at Cole Licensed Brands, a 1.9% increase in same
store sales at Things Remembered and increases in revenues from managed vision
care programs, offset by lower revenues at Pearle Vision. The increase in Cole
Licensed Brands revenues was primarily attributable to a 15.3% same store sales
increase at Target Optical.

Gross margin was $192.9 million in the first quarter of fiscal 2003,
compared with $192.3 million in the same period of fiscal 2002, an increase of
0.3%. The gross margin dollar increase was primarily attributable to higher
revenues at Things Remembered. The gross margin rate for the first quarter of
fiscal 2003 was 66.9%, compared to 67.4% for the first quarter of fiscal 2002.
The gross margin rate at Cole Vision decreased 0.3% from the same period last
year (further discussion is included in the Cole Vision segment). The gross
margin rate at Things Remembered decreased by 1.1%, due primarily to lower gift
personalization and higher freight costs associated with an increase in
customer orders fulfilled by centralized distribution.

Operating expenses were $195.4 million in the first quarter of fiscal
2003, compared with $183.9 million in the same period of fiscal 2002, an
increase of 6.3%. Expenses to support managed vision care programs were $3.5
million higher in the first quarter of fiscal 2003 to support increases in
capitated revenues and increased benefit utilization in capitated programs, net
of reductions in claims processing costs. Settlement costs related to the class
action lawsuit alleging claims of various violations of federal securities laws
related to the Companys publicly reported revenues and earnings totaled $2.7
million. The action, which pleaded claims under Sections 10(b) and 20(a) of the
Securities and Exchange Act of 1993 named the Company and certain present and
formers officers and directors as defendants. A memorandum of understanding for
the settlement was executed on May 30, 2003. The Company incurred charges of
$1.7 million in the first quarter of fiscal 2003 for outside audit fees related
to the reaudit of its restated financial statements for fiscal 2001 and 2000.
In addition, the Company incurred charges of $1.7 million for legal and
professional fees related to the reaudit and restatement. The Company incurred
$0.9 million in incremental fringe benefits costs in the first quarter of
fiscal 2003 compared to the first quarter of fiscal 2002 primarily due to
health care costs. Workers compensation expense increased $0.5 million in the
first quarter of fiscal 2003, compared to the same period of fiscal 2002,
primarily at Things Remembered. The increase was due to higher estimated
workers compensation obligations utilizing loss development factors prepared by
independent third party actuaries. Things Remembered incurred incremental
expenses of $1.0 million for marketing and $0.4 million in store rent and
occupancy costs in the first quarter of fiscal 2003, compared to the same
period last year. In addition, Things Remembered recorded higher payroll costs
in the first quarter of fiscal 2003, compared to the same period last year to
support higher revenues and also due to increased payroll hours to comply with
state statutory requirements. Partially offsetting expense increases
were savings from reduced bonus expense, work force reductions and a decrease in travel
expenses. In addition, the first quarter of 2002 included charges of
$1.0 million for the closure of 12 Target Optical stores.

Operating loss was $2.5 million in the first quarter of fiscal 2003,
compared to operating income of $8.4 million in the same period of fiscal
2002. The increases in expenses to support managed vision care programs, the
costs related to the settlement of the class action lawsuit, higher corporate
expenses due to the restatement and reaudit of the fiscal 2000 and 2001
financial statements, higher costs of fringe benefits and workers compensation,
as well as increased costs of occupancy were the primary reasons for the
decrease in operating results.

Interest and other (income) expense, net, was $5.5 million for the first
quarter of fiscal 2003, compared to $5.5 million for the same period of fiscal
2002. The Company recorded lower interest expense, primarily due to replacement
of the $150.0 million 9-

13



---



##### Table of Contents



7/8% Senior Subordinated Notes with the issuance of
8-7/8% Senior Subordinated Notes in May 2002 and the impact of the interest
rate swap agreements. See Note 3 of the Notes to Condensed Consolidated Financial
Statements. The lower interest expense was offset by a lower foreign currency
gain recorded in the first quarter of fiscal 2003. The Company recorded a
foreign currency gain of $0.1 million related to its investment in notes and
interest receivable from Pearle Europe in the first quarter of fiscal 2003.
This compared to a foreign currency gain of $0.7 million for the same period of
fiscal 2002.

The
Company recorded a tax benefit based on its estimated annual
effective rate of 20%. The estimated lower effective tax rate in fiscal 2003 is
primarily due to the expected full year results and certain nondeductible
expenses.

Cole Vision Segment

Cole Vision revenues were $233.5 million in the first quarter of fiscal
2003, compared with $232.9 million in the same period of fiscal 2002, an
increase of 0.2%. The revenue increase was primarily due to increased revenues
at Cole Licensed Brands and increased revenues from managed vision care
programs. The increase in Cole Licensed Brands revenues was primarily
attributable to a 15.3% increase in same store sales at Target Optical.
Revenues from managed vision care programs were higher primarily due to an
increase in the number of capitated plans sold to employees, health plans and
associations and due to program changes in laser vision correction resulting in
higher billing and administrative service revenues per procedure. Same-store sales for the first quarter of fiscal
2003 were flat at Cole Licensed Brands and decreased 2.9% at Pearle Vision
company-owned stores. Same-store sales at Pearle Vision reflected a decrease in
the number of transactions partially offset by an increase in the average
transaction size. The difficult economy and a strong first quarter sales
performance last year were the principal reasons for the decrease. Last year
Pearle Vision company-owned stores recorded a 10.6% same store sales increase
in the first quarter of fiscal 2002.

Gross margin was $153.2 million in the first quarter of fiscal 2003,
compared to $153.7 million in the same period last year, a decrease of 0.3%.
Gross margin, as a percentage of net revenues, decreased by 0.3 percentage
points at Cole Vision. Pearle Vision gross margin was impacted by an
increase in promotional discounts, higher lens costs due to a change in sales
mix to higher-end product and an increase in product sold to Pearle
franchisees. Partially offsetting these factors were the increase in average
spectacle selling price. Product sales to franchisees carry a lower margin but
offer benefits for the Company, including producing a more uniform merchandise
assortment and consistent brand look across all stores. Gross margin was also
negatively impacted by increased workers compensation expense in the lab
facilities, resulting in an incremental charge of $0.2 million. The increase
was due primarily to higher estimated workers compensation obligations. The
decline in gross margin rate was offset by increased revenues from managed
vision care programs and improvements at Cole Licensed Brands. At Cole Licensed
Brands, the gross margin rate increased due to an increase in the average
selling price, higher warranty sales and increased multi-pair sales. These
improvements were partially offset by an increase in paid-time-off (PTO)
expense at four labs due to a change in the PTO policy implemented in the third
quarter of fiscal 2002, which resulted in incremental expense of $0.2 million.

Operating expenses were $143.9 million in the first quarter of fiscal
2003, compared to $140.4 million for the same period last year, an increase of
2.5%. Operating expenses as a percent of net revenues increased at Cole Vision
by 1.4% in the first quarter of fiscal 2003, compared to the same period of
fiscal 2002. Expenses to support managed vision care programs were $3.5 million
higher in the first quarter of fiscal 2003 to support increases in capitated
revenues and increased benefit utilization in capitated programs, net of
reductions in claims processing costs. Fringe benefits costs increased $0.6
million in the first quarter of fiscal 2003, compared to the same period last
year. Partially offsetting expense increases
were savings from reduced bonus expense and work force reductions. Partially offsetting expense increases
were savings from reduced bonus expense, work force reductions and a decrease in travel
expenses. In addition, the first quarter of 2002 included charges of
$1.0 million for the closure of 12 Target Optical stores.

Operating income at Cole Vision decreased to $9.3 million in the first
quarter of fiscal 2003, compared to $13.3 million in the same period of fiscal
2002. Increased expenses to support managed vision care programs, the decrease
in gross margin rate at Pearle Vision, and increased costs of fringe benefits
were the primary reasons for the decrease.

Things Remembered Segment

Things Remembered sales were $54.7 million in the first quarter of fiscal
2003, compared with $52.5 million in the same period of fiscal 2002, a 4.3%
increase. The same-store sales increase of 1.9% and a 30% increase in direct
channel revenues were the primary reasons for the increase. Direct channel
revenues include revenues from its e-commerce site, www.ThingsRemembered.com,
revenues from Things Remembered catalogs and through affiliate programs direct
to businesses.

Gross margin was $39.7 million in the first quarter of fiscal 2003,
compared to $38.6 million for the same period last year, an increase of 2.7%.
Gross margin as a percent of revenues decreased 1.1% in the first quarter of
fiscal 2003 compared to the same

14



---



##### Table of Contents



period of fiscal 2002, primarily from lower
gift personalization and higher freight costs associated with an increase in
customer orders fulfilled by centralized distribution.

Operating expenses were $42.3 million in the first quarter of fiscal 2003,
compared to $40.4 million for the same period last year, an increase of 4.4%.
Operating expenses as a percent of revenues increased 0.1% in the first quarter
of fiscal 2003 compared to the same period of fiscal 2002. Things Remembered
incurred incremental marketing costs of $1.0 million in the first quarter of
fiscal 2003, compared to the same period last year. The increase was
attributable to increased radio and direct mail advertising to support the
increase in net revenues. Store rent and occupancy charges increased $0.4
million primarily due to higher rent and occupancy costs associated with a
higher mix of inline mall locations than kiosks. Inline mall locations
generally incur higher rent and occupancy costs than kiosks due to higher
square footage requirements. Things Remembered recorded higher payroll costs in
the first quarter of fiscal 2003, compared to the same period last year to
support higher revenues and also due to increased payroll hours to comply with
state statutory requirements. Workers compensation expense increased $0.4
million in the first quarter of fiscal 2003, compared to the same period last
year. The increase was due to higher estimated workers compensation obligations
utilizing loss development factors prepared by independent third party
actuaries. Things Remembered also incurred severance costs related to a senior
executive in the first quarter of fiscal 2003. Partially offsetting the expense
increases were savings from work force reductions and a decrease in travel
expenses.

Operating loss for the first quarter of fiscal 2003 was $2.6 million
compared to a loss of $1.8 million in the same period of fiscal 2002. The lower
gross margin rate, higher costs of marketing, store rent and occupancy, workers
compensation and payroll costs offset the increase in revenues.

Reconciliation of Same-Store Sales Growth

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

|                              |                                |             |         |                |         | 
|----------------------------- | ------------------------------ | ----------- | ------- | -------------- | ------- | 
|                              |                                |             |         | 2003          
|                              |                                |             |         | First Quarter 
|                              |                                |             |         |               
|                              |                                |             |         | (In thousands)
|Current year same-store sales |                                | $           | 251,911 |               
|Prior year same-store sales   |                                |             | 253,349 |               
|Percent change                |                                |             | (0.6    | )%            
|Current year same-store sales |                                | $           | 251,911 |               
|Adjustment for:               |                                |             |         |               
|                              | Sales at new and closed stores |             |         | 5,090          |        
|                              | Extended warranties            |             |         | (1,754         | )      
|                              | Order vs. customer receipt     |             |         | (2,026         | )      
|                              | Returns, remakes and refunds   |             |         | (249           | )      
|                              | Other                          |             |         | (138           | )      
|                              |                                |             |         |               
|                              |                                | Store sales |         |                | 252,834 | 
|Nonstore revenues             |                                |             | 43,989  |               
|Intercompany eliminations     |                                |             | (8,574  | )             
|                              |                                |             |         |               
|GAAP Basis Net Revenue        |                                | $           | 288,249 |               
|                              |                                |             |         |               

Liquidity and Capital Resources

Cole National Corporations primary source of liquidity is funds provided
from operations of its operating subsidiaries. In addition, its wholly owned
subsidiary, Cole National Group, Inc., and its operating subsidiaries have a
working capital line of credit. As of the end of the first quarter of fiscal
2003, the total commitment was $75.0 million and the availability under the
credit

15



---



##### Table of Contents



facility totaled $63.5 million after reduction for commitments
outstanding under letters of credit. There were no working capital borrowings
outstanding at any time during the first three months of fiscal 2003 or fiscal
2002.

The credit facility requires the principal operating subsidiaries of Cole
National Group to comply with various operating covenants that restrict
corporate activities, including covenants restricting the ability of the
subsidiaries to incur additional indebtedness, pay dividends, prepay
subordinated indebtedness, dispose of certain investments or make acquisitions.
The credit facility also requires the subsidiaries of Cole National Group to
comply with certain financial covenants, including covenants regarding interest
coverage and maximum leverage. On November 25, 2002 the Company received a
waiver from the lenders under the credit facility, which expired on December
31, 2002 associated with the restatement of the financial statements. On
December 19, 2002 the credit agreement was amended to accommodate the
anticipated changes due to the restatement. The Company received a waiver dated
May 9, 2003 of the maximum leverage coverage test for the fiscal year end 2002
and the first quarter of fiscal 2003. During the waiver period the maximum
leverage test was adjusted to accommodate the effect of the restatement on the
Companys financial statements. This waiver will expire on June 30, 2003. The
Company is in compliance with the covenants in the credit agreement and has met
the waiver conditions. The Company expects to complete a permanent amendment to
the credit agreement on or before June 30, 2003. However, there is no assurance
that the Company will be successful in its effort to complete such an
amendment. The Company believes that even if it is unsuccessful in its effort
to complete such an amendment, it will have sufficient liquidity from internal
and other external sources.

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

No significant principal payment obligations are due under the Companys
outstanding indebtedness until April 2004, when a $5.0 million principal
payment is due under a 5.0% promissory note and until 2007, when the $125.0
million Senior Subordinated debt is due. The ability of Cole National
Corporation and its subsidiaries to satisfy their obligations will be primarily
dependent upon future financial and operating performance of the subsidiaries
and upon Cole National Corporations ability to renew or refinance borrowings
or raise additional capital through equity financing or sales of assets.

Operations for the first three months of fiscal 2003 provided $7.6 million
of cash compared with $4.8 million in fiscal 2002. The improvement was
primarily attributable to changes in operating assets and liabilities, which
provided $7.3 million in the first quarter of fiscal 2003, compared with a use
of funds of $5.4 million in the first quarter of fiscal 2002. Changes in
accounts payable and accrued liabilities provided $24.0 million in the first
quarter, compared with $5.7 million in the prior year. The increase was
primarily due to the timing of purchases and payments, increases in liabilities
for legal and audit costs related to the restatement of the Companys financial
statements, increases in liabilities for the settlement of the class action
lawsuit, increases in advertising, fringe benefits, workers compensation and
deferred revenues. Changes in inventories resulted in a use of funds of $13.1
million in the first quarter, compared with a use of funds of $6.1 million in
the prior year. The increase was due primarily to earlier new product
introduction at Cole Licensed Brands and Things Remembered, an increased mix of
premium products and additional inventory needed to support the increase in
store count at Cole Licensed Brands. Changes in accounts receivable and other
assets resulted in a use of funds of $4.1 million in the first quarter of
fiscal 2003, compared to a use of funds of $5.4 million in the same period last
year. The increase in receivables in both periods is due primarily to increased
revenues at both Cole Licensed Brands and Cole Managed Vision. Improvements in cash from operating
assets and liabilities were offset by lower results from operations and from
changes in deferred taxes. The Company recorded a tax benefit of $1.6 million
in the first quarter of fiscal 2003 compared to a tax provision of $2.0 million
in the same period last year.

Net cash from investing activities resulted in a use of funds of $13.6
million for the first three months of fiscal 2003 compared to a use of funds
totaling $8.0 million in the same period of fiscal 2002. Capital expenditures,
which accounted for most of the cash used for investing, were $7.5 million and
$6.7 million in the first quarter of fiscal 2003 and 2002, respectively. The
majority of capital expenditures were for store fixtures, equipment and
leasehold improvements for new stores and remodeling of existing stores. The
Company used $3.8 million in the first quarter of fiscal 2003 for a contingent
payment in connection with the prior acquisition of MetLifes managed vision
business. Expenditures for systems development costs totaled $2.2 million and
$1.3 million for the first three months of fiscal 2003 and 2002, respectively.

16



---



##### Table of Contents



Net cash used for financing activities totaled $6.5 million in the first
three months of fiscal 2003, compared with cash provided by financing of $2.2
million in the prior year. Changes in overdraft balances resulted in a use of
funds totaling $6.5 million compared to a source of $1.9 million in the prior
year. The change was due to the timing of payments.

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

Off Balance Sheet Arrangements and Contractual Commitments

The Company leases a substantial portion of its equipment and facilities
including laboratories, office and warehouse space, and retail locations. In
addition, Cole Vision operates departments in various host stores and pays
occupancy costs solely as a percentage of sales. A more complete discussion of
the Companys lease and license commitments is included in Note 6 of the Notes
to Condensed Consolidated Financial Statements.

The Company guarantees future minimum lease payments for certain store
locations leased directly by Pearle franchisees. The term of these guarantees
range from one to ten years of which many are limited to periods that are less
than the full term of the leases involved. A more complete discussion of the
Companys guarantees is included in Note 6 of the Notes to Condensed
Consolidated Financial Statements.

Material Changes in Contingencies

The Company is in the process of settling a class action lawsuit alleging
claims for various violations of federal securities laws related to the
Companys publicly reported revenues and earnings. The action, which pleaded
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1993
named the Company and certain present and former officers and directors as
defendants, sought unspecified compensatory damages, punitive damages where
appropriate, costs, expenses and attorneys fees. On May 30, 2003, the Company
and attorneys for the plaintiffs have executed a memorandum of understanding
for a settlement to resolve the lawsuit. The settlement is subject to court
approval. A charge of $2,687,500 was recorded in the first quarter of fiscal
2003.

The company announced on June 4, 2003 that the Companys President and
Chief Operating Officer will become President and Chief Executive Officer at
the annual meeting of shareholders on June 25, 2003. The Companys President
and Chief Operating Officer succeeds the Companys Chairman and Chief Executive
Officer, who will retire. The Company anticipates fulfilling the Companys
obligations to the Chairman and Chief Executive Officer under his employment
agreement and for retirement and life insurance benefits. The Company estimates
that these obligations will require a one-time lump sum cash payment in the
range of $11.5 million to $15.0 million, with an impact on net income in the
second quarter of fiscal 2003 in the range of $5.0 million to $7.5 million.
These estimates are forward-looking statements. The actual amount of the
obligations and their impact may differ materially at the conclusion of pending
negotiations with the Companys Chairman and Chief Executive Officer.

Significant Accounting Policies and Critical Estimates

The Companys significant accounting policies are discussed in the Notes
to the Consolidated Financial Statements that are included in the Companys
2002 Annual Report on Form 10-K that is filed with the Securities and Exchange
Commission. In most cases, the accounting policies utilized by the Company are
the only ones permissible under U.S. Generally Accepted Accounting Principles
for businesses in our industry. However, the application of certain of these
policies requires significant judgments or a complex estimation process that
can affect the results of operations and financial position of the Company, as
well as the related footnote disclosures. The Company bases its estimates on
historical experience and other assumptions that it believes are reasonable. If
actual amounts are ultimately different from previous estimates, the revisions
are included in the Companys results of operations for the period in which the
actual amounts become known. The accounting policies and estimates that can
have a
significant impact on the operating results, financial position and
footnote disclosures of the Company are described in the Management Discussion
and Analysis in the Companys 2002 Annual Report on Form 10-K.

Forward Looking Statements

While the same-store sales in the Companys vision segment declined in the
first quarter of fiscal 2003, the Company saw a change in that trend in May,
with same-store sales for the vision segment increasing in the upper single
digits. Things Remembered

17



---



##### Table of Contents



same-store sales strengthened their trend from the
first quarter. There is no assurance that these same-store sales trends will
continue for the remainder of the second quarter.

The Company expects certain operating expense trends experienced in the
first quarter of fiscal 2003, such as higher workers compensation, fringe
benefits costs, and higher occupancy costs are likely to continue in the second
quarter of fiscal 2003. As previously noted, the Company expects certain
one-time charges associated with the retirement of its Chief Executive Officer
will negatively impact net income in the second quarter of fiscal 2003.

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




Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

In addition, the Company is exposed to changes in the fair value of its
debt portfolio, primarily resulting from the effects of changes in interest
rates. The Company utilizes interest rate swaps to manage its exposure and to
take advantage of favorable market interest rates. Management believes that its
use of these financial instruments is in the Companys best interest. These
agreements require the Company to pay an average floating interest rate based
on six month LIBOR plus 4.5375% to a counter party while receiving a fixed rate
on $50.0 million of the Companys $125.0 million 8-5/8% Senior Subordinated
Notes due 2007. The agreements mature August 15, 2007 and qualify as fair value
hedges. The LIBOR rate is reset in arrears. For the first quarter of fiscal
2003, the market rate for six month LIBOR was 1.29%, which resulted in a rate
of 5.8275% applied from February 15, 2003 through May 3, 2003.

A change in six-month LIBOR would affect the interest cost associated with
the $50.0 million notional value of the swap agreements. A 50% change (approximately 65
basis points) in the market rates of interest for six month LIBOR as compared
to the 5.8275% rate in effect for the first quarter of fiscal 2003 would
increase the Companys annual interest cost by $0.3 million.

The Company does not enter into financial instruments for trading
purposes.




Item 4. Controls and Procedures

(a)          Immediately following the Signature section of this Quarterly Report are
certifications of the Companys Chief Executive Officer and Chief Financial
Officer required in accordance with Section 302 of the Sarbanes-Oxley Act of
2002 (the Section 302 Certification). This portion of our Quarterly Report on
Form 10-Q is our disclosure of the results of our control evaluation referred
to in paragraphs (4), (5) and (6) of the Section 302 Certification and should
be read in conjunction with the Section 302 Certification for a more complete
understanding of the topics presented.

18



---



##### Table of Contents



Within 90 days prior to the filing date of this Quarterly Report on Form
10-Q, the Company carried out an evaluation, under the supervision and with the
participation of its Chief Executive Officer and Chief Financial Officer,
pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934
(the Exchange Act), as amended, of the effectiveness of the Companys design
and operation of its disclosure controls and procedures. The Companys Chief
Executive Officer and Chief Financial Officer concluded that as of the
evaluation date, the Companys disclosure controls and procedures were
reasonably designed to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission.

(b)          Since the evaluation date by the Companys management of its internal
controls, there have not been any significant changes in the internal
controls or in other factors that could significantly affect the internal
controls.




PART II  OTHER INFORMATION




Item 1. Legal Proceedings

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

The Company is in the process of settling a class action lawsuit alleging
claims for various violations of federal securities laws related to the
Companys publicly reported revenues and earnings. The action, which pleaded
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1993
named the Company and certain present and former officers and directors as
defendants, sought unspecified compensatory damages, punitive damages where
appropriate, costs, expenses and attorneys fees. On May 30, 2003, the Company
and attorneys for the plaintiffs have executed a memorandum of understanding
for a settlement to resolve the lawsuit. The settlement is subject to court
approval. A charge of $2,687,500 was recorded in the first quarter of fiscal
2003.




Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits. The following Exhibits are filed herewith and made a part hereof:

| |  |  |      |  |  |                                                                                                                                                                               
| |  |  | ---- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 10.1 |  |  | Employment Agreement entered into as of June 2, 2003 by and among
Cole National Corporation and Larry Pollock.                                                                
| |  |  |      |  |  |                                                                                                                                                                               
| |  |  | 99.1 |  |  | Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.

(b)  Reports on Form 8-K



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company filed a Form 8-K (Item 9) on May 19, 2003 announcing
financial results for the fourth fiscal quarter of 2002 and for fiscal year
2002.                                                                                                                                                                                                                                                                                                                                            
|
| | The Company filed a Form 8-K (Item 9) on May 16, 2003 announcing that
it would hold a conference call on May 19, 2003 to discuss fourth quarter
and its annual stockholders meeting on Wednesday, June 25, 2003 in its
offices located at 5915 Landerbrook Drive, Cleveland, Ohio, for
stockholders of record as of May 27, 2003.                                                                                                                                                             
|
| | The Company filed a Form 8-K (Item 5) on June 6, 2003 announcing that
Larry Pollock, the Companys President and Chief Operating Officer, will
become President and Chief Executive Officer on June 25, 2003. Mr. Pollock
succeeds Jeffrey A. Cole, the Companys Chairman and Chief Executive Officer, who will
retire. Walter Salmon, an independent director who has served on each
Companys Board of Directors since 1997, will assume the duties of
non-executive Chairman of the Board.
|
| | The Company filed a report on Form 8-K (Items 4 and 7) on June 11,
2003 disclosing the Company was replacing Grant Thornton LLP for the Cole
National Corporation 401(K) Savings Plan for Employees at Pearle Vision
Centers and                                                                                                                                                                                                                                                              

19



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | appointing Deloitte & Touche LLP to serve as its independent
public accountants for the Plan for the year ending December 31, 2002.                                                                                                                                                                                                                                     
|
| | The Company filed a report on Form 8-K (Items 4 and 7) on June 11,
2003 disclosing the Company was replacing Grant Thornton LLP for the Cole
National Corporation 401(K) Savings Plan and appointing Deloitte & Touche
LLP to serve as its independent public accountants for the Plan for the
year ending December 31, 2002.                                           
|
| | The Company filed a report on Form 8-K (Items 4 and 7) on June 11,
2003 disclosing the Company was replacing Grant Thornton LLP for the Cole
National Corporation 401(K) Savings Plan for Employees at Former NuVision
Locations and appointing Deloitte & Touche LLP to serve as its independent
public accountants for the Plan for the year ending December 31, 2002.

20



---



##### Table of Contents






SIGNATURES

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

| |  |                           |  |                                               
| |  | ------------------------- |  | ----------------------------------------------
| |  | COLE NATIONAL CORPORATION
| |  |                           |  |                                               
| |  | By:                       |  | /s/ Lawrence E. Hyatt                         
| |  |                           |  |                                               
| |  |                           |  | Lawrence E. Hyatt                             
| |  |                           |  | Executive Vice President and Chief            
| |  |                           |  | Financial Officer (Duly Authorized Officer)   
| |  |                           |  |                                               
| |  | By:                       |  | /s/ Ann M. Holt                               
| |  |                           |  |                                               
| |  |                           |  | Ann M. Holt                                   
| |  |                           |  | Senior Vice President and Corporate Controller
| |  |                           |  | (Principal Accounting Officer)                

Date: June 16, 2003

21



---



##### Table of Contents






CERTIFICATION

I, Jeffrey A. Cole, certify that:

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

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

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

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



| | a) |  | Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

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



| | a) |  | All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                    |  |                                      |  | 
|------------------- |  | ------------------------------------ |  | 
|Date: June 16, 2003 |  | /s/ Jeffrey A. Cole

Jeffrey A. Cole
|                    |  | Chairman and Chief Executive Officer |  | 

22



---



##### Table of Contents



CERTIFICATION

I, Lawrence E. Hyatt, certify that:

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

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

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

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



| | a) |  | Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

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



| | a) |  | All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

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

23



---



##### Table of Contents



COLE NATIONAL CORPORATION
FORM 10-Q
QUARTER ENDED MAY 3, 2003




EXHIBIT INDEX

|        |  |                                                                                                                                                                               
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                               
|Number  |  | Description                                                                                                                                                                   
|        |  |                                                                                                                                                                               
|10.1   |  | Employment Agreement entered into as of June 2, 2003 by and among Cole
National Corporation and Larry Pollock.                                                                
|        |  |                                                                                                                                                                               
|99.1   |  | Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

 Filed herewith.

24